Case digest in insurance
ISSUE
Qua Chee Gan v. Law Union Rock
FACTS
After certain insured bodegas and merchandise burned down following the
liberation of the region of Albay in the Second World War, owner and petitioner Qua Chee
Gan, a merchant of Albay and sought to recover the proceeds totaling to P370,000 from
fire insurance policies which were issued by Law Union and Rock Insurance Co., Ltd. The
CFI ruled in favor of the petitioner, ordering the defendant Law Union Rock Insurance Co.,
to pay the necessary sum. Defendant appealed directly to the SC.
Records show that before the Second World War, the petitioner owned 4
warehouses/bodegas in Albay which were used to store various merchandise, all of
which were insured with the defendant company since 1937. A fire from an
undetermined origin broke out on July 21, 1940, and lasted almost a week, resulting to
the burning down of a number of bodegas and the merchandise stored inside . Petitoner
then informed defendant company by telegram also on the same day, and by the next day,
the premises were examined and records of the insured goods were investigated. The
petitioner submitted fire claims but the defendant company resisted payment, claiming
that there was a violation of warranties and conditions, that there was a filing of
fraudulent claims, and that the fire was deliberately caused by the insurer or by other
persons conniving with him. The petitioner and his brother, as well as some of his
employees, were tried for the crime of arson it being claimed that they set fire to the
warehouses to collect the insurance, but they were acquitted, followed by a civil suit to
collect from the defendant company, with the court ruling in favor of the petitioner.
Defendant company claims that the policies were avoided for breach of fore
hydrants warranty appearing on riders on the face of the policies, arguing that
considering the perimeter of the external walls of the bodegas, the petitioner should have
11 fire hydrants, when he actually had only 2.
The SC claimed that with this argument, the defendant company is estopped, as
it issued the policies in question subject to the warranty and received the corresponding
premiums, knowing fully that the number of hydrants demanded in the warranty never
existed from the very beginning and it still issued the said policies and accepted the
premiums.
The defendant also argued that the petitioner violated the Hemp Warranty
provisions of one of the policies, against the storage of gasoline, since there were 36 cans
of gasoline in one of the bodegas that were not affected by the fire.
Whether or not the insured petitioner should be paid the insurance claims by the
defendant company
HELD
Yes. The Supreme Court affirmed the decision of the lower court against the defendant
company. The Court held that the insurance company was already aware of the number
of fire hydrants installed by the petitioner, contrary to the requirements of the said
warranty. The inspection made of the premises by the agents of the defendant was done
as a prerequisite for the fixing of the discount on the premium to which the
petitioner/insured was entitled, since such discount depended on the number of
hydrants and the firefighting equipment available, therefore the defendant is estopped
from claiming otherwise.
It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the
contract from its very inception, such knowledge constitutes a waiver of conditions in the
contract inconsistent with the facts, and the insurer is stopped thereafter from asserting
the breach of such conditions. The law is charitable enough to assume, in the absence of
any showing to the contrary, that an insurance company intends to executed a valid
contract in return for the premium received; and when the policy contains a condition
which renders it voidable at its inception, and this result is known to the insurer, it will be
presumed to have intended to waive the conditions and to execute a binding contract,
rather than to have deceived the insured into thinking he is insured when in fact he is not,
and to have taken his money without consideration.
Rationale: Human justiceto To allow a company to accept one's money for a policy of
insurance which it then knows to be void and of no effect, though it knows as it must, that
the assured believes it to be valid and binding, is so contrary to the dictates of honesty
and fair dealing, and so closely related to positive fraud, as to the abhorent to fairminded
men
It would be to allow the company to treat the policy as valid long enough to get the
preium on it, and leave it at liberty to repudiate it the next moment. This cannot be
deemed to be the real intention of the parties.
Furthermore, the Court noted the inequitableness of the conduct of the
insurance company, by the fact that after the petitioner incurred the expense of installing
the hydrants, the company collected the premiums and issued him a policy which gave a
smaller discount than what he was normally entitled to. It is logical that the greater
number of fire hydrants and appliances would entail a reduced risk of loss, but in the case
at bar, the defendant company kept the premium discount at the minimum, giving it a
double benefit. The Court held that such abuse is evident in the companys selection of
the words and terms of the contract, over which t had absolute control.
The Court then considered whether the defendant company, by reason of
inequitable conduct show, be estopped from enforcing forfeitures in its favor so as to
forestall fraud or imposition on the insured petitioner. The Court discussed that it is a
well settled rule of law that an insurer which with knowledge of facts entitling it to treat a
policy as no longer in force, receives and accepts a premium on the policy, is already
estopped from taking advantage of the forfeiture, and it cannot treat the policy as void for
the purpose of defense to an action to recover for a loss thereafter occurring and at the
same time treat it as a valid policy in order to earn and collect further premiums.
Regarding the argument of the defendant company regarding the violation of
the Hemp Warranty provisions, the Court held that gasoline was not specifically
mentioned among the prohibited articles listed in the said warranty, and such argument
shows the exclusive control of the phraseology of the contract, and therefore such
ambiguity must be held strictly against the insurer and liberally in favor of the insured,
specially to avoid a forfeiture (well-known rule that ambiguities or obscurities must be
strictly interpreted against the party that caused them).
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are
prepared by experts who know and can anticipate the hearing and possible complications
of every contingency. So long as insurance companies insist upon the use of ambiguous,
intricate and technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance, construe every
ambiguity in favor of the insured.
An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat
the very purpose for which the policy was procured
The reason behind the rigid application of the rule on ambiguities is because of
the monopolies, cartels and concentrations of capital actually impose upon parties
cunningly prepared agreements, with the other partys participation in the agreement
reduced to just take it or leave it. Such agreements are called contracts of adhesion or
contracts of adherence, contrary to contracts entered into with equal footing. The
Courts must be vigilant over such contracts in order to protect the weaker party from
abuses and impositions. A contract of insurance is one of perfect good faith for both the
insurer and insured.
Furthermore, it shows that the gasoline kept inside the bodegas were only
incidental to the business of the petitioner, and apparently the Hemp Warranty forbade
storage only in the building of the insured merchandise, when the said gasoline was
found isolated from other insured bodegas.
Regarding the accusation of the defendant company that the petitioner
connived at the loss and fraudulently increased the quantity of the insured stock in the
burnt bodegas, the Court did not agree with such contention as there appears no motive
by the petitioner to defraud the insurer, and since the defendant was not able to present
convincing proof to convict the petitioner of the crime of arson. Regarding the claim that
the petitioner filed false and fraudulent statements, such errors were held by the court to
be caused by the petitioners imperfect knowledge of English and were made without
intent to defraud.
Ty v. Filipinas Compana de Seguros
FACTS
Petitioner Diosdado Ty was an employee of the Broadway Cotton Factory as a
mechanic operator, and he took a Personal Accident Policies from the defendant
insurance companies, on different dates, effective for 12 months. During the effectivity of
these policies, a fire broke out in the factory where Ty was working, and an accident
caused the temporary total disability of his left hand. The defendant insurance companies
refused to pay Tys claims for compensation under the policies, but the Municipal Court of
Manila ruled in favor of the insurance companies. The CFI dismissed the appeal by Ty on
the grounds that under the uniform terms of the insurance policies, for partial disability
of the insured caused by loss of either hand to be compensable, the loss must result from
the amputation of that hand.
Petitioner argued that pursuant to the provision of the insurance contract
regarding indemnity for total or partial disability, it is enough that the insured is disabled
to such extent that he cannot substantially perform all acts or duties needed in his
business, and that what is compensable is not the amputation of his hand, but its
disability. Petitioner claims that the provision was ambiguous, especially as to what
constitutes loss of hand.
Petitioner Ty appealed from the decision of the CFI of Manila which dismissed
the 6 separate complaints he filed against 6 insurance companies (Filipinas Compaia de
Seguros, People's Surety & Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The
Philippine Guaranty Company, Inc., Universal Insurance & Indemnity Co., and Plaridel
Surety & Insurance Co., Inc.) for the collection of a sum of money as compensation for the
disability of his left hand.

ISSUE
Whether or not petitioner Ty can recover from the claims based on the provisions of the
insurance contracts
HELD
No. The Supreme Court affirmed the ruling of the lower court in favor of the defendant
insurance companies. The conditions in the insurance policies were clear that there is a
partial disability when such loss is caused by amputation. In the case at bar, there was no
such amputation, and that all there was was just temporary total disability of the
petitioners left hand. The loss must have been severe in order for the petitioner to be
entitled to indemnity. The Court emphasized that the agreement contained in the
insurance policies is the law between the parties, and since the terms of the policies are
clear, express and specific, there is no need to go beyond such interpretation in order to
cover situations not warranted by the policies.
Del Rosario v. Equitable Insurance
FACTS
Defendant Equitable Insurance and Casualty Co., Inc. issued a Personal
Accident Policy on the life of the son of petitioner Simon del Rosario, Francisco del
Rosario, binding to pay the sum of P1,000-P3,00 as indemnity for the death of the insured
and the policy included a rider regarding drowning, as it stated that death caused by
drowning is covered by the policy.
On February 24, 1957, Francisco del Rosario was on board the motor launch
ISLAMA together with 33 others, including his beneficiary in the Policy, Remedios
Jayme, and because of a fire in the vessel, they were forced to jump off the launch,
resulting to their death of drowning. Petitioner del Rosario, as the father of the insured
and the sole heir, filed a claim for payment with the defendant company, and it paid him
P1,000. The receipt of the amount was acknowledged, but it was claimed by the lawyer of
the petitioner that it was not the correct amount payable under the policy, as it should
have been P1,500, basing on the provisions of Section 2 part 11 of the policy, claiming
that they incident is similar to what is provided in the said section. The Insurance
Commissioner of the defendant company claimed that basing on the provisions of Section
1 part 1 of the policy2 and it refused to pay more. A complaint for the recovery of the
money was filed, but the defendant company claimed that the petitioner had already
received the full amount due as appearing in the policy.
The court held that while the policy mentions specific amounts that may be
recovered for death for bodily injury, there is no specific amount mentioned in the policy
for death through drowning although it was stated to be a ground for recover. Since the
defendant company bound itself to pay P1,000-P3,000 as indemnity for the death of the
insured, but no definite amount was stated for the case of drowning, there is an ambiguity
present and in this respect, such ambiguity must be interpreted in favor of the insured
and strictly against the insurer so as to allow greater indemnity. The court therefore held
that the petitioner is entitled to recover more.
ISSUE
Whether or not because of the ambiguity present in the policy, the petitioner can recover
more from the defendant company
HELD
Yes. The Supreme Court affirmed the ruling of the lower court in favor of the petitioner. It
is settled that when there is an ambiguity with respect to the terms and conditions of the
policy, such ambiguities will be resolved against the one responsible for it. Furthermore,
it is noted that the insured as little, if any, participation in the preparation of the policy,
including the drafting of its terms and conditions, therefore all the more reason that
obscure stipulations in a contract should not be interpreted in favor of the one who
caused the obscurity. In the policy in question, the insurance company agreed to pay
P1,000-P3,000 as indemnity for death of the insured.
1
Section 2. Injury sustained by the wrecking or disablement of a railroad
passenger car or street railway car in or on which the Insured is travelling
as a farepaying passenger. . . . . . . . P1,500.00
2
Section 1. Injury sustained other than those specified below unless
excepted hereinafter. . . . . . . . P1,000.00
And so it has been generally held that the "terms in an insurance policy, which are
ambiguous, equivocal or uncertain . . . are to be construed strictly against, the insurer, and
liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where a forfeiture is involved, and the reason for this
rule is that the "insured usually has no voice in the selection or arrangement of the words
employed and that the language of the contract is selected with great care and
deliberation by expert and legal advisers employed by, and acting exclusively in the
interest of, the insurance company"
Where two interpretations, equally fair, of languages used in an insurance policy may be
made, that which allows the greater indemnity will prevail.
Misamis Lumber v. Capital Insurance
FACTS
Petitioner Misamis Lumber Corporation insured its car for the amount of P14,000 with
defendant Capital Insurance & Surety Company Inc. under certain provisions. In the
evening of November 25, 1961, while the insurance policy was effective, the insured car
passed over a water hole which the driver was not able to see because an oncoming car
that did not dim its light, and this incident caused damage to the car which required
necessary repairs totally to an amount of P306.27. After the repairs were completed, the
petitioner then filed a claim to recover from the defendant company, but it refused to pay.
The case was brought to the CFI, which ruled in favor of the petitioner. The defendant
company admitted that it was liable in the amount of P150, but not for any excess thereof.
ISSUE
Whether or not the petitioner is entitled to the excess of the amount to be paid by the
defendant insurer
HELD
No. The Supreme Court held that the petitioner is not entitled to such amount, and that
the defendant company should not pay more than P150. Based on the provisions of the
policy, if the insured authorizes the repair, the liability of the insurer is limited to P150.
The Court held that the literal meaning of this stipulation must control, since it is an
actual contract, expressly and plainly provided for in the policy. The policy provided is
clear and specific and leaves no room for interpretation, and the Court held that the
interpretation of the lower court cannot stand, as it did not relieve the defendant
company from paying the excess amount because according to it, such would render the
insurance contract one-sided and that the insurer did not show that the cost of the
repairs was unreasonable, excessive or padded, or that it could have been cheaper. The
policy set both the limits and the mechanics that the insured must follow in order to be
entitled for full indemnity of repairs. There was an option in the policy for the insurance
company to undertake the repairs, but in the case at bar, the company was deprived of
that option because the insured took it upon himself to make the repairs, and only
notified the insurer when such repairs were done, therefore the limit of P150 applies.
Furthermore, it seems contrary to justice and equity to require that the insurer must
prove that the cost of the repairs were unreasonable, when the insurer was not given a
chance to inspect and assess the damage before repairs were made.
The insurance contract may be rather onerous ("one-sided", as the lower court put it),
but that in itself does not justify the abrogation of its express terms, terms which the
insured accepted or adhered to and which is the law between the contracting parties.
Verendia v. CA
FACTS
Petitioner Rafael Verendias residential building was insured by respondent
Fidelity and Surety Insurance Company of the Philippines (Fidelity), with its Fire
Insurance Policy, for the amount of P385,000, and the designated beneficiary was the
Monte de Piedad & Savings Bank. The same building was also insured with other
insurance companies, The Country Bankers Insurance for P56,000 and The Development
Insurance for P400,000. During the effectivity of the three fire insurance policies, the
insured building was destroyed by a fire. Fidelity was informed of the loss but refused to
pay under its policy despite demands, compelling Verandia to file a complaint with the
CFI of QC, with the complaint being amended to include Monte de Piedad as an unwilling
defendant.
Fidelity claimed that the policy was avoided by reason of over-insurance, and
that Verandia had maliciously represented that the building was leased to a certain
Roberto Garcia, when it was actually a Marcelo Garcia. The trial court ruled in favor of
Fidelity, as apart from affirming the claims of Fidelity, it also held that par. 3 of the policy
was also violated by Verendia as he failed to inform Fidelity of other insurance coverages
(with Country Bankers Insurance and Development Insurance).
The decision was reversed in the appellate court, as it held that: there was no
misrepresentation regarding the lease for the contract signed by Marcelo Garcia in the
name of Roberto Garcia and (b) that the requirement in par. 3 of the policy was waived by
Fidelity as shown in its conduct in attempting to settle Verendias claim.
ISSUE
(1) Whether or not the contract of lease submitted by Verendia to support his claim on
the fire insurance policy constitutes a false declaration which would forfeit his benefits
under Section 13 of the policy
(2) Whether or not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendias claim in the amount stated in the receipt
HELD
The Supreme Court ruled in favor of Fidelity, by affirming the decision of the trial court
and reversed and set aside the decision of the appellate court.
(1) Yes. The Supreme Court held that evidence points to the fact that there was indeed
falsity involved. Regarding the falsity of the lease contract, basing on the decision of the
appellate court, the Supreme Court held that there was a misapprehension of facts.
Evidence shows that it was Marcelo Garcia who was the real lessee and was occupying
the building when it was burned, and Roberto Garcia disappeared after the fire, while in
an affidavit he stated that he was not the lessee of the building. Evidence shows that
apparently, Marcelo Garcia was the cousin of Robert Garcia, who had been paying the
rentals, but Verendia failed to explain why Marcelo signed his cousins name when he was
the one paying the rent, and why he (Verendia) as the lessor allowed it. These evidence
shows that Verendia concocted the lease contract in order to deflect responsibility for the
fire towards an alleged lessee, inflated the value of the property, insured the same
property with two other insurance companies, and even created a dead-end for the
adjuster by Robert Garcias disappearance .
Basically a contract of indemnity, an insurance contract is the law between the parties,
and its terms and conditions constitute the measure of the insurers liability and
compliance therewith is a condition precedent to the insureds right to recover from the
insurer
As it is also a contract of adhesion, an insurance contract should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it.
In the case at bar, it is evident that Verendia used a false lease contract in order
to support his claim under the fire insurance policy, therefore the terms of the policy
should be strictly construed against him as the insured. He failed to live by the terms of
the policy, which were expressed in terms that were clear and unambiguous. In having
presented a false declaration to support his claim for the benefits, he forfeited all benefits
therein by virtue of section 13 of the policy in the absence of proof that Fidelity waived
such provision (Section 13: forfeited "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
devises are used by the Insured or anyone acting in his behalf to obtain any benefit under
the policy". By presenting a false lease contract, Verendia disregarded the principle that
insurance contract are uberrimae fidae and demand the most abundant good faith.
(2) No. The Supreme Court held that by submitting the subrogation receipt as evidence in
court, Fidelity has bound itself to mutually agree to settle Verendias claim, and it is noted
that in the receipt, it was stated that Verendia had received the amount. But the Court
held that the subrogation receipt by itself does not prove that a settlement had been
arrived at and was enforced, therefore it does not hold that Fidelitys presentation of the
subrogation receipt in evidence already indicates that it accedes to its terms or it would
be substituting the will of the Court for that of the parties.
Gulf Resorts v. Phil. Charter Insurance Corp.
FACTS
 Petitioner Guld Resorts Inc. is the owner of Plaza Resort in La Union, and it was
insured originally with the AHAC-AIU, and in the first four insurance policies issued by
AHAC-AIU, the risk of loss from earthquake shock was extended only to the petitioners
two swimming pools
The issue between petitioner Gulf Resorts Inc. and respondent Philippine
Charter Insurance Corporation involves the insurance companys liability for earthquake
damage to petitioners property. Petitioner claims that pursuant to the policys
earthquake shock endorsement rider, the policy covers all damages to the properties
within its resort caused by earthquake, while the respondent claims that the rider limits
the liability for loss only to the two swimming pools of petitioner. Documents show that
apparently petitioner had paid a premium against earthquake shock in the insurance
policies involved, and that the policy was endorsed by the respondent, stating that in
consideration of the payment by the petitioner, included additional premium, the
respondent agrees to have the insurance policy cover loss or damage to shock to any of
the property of the insured, but another evidence shows that apparently the word
included was deleted.
Following the earthquake, petitioner advised respondent that it would be
making a claim under its insurance policy for the damages on its properties, as the
earthquake caused damage to its clubhouse and two swimming pools. It was stated by
Bayne Adjusters and Surveyors Inc, an independent claims adjuster assigned by the
respondent, that except for the swimming pools, all affected items have no coverage of
earthquake shocks. Petitioner filed a claim for settlement of the damage to all of its
properties, but the respondent denied petitioners claim on the ground that the insurance
policy only afforded earthquake shock to the two swimming pools.
In failing to reach a settlement, the case was brought to the RTC, with the court
ruling in favor of the respondent. Apparently the petitioner only paid a premium against
the peril of earthquake shock, and the same premium covered only the two swimming
pools in all the policies issued by AHAC-AIU. The trial court ordered the respondent to
pay the petitioner the amount representing the damage to the two damaged pools, but
held that it is only the two swimming pools which had earthquake shock coverage (and
by virtue of the contract of insurance, the petitioner must be paid the amount), and the
respondent is only liable for the damage caused to the two swimming pools, as it has
been made known to the petitioner that it was ready and willing to settle for such
liability, and that there was no other basis for the grant of other damages prayed by the
petitioner. The Court held that though the petitioner was correct in saying that a policy of
insurance is a contract of adhesion and hence, where the language used in an insurance
contract or application is ambiguous, it should be resolved against the party responsible
for it (the insurance company which prepared the contract), in the case at bar the
language used in the policy in litigation is clear and unambiguous and no need for
interpretation or construction but only application of the provisions therein.
The petitioner filed an appeal with the CA, which affirmed the decision of the
lower court.
Petitioner claims that the policys earthquake shock endorsement clearly
covers all the properties insured and not only the two swimming pools, and that the
unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in
the body of the insurance policy, that the qualification referring to the two swimming
pools had already been deleted in the earthquake shock endorsement, that the
earthquake shock endorsement rider should take precedence over the wording of the
insurance policy because the rider is the more deliberate expression of the agreement of
the contracting parties, that any ambiguity in the earthquake shock endorsement should
be resolved in favor of the petitioner and against the respondent, as it was the
respondent which caused the ambiguity in the policy, that the premium for the
earthquake shock coverage already included the additional premium for the policy, that
the parties contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties.
ISSUE
Whether or not petitioner Gulf Resorts can recover from respondent apart from the
claims it can recover from the insured pools
HELD
No. The Supreme Court did not find merit in the contentions of the petitioner. As
evidenced in the insurance policy, only the two swimming pools were specified as
included. Petitioner claims that because of the rider, there were no qualifications placed
on the scope of the earthquake shock coverage, and therefore the policy extended
earthquake shock coverage to all insured properties. The Court emphasized that it is
basic that all the provisions of the insurance policy should be examined and interpreted
in consonance with each other and that the policy should not be construed piecemeal:
certain stipulations cannot be segregated and then made to control, and neither do
particular words or phrases necessarily determine its character. Therefore the petitioner
cannot focus on the earthquake shock endorsement to the exclusion of other provisions,
as all the provisions and riders, taken and interpreted together, clearly show that the
intention of the parties is to extend the policy coverage to the two swimming pools only.
Section 2(1) IC: defines a contract of insurances as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event
An insurance contract exists where the following elements concur:
(1) The insured has an insurable interest
(2) The insured is subject to a risk of loss by the happening of the designated peril
(3) The insurer assumes the risk
(4) Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk
(5) In consideration of the insurers promise, the insured pays a premium
Insurance premium: Consideration paid an insurer for undertaking to indemnify the
insured against a specified peril
In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as
the risk attaches
In the case at bar, there were no premiums paid with regard to earthquake
shock coverage, except on the two swimming pools, and there is no mention of any
premium payable for other resort properties with regard to earthquake shock.
The petitioner cannot merely rely on the earthquake shock endorsement alone,
and it does not hold that the respondents contemporaneous and subsequent acts to the
issuance of the insurance policy falsely gave the petitioner assurance that the coverage of
the earthquake shock endorsement included all its properties in the resort.
In sum, there is no ambiguity in the terms of the contract and its riders, and the
petitioner cannot rely on the general rule that insurance contracts are contracts of
adhesion which should be liberally construed in favor of the insured and strictly against
the insurer company which usually prepares it
Contract of adhesion: one wherein a party, usually a corporation, prepares the
stipulations in the contract, while the other party merely affixes his signature or his
adhesion thereto
Through the years, the courts have held that in these type of contracts, the parties do not
bargain on equal footing, and the weaker partys participation being reduced to the
alternative to take it or leave it. Thus these contracts are viewed as traps for the weaker
party whom the courts must protect. Consequently any ambiguity therein is resolved
against the insurer or construed liberally in favor of the insured.
The Court will only rule out blind adherence to terms where facts and circumstances will
show that they are basically one-sided
In the case at bar, the petitioner cannot claim that it did not know the
provisions of the policy, as from the inception of the policy, the respondent was already
required to copy verbatim the provisions and terms of its latest insurance policy from
AHAC-AIU
White Gold v. Pioneer Insurance
FACTS
Petitioner White Gold Marine Services Inc. procured a protection and
indemnity coverage for its vessels from Steamship Mutual Underwriting Association
Limited with respondent Pioneer Insurance and Surety Corporation, subsequently the
petitioner was issued a Certificate of Entry and Acceptance, and respondent also issued
receipts evidencing payments for the coverage. Because petitioner failed to fully pay its
accounts, Steamship Mutual refused to renew the coverage. Steamship Mutual then filed a
case for the collection of sum of money against petitioner in order to recover its unpaid
balance. Petitioner filed a complaint against Steamship Mutual, claiming it violated
Section 186 and 187 IC, while respondent violated Sections 299, 300, 301, in relation to
sections 302 and 303 IC.
The Insurance Commission dismissed the complaint against Steamship Mutual,
as it was not required to secure a license since it was not engaged in the insurance
business, rather it was a Protection and Indemnity Club. It also stated that Pioneer need
not obtain another license as insurance agent and/or a broker for Steamship Mutual
because Steamship Mutual was not engaged in the insurance business. Pioneer was
already licensed, therefore it would be superfluous to require Steamship Mutual to be
required one. The decision of the Insurance Commissioner was affirmed by the CA, as it
distinguished between P&I Clubs and conventional insurance, and held that Pioneer
merely acted as a collection agent of Steamship Mutual
ISSUE
(1) Whether or not Steamship Mutual, a P&I Club, is engaged in the insurance business in
the Philippines
(2) Whether or not respondent Pioneer needs a license as an insurance agent/broker for
Steamship Mutual

HELD
The Supreme Court reversed and set aside the ruling of the Insurance Commission and
ordered Steamship Mutual and Pioneer to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent respectively.
(1) Yes. The Supreme Court held that records reveal that Steamship Mutual is doing
business in the country without the requisite certificate of authority as stated in Section
187 IC. It was admitted that Steamship Mutual is a P&I Club and it does not have a license
to do business in the Philippines, although Pioneer is its resident agent. Petitioner claims
that Steamship Mutual as a P&I Club is engaged in the insurance business (P&I Club: an
association composed of shipoowners in general who band together for the specific
purpose of providing insurance cover on mutual basis against liabilities incidental to
shipowning that the members incur in favor of third parties) and that the purpose of P&I
Clubs is to solicit and provide protection and indemnity coverage. Respondents argue
that though it is a P&I Club, it is not engaged in the insurance business, as it is merely an
association of vessel owners who have come together to provide mutual protection
against liabilities incidental to shipowning.
In answering whether or not Steamship Mutual is engaged in the insurance
business, the SC referred to Section 2(2) IC, which enumerates what constitutes doing an
insurance business or transacting an insurance business:
(a) making or proposing to make, as insurer, any insurance contract
(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity of
the surety;
(c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
The same provision also provides that the fact that no profit is derived from the making
of insurance contracts, agreements or transactions, or that no separate or direct
consideration is received therefor, shall not preclude the existence of an insurance
business.
To determine whether or not a contract is an insurance contract, it depends on
the nature of the promise, the act required to be performed, the exact nature of the
agreement in the light of the occurrence, contingency or circumstances under which the
performance becomes requisite, and not by what the contract is called.
Insurance contract: contract of indemnity; one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event
Marine insurance: undertakes to indemnify the assured against marine losses, such as
losses incident to a marine adventure
A mutual insurance company is a cooperative enterprise where the members
are both the insurer and he insured, and all the members contribute, by a system of
premiums or assessments, to the creation of a fund from which all losses and liabilities
are paid, and where profits are divided among themselves in proportion to their interest,
and these clubs provide three types of coverage: protection and indemnity, war risks, and
defense costs.
A P&I Club is a form of insurance against third party liability, where the third
party is anyone other than the P&I Club and the members, and in the case at bar,
Steamship Mutual as a P&I Club is considered as a mutual insurance company association
engaged in the marine insurance business.
As Steamship Mutual is indeed doing business in the country without the
necessary certificate of authority, the Court emphasized that in order for it to continue to
do business in the country, it must secure a license from the Insurance Commission. A
contract of insurance involves public interest, and therefore regulation by the State is
necessary. No insurer or insurance company can engage in insurance business without
first securing a license or a certificate of authority from the Insurance Commission.
(2) Yes. The Supreme Court held that although Pioneer is already a licensed insurance
company, it needs a separate license to act as an insurance agent for Steamship Mutual as
provided in Section 299 IC As evidenced by the certificate of registration issued by the
Insurance Commission, respondent Pioneer has been licensed to do or transact insurance
business by virtue of the certificate of authority, but the certification also states that
Pioneer does not have a separate license to be an agent/broker of Steamship Mutual.
Section 299 IC: No person shall act as an insurance agent or as an insurance broker in the
solicitation or procurement of applications for insurance, or receive for services in
obtaining insurance, any commission or other compensation from any insurance
company doing business in the Philippines or any agent thereof, without first procuring a
license so to act from the Commissioner, which must be renewed annually on the first day
of January, or within six months thereafter
Eternal Gardens Memorial Park Corp. V. Philam
FACTS
Respondent Philamlife agreed to enter into an agreement (Creditor Group Life
Policy No. P-1920) with petititoner Eternal Gardens Memorial Park, and under the said
policy, clients of the petitioner who purchased burial lots from it on an installment basis
would be insured by Philmlife, with the amount of insurance coverage depending upon
the existing balance of the purchased burial lots. The policy was to be effective for one
year, renewable on a yearly basis. Petitioner Eternal was required to submit to Philamlife
a list of all new lot purchasers, together with a copy of the application of each purchaser,
and the amounts of the respective unpaid balances of all insured lot purchasers, and
included in the list as new business was a certain John Chuan, with a balance of payments
of P100,000 and Chuang eventually died. Petitioner Eternal then sent a letter to
Philamlife, serving as an insurance claim for Chuangs death including certain documents
(Certificate of Death, Identificaiton Certificate, Certificate of Claimant, Certificate of
Attending Physician, Assureds Certificate), and respondent Philiamlife required a number
of other documents to be submitted, which petitioner Eternal did submit. More than a
year has passed, and respondent Philamlife has not replied to the petitioners claim,
compelling the petitioner to demand from the respondent the payment of the claim, but
the respondent denied such demand stating that Chaung was not covered under the
policy because no application for the insurance has been submitted for approval, and that
with regard to the acceptance of the premiums, these do not connote their approval of the
insurance coverage but were held by them in trust for the payor until the prerequisites
for the insurance coverage have been met, but it also mentioned that it would return all
the premiums which have been paid in behald of Chuang.
Petitioner filed a case against Philamlife with the RTC for the recovery of a sum
of money, and the RTC ruled in favor of the petitioner, as it held that Eternal had
submitted Chuangs application fo the insurance which was accomplished before he died,
and that Philamlifes inaction on the application for the insurance and its acceptance of
the premiums are acts deemed to have approved Chuangs application. Furthermore it
held that since the contract was a group life insurance, once proof of death is submitted,
the payment must follow.
The decision was reversed and set aside by the CA, as it held that since
apparently Chuangs application was not submitted, such is in violation of Section 26 IC,
and therefore Chuang was not covered by the insurance.
ISSUE
Whether or not respondent Philamlife should have included Chuang in the coverage of
the application
HELD
Yes. The Supreme Court ordered Philamlife to pay the necessary proceeds of Chuangs life
insurance policy. The petitioner claims that it had submitted a copy of the insurance
application of Chuang before his death, and that Chuang was included in the list of new
business, but Philamlife claims that the evidence presented by Eternal was insufficient, as
Eternal must present evidence showng that Philamlife received a copy of Chuangs
insurance application. The Supreme Court held that evidence on record shows that
Philamlife stamped as received the insurance applications, and such stamp of receipt has
the effect of acknowledging receipt of the letter together with the attachments, therefore
such receipt is considered as ad admission by Philamlife against its own interest. The
burden is upon Philamlife to show that the application letter submitted by petitioner
Eternal did not include Chuangs insurance application, which Philamlife failed to do,
therefore it is deemed to have received Chuangs insurance application.
In answering whether or not Philamlife assumed the risk of loss without
approving the application, the Supreme Court answered in the affirmative, as Philamlife
and Eternal entered into a Creditor Group Life Policy, and it is evident in the Effective
Date of Benefit provision that there is an ambiguity between the first sentence of the
provision stating that the insurance coverage of the clients of Eternal have already
become effective upon contracting a loan with Eternal, and the second sentence requiring
Philamlife to approve the insurance contract before it can become effective. The Court
emphasized that a contract is a contract of adhesion which should be construed liberally
in favor of the insured and strictly against the insurer in order to safeguard the latters
interest.
Indemnity and liability insurance policies are construed in accordance with the general
rule of resolving any ambiguity therein in favor of the insured, where the contract or
policy is prepared by the insurer. A contract of insurance, being a contract of adhesion,
par excellence, any ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and strictly against the
insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its
obligations.

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.

In the case at bar, the vague contractual provision in the policy must be Philamcare Health Systems Inc. v. Court of Appeals and Julita Trinos
construed in favor of the insured and in favor of the effectivity of the insurance contract.
FACTS
The conflicting provisions must be harmonized to mean that upon the purchase of a
memorial lot on installment from Eternal, an insurance contract covering the lot
Ernani Trinos, the deceased husband of respondent Julita Trinos, applied for a
purchaser is created and effective, valid, and binding until terminated by Philamlife by
health care coverage with petitioner Philamcare, and the application was approved for a
disapproving the insurance application. The inaction of the insurer cannot be interpreted
period of one year, and he was issued a Health Care Agreement, and under the agreement,
as a termination of the insurance contract, as the termination must be explicit and
the respondents husband was entitled to avail of hospitalization benefits (ordinary or
unambiguous.
emergency) and was also entitled to avail of out-patient benefits (annual physical
examinations, preventive health care and other out-patient services). Upon the
As a final note, to characterize the insurer and the insured as contracting parties on equal
termination of the agreement, it was extended for another year and the amount of
footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with
coverage increased. During that period, Ernani suffered a heart attack, and while he was
vast amounts of experience in the industry purposefully used to its advantage. More often
confined in the hospital, the respondent tried to claim the benefits under the health care
than not, insurance contracts are contracts of adhesion containing technical terms and
agreement, but was denied on the grounds that the health care agreement was void, and
conditions of the industry, confusing if at all understandable to laypersons, that are
the fact that there was apparently concealment regarding Ernanis medical history (he
imposed on those who wish to avail of insurance. As such, insurance contracts are
had no answer to the question in the application form: Have you or any of your family
imbued with public interest that must be considered whenever the rights and obligations
members ever consulted or been treated for high blood pressure, heart trouble, diabetes,
of the insurer and the insured are to be delineated. Hence, in order to protect the interest
cancer, liver disease, asthma or peptic ulcer? (If Yes, give details), and because of this, the
of insurance applicants, insurance companies must be obligated to act with haste upon
respondent had to shoulder the expenses. Ernani eventually died. The respondent then
insurance applications, to either deny or approve the same, or otherwise be bound to
instituted an action for damages against petitioner Philamcare and its president, asking
honor the application as a valid, binding, and effective insurance contract
for the reimbursement of her expenses, plus moral damages, and the lower court ruled in
her favor, ordering the petitioners to pay and reimburse her. The decision was affirmed
by the CA, but deleted all awards for damages and absolved the petitioners president.

Petitioners claim that he health care agreement is not an insurance contract

therefore the incontestability clause under the IC does not apply. Petitioner claims that
the agreement grants living benefits and that only medical and hospitalization benefits
are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. It also argues that unlike insurance
contracts which last longer, the agreement was only for one year, therefore the
incontestability clause does not apply as the same requires an effectivity period of at least
2 years. Furthermore it argues that it is not an insurance company governed by the
Insurance Commission, but a Health Maintenance Organization under the authority of the
DOH.
ISSUE
Whether or not the health care agreement is a contract of insurance
HELD
Yes. Section 2(1) IC defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium
Section 3 IC states that any contingent or unknown event, whether past or
future, which may damnify a person having an insurable interest against him, may be
insured against. Every person has an insurable interest in the life and health of himself.
Section 10 IC provides: Every person has an insurable interest in the life and
health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of the respondents husband in
obtaining the health care agreement was his own health, and the agreement was in the
nature of a non-life insurance which is practically 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 under the contract.
Petitioner claims that the respondents husband concealed material
information in his application, as the application required that the respondents husband
sign an express authorization for any person, organization or entity that has nay record
or knowledge of his health to furnish any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or examination,
which may affect the eligibility for health care coverage, and it is also required that the
applicant disclose his medical history.
Though there is a stipulation regarding the invalidation of the agreement, the
Court held that the petitioner cannot merely rely on such stipulation, which states that
failure to disclose or misrepresentation of any material information would invalidate the
agreement from the very beginning. It cannot be claimed that the respondents husband
in answering the questions regarding his medical history would be considered as a
fraudulent intent on his part, as the insurer is not justified in relying upon such
statement but is obligated to make further inquiries. It is necessary that the fraudulent
intent on the part of the insured must be established for the insurance contract to be
rescinded.
Concealment as a defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the provider or insurer.
Section 27 IC: a concealment entitles the injured party to rescind a contract of insurance.
The right to rescind should be exercised previous to the commencement of an action on
the contract
With or without the authority to investigate, the petitioner is liable for the
claims made under the contract, and having assumed responsibility, it is bound to answer
to them. The liability of the health care provider attaches once the member is hospitalized
for the disease or injury covered by the agreement or whenever he avails of the benefits
he has prepaid.
The cancellation of health care agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or more
of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and
upon request of insured, to furnish facts on which cancellation is based
But in the case at bar, none of the preconditions were fulfilled in the case.
The Court emphasized that when the terms of insurance contracts contain
limitation on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. As such is a contract of adhesion, the
terms of the insurance contract are to be construed strictly against the party which
prepared the contractthe insurer. Because of the insurance companys exclusive
control over the terms and phraseology of the insurance contract, any ambiguity must be
strictly interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture. This applies to health care agreements.
Though the petitioner claims that the respondent was not the legal wife of the
deceased member, as at the time of their marriage the deceased was previously married
to another woman who was still alive, the Court held that the health care agreement is in
the nature of a contract of indemnity therefore payment must be made to the party who
incurred the expenses, therefore the respondent is entitled to reimbursement.
Phil. Healthcare Insurance Providers v. CIR
FACTS
Petitioner Philippine Health Care Providers Inc. is a domestic corporation
whose primary purpose is to establish, maintain, conduct and operate a prepaid group
practice health care delivery system/health maintenance organization to take care of the
sick and disabled persons enrolled in the health care plan, and to provide for the
administrative, legal and financial responsibilities of the organization. Individuals who
are enrolled in this program pay an annual membership fee and are entitled to various
medical services. Respondent Commissioner of Internal Revenue sent a letter to the
petitioner demanding the payment of deficiency taxes from the years 196-1997, and such
deficiency assessment was imposed on the petitioners health care agreement with the
members of the health care program pursuant to Section 185 1997 Tax Code. The
petitioner protested the assessment but because of the inaction of the respondent, the
petitioner filed a petition with the CTA to cancel the deficiency VAT and DST (
documentary tax) assessments. The CTA ordered the petitioner to pay the VAT deficiency
but the DST assessment was cancelled and set aside. The respondent then appealed to the
CA regarding the cancellation of the DST assessment, claiming that the petitioners
healthcare agreement was a contract of insurance subject to DST under Section 185 1997
Tax Code. The CA held that the health care agreement was in the nature of a non-life
insurance contract subject to DST, therefore requiring the petitioner to pay the deficient
DST assessment for 1996 and 1997. The petitioner moved for reconsideration by the CA
denied it.
ISSUE
Whether or not the petitioners must pay the deficient DST assessment
HELD
No. The Supreme Court granted the motion for reconsideration and reversed and set
aside the ruling of the CA against the petitioners, by cancelling and setting aside the order
for the petitioner to pay the deficiency DST assessment. The petitioner claimed that it is
important for the court to characterize the business it is engaged in, whether it is an HMO
(Health Maintenance Organization) or an insurance company, so as to determine whether
or not it is liable for DST on its health care agreements. The Court emphasized that HMOs
are not engaged in insurance business. Based on Section 185 of the 1997 Tax Code, there
are two requisites needed before the DST can apply: (1) the document must be a policy of
insurance or an obligation in the nature of indemnity. (2) the maker should be
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland and fire insurance). The petitioner is indeed an HMO, which provides,
offers or arranges for coverage of designated health services needed by plan members for
a fixed prepaid premium, and the payments do not vary with the extent, frequency or
type of services provided.
 In the case at bar, the petitioner was an HMO but not engaged in the business
of insurance during the pertinent taxable years. Section 2(2) IC provides what constitutes
an insurance business or transacting an insurance business:
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the
making thereof does not constitute the doing or transacting of an insurance business
HMO are not considered as insurance business, and one test applied is whether
the assumption of risk and indemnification of loss (elements of an insurance business)
are the principal object and purpose of the organization, or whether they are merely
incidental to its business. If they are merely incidental and service is the principal
purpose, then business is not insurance.
HMO: the cooperative is concerned principally with getting service rendered to its
members and doing so at lower prices made possible by quantity purchasing and
economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused
by extraordinary and unusual occurrences, such as death, disaster at sea, fire and
tornado. To summarize, the distinctive features of the cooperative are the rendering of
service, its extension, the bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, the substantial reduction in
cost by quantity purchasing in short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification for cost after the services is
rendered. Except the last, these are not distinctive or generally characteristic of the
insurance arrangement.
That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct.
The fallacy is in looking only at the risk element, to the exclusion of all others present or
their subordination to it. The question turns, not on whether risk is involved or assumed,
but on whether that or something else to which it is related in the particular plan is its
principal object purpose.
HMO: service rather than indemnity as the principal purpose; There is another and more
compelling reason for holding that the service is not engaged in the insurance business.
Absence or presence of assumption of risk or peril is not the sole test to be applied in
determining its status. The question, more broadly, is whether, looking at the plan of
operation as a whole, service rather than indemnity is its principal object and
purpose.Certainly the objects and purposes of the corporation organized and maintained
by the California physicians have a wide scope in the field of social service. Probably
there is no more impelling need than that of adequate medical care on a voluntary, low-
cost basis for persons of small income. The medical profession unitedly is endeavoring to
meet that need. Unquestionably this is service of a high order and not indemnity.[26]
The Court emphasized the main difference between an HMO and an insurance
company, with the HMO undertaking to provide or arrange for the provision of medical
services through participating physicians, while insurance companies simply undertake
to indemnify the insured for medical expenses incurred up to a pre-agreed limit.
Therefore the mere presence of risk is not sufficient to override the primary purpose of
the business to provide medical services as needed, with payment made directly to the
provider. So even though the petitioner assumes the risk of paying the cost of these
service, even if significantly more than what the member has prepaid, it nevertheless
cannot be considered as engaged in the insurance business. As an HMO, it is obligated to
maintain the good health of its members, and its health care programs are designed to
prevent or to minimize the possibility of any assumption of risk on its part, therefore its
agreements are not to indemnify its members against any loss or damage arising from a
medical condition but to provide the health and medical services needed to prevent such
loss or damage.
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services
through participating physicians, thus relieving subscribers of any further financial
burden, while the latter only undertake to indemnify an insured for medical expenses up
to, but not beyond, the schedule of rates contained in the policy.
The primary purpose of a medical service corporation, however, is an undertaking to
provide physicians who will render services to subscribers on a prepaid basis. Hence, if
there are no physicians participating in the medical service corporations plan, not only
will the subscribers be deprived of the protection which they might reasonably have
expected would be provided, but the corporation will, in effect, be doing business solely
as a health and accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service
corporation in return for which the health service corporation agrees to make payment
directly to the participating provider
The Court also noted that the health care agreement in the case is not an
insurance contract contemplated under Section 185 NIRC 1997, as such section states
that DST is imposed on all policies of insurance or obligations of the nature of indemnity
for loss, damage or liability. Tax statutes are strictly imposed against the taxing authority
as taxation is a destructive power interfering with personal and property rights of the
people and takes from them a portion of their property for the support of the
government, therefore tax laws cannot be extended by implication beyond the clear
import of their language, nor their operation enlarged as to embrace matters not
specifically provided.
The agreement also allows a member to take advantage of the benefits even in
the absence of any peril, loss or damage on his or her part. Furthermore, though the
petitioner is obliged to reimburse the member who receives care from a non-
participating physician or hospital, such is a minor part of the list of services available,
the assumption of the expense by the petitioner is not confined to the happening of a
contingency but includes incident even in the absence of illness or injury. Though risk is a
primary element of an insurance contract, it does not, by itself, is sufficient to establish it,
as almost anyone who undertakes a contractual obligation always bears a certain degree
of financial risk. The risk involved in an HMO is a business risk (a risk that it might fail to
earn a reasonable return on its investment) but it is not the risk peculiar only to
insurance companies, and their objective is to provide medical services at reduced cost
and not to distribute risk like an insurer.
Insurance risk: also known as actuarial risk is the risk that the cost of insurance claims
might be higher than the premiums paid. The premiums are calculated on the basis of
assumptions made relative to the insured.

Section 2 IC defines a contract of insurance and its necessary elements, but in

the case at bar, the elements characterizing an insurance contract are no present in the
health care agreements. The primary purpose of the HMO is in rendering service,
therefore it is not a contract of insurance and it does not necessarily mean that the
contract which contains all the elements would be considered as an insurance contract.
Furthermore, there is no loss, damage or liability on the part of the member that should
be indemnified by the petitioner as an HMO, because under the agreement, the member
pays the petitioner a predetermined consideration in exchange for the medical services,
the petitioner does not reimburse or indemnify the member as the latter does not pay
any third party, rather it is the petitioner who pays the participating health care
providers or physicians for the services rendered at pre-agreed rates, the member does
not make any such payment. Indemnification presupposes that a liability or claim has
already been incurred, but in the case of HMO, there is no indemnity because the member
merely avails of medical services to be paid or already paid in advance at a pre-agreed
price under the agreements. Filipinas Compana De Seguros v. Christern, Heunefeld and Co. Inc.
FACTS
Respondent Christern, Huenefeld and Co. Inc., after paying the corresponding
premium, obtained a fire policy from petitioner Filipinas Comapan de Seguros, covering
merchandise contained in a building in Manila. During the Japanese military occupation,
the insured merchandise inside the building were burned, and so the respondent
submitted to the petitioner its claim under the policy. The salvaged goods were sold at a
public auction and the total loss suffered by the responded was fixed at P92,650.
Petitioner refused to pay the claim on the ground that the policy had ceased to be in force
on the date US declared war against Germany, and the respondent corporation, though
organized under and by the virtue of Philippine laws, was being controlled by German
subjects and the petitioner being a company under American jurisdiction. But because of
the order by the Director of Bureau of Financing, Philippine Executive Commission, the
petitioner paid the respondent the sum.
Petitioner then filed an action with the CFI of Manila to recover from the
respondent the paid sum, as the petitioner claimed that the insured merchandise were
burned after the policy issued in 1941 in favor of the respondent ceased to be effective,
and the payment made by the petitioner was done under pressure. The CFI Manila
dismissed the action. The CA affirmed the decision. The CA held that the petitioner cannot
claim that the respondent corporation became an enemy when the US declared war
against Germany, as jurisprudence show that a corporation is a citizen of the country or
state by and under the laws of which it was created or organized, and that the nationality
of the corporation is not determined by the character or citizenship of its stockholders.
ISSUE
Whether or not the fire policy ceased to exist because the respondent corporation is
considered as an enemy corporation
HELD
Yes. The Supreme Court held that the respondent became an enemy corporation upon the
outbreak of WWII, and the jurisprudence relied upon by the CA have lost its force based
on the latest decisions of the SC of the US (Clark v. Uebersee Finanz Corporation). Under
the Philippine Insurance Law (Act No. 2427 Section 8, anyone except a public enemy may
be insured.
Effect of war, generally. All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition
includes all negotiations, commerce, or trading with the enemy; all acts which will
increase, or tend to increase, its income or resources; all acts of voluntary submission to
it; or receiving its protection; also all acts concerning the transmission of money or
goods; and all contracts relating thereto are thereby nullified. It further prohibits
insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in
service with the enemy; this for the reason that the subjects of one country cannot be
permitted to lend their assistance to protect by insurance the commerce or property of
belligerent, alien subjects, or to do anything detrimental too their country's interest. The
purpose of war is to cripple the power and exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its enemy's property and repay in insurance
the value of what has been so destroyed, or that it should in such manner increase the
resources of the enemy, or render it aid, and the commencement of war determines, for
like reasons, all trading intercourse with the enemy, which prior thereto may have been
lawful. All individuals therefore, who compose the belligerent powers, exist, as to each
other, in a state of utter exclusion, and are public enemies.
Because of the war, the respondent company has become an enemy
corporation and the insurance policy issued in its favor by the petitioner had ceased to be
valid and enforceable, as the respondent was not entitled to any indemnity under the said
policy from the petitioner during the war, however, elementary rules of justice (in the
absence of any specific provision in the Insurance Law) require that the premium paid by
the respondent during the period covered by the policy, should be returned by the
petitioner.

Constantino v. Asia Life Insurance Co.
FACTS
In the first case, Respondent Asia Life Insurance Co., a foreign corporation
incorporated under US laws, in consideration of a premium, issued a policy to petitioner
Arcadio Constatino for a term of 20 years, with petitioner Paz Lopez de Constantino as
the appointed beneficiary. After the first payment was made, no further premiums were
paid, until the insured eventually died. Because of the Japanese occupation, the
respondent corporation had to close its branch office in Manila from 1942 to 1945.
In the second case, respondent corporation issued a policy covering the lives of
Tomas Ruiz and Agustina Peralta, and the annual premium of the policy was regularly
paid. Upon the Japanese occupation, the insured and the insurer became separated by
lnes of war and it was impossible and illegal for them to deal with each other. Eventually
Tomas Ruiz died, and petitioner Agusitina Peralta demanded payment from the
respondent corporation, but it refused to pay on the ground of non-payment of the
premiums.
Petitioners in both cases claim that as beneficiaries, they are entitled to receive
the proceeds of the policies, and they allege that the non-payment of the premiums was
because of the closing of the respondents offices in Manila during the Japanese
occupation and the impossible circumstances created by war. The respondent
corporation claims that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation. The
lower court absolved the respondent.
ISSUE
Whether or not the petitioners are entitled to receive the proceeds of the policies
HELD
No. The Supreme Court affirmed the decision of the lower court, and absolved the
respondent company from all liability on the policies in question. Since 1917, the
Philippine law on Insurance was found in Act No. 2427, which was largely copied from
the Civil Code of California. In considering the express terms of the policy in question,
that all premium payments are due in advance and any unpunctuality in making such
payment shall cause the policy to lapse, the Court considered the definition of contracts of
insurance based on jurisprudence: "contracts of insurance are contracts of indemnity
upon the terms and conditions specified in the policy. The parties have a right to impose
such reasonable conditions at the time of the making of the contract as they may deem
wise and necessary. The rate of premium is measured by the character of the risk
assumed. The insurance company, for a comparatively small consideration, undertakes to
guarantee the insured against loss or damage, upon the terms and conditions agreed
upon, and upon no other, and when called upon to pay, in case of loss, the insurer,
therefore, may justly insists upon a fulfillment of these terms. If the insured cannot bring
himself within the conditions of the policy, he is not entitled for the loss. The terms of the
policy constitute the measure of the insurer's liability, and in order to recover the insured
must show himself within those terms; and if it appears that the contract has been
terminated by a violation, on the part of the insured, of its conditions, then there can be
no right of recovery. The compliance of the insured with the terms of the contract is a
condition precedent to the right of recovery."
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding
upon the parties and should be enforced by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to bring the law itself into disrepute
when, by astute and subtle distinctions, a plain case is attempted to be taken without the
operation of a clear, reasonable and material obligation of the contract.
After considering the Insurance Act, the Court is persuaded that the non-
payment of premiums is a vital defense of insurance companies since the very beginning
and Act No. 2427 expressly preserved it, as it provided that after the policy shall have
been in force for 2 years, it shall be incontestable/the insurer shall have no defense
except for fraud, non-payment of premiums, and military or naval service in time of war,
therefore the fundamental character of the undertaking to pay premiums and the high
importance of the defense of its non-payment was recognized.

Great Pacific Life Assurance Corp. v. Court of Appeals
FACTS
A contract of group insurance was executed between petitioner Great Pacific
Life Assurance Corporation (Grepalife) and Development Bank of the Philippines (DBP),
with Grepalife agreeing to insure the lives of eligible housing loan mortgagors of DBP. Dr.
Wilfredo Leuterio, a physician and housing debtor of DBP, applied for membership in the
said group life insurance plan, and answerd the questions concerning his health condition
in the application form. Petitioner Grepalife then issued a certificate as an insurance
coverage of Dr. Leuterio to the extent of his DBP mortgage indebtedness. Dr. Leuterio
died because of massive cerebral hemorrhage, and consequently DBP submitted a death
claim to petitioner Grepalife. Grepalife denied the claim, alleging that apparently Dr.
Leuterio was not physically healthy when he applied for the insurance coverage, and that
he did not disclose that he had been suffering from hypertension, which was the cause of
his death, and that such non-disclosure constituted a concealment that justified the denial
of the claim.
Medarda V. Leuterio, the widow, then filed a complaint with the RTC against
petitioner Grepalife, and the lower court ruled in favor of the respondent widow and
against petitioner Grepalife, a ruling affirmed by the CA.
Petitioner claims that the complaint against them was instituted by the widow
of Dr. Leuterio, who was not the real party in interest, and hence the trial court had not
jurisdiction over the case, and it argued that when the CA affirmed the ruling of the lower
court, Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP
which was the indispensable party who was not joined in the suit.
ISSUE
Whether or not the respondent widow is entitled to the payment of the insurance
proceeds
HELD
Yes. The Supreme Court affirmed with modification the decision of the CA and ordered
the petitioner to pay the said insurance proceeds. The Court first considered the
insurable interest in the mortgaged properties and the parties in the case at bar. A group
insurance policy of mortgagors or a mortgage redemption insurance, is a device used for
the protection of both the mortgagee and the mortgagor: for the mortgagee, it has to
enter into the contract so that in the event of an unexpected demise of the mortgagor
during the subsistence of the mortgage contract, the proceeds from such insurance will
be applied to the payment of the mortgage debt, therefore relieve the heirs of the
mortgagor from paying the obligation, similarly, protection is also given to the mortgagor
so that in the event of death, the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness. Therefore, where
the mortgagor pays the insurance premium under the group insurance policy, making the
loss payable to the mortgagee, the insurance is on the mortgagors interest and the
mortgagor continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, and such loss-payable clause
does not make the mortgagee a party to the contract.
Section 8 IC: Unless the policy provides, where a mortgagor of property effects insurance
in his own name providing that the loss shall be payable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original contract, and any act of his,
prior to the loss, which would otherwise avoid the insurance, will have the same effect,
although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been performed by the
mortgagor.
 In the case at bar, the insured private respondent did not cede to the
mortgagee (Leuterio) all his rights or interest in the insurance: In the event of the
debtors death before his indebtedness with the creditor DBP shall have been fully paid,
an amount to pay the outstanding indebtedness shall first be paid to the creditor and the
balance of the sum assured, if there is any, shall then be paid to the beneficiaries
designated by the debtor. There in the case, when DBP submitted the insurance claim
against petitioner, the petitioner denied the payment grounded on the defense of
concealment committed by the insured (Leuterio), thereafter DBP collected the debt from
the mortgagor and took the necessary action of foreclosure on the residential lot.
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for the
benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon
in his own name, especially where the mortgagees interest is less than the full amount
recoverable under the policy, * * *.
Insured may be regarded as the real party in interest, although he has assigned the policy
for the purpose of collection, or has assigned as collateral security any judgment he may
obtain
The Court emphasized that since a policy of insurance upon life or health may
actually pass by transfer, will or succession to any person whether he has insurable
interest or not, such person may recover from the proceeds, therefore in the case at bar,
the widow of Dr. Leuterio may file the suit against Grepalife as insurer.
Regarding the issue that Dr. Leuterio failed to disclose that he had
hypertension, the Court defined concealment to exist where the assured has knowledge
of a fact material to the risk, and honesty, good faith and fair dealing requires that he
should communicate it to the assured, but he designedly and intentionally withholds the
same. In the case at bar, Dr. Leuterio answered the insurance application without
consulting a doctor and it might be possible that he died because of cerebral hemorrhage,
probably secondary to hypertension, and the petitioner merely relied on such reports to
ground their refusal to pay the insurance claim. There was no sufficient proof to show
that the insured suffered from hypertension, and it failed to establish that there was
concealment made by the insured, therefore it cannot refuse payment of the claim.
The fraudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is
an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the insurer. In the case at bar, the petitioner failed to
clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds
of the insurance.
A life insurance policy is a valued policy. Unless the interest of a person insured is
susceptible of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy. The mortgagor paid the
premium according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtors death during the terms of
this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
Creditor and the balance of the Sum Assured, if there is any shall then be paid to the
beneficiary/ies designated by the debtor
The Court also held that DBP foreclosed the residential lot in satisfaction of the
mortgagors outstanding loan, and considering the supervening event, the insurance
proceeds shall inure to the benefit of the heirs of the deceased person or his beneficiaries.
Equity requires that DBP should not unjustly enrich itself at the expense of another,
therefore it cannot collect the insurance proceeds after it already foreclosed the
mortgage, and so the proceeds now rightly belong to the heirs of Leuterio.
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of
Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation versus
Armando Geagonia," reversing the decision of the Insurance Commission in I.C. Case No.
3340 which awarded the claim of petitioner Armando Geagonia against private
respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private
respondent fire insurance policy No. F-14622 2 for P100,000.00. The period of the policy
was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-in-
trade consisting principally of dry goods such as RTW's for men and women wear and
other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that
Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the
petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
time of loss, which was P1,000,000.00.
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of any insurance or insurances already
affected, or which may subsequently be effected, covering any of the property or
properties consisting of stocks in trade, goods in process and/or inventories only hereby
insured, and unless such notice be given and the particulars of such insurance or
insurances be stated therein or endorsed in this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited, provided however, that
this condition shall not apply when the total insurance or insurances in force at the time
of the loss or damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public
market of San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were
completely destroyed prompting him to file with the private respondent a claim under
the policy. On 28 December 1990, the private respondent denied the claim because it
found that at the time of the loss the petitioner's stocks-in-trade were likewise covered
by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued
by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These
policies indicate that the insured was "Messrs. Discount Mart (Mr. Armando Geagonia,
Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as
their interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED:
P100,000. Phils. First CEB/F 24758. 4
The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
The petitioner then filed a complaint 5 against the private respondent with the Insurance
Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy
No. F-14622 and for attorney's fees and costs of litigation. He attached as Annex
"AM" 6 thereof his letter of 18 January 1991 which asked for the reconsideration of the
denial. He admitted in the said letter that at the time he obtained the private respondent's
fire insurance policy he knew that the two policies issued by the PFIC were already in
existence; however, he had no knowledge of the provision in the private respondent's
policy requiring him to inform it of the prior policies; this requirement was not
mentioned to him by the private respondent's agent; and had it been mentioned, he
would not have withheld such information. He further asserted that the total of the
amounts claimed under the three policies was below the actual value of his stocks at the
In its answer, 7 the private respondent specifically denied the allegations in the
complaint and set up as its principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did
not violate Condition 3 as he had no knowledge of the existence of the two fire insurance
policies obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC
policies without informing him or securing his consent; and that Cebu Tesing Textile, as
his creditor, had insurable interest on the stocks. These findings were based on the
petitioner's testimony that he came to know of the PFIC policies only when he filed his
claim with the private respondent and that Cebu Tesing Textile obtained them and paid
for their premiums without informing him thereof. The Insurance Commission then
decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay
complainant the sum of P100,000.00 with legal interest from the time the complaint was
filed until fully satisfied plus the amount of P10,000.00 as attorney's fees. With costs. The
compulsory counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the Insurance
Commission in its resolution of 20 August 1993, 10 the private respondent appealed to
the Court of Appeals by way of a petition for review. The petition was docketed as CA-G.R.
SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the
Insurance Commission because it found that the petitioner knew of the existence of the
two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the
insurance was taken in the name of private respondent [petitioner herein]. The policy
states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)" was the assured and
that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by
the Tesing Textiles which is alleged to have taken out the other insurance without the
knowledge of private respondent. This is shown by Premium Invoices nos. 46632 and
46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be only the
mortgagee of the goods insured but the party to which they were issued were the
"DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the policies
on the same property subject of the insurance with petitioner. Hence, in failing to disclose
the existence of these insurances private respondent violated Condition No. 3 of Fire
Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions insurances
is belied by his letter to petitioner [of 18 January 1991. The body of the letter reads as
follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision requiring me to inform
your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not
mention about said requirement at the time he was convincing me to insure with you. If
he only die or even inquired if I had other existing policies covering my establishment, I
would have told him so. You will note that at the time he talked to me until I decided to
insure with your company the two policies aforementioned were already in effect.
Therefore I would have no reason to withhold such information and I would have
desisted to part with my hard earned peso to pay the insurance premiums [if] I know I
could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my investments. The
actual value of my stocks damaged by the fire was estimated by the Police Department to
be P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the fire, shows my
merchandise inventory was already some P595,455.75. . . . These will support my claim
that the amount claimed under the three policies are much below the value of my stocks
lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know that there
were other insurances taken on the stock-in-trade and seriously puts in question his
credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the
instant petition. He contends therein that the Court of Appeals acted with grave abuse of
discretion amounting to lack or excess of jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING
INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY
BY THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED
AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE
PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the
petitioner had prior knowledge of the two insurance policies issued by the PFIC when he
obtained the fire insurance policy from the private respondent, thereby, for not disclosing
such fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded
from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's
letter of reconsideration of 18 January 1991, is without merit. The petitioner claims that
the said letter was not offered in evidence and thus should not have been considered in
deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of
this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M"
thereof and made integral part of the complaint. 12 It has attained the status of a judicial
admission and since its due execution and authenticity was not denied by the other party,
the petitioner is bound by it even if it were not introduced as an independent
evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and found
otherwise in view of the explicit admission by the petitioner in his letter to the private
respondent of 18 January 1991, which was quoted in the challenged decision of the Court
of Appeals. These divergent findings of fact constitute an exception to the general rule
that in petitions for review under Rule 45, only questions of law are involved and findings
of fact by the Court of Appeals are conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued
by the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves
this knowledge. His testimony to the contrary before the Insurance Commissioner and
which the latter relied upon cannot prevail over a written admission madeante litem
motam. It was, indeed, incredible that he did not know about the prior policies since
these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No.
F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being
F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not
proscribed by law. Its incorporation in the policy is allowed by Section 75 of the
Insurance Code 15 which provides that "[a] policy may declare that a violation of
specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the moral
hazard. It is commonly known as the additional or "other insurance" clause and has been
upheld as valid and as a warranty that no other insurance exists. Its violation would thus
avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon
same subject matter, the same interest therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent
insurable interest therein and both interests may be one policy, or each may take out a
separate policy covering his interest, either at the same or at separate times. 18 The
mortgagor's insurable interest covers the full value of the mortgaged property, even
though the mortgage debt is equivalent to the full value of the property. 19 The
mortgagee's insurable interest is to the extent of the debt, since the property is relied
upon as security thereof, and in insuring he is not insuring the property but his interest
or lien thereon. His insurable interest is prima facie the value mortgaged and extends
only to the amount of the debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering different insurable interests may be
obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is
the usual practice. The mortgagee may be made the beneficial payee in several ways. He
may become the assignee of the policy with the consent of the insurer; or the mere
pledgee without such consent; or the original policy may contain a mortgage clause; or a
rider making the policy payable to the mortgagee "as his interest may appear" may be
attached; or a "standard mortgage clause," containing a collateral independent contract
between the mortgagee and insurer, may be attached; or the policy, though by its terms
payable absolutely to the mortgagor, may have been procured by a mortgagor under a
contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires
an equitable lien upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the mortgagee is only a beneficiary under the
contract, and recognized as such by the insurer but not made a party to the contract
himself. Hence, any act of the mortgagor which defeats his right will also defeat the right
of the mortgagee. 22 This kind of policy covers only such interest as the mortgagee has at
the issuing of the policy. 23
On the other hand, a mortgagee may also procure a policy as a contracting party in
accordance with the terms of an agreement by which the mortgagor is to pay the
premiums upon such insurance. 24 It has been noted, however, that although the
mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains on the assurance that it
insures him, the policy is in fact in the form used to insure a mortgagor with loss payable
clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and
contain a mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest
may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved
in General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety
Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or insurances already
effected, or which may subsequently be effected covering any of the property hereby
insured, and unless such notice be given and the particulars of such insurance or
insurances be stated in or endorsed on this Policy by or on behalf of the Company before
the occurrence of any loss or damage, all benefits under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the
objects thereby assured must be declared by the insured in writing and he must cause the
company to add or insert it in the policy, without which such policy shall be null and void,
and the insured will not be entitled to indemnity in case of loss,"Condition 3 in the private
respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It
expressly provides that the condition "shall not apply when the total insurance or
insurances in force at the time of the loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted
liberally in favor of the insured and strictly against the company, the reason being,
undoubtedly, to afford the greatest protection which the insured was endeavoring to
secure when he applied for insurance. It is also a cardinal principle of law that forfeitures
are not favored and that any construction which would result in the forfeiture of the
policy benefits for the person claiming thereunder, will be avoided, if it is possible to
construe the policy in a manner which would permit recovery, as, for example, by finding
a waiver for such forfeiture. 29 Stated differently, provisions, conditions or exceptions in
policies which tend to work a forfeiture of insurance policies should be construed most
strictly against those for whose benefits they are inserted, and most favorably toward
those against whom they are intended to operate.30 The reason for this is that, except for
riders which may later be inserted, the insured sees the contract already in its final form
and has had no voice in the selection or arrangement of the words employed therein. On
the other hand, the language of the contract was carefully chosen and deliberated upon
by experts and legal advisers who had acted exclusively in the interest of the insurers and
the technical language employed therein is rarely understood by ordinary laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the subject policy
is not totally free from ambiguity and must, perforce, be meticulously analyzed. Such
analysis leads us to conclude that (a) the prohibition applies only to double insurance,
and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the
total policies obtained.
The first conclusion is supported by the portion of the condition referring to other
insurance "covering any of the property or properties consisting of stocks in trade, goods
in process and/or inventories only hereby insured," and the portion regarding the
insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile
Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same
person is insured by several insurers separately in respect of the same subject and
interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the
mortgaged property are distinct and separate. Since the two policies of the PFIC do not
cover the same interest as that covered by the policy of the private respondent, no double
insurance exists. The non-disclosure then of the former policies was not fatal to the
petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the
total insurance in force at the time of loss does not exceed P200,000.00, the private
respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale
behind the incorporation of "other insurance" clause in fire policies is to prevent over-
insurance and thus avert the perpetration of fraud. When a property owner obtains
insurance policies from two or more insurers in a total amount that exceeds the
property's value, the insured may have an inducement to destroy the property for the
purpose of collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance
Commission in Case No. 3340 is REINSTATED.
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of Manila
praying that (1) the transaction entered into between them on December 18, 1951 be
declared as one of loan, and the document executed covering the transaction as one of
equitable mortgage to secure the payment of said loan; (2) the defendant be ordered to
credit to the plaintiff with the necessary amount from the sum received by the defendant
from the Associated Insurance & Surety Co., Inc. and to apply the same to the payment of
plaintiff's obligation thus considering it as fully paid; and (3) the defendant be ordered to
pay to plaintiff the difference between the alleged indebtedness of plaintiff and the sum
received by defendant from the aforementioned insurance company, plus the sum
allegedly paid to defendant as interest on the alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special defense that the
transaction entered into between the plaintiff and defendant is one of sale with option to
repurchase but that the period for repurchase had expired without plaintiff having
returned the price agreed upon as a result of which the ownership of the property had
become consolidated in the defendant. Defendant also set up certain counterclaims which
involve a total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several
postponements asked by the parties, the same has to be set anew for trial on January 12,
1954. On this date, neither the defendant nor her counsel appeared, even if the latter had
been notified of the postponement almost a month earlier, and so the court received the
evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence
presented, rendered judgment granting the relief prayed for in the complaint.
On February 2, 1954, the original counsel for the defendant was substituted and the new
counsel immediately moved that the judgment be set aside on the ground that, due to
mistake or excusable negligence, defendant was unable to present her evidence and the
decision was contrary to law, and this motion having been denied, defendant took the
present appeal.
The important issue to be determined in this appeal is whether the lower court
committed a grave abuse of discretion in not reopening the case to give defendant an
opportunity to present her evidence considering that the failure of her original counsel to
appear was due to mistake or execusable negligence which ordinary prudence could not
have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11,
1953, said counsel showed interest in the early disposal of this case by moving the court
to have it set for trial. The first date set was April 7, 1953, but no hearing was had on that
date because plaintiff had moved to postpone it. The case was next set for hearing on
April 28, 1953, but on motion again of plaintiff, the hearing was transferred to November
6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15,
1953, and because Atty. Guerrero could not appear on said date because of a case he had
in Cebu City, the hearing was postponed to January 18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty.
Guerrero was appointed Undersecretary of Foreign Affairs. It is now contended that the
appointment was so sudden and unexpected that Atty. Guerrero, after taking his oath,
was unable to wind up his private cases or make any preparation at all. It is averred that
"The days that followed his appointment were very busy days for defendant's former
counsel. There was an immediate need for clearing the backlog of official business,
including the reorganization of the Department of Foreign Affairs and our Foreign
Service, and more importantly, he had to assist the Secretary of Foreign Affairs in
negotiations of national importance like the Japanese reparations, and the revision of the
trade agreement with the United States, that, Atty. Guerrero had to work as much as
fourteen hours daily . . . Because of all these unavoidable confusion that followed in the
wake of Atty. Guerrero's sudden and unexpected appointment, the trial of this case
scheduled for January 18, 1954 escaped his memory, and consequently, Atty. Guerrero
and the defendant were unable to appear when the case was called for trial." These
reasons, it is intimated, constitute excusable negligence which ordinary prudence
could not have guarded against and should have been considered by the trial court as
sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on
the ground of mistake or excusable negligence is addressed to the sound discretion of the
court (see Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an
order issued in the exercise of such discretion is ordinarily not to be disturbed unless it is
shown that the court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70;
Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta,
38 Phil., 821; Salvavs. Palacio and Leuterio, 90 Phil., 731.) In denying the motion for
reopening the trial court said: "After going over the same arguments, this Court is of the
opinion, and so holds that the decision of this Court of January 18, 1954 should not be
disturbed." Considering the stature, ability and experience of counsel Leon Ma. Guerrero,
and the fact that he was given almost one month notice before the date set for trial, we
are persuaded to conclude that the trial court did not abuse its discretion in refusing to
reconsider its decision.
Coming now to the merits of the case, we note that the lower court made the following
findings: On December 18, 1951, plaintiff obtained from defendant a loan in the sum of
P12,000 subject to the following conditions: (a) that plaintiff shall pay to defendant an
interest in the amount of P250 a month; (b) that defendant shall deduct from the loan
certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250
as interest for the first month; and (c) that after making the above deductions, defendant
shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of
P2,250.00 corresponding to nine months from December 18, 1951, on the basis of
P250.00 a month, which is more than the maximum interest authorized by law. To secure
the payment of the aforesaid loan, defendant required plaintiff to sign a document known
as "Conditional Sale of Residential Building", purporting to convey to defendant, with
right to repurchase, a two-story building of strong materials belonging to plaintiff. This
document did not express the true intention of the parties which was merely to place said
property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire
with the Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance
policy having been issued in the name of defendant. The building was partly destroyed by
fire and, after proper demand, defendant collected from the insurance company an
indemnity of P13,107.00. Plaintiff demanded from defendant that she be credited with
the necessary amount to pay her obligation out of the insurance proceeds but defendant
refused to do so. And on the strength of these facts, the court rendered decision the
dispositive part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff
and defendant, as shown in Exhibit A, an equitable mortgage to secure the payment of the
sum of P12,000 loaned by the defendant to plaintiff; ordering the defendant to credit the
sum of P13,107 received by the defendant from the Associated Insurance & surety Co.,
Inc. to the payment of plaintiff's obligation in the sum of P12,000.00 as stated in the
complaint, thus considering the agreement of December 18, 1951 between the herein
plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107
from the insurance collected by defendant; that as plaintiff had paid to the defendant the
sum of P2,250.00 for nine months as interest on the sum of P12,000 loaned to plaintiff
and the legal interest allowed by law in this transaction does not exceed 12 per cent per
annum, or the sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of
P810 to the defendant, which this Court hereby likewise orders the said defendant to
refund to herein plaintiff, plus the balance of P1,107 representing the difference of the
sum loan of P12,000 and the collected insurance of P13,107 from the insurance company
abovementioned to which the herein plaintiff is entitled to receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of
plaintiff fully compensated by the insurance amount and in ordering defendant to refund
to plaintiff the sum of P1,107 representing the difference of the loan of P12,000 and the
sum of P13,107 collected by said defendant from the insurance company notwithstanding
the fact that it was not proven that the insurance was taken for the benefit of the
mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the
rule governing an insurance taken by a mortgagee independently of the mortgagor. The
rule is that "where a mortgagee, independently of the mortgagor, insures the mortgaged
property in his own name and for his own interest, he is entitled to the insurance
proceeds in case of loss, but in such case, he is not allowed to retain his claim against the
mortgagor,but is passed by subrogation to the insurer to the extent of the money paid."
(Vance on Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure
his interest in the property independently of the mortgagor. In that event, upon the
destruction of the property the insurance money paid to the mortgagee will not inure to
the benefit of the mortgagor, and the amount due under the mortgage debt remains
unchanged. The mortgagee, however, is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance
money paid." (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by
this Court in a case that arose in this jurisdiction. In the case mentioned, an insurance
contract was taken out by the mortgagee upon his own interest, it being stipulated that
the proceeds would be paid to him only and when the case came up for decision, this
Court held that the mortgagee, in case of loss, may only recover upon the policy to the
extent of his credit at the time of the loss. It was declared that the mortgaged had no right
of action against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40
Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on
his separate interest at his own expense and for his own benefit, without any agreement
with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and
is not entitled to have the insurance proceeds applied in reduction of the mortgage debt"
(19 R.C.L., p. 405), and that, furthermore, the mortgagee "has still a right to recover his
whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins.
Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396;
Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506;
Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent
the minority view (See case note, 3 Lawyers' Report Annotated, new series, p. 79). "The
general rule and the weight of authority is, that the insurer is thereupon subrogated to
the rights of the mortgagee under the mortgage. This is put upon the analogy of the
situation of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in declaring
that the proceeds of the insurance taken out by the defendant on the property mortgaged
inured to the benefit of the plaintiff and in ordering said defendant to deliver to the
plaintiff the difference between her indebtedness and the amount of insurance received
by the defendant, for, in the light of the majority rule we have above enunciated, the
correct solution should be that the proceeds of the insurance should be delivered to the
defendant but that her claim against the plaintiff should be considered assigned to the
insurance company who is deemed subrogated to the rights of the defendant to the extent
of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the
lower court as follows:(1) the transaction had between the plaintiff and defendant as
shown in Exhibit A is merely an equitable mortgage intended to secure the payment of
the loan of P12,000;(2) that the proceeds of the insurance amounting to P13,107.00 was
properly collected by defendant who is not required to account for it to the plaintiff; (3)
that the collection of said insurance proceeds shall not be deemed to have compensated
the obligation of the plaintiff to the defendant, but bars the latter from claiming its
payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00
representing the overpayment made by plaintiff by way of interest on the loan. No
pronouncement as to costs.
HILARIO GERCIO, plaintiff-appellee,
vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.
MALCOLM, J.:
The question of first impression in the law of life insurance to be here decided is whether
the insured the husband has the power to change the beneficiary the former wife
and to name instead his actual wife, where the insured and the beneficiary have been
divorced and where the policy of insurance does not expressly reserve to the insured the
right to change the beneficiary. Although the authorities have been exhausted, no legal
situation exactly like the one before us has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the
insurer, and Andrea Zialcita, the beneficiary, are the defendants. The complaint is in the
nature of mandamus. Its purpose is to compel the defendant Sun Life Assurance Co. of
Canada to change the beneficiary in the policy issued by the defendant company on the
life of the plaintiff Hilario Gercio, with one Andrea Zialcita as beneficiary.
A default judgment was taken in the lower court against the defendant Andrea Zialcita.
The other defendant, the Sun Life Assurance Co. of Canada, first demurred to the
complaint and when the demurrer was overruled, filed an answer in the nature of a
general denial. The case was then submitted for decision on an agreed statement of facts.
The judgment of the trial court was in favor of the plaintiff without costs, and ordered the
defendant company to eliminate from the insurance policy the name of Andrea Zialcita as
beneficiary and to substitute therefor such name as the plaintiff might furnish to the
defendant for that purpose.
The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged
to have been committed by the lower court. The appellee has countered with a motion
which asks the court to dismiss the appeal of the defendant Sun Life Assurance Co. of
Canada, with costs.
As the motion presented by the appellee and the first two errors assigned by the
appellant are preliminary in nature, we will pass upon the first. Appellee argues that the
"substantial defendant" was Andrea Zialcita, and that since she was adjudged in default,
the Sun Life Assurance Co. of Canada has no interest in the appeal. It will be noticed,
however, that the complaint prays for affirmative relief against the insurance company. It
will be noticed further that it is stipulated that the insurance company has persistently
refused to change the beneficiary as desired by the plaintiff. As the rights of Andrea
Zialcita in the policy are rights which are enforceable by her only against the insurance
company, the defendant insurance company will only be fully protected if the question at
issue is conclusively determined. Accordingly, we have decided not to accede to the
motion of the appellee and not to order the dismissal of the appeal of the appellant.
This brings us to the main issue. Before, however, discussing its legal aspects, it is
advisable to have before us the essential facts. As they are stipulated, this part of the
decision can easily be accomplished.
On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No.
161481 on the life of Hilario Gercio. The policy was what is known as a twenty-year
endowment policy. By its terms, the insurance company agreed to insure the life of
Hilario Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if the
insured should die before said date, then to his wife, Mrs. Andrea Zialcita, should she
survive him; otherwise to the executors, administrators, or assigns of the insured. The
policy also contained a schedule of reserves, amounts in cash, paid-up policies, and
renewed insurance, guaranteed. The policy did not include any provision reserving to the
insured the right to change the beneficiary.
On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio.
Towards the end of the year 1919, she was convicted of the crime of adultery. On
September 4, 1920, a decree of divorce was issued in civil case no. 17955, which had the
effect of completely dissolving the bonds of matrimony contracted by Hilario Gercio and
Andrea Zialcita.
On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada
that he had revoked his donation in favor of Andrea Zialcita, and that he had designated
in her stead his present wife, Adela Garcia de Gercio, as the beneficiary of the policy.
Gercio requested the insurance company to eliminate Andrea Zialcita as beneficiary. This,
the insurance company has refused and still refuses to do.
With all of these introductory matters disposed of and with the legal question to the
forefront, it becomes our first duty to determine what law should be applied to the facts.
In this connection, it should be remembered that the insurance policy was taken out in
1910, that the Insurance Act. No. 2427, became effective in 1914, and that the effort to
change the beneficiary was made in 1922. Should the provisions of the Code of Commerce
and the Civil Code in force in 1910, or the provisions of the Insurance Act now in force, or
the general principles of law, guide the court in its decision?
On the supposition, first, that the Code of Commerce is applicable, yet there can be found
in it no provision either permitting or prohibiting the insured to change the beneficiary.
On the supposition, next, that the Civil Code regulates insurance contracts, it would be
most difficult, if indeed it is practicable, to test a life insurance policy by its provisions.
Should the insurance contract, whereby the husband names the wife as the beneficiary,
be denominated a donation inter vivos, a donation causa mortis, a contract in favor of a
third person, or an aleatory contract? The subject is further complicated by the fact that if
an insurance contract should be considered a donation, a husband may then never insure
his life in favor of his wife and vice versa, inasmuch as article 1334 prohibits all donations
between spouses during marriage. It would seem, therefore, that this court was right
when in the case of Del Val vs. Del Val ([1915]), 29 Phil., 534), it declined to consider the
proceeds of the insurance policy as a donation or gift, saying "the contract of life
insurance is a special contract and the destination of the proceeds thereof is determined
by special laws which deal exclusively with that subject. The Civil Code has no provisions
which relate directly and specifically to life-insurance contracts or to the destination of
life-insurance proceeds. . . ." Some satisfaction is gathered from the perplexities of the
Louisiana Supreme Court, a civil law jurisdiction, where the jurists have disagreed as to
the classification of the insurance contract, but have agreed in their conclusions as will
hereafter see. (Re Succession of Leone Desforges [1914], 52 L.R.A. [N.S.], 689; Lambert vs
Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co. [1898], 50 La.
Ann., 1027.)
On the further supposition that the Insurance Act applies, it will be found that in this Law,
there is likewise no provision either permitting or prohibiting the insured to change the
beneficiary.
We must perforce conclude that whether the case be considered as of 1910, or 1914, or
1922, and whether the case be considered in the light of the Code of Commerce, the Civil
Code, or the Insurance Act, the deficiencies in the law will have to be supplemented by
the general principles prevailing on the subject. To that end, we have gathered the rules
which follow from the best considered American authorities. In adopting these rules, we
do so with the purpose of having the Philippine Law of Insurance conform as nearly as
possible to the modern Law of Insurance as found in the United States proper.
The wife has an insurable interest in the life of her husband. The beneficiary has an
absolute vested interest in the policy from the date of its issuance and delivery. So when a
policy of life insurance is taken out by the husband in which the wife is named as
beneficiary, she has a subsisting interest in the policy. And this applies to a policy to
which there are attached the incidents of a loan value, cash surrender value, an automatic
extension by premiums paid, and to an endowment policy, as well as to an ordinary life
insurance policy. If the husband wishes to retain to himself the control and ownership of
the policy he may so provide in the policy. But if the policy contains no provision
authorizing a change of beneficiary without the beneficiary's consent, the insured cannot
make such change. Accordingly, it is held that a life insurance policy of a husband made
payable to the wife as beneficiary, is the separate property of the beneficiary and beyond
the control of the husband.
As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely
provides in section 9 that the decree of divorce shall dissolve the community property as
soon as such decree becomes final. Unlike the statutes of a few jurisdictions, there is no
provision in the Philippine Law permitting the beneficiary in a policy for the benefit of
the wife of the husband to be changed after a divorce. It must follow, therefore, in the
absence of a statute to the contrary, that if a policy is taken out upon a husband's life the
wife is named as beneficiary therein, a subsequent divorce does not destroy her rights
under the policy.
These are some of the pertinent principles of the Law of Insurance. To reinforce them, we
would, even at the expense of clogging the decision with unnecessary citation of
authority, bring to notice certain decisions which seem to us to have controlling
influence.
To begin with, it is said that our Insurance Act is mostly taken from the statute of
California. It should prove of interest, therefore, to know the stand taken by the Supreme
Court of that State. A California decision oft cited in the Cyclopedias is Yore vs.
Booth ([1895]), 110 Cal., 238; 52 Am. St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but slight dissent in the courts of this country,
that a person who procures a policy upon his own life, payable to a designated
beneficiary, although he pays the premiums himself, and keeps the policy in his exclusive
possession, has no power to change the beneficiary, unless the policy itself, or the charter
of the insurance company, so provides. In policy, although he has parted with nothing,
and is simply the object of another's bounty, has acquired a vested and irrevocable
interest in the policy, which he may keep alive for his own benefit by paying the
premiums or assessments if the person who effected the insurance fails or refuses to do
so.
As carrying great weight, there should also be taken into account two decisions coming
from the Supreme Court of the United States. The first of these decisions, in point of time,
is Connecticut Mutual Life Insurance Company vs Schaefer ([1877]), 94 U.S., 457). There,
Mr. Justice Bradley, delivering the opinion of the court, in part said:
This was an action on a policy of the court, in part said: July 25, 1868, on the joint lives of
George F. and Francisca Schaefer, then husband and wife, payable to the survivor on the
death of either. In January, 1870, they were divorced, and alimony was decreed and paid
to the wife, and there was never any issue of the marriage. They both subsequently
married again, after which, in February, 1871, George F. Schaefer died. This action was
brought by Francisca, the survivor.
xxx xxx xxx
The other point, relating to the alleged cessation of insurable interest by reason of the
divorce of the parties, is entitled to more serious consideration, although we have very
little difficulty in disposing of it.
It will be proper, in the first place, to ascertain what is an insurable interest. It is generally
agreed that mere wager policies, that is, policies in which the insured party has no
interest in its loss or destruction, are void, as against public policy. . . . But precisely what
interest is necessary, in order to take a policy out of the category of mere wager, has been
the subject of much discussion. In marine and fire insurance the difficulty is not so great,
because there insurance is considered as strictly an indemnity. But in life insurance the
loss can seldom be measured by pecuniary values. Still, an interest of some sort in the
insured life must exist. A man cannot take out insurance on the life of a total stranger, nor
on that of one who is not so connected with him as to make the continuance of the life a
matter of some real interest to him.
It is well settled that a man has an insurable interest in his own life and in that of his wife
and children; a woman in the life of her husband; and the creditor in the life of his debtor.
Indeed it may be said generally that any reasonable expectation of pecuniary benefit or
advantage from the continued life of another creates an insurable interest in such life.
And there is no doubt that a man may effect an insurance on his own life for the benefit of
a relative or fried; or two or more persons, on their joint lives, for the benefit of the
survivor or survivors. The old tontines were based substantially on this principle, and
their validity has never been called in question.
xxx xxx xxx
The policy in question might, in our opinion, be sustained as a joint insurance, without
reference to any other interest, or to the question whether the cessation of interest
avoids a policy good at its inception. We do not hesitate to say, however, that a policy
taken out in good faith and valid at its inception, is not avoided by the cessation of the
insurable interest, unless such be the necessary effect of the provisions of the policy itself.
...
. . . .In our judgment of life policy, originally valid, does not cease to be so by the cessation
of the assured party's interest in the life insured.
Another controlling decision of the United States Supreme Court is that of the Central
National Bank of Washington City vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief
Justice Fuller, as the organ of the court, announced the following doctrines:
We think it cannot be doubted that in the instance of contracts of insurance with a wife or
children, or both, upon their insurable interest in the life of the husband or father, the
latter, while they are living, can exercise no power of disposition over the same without
their consent, nor has he any interest therein of which he can avail himself; nor upon his
death have his personal representatives or his creditors any interest in the proceeds of
such contracts, which belong to the beneficiaries to whom they are payable.
It is indeed the general rule that a policy, and the money to become due under it, belong,
the moment it is issued, to the person or persons named in it as the beneficiary or
beneficiaries, and that there is no power in the person procuring the insurance, by any act
of his, by deed or by will, to transfer to any other person the interest of the person named.
A jurisdiction which found itself in somewhat the same situation as the Philippines,
because of having to reconcile the civil law with the more modern principles of insurance,
is Louisiana. In a case coming before the Federal Courts, In re Dreuil & Co. ([1915]), 221
Fed., 796), the facts were that an endowment insurance policy provided for payment of
the amount thereof at the expiration of twenty years to the insured, or his executors,
administrators, or assigns, with the proviso that, if the insured die within such period,
payment was to be made to his wife if she survive him. It was held that the wife has a
vested interest in the policy, of which she cannot be deprived without her consent. Foster,
District Judge, announced:
In so far as the law of Louisiana is concerned, it may also be considered settled that
where a policy is of the semitontine variety, as in this case, the beneficiary has a vested
right in the policy, of which she cannot be deprived without her consent. (Lambert vs
Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in same connection a
leading decision of the Louisiana Supreme Court, Re Succession of Leonce Desforges,
[1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the insured to destroy the vested interest of
the beneficiary in the policy. That point is well covered in the case of Entwistle vs.
Travelers Insurance Company ([1902], 202 Pa. St., 141). To quote:
. . . The interest of the wife was wholly contingent upon her surviving her husband, and
she could convey no greater interest in the policy than she herself had. The interest of the
children of the insured, which was created for them by the contract when the policy was
issued; vested in them at the same time that the interest of the wife became vested in her.
Both interests were contingent. If the wife die before the insured, she will take nothing
under the policy. If the insured should die before the wife, then the children take nothing
under the policy. We see no reason to discriminate between the wife and the children.
They are all payees, under the policy, and together constitute the assured.
The contingency which will determine whether the wife, or the children as a class will
take the proceeds, has not as yet happened; all the beneficiaries are living, and nothing
has occurred by which the rights of the parties are in any way changed. The provision
that the policy may be converted into cash at the option of the holder does not change the
relative rights of the parties. We agree entirely with the suggestion that "holder" or
"holders", as used in this connection, means those who in law are the owners of the
policy, and are entitled to the rights and benefits which may accrue under it; in other
words, all the beneficiaries; in the present case, not only the wife, by the children of the
insured. If for any reason, prudence required the conversion of the policy into cash, a
guardian would have no special difficulty in reasonable protecting the interest of his
wards. But however that may be, it is manifest that the option can only be exercised by
those having the full legal interest in the policy, or by their assignee. Neither the husband,
nor the wife, nor both together had power to destroy the vested interest of the children in
the policy.
The case most nearly on all fours with the one at bar is that of Wallace vs Mutual Benefit
Life Insurance Co.([1906], 97 Minn., 27; 3 L.R.A. [N.S.], 478). The opinion there delivered
also invokes added interest when it is noted that it was written by Mr. Justice Elliott, the
author of a text on insurance, later a member of this court. In the Minnesota case cited,
one Wallace effected a "twenty-year endowment" policy of insurance on his life, payable
in the event of his death within twenty years to Emma G. Wallace, his wife, but, if he lived,
to himself at the end of twenty years. If Wallace died before the death of his wife, within
the twenty years, the policy was payable to the personal representatives of the insured.
During the pendency of divorce proceedings, the parties signed a contract by which
Wallace agreed that, if a divorce was granted to Mrs. Wallace, the court might award her
certain specified property as alimony, and Mrs. Wallace agreed to relinquish all claim to
any property arising out of the relation of husband and wife. The divorce was granted. An
action was brought by Wallace to compel Mrs. Wallace to relinquish her interest in the
insurance policy. Mr. Justice Elliott said:
As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of which
she could not be deprived without her consent, except under the terms of the contract
with the insurance company. No right to change the beneficiary was reserved. Her
interest in the policy was her individual property, subject to be divested only by her
death, the lapse of time, or by the failure of the insured to pay the premiums. She could
keep the policy alive by paying the premiums, if the insured did not do so. It was
contingent upon these events, but it was free from the control of her husband. He had no
interest in her property in this policy, contingent or otherwise. Her interest was free from
any claim on the part of the insured or his creditors. He could deprive her of her interest
absolutely in but one way, by living more than twenty years. We are unable to see how
the plaintiff's interest in the policy was primary or superior to that of the husband. Both
interests were contingent, but they were entirely separate and distinct, the one from the
other. The wife's interest was not affected by the decree of court which dissolved the
marriage contract between the parties. It remains her separate property, after the
divorce as before. . .
. . . . The fact that she was his wife at the time the policy was issued may have been, and
undoubtedly was, the reason why she was named as beneficiary in the event of his death.
But her property interest in the policy after it was issued did not in any reasonable sense
arise out of the marriage relation.
Somewhat the same question came before the Supreme Court of Kansas in the leading
case of Filley vs. Illinois Life Insurance Company ([1914]), 91 Kansas, 220; L.R.A. [1915
D], 130). It was held, following consideration extending to two motions for rehearing, as
follows:
The benefit accruing from a policy of life insurance upon the life of a married man,
payable upon his death to his wife, naming her, is payable to the surviving beneficiary
named, although she may have years thereafter secured a divorce from her husband, and
he was thereafter again married to one who sustained the relation of wife to him at the
time of his death.
The rights of a beneficiary in an ordinary life insurance policy become vested upon the
issuance of the policy, and can thereafter, during the life of the beneficiary, be defeated
only as provided by the terms of the policy.
If space permitted, the following corroborative authority could also be taken into
account: Joyce, The Law of Insurance, second edition, vol. 2, pp. 1649 et seq.; 37 Corpus
Juris, pp. 394 et seq.; 14 R.C.L., pp. 1376 et seq.;Green vs. Green ([1912], 147 Ky., 608; 39
L.R.A. [N.S.], 370); Washington Life Insurance Co. vs. Berwald([1903], 97 Tex.,
111); Begley vs. Miller ([1907]), 137 Ill., App., 278); Blum vs. New York L. Ins. Co. ([1906],
197 Mo., 513; 8 L.R.A. [N.S.], 923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St.,
385; 49 L.R.A., 737);Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St.
Rep., 96); Preston vs. Conn. Mut. L. Ins. Co. of Hartford ([1902]); 95 Md., 101); Snyder vs.
Supreme Ruler of Fraternal Mystic Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.],
209); Lloyd vs. Royal Union Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix Mut. L. Ins.
Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix Ins.
Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme Council American Legion of Honor
vs. Smith and Smith ([1889], 45 N.J. Eq., 466); Overhiser vs. Overhiser ([1900], 63 Ohio
St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon vs. New York Life Insurance Co.
([1918], 183 Iowa, 658); with which compare Foster vs. Gile ([1880], 50 Wis., 603)
and Hatch vs. Hatch([1904], 35 Tex. Civ. App., 373).
On the admitted facts and the authorities supporting the nearly universally accepted
principles of insurance, we are irresistibly led to the conclusion that the question at issue
must be answered in the negative.
The judgment appealed from will be reversed and the complaint ordered dismissed as to
the appellant, without special pronouncement as to the costs in either instance. So
ordered.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary
in the life insurance policy of a legally married man claim the proceeds thereof in case of
death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance
Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental
Death for the same amount Buenaventura C. Ebrado designated T. Ebrado as the
revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by
a failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd.
liable to pay the coverage in the total amount of P11,745.73, representing the face value
of the policy in the amount of P5,882.00 plus the additional benefits for accidental death
also in the amount of P5,882.00 and the refund of P18.00 paid for the premium due
November, 1969, minus the unpaid premiums and interest thereon due for January and
February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit of
marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She
asserts that she is the one entitled to the insurance proceeds, not the common-law wife,
Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First
Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after
which, a pre-trial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties submit
their evidence for the purpose of the pre-trial and make admissions for the purpose of
pretrial. During this conference, parties Carponia T. Ebrado and Pascuala Ebrado agreed
and stipulated: 1) that the deceased Buenaventura Ebrado was married to Pascuala
Ebrado with whom she has six (legitimate) namely; Hernando, Cresencio, Elsa, Erlinda,
Felizardo and Helen, all surnamed Ebrado; 2) that during the lifetime of the deceased, he
was insured with Insular Life Assurance Co. Under Policy No. 009929 whole life plan,
dated September 1, 1968 for the sum of P5,882.00 with the rider for accidental death
benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant Pascuala
and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he
was living with his common-wife, Carponia Ebrado, with whom she had 2 children
although he was not legally separated from his legal wife; 4) that Buenaventura in
accident on October 21, 1969 as evidenced by the death Exhibit 3 and affidavit of the
police report of his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with
the Insular Life Assurance Co. which was contested by Pascuala Ebrado who also filed
claim for the proceeds of said policy 6) that in view ofthe adverse claims the insurance
company filed this action against the two herein claimants Carponia and Pascuala
Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of the
policy P11,745.73; 8) that the beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to change the beneficiary but
although the insured made the option to change the beneficiary, same was never changed
up to the time of his death and the wife did not have any opportunity to write the
company that there was reservation to change the designation of the parties agreed that a
decision be rendered based on and stipulation of facts as to who among the two claimants
is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura
Cristor Ebrado and directing the payment of the insurance proceeds to the estate of the
deceased insured. The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction
for adultery or concubinage is not essential in order to establish the disqualification
mentioned therein. Neither is it also necessary that a finding of such guilt or commission
of those acts be made in a separate independent action brought for the purpose. The guilt
of the donee (beneficiary) may be proved by preponderance of evidence in the same
proceeding (the action brought to declare the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the disqualification
and incapacity to exist and that it is only necessary that such fact be established by
preponderance of evidence in the trial. Since it is agreed in their stipulation above-quoted
that the deceased insured and defendant Carponia T. Ebrado were living together as
husband and wife without being legally married and that the marriage of the insured with
the other defendant Pascuala Vda. de Ebrado was valid and still existing at the time the
insurance in question was purchased there is no question that defendant Carponia T.
Ebrado is disqualified from becoming the beneficiary of the policy in question and as such
she is not entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11,
1976, the Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly
resolutory of the prime question at hand. Section 50 of the Insurance Act which provides
that "(t)he insurance shag be applied exclusively to the proper interest of the person in
whose name it is made" 1 cannot be validly seized upon to hold that the mm includes the
beneficiary. The word "interest" highly suggests that the provision refers only to the
"insured" and not to the beneficiary, since a contract of insurance is personal in
character. 2 Otherwise, the prohibitory laws against illicit relationships especially on
property and descent will be rendered nugatory, as the same could easily be
circumvented by modes of insurance. Rather, the general rules of civil law should be
applied to resolve this void in the Insurance Law. Article 2011 of the New Civil Code
states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed
by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the
same Code, "any person who is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a fife insurance policy by the person who cannot make a
donation to him. 4 Common-law spouses are, definitely, barred from receiving donations
from each other. Article 739 of the new Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the time
of donation;
Those made between persons found guilty of the same criminal offense, in consideration
thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his
office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in Article 739 of the new Civil Code should
equally operate in life insurance contracts. The mandate of Article 2012 cannot be laid
aside: any person who cannot receive a donation cannot be named as beneficiary in the
life insurance policy of the person who cannot make the donation.5 Under American law,
a policy of life insurance is considered as a testament and in construing it, the courts will,
so far as possible treat it as a will and determine the effect of a clause designating the
beneficiary by rules under which wins are interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every
reason to hold that the bar in donations between legitimate spouses and those between
illegitimate ones should be enforced in life insurance policies since the same are based on
similar consideration As above pointed out, a beneficiary in a fife insurance policy is no
different from a donee. Both are recipients of pure beneficence. So long as manage
remains the threshold of family laws, reason and morality dictate that the impediments
imposed upon married couple should likewise be imposed upon extra-marital
relationship. If legitimate relationship is circumscribed by these legal disabilities, with
more reason should an illicit relationship be restricted by these disabilities. Thus,
in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of
that court (Court of Appeals), 'to prohibit donations in favor of the other consort and his
descendants because of and undue and improper pressure and influence upon the donor,
a prejudice deeply rooted in our ancient law;" por-que no se enganen desponjandose el
uno al otro por amor que han de consuno' (According to) the Partidas (Part IV, Tit. XI,
LAW IV), reiterating the rationale 'No Mutuato amore invicem spoliarentur' the Pandects
(Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is very reason to apply the
same prohibitive policy to persons living together as husband and wife without the
benefit of nuptials. For it is not to be doubted that assent to such irregular connection for
thirty years bespeaks greater influence of one party over the other, so that the danger
that the law seeks to avoid is correspondingly increased. Moreover, as already pointed
out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be just that such donations
should subsist, lest the condition 6f those who incurred guilt should turn out to be better.'
So long as marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any
other conclusion cannot stand the test of scrutiny. It would be to indict the frame of the
Civil Code for a failure to apply a laudable rule to a situation which in its essentials cannot
be distinguished. Moreover, if it is at all to be differentiated the policy of the law which
embodies a deeply rooted notion of what is just and what is right would be nullified if
such irregular relationship instead of being visited with disabilities would be attended
with benefits. Certainly a legal norm should not be susceptible to such a reproach. If there
is every any occasion where the principle of statutory construction that what is within
the spirit of the law is as much a part of it as what is written, this is it. Otherwise the basic
purpose discernible in such codal provision would not be attained. Whatever omission
may be apparent in an interpretation purely literal of the language used must be
remedied by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may effectuate. More specifically, with record to the
disability on "persons who were guilty of adultery or concubinage at the time of the
donation," Article 739 itself provides: +.wph!1 REYES, J.B.L., J.:
In the case referred to in No. 1, the action for declaration of nullity may be brought by the
spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a
condition precedent. In fact, it cannot even be from the aforequoted provision that a
prosecution is needed. On the contrary, the law plainly states that the guilt of the party
may be proved "in the same acting for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for the offense
indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations between
the parties in the pre-trial conference of the case. It case agreed upon and stipulated
therein that the deceased insured Buenaventura C. Ebrado was married to Pascuala
Ebrado with whom she has six legitimate children; that during his lifetime, the deceased
insured was living with his common-law wife, Carponia Ebrado, with whom he has two
children. These stipulations are nothing less thanjudicial admissions which, as a
consequence, no longer require proof and cannot be contradicted. 8 A fortiori, on the
basis of these admissions, a judgment may be validly rendered without going through the
rigors of a trial for the sole purpose of proving the illicit liaison between the insured and
the beneficiary. In fact, in that pretrial, the parties even agreed "that a decision be
rendered based on this agreement and stipulation of facts as to who among the two
claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C.
Ebrado in his life insurance policy. As a consequence, the proceeds of the policy are
hereby held payable to the estate of the deceased insured. Costs against Carponia T.
Ebrado.
SO ORDERED.
DELFIN NARIO, and ALEJANDRA SANTOS-NARIO, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
Ricardo T. Bancod and Severino C. Zarasate for plaintiffs-appellants.
M. Lim, M. Y. Macias and Associates for defendant-appellee.
Direct appeal, on pure question of law, from a decision of the Court of First Instance of
Manila, in its Civil Case No. 54942, dismissing plaintiffs' complaint as well as from a later
order of the same court, denying a motion to set aside and/or reconsider said decision of
dismissal.
The facts of this case may be stated briefly as follows:
Mrs. Alejandra Santos-Mario was, upon application, issued, on June 12, 1959, by the
Philippine American Life Insurance Co., a life insurance policy (No. 503617) under a 20-
year endowment plan, with a face value of P5,000.00. She designated thereon her
husband, Delfin Nario, and their unemancipated minor son, Ernesto Nario, as her
irrevocable beneficiaries.
About the middle of June, 1963, Mrs. Nario applied for a loan on the above stated policy
with the Insurance Company, which loan she, as policy-holder, has been entitled to avail
of under one of the provisions of said policy after the same has been in force for three (3)
years, for the purpose of using the proceeds thereof for the school expenses of her minor
son, Ernesto Nario. Said application bore the written signature and consent of Delfin
Nario in two capacities: first, as one of the irrevocable beneficiaries of the policy; and the
other, as the father-guardian of said minor son and irrevocable beneficiary, Ernesto
Nario, and as the legal administrator of the minor's properties, pursuant to Article 320 of
the Civil Code of the Philippines.
The Insurance Company denied said application, manifesting to the policy holder that the
written consent for the minor son must not only be given by his father as legal guardian
but it must also be authorized by the court in a competent guardianship proceeding.
After the denial of said policy loan application, Mrs. Nario signified her decision to
surrender her policy to the Insurance Company, which she was also entitled to avail of
under one of the provisions of the same policy, and demanded its cash value which then
amounted to P520.00.
The Insurance Company also denied the surrender of the policy, on the same ground as
that given in disapproving the policy loan application; hence, on September 10, 1963,
Mrs. Alejandra Santos-Nario and her husband, Delfin Nario, brought suit against the
Philippine American Life Insurance Co. in the above mentioned court of first instance,
seeking to compel the latter (defendant) to grant their policy loan application and/or to
accept the surrender of said policy in exchange for its cash value.1wph1.t
Defendant Insurance Company answered the complaint, virtually admitting its material
allegations, but it set up the affirmative defense that inasmuch as the policy loan
application and the surrender of the policy involved acts of disposition and alienation of
the property rights of the minor, said acts are not within the powers of the legal
administrator, under article 320 in relation to article 326 of the Civil Code; hence, mere
written consent given by the father-guardian, for and in behalf of the minor son, without
any court authority therefor, was not a sufficient compliance of the law, and it (defendant
Insurance Company) was, therefore, justified in refusing to grant and in disapproving the
proposed transactions in question.
There having been no substantial disagreement or dispute as to any material fact, the
parties, upon joint motion which the lower court granted, dispensed with the
presentation of evidence and submitted their respective memoranda, after which the case
was considered submitted for decision.
Unable to secure reconsideration of the trial Court's ruling, petitioner appealed directly
to this Court, contending that the minor's interest amounted to only one-half of the
policy's cash surrender value of P520.00; that under Rule 96, Section 2 of the Revised
Rules of Court, payment of the ward's debts is within the powers of the guardian, where
no realty is involved; hence, there is no reason why the father may not validly agree to the
proposed transaction on behalf of the minor without need of court authority.
The appeal is unmeritorious. We agree with the lower court that the vested interest or
right of the beneficiaries in the policy should be measured on its full face value and not on
its cash surrender value, for in case of death of the insured, said beneficiaries are paid on
the basis of its face value and in case the insured should discontinue paying premiums,
the beneficiaries may continue paying it and are entitled to automatic extended term or
paid-up insurance options, etc. and that said vested right under the policy cannot be
divisible at any given time. We likewise agree with the conclusion of the lower court that
the proposed transactions in question (policy loan and surrender of policy) constitute
acts of disposition or alienation of property rights and not merely of management or
administration because they involve the incurring or termination of contractual
obligations.

The lower court found and opined that since the parties expressly stipulated in the
endorsement attached to the policy and which formed part thereof that
It is hereby understood and agreed that, notwithstanding the provisions of this Policy to
the contrary, inasmuch as the designation of the beneficiaries have been made by the
Insured without reserving the right to change said beneficiaries, the Insured may not
designate a new beneficiary or assign, release or surrender this Policy to the Company
and exercise any and all other rights and privileges hereunder or agree with the Company
to any change in or amendment to this Policy, without the consent of the beneficiaries
originally designated;
As above noted, the full face value of the policy is P5,000.00 and the minor's vested
interest therein, as one of the two (2) irrevocable beneficiaries, consists of one-half () of
said amount or P2,500.00.
Article 320 of the Civil Code of the Philippines provides
The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two
thousand pesos, the father or mother shall give a bond subject to the approval of the
Court of First Instance.

that under the above quoted provision, the minor son, as one of the designated
irrevocable beneficiaries, "acquired a vested right to all benefits accruing to the policy,
including that of obtaining a policy loan to the extent stated in the schedule of values
attached to the policy (Gercio vs. Sun Life Assurance of Canada, 48 Phil. 53, 58)"; that the
proposed transactions in question (policy loan and surrender of policy) involved acts of
disposition or alienation of the minor's properties for which the consent given by the
father-guardian for and in behalf of the minor son, must be with the requisite court
authority (U.S.V.A. vs. Bustos, 92 Phil. 327; Visaya vs. Suguitan, G.R. No. L-8300,
November 18, 1955; 99 Phil. 1004 [unrep] and in the case at bar, such consent was given
by the father-guardian without any judicial authority; said court, agreeing with
defendant's contention, sustained defendant's affirmative defense, and rendered, on
January 28, 1964, its decision dismissing plaintiffs' complaint.
and article 326 of the same Code reads
When the property of the child is worth more than two thousand pesos, the father or
mother shall be considered a guardian of the child's property, subject to the duties and
obligations of guardians under the Rules of Court.
The above quoted provisions of the Civil Code have already been implemented and
clarified in our Revised Rules of Court which provides
SEC. 7. Parents as guardians. When the property of the child under parental authority
is worth two thousand pesos or less, the father or the mother, without the necessity of
court appointment, shall be his legal guardian. When the property of the child is worth
more than two thousand pesos, the father or the mother shall be considered guardian of
the child's property, with the duties and obligations of guardians under these rules, and
shall file the petition required by Section 2 hereof. For good reasons the court may,
however, appoint another suitable person. (Rule 93).
It appearing that the minor beneficiary's vested interest or right on the policy exceeds
two thousand pesos (P2,000.00); that plaintiffs did not file any guardianship bond to be
approved by the court; and as later implemented in the abovequoted Section 7, Rule 93 of
the Revised Rules of Court, plaintiffs should have, but, had not, filed a formal application
or petition for guardianship, plaintiffs-parents cannot possibly exercise the powers
vested on them, as legal administrators of their child's property, under articles 320 and
326 of the Civil Code. As there was no such petition and bond, the consent given by the
father-guardian, for and in behalf of the minor son, without prior court authorization, to
the policy loan application and the surrender of said policy, was insufficient and
ineffective, and defendant-appellee was justified in disapproving the proposed
transactions in question.
The American cases cited by appellants are not applicable to the case at bar for lack of
analogy. In those cases, there were pending guardianship proceedings and the guardians
therein were covered by bonds to protect the wards' interests, which circumstances are
wanting in this case.
The result would be the same even if we regarded the interest of the ward to be worth
less than P2,000.00. While the father or mother would in such event be exempt from the
duty of filing a bond, and securing judicial appointment, still the parent's authority over
the estate of the ward as a legal-guardian would not extend to acts of encumbrance or
disposition, as distinguished from acts of management or administration. The distinction
between one and the other kind of power is too basic in our law to be ignored. Thus,
under Article 1877 of the Civil Code of the Philippines, an agency in general terms does
not include power to encumber or dispose of the property of the principal; and the Code
explicitly requires a special power or authority for the agent "to loan or borrow money,
unless the latter act be urgent or indispensable for the preservation of the thing under
administration" (Art. 1878 no. 7). Similarly, special powers are required to required to
effect novations, to waive any obligation gratuitously or obligate the principal as a
guarantor or surety (Do., nos. 2, 4 and 11). By analogy, since the law merely constitutes
the parent as legal administrator of the child's property (which is a general power), the
parent requires special authority for the acts above specified, and this authority can be
given only by a court. This restricted interpretation of the parent's authority becomes all
the more necessary where as in the case before us, there is no bond to guarantee the
ward against eventual losses.
Appellants seek to bolster their petition by invoking the parental power (patria potestas)
under the Civil Code of 1889, which they claim to have been revived by the Civil Code of
the Philippines (Rep. Act 386). The appeal profits them nothing. For the new Civil Code
has not effected a restitutio in integrum of the Spanish patria potestas; the revival has
been only in part. And, significantly, the Civil Code now in force did not reenact Article
164 of the Civil Code of 1889, that prohibited the alienation by the parents of the real
property owned by the child without court authority and led the commentators and
interpreters of said Code to infer that the parents could by themselves alienate the child's
movable property. The omission of any equivalent precept in the Civil Code now in force
proves the absence of any authority in the parents to carry out now acts of disposition or
alienation of the child's goods without court approval, as contended by the appellee and
the court below.
Wherefore, the decision appealed from is affirmed. Costs against appellants Nario. So
ordered.
Intestate estate of the late Esperanza J. Villanueva. PABLO ORO, administrator; MARIANO
J. VILLANUEVA, claimant-appellant.
Nicolas P. Nonato for claimant and Appellant.
Rodrigo J. Harder for administrator and appellee.
SYLLABUS
INSURANCE; LIFE; BENEFICIARY; PROCEEDS, TO WHOM PAYABLE WHEN INSURED
OUTLIVES POLICY. Where the insurer obligates itself, under the life insurance policy,
to pay the proceeds to the insured if the latter lives on the date of maturity or to the
designated beneficiary if the insured dies during the continuance of the policy, and where
the insured outlives the policy, the proceeds shall be payable exclusively to the insured or
his assignee, the benefit of the policy inuring to the beneficiary only in case the insured
dies during its continuance.
DECISION
PARAS, J.:
The West Coast Life Insurance Company issued two policies of insurance on the life of
Esperanza J. Villanueva, one for two thousand pesos and maturing on April 1, 1943, and
the other for three thousand pesos and maturing on March 31, 1943. In both policies
(with corresponding variation in amount and date of maturity) the insurer agreed "to pay
two thousand pesos, at the home office of the Company, in San Francisco, California, to
the insured hereunder, if living, on the 1st day of April 1943, or to the beneficiary
Bartolome Villanueva, father of the insured, immediately upon receipt of due proof of the
prior death of the insured, Esperanza J. Villanueva, of La Paz, Philippine Islands, during
the continuance of this policy, with right on the part of the insured to change the
beneficiary."cralaw virtua1aw library
After the death of Bartolome Villanueva in 1940, the latter was duly substituted as
beneficiary under the policies by Mariano J. Villanueva, a brother of the insured.
Esperanza J. Villanueva survived the insurance period, for she died only on October 15,
1944, without, however, collecting the insurance proceeds. Adverse claims for said
proceeds were presented by the estate of Esperanza J. Villanueva on the one hand and by
Mariano J. Villanueva on the other, which conflict was squarely submitted in the intestate
proceedings of Esperanza J. Villanueva pending in the Court of First Instance of Iloilo.
From an order, dated February 26, 1947, holding that the estate of the insured is entitled
to the insurance proceeds, to the exclusion of the beneficiary, Mariano J. Villanueva, the
latter has interposed the present appeal.
The lower court committed no error. Under the policies, the insurer obligated itself to pay
the insurance proceeds (1) to the insured if the latter lived on the dates of maturity or (2)
to the beneficiary if the insured died during the continuance of the policies. The first
contingency of course excludes the second, and vice versa. In other words, as the insured
Esperanza J. Villanueva was living on April 1, and March 31, 1943, the proceeds are
payable exclusively to her or to her estate unless she had before her death otherwise
assigned the matured policies. (It is not here pretended and much less proven, that there
was such assignment.) The beneficiary, Mariano J. Villanueva, could be entitled to said
proceeds only in default of the first contingency. To sustain the beneficiarys claim would
be to altogether eliminate from the policies the condition that the insurer "agrees to pay .
. . to the insured hereunder, if living."
There is nothing in the Insurance Law (Act No. 2427) that militates against the
construction placed by the lower court on the disputed condition appearing in the two
policies now under advisement. On the contrary, said law provides that "an insurance
upon life may be made payable on the death of the person, or on his surviving a specified
period, or otherwise contingently on the continuance or cessation of life" (section 165),
and that "a policy of insurance upon life or health may pass by transfer, will, or
succession, to any person, whether he has an insurable interest or not, and such person
may recover upon it whatever the insured might have recovered" (section 166).
Counsel for the beneficiary invokes the decision in Del Val v. Del Val, 29 Phil., 534, 540, in
which it was held that "the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured, and that such
proceeds are the separate and individual property of the beneficiary, and not of the heirs
of the person whose life was insured." This citation is clearly not controlling, first,
because it does not appear therein that the insurance contract contained the stipulation
appearing in the policies issued on the life of Esperanza J. Villanueva and on which the
appealed order in the case at bar is based; and, secondly, because the Del Val doctrine
was made upon the authority of the provisions of the Code of Commerce relating to
insurance (particularly section 428) which had been expressly repealed by the present
Insurance Act No. 2427.
Our pronouncement is not novel, since it tallies with the following typical American
authorities: "If a policy of insurance provides that the proceeds shall be payable to the
assured, if he lives to a certain date, and, in case of his death before that date, then they
shall be payable to the beneficiary designated, the interest of the beneficiary is a
contingent one, and the benefit of the policy will only inure to such beneficiary in case the
assured dies before the end of the period designated in the policy." (Couch, Cyclopedia of
Insurance Law, Vol. 2, sec. 343, p. 1023.) "Under endowment or tontine policies payable
to the insured at the expiration of a certain period, if alive, but providing for the payment
of a stated sum to a designated beneficiary in case of the insureds death during the
period mentioned, the insured and the beneficiary take contingent interests. The interest
of the insured in the proceeds of the insurance depends upon his survival of the
expiration of endowment period. Upon the insureds death, within the period, the
beneficiary will take, as against the personal representative or the assignee of the
insured. Upon the other hand, if the insured survives the endowment period, the benefits
are payable to him or to his assignee, notwithstanding a beneficiary is designated in the
policy." (29 Am. Jur., section 1277, pp. 952, 953.)
The appealed order is, therefore, hereby affirmed, and it is so ordered with costs against
the Appellant.
THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,
vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of First Instance
of Rizal, and RODOLFO C. DIMAYUGA, respondents.
PARAS, J.:
Challenged before Us in this petition for review on certiorari are the Orders of the
respondent Judge dated March 19, 1980 and June 10, 1980 granting the prayer in the
petition in Sp. Proc. No. 9210 and denying petitioner's Motion for Reconsideration,
respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy from
the petitioner company and designated his wife and children as irrevocable beneficiaries
of said policy.
Under date February 22, 1980 private respondent filed a petition which was docketed as
Civil Case No. 9210 of the then Court of First Instance of Rizal to amend the designation of
the beneficiaries in his life policy from irrevocable to revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the same
date, petitioner filed its Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge
Gregorio G. Pineda, presiding Judge of the then Court of First Instance of Rizal, Pasig
Branch XXI, denied petitioner's Urgent Motion, thus allowing the private respondent to
adduce evidence, the consequence of which was the issuance of the questioned Order
granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an
Order June 10, 1980. Hence, this petition raising the following issues for resolution:
I abrogating the contention of the private respondent that said designation can be
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES COULD
BE CHANGED OR AMENDED WITHOUT THE CONSENT OF ALL THE IRREVOCABLE
BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF WHOM IS
ALREADY DECEASED WHILE THE OTHERS ARE ALL MINORS, COULD VALIDLY GIVE
CONSENT TO THE CHANGE OR AMENDMENT IN THE DESIGNATION OF THE
IRREVOCABLE BENEFICIARIES.
We are of the opinion that his Honor, the respondent Judge, was in error in issuing the
questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise
known as Act No. 2427 as amended, the policy having been procured in 1968. Under the
said law, the beneficiary designated in a life insurance contract cannot be changed
without the consent of the beneficiary because he has a vested interest in the policy
(Gercio v. Sun Life Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International
Assurance Co., Ltd., 72 Phil. 71).
In this regard, it is worth noting that the Beneficiary Designation Indorsement in the
policy which forms part of Policy Number 0794461 in the name of Rodolfo Cailles
Dimayuga states that the designation of the beneficiaries is irrevocable (Annex "A" of
Petition in Sp. Proc. No. 9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions of this policy to
the contrary, inasmuch as the designation of the primary/contingent
beneficiary/beneficiaries in this Policy has been made without reserving the right to
change said beneficiary/ beneficiaries, such designation may not be surrendered to the
Company, released or assigned; and no right or privilege under the Policy may be
exercised, or agreement made with the Company to any change in or amendment to the
Policy, without the consent of the said beneficiary/beneficiaries. (Petitioner's
Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to
disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention
the law then applicable, it is only with the consent of all the beneficiaries that any change
or amendment in the policy concerning the irrevocable beneficiaries may be legally and
validly effected. Both the law and the policy do not provide for any other exception, thus,
amended if the Court finds a just, reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot be considered an effective ratification
to the change of the beneficiaries from irrevocable to revocable. Indubitable is the fact
that all the six (6) children named as beneficiaries were minors at the time,** for which
reason, they could not validly give their consent. Neither could they act through their
father insured since their interests are quite divergent from one another. In point is an
excerpt from the Notes and Cases on Insurance Law by Campos and Campos, 1960,
reading-
The insured ... can do nothing to divest the beneficiary of his rights without his consent.
He cannot assign his policy, nor even take its cash surrender value without the consent of
the beneficiary. Neither can the insured's creditors seize the policy or any right
thereunder. The insured may not even add another beneficiary because by doing so, he
diminishes the amount which the beneficiary may recover and this he cannot do without
the beneficiary's consent.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested rights of the irrevocable beneficiaries would
be rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the
law binding on both of them and for so many times, this court has consistently issued
pronouncements upholding the validity and effectivity of contracts. Where there is
nothing in the contract which is contrary to law, good morals, good customs, public policy
or public order the validity of the contract must be sustained. Likewise, contracts which
are the private laws of the contracting parties should be fulfilled according to the literal
sense of their stipulations, if their terms are clear and leave no room for doubt as to the
intention of the contracting parties, for contracts are obligatory, no matter in what form
they may be, whenever the essential requisites for their validity are present (Phoenix
Assurance Co., Ltd. vs. United States Lines, 22 SCRA 675, Phil. American General
Insurance Co., Inc. vs. Mutuc, 61 SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this
Court ruled that:
... it is settled that the parties may establish such stipulations, clauses, terms, and
conditions as they may want to include; and as long as such agreements are not contrary
to law, good morals, good customs, public policy or public order, they shall have the force
of law between them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its
validity and does not in any way violate the law, morals, customs, orders, etc. leaving no
reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the
change in the designation of beneficiaries could be validly effected means that it was
never within the contemplation of the parties. The lower court, in gratuitously providing
for such contingency, made a new contract for them, a proceeding which we cannot
tolerate. Ergo, We cannot help but conclude that the lower court acted in excess of its
authority when it issued the Order dated March 19, 1980 amending the designation of the
beneficiaries from "irrevocable" to "revocable" over the disapprobation of the petitioner
insurance company.
WHEREFORE, premises considered, the questioned Orders of the respondent Judge are
hereby nullified and set aside.
SO ORDERED.
BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE, JR.,
RODRIGO, LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS,
HIGHWAY DISTRICT ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL
SERVICE, and ROSARIO DIAZ,respondents-appellees.
Bernardino O. Almeda for petitioners-appellants.
Binag and Arevalo, Jr. for respondent-appellee Government Service Insurance System.
Office of the Solicitor General for other respondents-appellees.
ZALDIVAR, J.:
Appeal on purely questions of law from the decision of the Court of First Instance of
Surigao del Norte, dated March 7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the
following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the
office of the District Engineer in the province of Surigao del Norte. In his lifetime,
Consuegra contracted two marriages, the first with herein respondent Rosario Diaz,
solemnized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on July 15,
1937, out of which marriage were born two children, namely, Jose Consuegra, Jr. and
Pedro Consuegra, but both predeceased their father; and the second, which was
contracted in good faith while the first marriage was subsisting, with herein petitioner
Basilia Berdin, on May 1, 1957 in the same parish and municipality, out of which marriage
were born seven children, namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida
and Luz, all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the proceeds of his life insurance under policy
No. 601801 were paid by the GSIS to petitioner Basilia Berdin and her children who were
the beneficiaries named in the policy. Having been in the service of the government for
22.5028 years, Consuegra was entitled to retirement insurance benefits in the sum of
P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic
Acts 1616 and 3836. Consuegra did not designate any beneficiary who would receive the
retirement insurance benefits due to him. Respondent Rosario Diaz, the widow by the
first marriage, filed a claim with the GSIS asking that the retirement insurance benefits be
paid to her as the only legal heir of Consuegra, considering that the deceased did not
designate any beneficiary with respect to his retirement insurance benefits. Petitioner
Basilia Berdin and her children, likewise, filed a similar claim with the GSIS, asserting that
being the beneficiaries named in the life insurance policy of Consuegra, they are the only
ones entitled to receive the retirement insurance benefits due the deceased Consuegra.
Resolving the conflicting claims, the GSIS ruled that the legal heirs of the late Jose
Consuegra were Rosario Diaz, his widow by his first marriage who is entitled to one-half,
or 8/16, of the retirement insurance benefits, on the one hand; and Basilia Berdin, his
widow by the second marriage and their seven children, on the other hand, who are
entitled to the remaining one-half, or 8/16, each of them to receive an equal share of
1/16.
Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia
Berdin and her children1 filed on October 10, 1966 a petition for mandamus with
preliminary injunction in the Court of First Instance of Surigao, naming as respondents
the GSIS, the Commissioner of Public Highways, the Highway District Engineer of Surigao
del Norte, the Commissioner of Civil Service, and Rosario Diaz, praying that they
(petitioners therein) be declared the legal heirs and exclusive beneficiaries of the
retirement insurance of the late Jose Consuegra, and that a writ of preliminary injunction
be issued restraining the implementation of the adjudication made by the GSIS. On
October 26, 1966, the trial court issued an order requiring therein respondents to file
their respective answers, but refrained from issuing the writ of preliminary injunction
prayed for. On February 11, 1967, the parties submitted a stipulation of facts, prayed that
the same be admitted and approved and that judgment be rendered on the basis of the
stipulation of facts. On March 7, 1967, the court below rendered judgment, the pertinent
portions of which are quoted hereunder:
This Court, in conformity with the foregoing stipulation of facts, likewise is in full accord
with the parties with respect to the authority cited by them in support of said stipulation
and which is herein-below cited for purposes of this judgment, to wit:
"When two women innocently and in good faith are legally united in holy matrimony to
the same man, they and their children, born of said wedlock, will be regarded as
legitimate children and each family be entitled to one half of the estate. Lao & Lao vs. Dee
Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon vs. Bejec, 74 Phil.
88.
WHEREFORE, in view of the above premises, this Court is of the opinion that the
foregoing stipulation of facts is in order and in accordance with law and the same is
hereby approved. Judgment, therefore, is hereby rendered declaring the petitioner Basilia
Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria Lourdes, Jose, Jr.,
Rodrigo, Lenida and Luis, all surnamed Consuegra, beneficiary and entitled to one-half
(1/2) of the retirement benefit in the amount of Six Thousand Three Hundred Four Pesos
and Fourty-Seven Centavos (P6,304.47) due to the deceased Jose Consuegra from the
Government Service Insurance System or the amount of P3,152.235 to be divided equally
among them in the proportional amount of 1/16 each. Likewise, the respondent Rosario
Diaz Vda. de Consuegra is hereby declared beneficiary and entitled to the other half of the
retirement benefit of the late Jose Consuegra or the amount of P3,152.235. The case with
respect to the Highway District Engineer of Surigao del Norte is hereby ordered
dismissed.
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her
children.
It is the contention of appellants that the lower court erred in not holding that the
designated beneficiaries in the life insurance of the late Jose Consuegra are also the
exclusive beneficiaries in the retirement insurance of said deceased. In other words, it is
the submission of appellants that because the deceased Jose Consuegra failed to
designate the beneficiaries in his retirement insurance, the appellants who were the
beneficiaries named in the life insurance should automatically be considered the
beneficiaries to receive the retirement insurance benefits, to the exclusion of respondent
Rosario Diaz. From the arguments adduced by appellants in their brief We gather that it
is their stand that the system of life insurance and the system of retirement insurance,
that are provided for in Commonwealth Act 186 as amended, are simply complementary
to each other, or that one is a part or an extension of the other, such that whoever is
named the beneficiary in the life insurance is also the beneficiary in the retirement
insurance when no such beneficiary is named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance System is
Commonwealth Act 186 which was enacted by the National Assembly on November 14,
1936. As originally approved, Commonwealth Act 186 provided for the compulsory
membership in the Government Service Insurance System of all regularly and
permanently appointed officials and employees of the government, considering as
automatically insured on life all such officials and employees, and issuing to them the
corresponding membership policy under the terms and conditions as provided in the
Act.2
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act
186 was amended by Republic Act 660 which was enacted by the Congress of the
Philippines on June 16, 1951, and, among others, the amendatory Act provided that aside
from the system of life insurance under the Government Service Insurance System there
was also established the system of retirement insurance. Thus, We will note in Republic
Act 660 that there is a chapter on life insurance and another chapter on retirement
insurance. 3 Under the chapter on life insurance are sections 8, 9 and 10 of
Commonwealth Act 186, as amended; and under the chapter on retirement insurance are
sections 11, 12, 13 and 13-A. On May 31, 1957, Republic Act 1616 was enacted by
Congress, amending section 12 of Commonwealth Act 186 as amended by Republic Act
660, by adding thereto two new subsections, designated as subsections (b) and (c). This
subsection (c) of section 12 of Commonwealth Act 186, as amended by Republic Acts 660,
1616 and 3096, was again amended by Republic Act 3836 which was enacted on June 22,
1963.lwph1.t The pertinent provisions of subsection (c) of Section 12 of operation was resumed sometime in 1946. When Consuegra designated his beneficiaries
Commonwealth Act 186, as thus amended and reamended, read as follows:
(c) Retirement is likewise allowed to a member, regardless of age, who has rendered at
least twenty years of service. The benefit shall, in addition to the return of his personal
contributions plus interest and the payment of the corresponding employer's premiums
described in subsection (a) of Section 5 hereof, without interest, be only a gratuity
equivalent to one month's salary for every year of service, based on the highest rate
received, but not to exceed twenty-four months; Provided, That the retiring officer or
employee has been in the service of the said employer or office for at least four years,
immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is hereby authorized
to provide the necessary appropriation to pay the same from any unexpended items of
appropriations.
Elective or appointive officials and employees paid gratuity under this subsection shall be
entitled to the commutation of the unused vacation and sick leave, based on the highest
rate received, which they may have to their credit at the time of retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had
acquired rights under the above-quoted provisions of subsection (c) of Section 12 of Com.
Act 186, as finally amended by Rep. Act 3836 on June 22, 1963. When Consuegra died on
September 26, 1965, he had to his credit 22.5028 years of service in the government, and
pursuant to the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186,
as amended, on the basis of the highest rate of salary received by him which was P282.83
per month, he was entitled to receive retirement insurance benefits in the amount of
P6,304.47. This is the retirement benefits that are the subject of dispute between the
appellants, on the one hand, and the appellee Rosario Diaz, on the other, in the present
case. The question posed is: to whom should this retirement insurance benefits of Jose
Consuegra be paid, because he did not, or failed to, designate the beneficiary of his
retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September
26, 1965, it follows that he started in the government service sometime during the early
part of 1943, or before 1943. In 1943 Com. Act 186 was not yet amended, and the only
benefits then provided for in said Com. Act 186 were those that proceed from a life
insurance. Upon entering the government service Consuegra became a compulsory
member of the GSIS, being automatically insured on his life, pursuant to the provisions of
Com. Act 186 which was in force at the time. During 1943 the operation of the
Government Service Insurance System was suspended because of the war, and the
in his life insurance he could not have intended those beneficiaries of his life insurance as
also the beneficiaries of his retirement insurance because the provisions on retirement
insurance under the GSIS came about only when Com. Act 186 was amended by Rep. Act
660 on June 16, 1951. Hence, it cannot be said that because herein appellants were
designated beneficiaries in Consuegra's life insurance they automatically became the
beneficiaries also of his retirement insurance. Rep. Act 660 added to Com. Act 186
provisions regarding retirement insurance, which are Sections 11, 12, and 13 of Com. Act
186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by Rep. Act
660, provides as follows:
(b) Survivors benefit. Upon death before he becomes eligible for retirement, his
beneficiaries as recorded in the application for retirement annuity filed with the System
shall be paid his own premiums with interest of three per centum per annum,
compounded monthly. If on his death he is eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186,
as amended by Rep. Act 660, clearly indicate that there is need for the employee to file an
application for retirement insurance benefits when he becomes a member of the GSIS,
and he should state in his application the beneficiary of his retirement insurance. Hence,
the beneficiary named in the life insurance does not automatically become the beneficiary
in the retirement insurance unless the same beneficiary in the life insurance is so
designated in the application for retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life
insurance fund and for a retirement insurance fund. There was no such provision in Com.
Act 186 before it was amended by Rep. Act 660. Thus, subsections (a) and (b) of Section
24 of Commonwealth Act 186, as amended by Rep. Act 660, partly read as follows:
(a) Life insurance fund. This shall consist of all premiums for life insurance benefit
and/or earnings and savings therefrom. It shall meet death claims as they may arise or
such equities as any member may be entitled to, under the conditions of his policy, and
shall maintain the required reserves to the end of guaranteeing the fulfillment of the life
insurance contracts issued by the System ...
(b) Retirement insurance fund. This shall consist of all contributions for retirement
insurance benefit and of earnings and savings therefrom. It shall meet annuity payments
and establish the required reserves to the end of guaranteeing the fulfillment of the
contracts issued by the System. ...
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its
members one is the life insurance and the other is the retirement insurance. These two
distinct systems of benefits are paid out from two distinct and separate funds that are
maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named the
beneficiary in the life insurance policy. As in the case of a life insurance provided for in
the Insurance Act (Act 2427, as amended), the beneficiary in a life insurance under the
GSIS may not necessarily be a heir of the insured. The insured in a life insurance may
designate any person as beneficiary unless disqualified to be so under the provisions of
the Civil Code.4 And in the absence of any beneficiary named in the life insurance policy,
the proceeds of the insurance will go to the estate of the insured.
Retirement insurance is primarily intended for the benefit of the employee to provide
for his old age, or incapacity, after rendering service in the government for a required
number of years. If the employee reaches the age of retirement, he gets the retirement
benefits even to the exclusion of the beneficiary or beneficiaries named in his application
for retirement insurance. The beneficiary of the retirement insurance can only claim the
proceeds of the retirement insurance if the employee dies before retirement. If the
employee failed or overlooked to state the beneficiary of his retirement insurance, the
retirement benefits will accrue to his estate and will be given to his legal heirs in
accordance with law, as in the case of a life insurance if no beneficiary is named in the
insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled that
the proceeds of the retirement insurance of the late Jose Consuegra should be divided
equally between his first living wife Rosario Diaz, on the one hand, and his second wife
Basilia Berdin and his children by her, on the other; and the lower court did not commit
error when it confirmed the action of the GSIS, it being accepted as a fact that the second
marriage of Jose Consuegra to Basilia Berdin was contracted in good faith. The lower
court has correctly applied the ruling of this Court in the case of Lao, et al. vs. Dee Tim, et
al., 45 Phil. 739 as cited in the stipulation of facts and in the decision appealed from.5 In
the recent case of Gomez vs. Lipana, L-23214, June 30, 1970, 6 this Court, in construing
the rights of two women who were married to the same man a situation more or less
similar to the case of appellant Basilia Berdin and appellee Rosario Diaz held "that
since the defendant's first marriage has not been dissolved or declared void the conjugal
partnership established by that marriage has not ceased. Nor has the first wife lost or
relinquished her status as putative heir of her husband under the new Civil Code, entitled
to share in his estate upon his death should she survive him. Consequently, whether as
conjugal partner in a still subsisting marriage or as such putative heir she has an interest
in the husband's share in the property here in dispute.... " And with respect to the right of
the second wife, this Court observed that although the second marriage can be presumed
to be void ab initio as it was celebrated while the first marriage was still subsisting, still
there is need for judicial declaration of such nullity. And inasmuch as the conjugal
partnership formed by the second marriage was dissolved before judicial declaration of
its nullity, "[t]he only lust and equitable solution in this case would be to recognize the
right of the second wife to her share of one-half in the property acquired by her and her
husband and consider the other half as pertaining to the conjugal partnership of the first
marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitioners-
appellants. It is so ordered.
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.
REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the
dispositive part of which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant
Filipino Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with
interest at legal rate from the date of filing of the complaint, and is modified with respect
to the third party complaint in that (1) third party defendant E. Razon, Inc. is ordered to
reimburse third party plaintiff the sum of P25,471.80 with legal interest from the date of
payment until the date of reimbursement, and (2) the third-party complaint against third
party defendant Compagnie Maritime Des Chargeurs Reunis is dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on board
the vessel SS Bougainville and unloaded at the Port of Manila on or about December 11,
1976 and seeks to recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has been insured by the
defendant insurance company under Policy No. M-2678. The defendant brought a third
party complaint against third party defendants Compagnie Maritime Des Chargeurs
Reunis and/or E. Razon, Inc. seeking judgment against the third (sic) defendants in case
Judgment is rendered against the third party plaintiff. It appears from the evidence
presented that in December 1976, plaintiff insured said shipment with defendant
insurance company under said cargo Policy No. M-2678 for the sum of P267,653.59 for
the goods described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each
from Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms.
Actually, what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF
Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on December
11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge 105 bags were in bad order condition as
jointly surveyed by the ship's agent and the arrastre contractor. The condition of the bad
order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to
120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6-
Razon. The cargo was also surveyed by the arrastre contractor before delivery of the
cargo to the consignee and the condition of the cargo on such delivery was reflected in E.
Razon's Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in
bad order condition. Defendant's surveyor has conducted a final and detailed survey of
the cargo in the warehouse for which he prepared a survey report Exhibit F with the
findings on the extent of shortage or loss on the bad order bags totalling 227 bags
amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff made a
formal claim against the defendant Filipino Merchants Insurance Company for
P51,568.62 (Exhibit C) the computation of which claim is contained therein. A formal
claim statement was also presented by the plaintiff against the vessel dated December 21,
1976, Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay
the claim. Consequently, the plaintiff brought an action against said defendant as
adverted to above and defendant presented a third party complaint against the vessel and
the arrastre contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the
plaintiff and against the defendant Filipino Merchant's (sic) Insurance Co., ordering the
defendants to pay the plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of the filing of the
complaint;
On the third party complaint, the third party defendant Compagnie Maritime Des
Chargeurs Reunis and third party defendant E. Razon, Inc. are ordered to pay to the third
party plaintiff jointly and severally reimbursement of the amounts paid by the third party
plaintiff with legal interest from the date of such payment until the date of such
reimbursement.
Without pronouncement as to costs. 3
On appeal, the respondent court affirmed the decision of the lower court insofar as the
award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the aforesaid
decision was denied, hence this petition with the following assignment of errors:
1. The Court of Appeals erred in its interpretation and application of the "all risks" clause
of the marine insurance policy when it held the petitioner liable to the private respondent
for the partial loss of the cargo, notwithstanding the clear absence of proof of some
fortuitous event, casualty, or accidental cause to which the loss is attributable, thereby
contradicting the very precedents cited by it in its decision as well as a prior decision of
the same Division of the said court (then composed of Justices Cacdac, Castro-Bartolome,
and Pronove);
2. The Court of Appeals erred in not holding that the private respondent had no insurable
interest in the subject cargo, hence, the marine insurance policy taken out by private
respondent is null and void;
3. The Court of Appeals erred in not holding that the private respondent was guilty of
fraud in not disclosing the fact, it being bound out of utmost good faith to do so, that it
had no insurable interest in the subject cargo, which bars its recovery on the policy. 4
On the first assignment of error, petitioner contends that an "all risks" marine policy has
a technical meaning in insurance in that before a claim can be compensable it is essential
that there must be "some fortuity, " "casualty" or "accidental cause" to which the alleged
loss is attributable and the failure of herein private respondent, upon whom lay the
burden, to adduce evidence showing that the alleged loss to the cargo in question was
due to a fortuitous event precludes his right to recover from the insurance policy. We find
said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured but
shall in no case be deemed to extend to cover loss, damage, or expense proximately
caused by delay or inherent vice or nature of the subject-matter insured. Claims
recoverable hereunder shall be payable irrespective of percentage. 5
An "all risks policy" should be read literally as meaning all risks whatsoever and covering
all losses by an accidental cause of any kind. The terms "accident" and "accidental", as
used in insurance contracts, have not acquired any technical meaning. They are
construed by the courts in their ordinary and common acceptance. Thus, the terms have
been taken to mean that which happens by chance or fortuitously, without intention and
design, and which is unexpected, unusual and unforeseen. An accident is an event that
takes place without one's foresight or expectation; an event that proceeds from an
unknown cause, or is an unusual effect of a known cause and, therefore, not expected. 6
The very nature of the term "all risks" must be given a broad and comprehensive meaning
as covering any loss other than a willful and fraudulent act of the insured. 7 This is
pursuant to the very purpose of an "all risks" insurance to give protection to the insured
in those cases where difficulties of logical explanation or some mystery surround the loss
or damage to property. 8 An "all asks" policy has been evolved to grant greater protection
than that afforded by the "perils clause," in order to assure that no loss can happen
through the incidence of a cause neither insured against nor creating liability in the ship;
it is written against all losses, that is, attributable to external causes. 9
The term "all risks" cannot be given a strained technical meaning, the language of the
clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it
extends to all damages/losses suffered by the insured cargo except (a) loss or damage or
expense proximately caused by delay, and (b) loss or damage or expense proximately
caused by the inherent vice or nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an "all risks" policy the burden is not on the insured to prove the
precise cause of loss or damage for which it seeks compensation. The insured under an
"all risks insurance policy" has the initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was damaged when unloaded from
the vessel; thereafter, the burden then shifts to the insurer to show the exception to the
coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co.,
Ltd. 11 the basic rule is that the insurance company has the burden of proving that the
loss is caused by the risk excepted and for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special type
of insurance which extends coverage to risks not usually contemplated and avoids
putting upon the insured the burden of establishing that the loss was due to the peril
falling within the policy's coverage; the insurer can avoid coverage upon demonstrating
that a specific provision expressly excludes the loss from coverage. 12 A marine
insurance policy providing that the insurance was to be "against all risks" must be
construed as creating a special insurance and extending to other risks than are usually
contemplated, and covers all losses except such as arise from the fraud of the
insured. 13 The burden of the insured, therefore, is to prove merely that the goods he
transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to
the insurer to prove that the loss was due to excepted perils. To impose on the insured
the burden of proving the precise cause of the loss or damage would be inconsistent with
the broad protective purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the
excepted perils, the insurer is liable under the policy. As aptly stated by the respondent
Court of Appeals, upon due consideration of the authorities and jurisprudence it
discussed
... it is believed that in the absence of any showing that the losses/damages were caused
by an excepted peril, i.e. delay or the inherent vice or nature of the subject matter
insured, and there is no such showing, the lower court did not err in holding that the loss
was covered by the policy.
There is no evidence presented to show that the condition of the gunny bags in which the
fishmeal was packed was such that they could not hold their contents in the course of the
necessary transit, much less any evidence that the bags of cargo had burst as the result of
the weakness of the bags themselves. Had there been such a showing that spillage would
have been a certainty, there may have been good reason to plead that there was no risk
covered by the policy (See Berk vs. Style [1956] cited in Marine Insurance Claims, Ibid, p.
125). Under an 'all risks' policy, it was sufficient to show that there was damage
occasioned by some accidental cause of any kind, and there is no necessity to point to any
particular cause. 14
Contracts of insurance are contracts of indemnity upon the terms and conditions
specified in the policy. The agreement has the force of law between the parties. The terms
of the policy constitute the measure of the insurer's liability. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular
sense. 15
Anent the issue of insurable interest, we uphold the ruling of the respondent court that
private respondent, as consignee of the goods in transit under an invoice containing the
terms under "C & F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every interest
in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured. In
principle, anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction whether he has or has not any title in,
or lien upon or possession of the property y. 16 Insurable interest in property may
consist in (a) an existing interest; (b) an inchoate interest founded on an existing interest;
or (c) an expectancy, coupled with an existing interest in that out of which the expectancy
arises. 17
Herein private respondent, as vendee/consignee of the goods in transit has such existing
interest therein as may be the subject of a valid contract of insurance. His interest over
the goods is based on the perfected contract of sale. 18 The perfected contract of sale
between him and the shipper of the goods operates to vest in him an equitable title even
before delivery or before be performed the conditions of the sale. 19 The contract of
shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the
determination of whether the vendee has an insurable interest or not in the goods in
transit. The perfected contract of sale even without delivery vests in the vendee an
equitable title, an existing interest over the goods sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of
sale, the seller is authorized or required to send the goods to the buyer, delivery of the
goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to
the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule
not obtaining in the present case. The Court has heretofore ruled that the delivery of the
goods on board the carrying vessels partake of the nature of actual delivery since, from
that time, the foreign buyers assumed the risks of loss of the goods and paid the
insurance premium covering them. 20
C & F contracts are shipment contracts. The term means that the price fixed includes in a
lump sum the cost of the goods and freight to the named destination. 21 It simply means
that the seller must pay the costs and freight necessary to bring the goods to the named
destination but the risk of loss or damage to the goods is transferred from the seller to
the buyer when the goods pass the ship's rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest was not among the defenses averred in
petitioners answer. It was neither an issue agreed upon by the parties at the pre-trial
conference nor was it raised during the trial in the court below. It is a settled rule that an
issue which has not been raised in the court a quo cannot be raised for the first time on
appeal as it would be offensive to the basic rules of fair play, justice and due
process. 23 This is but a permuted restatement of the long settled rule that when a party
deliberately adopts a certain theory, and the case is tried and decided upon that theory in
the court below, he will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a
disquisition on the issue of insurable interest raised by petitioner, it was to put at rest all
doubts on the matter under the facts in this case and also to dispose of petitioner's third
assignment of error which consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent
Court of Appeals is AFFIRMED in toto.
SO ORDERED.
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of
Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering upon two
policies of insurance underwritten respectively by Law Union and Rock Insurance
Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of P7,500 each,
insuring certain property which has been destroyed by fire. The plaintiff, the San Miguel
Brewery, is named as the party assured in the two policies referred to, but it is alleged in
the complaint that said company was in reality interested in the property which was the
subject of insurance in the character of a mortgage creditor only, and that the owner of
said property upon the date the policies were issued was one D. P. Dunn who was later
succeeded as owner by one Henry Harding. Accordingly said Harding was made a
defendant, as a person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff against
the two companies named for the sum of P15,000, with interest and costs, and further
that upon satisfaction of the balance of P4,505.30 due to the plaintiff upon the mortgage
debt, and upon the cancellation of the mortgage, the plaintiff be absolved from liability to
the defendants or any of them. The peculiar form of the latter part of the prayer is
evidently due to the design of the plaintiff to lay a foundation for Harding to recover the
difference between the plaintiff's credit and the amount for which the property was
insured. Accordingly, as was to be expected, Harding answered, admitting the material
allegations of the complaint and claiming for himself the right to recover the difference
between the plaintiff's mortgage credit and the face value of the policies. The two
insurance companies also answered, admitting in effect their liability to the San Miguel
Brewery to the extent of its mortgage credit, but denying liability to Harding on the
ground that under the contracts of insurance the liability of the insurance companies was
limited to the insurable interest of the plaintiff therein. Soon after the action was begun
the insurance companies effected a settlement with the San Miguel Brewery by paying
the full amount of the credit claimed by it, with the result that the litigation as between
the original plaintiff and the two insurance companies came to an end, leaving the action
to be prosecuted to final judgement by the defendant Harding with respect to the balance
claimed to be due to him upon the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had no
right of action whatever against the companies and absolved them from liability without
special finding as to costs. From this decision the said Henry Harding has appealed.
The two insurance companies who are named as defendants do not dispute their liability
to the San Miguel Brewery, to the extent already stated, and the only question here under
discussion is that of the liability of the insurance companies to Harding. It is therefore
necessary to take account of such facts only as bear upon this aspect of the case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the
property to which the insurance relates, mortgaged the same to the San Miguel Brewery
to secure a debt of P10,000. In the contract of mortgage Dunn agreed to keep the
property insured at his expense to the full amount of its value in companies to be selected
by the Brewery Company and authorized the latter in case of loss to receive the proceeds
of the insurance and to retain such part as might be necessary to cover the mortgage
debt. At the same time, in order more conveniently to accomplish the end in view, Dunn
authorized and requested the Brewery Company to effect said insurance itself.
Accordingly on the same date Antonio Brias, general manager of the Brewery, made a
verbal application to the Law Union and Rock Insurance Company for insurance to the
extent of P15,000 upon said property. In reply to a question of the company's agent as to
whether the Brewery was the owner of the property, he stated that the company was
interested only as a mortgagee. No information was asked as to who was the owner of the
property, and no information upon this point was given.
It seems that the insurance company to whom this application was directed did not want
to carry more than one-half the risk. It therefore issued its own policy for P7,500 and
procured a policy in a like amount to be issued by the "Filipinas" Compania de
Seguros. Both policies were issued in the name of the San Miguel Brewery as the assured,
and contained no reference to any other interest in the property. Both policies contain
the usual clause requiring assignments to be approved and noted on the policy. The
premiums were paid by the Brewery and charged to Dunn. A year later the policies were
renewed, without change, the renewal premiums being paid by the Brewery, supposedly
for the account of the owner. In the month of March of the year 1917 Dunn sold the
insured property to the defendant Henry Harding, but not assignment of the insurance, or
of the insurance policies, was at any time made to him.
We agree with the trial court that no cause of action in Henry Harding against the
insurance companies is show. He is not a party to the contracts of insurance and cannot
directly maintain an action thereon. (Uy Tam and Uy Yetvs. Leonard, 30 Phil. Rep., 471.)
His claim is merely of an equitable and subsidiary nature and must be made effective, if at
all, through the San Miguel Brewery in whose name the contracts are written. Now the
Brewery, as mortgagee of the insured property, undoubtedly had an insurable interest
therein; but it could not, in any event, recover upon these policies an amount in excess of
its mortgage credit. In this connection it will be remembered that Antonio Brias, upon
making application for the insurance, informed the company with which the insurance
was placed that the Brewery was interested only as a mortgagee. It would, therefore, be
impossible for the Brewery mortgage on the insured property.
This conclusion is not only deducible from the principles governing the operation and
effect of insurance contracts in general but the point is clearly covered by the express
provisions of sections 16 and 50 of the Insurance Act (Act No. 2427). In the first of the
sections cited, it is declared that "the measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or injury thereof" (sec. 16); while
in the other it is stated that "the insurance shall be applied exclusively to the proper
interest of the person in whose name it is made unless otherwise specified in the policy"
(sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if
the ownership of the property had continued in him up to the time of the loss; and as
regards Harding, an additional insuperable obstacle is found in the fact that the
ownership of the property had been charged, prior to the loss, without any corresponding
change having been effected in the policy of insurance. In section 19 of the Insurance Act
we find it stated that "a change of interest in any part of a thing insured unaccompanied
by a corresponding change of interest in the insurance, suspends the insurance to an
equivalent extent, until the interest in the thing and the interest in the insurance are
vested in the same person." Again in section 55 it is declared that "the mere transfer of a
thing insured does not transfer the policy, but suspends it until the same person becomes
the owner of both the policy and the thing insured."
Undoubtedly these policies of insurance might have been so framed as to have been
"payable to the Sane Miguel Brewery, mortgagee, as its interest may appear, remainder to
whomsoever, during the continuance of the risk, may become the owner of the interest
insured." (Sec 54, Act No. 2427.) Such a clause would have proved an intention to insure
the entire interest in the property, not merely the insurable interest of the San Miguel
Brewery, and would have shown exactly to whom the money, in case of loss, should be
paid. But the policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less than
from the testimony of Brias, the manager of the San Miguel Brewery, that, as the
insurance was written up, the obligation of the insurance companies was different from
that contemplated by Dunn, at whose request the insurance was written, and Brias. In the
contract of mortgage Dunn had agreed, at his own expense, to insure the mortgaged
property for its full value and to indorse the policies in such manner as to authorize the
Brewery Company to receive the proceeds in case of loss and to retain such part thereof
as might be necessary to satisfy the remainder then due upon the mortgage debt. Instead,
however, of effecting the insurance himself Dunn authorized and requested the Brewery
Company to procure insurance on the property in the amount of P15,000 at Dunn's
expense. The Brewery Company undertook to carry this mandate into effect, and it of
course became its duty to procure insurance of the character contemplated, that is, to
have the policies so written as to protect not only the insurable interest of the Brewery,
but also the owner. Brias seems to have supposed that the policies as written had this
effect, but in this he was mistaken. It was certainly a hardship on the owner to be
required to pay the premiums upon P15,000 of insurance when he was receiving no
benefit whatever except in protection to the extent of his indebtedness to the Brewery.
The blame for the situation thus created rests, however, with the Brewery rather than
with the insurance companies, and there is nothing in the record to indicate that the
insurance companies were requested to write insurance upon the insurable interest of
the owner or intended to make themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had been
agreed between the contracting parties that the insurance should be so written as to
protect not only the interest of the mortgagee but also the residuary interest of the
owner, and the policies had been, by inadvertence, ignorance, or mistake written in the
form in which they were issued, a court would have the power to reform the contracts
and give effect to them in the sense in which the parties intended to be bound. But in
order to justify this, it must be made clearly to appear that the minds of the contracting
parties did actually meet in agreement and that they labored under some mutual error or
mistake in respect to the expression of their purpose. Thus, in Bailey vs. American Central
Insurance Co. (13 Fed., 250), it appeared that a mortgage desiring to insure his own
insurable interest only, correctly stated his interest, and asked that the same be insured.
The insurance company agreed to accept the risk, but the policy was issued in the name
of the owner, because of the mistaken belief of the company's agent that the law required
it to be so drawn. It was held that a court of equity had the power, at the suit of the
mortgage, to reform the instrument and give judgment in his favor for the loss
thereunder, although it had been exactly as it was. Said the court: "If the applicant
correctly states his interest and distinctly asks for an insurance thereon, and the agent of
the insurer agrees to comply with his request, and assumes to decide upon the form of
the policy to be written for that purpose, and by mistake of law adopts the wrong form, a
court of equity will reform the instrument so as to make it insurance upon the interest
named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs. Home Insurance
Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co., vs.Charter Oak
Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by mistake described as owner, the court may
grant reformation and permit a recovery by the mortgage in his character as such.
(Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare vs. Home Mutual
Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co. (136 U.S., 287; 34 L.
3d., 408), it appeared that one Kearney made application to an insurance company for
insurance on certain property in his hands as receiver and it was understood between
him and the company's agent that, in case of loss, the proceeds of the policy should accrue
to him and his successors as receiver and to others whom it might concern. However, the
policy, as issued, was so worded as to be payable only to him as receiver. In an action
brought on the policy by a successor of Kearney, it was alleged that the making of the
contract in this form was due to inadvertence, accident, and mistake upon the part of
both Kearney and the company.
Said the court:
If by inadvertence, accident, or mistake the terms of the contract were not fully set forth
in the policy, the plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have been
omitted, whereby the true intent and meaning of the parties are not fully or accurately
expressed. There was a definite concluded agreement as to insurance, which, in point of
time, preceded the preparation and delivery of the policy, and this is demonstrated by
legal and exact evidence, which removes all doubt as to the sense and undertaking of the
parties. In the agreement there has been a mutual mistake, caused chiefly by that
contracting party who now seeks to limit the insurance to an interest in the property less
than that agreed to be insured. The written agreement did not effect that which the
parties intended. That a court of equity can afford relief in such a case, is, we think, well
settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most satisfactory
character, and it must clearly appear that the contract failed to express the real
agreement between the parties. (Philippine Sugar Estates Development
Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government
of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is entirely insufficient to authorize the application of
the doctrine state in the foregoing cases, for it is by means clear from the testimony of
Brias and none other was offered that the parties intended for the policy to cover
the risk of the owner in addition to that of the mortgagee. It results that the defendant
Harding is not entitled to relief in any aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners,
vs. COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.
DECISION
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set
aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract
with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5
October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles,
goods and effects placed at any stall or store or space in the leased premises without first
obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of the LESSOR then the policy is deemed assigned
and transferred to the LESSOR for its own benefit; x x x[1]
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire their merchandise inside the leased premises for Five Hundred
Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without
the written consent of private respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the
insurance contract (between the Cha spouses and United) be paid directly to CKS, based
on its lease contract with Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses
and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a
decision* ordering therein defendant United to pay CKS the amount ofP335,063.11 and
defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as
attorneys fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a
decision** dated 11 January 1996, affirming the trial court decision, deleting however the
awards for exemplary damages and attorneys fees. A motion for reconsideration by
United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of
Appeals:
I based on sound public policy: to prevent a person from taking out an insurance policy on
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT
OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE
QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
THE RESPONDENT CORPORATION.[2]
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18
of the lease contract entered into between CKS and the Cha spouses is valid insofar as it
provides that any fire insurance policy obtained by the lessee (Cha spouses) over their
merchandise inside the leased premises is deemed assigned or transferred to the lessor
(CKS) if said policy is obtained without the prior written of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract
cannot be contrary to law, morals, good customs, public order or public policy.[3]
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses
over their merchandise is primarily a contract of indemnity. Insurable interest in the
property insured must exist at the time the insurance takes effect and at the time the loss
occurs.[4] The basis of such requirement of insurable interest in property insured is
property upon which he has no insurable interest and collecting the proceeds of said
policy in case of loss of the property. In such a case, the contract of insurance is a mere
wager which is void under Section 25 of the Insurance Code, which provides:
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured, or that the policy
shall be received as proof of such interest, and every policy executed by way of gaming or
wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods
and merchandise inside the leased premises under the provisions of Section 17 of the
Insurance Code which provide.
Section 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their
merchandise. This insurable interest over said merchandise remains with the insured, the
Cha spouses. The automatic assignment of the policy to CKS under the provision of the
lease contract previously quoted is void for being contrary to law and/or public
policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo
Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled
to pay the proceeds of the fire insurance policy to a person (CKS) who has no insurable
interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha
spouses obtained a fire insurance policy over their own merchandise, without the
consent of CKS, is a separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire insurance
policy to petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.
E. M. BACHRACH, plaintiff-appellee,
vs.
BRITISH AMERICAN ASSURANCE COMPANY, a corporation, defendant-appellant.
Haussermann, Ortigas, Cohn and Fisher, for appellant
Kincaid & Hurd and Thomas L. Hartigan, for appellee.
JOHNSON, J.:
On the 13th of July, 1908, the plaintiff commenced an action against the defendant to
recover the sum of P9,841.50, the amount due, deducting the salvage, upon the following
fire insurance policy issued by the defendant to the plaintiff:
[Fire policy No. 3007499.]
This policy of insurance witnesseth, that E. M. Bachrach, esq., Manila (hereinafter called
the insured), having paid to the undersigned, as authorized agent of the British American
Assurance Company (hereinafter called the company), the sum of two thousand pesos
Philippine currency, for insuring against loss or damage by fire, as hereinafter mentioned,
the property hereinafter described, in the sum of several sums following, viz:
Ten thousand pesos Philippine currency, on goods, belonging to a general furniture store,
such as iron and brass bedsteads, toilet tables, chairs, ice boxes, bureaus, washstands,
mirrors, and sea-grass furniture (in accordance with warranty "D" of the tariff attached
hereto) the property of the assured, in trust, on commission or for which he is
responsible, whilst stored in the ground floor and first story of house and dwelling No. 16
Calle Martinez, district 3, block 70, Manila, built, ground floor of stone and or brick, first
story of hard wood and roofed with galvanized iron bounded in the front by the said
calle, on one side by Calle David and on the other two sides by buildings of similar
construction and occupation.
Co-insurance allowed, particulars of which to be declared in the event of loss or claim.
The company hereby agrees with the insured (but subject to the conditions on the back
hereof, which are to be taken as a part of this policy) that if the property above described,
or any part thereof, shall be destroyed or damaged by fire, at any time between the 21st
day of February, 1908, and 4 o'clock in the afternoon of the 21st day of February, 1909, or
(in case of the renewal of this policy) at any time afterwards, so long as, and during the
period in respect of which the insured shall have paid to the company, and they shall have
accepted, the sum required for the renewal of this policy, the company will, out of their
capital stock, and funds, pay or make good to the insured the value of the property so
destroyed, or the amount of such damage thereto, to any amount not exceeding, in
respect of each or any of the several matters above specified, the sum set opposite
thereto, respectively, and not exceeding in the whole the sum of ten thousand pesos, and
also not exceeding, in any case, the amount of the insurable interest therein of the insured
at the time of the happening of such fire.
In witness whereof, the British American Assurance Company has accused these presents
to be signed this 21st day of February, in the year of our Lord 1908.
For the company.
W. F. STEVENSON & Co. LTD.,
"By...............................................,
"Manager Agents."
And indorsed on the back the following:
The within policy and includes a "Calalac" automobile to the extent of (P1,250) twelve
hundred and fifty pesos Philippine currency.
Memo: Permission is hereby granted for the use of gasoline not to exceed 10 gallons for
the above automobile, but only whilst contained in the reservoir of the car. It is further
warranted that the car be neither filled nor emptied in the within-described building or
this policy be null and void.
Manila, 27th February, 1908.
"W. F. STEVENSON & Co. LTD.,
"By.......................................................,
"Manager Agents."
The defendant answered the complaint, admitting some of the facts alleged by the
plaintiff and denying others. The defendant also alleged certain facts under which it
claimed that it was released from all obligations whatever under said policy. These
special facts are as follows:
First. That the plaintiff maintained a paint and varnish shop in the said building where
the goods which were insured were stored.
Second. That the plaintiff transferred his interest in and to the property covered by the
policy to H. W. Peabody & Co. to secure certain indebtedness due and owing to said
company, and also that the plaintiff had transferred his interest in certain of the goods
covered by the said policy to one Macke, to secure certain obligations assumed by the
said Macke for and on behalf of the insured. That the sanction of the said defendant had
not been obtained by the plaintiff, as required by the said policy.
Third. That the plaintiff, on the 18th of April, 1908, and immediately preceding the
outbreak of the alleged fire, willfully placed a gasoline can containing 10 gallons of
gasoline in the upper story of said building in close proximity to a portion of said goods,
wares, and merchandise, which can was so placed by the plaintiff as to permit the
gasoline to run on the floor of said second story, and after so placing said gasoline, he, the
plaintiff, placed in close proximity to said escaping gasoline a lighted lamp containing
alcohol, thereby greatly increasing the risk of fire.
Fourth. That the plaintiff made no proof of the loss within the time required by condition
five of said policy, nor did the insured file a statement with he municipal or any other
judge or court of the goods alleged to have been in said building at the time of the alleged
fire, nor of the goods saved, nor the loss suffered.
The plaintiff, after denying nearly all of the facts set out in the special answer of the
defendant, alleged:
First. That he had been acquitted in a criminal action against him, after a trial duly and
regularly had, upon a charge of arson, based upon the same alleged facts set out in the
answer of the defendant.
Second. That her had made no proof of the loss set up in his complaint for the reason that
immediately after he had, on the 20th of April, 1908, given the defendant due notice in
writing of said loss, the defendant, on the 21st of April, 1908, and thereafter on other
occasions, had waived all right to require proof of said loss by denying all liability under
the policy and by declaring said policy to be null and void.
After hearing the evidence adduced during the trial of the cause, the lower court found
that the defendant was liable to the plaintiff and rendered a judgment against the
defendant for the sum of P9,841.50, with interest for a period of one year at 6 per cent,
making a total of P10,431.99, with costs.
From that decision the defendant appealed and made the following assignments of error:
1. The court erred in failing to hold that the use of the building, No. 16 Calle Martinez, as a
paint and varnish shop annulled the policy of insurance.
2. The court erred in failing to hold the execution of the chattel mortgages without the
knowledge and consent of the insurance company annulled the policy of insurance.
3. The court erred in holding that the keeping of gasoline and alcohol not in bottles in the
building No. 16 Calle Martinez was not such a violation of the conditions of the policy as
to render the same null and void.
4. The court erred in failing to find as a fact that E. M. Bachrach, the insured, willfully
placed a gasoline can containing about 10 gallons of gasoline in the upper story of said
building, No. 16 Calle Martinez, in close proximity to a portion of the goods, wares, and
merchandise stored therein, and that said can was so placed by said Bachrach as to
permit the gasoline to run on the floor of said second story.
5. The court erred in failing to find as a fact that E. M. Bachrach, after placing said gasoline
can in close proximity to the goods, wares, and merchandise covered by the policy of
insurance, the he (Bachrach) placed in close proximity to said escaping gasoline a lighted
lamp containing alcohol, thereby greatly increasing the risk of fire.
6. The court erred in holding that the policy of insurance was in force at the time of said
fire, and that the acts or omissions on the part of the insured which cause, or tended to
cause, the forfeiture of the policy, were waived by the defendant.
7. The court erred in holding the defendant liable for the loss under the policy.lawphil.net
8. The court erred in refusing to deduct from the loss sustained by Bachrach the value of
the automobile, which was saved without damage.
9. The court erred in refusing to grant the motion for a new trial.
10. The court erred in refusing to enter judgment in favor of the defendant and against
the plaintiff.
With reference to the first above assignment of error, the lower court in its decision said:
It is claimed that either gasoline or alcohol was kept in violation of the policy in
the bodega containing the insured property. The testimony on this point is somewhat
conflicting, but conceding all of the defendant's claims, the construction given to this
claim by American courts would not justify the forfeiture of the policy on that ground.
The property insured consisted mainly of household furniture kept for the purpose of
sale. The preservation of the furniture in a salable condition by retouching or otherwise
was incidental to the business. The evidence offered by the plaintiff is to the effect that
alcohol was used in preparing varnish for the purpose of retouching, though he also says
that the alcohol was kept in store and not in the bodegawhere the furniture was. It is well
settled that the keeping of inflammable oils on the premises, though prohibited by the
policy, does not void it if such keeping is incidental to the business. Thus, where a
furniture factory keeps benzine for the purposes of operation (Davis vs. Pioneer
Furniture Company, 78 N. W. Rep., 596; Faust vs. American Fire Insurance Company, 91
Wis., 158), or where it is used for the cleaning machinery (Mears vs. Humboldt Insurance
Company, 92 Pa. St., 15; 37 Am. Rep., 647), the insurer can not on that ground avoid
payment of loss, though the keeping of the benzine on the premises is expressly
prohibited. These authorities also appear sufficient to answer the objection that the
insured automobile contained gasoline and that the plaintiff on one occasion was seen in
the bodega with a lighted lamp. The first was incidental to the use of the insured article
and the second being a single instance falls within the doctrine of the case last cited.
It may be added that there was no provision in the policy prohibiting the keeping of
paints and varnishes upon the premises where the insured property was stored. If the
company intended to rely upon a condition of that character, it ought to have been plainly
expressed in the policy.
With reference to the second above assignment of error, the defendant and appellant
contends that the lower court erred in failing to hold that the execution of the said chattel
mortgage, without the knowledge and consent of the insurance company and without
receiving the sanction of said company, annulled the said policy of insurance.
With reference to this assignment of error, upon reading the policy of insurance issued by
the defendant to the plaintiff, it will be noted that there is no provision in said policy
prohibiting the plaintiff from placing a mortgage upon the property insured, but,
admitting that such a provision was intended, we think the lower court has completely
answered this contention of the defendant. He said, in passing upon this question as it
was presented:
It is claimed that the execution of a chattel mortgage on the insured property violated
what is known as the "alienation clause," which is now found in most policies, and which
is expressed in the policies involved in cases 6496 and 6497 by a purchase imposing
forfeiture if the interest in the property pass from the insured. (Cases 6496 and 6497, in
which are involved other action against other insurance companies for the same loss as in
the present action.)
This clause has been the subject of a vast number of judicial decisions (13 Am. & Eng.
Encyc. of Law, 2d ed., pp. 239 et seq.), and it is held by the great weight of authority that
the interest in property insured does not pass by the mere execution of a chattel
mortgage and that while a chattel mortgage is a conditional sale, there is no alienation
within the meaning of the insurance law until the mortgage acquires a right to take
possession by default under the terms of the mortgage. No such right is claimed to have
accrued in the case at bar, and the alienation clause is therefore inapplicable.
With reference to the third assignment of error above noted, upon a reading of the
decision of the lower court it will be found that there is nothing in the decision of the
lower court relating to the facts stated in this assignment of error, neither is there any
provision in the policy relating to the facts alleged in said assignment of error.
Assignment of error numbers 4 and 5 above noted may be considered together.
The record discloses that some time prior to the commencement of this present action, a
criminal action was commenced against the plaintiff herein in the Court of First Instance
of the city of Manila, in which he was charged with willfully and maliciously burning the
property covered by the policy in the present case. At the conclusion of the criminal
action and after hearing the evidence adduced during the trial, the lower court, with the
assistance of two assessors, found that the evidence was insufficient to show beyond
peradventure of doubt that the defendant was guilty of the crime. The evidence adduced
during the trial of the criminal cause was introduced as evidence in the present cause.
While the evidence shows some very peculiar and suspicious circumstances concerning
the burning of the goods covered by the said policy, yet, nevertheless, in view of the
findings of the lower court and in view of the apparent conflict in the testimony, we can
not find that there is a preponderance of evidence showing that the plaintiff did actually
set fire or cause fire to be set to the goods in question. The lower court, in discussing this
question, said:
As to the claim that the loss occurred through the voluntary act of the insured, we
consider it unnecessary to review the evidence in detail. That was done by another
branch of this court in disposing of the criminal prosecution brought against the insured,
on the same ground, based mainly on the same evidence. And regardless of whether or
not the judgment in that proceeding is res adjudicata as to anything here, we are at least
of the opinion that the evidence to establish this defense should not be materially less
convincing than that required in order to convict the insured of the crime of arson.
(Turtell vs. Beamount, 25 Rev. Rep., 644.) In order to find that the defense of
incendiarism was established here, we would be obliged, therefore, in effect to set aside
the findings of the judge and assessors in the criminal cause, and this we would be loath
to do even though the evidence now produced were much stronger than it is.
With reference to the sixth assignment of error above noted, to wit:itc@alf That the court
erred in holding that the policy of insurance was in force at the time of said fire and that
the acts or omissions on the part of the insured which caused or tended to cause a
forfeiture of the policy were waived by the defendant, the lower court, in discussing this
question, said:
Regardless of the question whether the plaintiff's letter of April 20 (Exhibit B) was a
sufficient compliance with the requirement that he furnish notice of loss, the fact remains
that on the following day the insurers replied by a letter (Exhibit C) declaring that the
"policies were null and void," and in effect denying liability. It is well settled by a
preponderance of authorities that such a denial is a waiver of notice of loss, because if the
"policies are null and void," the furnishing of such notice would be vain and useless. (13
Am. & Eng. Encyc. of Law, 347, 348, 349.) Besides, "immediate notice" is construed to
mean only within a reasonable time.
Much the same may be said as to the objection that the insured failed to furnish to the
insurers his books and papers or to present a detailed statement to the "juez municipal,"
in accordance with article 404 of the Code of Commerce. The last-named provision is
similar to one appearing in many American policies requiring a certificate from a
magistrate nearest the loss regarding the circumstance thereof. A denial of liability on
other grounds waives this requirement (O'Niel vs. Buffalo Fire Insurance Company, 3 N.
Y., 122; Peoria Marine Ins. Co. vs. Whitehill, 25 Ill., 382), as well as that relating to the
production of books and papers (Ga. Home Ins. Co. vs. Goode & Co., 95 Va., 751; 66 Jur.
Civ., 16). Besides, the insured might have had difficulty in attempting to comply with this
clause, for there is no longer an official here with the title of "juez municipal."
Besides the foregoing reasons, it may be added that there was no requirement in the
policy in question that such notice be given.
With reference to the assignments of error numbers 7, 9, and 10, they are too general in
their character to merit consideration.
With reference to the eight assignment of error above noted, the defendant and appellant
contends that he was entitled to have the amount of his responsibility reduced by the full
value (P1,250) of the said automobile.
It does not positively appear of record that the automobile in question was not included
in the other policies. It does appear that the automobile was saved and was considered as
a part of the salvaged. It is alleged that the salvage amounted to P4,000, including the
automobile. This amount (P4,000) was distributed among the different insurers and the
amount of their responsibility was proportionately reduced. The defendant and appellant
in the present case made no objection at any time in the lower court to that distribution
of the salvage. The claim is now made for the first time. No reason is given why the
objection was not made at the time of the distribution of the salvage, including the
automobile, among all of the insurers. The lower court had no opportunity to pass upon
the question now presented for the first time. The defendant stood by and allowed the
other insurers to share in the salvage, which he claims now wholly belonged to him. We
think it is now too late to raise the question.
For all the foregoing reasons, we are of the opinion that the judgment of the lower court
should be affirmed, and it is hereby ordered that judgment be entered against the
defendant and in favor of the plaintiff for the sum of P9,841.50, with interest at the rate of
6 per cent from the 13th of July, 1908, with costs. So ordered.
VICENTE ONG LIM SING, JR., G.R. No. 168115
Petitioner,
Present:
YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
 NACHURA, JJ. aforesaid lease agreement. Corresponding Lease Schedules with Delivery and Acceptance
Certificates[5] over the equipment and motor vehicles formed part of the
agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly
rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos
FEB LEASING & FINANCE CORPORATION, Promulgated: (P170,494.00).

Respondent.

June 8, 2007 JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in
arrears, including penalty charges and insurance premiums, amounted to Three Million
Four Hundred Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos
(P3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of the
x------------------------------------------------------------------------------------x said amount. However, JVL failed to pay.[6]

On December 6, 2000, FEB filed a Complaint[7] with the Regional Trial Court of Manila,
docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin against
DECISION JVL, Lim, and John Doe.

NACHURA, J.: In the Amended Answer,[8] JVL and Lim admitted the existence of the lease agreement
but asserted that it is in reality a sale of equipment on installment basis, with FEB acting
as the financier. JVL and Lim claimed that this intention was apparent from the fact that
they were made to believe that when full payment was effected, a Deed of Sale will be
executed by FEB as vendor in favor of JVL and Lim as vendees.[9] FEB purportedly
assured them that documenting the transaction as a lease agreement is just an industry
practice and that the proper documentation would be effected as soon as full payment for
This is a petition for review on certiorari assailing the Decision[1] dated March 15, every item was made. They also contended that the lease agreement is a contract of
2005 and the Resolution[2] dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. adhesion and should, therefore, be construed against the party who prepared it, i.e., FEB.
CV No. 77498.

In upholding JVL and Lims stance, the trial court stressed the contradictory terms it found
The facts are as follows: in the lease agreement. The pertinent portions of the Decision dated November 22,
2002 read:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease[3] of
equipment and motor vehicles with JVL Food Products (JVL). On the same date, Vicente
Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement[4] with FEB to
guarantee the prompt and faithful performance of the terms and conditions of the
A profound scrutiny of the provisions of the contract which is a contract of adhesion at
once exposed the use of several contradictory terms. To name a few, in Section 9 of the
said contract disclaiming warranty, it is stated that the lessor is not the manufacturer nor
the latters agent and therefore does not guarantee any feature or aspect of the object of
the contract as to its merchantability. Merchantability is a term applied in a contract of
sale of goods where conditions and warranties are made to apply. Article 1547 of the Civil
Code provides that unless a contrary intention appears an implied warranty on the part
of the seller that he has the right to sell and to pass ownership of the object is furnished
by law together with an implied warranty that the thing shall be free from hidden faults
or defects or any charge or encumbrance not known to the buyer.
In an adhesion contract which is drafted and printed in advance and parties are not given
a real arms length opportunity to transact, the Courts treat this kind of contract strictly
against their architects for the reason that the party entering into this kind of contract
has no choice but to accept the terms and conditions found therein even if he is not in
accord therewith and for that matter may not have understood all the terms and
stipulations prescribed thereat. Contracts of this character are prepared unilaterally by
the stronger party with the best legal talents at its disposal. It is upon that thought that
the Courts are called upon to analyze closely said contracts so that the weaker party
could be fully protected.
Another instance is when the alleged lessee was required to insure the thing against loss,
damage or destruction.
In property insurance against loss or other accidental causes, the assured must have an
insurable interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the assured
has a right, title or interest therein that he will be benefited by its preservation and
continued existence or suffer a direct pecuniary loss from its destruction or injury by the
peril insured against. If the defendants were to be regarded as only a lessee, logically the
lessor who asserts ownership will be the one directly benefited or injured and therefore
the lessee is not supposed to be the assured as he has no insurable interest.
There is also an observation from the records that the actual value of each object of the
contract would be the result after computing the monthly rentals by multiplying the said
rentals by the number of months specified when the rentals ought to be paid.
Still another observation is the existence in the records of a Deed of Absolute Sale by and
between the same parties, plaintiff and defendants which was an exhibit of the defendant
where the plaintiff sold to the same defendants one unit 1995 Mitsubishi L-200 STRADA
DC PICK UP and in said Deed, The Court noticed that the same terms as in the alleged
lease were used in respect to warranty, as well as liability in case of loss and other
conditions. This action of the plaintiff unequivocally exhibited their real intention to
execute the corresponding Deed after the defendants have paid in full and as heretofore
discussed and for the sake of emphasis the obscurity in the written contract cannot favor
the party who caused the obscurity.
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulations shall
control. If the words appear to be contrary to the evident intention of the parties, their
contemporaneous and subsequent acts shall be principally considered. If the doubts are
cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract shall be null and void.[10]
Thus, the court concluded with the following disposition:
In this case, which is held by this Court as a sale on installment there is no chattel
mortgage on the thing sold, but it appears amongst the Complaints prayer, that the
plaintiff elected to exact fulfillment of the obligation.
For the vehicles returned, the plaintiff can only recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of the
units, specially so, as it appears, these returned vehicles were sold at auction and that the
plaintiff can apply the proceeds to the balance. However, with respect to the unreturned
units and machineries still in the possession of the defendants, it is this Courts view and
so hold that the defendants are liable therefore and accordingly are ordered jointly and
severally to pay the price thereof to the plaintiff together with attorneys fee and the costs
of suit in the sum of Php25,000.00.
SO ORDERED.[11]
On December 27, 2002, FEB filed its Notice of Appeal.[12] Accordingly, on January 17,
2003, the court issued an Order[13] elevating the entire records of the case to the CA. FEB
averred that the trial court erred:
A. When it ruled that the agreement between the Parties-Litigants is one of sale of
personal properties on installment and not of lease;
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and
not R.A. No. 8556;
C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid
balance of the price because of the previous payments made by the defendants for the
reasonable use of the units;
D. When it failed to make a ruling or judgment on the Joint and Solidary Liability
of Vicente Ong Lim, Jr. to the Plaintiff-Appellant.[14]
On March 15, 2005, the CA issued its Decision[15] declaring the transaction between the
parties as a financial lease agreement under Republic Act (R.A.) No. 8556.[16] The fallo of
the assailed Decision reads:
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22
November 2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case
No. 00-99451 is REVERSED and SET ASIDE, and a new judgment is
herebyENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to
solidarily pay appellant FEB Leasing and Finance Corporation the amount of Three
Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos and 75/100
(Php3,414,468.75), with interest at the rate of twelve percent (12%) per annum starting
from the date of judicial demand on 06 December 2000, until full payment thereof. Costs
against appellees.
SO ORDERED.[17]
Lim filed the instant Petition for Review on Certiorari under Rule 45
contending that:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT
THE UNDATEDCOMPLAINT WAS FILED BY SATURNINO J. GALANG, JR., WITHOUT ANY
AUTHORITY FROM RESPONDENTS BOARD OF DIRECTORS AND/OR SECRETARYS
CERTIFICATE.
II
THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO STRICTLY APPLY
SECTION 7, RULE 18 OF THE 1997 RULES OF CIVIL PROCEDURE AND NOW ITEM 1, A(8)
OF A.M. NO. 03-1-09 SC (JUNE 8, 2004).
III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE APPEAL FOR
FAILURE OF THE RESPONDENT TO FILE ON TIME ITS APPELLANTS BRIEF AND TO
SEPARATELY RULE ON THE PETITIONERS MOTION TO DISMISS.

IV

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE CONTRACT

BETWEEN THE PARTIES IS ONE OF A FINANCIAL LEASE AND NOT OF A CONTRACT
OF SALE.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PAYMENTS PAID
BY THE PETITIONER TO THE RESPONDENT ARE RENTALS AND NOT INSTALLMENTS
PAID FOR THE PURCHASE PRICE OF THE SUBJECT MOTOR VEHICLES, HEAVY
MACHINES AND EQUIPMENT.
VI
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PREVIOUS
CONTRACT OF SALEINVOLVING THE PICK-UP VEHICLE IS OF NO CONSEQUENCE.
VII
THE HONORABLE COURT OF APPEALS FAILED TO TAKE
INTO CONSIDERATION THAT THE CONTRACT OFLEASE, A CONTRACT OF ADHESION,
CONCEALED THE TRUE INTENTION OF THE PARTIES, WHICH IS A CONTRACT OF SALE.
VIII
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PETITIONER IS A
LESSEE WITH INSURABLE INTEREST OVER THE SUBJECT PERSONAL PROPERTIES.
IX
THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE INTENTIONS OF
THE COURT A QUO IN ITS USAGE OF THE TERM MERCHANTABILITY.[18]
We affirm the ruling of the appellate court.
First, Lim can no longer question Galangs authority as FEBs authorized representative in
filing the suit against Lim.Galang was the representative of FEB in the proceedings before
the trial court up to the appellate court. Petitioner never placed in issue the validity of
Galangs representation before the trial and appellate courts. Issues raised for the first
time on appeal are barred by estoppel. Arguments not raised in the original proceedings
cannot be considered on review; otherwise, it would violate basic principles of fair
play.[19]
Second, there is no legal basis for Lim to question the authority of the CA to go beyond
the matters agreed uponduring the pre-trial conference, or in not dismissing the appeal
for failure of FEB to file its brief on time, or in not ruling separately on the petitioners
motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties right to due process. In numerous cases, this Court
has allowed liberal construction of the rules when to do so would serve the demands of
substantial justice and equity.[20] InAguam v. Court of Appeals, the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a
power conferred on the court, not a duty. The "discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause of justice. The court's primary duty is to
render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike
duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts." Litigations must be decided on their merits and not on
technicality. Every party litigant must be afforded the amplest opportunity for the proper
and just determination of his cause, free from the unacceptable plea of
technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon
where the policy of the court is to encourage hearings of appeals on their merits and the
rules of procedure ought not to be applied in a very rigid, technical sense; rules of
procedure are used only to help secure, not override substantial justice. It is a far better
and more prudent course of action for the court to excuse a technical lapse and afford the
parties a review of the case on appeal to attain the ends of justice rather than dispose of
the case on technicality and cause a grave injustice to the parties, giving a false
impression of speedy disposal of cases while actually resulting in more delay, if not a
miscarriage of justice.[21]
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a
contract is not void per se. It is as binding as any ordinary contract. A party who enters
into an adhesion contract is free to reject the stipulations entirely.[22]If the terms thereof
are accepted without objection, then the contract serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement
between them, and that no representations have been made other than as set forth
herein. This Agreement shall not be amended or altered in any manner, unless such
amendment be made in writing and signed by the parties hereto.
Petitioners claim that the real intention of the parties was a contract of sale of personal
property on installment basis is more likely a mere afterthought in order to defeat the
rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease within the purview of R.A. No.
8556. Section 3(d) thereof defines financial leasing as:
[A] mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor
vehicles, appliances, business and office machines, and other movable or immovable
property in consideration of the periodic payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an obligatory period of
not less thantwo (2) years during which the lessee has the right to hold and use the
leased property with the right to expense the lease rentals paid to the lessor and bears
the cost of repairs, maintenance, insurance and preservation thereof, but with no
obligation or option on his part to purchase the leased property from the owner-lessor at
the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly
periodic payment ofP170,494.00. The periodic payment by petitioner is sufficient to
amortize at least 70% of the purchase price or acquisition cost of the said movables in
accordance with the Lease Schedules with Delivery and Acceptance Certificates. The
basicpurpose of a financial leasing transaction is to enable the prospective buyer of
equipment, who is unable to pay for such equipment in cash in one lump sum, to lease
such equipment in the meantime for his use, at a fixed rental sufficient to amortize at
least 70% of the acquisition cost (including the expenses and a margin of profit for the
financial lessor) with the expectation that at the end of the lease period the
buyer/financial lessee will be able to pay any remaining balance of the purchase
price.[23]
The allegation of petitioner that the rent for the use of each movable constitutes the value
of the vehicle or equipment leased is of no moment. The law on financial lease does not
prohibit such a circumstance and this alone does not make the transaction between the
parties a sale of personal property on installment. In fact, the value of the lease, usually
constituting the value or amount of the property involved, is a benefit allowed by law to
the lessor for the use of the property by the lessee for the duration of the lease. It is
recognized that the value of these movables depreciates through wear and tear upon use
by the lessee. In Beltran v. PAIC Finance Corporation,[24] we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a
trading company. Neither is it an ordinary leasing company; it does not make its profit by
buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a purchase and sale
contract covering the equipment which becomes the subject matter of the financial lease.
The financial lessor takes the role of the buyer of the equipment leased. And so the formal
or documentary tie between the seller and the real buyer of the equipment, i.e., the
financial lessee, is apparently severed. In economic reality, however, that relationship
remains. The sale of the equipment by the supplier thereof to the financial lessor and the
latter's legal ownership thereof are intended to secure the repayment over time of the
purchase price of the equipment, plus financing charges, through the payment of lease
rentals; that legal title is the upfront security held by the financial lessor, a security
probably superior in some instances to a chattel mortgagee's lien.[25]
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL
entered into the lease contract with full knowledge of its terms and conditions. The
contract was in force for more than four years. Since its inception on March 9, 1995, JVL
and Lim never questioned its provisions. They only attacked the validity of the contract
after they were judicially made to answer for their default in the payment of the agreed
rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and
conditions as they may want to include in a contract. As long as such agreements are not
contrary to law, morals, good customs, public policy, or public order, they shall have the
force of law between the parties.[26] Contracting parties may stipulate on terms and
conditions as they may see fit and these have the force of law between them.[27]
The stipulation in Section 14[28] of the lease contract, that the equipment shall be
insured at the cost and expense of the lessee against loss, damage, or destruction from
fire, theft, accident, or other insurable risk for the full term of the lease, is a binding and
valid stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and
motor vehicles leased.Section 17 of the Insurance Code provides that the measure of
an insurable interest in property is the extent to which the insured might be damnified by
loss or injury thereof. It cannot be denied that JVL will be directly damnified in case of
loss, damage, or destruction of any of the properties leased.
Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not
warrant the merchantability of the equipment is a valid stipulation. Section 9.1 of the
lease contract is stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT
IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER
THEREOF AND THAT THEREARE NO WARRANTIES, CONDITIONS, TERMS,
REPRESENTATION OR INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR
OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY FEATURE OR
ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER
THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW,RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.[29]
In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of
defect of any kind that will be found by the lessee in any of the equipment, recourse
should be made to the manufacturer. The financial lessor, being a financing company, i.e.,
an extender of credit rather than an ordinary equipment rental company, does not extend
a warranty of the fitness of the equipment for any particular use. Thus, the financial
lessee was precisely in a position to enforce such warranty directly against the supplier of
the equipment and not against the financial lessor. We find nothing contra legem or
contrary to public policy in such a contractual arrangement.[30]
Fifth, petitioner further proffers the view that the real intention of the parties was to
enter into a contract of sale on installment in the same manner that a previous
transaction between the parties over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was
initially covered by an agreement denominated as a lease and eventually became the
subject of a Deed of Absolute Sale.
We join the CA in rejecting this view because to allow the transaction involving the pick- NACHURA, and
up to be read into the terms of the lease agreement would expand the coverage of the
agreement, in violation of Article 1372 of the New Civil Code.[31] The lease contract PERALTA, JJ.
subject of the complaint speaks only of a lease. Any agreement between the parties after
the lease contract has ended is a different transaction altogether and should not be
included as part of the lease. Furthermore, it is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt as to the intention of Promulgated:
the contracting parties, the literal meaning of its stipulations shall control. No amount of
extrinsic aid is necessary in order to determine the parties' intent.[32]

June 5, 2009

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the
CA in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23,
2005 are AFFIRMED. Costs against petitioner. x------------------------------------------------------------------------------------x

SO ORDERED.

DECISION

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse G.R. No. 181132

VICENTA PANGILINAN MARAMAG,
NACHURA, J.:
Petitioners,

- versus -

Present:

EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG,
KARL BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE
INSULAR LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE
ASSURANCE CORPORATION,
This is a petition[1] for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution[2]dated January 8, 2008 of the Court of Appeals
YNARES-SANTIAGO, J.,(CA), in CA-G.R. CV No. 85948, dismissing petitioners appeal for lack of jurisdiction.
Chairperson,

CARPIO,* The case stems from a petition[3] filed against respondents with the Regional Trial Court,
Respondents.
Branch 29, for revocation and/or reduction of insurance proceeds for being void and/or
CORONA,** inofficious, with prayer for a temporary restraining order (TRO) and a writ of preliminary
injunction.

The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva de
Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the
latter, thus, she is disqualified to receive any proceeds from his insurance policies from
Insular Life Assurance Company, Ltd. (Insular)[4] and Great Pacific Life Assurance
Corporation (Grepalife);[5] (3) the illegitimate children of LoretoOdessa, Karl Brian, and
Trisha Angeliewere entitled only to one-half of the legitime of the legitimate children,
thus, the proceeds released to Odessa and those to be released to Karl Brian and Trisha
Angelie were inofficious and should be reduced; and (4) petitioners could not be
deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged,
among others, that part of the insurance proceeds had already been released in favor
of Odessa, while the rest of the proceeds are to be released in favor of Karl Brian and
Trisha Angelie, both minors, upon the appointment of their legal guardian. Petitioners
also prayed for the total amount of P320,000.00 as actual litigation expenses and
attorneys fees.
In answer,[6] Insular admitted that Loreto misrepresented Eva as his legitimate wife and
Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their
claims for the insurance proceeds of the insurance policies; that when it ascertained that
Eva was not the legal wife of Loreto, it disqualified her as a beneficiary and divided the
proceeds among Odessa, Karl Brian, and Trisha Angelie, as the remaining designated
beneficiaries; and that it released Odessas share as she was of age, but withheld the
release of the shares of minors Karl Brian and Trisha Angelie pending submission of
letters of guardianship. Insular alleged that the complaint or petition failed to state a
cause of action insofar as it sought to declare as void the designation of Eva as
beneficiary, because Loreto revoked her designation as such in Policy No. A001544070
and it disqualified her in Policy No. A001693029; and insofar as it sought to declare as
inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no
settlement of Loretos estate had been filed nor had the respective shares of the heirs
been determined. Insular further claimed that it was bound to honor the insurance
policies designating the children of Loreto with Eva as beneficiaries pursuant to Section
53 of the Insurance Code.
In its own answer[7] with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian,
and Trisha Angelie were denied because Loreto was ineligible for insurance due to a
misrepresentation in his application form that he was born on December 10, 1936 and,
thus, not more than 65 years old when he signed it in September 2001; that the case was
premature, there being no claim filed by the legitimate family of Loreto; and that the law
on succession does not apply where the designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of
Loreto failed to file their answer. Hence, the trial court, upon motion of petitioners,
declared them in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues
raised in their respective answers be resolved first. The trial court ordered petitioners to
comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was
purely legal whether the complaint itself was proper or not and that the designation of a
beneficiary is an act of liberality or a donation and, therefore, subject to the provisions of
Articles 752[8] and 772[9] of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to the heirs
of the insured. Grepalife also reiterated that it had disqualified Eva as a beneficiary when
it ascertained that Loreto was legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of
which reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular
Life and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha
Maramag. The action shall proceed with respect to the other defendants Eva Verna de
Guzman, Insular Life and Grepalife.
SO ORDERED.[10]
In so ruling, the trial court ratiocinated thus
Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in such special laws shall be regulated by
this Code. The principal law on insurance is the Insurance Code, as amended.Only in case
of deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v.
Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds
shall be applied exclusively to the proper interest of the person in whose name or for
whose benefit it is made, unless otherwise specified in the policy. Since the defendants
are the ones named as the primary beneficiary (sic) in the insurances (sic) taken by the
deceased Loreto C. Maramag and there is no showing that herein plaintiffs were also
included as beneficiary (sic) therein the insurance proceeds shall exclusively be paid to
them. This is because the beneficiary has a vested right to the indemnity, unless the
insured reserves the right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of
Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect the
insurance indemnity. The beneficiary in a contract of insurance is not the donee spoken
in the law of donation. The rules on testamentary succession cannot apply here, for the
insurance indemnity does not partake of a donation. As such, the insurance indemnity
cannot be considered as an advance of the inheritance which can be subject to collation
(Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon Employees Association v.
Juanita Golpeo, et al., the Honorable Supreme Court made the following
pronouncements[:]
With the finding of the trial court that the proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and separate property, we agree that the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate
of the person whose life was insured, and that such proceeds are the separate and
individual property of the beneficiary and not of the heirs of the person whose life was
insured, is the doctrine in America. We believe that the same doctrine obtains in
these Islands by virtue of Section 428 of the Code of Commerce x x x.
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no
sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie
Maramag for the reduction and/or declaration of inofficiousness of donation as primary
beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the named
beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his
concubine Eva Verna De Guzman. Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance policy of the
person who cannot make any donation to him, according to said article (Art. 2012, Civil
Code). If a concubine is made the beneficiary, it is believed that the insurance contract
will still remain valid, but the indemnity must go to the legal heirs and not to the
concubine, for evidently, what is prohibited under Art. 2012 is the naming of the
improper beneficiary. In such case, the action for the declaration of nullity may be
brought by the spouse of the donor or donee, and the guilt of the donor and donee may be
proved by preponderance of evidence in the same action (Comment of Edgardo L. Paras,
Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de
Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late
Loreto C. Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that
should be paid to her must go to the legal heirs of the deceased which this court may
properly take cognizance as the action for the declaration for the nullity of a void
donation falls within the general jurisdiction of this Court.[11]
Insular[12] and Grepalife[13] filed their respective motions for reconsideration, arguing,
in the main, that the petition failed to state a cause of action. Insular further averred that
the proceeds were divided among the three children as the remaining named
beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already been
refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that
whether the complaint may be dismissed for failure to state a cause of action must be
determined solely on the basis of the allegations in the complaint, such that the defenses
of Insular and Grepalife would be better threshed out during trial.
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration
filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the
portion of the Resolution of this Court dated 21 September 2004 which ordered the
prosecution of the case against defendant Eva Verna De Guzman, Grepalife and Insular
Life is hereby SET ASIDE, and the case against them is hereby ordered DISMISSED.
SO ORDERED.[14]
In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in one
policy and that Insular disqualified her as a beneficiary in the other policy such that the
entire proceeds would be paid to the illegitimate children of Loreto with Eva pursuant to
Section 53 of the Insurance Code. It ruled that it is only in cases where there are no
beneficiaries designated, or when the only designated beneficiary is disqualified, that the
proceeds should be paid to the estate of the insured. As to the claim that the proceeds to
be paid to Loretos illegitimate children should be reduced based on the rules on legitime,
the trial court held that the distribution of the insurance proceeds is governed primarily
by the Insurance Code, and the provisions of the Civil Code are irrelevant and
inapplicable. With respect to the Grepalife policy, the trial court noted that Eva was never
designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it
upheld the dismissal of the case as to the illegitimate children. It further held that the
matter of Loretos misrepresentation was premature; the appropriate action may be filed
only upon denial of the claim of the named beneficiaries for the insurance proceeds by
Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal
for lack of jurisdiction, holding that the decision of the trial court dismissing the
complaint for failure to state a cause of action involved a pure question of law.The
appellate court also noted that petitioners did not file within the reglementary period a
motion for reconsideration of the trial courts Resolution, dated September 21, 2004,
dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said
Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of
action, may the Court consider matters which were not alleged in the Complaint,
particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to
state a cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof,
when it premised the dismissal on allegations of the defendants in their answer which
had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?[15]
In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either
disqualified as a beneficiary by the insurance companies or that her designation was
revoked by Loreto, hypothetically admitted as true, was raised only in the answers and
motions for reconsideration of both Insular and Grepalife. They argue that for a motion to
dismiss to prosper on that ground, only the allegations in the complaint should be
considered. They further contend that, even assuming Insular disqualified Eva as a
beneficiary, her share should not have been distributed to her children with Loreto but,
instead, awarded to them, being the legitimate heirs of the insured deceased, in
accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the petition
failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court,
which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following
grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of another.[16] A
complaint states a cause of action when it contains the three (3) elements of a cause of
action(1) the legal right of the plaintiff; (2) the correlative obligation of the defendant;
and (3) the act or omission of the defendant in violation of the legal right. If any of these
elements is absent, the complaint becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action.[17]
When a motion to dismiss is premised on this ground, the ruling thereon should be based
only on the facts alleged in the complaint. The court must resolve the issue on the
strength of such allegations, assuming them to be true. The test of sufficiency of a cause of
action rests on whether, hypothetically admitting the facts alleged in the complaint to be
true, the court can render a valid judgment upon the same, in accordance with the prayer
in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded;
or
5. there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case.[18]
In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries in the
insurance policies issued by Insular and Grepalife. The basis of petitioners claim is that
Eva, being a concubine of Loreto and a suspect in his murder, is disqualified from being
designated as beneficiary of the insurance policies, and that Evas children with Loreto,
being illegitimate children, are entitled to a lesser share of the proceeds of the
policies. They also argued that pursuant to Section 12 of the Insurance Code,[19] Evas
share in the proceeds should be forfeited in their favor, the former having brought about
the death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of
Loretos illegitimate children should be awarded to them, being the legitimate heirs of
Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that
insurance contracts shall be governed by special laws, i.e., the Insurance Code. Section 53
of the Insurance Code states

SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of
the person in whose name or for whose benefit it is made unless otherwise specified in
the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is already
deceased, upon the maturation of the policy.[20] The exception to this rule is a situation
where the insurance contract was intended to benefit third persons who are not parties
to the same in the form of favorable stipulations or indemnity. In such a case, third
parties may directly sue and claim from the insurer.[21]
Petitioners are third parties to the insurance contracts with Insular and Grepalife and,
thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular and
Grepalife have no legal obligation to turn over the insurance proceeds to petitioners. The
revocation of Eva as a beneficiary in one policy and her disqualification as such in another
are of no moment considering that the designation of the illegitimate children as
beneficiaries in Loretos insurance policies remains valid. Because no legal proscription
exists in naming as beneficiaries the children of illicit relationships by the
insured,[22] the shares of Eva in the insurance proceeds, whether forfeited by the court
in view of the prohibition on donations under Article 739 of the Civil Code or by the
insurers themselves for reasons based on the insurance contracts, must be awarded to
the said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any
beneficiary,[23] or when the designated beneficiary is disqualified by law to receive the
proceeds,[24] that the insurance policy proceeds shall redound to the benefit of the
estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In
the same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed,
the appellate court had no jurisdiction to take cognizance of the appeal; the issue of
failure to state a cause of action is a question of law and not of fact, there being no
findings of fact in the first place.[25]
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October 11,
2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision
dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case
No. 92-322 and upheld the causes of action for damages of Insurance Company of North
America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution
dated April 11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned
by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance
policies with book debt endorsements. The insurance policies provide for coverage on
"book debts in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still appearing in
the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss
for a period in excess of six (6) months from the date of the covering invoice or actual
delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days after
the close of every calendar month all amount shown in their books of accounts as unpaid
and thus become receivable item from their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was
consumed by fire. Included in the items lost or destroyed in the fire were stocks of ready-
made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
alleges that IMC and LSPI filed with respondent their claims under their respective fire
insurance policies with book debt endorsements; that as of February 25, 1991, the unpaid
accounts of petitioner on the sale and delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims
of IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights against
petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not
be held liable because the property covered by the insurance policies were destroyed due
to fortuities event or force majeure; that respondent's right of subrogation has no basis
inasmuch as there was no breach of contract committed by it since the loss was due to
fire which it could not prevent or foresee; that IMC and LSPI never communicated to it
that they insured their properties; that it never consented to paying the claim of the
insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus,
trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It
held that the fire was purely accidental; that the cause of the fire was not attributable to
the negligence of the petitioner; that it has not been established that petitioner is the
debtor of IMC and LSPI; that since the sales invoices state that "it is further agreed that
merely for purpose of securing the payment of purchase price, the above-described
merchandise remains the property of the vendor until the purchase price is fully paid",
IMC and LSPI retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision
reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to
pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to
the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to
the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully
paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne
by petitioner since the proviso contained in the sales invoices is an exception under
Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous
event, the risk is borne by the owner of the thing at the time the loss under the principle
of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery of the
lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the
insurer has the right to go against petitioner; that, being a fire insurance with book debt
endorsements, what was insured was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be
deemed to be over credit since an insurance "on credit" belies not only the nature of fire
insurance but the express terms of the policies; that it was not credit that was insured
since respondent paid on the occasion of the loss of the insured goods to fire and not
because of the non-payment by petitioner of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as the accounts were not yet due since no
prior demands were made by IMC and LSPI against petitioner for payment of the debt
and such demands came from respondent only after it had already paid IMC and LSPI
under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all
risk had transferred to petitioner upon delivery of the goods; that petitioner was not
privy to the insurance contract or the payment between respondent and its insured nor
was its consent or approval ever secured; that this lack of privity forecloses any real
interest on the part of respondent in the obligation to pay, limiting its interest to keeping
the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from its
destruction by fire; that petitioner is liable for loss of the ready-made clothing materials
since it failed to overcome the presumption of liability under Article 126516 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to provide
stringent measures of caution, care and maintenance on its property because electric
wires do not usually short circuit unless there are defects in their installation or when
there is lack of proper maintenance and supervision of the property; that petitioner is
guilty of gross and evident bad faith in refusing to pay respondent's valid claim and
should be liable to respondent for contracted lawyer's fees, litigation expenses and cost of
suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
before it from the CA is limited to reviewing questions of law which involves no
examination of the probative value of the evidence presented by the litigants or any of
them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or weigh
evidence all over again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues
may be resolved by this Court, such as: (1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the CA went beyond the issues of the case, or
its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth
in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; and (11) when the CA manifestly
overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply
to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims
that the CA erred in construing a fire insurance policy on book debts as one covering the
unpaid accounts of IMC and LSPI since such insurance applies to loss of the ready-made
clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss covered
under this Policy."24 Nowhere is it provided in the questioned insurance policies that the
subject of the insurance is the goods sold and delivered to the customers and dealers of
the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
literally just as they appear on the face of the contract.25 Thus, what were insured
against were the accounts of IMC and LSPI with petitioner which remained unpaid 45
days after the loss through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership
of the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for
purpose of securing the payment of the purchase price the above described merchandise
remains the property of the vendor until the purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership in the goods has been retained by the
seller merely to secure performance by the buyer of his obligations under the contract,
the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of
the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law concept
of res perit domino, where ownership is the basis for consideration of who bears the risk
of loss, in property insurance, one's interest is not determined by concept of title, but
whether insured has substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the insured." Parenthetically,
under Section 14 of the same Code, an insurable interest in property may consist in: (a)
an existing interest; (b) an inchoate interest founded on existing interest; or (c) an
expectancy, coupled with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an interest, it
is sufficient that the insured is so situated with reference to the property that he would be
liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction.30Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor's lien.31 In
this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing
in their Books of Account 45 days after the time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by
fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after
the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly
stated by the CA, where the obligation consists in the payment of money, the failure of the
debtor to make the payment even by reason of a fortuitous event shall not relieve him of
his liability.33 The rationale for this is that the rule that an obligor should be held exempt
from liability when the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation
holding him liable even in case of fortuitous event. It does not apply when the obligation
is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss
or destruction of anything of the same kind does not extinguish the obligation." If the
obligation is generic in the sense that the object thereof is designated merely by its class
or genus without any particular designation or physical segregation from all others of the
same class, the loss or destruction of anything of the same kind even without the debtor's
fault and before he has incurred in delay will not have the effect of extinguishing the
obligation.35 This rule is based on the principle that the genus of a thing can never
perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to
"C-22"38 show that petitioner has an outstanding account with IMC in the amount
of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit
"F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of
the insurance proceeds. All these documents have been properly identified, presented
and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but
also the amount paid to settle the insurance claim. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim.41 Respondent's
action against petitioner is squarely sanctioned by Article 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. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action.
No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23,
1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an
admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed petitioner's building on
February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that respondent
has been subrogated to any right which LSPI may have against petitioner. Failure to
substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11,
2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATIONthat the order to pay the amount of P535,613.00
to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.
LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.
G.R. No. 128834 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, petitioners,
vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., petitioners,
vs.
GOYU & SONS, INC. respondent.
MELO, J.:
The issue relevant to the herein three consolidated petitions revolve around the fire loss
claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance
Company, Inc. (MICO) in connection with the mortgage contracts entered into by and
between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commending July 27, 1992. RCBC was
ordered to pay actual and compensatory damages in the amount of P5,000,000.00. MICO
and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages
and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at
P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC
and MICO appealed separately but, in view of the common facts and issues involved, their
individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch.
After due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun
Bing and Eli D. Lao, recommended GOYU's application for approval by RCBC's executive
committee. A credit facility in the amount of P30 million was initially granted. Upon
GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee
increased GOYU's credit facility to P50 million, then to P90 million, and finally to P117
million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages
and two chattel mortgages in favor of RCBC, which were registered with the Registry of
Deeds at Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU
committed itself to insure the mortgaged property with an insurance company approved
by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992,
Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan
insurance policies, issued nine endorsements in favor of RCBC seemingly upon
instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").
On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire.
Consequently, GOYU submitted its claim for indemnity on account of the loss insured
against. MICO denied the claim on the ground that the insurance policies were either
attached pursuant to writs of attachments/garnishments issued by various courts or that
the insurance proceeds were also claimed by other creditors of GOYU alleging better
rights to the proceeds than the insured. GOYU filed a complaint for specific performance
and damages which was docketed at the Regional Trial Court of the National Capital
Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present
G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of
the insurance policies, but said claims were also denied for the same reasons that MICO
denied GOYU's claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional
Trial Court of Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban
Bank, Alfredo Sebastian, and Philippine Trust Company obtained their respective writs of
attachments from various courts, covering an aggregate amount of P14,938,080.23, and
ordered that the proceeds of the ten insurance policies be deposited with the said court
minus the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO
deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila
RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation,
ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the
amount of P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by was of interest for the duration of the delay since July
27, 1992 (ninety days after defendant insurer's receipt of the required proof of loss and
notice of loss) at the rate of twice the ceiling prescribed by the Monetary Board, on the
following amounts:
1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with
this Court on January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments
were received by defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorney's fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992,
with interest thereon at the rate stipulated in the respective promissory notes (without
surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to
release immediately to the plaintiff the amount of P50,000,000.00 deposited with the
Court by defendant Malayan, together with all the interest earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied
with the amount awarded in its favor. MICO and RCBC disputed the trial court's findings
of liability on their part. The Court of Appeals party granted GOYU's appeal, but sustained
the findings of the trial court with respect to MICO and RCBC's liabilities, thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as
follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the
amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages
by way of interest commencing July 27, 1992 until the time Goyu receives the said
amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling
prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;
a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING
CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.
4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan
obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any
interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to
immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No.
3649285) deposited with it by Malayan Insurance Co., Inc., together with all the interests
thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking
review and consequent reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376,
which case, by virtue of the Court of Appeals' resolution dated August 7, 1996, was
consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in
said petition is RCBC's right to intervene in the action between Alfredo C. Sebastian (the
creditor) and GOYU (the debtor), where the subject insurance policies were attached in
favor of Sebastian.
After a careful reviews of the material facts as found by the two courts below in relation
to the pertinent and applicable laws, we find merit in the submission of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues
which are now submitted in the petitions before us. This Court, however, discerns one
primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right
over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of
loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the
latter executed several mortgage contracts in favor of RCBC. It was expressly stipulated in
these mortgage contracts that GOYU shall insure the mortgaged property with any of the
insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property
with MICO, an insurance company acceptable to RCBC. Bases on their stipulations in the
mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of,
and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from
whom GOYU obtained the subject insurance policies, prepared the nine endorsements
(see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to "59-RCBC"), copies of
which were delivered to GOYU, RCBC, and MICO. However, because these endorsements
do not bear the signature of any officer of GOYU, the trial court, as well as the Court of
Appeals, concluded that the endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separated and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that GOYU could insure the
mortgaged property for its own exclusive benefit. In the present case, although it appears
that GOYU obtained the subject insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their contemporaneous acts, must be given due
consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of
RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any
specific insurance policy in favor of any particular beneficiary or payee other than the
insured had not such named payee or beneficiary been specifically disclosed by the
insured itself. It is also significant that GOYU voluntarily and purposely took the
insurance policies from MICO, a sister company of RCBC, and not just from any other
insurance company. Alchester would not have found out that the subject pieces of
property were mortgaged to RCBC had not such information been voluntarily disclosed
by GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's
intention of obtaining insurance coverage in compliance with its undertaking in the
mortgage contracts with RCBC, and verily, Alchester would not have endorsed the
policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained
to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine was explained
in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good
faith and justice, and its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one to whom they were directed and
who reasonably relied thereon. The doctrine of estoppel springs from equitable
principles and the equities in the case. It is designed to aid the law in the administration
of justice where without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain
Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement
documents for GOYU's nine insurance policies in favor of RCBC. The original copies of
each of these nine endorsement documents were sent to GOYU, and the others were sent
to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn,
February 23, pp. 7-8). GOYU has not denied having received from Alchester the originals
of these documents.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only
pursuant to the stipulation in the mortgage contracts. We find such reliance to be justified
under the circumstances of the case. GOYU failed to seasonably repudiate the authority of
the person or persons who prepared such endorsements. Over and above this, GOYU
continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by
RCBC. After the occurrence of the loss insure against, it was too late for GOYU to disown
the endorsements for any imagined or contrived lack of authority of Alchester to prepare
and issue said endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least estopped
from assailing their operative effects. To permit GOYU to capitalize on its non-
confirmation of these endorsements while it continued to enjoy the benefits of the credit
facilities of RCBC which believed in good faith that there was due endorsement pursuant
to their mortgage contracts, is to countenance grave contravention of public policy, fair
dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under
the peculiar circumstances obtaining in this case, the Court is bound to recognize RCBC's
right to the proceeds of the insurance polices if not for the actual endorsement of the
policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the
proceeds of insurance shall exclusively apply to the interest of the person in whose name
or for whose benefit it is made. The peculiarity of the circumstances obtaining in the
instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties to
designate RCBC as the party for whose benefit the insurance policies were taken out.
Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage
contracts entered into between RCBC and GOYU in consideration of and for securing
GOYU's credit facilities from RCBC. The mortgage contracts contained common
provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property
properly covered against any loss by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property from
MICO, no less than a sister company of RCBC and definitely an acceptable insurance
company to RCBC.
3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance
Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail,
until of late, the validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit
facilities extended by RCBC which was conditioned upon the endorsement of the
insurance policies to be taken by GOYU to cover the mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the endorsement
documents prepared by Alchester, GOYU, despite the absence of its written conformity
thereto, obviously considered said endorsement to be sufficient compliance with its
obligation under the mortgage contracts since RCBC accordingly continued to extend the
benefits of its credits facilities and GOYU continued to benefit therefrom. Just as plain too
is the intention of the parties to constitute RCBC as the beneficiary of the various
insurance policies obtained by GOYU. The intention of the parties will have to be given
full force and effect particular case. The insurance proceeds may, therefore, be exclusively
applied to RCBC, which under the factual circumstances of the case, is truly the person or
entity for whose benefit the polices were clearly intended.
Moreover, the law's evident intention to protect the interests of the mortgage upon the
mortgaged property is expressed in Article 2127 of the Civil Code which states:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation becomes due, and to
the amount of the indemnity granted or owing to the proprietor from the insurers of the
property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case,
only 8 of them appear to have been subject of the endorsements prepared and delivered
by Alchester for and upon instructions of GOYU as shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92
b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"
Issue Date January 18, 1992
Expiry Date (not legible) which we already ruled to have the force and effect of an endorsement by GOYU itself,
Amount P6,603,586.43 these 8 policies can not be attached by GOYU's other creditors up to the extent of the
GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains
e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan" that the insurance proceeds of the endorsed policies shall be applied exclusively to the
Issue Date January 18, 1992 proper interest of the person for whose benefit it was made. In this case, to the extent of
Expiry Date February 9, 1993 GOYU's obligation with RCBC, the interest of GOYU in the subject policies had been
Amount P9,457,972.76 transferred to RCBC effective as of the time of the endorsement. These policies may no
longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present
f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan" G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and
Issue Date January 13, 1992 academic in view of the results reached herein. Only the two other policies amounting to
Expiry Date January 13, 1993 P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's other
Amount P24,750,000.00 creditors. To the extent of GOYU's outstanding obligation with RCBC, all the rest of the
other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be
g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan" released from attachment, garnishment, and levy by the other creditors of GOYU.
Issue Date May 29, 1991
Expiry Date June 27, 1992 This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding
Amount P6,000,000.00 obligation with RCBC which the proceeds of the 8 insurance policies will discharge and
liquidate, or put differently, the actual amount of GOYU's liability to RCBC.
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991 The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's
Expiry Date May 3, 1992 total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning
Amount P10,000,000.00 the trial court's exclusion of Promissory Note No. 421-92 (renewal of Promissory Note
No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91)
i. Policy Number F-114-07402 Exhibit "8-Malayan" on the ground that their execution is highly questionable for not only are these dated
Issue Date September 16, 1991 after the fire, but also because the signatures of either GOYU or any its representative are
Expiry Date October 19, 1992 conspicuously absent. Accordingly, the Court of Appeals speculated thusly:
Amount P32,252,125.20
. . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed
j. Policy Number F-114-07525 Exhibit "9-Malayan" by plaintiff in bank terms, as averred by plaintiff, in contemplation of the speedy grant of
Issue Date November 20, 1991 future loans, for the same practice of procedure has always been adopted in its previous
Expiry Date December 5, 1992 dealings with the bank.
Amount P6,603,586.43
(Rollo, pp. 181-182.)
(pp. 456-457, Record; Folder of Exhibits for MICO.)
The fact that the promissory notes bear dates posterior to the fire does not necessarily
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted mean that the documents are spurious, for it is presumed that the ordinary course of
by MICO's witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record business had been followed (Metropolitan Bank and Trust Company vs. Quilts and All,
shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the Inc., 22 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument
endorsement documents, Exhibit "5-Malayan", refers to a certain insurance policy has the burden of proof of showing that he no longer owes the obligee any amount
number ACIA-F-07066, which is not among the insurance policies involved in the (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
complaint.
Even casting aside the presumption of regularity of private transactions, receipt of the
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as
Being excessively payable to RCBC by reason of the endorsement by Alchester to RCBC,
indicated in the testimony of Go Song Hiap when he answered the queries of the trial respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable
court. insurance companies and other legitimate deductions. We accept and confirm this
amount of P116,301,992.60 as stated as true and correct.
ATTY. NATIVIDAD
(Exhibit BB.)
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein? The Court of Appeals erred in placing much significance on the fact that the excluded
promissory notes are dated after the fire. It failed to consider that said notes had for their
A: Yes, sir, I received the amount. origin transactions consummated prior to the fire. Thus, careful attention must be paid to
the fact that Promissory Notes No. 420-92 and 421-92 are mere renewalsof Promissory
COURT Notes No. 908-91 and 952-91, loans already availed of by GOYU.

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC? The two courts below erred in failing to see that the promissory notes which they ruled
should be excluded for bearing dates which are after that of the fire, are mere renewals of
WITNESS: previous ones. The proceeds of the loan represented by these promissory notes were
admittedly received by GOYU. There is ample factual and legal basis for giving GOYU's
Yes, Your Honor, I received all the amounts. judicial admission of liability in the amount of P116,301,992.60 full force and effect.

COURT It should, however, be quickly added that whatever amount RCBC may have recovered
from the other insurers of the mortgage property will, nonetheless, have to be applied as
Indicated in the Promissory Notes? payment against GOYU's obligation. But, contrary to the lower courts' findings, payments
effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments
WITNESS
had obviously been duly considered by GOYU, in its aforequoted letter date March 9,
1993, wherein it admitted that its past due account totaled P116,301,992.60 as of January
A. The promissory Notes they did not give to me but the amount I asked which is correct,
21, 1993.
Your Honor.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of
COURT
January 21, 1993, to wit:
Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
A Yes, Your Honor.

Broken down as follows:

(tsn, Jan. 14, 1994, p. 26.)

Principal 1 Interest
Furthermore, aside from its judicial admission of having received all the proceeds of the
29 promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC
Regular 80,535,946.32
that is obligation be fixed at P116,301,992.60 as shown in its letter date March 9, 1993,
FDU 27,548,025.17
which pertinently reads:
____________
Total 108,083,971.49 8,218,021.11 2
We wish to inform you, therefore that we are ready and willing to pay the current past
due account of this company in the amount of P116,301,992.60 as of 21 January 1993,
LESS:
specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the
Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city,
1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81
2) Proceeds from
Equitable Insurance
Company 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
___________
9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90
The need for the payment of interest due the principal amount of the obligation, which is
the cost of money to RCBC, the primary end and the ultimate reason for RCBC's existence
and being, was duly recognized by the trial court when it ruled favorably on RCBC's
counterclaim, ordering GOYU "to pay its loan obligation with RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the
respective promissory notes (without surcharges and penalties) per computation, pp. 14-
A, 14-B 14-C" (Record, p. 479). Inexplicably, the Court of Appeals, without even laying
down the factual or legal justification for its ruling, modified the trial court's ruling and
ordered GOYU "to pay the principal amount of P68,785,069.04 without any interest,
surcharges and penalties" (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment of additional interest, penalties, and charges, in this
manner:
Regarding defendant RCBC's commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of
writing to be binding and enforceable. The principle is well known that generally a verbal
agreement or contract is no less binding and effective than a written one. And the
existence of such a verbal agreement has been amply established by the evidence in this
case. In any event, regardless of the existence of such verbal agreement, it would still be
unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and
penalties considering the latter's pitiful situation. (Emphasis supplied).
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and
distinct from that of surcharges and penalties. What may justify a court in not allowing
the creditor to charge surcharges and penalties despite express stipulation therefor in a
valid agreement, may not equally justify non-payment of interest. The charging of interest
for loans forms a very essential and fundamental element of the banking business, which
may truly be considered to be at the very core of its existence or being. It is inconceivable
for a bank to grant loans for which it will not charge any interest at all. We fail to find
justification for the Court of Appeal's outright deletion of the payment of interest as
agreed upon in the respective promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb
laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78
[1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the actual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default,i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date of the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision (pp. 470
and 471, Record) such agreed interest rates must be followed. This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful
situation must be taken into account. We do not agree, however, that payment of any
amount as surcharges and penalties should altogether be deleted. Even assuming that
RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may
have relayed its assurance for assistance to GOYU immediately after the occurrence of the
fire, we cannot accept the lower courts' finding that RCBC had thereby ipso
facto effectively waived collection of any additional interests, surcharges, and penalties
from GOYU. Assurances of assistance are one thing, but waiver of additional interests,
surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the
nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil
Code. Article 2227 thereof provides:
Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be
equitably reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the
Court must consider the circumstances of each case. It should be stressed that the Court
will not make any sweeping ruling that surcharges and penalties imposed by banks for
non-payment of the loans extended by them are generally iniquitous and unconscionable.
What may be iniquitous and unconscionable in one case, may be totally just and equitable
in another. This provision of law will have to be applied to the established facts of any
given case. Given the circumstance under which GOYU found itself after the occurrence of
the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the
penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court
tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYU's offer
to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which
RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge
additional interest, surcharges, and penalties from that time onward.
Given the factual milieu hereover, we rule that it was error to hold MICO liable in
damages for denying or withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance
policies, RCBC has the right to claim the insurance proceeds, in substitution of the
property lost in the fire. Having assigned its rights, GOYU lost its standing as the
beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive, or
malevolent (Zenith Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally
agreed, however, that an insurer may in good faith and honesty entertain a difference of
opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless the evidence and circumstances show
that such refusal was willful and without reasonable cause as the facts appear to a
reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70
ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky
vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show
that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in
the determination of who is the actual beneficiary of the insurance policies, aggravated by
the claim of various creditors who wanted to partake of the insurance proceeds, not to
mention the importance of the endorsement to RCBC, to our mind, and as now borne out
by the outcome herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot
avail itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one
for specific performance and the other for foreclosure. In doing so, said the appellate
court, the second action is deemed barred, RCBC having split a single cause of action
(Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the foreclosure suit is still pending appeal
before the same Court of Appeals in CA G.R. CV No. 46247, the case having been elevated
by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of
Appeals pre-empted the resolution of said foreclosure case which is not before it. This is
plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691 [1995]):
It should have been enough, nonetheless, for the appellate court to merely set aside the
questioned ordered of the trial court for having been issued by the latter with grave
abuse of discretion. In likewise enjoining permanently herein petitioner "from entering in
and interfering with the use or occupation and enjoyment of petitioner's (now private
respondent) residential house and compound," the appellate court in effect, precipitately
resolved with finality the case for injunction that was yet to be heard on the merits by the
lower court. Elevated to the appellate court, it might be stressed, were mere incidents of
the principal case still pending with the trial court. In Municipality of Bian, Laguna
vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have "no
jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits
of the main case itself which was not on appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and academic.
Respondent Sebastian must, however, yield to the preferential right of RCBC over the
MICO insurance policies. It is basic and fundamental that the first mortgagee has superior
rights over junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs.
Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil.
271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of
December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and
SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442
before Branch 3 of the Manila Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking
Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per
report of adjuster Toplis & Harding (Far East), Inc., Exhibits "2" and "2-1"), less the
amount of P50,505,594.60 (per O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the
interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking
Corporation in the principal amount of P107,246,887.90, with interest at the respective
rates stipulated in each promissory note from January 21, 1993 until finality of this
judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9,
1993, minus payments made by Malayan Insurance Company, Inc. and the proceeds of
the amount deposited with the trial court and its earned interest. The total amount due
RCBC at the time of the finality of this judgment shall earn interest at the legal rate of
12% in lieu of all other stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court in
CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results herein
arrived at. Respondent Sebastian's right as attaching creditor must yield to the
preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance
policies as first mortgagee.
SO ORDERED.
THELMA VDA. DE CANILANG, petitioner,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, respondents.
Simeon C. Sato for petitioner.
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as
suffering from "sinus tachycardia." The doctor prescribed the following fro
him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the
same doctor again on 3 August 1982 and this time was found to have "acute bronchitis."
On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy
with respondent Great Pacific Life Assurance Company ("Great Pacific") naming his wife,
Thelma Canilang, as his beneficiary. 1 Jaime Canilang was issued ordinary life insurance
Policy No. 345163, with the face value of P19,700, effective as of 9 August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and
"chronic anemia." 2 Petitioner, widow and beneficiary of the insured, filed a claim with
Great Pacific which the insurer denied on 5 December 1983 upon the ground that the
insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance Commission for
recovery of the insurance proceeds. During the hearing called by the Insurance
Commissioner, petitioner testified that she was not aware of any serious illness suffered
by her late husband 3 and that, as far as she knew, her husband had died because of a
kidney disorder. 4 A deposition given by Dr. Wilfredo Claudio was presented by
petitioner. There Dr. Claudio stated that he was the family physician of the deceased
Jaime Canilang 5 and that he had previously treated him for "sinus tachycardia" and
"acute bronchitis." 6 Great Pacific for its part presented Dr. Esperanza Quismorio, a
physician
and a medical underwriter working for Great Pacific. 7 She testified that the deceased's
insurance application had been approved on the basis of his medical declaration. 8 She
explained that as a rule, medical examinations are required only in cases where the
applicant has indicated in his application for insurance coverage that he has previously
undergone medical consultation and hospitalization. 9
In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo
ordered Great Pacific to pay P19,700 plus legal interest and P2,000.00 as attorney's fees
after holding that:
1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it
would not have affected Great Pacific's decision to insure him;
2. Great Pacific had waived its right to inquire into the health condition of the applicant
by the issuance of the policy despite the lack of answers to "some of the pertinent
questions" in the insurance application;
3. there was no intentional concealment on the part of the insured Jaime Canilang as he
had thought that he was merely suffering from a minor ailment and simple cold; 10 and
4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not
concealment was intentionally made, was not applicable to Canilang's case as that law
became effective only on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the
Insurance Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's
counterclaim. The Court of Appealed found that the use of the word "intentionally" by the
Insurance Commissioner in defining and resolving the issue agreed upon by the parties at
pre-trial before the Insurance Commissioner was not supported by the evidence; that the
issue agreed upon by the parties had been whether the deceased insured, Jaime Canilang,
made a material concealment as the state of his health at the time of the filing of
insurance application, justifying respondent's denial of the claim. The Court of Appeals
also found that the failure of Jaime Canilang to disclose previous medical consultation and
treatment constituted material information which should have been communicated to
Great Pacific to enable the latter to make proper inquiries. The Court of Appeals finally
held that the Ng Gan Zee case which had involved misrepresentation was not applicable
in respect of the case at bar which involves concealment.
Petitioner Thelma Canilang is now before this Court on a Petition for Review
on Certiorari alleging that:
1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that
the issue in the case agreed upon between the parties before the Insurance Commission is
whether or not Jaime Canilang "intentionally" made material concealment in stating his
state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions
does not amount to fraud and private respondent is deemed to have waived inquiry
thereto. 11
The medical declaration which was set out in the application for insurance executed by
Jaime Canilang read as follows:
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any
medical or surgical advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical
impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
________________________________________________________________________________
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements are complete, true and
correct. I herebyagree that if there be any fraud or misrepresentation in the above
statements material to the risk, the INSURANCE COMPANY upon discovery within two (2)
years from the effective date of insurance shall have the right to declare such insurance
null and void. That the liabilities of the Company under the said Policy/TA/Certificate
shall accrue and begin only from the date of commencement of risk stated in the
Policy/TA/Certificate, provided that the first premium is paid and the
Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual
good health.
Signed at Manila his 4th day of August, 1992.
Illegible
Signature of Applicant. 12
We note that in addition to the negative statements made by Mr. Canilang in paragraph 1
and 2 of the medical declaration, he failed to disclose in the appropriate space, under the
caption "Exceptions," that he had twice consulted Dr. Wilfredo B. Claudio who had found
him to be suffering from "sinus tachycardia" and "acute bronchitis."
The relevant statutory provisions as they stood at the time Great Pacific issued the
contract of insurance and at the time Jaime Canilang died, are set out in P.D. No. 1460,
also known as the Insurance Code of 1978, which went into effect on 11 June 1978. These
provisions read as follows:
Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.
xxx xxx xxx
Sec. 28. Each party to a contract of insurance must communicate to the other, in good
faith, all factorswithin his knowledge which are material to the contract and as to which
he makes no warranty, and which the other has not the means of ascertaining. (Emphasis
supplied)
Under the foregoing provisions, the information concealed must be information which
the concealing party knew and "ought to [have] communicate[d]," that is to say,
information which was "material to the contract." The test of materiality is contained in
Section 31 of the Insurance Code of 1978 which reads:
Sec. 31. Materially is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his
inquiries. (Emphasis supplied)
"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per
minute." 13 The symptoms of this condition include pounding in the chest and sometimes
faintness and weakness of the person affected. The following elaboration was offered by
Great Pacific and set out by the Court of Appeals in its Decision:
Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per
minute. (Harrison' s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is, among
others, a common reaction to heart disease, including myocardial infarction, and heart
failure per se. (Henry J.L. Marriot, M.D.,Electrocardiography, 6th ed., [1977], p. 127.) The
medication prescribed by Dr. Claudio for treatment of Canilang's ailment on June 18,
1982, indicates the condition that said physician was trying to manage. Thus, he
prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14, No. 3, Dec.
1985, p. 112) which is anti-anxiety, anti-convulsant, muscle-relaxant; and Aptin, (Idem, p.
36) a cardiac drug, for palpitations and nervous heart. Such treatment could have been a
very material information to the insurer in determining the action to be take on
Canilang's application for life insurance coverage. 14
We agree with the Court of Appeals that the information which Jaime Canilang failed to
disclose was material to the ability of Great Pacific to estimate the probable risk he
presented as a subject of life insurance. Had Canilang disclosed his visits to his doctor, the
diagnosis made and medicines prescribed by such doctor, in the insurance application, it
may be reasonably assumed that Great Pacific would have made further inquiries and
would have probably refused to issue a non-medical insurance policy or, at the very least,
required a higher premium for the same coverage. 15 The materiality of the information
withheld by Great Pacific did not depend upon the state of mind of Jaime Canilang. A
man's state of mind or subjective belief is not capable of proof in our judicial process,
except through proof of external acts or failure to act from which inferences as to his
subjective belief may be reasonably drawn. Neither does materiality depend upon the
actual or physical events which ensue. Materiality relates rather to the "probable and
reasonable influence of the facts" upon the party to whom the communication should
have been made, in assessing the risk involved in making or omitting to make further
inquiries and in accepting the application for insurance; that "probable and reasonable
influence of the facts" concealed must, of course, be determined objectively, by the judge
ultimately.
The insurance Great Pacific applied for was a "non-medical" insurance policy.
In Saturnino v. Philippine-American Life Insurance Company, 16 this Court held that:
. . . if anything, the waiver of medical examination [in a non-medical insurance contract]
renders even more material the information required of the applicant concerning
previous condition of health and diseases suffered, for such information necessarily
constitutes an important factor which the insurer takes into consideration in deciding
whether to issue the policy or not . . . . 17 (Emphasis supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific to convey
certain information to the insurer was not "intentional" in nature, for the reason that
Jaime Canilang believed that he was suffering from minor ailment like a common cold.
Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is,
throughout the time range material for present purposes, provided that:
Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:
Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to
rescind a contract of insurance. (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978
so as to read as follows:
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the
rescind a contract of insurance. (Emphasis supplied) Court of Appeals dated 16 October 1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED.
No pronouncement as to the costs.
The unspoken theory of the Insurance Commissioner appears to have been that by
deleting the phrase "intentional or unintentional," the Insurance Code of 1978 (prior to SO ORDERED.
its amendment by B.P. Blg. 874) intended to limit the kinds of concealment which
generate a right to rescind on the part of the injured party to "intentional concealments." SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
This argument is not persuasive. As a simple matter of grammar, it may be noted that vs.
"intentional" and "unintentional" cancel each other out. The net result therefore of the The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
phrase "whether intentional or unitentional" is precisely to leave unqualified the term BACANI, respondents.
"concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as
referring to "any concealment" without regard to whether such concealment is
intentional or unintentional. The phrase "whether intentional or unintentional" was in
fact superfluous. The deletion of the phrase "whether intentional or unintentional" QUIASON, J.:
could not have had the effect of imposing an affirmative requirement that a concealment
must be intentional if it is to entitle the injured party to rescind a contract of insurance. This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to
The restoration in 1985 by B.P. Blg. 874 of the phrase "whether intentional or reverse and set aside the Decision dated February 21, 1992 of the Court of Appeals in CA-
unintentional" merely underscored the fact that all throughout (from 1914 to 1985), the G.R. CV No. 29068, and its Resolution dated April 22, 1992, denying reconsideration
statute did not require proof that concealment must be "intentional" in order to authorize thereof.
rescission by the injured party.
We grant the petition.
In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such
that the failure to communicate must have been intentional rather than merely I
inadvertent. For Jaime Canilang could not have been unaware that his heart beat would at
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself
times rise to high and alarming levels and that he had consulted a doctor twice in the two
from petitioner. He was issued Policy No. 3-903-766-X valued at P100,000.00, with
(2) months before applying for non-medical insurance. Indeed, the last medical
double indemnity in case of accidental death. The designated beneficiary was his mother,
consultation took place just the day before the insurance application was filed. In all
respondent Bernarda Bacani.
probability, Jaime Canilang went to visit his doctor precisely because of the discomfort
and concern brought about by his experiencing "sinus tachycardia."
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a
claim with petitioner, seeking the benefits of the insurance policy taken by her son.
We find it difficult to take seriously the argument that Great Pacific had waived inquiry
Petitioner conducted an investigation and its findings prompted it to reject the claim.
into the concealment by issuing the insurance policy notwithstanding Canilang's failure
to set out answers to some of the questions in the insurance application. Such failure
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not
precisely constituted concealment on the part of Canilang. Petitioner's argument, if
disclose material facts relevant to the issuance of the policy, thus rendering the contract
accepted, would obviously erase Section 27 from the Insurance Code of 1978.
of insurance voidable. A check representing the total premiums paid in the amount of
P10,172.00 was attached to said letter.
It remains only to note that the Court of Appeals finding that the parties had not agreed in
the pretrial before the Insurance Commission that the relevant issue was whether or not
Petitioner claimed that the insured gave false statements in his application when he
Jaime Canilang had intentionally concealed material information from the insurer, was
answered the following questions:
supported by the evidence of record, i.e., the Pre-trial Order itself dated 17 October 1984
and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows
5. Within the past 5 years have you:
that the word "intentional" does not appear in the statement or definition of the issue in
the said Order and Minutes." 18 a) consulted any doctor or other health practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
6. Have you ever had or sought advice for:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his answer to a
consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on
February 1986, for cough and flu complications. The other questions were answered in
the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the insured
was examined and confined at the Lung Center of the Philippines, where he was
diagnosed for renal failure. During his confinement, the deceased was subjected to
urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her husband, respondent
Rolando Bacani, filed an action for specific performance against petitioner with the
Regional Trial Court, Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer
with counterclaim and a list of exhibits consisting of medical records furnished by the
Lung Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for
Summary Judgment" where they manifested that they "have no evidence to refute the
documentary evidence of concealment/misrepresentation by the decedent of his health
condition (Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due execution
of several documents as well as allegations regarding the health of the insured. Private
respondents failed to oppose said request or reply thereto, thereby rendering an
admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in favor of
private respondents. The dispositive portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendant, condemning the latter to pay the former the amount of One Hundred
Thousand Pesos (P100,000.00) the face value of insured's Insurance Policy No. 3903766,
and the Accidental Death Benefit in the amount of One Hundred Thousand Pesos
(P100,000.00) and further sum of P5,000.00 in the concept of reasonable attorney's fees
and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed by the
insured were made in good faith and under a belief that they need not be disclosed.
Moreover, it held that the health history of the insured was immaterial since the
insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court.
The appellate court ruled that petitioner cannot avoid its obligation by claiming
concealment because the cause of death was unrelated to the facts concealed by the
insured. It also sustained the finding of the trial court that matters relating to the health
history of the insured were irrelevant since petitioner waived the medical examination
prior to the approval and issuance of the insurance policy. Moreover, the appellate court
agreed with the trial court that the policy was "non-medical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding on
this Court is not absolute and admits of exceptions, such as when the judgment is based
on a misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there was
concealment and misrepresentation, however, the same was made in "good faith" and the
facts concealed or misrepresented were irrelevant since the policy was "non-medical".
We disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance
to communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has
no means of ascertaining. Said Section provides:
A neglect to communicate that which a party knows and ought to communicate, is called
concealment.
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose to the
insurer matters relating to his health.
The information which the insured failed to disclose were material and relevant to the
approval and issuance of the insurance policy. The matters concealed would have
definitely affected petitioner's action on his application, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Moreover, a
disclosure may have warranted a medical examination of the insured by petitioner in
order for it to reasonably assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of
the information withheld does not depend on the state of mind of the insured. Neither
does it depend on the actual or physical events which ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact
that he was hospitalized for two weeks prior to filing his application for insurance, raises
grave doubts about his bonafides. It appears that such concealment was deliberate on his
part.
The argument, that petitioner's waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. We reiterate our ruling
in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316 (1963), that " . .
. the waiver of a medical examination [in a non-medical insurance contract] renders even
more material the information required of the applicant concerning previous condition of
health and diseases suffered, for such information necessarily constitutes an important
factor which the insurer takes into consideration in deciding whether to issue the policy
or not . . . "
Moreover, such argument of private respondents would make Section 27 of the Insurance
Code, which allows the injured party to rescind a contract of insurance where there is
concealment, ineffective (See Vda. de Canilang v. Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of the
insured, it is well settled that the insured need not die of the disease he had failed to
disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed insurance policy or in making inquiries
(Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the contract of
insurance by reason of the concealment employed by the insured. It must be emphasized
that rescission was exercised within the two-year contestability period as recognized in
Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is
REVERSED and SET ASIDE.
SO ORDERED.
NG GAN ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant.
Alberto Q. Ubay for plaintiff-appellee.
Santiago F. A lidio for defendant-appellant.
ESCOLIN, J.:
This is an appeal from the judgment of the Court of First Instance of Manila, ordering the
appellant Asian-Crusader Life Assurance Corporation to pay the face value of an
insurance policy issued on the life of Kwong Nam the deceased husband of appellee Ng
Gan Zee. Misrepresentation and concealment of material facts in obtaining the policy
were pleaded to avoid the policy. The lower court rejected the appellant's theory and
ordered the latter to pay appellee "the amount of P 20,000.00, with interest at the legal
rate from July 24, 1964, the date of the filing of the complaint, until paid, and the costs. "
The Court of Appeals certified this appeal to Us, as the same involves solely a question of
law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for
the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On the same
date, appellant, upon receipt of the required premium from the insured, approved the
application and issued the corresponding policy. On December 6, 1963, Kwong Nam died
of cancer of the liver with metastasis. All premiums had been religiously paid at the time
of his death.
On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant
for payment of the face value of the policy. On the same date, she submitted the required
proof of death of the insured. Appellant denied the claim on the ground that the answers
given by the insured to the questions appealing in his application for life insurance were
untrue.
Appellee brought the matter to the attention of the Insurance Commissioner, the Hon.
Francisco Y. Mandamus, and the latter, after conducting an investigation, wrote the
appellant that he had found no material concealment on the part of the insured and that,
therefore, appellee should be paid the full face value of the policy. This opinion of the
Insurance Commissioner notwithstanding, appellant refused to settle its obligation.
Appellant alleged that the insured was guilty of misrepresentation when he answered
"No" to the following question appearing in the application for life insurance-
Has any life insurance company ever refused your application for insurance or for
reinstatement of a lapsed policy or offered you a policy different from that applied for? If,
so, name company and date.
In its brief, appellant rationalized its thesis thus:
... As pointed out in the foregoing summary of the essential facts in this case, the insured
had in January, 1962, applied for reinstatement of his lapsed life insurance policy with
the Insular Life Insurance Co., Ltd, but this was declined by the insurance company,
although later on approved for reinstatement with a very high premium as a result of his
medical examination. Thus notwithstanding the said insured answered 'No' to the
[above] question propounded to him. ... 1
The lower court found the argument bereft of factual basis; and We quote with approval
its disquisition on the matter-
On the first question there is no evidence that the Insular Life Assurance Co., Ltd. ever
refused any application of Kwong Nam for insurance. Neither is there any evidence that
any other insurance company has refused any application of Kwong Nam for insurance.
... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong Nam's
request for reinstatement and amendment of his lapsed insurance policy on April 24,
1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes from said application
for reinstatement and amendment, Exh. 'L', that the amount applied for was P20,000.00
only and not for P50,000.00 as it was in the lapsed policy. The amount of the reinstated
and amended policy was also for P20,000.00. It results, therefore, that when on May 12,
1962 Kwong Nam answered 'No' to the question whether any life insurance company
ever refused his application for reinstatement of a lapsed policy he did not misrepresent
any fact.
... the evidence shows that the application of Kwong Nam with the Insular Life Assurance
Co., Ltd. was for the reinstatement and amendment of his lapsed insurance policy-Policy
No. 369531 -not an application for a 'new insurance policy. The Insular Life Assurance
Co., Ltd. approved the said application on April 24, 1962. Policy No. 369531 was
reinstated for the amount of P20,000.00 as applied for by Kwong Nam [Exhs. 'L', 'L-l' and
'L-2']. No new policy was issued by the Insular Life Assurance Co., Ltd. to Kwong Nam in
connection with said application for reinstatement and amendment. Such being the case,
the Court finds that there is no misrepresentation on this matter. 2
Appellant further maintains that when the insured was examined in connection with his
application for life insurance, he gave the appellant's medical examiner false and
misleading information as to his ailment and previous operation. The alleged false
statements given by Kwong Nam are as follows:
Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been
associated with ulcer of stomach. Tumor taken out was hard and of a hen's egg size.
Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now, claims he is
completely recovered.
To demonstrate the insured's misrepresentation, appellant directs Our attention to:
[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese
General Hospital on May 22, 1960, i.e., about 2 years before he applied for an insurance
policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan had diagnosed the
patient's ailment as 'peptic ulcer' for which, an operation, known as a 'sub-total gastric
resection was performed on the patient by Dr. Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen
removed from the patient's body was 'a portion of the stomach measuring 12 cm. and 19
cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension.
On the bases of the above undisputed medical data showing that the insured was
operated on for peptic ulcer", involving the excision of a portion of the stomach, appellant
argues that the insured's statement in his application that a tumor, "hard and of a hen's
egg size," was removed during said operation, constituted material concealment.
The question to be resolved may be propounded thus: Was appellant, because of
insured's aforesaid representation, misled or deceived into entering the contract or in
accepting the risk at the rate of premium agreed upon?
The lower court answered this question in the negative, and We agree.
Section 27 of the Insurance Law [Act 2427] provides:
Sec. 27. Such party a contract of insurance must communicate to the other, in good faith,
all facts within his knowledge which are material to the contract, and which the other has
not the means of ascertaining, and as to which he makes no warranty. 3
Thus, "concealment exists where the assured had knowledge of a fact material to the risk,
and honesty, good faith, and fair dealing requires that he should communicate it to the
assurer, but he designedly and intentionally withholds the same." 4
It has also been held "that the concealment must, in the absence of inquiries, be not only
material, but fraudulent, or the fact must have been intentionally withheld." 5
Assuming that the aforesaid answer given by the insured is false, as claimed by the
appellant. Sec. 27 of the Insurance Law, above-quoted, nevertheless requires that
fraudulent intent on the part of the insured be established to entitle the insurer to rescind
the contract. And as correctly observed by the lower court, "misrepresentation as a
defense of the insurer to avoid liability is an 'affirmative' defense. The duty to establish
such a defense by satisfactory and convincing evidence rests upon the defendant. The
evidence before the Court does not clearly and satisfactorily establish that defense."
It bears emphasis that Kwong Nam had informed the appellant's medical examiner that
the tumor for which he was operated on was "associated with ulcer of the stomach." In
the absence of evidence that the insured had sufficient medical knowledge as to enable
him to distinguish between "peptic ulcer" and "a tumor", his statement that said tumor
was "associated with ulcer of the stomach, " should be construed as an expression made
in good faith of his belief as to the nature of his ailment and operation. Indeed, such
statement must be presumed to have been made by him without knowledge of its
incorrectness and without any deliberate intent on his part to mislead the appellant.
While it may be conceded that, from the viewpoint of a medical expert, the information
communicated was imperfect, the same was nevertheless sufficient to have induced
appellant to make further inquiries about the ailment and operation of the insured.
Section 32 of Insurance Law [Act No. 24271 provides as follows:
Section 32. The right to information of material facts maybe waived either by the terms of
insurance or by neglect to make inquiries as to such facts where they are distinctly
implied in other facts of which information is communicated.
It has been held that where, upon the face of the application, a question appears to be not
answered at all or to be imperfectly answered, and the insurers issue a policy without any
further inquiry, they waive the imperfection of the answer and render the omission to
answer more fully immaterial. 6
As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had such
an important bearing on the question of whether the defendant would undertake the
insurance or not, the court cannot understand why the defendant or its medical examiner
did not make any further inquiries on such matters from the Chinese General Hospital or
require copies of the hospital records from the appellant before acting on the application
for insurance. The fact of the matter is that the defendant was too eager to accept the
application and receive the insured's premium. It would be inequitable now to allow the
defendant to avoid liability under the circumstances."
Finding no reversible error committed by the trial court, the judgment appealed from is
hereby affirmed, with costs against appellant Asian-Crusader life Assurance Corporation.
SO ORDERED.
IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF CARLOS
SATURNINO, minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
Eleazaro A. Samson for plaintiffs-appellants.
Abello & Macias for defendant-appellee.
MAKALINTAL, J.:
Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to
recover the sum of P5,000.00, corresponding to the face value of an insurance policy
issued by defendant on the life of Estefania A. Saturnino, and the sum of P1,500.00 as
attorney's fees. Defendant, now appellee, set up special defenses in its answer, with a
counterclaim for damages allegedly sustained as a result of the unwarranted presentation
of this case. Both the complaint and the counterclaim were dismissed by the trial court;
but appellants were declared entitled to the return of the premium already paid; plus
interest at 6% up to January 8, 1959, when a check for the corresponding amount
P359.65 was sent to them by appellee.
The policy sued upon is one for 20-year endowment non-medical insurance. This kind of
policy dispenses with the medical examination of the applicant usually required in
ordinary life policies. However, detailed information is called for in the application
concerning the applicant's health and medical history. The written application in this case
was submitted by Saturnino to appellee on November 16, 1957, witnessed by appellee's
agent Edward A. Santos. The policy was issued on the same day, upon payment of the first
year's premium of P339.25. On September 19, 1958 Saturnino died of pneumonia,
secondary to influenza. Appellants here, who are her surviving husband and minor child,
respectively, demanded payment of the face value of the policy. The claim was rejected
and this suit was subsequently instituted.
It appears that two months prior to the issuance of the policy or on September 9, 1957,
Saturnino was operated on for cancer, involving complete removal of the right breast,
including the pectoral muscles and the glands found in the right armpit. She stayed in the
hospital for a period of eight days, after which she was discharged, although according to
the surgeon who operated on her she could not be considered definitely cured, her
ailment being of the malignant type.
Notwithstanding the fact of her operation Estefania A. Saturnino did not make a
disclosure thereof in her application for insurance. On the contrary, she stated therein
that she did not have, nor had she ever had, among other ailments listed in the
application, cancer or other tumors; that she had not consulted any physician, undergone
any operation or suffered any injury within the preceding five years; and that she had
never been treated for nor did she ever have any illness or disease peculiar to her sex,
particularly of the breast, ovaries, uterus, and menstrual disorders. The application also
recites that the foregoing declarations constituted "a further basis for the issuance of the
policy."
The question at issue is whether or not the insured made such false representations of
material facts as to avoid the policy. There can be no dispute that the information given
by her in her application for insurance was false, namely, that she had never had cancer
or tumors, or consulted any physician or undergone any operation within the preceding
period of five years. Are the facts then falsely represented material? The Insurance Law
(Section 30) provides that "materiality is to be determined not by the event, but solely by
the probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the proposed contract, or in making his
inquiries." It seems to be the contention of appellants that the facts subject of the
representation were not material in view of the "non-medical" nature of the insurance
applied for, which does away with the usual requirement of medical examination before
the policy is issued. The contention is without merit. If anything, the waiver of medical
examination renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer takes into consideration in
deciding whether to issue the policy or not. It is logical to assume that if appellee had
been properly apprised of the insured's medical history she would at least have been
made to undergo medical examination in order to determine her insurability.
Appellants argue that due information concerning the insured's previous illness and
operation had been given to appellees agent Edward A. Santos, who filled the application
form after it was signed in blank by Estefania A. Saturnino. This was denied by Santos in
his testimony, and the trial court found such testimony to be true. This is a finding of fact
which is binding upon us, this appeal having been taken upon questions of law alone. We
do not deem it necessary, therefore, to consider appellee's additional argument, which
was upheld by the trial court, that in signing the application form in blank and leaving it
to Edward A. Santos to fill (assuming that to be the truth) the insured in effect made
Santos her agent for that purpose and consequently was responsible for the errors in the
entries made by him in that capacity.
In the application for insurance signed by the insured in this case, she agreed to submit to
a medical examination by a duly appointed examiner of appellee if in the latter's opinion
such examination was necessary as further evidence of insurability. In not asking her to
submit to a medical examination, appellants maintain, appellee was guilty of negligence,
which precluded it from finding about her actual state of health. No such negligence can
be imputed to appellee. It was precisely because the insured had given herself a clean bill
of health that appellee no longer considered an actual medical checkup necessary.
Appellants also contend there was no fraudulent concealment of the truth inasmuch as
the insured herself did not know, since her doctor never told her, that the disease for
which she had been operated on was cancer. In the first place the concealment of the fact
of the operation itself was fraudulent, as there could not have been any mistake about it,
no matter what the ailment. Secondly, in order to avoid a policy it is not necessary to
show actual fraud on the part of the insured. In the case of Kasprzyk v. Metropolitan
Insurance Co., 140 N.Y.S. 211, 214, it was held:
Moreover, if it were the law that an insurance company could not depend a policy on the
ground of misrepresentation, unless it could show actual knowledge on the part of the
applicant that the statements were false, then it is plain that it would be impossible for it
to protect itself and its honest policyholders against fraudulent and improper claims. It
would be wholly at the mercy of any one who wished to apply for insurance, as it would
be impossible to show actual fraud except in the extremest cases. It could not rely on an
application as containing information on which it could act. There would be no incentive
to an applicant to tell the truth.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1wph1.t
In this jurisdiction a concealment, whether intentional or unintentional, entitles the
insurer to rescind the contract of insurance, concealment being defined as "negligence to
communicate that which a party knows and ought to communicate" (Sections 24 & 26,
Act No. 2427). In the case of Argente v. West Coast Life Insurance Co., 51 Phil. 725, 732,
this Court said, quoting from Joyce, The Law of Insurance, 2nd ed., Vol. 3:
"The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed
upon. The insurer, relying upon the belief that the assured will disclose every material
fact within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk upon
a false basis that it does not exist."
The judgment appealed from, dismissing the complaint and awarding the return to
appellants of the premium already paid, with interest at 6% up to January 29, 1959,
affirmed, with costs against appellants.
REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-
appellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE
OF RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.
VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal from a decision of the
Court of First Instance Rizal, Branch V, Quezon City, to be taken directly to the Supreme
Court is whether or not the acceptance by the private respondent insurance corporation
of the premium and the issuance of the corresponding certificate of insurance should be
deemed a waiver of the exclusionary condition of overage stated in the said certificate of
insurance.
The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied
with respondent insurance corporation for insurance coverage against accident and
injuries. She filled up the blank application form given to her and filed the same with the
respondent insurance corporation. In the said application form which was dated April 15,
1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the sum
of P20.00 representing the premium for which she was issued the corresponding receipt
signed by an authorized agent of the respondent insurance corporation. (Rollo, p. 27.)
Upon the filing of said application and the payment of the premium on the policy applied
for, the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of
Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90
days.
On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O.
Lapuz died in a vehicular accident in the North Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the
named beneficiary in the policy, filed her claim for the proceeds of the insurance,
submitting all the necessary papers and other requisites with the private respondent. Her
claim having been denied, Regina L. Edillon instituted this action in the Court of First
Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the respondent insurance corporation relies on a
provision contained in the Certificate of Insurance, excluding its liability to pay claims
under the policy in behalf of "persons who are under the age of sixteen (16) years of age
or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty
(60) years of age when she applied for the insurance coverage, the policy was null and
void, and no risk on the part of the respondent insurance corporation had arisen
therefrom.
The trial court sustained the contention of the private respondent and dismissed the
complaint; ordered the petitioner to pay attorney's fees in the sum of ONE THOUSAND
(P1,000.00) PESOS in favor of the private respondent; and ordered the private
respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium
on the insurancy policy. It was reasoned out that a policy of insurance being a contract of
adhesion, it was the duty of the insured to know the terms of the contract he or she is
entering into; the insured in this case, upon learning from its terms that she could not
have been qualified under the conditions stated in said contract, what she should have
done is simply to ask for a refund of the premium that she paid. It was further argued by
the trial court that the ruling calling for a liberal interpretation of an insurance contract in
favor of the insured and strictly against the insurer may not be applied in the present
case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was
not concealed to the insurance company. Her application for insurance coverage which
was on a printed form furnished by private respondent and which contained very few
items of information clearly indicated her age of the time of filing the same to be almost
65 years of age. Despite such information which could hardly be overlooked in the
application form, considering its prominence thereon and its materiality to the coverage
applied for, the respondent insurance corporation received her payment of premium and
issued the corresponding certificate of insurance without question. The accident which
resulted in the death of the insured, a risk covered by the policy, occurred on May 31,
1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was
sufficient time for the private respondent to process the application and to notice that the
applicant was over 60 years of age and thereby cancel the policy on that ground if it was
minded to do so. If the private respondent failed to act, it is either because it was willing
to waive such disqualification; or, through the negligence or incompetence of its
employees for which it has only itself to blame, it simply overlooked such fact. Under the
circumstances, the insurance corporation is already deemed in estoppel. It inaction to
revoke the policy despite a departure from the exclusionary condition contained in the
said policy constituted a waiver of such condition, as was held in the case of "Que Chee
Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an
insurance policy which contained a provision as to the installation of fire hydrants the
number of which depended on the height of the external wan perimeter of the bodega
that was insured. When it was determined that the bodega should have eleven (11) fire
hydrants in the compound as required by the terms of the policy, instead of only two (2)
that it had, the claim under the policy was resisted on that ground. In ruling that the said
deviation from the terms of the policy did not prevent the claim under the same, this
Court stated the following:
We are in agreement with the trial Court that the appellant is barred by waiver (or rather
estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that
knowing fully an that the number of hydrants demanded therein never existed from the
very beginning, the appellant nevertheless issued the policies in question subject to such
warranty, and received the corresponding premiums. It would be perilously close to
conniving at fraud upon the insured to allow appellant to claim now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it
was informed, and after it had misled the defendant into believing that the policies were
effective.
The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Que Chee Gan and two
others nearby, owned by the municipality of Tabaco, contrary to the requirements of the
warranty in question. Such fact appears from positive testimony for the insured that
appellant's agents inspected the premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof. That such inspection was made it
moreover rendered probable by its being a prerequisite for the fixing of the discount on
the premium to which the insured was entitled, since the discount depended on the
number of hydrants, and the fire fighting equipment available (See"'Scale of Allowances"
to which the policies were expressly made subject). The law, supported by a long line of
cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the
contract from its very inception, such knowledge constitutes a waiver of conditions in the
contract inconsistent with the known facts, and the insurer is stopped thereafter from
asserting the breach of such conditions. The law is charitable enough to assume, in the
absence of any showing to the contrary, that an insurance company intends to execute a
valid contract in return for the premium received; and when the policy contains a
condition which renders it voidable at its inception, and this result is known to the
insurer, it will be presumed to have intended to waive the conditions and to execute a
binding contract, rather than to have deceived the insured into thinking he is insured
when in fact he is not, and to have taken is money without consideration.' (29 Am. Jur.,
Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company to
accept one's money for a policy of insurance which it then knows to be void and of no
effect, though it knows as it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely related to positive
fraud, as to be abhorent to fairminded men. It would be to allow the company to treat the
policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it
the next moment. This cannot be deemed to be the real intention of the parties. To hold
that a literal construction of the policy expressed the true intention of the company
would be to indict it, for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).
A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era
Co., Inc., 65 SCRA 134, which involved a violation of the provision of the policy requiring
the payment of premiums before the insurance shall become effective. The company
issued the policy upon the execution of a promissory note for the payment of the
premium. A check given subsequent by the insured as partial payment of the premium
was dishonored for lack of funds. Despite such deviation from the terms of the policy, the
insurer was held liable.
Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic
Era to pay the insurance premium within thirty (30) days from the effective date of
policy. By so doing, it has impliedly agreed to modify the tenor of the insurance policy and
in effect, waived the provision therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium. Considering that the insurance
policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted
the promissory note in payment of the premium. This rendered the policy immediately
operative on the date it was delivered. The view taken in most cases in the United States:
... is that although one of conditions of an insurance policy is that "it shall not be valid or
binding until the first premium is paid", if it is silent as to the mode of payment,
promissory notes received by the company must be deemed to have been accepted in
payment of the premium. In other words, a requirement for the payment of the first or
initial premium in advance or actual cash may be waived by acceptance of a promissory
note...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu
thereof, the private respondent insurance corporation is hereby ordered to pay to the
petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance
Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid, This case is about an insureds alleged concealment in his pension plan application of his
the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and the true state of health and its effect on the life insurance portion of that plan in case of death.
costs of suit.

SO ORDERED.
The Facts and the Case
MA. LOURDES S. FLORENDO, G.R. No. 186983

Petitioner,
On October 23, 1997 Manuel Florendo filed an application for comprehensive pension
Present: plan with respondent Philam Plans, Inc. (Philam Plans) after some convincing by
respondent Perla Abcede. The plan had a pre-need price ofP997,050.00, payable in 10
VELASCO, JR., J., Chairperson, years, and had a maturity value of P2,890,000.00 after 20 years.[1] Manuel signed the
application and left to Perla the task of supplying the information needed in the
- versus - PERALTA, application.[2] Respondent Ma. Celeste Abcede, Perlas daughter, signed the application as
sales counselor.[3]
ABAD,

MENDOZA, and
Aside from pension benefits, the comprehensive pension plan also provided life
PERLAS-BERNABE, JJ. insurance coverage to Florendo.[4]This was covered by a Group Master Policy that
Philippine American Life Insurance Company (Philam Life) issued to Philam
PHILAM PLANS, INC., Plans.[5] Under the master policy, Philam Life was to automatically provide life insurance
coverage, including accidental death, to all who signed up for Philam Plans
PERLA ABCEDE and Promulgated: comprehensive pension plan.[6] If the plan holder died before the maturity of the plan,
his beneficiary was to instead receive the proceeds of the life insurance, equivalent to the
MA. CELESTE ABCEDE,
pre-need price. Further, the life insurance was to take care of any unpaid premium until
the pension plan matured, entitling the beneficiary to the maturity value of the pension
Respondents. February 22, 2012
plan.[7]

x --------------------------------------------------------------------------------------- x
On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584[8] to
Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel
paid his quarterly premiums.[9]
DECISION
Eleven months later or on September 15, 1998, Manuel died of blood
poisoning. Subsequently, Lourdes filed a claim with Philam Plans for the payment of the
benefits under her husbands plan.[10] Because Manuel died before his pension plan
ABAD, J.: matured and his wife was to get only the benefits of his life insurance, Philam Plans
forwarded her claim to Philam Life.[11]
On May 3, 1999 Philam Plans wrote Lourdes a letter,[12] declining her claim. Philam Life
found that Manuel was on maintenance medicine for his heart and had an implanted
pacemaker. Further, he suffered from diabetes mellitus and was taking
insulin. Lourdes renewed her demand for payment under the plan[13] but Philam Plans
rejected it,[14] prompting her to file the present action against the pension plan company
before the Regional Trial Court (RTC) of Quezon City.[15]
On March 30, 2006 the RTC rendered judgment,[16] ordering Philam Plans, Perla and Ma.
Celeste, solidarily, to pay Lourdes all the benefits from her husbands pension plan,
namely: P997,050.00, the proceeds of his term insurance, andP2,890,000.00 lump sum
pension benefit upon maturity of his plan; P100,000.00 as moral damages; and to pay the
costs of the suit. The RTC ruled that Manuel was not guilty of concealing the state of his
health from his pension plan application.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision,[17] holding
that insurance policies are traditionally contracts uberrimae fidae or contracts of utmost
good faith. As such, it required Manuel to disclose to Philam Plans conditions affecting the
risk of which he was aware or material facts that he knew or ought to know.[18]
Issues Presented
The issues presented in this case are:
1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he
kept blank and did not answer questions in his pension plan application regarding the
ailments he suffered from;
2. Whether or not the CA erred in holding that Manuel was bound by the failure of
respondents Perla and Ma. Celeste to declare the condition of Manuels health in the
pension plan application; and
3. Whether or not the CA erred in finding that Philam Plans approval of Manuels pension
plan application and acceptance of his premium payments precluded it from
denying Lourdes claim.
Rulings of the Court
One. Lourdes points out that, seeing the unfilled spaces in Manuels pension plan
application relating to his medical history, Philam Plans should have returned it to him
for completion. Since Philam Plans chose to approve the application just as it was, it
cannot cry concealment on Manuels part. Further, Lourdes adds that Philam Plans never
queried Manuel directly regarding the state of his health. Consequently, it could not
blame him for not mentioning it.[19]
But Lourdes is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuels health. She forgets that since Philam Plans waived
medical examination for Manuel, it had to rely largely on his stating the truth regarding
his health in his application. For, after all, he knew more than anyone that he had been
under treatment for heart condition and diabetes for more than five years preceding his
submission of that application. But he kept those crucial facts from Philam Plans.
Besides, when Manuel signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes from Philam
Plans. The pertinent portion of his representations and declarations read as follows:
I hereby represent and declare to the best of my knowledge that:
xxxx
(c) I have never been treated for heart condition, high blood pressure, cancer, diabetes,
lung, kidney or stomach disorder or any other physical impairment in the last five years.
 Lourdes next points out that it made no difference if Manuel failed to reveal the fact that
he had a pacemaker implant in the early 70s since this did not fall within the five-year
(d) I am in good health and physical condition. timeframe that the disclosure contemplated.[24] But a pacemaker is an electronic device
implanted into the body and connected to the wall of the heart, designed to provide
regular, mild, electric shock that stimulates the contraction of the heart muscles and
restores normalcy to the heartbeat.[25] That Manuel still had his pacemaker when he
If your answer to any of the statements above reveal otherwise, please give details in the applied for a pension plan in October 1997 is an admission that he remained under
space provided for: treatment for irregular heartbeat within five years preceding that application.

Date of confinement : ____________________________ Besides, as already stated, Manuel had been taking medicine for his heart condition and
diabetes when he submitted his pension plan application. These clearly fell within the
Name of Hospital or Clinic : ____________________________ five-year period. More, even if Perlas knowledge of Manuels pacemaker may be applied to
Philam Plans under the theory of imputed knowledge,[26] it is not claimed that Perla was
Name of Attending Physician : ____________________________ aware of his two other afflictions that needed medical treatments. Pursuant to Section
27[27] of the Insurance Code, Manuels concealment entitles Philam Plans to rescind its
Findings : ____________________________
contract of insurance with him.
Others: (Please specify) : ____________________________
Two. Lourdes contends that the mere fact that Manuel signed the application in blank and
let Perla fill in the required details did not make her his agent and bind him to her
x x x x.[20] (Emphasis supplied)
concealment of his true state of health. Since there is no evidence of collusion between
them, Perlas fault must be considered solely her own and cannot prejudice Manuel.[28]
Since Manuel signed the application without filling in the details regarding his continuing
treatments for heart condition and diabetes, the assumption is that he has never been
treated for the said illnesses in the last five years preceding his application. This is
implicit from the phrase If your answer to any of the statements above (specifically, the
But Manuel forgot that in signing the pension plan application, he certified that he wrote
statement: I have never been treated for heart condition or diabetes) reveal otherwise,
all the information stated in it or had someone do it under his direction. Thus:
please give details in the space provided for. But this is untrue since he had been on
Coumadin, a treatment for venous thrombosis,[21] and insulin, a drug used in the
treatment of diabetes mellitus, at that time.[22]
APPLICATION FOR PENSION PLAN

(Comprehensive)
Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew
that Manuel had a pacemaker implanted on his chest in the 70s or about 20 years before
he signed up for the pension plan.[23] But by its tenor, the responsibility for preparing
the application belonged to Manuel. Nothing in it implies that someone else may provide I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described
the information that Philam Plans needed. Manuel cannot sign the application and disown herein in accordance with the General Provisions set forth in this application and
the responsibility for having it filled up. If he furnished Perla the needed information and hereby certify that the date and other information stated herein are written by me or
delegated to her the filling up of the application, then she acted on his instruction, not on under my direction. x x x.[29] (Emphasis supplied)
Philam Plans instruction.
Assuming that it was Perla who filled up the application form, Manuel is still bound by
what it contains since he certified that he authorized her action. Philam Plans had every
right to act on the faith of that certification.
Lourdes could not seek comfort from her claim that Perla had assured Manuel that the
state of his health would not hinder the approval of his application and that what is
written on his application made no difference to the insurance company. But, indubitably,
Manuel was made aware when he signed the pension plan application that, in granting
the same, Philam Plans and Philam Life were acting on the truth of the representations
contained in that application. Thus:
DECLARATIONS AND REPRESENTATIONS
xxxx
I agree that the insurance coverage of this application is based on the truth of the
foregoing representations and is subject to the provisions of the Group Life Insurance
Policy issued by THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS,
INC.[30] (Emphasis supplied)
As the Court said in New Life Enterprises v. Court of Appeals:[31]
It may be true that x x x insured persons may accept policies without reading them, and
that this is not negligence per se. But, this is not without any exception. It is and was
incumbent upon petitioner Sy to read the insurance contracts, and this can be reasonably
expected of him considering that he has been a businessman since 1965 and the contract
concerns indemnity in case of loss in his money-making trade of which important
consideration he could not have been unaware as it was precisely the reason for his
procuring the same.[32]
The same may be said of Manuel, a civil engineer and manager of a construction
company.[33] He could be expected to know that one must read every document,
especially if it creates rights and obligations affecting him, before signing the
same. Manuel is not unschooled that the Court must come to his succor. It could
reasonably be expected that he would not trifle with something that would provide
additional financial security to him and to his wife in his twilight years.
Three. In a final attempt to defend her claim for benefits under Manuels pension
plan, Lourdes points out that any defect or insufficiency in the information provided by
his pension plan application should be deemed waived after the same has been approved,
the policy has been issued, and the premiums have been collected. [34]
The Court cannot agree. The comprehensive pension plan that Philam Plans issued
contains a one-year incontestability period. It states:
VIII. INCONTESTABILITY
After this Agreement has remained in force for one (1) year, we can no longer contest for
health reasons any claim for insurance under this Agreement, except for the reason that
installment has not been paid (lapsed), or that you are not insurable at the time you
bought this pension program by reason of age. If this Agreement lapses but is reinstated
afterwards, the one (1) year contestability period shall start again on the date of approval
of your request for reinstatement.[35]
The above incontestability clause precludes the insurer from disowning liability under
the policy it issued on the ground of concealment or misrepresentation regarding the
health of the insured after a year of its issuance.
Since Manuel died on the eleventh month following the issuance of his plan,[36] the one
year incontestability period has not yet set in. Consequently, Philam Plans was not barred
from questioning Lourdes entitlement to the benefits of her husbands pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in
CA-G.R. CV 87085 dated December 18, 2007.
SO ORDERED.
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, respondents.
DECISION
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision[1] dated
May 17, 1993, of the Court of Appeals and its Resolution[2] dated January 4, 1994 in CA-
G.R. CV No. 18341. The appellate court affirmed in toto the judgment of the Misamis
Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private
respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial
courts decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim, with costs
against the defendant and dismissing the complaint in respect to the plaintiffs, other than
the widow-beneficiary, for lack of cause of action.[3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan mortgagors
of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In an application form, Dr.
Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.[4]
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage
of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six
thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently,
DBP submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr.
Leuterio was not physically healthy when he applied for an insurance coverage on
November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he had been
suffering from hypertension, which caused his death. Allegedly, such non-disclosure
constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio,
filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against
Grepalife for Specific Performance with Damages.[5] During the trial, Dr. Hernando Mejia,
who issued the death certificate, was called to testify. Dr. Mejias findings, based partly
from the information given by the respondent widow, stated that Dr. Leuterio complained
of headaches presumably due to high blood pressure. The inference was not conclusive
because Dr. Leuterio was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow
and against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial courts
decision. Hence, the present petition. Petitioners interposed the following assigned
errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE
CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON
THE LIFE OF PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN
BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT
[Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP
THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW
MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP
INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO.[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in
a group life insurance contract from a complaint filed by the widow of the
decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he
had hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty
six thousand, two hundred (P86,200.00) pesos without proof of the actual outstanding
mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the
real party in interest, hence the trial court acquired no jurisdiction over the case. It
argues that when the Court of Appeals affirmed the trial courts judgment, Grepalife was
held liable to pay the proceeds of insurance contract in favor of DBP, the indispensable
party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties
and the parties to this type of contract. The rationale of a group insurance policy of
mortgagors, otherwise known as the mortgage redemption insurance, is a device for the
protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it has
to enter into such form of contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the proceeds from such
insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs
of the mortgagor from paying the obligation.[7] In a similar vein, ample protection is
given to the mortgagor under such a concept so that in the event of death; the mortgage
obligation will be extinguished by the application of the insurance proceeds to the
mortgage indebtedness.[8] Consequently, where the mortgagor pays the insurance
premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagors interest, and the mortgagor continues to be a party to
the contract. In this type of policy insurance, the mortgagee is simply an appointee of the
insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract.[9]
Section 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his own
name providing that the loss shall be payable to the mortgagee, or assigns a policy of
insurance to a mortgagee, the insurance is deemed to be upon the interest of the
mortgagor, who does not cease to be a party to the original contract, and any act of his,
prior to the loss, which would otherwise avoid the insurance, will have the same effect,
although the property is in the hands of the mortgagee, but any act which, under the
contract of insurance, is to be performed by the mortgagor, may be performed by the
mortgagee therein named, with the same effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in
the insurance, the policy stating that: In the event of the debtors death before his
indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the
debtor.[10] When DBP submitted the insurance claim against petitioner, the latter denied
payment thereof, interposing the defense of concealment committed by the
insured.Thereafter, DBP collected the debt from the mortgagor and took the necessary
action of foreclosure on the residential lot of private respondent.[11] InGonzales La O vs.
Yek Tong Lin Fire & Marine Ins. Co.[12] we held:
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for the
benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon
in his own name, especially where the mortgagees interest is less than the full amount
recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the policy
for the purpose of collection, or has assigned as collateral security any judgment he may
obtain.[13]
And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such person
may recover it whatever the insured might have recovered,[14] the widow of the
decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed
as its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed
to disclose that he had hypertension, which might have caused his death. Concealment
exists where the assured had knowledge of a fact material to the risk, and honesty, good
faith, and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same.[15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia,
as supported by the information given by the widow of the decedent. Grepalife asserts
that Dr. Mejias technical diagnosis of the cause of death of Dr. Leuterio was a duly
documented hospital record, and that the widows declaration that her husband had
possible hypertension several years ago should not be considered as hearsay, but as part
of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia
stated that he had no knowledge of Dr. Leuterios any previous hospital
confinement.[16] Dr. Leuterios death certificate stated that hypertension was only the
possible cause of death. The private respondents statement, as to the medical history of
her husband, was due to her unreliable recollection of events. Hence, the statement of the
physician was properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate
court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in good
health and that he had not consulted a doctor or any of the enumerated ailments,
including hypertension; when he died the attending physician had certified in the death
certificate that the former died of cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant insurance company refused to pay the
insurance claim. Appellant alleged that the insured had concealed the fact that he had
hypertension.
Contrary to appellants allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insureds widow who was
not even sure if the medicines taken by Dr. Leuterio were for hypertension, the appellant
had not proven nor produced any witness who could attest to Dr. Leuterios medical
history...
xxx
Appellant insurance company had failed to establish that there was concealment made by
the insured, hence, it cannot refuse payment of the claim.[17]
The fraudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract.[18] Misrepresentation as a defense of the insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory
and convincing evidence rests upon the insurer.[19] In the case at bar, the petitioner
failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the
proceeds of the insurance.
And that brings us to the last point in the review of the case at bar. Petitioner claims that
there was no evidence as to the amount of Dr. Leuterios outstanding indebtedness to DBP
at the time of the mortgagors death. Hence, for private respondents failure to establish
the same, the action for specific performance should be dismissed. Petitioners claim is
without merit. A life insurance policy is a valued policy.[20] Unless the interest of a
person insured is susceptible of exact pecuniary measurement, the measure of indemnity
under a policy of insurance upon life or health is the sum fixed in the policy.[21] The
mortgagor paid the premium according to the coverage of his insurance, which states
that:
The policy states that upon receipt of due proof of the Debtors death during the terms of
this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
Creditor and the balance of the Sum Assured, if there is any shall then be paid to the
beneficiary/ies designated by the debtor.[22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was promulgated on May 17,
1993. In private respondents memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagors outstanding loan. Considering this
supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich
itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds
now rightly belong to Dr. Leuterios heirs represented by his widow, herein private
respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of
Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is
ORDERED to pay the insurance proceeds amounting to Eighty-six thousand, two hundred
(P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of mortgagors indebtedness to Development
Bank of the Philippines. Costs against petitioner.
SO ORDERED.
Soliman v. US Life- Rescind Contract of Insurance
104 PHIL 1046
Facts:
> US Life issued a 20 yr endowment life policy on the joint lives of Patricio Soliman and
his wife Rosario, each of them being the beneficiary of the other.
> In Mar. 1949, the spouses were informed that the premium for Jan 1949 was still
unpaid notwithstanding that the 31-day grace period has already expired, and they were
furnished at the same time long-form health certificates for the reinstatement of the
policies.
> In Apr 1949, they submitted the certificates and paid the premiums.
> In Jan. 1950, Rosario died of acute dilation of the heart, and thereafter, Patricio filed a
claim for the proceeds of the insurance.
> US life denied the claim and filed for the rescission of the contract on the ground that
the certificates failed to disclose that Rosario had been suffering from bronchial asthma
for 3 years prior to their submission.
Issue:
Whether or not the contract can still be rescinded.
Held:
Yes.
The insurer is once again given two years from the date of reinstatement to investigate
into the veracity of the facts represented by the insured in the application for
reinstatement. When US life sought to rescind the contract on the ground of
concealment/misrepresentation, two years had not yet elapsed. Hence, the contract can
still be rescinded.
THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
vs.
SERAFIN D. FELICIANO ET AL., respondents.
Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.
OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941, 1 this Court affirmed the
judgment of the Court of Appeals in favor of the respondents and against the petitioner
for the sum of P25,000, representing the value of two insurance policies issued by the
petitioner on the life of Evaristo Feliciano. A motion to reconsider and set aside said
decision has been filed by the petitioner, and both parties have submitted exhaustive and
luminous written arguments in support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions heretofore
handed down by this Court, the salient points of which may be briefly restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced
pulmonary tuberculosis when he signed his applications for insurance with the petitioner
on October 12, 1934. On that same date Doctor Trepp, who had taken X-ray pictures of
his lungs, informed the respondent Dr. Serafin D. Feliciano, brother of Evaristo, that the
latter "was already in a very serious ad practically hopeless condition." Nevertheless the
question contained in the application "Have you ever suffered from any ailment or
disease of the lungs, pleurisy, pneumonia or asthma?" appears to have been answered ,
"No" And above the signature of the applicant, following the answers to the various
questions propounded to him, is the following printed statement:1awphil.net
I declare on behalf of myself and of any person who shall have or claim any interest in any
policy issued hereunder, that each of the above answers is full, complete and true, and
that to the best of my knowledge and belief I am a proper subject for life insurance.
(Exhibit K.)
The false answer above referred to, as well as the others, was written by the Company's
soliciting agent Romulo M. David, in collusion with the medical examiner Dr. Gregorio
Valdez, for the purpose of securing the Company's approval of the application so that the
policy to be issued thereon might be credited to said agent in connection with the inter-
provincial contest which the Company was then holding among its soliciting agents to
boost the sales of its policies. Agent David bribed Medical Examiner Valdez with money
which the former borrowed from the applicant's mother by way of advanced payment on
the premium, according to the finding of the Court of Appeals. Said court also found that
before the insured signed the application he, as well as the members of his family, told
the agent and the medical examiner that he had been sick and coughing for some time
and that he had gone three times to the Santol Sanatorium and had X-ray pictures of his
lungs taken; but that in spite of such information the agent and the medical examiner told
them that the applicant was a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract between the parties
hereto. . . . Only the President, or the Manager, acting jointly with the Secretary or
Assistant Secretary (and then only in writing signed by them) have power in behalf of the
Company to issue permits, or to modify this or any contract, or to extend the same time
for making any premium payment, and the Company shall not be bound by any promise
or representation heretofore or hereafter given by any person other than the above-
named officials, and by them only in writing and signed conjointly as stated.
The application contains, among others, the following statements:
18. I [the applicant] hereby declare that all the above statements and answers as well
as all those that I may make to the Company's Medical Examiner in continuation of this
application, to be complete, true and correct to the best of my knowledge and belief, and I
hereby agree as follows:
1. That his declaration, with the answers to be given by me to the Medical Examiner, shall
be the basis of the policy and form part of same.
xxx xxx xxx
3. That the said policy shall not take effect until the first premium has been paid and the
policy has been delivered to and accepted by me, while I am in good health.
4. That the agent taking this application has no authority to make, modify or discharge
contracts, or to waive any of the Company's rights or requirements.
5. My acceptance of any policy issued on this application will constitute a ratification by
me of any corrections in or additions to this application made by the Company in the
space provided "For Home Office Corrections or Additions Only." I agree that
photographic copy of this applications as corrected or added to shall constitute sufficient
notice to me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are null and
void ab initio and that all that the respondents are entitled to is the refund of the
premiums paid thereon. After a careful re-examination of the facts and the law, we are
persuaded that petitioner's contention is correct. To the reasons adduced in the
dissenting opinion heretofore published, we only desire to add the following
considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in blank and
authorized the soliciting agent and/or medical examiner of the Company to write the
answers for him, he made them his own agents for that purpose, and he was responsible
for their acts in that connection. If they falsified the answers for him, he could not evade
the responsibility for he falsification. He was not supposed to sign the application in
blank. He knew that the answers to the questions therein contained would be "the basis
of the policy," and for that every reason he was required with his signature to vouch for
truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the insured
acted in connivance with the soliciting agent and the medical examiner of the Company in
accepting the policies in question. Above the signature of the applicant is the printed
statement or representation: " . . . I am a proper subject for life insurance." In another
sheet of the same application and above another signature of the applicant was also
printed this statement: "That the said policy shall not take effect until he first premium
has been paid and the policy as been delivered to and accepted by me, while I am in good
health." When the applicant signed the application he was "having difficulty in breathing, .
. . with a very high fever." He had gone three times to the Santol Sanatorium and had X-
ray pictures taken of his lungs. He therefore knew that he was not "a proper subject for
life insurance." When he accepted the policy, he knew that he was not in good health.
Nevertheless, he not only accepted the first policy of P20,000 but then and there applied
for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to read the
answers contained in the photostatic copy of the application attached to and made a part
of the policy before he accepted it and paid the premium thereon. He must have notice
that the answers to the questions therein asked concerning his clinical history were false,
and yet he accepted the first policy and applied for another. In any event, he obligated
himself to read the policy when he subscribed to this statement: "My acceptance of any
policy issued on this application will constitute a ratification by me of any corrections in
or additions to this application made by the Company . . ." By accepting the policy he
became charged with knowledge of its contents, whether he actually read it or not. He
could not ostrich-like hide his head from it in order to avoid his part of the bargain and at
the same time claim the benefit thereof. He knew, or was chargeable with knowledge,
from the very terms of the two policies sued upon (one of which is printed in English and
the other in Spanish) that the soliciting agent and the medical examiner had no power to
bind the Company by any verbal promise or oral representation. The insured, therefore,
had no right to rely and we cannot believe he relied in good faith upon the oral
representation. The insured, therefore, had no right to rely and we cannot believe he
relied in good faith upon the oral representation of said agent and medical examiner
that he (the applicant) was a fit subject for insurance notwithstanding that he had been
and was still suffering with advanced pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude that the
insured was a coparticipant, and coresponsible with Agent David and Medical Examiner
Valdez, in the fraudulent procurement of the policies in question and that by reason
thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the Court
of Appeals is hereby reversed. Let another judgment be entered in favor of the
respondents and against the petitioner for the refund of the premiums amounting to
P1,389, with legal interest thereon from the date of the complaint, and without any
finding as to costs.
Insular Life v. Feliciano - Concealment
73 PHIL 201
Facts:
> Evaristo Feliciano filed an application with Insular Life upon the solicitation of one of
its agents.
> It appears that during that time, Evaristo was already suffering from tuberculosis. Such
fact appeared during the medical exam, but the examiner and the companys agent
ignored it.
> After that, Evaristo was made to sign an application form and thereafter the blank
spaces were filled by the medical examiner and the agent making it appear that Evaristo
was a fit subject of insurance. (Evaristo could not read and understand English)
> When Evaristo died, Insular life refused to pay the proceeds because of concealment.
Issue:
Whether or not Insular Life was bound by their agents acts.
Held:
Yes.
The insurance business has grown so vast and lucrative within the past
century. Nowadays, even people of modest means enter into insurance contracts. Agents
who solicit contracts are paid large commissions on the policies secured by them. They
act as general representatives of insurance companies.
IN the case at bar, the true state of health of the insured was concealed by the agents of
the insurer. The insurers medical examiner approved the application knowing fully well
that the applicant was sick. The situation is one in which of two innocent parties must
bear a loss for his reliance upon a third person. In this case, it is the one who drafted and
accepted the policy and consummated the contract. It seems reasonable that as between
the two of them, the one who employed and gave character to the third person as its
agent should be the one to bear the loss. Hence, Insular is liable to the beneficiaries.
QUA CHEE GAN, plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER,
BARNES AND CO., LTD., defendant-appellant.
Delgado, Flores & Macapagal for appellant.
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile &
Contreras for appellee.
REYES, J. B. L., J.:
Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First
Instance of said province, seeking to recover the proceeds of certain fire insurance
policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon
certain bodegas and merchandise of the insured that were burned on June 21, 1940. The
records of the original case were destroyed during the liberation of the region, and were
reconstituted in 1946. After a trial that lasted several years, the Court of First Instance
rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:
Wherefore, judgment is rendered for the plaintiff and against the defendant condemning
the latter to pay the former
(a) Under the first cause of action, the sum of P146,394.48;
(b) Under the second cause of action, the sum of P150,000;
2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No. 1)

(c) Under the third cause of action, the sum of P5,000;

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3
(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000; 2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91
(b) of the Insurance Act from September 26, 1940, until each is paid, with costs against
the defendant.
Total
The complaint in intervention of the Philippine National Bank is dismissed without costs.
(Record on Appeal, 166-167.)
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and
lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with
From the decision, the defendant Insurance Company appealed directly to this Court.
the merchandise stored theren. Plaintiff-appellee informed the insurer by telegram on the
same date; and on the next day, the fire adjusters engaged by appellant insurance
The record shows that before the last war, plaintiff-appellee owned four warehouses or
company arrived and proceeded to examine and photograph the premises, pored over
bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for
the books of the insured and conducted an extensive investigation. The plaintiff having
the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealth
submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full
extensively. They had been, with their contents, insured with the defendant Company
amount of the insurance, P370,000), the Insurance Company resisted payment, claiming
since 1937, and the lose made payable to the Philippine National Bank as mortgage of the
violation of warranties and conditions, filing of fraudulent claims, and that the fire had
hemp and crops, to the extent of its interest. On June, 1940, the insurance stood as
been deliberately caused by the insured or by other persons in connivance with him.
follows:
With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with
Policy No. Property Insured Amount
his brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for
the crime of arson, it being claimed that they had set fire to the destroyed warehouses to
collect the insurance. They were, however, acquitted by the trial court in a final decision
2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00
dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money
proceeded to its trial and termination in the Court below, with the result noted at the
start of this opinion. The Philippine National Bank's complaint in intervention was
Bodega No. 2 (Building) 10,000.00
dismissed because the appellee had managed to pay his indebtedness to the Bank during
the pendecy of the suit, and despite the fire losses.
Bodega No. 3 (Building) 25,000.00
In its first assignment of error, the insurance company alleges that the trial Court should
2637165 (Exhibit "JJ") have held that the policies were avoided for breach of warranty, specifically the one
Bodega No. 4 (Building) appearing on a rider pasted (with other similar riders) on the face of the policies
10,000.00
(Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the
pertinent portions read as follows:
Hemp Press moved by steam engine 5,000.00
Memo. of Warranty. The undernoted Appliances for the extinction of fire being kept on
the premises insured hereby, and it being declared and understood that there is an ample
and constant water supply with sufficient pressure available at all seasons for the same, it
is hereby warranted that the said appliances shall be maintained in efficient working
order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is
allowed on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet of external wall
measurement of building, protected, with not less than 100 feet of hose piping and
nozzles for every two hydrants kept under cover in convenient places, the hydrants being
supplied with water pressure by a pumping engine, or from some other source, capable of
discharging at the rate of not less than 200 gallons of water per minute into the upper
story of the highest building protected, and a trained brigade of not less than 20 men to
work the same.'
It is argued that since the bodegas insured had an external wall perimeter of 500 meters
or 1,640 feet, the appellee should have eleven (11) fire hydrants in the compound, and
that he actually had only two (2), with a further pair nearby, belonging to the
municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or rather
estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that
knowing fully all that the number of hydrants demanded therein never existed from the
very beginning, the appellant neverthless issued the policies in question subject to such
warranty, and received the corresponding premiums. It would be perilously close to
conniving at fraud upon the insured to allow appellant to claims now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it
was informed, and after it had misled the defendant into believing that the policies were
effective.
The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Qua Chee Gan and two
others nearby, owned by the municipality of TAbaco, contrary to the requirements of the
warranty in question. Such fact appears from positive testimony for the insured that
appellant's agents inspected the premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof. That such inspection was made is
moreover rendered probable by its being a prerequisite for the fixing of the discount on
the premium to which the insured was entitled, since the discount depended on the
number of hydrants, and the fire fighting equipment available (See "Scale of Allowances"
to which the policies were expressly made subject). The law, supported by a long line of
cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a policy of
insurance, has knowledge of existing facts which, if insisted on, would invalidate the
contract from its very inception, such knowledge constitutes a waiver of conditions in the
contract inconsistent with the facts, and the insurer is stopped thereafter from asserting
the breach of such conditions. The law is charitable enough to assume, in the absence of
any showing to the contrary, that an insurance company intends to executed a valid
contract in return for the premium received; and when the policy contains a condition
which renders it voidable at its inception, and this result is known to the insurer, it will be
presumed to have intended to waive the conditions and to execute a binding contract,
rather than to have deceived the insured into thinking he is insured when in fact he is not,
and to have taken his money without consideration. (29 Am. Jur., Insurance, section 807,
at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a company to
accept one's money for a policy of insurance which it then knows to be void and of no
effect, though it knows as it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely related to positive
fraud, as to the abhorent to fairminded men. It would be to allow the company to treat the
policy as valid long enough to get the preium on it, and leave it at liberty to repudiate it
the next moment. This cannot be deemed to be the real intention of the parties. To hold
that a literal construction of the policy expressed the true intention of the company
would be to indict it, for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case is
heightened by the fact that after the insured had incurred the expense of installing the
two hydrants, the company collected the premiums and issued him a policy so worded
that it gave the insured a discount much smaller than that he was normaly entitledto.
According to the "Scale of Allowances," a policy subject to a warranty of the existence of
one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7
1/2 per cent of the premium; while the existence of "hydrants, in compund" (regardless
of number) reduced the allowance on the premium to a mere 2 1/2 per cent. This
schedule was logical, since a greater number of hydrants and fire fighting appliances
reduced the risk of loss. But the appellant company, in the particular case now before us,
so worded the policies that while exacting the greater number of fire hydrants and
appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby
giving the insurance company a double benefit. No reason is shown why appellant's
premises, that had been insured with appellant for several years past, suddenly should be
regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of
appellant's own scale of allowances. Such abnormal treatment of the insured strongly
points at an abuse of the insurance company's selection of the words and terms of the
contract, over which it had absolute control.
These considerations lead us to regard the parol evidence rule, invoked by the appellant
as not applicable to the present case. It is not a question here whether or not the parties
may vary a written contract by oral evidence; but whether testimony is receivable so that
a party may be, by reason of inequitable conduct shown, estopped from enforcing
forfeitures in its favor, in order to forestall fraud or imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment.
It is a well settled rule of law that an insurer which with knowledge of facts entitling it
to treat a policy as no longer in force, receives and accepts a preium on the policy,
estopped to take advantage of the forfeiture. It cannot treat the policy as void for the
purpose of defense to an action to recover for a loss thereafter occurring and at the same
time treat it as valid for the purpose of earning and collecting further premiums." (29 Am.
Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under circumstances
which it knew rendered the policy void and then to accept and retain premiums under
such a void policy. Neither law nor good morals would justify such conduct and the
doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home
Life Ins. Co. 94 Pa. Super Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities must
be strictly interpreted aganst the prty that caused them, 1the "memo of warranty"
invoked by appellant bars the latter from questioning the existence of the appliances
called for in the insured premises, since its initial expression, "the undernoted appliances
for the extinction of fire being kept on the premises insured hereby, . . . it is hereby
warranted . . .", admists of interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the parol evidence rule apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must
be equally rejected, since the appellant's argument thereon is based on the assumption
that the insured was bound to maintain no less than eleven hydrants (one per 150 feet of
wall), which requirement appellant is estopped from enforcing. The supposed breach of
the wter pressure condition is made to rest on the testimony of witness Serra, that the
water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring that the
maximum quantity obtainable from the hydrants was 100 gallons a minute, when the
warranty called for 200 gallons a minute. The transcript shows, however, that Serra
repeatedly refused and professed inability to estimate the rate of discharge of the water,
and only gave the "5-gallon per 3-second" rate because the insistence of appellant's
counsel forced the witness to hazard a guess. Obviously, the testimony is worthless and
insufficient to establish the violation claimed, specially since the burden of its proof lay
on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the
same was organized, and drilled, from time to give, altho not maintained as a
permanently separate unit, which the warranty did not require. Anyway, it would be
unreasonable to expect the insured to maintain for his compound alone a fire fighting
force that many municipalities in the Islands do not even possess. There is no merit in
appellant's claim that subordinate membership of the business manager (Co Cuan) in the
fire brigade, while its direction was entrusted to a minor employee unders the testimony
improbable. A business manager is not necessarily adept at fire fighting, the qualities
required being different for both activities.
Under the second assignment of error, appellant insurance company avers, that the
insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ),
against the storage of gasoline, since appellee admitted that there were 36 cans (latas) of
gasoline in the building designed as "Bodega No. 2" that was a separate structure not
affected by the fire. It is well to note that gasoline is not specifically mentioned among the
prohibited articles listed in the so-called "hemp warranty." The cause relied upon by the
insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid
products having a flash point below 300o Fahrenheit", and is decidedly ambiguous and
uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or
kerosene. And how many insured, it may well be wondered, are in a position to
understand or determine "flash point below 003o Fahrenheit. Here, again, by reason of
the exclusive control of the insurance company over the terms and phraseology of the
contract, the ambiguity must be held strictly against the insurer and liberraly in favor of
the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).
Insurance is, in its nature, complex and difficult for the layman to understand. Policies are
prepared by experts who know and can anticipate the hearing and possible complications
of every contingency. So long as insurance companies insist upon the use of ambiguous,
intricate and technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance, construe every
ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA
1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat
the very purpose for which the policy was procured (Moore vs. Aetna Life Insurance Co.,
LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not be
expressed clearly and unmistakably, in the language and terms that the general public
can readily understand, without resort to obscure esoteric expression (now derisively
termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American
Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought to have been
plainly expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentrations of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared "agreements" that the
weaker party may not change one whit, his participation in the "agreement" being
reduced to the alternative to take it or leave it" labelled since Raymond Baloilles"
contracts by adherence" (con tracts d'adhesion), in contrast to these entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance and
international bills of lading are prime examples) obviously call for greater strictness and
vigilance on the part of courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the unwarry (New Civil
Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna
oscuridad, habra de ser tenido en cuenta que al seguro es, practicamente un contrato de
los llamados de adhesion y por consiguiente en caso de duda sobre la significacion de las
clausulas generales de una poliza redactada por las compafijas sin la intervencion
alguna de sus clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo
Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la
empresa aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of
Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured
alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominant
bargaining position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was
only incidental to his business, being no more than a customary 2 day's supply for the five
or six motor vehicles used for transporting of the stored merchandise (t. s. n., pp. 1447-
1448). "It is well settled that the keeping of inflammable oils on the premises though
prohibited by the policy does not void it if such keeping is incidental to the business."
Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to the weight of
authority, even though there are printed prohibitions against keeping certain articles on
the insured premises the policy will not be avoided by a violation of these prohibitions, if
the prohibited articles are necessary or in customary use in carrying on the trade or
business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance,
section 966b). It should also be noted that the "Hemp Warranty" forbade storage only "in
the building to which this insurance applies and/or in any building communicating
therewith", and it is undisputed that no gasoline was stored in the burned bodegas, and
that "Bodega No. 2" which was not burned and where the gasoline was found, stood
isolated from the other insured bodegas.
The charge that the insured failed or refused to submit to the examiners of the insurer the
books, vouchers, etc. demanded by them was found unsubstantiated by the trial Court,
and no reason has been shown to alter this finding. The insured gave the insurance
examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the examiner even
kept and photographed some of the examined books in his possession. What does appear
to have been rejected by the insured was the demand that he should submit
"a list of all books, vouchers, receipts and other records" (Age 4, Exhibit 9-c); but the
refusal of the insured in this instance was well justified, since the demand for a list of all
the vouchers (which were not in use by the insured) and receipts was positively
unreasonable, considering that such listing was superfluous because the insurer was not
denied access to the records, that the volume of Qua Chee Gan's business ran into
millions, and that the demand was made just after the fire when everything was in
turmoil. That the representatives of the insurance company were able to secure all the
date they needed is proved by the fact that the adjuster Alexander Stewart was able to
prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from
that submitted by the insured (Exhibit J) except for the valuation of the merchandise, as
expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly
illustrated in the decision of the arson case (Exhibit WW) acquiting Qua Choc Gan,
appellee in the present proceedings. The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi
como su existencia de copra y abaca en las bodega al tiempo del incendio durante el
periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que
Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun
Steward al llegar a este conclusion el ha tenidoen cuenta el balance de comprobacion
Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros
y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen
que no estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el
balance mercado exhibit J que fue preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured and the adjuster Stewart
for the insurer, the Court referred the controversy to a government auditor, Apolonio
Ramos; but the latter reached a different result from the other two. Not only that, but
Ramos reported two different valuations that could be reached according to the methods
employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para
promovar el comercio y la finanza, pero en el caso presente ha resultado un tanto
cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los
contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado
las mismas partidas y los mismos libros dichos contadores hayan de llegara dos
conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la
comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que,
segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes
dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The
insurer attempted to bolster its case with alleged photographs of certain pages of the
insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B)
and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20,
1940. The Court below remained unconvinced of the authenticity of those photographs,
and rejected them, because they were not mentioned not introduced in the criminal case;
and considering the evident importance of said exhibits in establishing the motive of the
insured in committing the arson charged, and the absence of adequate explanation for
their omission in the criminal case, we cannot say that their rejection in the civil case
constituted reversible error.
The next two defenses pleaded by the insurer, that the insured connived at the loss
and that the fraudulently inflated the quantity of the insured stock in the burnt bodegas,
are closely related to each other. Both defenses are predicted on the assumption that
the insured was in financial difficulties and set the fire to defraud the insurance company,
presumably in order to pay off the Philippine National Bank, to which most of the insured
hemp and copra was pledged. Both defenses are fatally undermined by the established
fact that, notwithstanding the insurer's refusal to pay the value of the policies the
extensive resources of the insured (Exhibit WW) enabled him to pay off the National
Bank in a short time; and if he was able to do so, no motive appears for attempt to
defraud the insurer. 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).
As to the defense that the burned bodegas could not possibly have contained the
quantities of copra and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusionsAs to the defense that the burned
bodegas could not possibly have contained the quantities of copra and hemp stated in the
fire claims, the insurer's case rests almost exclusively on the estimates, inferences and
conclusions of its adjuster investigator, Alexander D. Stewart, who examined the
premises during and after the fire. His testimony, however, was based on inferences from
the photographs and traces found after the fire, and must yield to the contradictory
testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan
Department of the National Bank's Legaspi branch, Porfirio Barrios, and of Bank
Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before
the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of
the veracity and accuracy of these witnesses, and the appellant insurer has failed to
substantiate its charges aganst their character. In fact, the insurer's repeated accusations
that these witnesses were later "suspended for fraudulent transactions" without giving
any details, is a plain attempt to create prejudice against them, without the least support
in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the
quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the
refusal of the Court below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that the adjuster's calculations
of the maximum contents of the destroyed warehouses rested on the assumption that all
the copra and hemp were in sacks, and on the result of his experiments to determine the
space occupied by definite amounts of sacked copra. The error in the estimates thus
arrived at proceeds from the fact that a large amount of the insured's stock were in loose
form, occupying less space than when kept in sacks; and from Stewart's obvious failure to
give due allowance for the compression of the material at the bottom of the piles (t. s. n.,
pp. 1964, 1967) due to the weight of the overlying stock, as shown by engineer Bolinas. It
is probable that the errors were due to inexperience (Stewart himself admitted that this
was the first copra fire he had investigated); but it is clear that such errors render
valueles Stewart's computations. These were in fact twice passed upon and twice rejected
by different judges (in the criminal and civil cases) and their concordant opinion is
practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court
below, since the opinions stated therein were based on ex parte investigations made at
the back of the insured; and the appellant did not present at the trial the original
testimony and documents from which the conclusions in the report were
drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured contained
false and fraudulent statements that avoided the insurance policy. But the trial Court
found that the discrepancies were a result of the insured's erroneous interpretation of
the provisions of the insurance policies and claim forms, caused by his imperfect
knowledge of English, and that the misstatements were innocently made and without
intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting
these conclusions of the Court below. For example, the occurrence of previous fires in the
premises insured in 1939, altho omitted in the claims, Exhibits EE and FF, were
nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with
them), KK and WW. Considering that all these claims were submitted to the smae agent,
and that this same agent had paid the loss caused by the 1939 fire, we find no error in the
trial Court's acceptance of the insured's explanation that the omission in Exhibits EE and
FF was due to inadvertance, for the insured could hardly expect under such
circumstances, that the 1939 would pass unnoticed by the insurance agents. Similarly, the
20 per cent overclaim on 70 per cent of the hemo stock, was explained by the insured as
caused by his belief that he was entitled to include in the claim his expected profit on the
70 per cent of the hemp, because the same was already contracted for and sold to other
parties before the fire occurred. Compared with other cases of over-valuation recorded in
our judicial annals, the 20 per cent excess in the case of the insured is not by itself
sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil.
134, the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go
Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs.
North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance,
51 Phil. 212, the claim totalled P31,860.85 while the goods insured were inventoried at
O13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar, duly
explained by him to the Court a quo, appears puny by comparison, and can not be
regarded as "more than misstatement, more than inadvertence of mistake, more than a
mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun Insurance
Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock;
had the insured acted with fraudulent intent, nothing prevented him from increasing the
value of all of his copra, hemp and buildings in the same proportion. This also applies to
the alleged fraudulent claim for burned empty sacks, that was likewise explained to our
satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing
must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the
cause. Of course, the lack of fraudulent intent would not authorize the collection of the
expected profit under the terms of the polices, and the trial Court correctly deducte the
same from its award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby
affirmed. Costs against the appellant. So ordered.