Marine Eastern Shipping v Prudential

DECISION

PERALTA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
seeking to set aside the April 26, 2006 Decision and August 15, 2006 Resolution of the Court of
Appeals (CA) in CA-G.R. CV No. 68165.

The facts of the case:

On November 8, 1995, fifty-six cases of completely knock-down auto parts of Nissan motor
vehicle (cargoes) were loaded on board M/V Apollo Tujuh (carrier) at Nagoya,Japan, to be shipped
to Manila. The shipment was consigned to Nissan Motor Philippines, Inc. (Nissan) and was
covered by Bill of Lading No. NMA-1. The carrier was owned and operated by petitioner Eastern
Shipping Lines, Inc.

On November 16, 1995, the carrier arrived at the port of Manila. On November 22, 1995,
the shipment was then discharged from the vessel onto the custody of the arrastre operator,
Asian Terminals, Inc. (ATI), complete and in good condition, except for four cases

On November 24 to 28, 1995, the shipment was withdrawn by Seafront Customs and
Brokerage from the pier and delivered to the warehouse of Nissan in Quezon City.
A survey of the shipment was then conducted by Tan-Gaute Adjustment Company, Inc.
(surveyor) at Nissans warehouse. On January 16, 1996, the surveyor submitted its report [7] with a
finding that there were short (missing) items in Cases Nos. 10/A26/T3K and 10/A26/7K and
broken/scratched and broken items in Case No. 10/A26/70K; and that (i)n (its) opinion, the
shortage and damage sustained by the shipment were due to pilferage and improper handling,
respectively while in the custody of the vessel and/or Arrastre Contractors. [8]

As a result, Nissan demanded the sum of P1,047,298.34[9] representing the cost of the
damages sustained by the shipment from petitioner, the owner of the vessel, and ATI,
the arrastre operator. However, the demands were not heeded. [10]
On August 21, 1996, as insurer of the shipment against all risks per Marine Open Policy
No. 86-168 and Marine Cargo Risk Note No. 3921/95, respondent Prudential Guarantee and
Assurance Inc. paid Nissan the sum of P1,047,298.34.

On October 1, 1996, respondent sued petitioner and ATI for reimbursement of the amount
it paid to Nissan before the Regional Trial Court (RTC) of Makati City, Branch 148, docketed as
Civil Case No. 96-1665, entitled Prudential Guarantee and Assurance, Inc. v. Eastern Shipping
Lines, Inc. Respondent claimed that it was subrogated to the rights of Nissan by virtue of said
payment.[11]

On June 21, 1999, the RTC rendered a Decision, [12] the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of

the plaintiff and against the defendants Eastern Shipping Lines, Inc. and ATI, and
said defendants are hereby ordered to pay jointly and solidarily plaintiff the
following:

1) The claim of P1,047,298.34 with legal interest thereon of 6% per annum

from the date of the filing of this complaint until the same is fully paid;
2) [Twenty-five (25%)] percent of the principal claim, as and for attorneys
fees;
3) Plus costs of suit.

Both the counterclaims and crossclaims are without legal basis. The
counterclaims and crossclaims are based on the assumption that the other
defendant is the one solely liable. However, inasmuch as the solidary liability of the
defendants have been established, the counterclaims and crossclaims must be
denied.

Equal costs against Eastern Shipping Lines, Inc. and Asian Terminals, Inc.

SO ORDERED.[13]
 Both petitioner and ATI appealed to the CA.

On April 26, 2006, the CA rendered a Decision the dispositive portion of which reads:

WHEREFORE, the appealed decision is AFFIRMED with MODIFICATIONS, in that

(i) defendant-appellant Eastern Shipping Lines, Inc. is ordered to pay appellee (a)
the amount ofP904,293.75 plus interest thereon at the rate of 6% per annum from
the filing of the complaint up to the finality of this judgment, when the interest shall
become 12% per annum until fully paid, and (b) the costs of suit; (ii) the award of
attorneys fees is DELETED; and (iii) the complaint against defendant-appellant Asian
Terminals, Inc. is DISMISSED.

SO ORDERED.[14]

The CA exonerated ATI and ruled that petitioner was solely responsible for the damages
caused to the cargoes. Moreover, the CA relying on Delsan Transport Lines, Inc. vs. Court of
Appeals,[15] ruled that the right of subrogation accrues upon payment by the insurance company
of the insurance claim and that the presentation of the insurance policy is not indispensable
before the appellee may recover in the exercise of its subrogatory right. [16]
Petitioner then filed a motion for reconsideration, which was, however, denied by the CA in
a Resolution dated August 15, 2006.

Hence, herein petition, with petitioner raising the following assignment of errors to wit:

I.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF
THE LOWER COURT FINDING HEREIN PETITIONER LIABLE DESPITE THE FACT THAT
RESPONDENT FAILED TO SUBMIT ANY INSURANCE POLICY.

II.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT APPLYING THE
US$500.00/PACKAGE/CASE PACKAGE LIMITATION OF LIABILITY IN ACCORDANCE WITH THE
CARRIAGE OF GOODS BY SEA ACT.[17]

The petition is meritorious.

The rule in our jurisdiction is that only questions of law may be entertained by this Court in a
petition for review on certiorari. This rule, however, is not iron-clad and admits of certain
exceptions, one of which is when the CA manifestly overlooked certain relevant and undisputed
facts that, if properly considered, would justify a different conclusion. [18]In the case at bar, the
records of the case contain evidence which justify the application of the exception.
Anent the first error, petitioner argues that respondent was not properly subrogated
because of the non-presentation of the marine insurance policy. In the case at bar, in order to
prove its claim, respondent presented a marine cargo risk note and a subrogation receipt. Thus,
the question to be resolved is whether the two documents, without the Marine Insurance Policy,
are sufficient to prove respondents right of subrogation.

Before anything else, it must be emphasized that a marine risk note is not an insurance policy. It
is only an acknowledgment or declaration of the insurer confirming the specific shipment covered
by its marine open policy, the evaluation of the cargo and the chargeable premium.
[19]
In International Container Terminal Services, Inc. v. FGU Insurance Corporation (International),
[20]
the nature of a marine cargo risk note was explained, thus:
x x x It is the marine open policy which is the main insurance contract. In
other words, the marine open policy is the blanket insurance to be undertaken by
FGU on all goods to be shipped by RAGC during the existence of the contract, while
the marine risk note specifies the particular goods/shipment insured by FGU on that
specific transaction, including the sum insured, the shipment particulars as well as
the premium paid for such shipment. x x x.[21]

For clarity, the pertinent portions of the Marine Cargo Risk Note, [22] relied upon by respondent,
are hereunder reproduced, to wit:

RN NO 39821/95
Date: Nov. 16, 1995

NISSAN MOTOR PHILS., INC.

 Gentlemen:

We have this day noted a Risk in your favor subject to all clauses and condition
of the Companys printed form of Marine Open Policy No. 86-168

For PHILIPINE PESOS FOURTEEN MILLION ONE HUNDRED SEVENTY-THREE

THOUSAND FORTY-TWO & 91/100 ONLY (P14, 173,042.91) xxx

CARGO: 56 CASES NISSAN MOTOR VEHICLE CKD (GC22)

CONDITIONS: INSTITUTE CARGO CLAUSES A

OTHER TERMS AND CONDITIONS PER
MOP-86-168

From: NAGOYA
To: MANILA, PHILS.
ETD: NOV. 8, 1995 ETA: NOV. 17, 1995
CARRIER: APOLLO TUJUH
B/L NO: NMA-1
BANK: BANK OF THE PHILLIPINE ISLANDS
L/C NO: 026010051971
Shipper/ Consignee: MARUBENI CORPORATION

It is undisputed that the cargoes were already on board the carrier as early as November
8, 1995 and that the same arrived at the port of Manila on November 16, 1995. It is, however,
very apparent that the Marine Cargo Risk Note was issued only on November 16, 1995. The
same, therefore, should have raised a red flag, as it would be impossible to know whether said
goods were actually insured while the same were in transit from Japan to Manila. On this score,
this Court is guided by Malayan Insurance Co., Inc. v. Regis Brokerage Corp., [23] where this Court
ruled:

Thus, we can only consider the Marine Risk Note in determining whether
there existed a contract of insurance between ABB Koppel and Malayan at the time
of the loss of the motors.However, the very terms of the Marine Risk
Note itself are quite damning. It is dated 21 March 1995, or after the
occurrence of the loss, and specifically states that Malayan ha[d] this day noted
the above-mentioned risk in your favor and hereby guarantee[s] that this document
has all the force and effect of the terms and conditions in the Corporations printed
form of the standard Marine Cargo Policy and the Companys Marine Open Policy. [24]

Likewise, the date of the issuance of the Marine Risk Note also caught the attention of
petitioner. In petitioners Comment/Opposition [25] to the formal offer of evidence before the RTC,
petitioner made the following manifestations, to wit:

Exhibit B, Marine Cargo Risk Note No. 39821 dated November 16,
1995 is being objected to for being irrelevant and immaterial as it was
executed on November 16, 1995. The cargoes arrived in Manila on
November 16, 1995. This means that the cargoes are not specifically
covered by any particular insurance at the time of transit. The alleged
Marine Open Policy was not presented. Marine Open Policy may be subject to
Institute Cargo Clauses which may require arbitration prior to the filing of an action
in court.[26]

In addition, petitioner also contended that the Marine Cargo Risk Note referred to Institute
Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168.
Based on the forgoing, it is already evident why herein petition is meritorious. The Marine
Risk Note relied upon by respondent as the basis for its claim for subrogation is insufficient to
prove said claim.
As previously stated, the Marine Risk Note was issued only on November 16, 1995; hence,
without a copy of the marine insurance policy, it would be impossible and simply guesswork to
know whether the cargo was insured during the voyage which started on November 8, 1995.
Again, without the marine insurance policy, it would be impossible for this Court to know the
following: first, the specifics of the Institute Cargo Clauses A and other terms and conditions per
Marine Open Policy-86-168 as alluded to in the Marine Risk Note; second, if the said terms and
conditions were actually complied with before respondent paid Nissans claim.
 Furthermore, a reading of the transcript of the records clearly show that, at the RTC,
petitioner had already objected to the non-presentation of the marine insurance policy, to wit:

Q. Are you also the one preparing the Marine Insurance Contract?
A. No, sir.

Q. Who is the one?

A. Our Marine Cargo Underwriting Department.

Q. And do you know anybody in that department?

A. Yes, sir.

Q. And you were aware that this particular cargo of the shipment was insured?
A. Yes, sir, per policy issued.
Q. And that you are referring to Exhibit?
A. The Marine Cargo Risk.

Q. Is this the only contract of Insurance between Prudential Guarantee

and Nissan?
A. Sir, there is a Marine Open Policy.

Q. Do you have any copy of that?

A. It is in the office.

Atty. Alojado Can you produce that copy?

Atty. Zapa May we know the request of counsel for producing this Marine Open
Policy?

Atty. Alojado The basis of the question is the answer of the witness which says that
there is another contract of insurance.

COURT Yes, that is a Marine Open Policy.

Are you familiar with Marine Open Policy?

Atty. Alojado Yes, Your Honor.

But we would also like to be familiarize with
that contract.

COURT But you know already a Marine Open Policy

Atty. Alojado Yes, Your Honor.

COURT I do not know if you work as a lawyer for several Insurance Company?

Atty. Alojado No, Your Honor. Honestly, Your Honor I worked as

a Maritime lawyer.

COURT Then you should know what is Marine Open Policy.

Atty. Alojado I would like to know the specification of the
Marine Open Policy in this regard.

Atty. Zapa I think your Honor, between the plaintiff and the defendant there is no
issue against the insurance.

COURT Yes because this witness it not testifying on the Marine Open Policy.

Atty. Alojado We submit.

COURT Proceed.

Atty. Alojado
Q. But there is a Marine Open Policy
A. Yes, sir.[27]

COURT
Q. Is the policy a standing policy, a continuing policy or is it going only for only a
year or for a particular shipment or what?
 A. For this particular consignee, they have Marine Open Policy.

Atty. Alojado That was not presented.

COURT Thats why Im asking. So the policy is not only for a particular shipment, but
all other shipments that may come?
A. Yes, Your Honor.

Q. Are covered?
A. Yes, Your Honor.

Q. Without any specifications?

A. Yes, Your Honor.[28]

Clearly, petitioner was not remiss when it openly objected to the non-presentation of the
Marine Insurance Policy. As testified to by respondents witness, they had a copy of the marine
insurance policy in their office. Thus, respondent was already apprised of the possible
importance of the said document to their cause.

In addition, this Court takes notice that notwithstanding that the RTC may have denied the
repeated manifestation of petitioner of the non-presentation of the marine insurance policy, the
same by itself does not exonerate respondent. As plaintiff, it was respondents burden to present
the evidence necessary to substantiate its claim.

In its Complaint,[29] respondent alleged: That the above-described shipment was insured
for P14,173,042.91 against all risks under plaintiffs Marine Cargo Risk Note No. 39821/Marine
Open Policy No. 86-168.[30] Therefore, other than the marine cargo risk note, respondent
should have also presented the marine insurance policy, as the same also served as the basis for
its complaint. Section 7, Rule 9 of the 1997 Rules of Civil Procedure, provide:

SECTION 7. Action or defense based on document.Whenever an action or defense is

based upon a written instrument or document, the substance of such instrument or
document shall be set forth in the pleading, and the original or a copy thereof shall
be attached to the pleading as an exhibit, which shall be deemed to be a part of the
pleading, or said copy may, with like effect, be set forth in the pleading.

On this score, Malayan is instructive:

Malayans right of recovery as a subrogee of ABB Koppel cannot be predicated

alone on the liability of the respondent to ABB Koppel, even though such liability will
necessarily have to be established at the trial for Malayan to recover. Because
Malayans right to recovery derives from contractual subrogation as an incident to
an insurance relationship, and not from any proximate injury to it inflicted by the
respondents, it is critical that Malayan establish the legal basis of such right to
subrogation by presenting the contract constitutive of the insurance relationship
between it and ABB Koppel. Without such legal basis, its cause of action cannot
survive.

Our procedural rules make plain how easily Malayan could have
adduced the Marine Insurance Policy. Ideally, this should have been
accomplished from the moment it filed the complaint. Since the Marine
Insurance Policy was constitutive of the insurer-insured relationship from
which Malayan draws its right to subrogation, such document should have
been attached to the complaint itself, as provided for in Section 7, Rule 9
of the 1997 Rules of Civil Procedure: x x x[31]
Therefore, since respondent alluded to an actionable document in its complaint, the contract of
insurance between it and Nissan, as integral to its cause of action against petitioner, the Marine
Insurance Policy should have been attached to the Complaint. Even in its formal offer of
evidence, respondent alluded to the marine insurance policy which can stand independent of the
Marine Cargo Risk Note, to wit:

EXH B = Marine Cargo Risk Note No. 39821/95 Dated November 16, 1995.
 Purpose: As proof that the subject shipment was covered by insurance for P14,173,
042.91 under Marine Open Policy No. 86-168.[32]

It is significant that the date when the alleged insurance contract was constituted cannot
be established with certainty without the contract itself. Said point is crucial because there can
be no insurance on a risk that had already occurred by the time the contract was executed.
[33]
Surely, the Marine Risk Note on its face does not specify when the insurance was constituted.

The importance of the presentation of the Marine Insurance Policy was also emphasized
in Wallem Philippines Shipping, Inc. v. Prudential Guarantee & Assurance, Inc., [34] where this Court
ruled:

x x x Wallem still cannot be held liable because of the failure of Prudential to

present the contract of insurance or a copy thereof. Prudential claims that it is
subrogated to the rights of GMC pursuant to their insurance contract. For this
purpose, it submitted a subrogation receipt (Exh. J) and a marine cargo risk note
(Exh. D). However, as the trial court pointed out, this is not sufficient. As GMCs
subrogee, Prudential can exercise only those rights granted to GMC under the
insurance contract. The contract of insurance must be presented in evidence to
indicate the extent of its coverage. As there was no determination of rights under
the insurance contract, this Courts ruling in Home Insurance Corporation v. Court of
Appeals is applicable:
The insurance contract has not been presented. It may be assumed for the sake
of argument that the subrogation receipt may nevertheless be used to establish the
relationship between the petitioner [Home Insurance Corporation] and the
consignee [Nestl Phil.] and the amount paid to settle the claim. But that is all the
document can do. By itself alone, the subrogation receipt is not sufficient to prove
the petitioners claim holding the respondent [Mabuhay Brokerage Co., Inc.] liable for
the damage to the engine.
It is curious that the petitioner disregarded this rule, knowing that the best
evidence of the insurance contract was its original copy, which was presumably in
the possession of Home itself.Failure to present this original (or even a copy of it),
for reasons the Court cannot comprehend, must prove fatal to this petition. [35]
Finally, there have been cases where this Court ruled that the non-presentation of the
marine insurance policy is not fatal, as can be gleaned in
International, where this Court held:
Indeed, jurisprudence has it that the marine insurance policy needs to be presented
in evidence before the trial court or even belatedly before the appellate
court. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., the Court stated that
the presentation of the marine insurance policy was necessary, as the issues raised
therein arose from the very existence of an insurance contract between Malayan
Insurance and its consignee, ABB Koppel, even prior to the loss of the
shipment. In Wallem Philippines Shipping, Inc. v. Prudential Guarantee and
Assurance, Inc., the Court ruled that the insurance contract must be presented in
evidence in order to determine the extent of the coverage. This was also the ruling
of the Court in Home Insurance Corporation v. Court of Appeals.
However, as in every general rule, there are admitted exceptions. In Delsan
Transport Lines, Inc. v. Court of Appeals, the Court stated that the presentation of
the insurance policy was not fatal because the loss of the cargo undoubtedly
occurred while on board the petitioner's vessel, unlike in Home Insurance in which
the cargo passed through several stages with different parties and it could not be
determined when the damage to the cargo occurred, such that the insurer should
be liable for it.

As in Delsan, there is no doubt that the loss of the cargo in the present case
occurred while in petitioner's custody. Moreover, there is no issue as regards
the provisions of Marine Open Policy No. MOP-12763, such that the
presentation of the contract itself is necessary for perusal, not to mention
that its existence was already admitted by petitioner in open court. And
even though it was not offered in evidence, it still can be considered by the court as
long as they have been properly identified by testimony duly recorded and they
have themselves been incorporated in the records of the case. [36]

Although the CA may have ruled that the damage to the cargo occurred while the same was in
petitioners custody, this Court cannot apply the ruling in International to the case at bar. In
contrast, unlike in International where there was no issue as regards the provisions of the marine
insurance policy, such that the presentation of the contract itself is necessary for perusal, herein
petitioner had repeatedly objected to the non-presentation of the marine insurance policy and
had manifested its desire to know the specific provisions thereof. Moreover, and the same is
critical, the marine risk note in the case at bar is questionable because: first, it is dated on the
same day the cargoes arrived at the port of Manila and not during the duration of the
voyage; second, without the Marine Insurance Policy to elucidate on the specifics of the terms
and conditions alluded to in the marine risk note, it would be simply guesswork to know if the
same were complied with.

Lastly, to cast all doubt on the merits of herein petition, this Court is guided by the ruling
in Malayan, to wit:

It cannot be denied from the only established facts that Malayan and ABB
Koppel comported as if there was an insurance relationship between them and
documents exist that evince the presence of such legal relationship. But, under
these premises, the very insurance contract emerges as the white elephant in the
room an obdurate presence which everybody reacts to, yet, legally invisible as a
matter of evidence since no attempt had been made to prove its corporeal
existence in the court of law. It may seem commonsensical to conclude
anyway that there was a contract of insurance between Malayan and ABB
Koppel since they obviously behaved in a manner that indicates such
relationship, yet the same conclusion could be had even if, for example,
those parties staged an elaborate charade to impress on the world the
existence of an insurance contract when there actually was none. While
there is absolutely no indication of any bad faith of such import by
Malayan or ABB Koppel, the fact that the commonsensical conclusion can
be drawn even if there was bad faith that convinces us to reject such
line of thinking.

The Court further recognizes the danger as precedent should we

sustain Malayans position, and not only because such a ruling would
formally violate the rule on actionable documents. Malayan would have us
effectuate an insurance contract without having to consider its particular
terms and conditions, and on a blind leap of faith that such contract is
indeed valid and subsisting. The conclusion further works to the utter prejudice
of defendants such as Regis or Paircargo since they would be deprived the
opportunity to examine the document that gives rise to the plaintiffs right to
recover against them, or to raise arguments or objections against the validity or
admissibility of such document. If a legal claim is irrefragably sourced from an
actionable document, the defendants cannot be deprived of the right to examine or
utilize such document in order to intelligently raise a defense. The inability or
refusal of the plaintiff to submit such document into evidence constitutes
an effective denial of that right of the defendant which is ultimately
rooted in due process of law, to say nothing on how such failure fatally
diminishes the plaintiffs substantiation of its own cause of action. [37]

In conclusion, this Court rules that based on the applicable jurisprudence, because of the
inadequacy of the Marine Cargo Risk Note for the reasons already stated, it was incumbent on
respondent to present in evidence the Marine Insurance Policy, and having failed in doing so, its
claim of subrogation must necessarily fail.

Because of the foregoing, it would be unnecessary to discuss the second error raised by
petitioner.
WHEREFORE, premises considered, the petition is GRANTED. The April 26, 2006 Decision
and August 15, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 68165 are
hereby REVERSED and SET ASIDE. The Complaint in Civil Case No. 96-1665 is DISMISSED.

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

MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS and
TKC MARKETING CORPORATION, respondents.

DECISION
ROMERO, J.:

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

Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric
tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or about
September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of Manila. Said
cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for which
it issued two (2) Marine Cargo Policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP
97800306 amounting to P1,195,005.45, both dated September 1989.

While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to
Manila, the civil authorities arrested and detained it because of a lawsuit on a question of
ownership and possession. As a result, private respondent notified petitioner on October 4, 1989
of the arrest of the vessel and made a formal claim for the amount of US$916,886.66,
representing the dollar equivalent on the policies, for non-delivery of the cargo. Private
respondent likewise sought the assistance of petitioner on what to do with the cargo.

Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the
policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo and
requested an extension of the insurance coverage until actual transhipment, which extension
was approved upon payment of additional premium. The insurance coverage was extended
under the same terms and conditions embodied in the original policies while in the process of
making arrangements for the transhipment of the cargo from Durban to Manila, covering the
period October 4-December 19, 1989.

However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40
per metric ton or a total of P10,304,231.75 due to its perishable nature which could no longer
stand a voyage of twenty days to Manila and another twenty days for the discharge thereof. On
January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso
equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private
respondent's loss after the proceeds of the sale were deducted from the original claim of
$916,886.66 or P20,184,159.55.

Petitioner maintained its position that the arrest of the vessel by civil authorities on a
question of ownership was an excepted risk under the marine insurance policies. This prompted
private respondent to file a complaint for damages praying that aside from its claim, it be
reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the loan it
obtained to finance the shipment totalling P942,269.30. In addition, private respondent asked for
moral damages amounting to P200,000.00, exemplary damages amounting toP200,000.00 and
attorney's fees equivalent to 30% of what will be awarded by the court.

The lower court decided in favor of private respondent and required petitioner to pay, aside
from the insurance claim, consequential and liquidated damages amounting toP1,024,233.88,
exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to 10%
of whatever is recovered as attorney's fees as well as the costs of the suit. On private
respondent's motion for reconsideration, petitioner was also required to further pay interest at
the rate of 12% per annum on all amounts due and owing to the private respondent by virtue of
the lower court decision counted from the inception of this case until the same is paid.

On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the
deletion of Clause 12 of the policies issued to private respondent, the same became
automatically covered under subsection 1.1 of Section 1 of the Institute War Clauses. The arrests,
restraints or detainments contemplated in the former clause were those effected by political or
executive acts. Losses occasioned by riot or ordinary judicial processes were not covered therein.
In other words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S.
Clause) rules out detention by ordinary legal processes. Hence, arrests by civil authorities, such
as what happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo
Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the Institute Cargo
Clause and the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest
and seizure by judicial processes which were excluded under the former policy became one of
the covered risks.

The appellate court added that the failure to deliver the consigned goods in the port of
destination is a loss compensable, not only under the Institute War Clause but also under the
Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to
Section 130 of the Insurance Code and as held in Williams v. Cole.[2]

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

Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies.

2. In ruling that there was constructive total loss over the cargo.

3. In ruling that petitioner was in bad faith in declining private respondent's claim.

4. In giving undue reliance to the doctrine that insurance policies are strictly construed against
the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is
not compensable since the term "arrest" refers to "political or executive acts" and does not
include a loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of the
Free from Capture or Seizure Clause would leave the assured covered solely for the perils
specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest
pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and civil
authorities.

As to the second assigned error, petitioner submits that any loss which private respondent
may have incurred was in the nature and form of unrecovered acquisition value brought about by
a voluntary sacrifice sale and not by arrest, detention or seizure of the ship.

As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its
honest belief that the arrest of the vessel was not a compensable risk under the policies issued.
In fact, petitioner supported private respondent by accommodating the latter's request for an
extension of the insurance coverage, notwithstanding that it was then under no legal obligation
to do so.

Private respondent, on the other hand, argued that when it appealed its case to the Court of
Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now, for
the first time, raise the same before this Court. Likewise, petitioner cannot submit for the first
time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it
did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were
possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is
evident from the very terms of the policies.

It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly
interpreted against it because the rule is that any ambiguity is to be taken contra proferentum.
Risk policies should be construed reasonably and in a manner as to make effective the intentions
and expectations of the parties. It added that the policies clearly stipulate that they cover the
risks of non-delivery of an entire package and that it was petitioner itself that invited and granted
the extensions and collected premiums thereon.

The resolution of this controversy hinges on the interpretation of the "Perils" clause of the
subject policies in relation to the excluded risks or warranty specifically stated therein.

By way of a historical background, marine insurance developed as an all-risk coverage, using

the phrase "perils of the sea" to encompass the wide and varied range of risks that were
covered.[3] The subject policies contain the "Perils" clause which is a standard form in any marine
insurance policy. Said clause reads:

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

The exception or limitation to the "Perils" clause and the "All other perils" clause in the
subject policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure
Clause" or the F.C. & S. Clause which reads, thus:

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

Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike
arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form
part of this insurance." (Underscoring supplied)

However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War
Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides:

"1. This insurance covers:

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

According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the

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

This Court cannot agree with petitioner's assertions, particularly when it alleges that in the
"Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of the
government of the seizing state and thereby excludes "arrests" caused by ordinary legal
processes, such as in the instant case.

With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however,
this Court agrees with the Court of Appeals and the private respondent that "arrest" caused by
ordinary judicial process is deemed included among the covered risks. This interpretation
becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that
"this insurance covers the risks excluded from the Standard Form of English Marine Policy by the
clause 'Warranted free of capture, seizure, arrest, etc. x x x'" or the F.C. & S. Clause.
Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the
Standard Form of English Marine Policy by the F.C. & S. Clause.

Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is
not included in the covered risk simply because the F.C. & S. Clause under the Institute War
Clauses can only be operative in case of hostilities or warlike operations on account of its
heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that ". .
. Although the F.C. & S. Clause may have originally been inserted in marine policies to protect
against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at
71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, x x x"[5] In fact, petitioner
itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even
if it were not a result of hostilities or warlike operations. [6] In this regard, since what was also
excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process,
logically, such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of the
Institute War Clauses, regardless of whether or not said "arrest" by civil authorities occurred in a
state of war.

Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as
that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. &
S. Clause was "originally incorporated in insurance policies to eliminate the risks of warlike
operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike
operations x x x"[7] In the same vein, it contended that subsection 1.1 of Section 1 of the Institute
War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1
of the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of
hostilities or warlike operations."[8]
 This Court cannot help the impression that petitioner is overly straining its interpretation of
the provisions of the policy in order to avoid being liable for private respondent's claim.

This Court finds it pointless for petitioner to maintain its position that it only insures risks of
"arrest" occasioned by executive or political acts of government which is interpreted as not
referring to those caused by ordinary legal processes as contained in the "Perils" Clause; deletes
the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of the
government and naturally, also those caused by ordinary legal processes; and, thereafter
incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the
coverage risks of arrest due to executive or political acts of a government but then still excludes
"arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said
Clauses should also have included "arrests" previously excluded from the coverage of the F.C. &
S. Clause.

It has been held that a strained interpretation which is unnatural and forced, as to lead to an
absurd conclusion or to render the policy nonsensical, should, by all means, be avoided.
[9]
Likewise, it must be borne in mind that such contracts are invariably prepared by the
companies and must be accepted by the insured in the form in which they are written. [10] Any
construction of a marine policy rendering it void should be avoided. [11] Such policies will,
therefore, be construed strictly against the company in order to avoid a forfeiture, unless no
other result is possible from the language used. [12]

If a marine insurance company desires to limit or restrict the operation of the general
provisions of its contract by special proviso, exception, or exemption, it should express such
limitation in clear and unmistakable language. [13] Obviously, the deletion of the F.C. & S. Clause
and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses
(Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was
expressly indicated as an exception in the subject policies, there would have been no
controversy with respect to the interpretation of the subject clauses.

Be that as it may, exceptions to the general coverage are construed most strongly against
the company.[14] Even an express exception in a policy is to be construed against the
underwriters by whom the policy is framed, and for whose benefit the exception is introduced. [15]

An insurance contract should be so interpreted as to carry out the purpose for which the
parties entered into the contract which is, to insure against risks of loss or damage to the goods.
Such interpretation should result from the natural and reasonable meaning of language in the
policy.[16] Where restrictive provisions are open to two interpretations, that which is most
favorable to the insured is adopted.[17]

Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer.[18] A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude the insurer
from noncompliance with its obligations. [19]

In view of the foregoing, this Court sees no need to discuss the other issues presented.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.