1

I. General Concepts

PHILAMCARE HEALTH SYSTEMS, INC., vs. COURT OF APPEALS and JULITA TRINOS,
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with
petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the
following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly,
he was issued Health Care Agreement No. P010194. Under the agreement, respondents husband was
entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also
entitled to avail of out-patient benefits such as annual physical examinations, preventive health care and
other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to
March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a
maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical
Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent
tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying
that the Health Care Agreement was void. According to petitioner, there was a concealment regarding
Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that
he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus,
respondent paid the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later,
he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought
her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very
weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the
same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for
damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No.
90-53795. She asked for reimbursement of her expenses plus moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos,
ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the
amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages
and absolved petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5] Hence, petitioner
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I. General Concepts

brought the instant petition for review, raising the primary argument that a health care agreement is not an
insurance contract; hence the incontestability clause under the Insurance Code[6] does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and hospitalization
which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its
expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are
given under the agreement without any indemnification, unlike in an insurance contract where the insured
is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as
compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does
not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is
not an insurance company, which is governed by the Insurance Commission, but a Health Maintenance
Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event. An insurance contract exists where the following elements concur:
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.[8]
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which
may damnify a person having an insurable interest against him, may be insured against. Every person has
an insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or service,
of which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was
his own health. The health care agreement was in the nature of non-life insurance, which is primarily a
contract of indemnity.[9] Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent
agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It appears that in
the application for health coverage, petitioners required respondents husband to sign an express
authorization for any person, organization or entity that has any record or knowledge of his health to furnish
any and all information relative to any hospitalization, consultation, treatment or any other medical advice
or examination.[10] Specifically, the Health Care Agreement signed by respondents husband states:
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I. General Concepts

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed
to this application are full, complete and true and bind all parties in interest under the Agreement herein
applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued
on this application and the full Membership Fee according to the mode of payment applied for is actually
paid during the lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the
application; that any physician is, by these presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his professional capacity upon any question affecting
the eligibility for health care coverage of the Proposed Members and that the acceptance of any Agreement
issued on this application shall be a ratification of any correction in or addition to this application as stated
in the space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire
about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or
that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or examination. This authorization is
in connection with the application for health care coverage only. A photographic copy of this authorization
shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or
medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement
from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees
paid. An undisclosed or misrepresented information is deemed material if its revelation would have resulted
in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the
benefit or benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to the medical history of the
applicant. This largely depends on opinion rather than fact, especially coming from respondents husband
who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are untrue.[14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured
will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance
at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is not justified in relying
upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a
case and one in which the insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown
by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts
to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance
contract.[16] Concealment as a defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests
upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound
to answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails
of the covered benefits which he has prepaid.
 4
I. General Concepts

Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of
insurance. The right to rescind should be exercised previous to the commencement of an action on the
contract.[17] In this case, no rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
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.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain
limitations on liability, courts should construe them in such a way as to preclude the insurer from non-
compliance with his obligation.[19] Being a contract of adhesion, the terms of an insurance contract are to
be construed strictly against the party which prepared the contract the insurer.[20] By reason of the exclusive
control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.[21] This is equally applicable to Health Care Agreements. The phraseology used in medical or
hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and
if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be
adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote with approval the
following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve
months from the date of issuance of the Agreement within which to contest the membership of the patient
if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was
sick of diabetes or hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that
at the time of their marriage, the deceased was previously married to another woman who was still alive.
The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to
the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical
expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred
by respondent for the deceaseds hospitalization, medication and the professional fees of the attending
physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of
Appeals dated December 14, 1995 is AFFIRMED.

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, vs. SUN LIFE
ASSURANCE COMPANY OF CANADA,

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to
recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life
annuity. The trial court gave judgment for the defendant. Plaintiff appeals.
 5
I. General Concepts

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life
Assurance Company of Canada through its office in Manila for a life annuity. Two days later he paid the
sum of P6,000 to the manager of the company's Manila office and was given a receipt reading as follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia
solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central
de la Compaia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On
November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same
day the cable was received notice was sent by the Manila office of Herrer that the application had been
accepted, is a disputed point, which will be discussed later.) On December 4, 1917, the policy was issued
at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the company
stating that Herrer desired to withdraw his application. The following day the local office replied to Mr.
Torres, stating that the policy had been issued, and called attention to the notification of November 26,
1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance
of his application. To resolve this question, we propose to go directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial
testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and
handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on cross-examination
that after preparing the letter and giving it to he manager, he new nothing of what became of it. The local
manager, Mr. White, testified to having received the cablegram accepting the application of Mr. Herrer
from the home office on November 26, 1917. He said that on the same day he signed a letter notifying Mr.
Herrer of this acceptance. The witness further said that letters, after being signed, were sent to the chief
clerk and placed on the mailing desk for transmission. The witness could not tell if the letter had every
actually been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not
called as a witness. For the defense, attorney Manuel Torres testified to having prepared the will of Joaquin
Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life annuity, and that he said
that the only document relating to the transaction in his possession was the provisional receipt. Rafael
Enriquez, the administrator of the estate, testified that he had gone through the effects of the deceased and
had found no letter of notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr.
Herrer that his application had been accepted, was prepared and signed in the local office of the insurance
company, was placed in the ordinary channels for transmission, but as far as we know, was never actually
mailed and thus was never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be
applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the
Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of
Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil Code
there formerly existed and presumably still exist, Chapters II and IV, entitled insurance contracts and life
annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in force the
Insurance Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly
 6
I. General Concepts

repealed Title VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of
insurance is consequently now found in the Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in article
1802, not only describes a contact of life annuity markedly similar to the one we are considering, but in two
other articles, gives strong clues as to the proper disposition of the case. For instance, article 16 of the Civil
Code provides that "In matters which are governed by special laws, any deficiency of the latter shall be
supplied by the provisions of this Code." On the supposition, therefore, which is incontestable, that the
special law on the subject of insurance is deficient in enunciating the principles governing acceptance, the
subject-matter of the Civil code, if there be any, would be controlling. In the Civil Code is found article
1262 providing that "Consent is shown by the concurrence of offer and acceptance with respect to the thing
and the consideration which are to constitute the contract. An acceptance made by letter shall not bind the
person making the offer except from the time it came to his knowledge. The contract, in such case, is
presumed to have been entered into at the place where the offer was made." This latter article is in opposition
to the provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the
only duty remaining is for the court to apply the law as it is found. The legislature in its wisdom having
enacted a new law on insurance, and expressly repealed the provisions in the Code of Commerce on the
same subject, and having thus left a void in the commercial law, it would seem logical to make use of the
only pertinent provision of law found in the Civil code, closely related to the chapter concerning life
annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the
date it came to his knowledge, may not be the best expression of modern commercial usage. Still it must
be admitted that its enforcement avoids uncertainty and tends to security. Not only this, but in order that
the principle may not be taken too lightly, let it be noticed that it is identical with the principles announced
by a considerable number of respectable courts in the United States. The courts who take this view have
expressly held that an acceptance of an offer of insurance not actually or constructively communicated to
the proposer does not make a contract. Only the mailing of acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the control
of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of
the Civil Code providing that an acceptance made by letter shall not bind the person making the offer except
from the time it came to his knowledge. The pertinent fact is, that according to the provisional receipt, three
things had to be accomplished by the insurance company before there was a contract: (1) There had to be a
medical examination of the applicant; (2) there had to be approval of the application by the head office of
the company; and (3) this approval had in some way to be communicated by the company to the applicant.
The further admitted facts are that the head office in Montreal did accept the application, did cable the
Manila office to that effect, did issue the policy and did, through its agent in Manila, actually write the letter
of notification and place it in the usual channels for transmission to the addressee. The fact as to the letter
of notification thus fails to concur with the essential elements of the general rule pertaining to the mailing
and delivery of mail matter as announced by the American courts, namely, when a letter or other mail matter
is addressed and mailed with postage prepaid there is a rebuttable presumption of fact that it was received
by the addressee as soon as it could have been transmitted to him in the ordinary course of the mails. But if
any one of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will not
be presumed to have been received by the addressee unless it is shown that it was deposited in the post-
office, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because it has not been
proved satisfactorily that the acceptance of the application ever came to the knowledge of the
applicant.lawph!l.net
 7
I. General Concepts

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with
legal interest from November 20, 1918, until paid, without special finding as to costs in either instance. So
ordered.

ETERNAL GARDENS MEMORIAL PARK CORPORATION, vs. THE PHILIPPINE AMERICAN

LIFE INSURANCE COMPANY
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May
the inaction of the insurer on the insurance application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into
an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal Gardens
Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased burial lots
from it on installment basis would be insured by Philamlife. The amount of insurance coverage depended
upon the existing balance of the purchased burial lots. The policy was to be effective for a period of one
year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the
Assured for the unpaid balance of his loan with the Assured, and is accepted for Life Insurance coverage
by the Company on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00. However, a
declaration of good health shall be required for all Lot Purchasers as part of the application. The Company
reserves the right to require further evidence of insurability satisfactory to the Company in respect of the
following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance of
his loan (including arrears up to but not exceeding 2 months) as reported by the Assured to the Company
or the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the Assured if the Lot
Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the
Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by
the Company.3
Eternal was required under the policy 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
 8
I. General Concepts

lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter dated December
29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982. One of those included
in the list as "new business" was a certain John Chuang. His balance of payments was PhP 100,000. On
August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for Chuangs
death. Attached to the claim were the following documents: (1) Chuangs Certificate of Death; (2)
Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant;
(4) Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the following
documents relative to its insurance claim for Chuangs death: (1) Certificate of Claimant (with form
attached); (2) Assureds Certificate (with form attached); (3) Application for Insurance accomplished and
signed by the insured, Chuang, while still living; and (4) Statement of Account showing the unpaid balance
of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was received
by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance claim.
This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25,
1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20,
1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal Gardens
Memorial Park in October 1982 for the total maximum insurable amount of P100,000.00 each. No
application for Group Insurance was submitted in our office prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability provision,
"a declaration of good health shall be required for all Lot Purchasers as party of the application." We cite
further the provision on Effective Date of Coverage under the policy which states that "there shall be no
insurance if the application is not approved by the Company." Since no application had been submitted by
the Insured/Assured, prior to his death, for our approval but was submitted instead on November 15, 1984,
after his death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal
Gardens being the Assured was a party to the Contract and was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the insurance
coverage but are held by us in trust for the payor until the prerequisites for insurance coverage shall have
been met. We will however, return all the premiums which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money
against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against
Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00,
representing the proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and,
to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he accomplished before
his death, as testified to by Eternals witness and evidenced by the letter dated December 29, 1982, stating,
 9
I. General Concepts

among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that due to
Philamlifes inaction from the submission of the requirements of the group insurance on December 29,
1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the premiums during the
same period, Philamlife was deemed to have approved Chuangs application. The RTC said that since the
contract is a group life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternals
letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application
form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application form,
Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore determined by this
Honorable Court, or has decided it in a way not in accord with law or with the applicable jurisprudence, in
holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife before the death of John
Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the
CA and first level courts, considering their findings of facts are conclusive and binding on this Court.
However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when
in making its findings the [CA] went beyond the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee; (7) when the findings [of the CA] are contrary to the
trial court; (8) when the findings are conclusions without citation of specific evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence
and contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked
certain relevant facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.12(Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review
them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated December
29, 1982, a list of insurable interests of buyers for October 1982 was attached, including Chuang in the list
of new businesses. Eternal added it was noted at the bottom of said letter that the corresponding "Phil-Am
 10
I. General Concepts

Life Insurance Application Forms & Cert." were enclosed in the letter that was apparently received by
Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of the insurance application
which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states
that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such stamp of
receipt has the effect of acknowledging receipt of the letter together with the attachments. Such receipt is
an admission by Philamlife against its own interest.13 The burden of evidence has shifted to Philamlife,
which must prove that the letter did not contain Chuangs insurance application. However, Philamlife failed
to do so; thus, Philamlife is deemed to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as
received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies
is groundless. The trial court is in the best position to determine the reliability and credibility of the
witnesses, because it has the opportunity to observe firsthand the witnesses demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court, unless
some facts or circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and the original
of this is submitted to Philamlife together with the monthly remittances and the second copy is remained or
retained with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for the location and
does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that payment together
with the new clients all the originals I see to it before I sign the transmittal letter the originals are attached
therein.16
 11
I. General Concepts

In other words, the witness admitted not knowing where the original insurance application was, but believed
that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insurance
application forms were accomplished and the testimony of Mendoza on who actually filled out the
application form, these are minor inconsistencies that do not affect the credibility of the witnesses. Thus,
we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of witnesses,
and these may even serve to strengthen their credibility as these negate any suspicion that the testimonies
have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions evidence
as a whole or reflect on the witnesses honesty. The test is whether the testimonies agree on essential facts
and whether the respective versions corroborate and substantially coincide with each other so as to make a
consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at issue,
neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the
Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by
the Company.
An examination of the above provision would show ambiguity between its two sentences. The first sentence
appears to state that the insurance coverage of the clients of Eternal already became effective upon
contracting a loan with Eternal while the second sentence appears to require Philamlife to approve the
insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally
in favor of the insured and strictly against the insurer in order to safeguard the latters interest. Thus,
in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving
any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A
contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its obligations. 19 (Emphasis
supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:
 12
I. General Concepts

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.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a partys
purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is
created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date
of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice
the insured; it cannot be interpreted as a termination of the insurance contract. The termination of the
insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience
in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts of
adhesion containing technical terms and conditions of the industry, confusing if at all understandable to
laypersons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are
imbued with public interest that must be considered whenever the rights and obligations of the insurer and
the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance
companies must be obligated to act with haste upon insurance applications, to either deny or approve the
same, or otherwise be bound to honor the application as a valid, binding, and effective insurance contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No.
57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138
is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of
Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time of
extra-judicial demand by Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision on June 17,
1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June
17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.
SO ORDERED.

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON
MONTILLA PATERNO, JR.,

QUIASON, J.:
 13
I. General Concepts

This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with
preliminary injunction or temporary restraining order, to annul and set aside the Order dated November 6,
1986 of the Insurance Commissioner and the entire proceedings taken in I.C. Special Case No. 1-86.

We grant the petition.

The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. dated April 17,
1986, to respondent Commissioner, alleging certain problems encountered by agents, supervisors,
managers and public consumers of the Philippine American Life Insurance Company (Philamlife) as a
result of certain practices by said company.

In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los Reyes, in his
capacity as Philamlife's president, to comment on respondent Paterno's letter.

In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested that private
respondent "submit some sort of a 'bill of particulars' listing and citing actual cases, facts, dates, figures,
provisions of law, rules and regulations, and all other pertinent data which are necessary to enable him to
prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the Insurance Commissioner
to private respondent for his comments thereon.

On May 16, 1986, respondent Commissioner received a letter from private respondent maintaining that his
letter-complaint of April 17, 1986 was sufficient in form and substance, and requested that a hearing thereon
be conducted.

Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated his claim
that private respondent's letter of May 16, 1986 did not supply the information he needed to enable him to
answer the letter-complaint.

On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the validity of the
Contract of Agency complained of by private respondent.

In said hearing, private respondent was required by respondent Commissioner to specify the provisions of
the agency contract which he claimed to be illegal.

On August 4, private respondent submitted a letter of specification to respondent Commissioner dated July
31, 1986, reiterating his letter of April 17, 1986 and praying that the provisions on charges and fees stated
in the Contract of Agency executed between Philamlife and its agents, as well as the implementing
provisions as published in the agents' handbook, agency bulletins and circulars, be declared as null and
void. He also asked that the amounts of such charges and fees already deducted and collected by Philamlife
in connection therewith be reimbursed to the agents, with interest at the prevailing rate reckoned from the
date when they were deducted.

Respondent Commissioner furnished petitioner De los Reyes with a copy of private respondent's letter of
July 31, 1986, and requested his answer thereto.

Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:

(1) Private respondent's letter of August 11, 1986 does not contain any of the particular
information which Philamlife was seeking from him and which he promised to submit.

(2) That since the Commission's quasi-judicial power was being invoked with regard to the
complaint, private respondent must file a verified formal complaint before any further
proceedings.
 14
I. General Concepts

In his letter dated September 9, 1986, private respondent asked for the resumption of the hearings on his
complaint.

On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986, and July 31,
1986.

In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President and
Executive Assistant to the President, asked that respondent Commission first rule on the questions of the
jurisdiction of the Insurance Commissioner over the subject matter of the letters-complaint and the legal
standing of private respondent.

On October 27, respondent Commissioner notified both parties of the hearing of the case on November 5,
1986.

On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds;

1. The Subpoena/Notice has no legal basis and is premature because:

(1) No complaint sufficient in form and contents has been filed;

(2) No summons has been issued nor

received by the respondent De los Reyes,
and hence, no jurisdiction has been
acquired over his person;

(3) No answer has been filed, and hence,

the hearing scheduled on November 5,
1986 in the Subpoena/Notice, and
wherein the respondent is required to
appear, is premature and lacks legal
basis.

II. The Insurance Commission has no jurisdiction over;

(1) the subject matter or nature of the action; and

(2) over the parties involved (Rollo, p. 102).

In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash. The
dispositive portion of said Order reads:

NOW, THEREFORE, finding the position of complainant thru counsel tenable and
considering the fact that the instant case is an informal administrative litigation falling
outside the operation of the aforecited memorandum circular but cognizable by this
Commission, the hearing officer, in open session ruled as it is hereby ruled to deny the
Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).

Hence, this petition.

II

The main issue to be resolved is whether or not the resolution of the legality of the Contract of Agency
falls within the jurisdiction of the Insurance Commissioner.
 15
I. General Concepts

Private respondent contends that the Insurance Commissioner has jurisdiction to take cognizance of the
complaint in the exercise of its quasi-judicial powers. The Solicitor General, upholding the jurisdiction of
the Insurance Commissioner, claims that under Sections 414 and 415 of the Insurance Code, the
Commissioner has authority to nullify the alleged illegal provisions of the Contract of Agency.

III

The general regulatory authority of the Insurance Commissioner is described in Section 414 of the
Insurance Code, to wit:

The Insurance Commissioner shall have the duty to see that all laws relating to insurance,
insurance companies and other insurance matters, mutual benefit associations and trusts
for charitable uses are faithfully executed and to perform the duties imposed upon him by
this Code, . . .

On the other hand, Section 415 provides:

In addition to the administrative sanctions provided elsewhere in this Code, the Insurance
Commissioner is hereby authorized, at his discretion, to impose upon insurance companies,
their directors and/or officers and/or agents, for any willful failure or refusal to comply
with, or violation of any provision of this Code, or any order, instruction, regulation or
ruling of the Insurance Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as may be determined by the the
Insurance Commissioner, the following:

(a) fines not in excess of five hundred pesos a day; and

(b) suspension, or after due hearing,

removal of directors and/or officers
and/or agents.

A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to
regulate the business of insurance, which is defined as follows:

(2) The term "doing an insurance business" or "transacting an insurance business," within
the meaning of this Code, shall include
(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. (Insurance Code, Sec. 2[2]; Emphasis
supplied).

Since the contract of agency entered into between Philamlife and its agents is not included within the
meaning of an insurance business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction
over the same to the Insurance Commissioner. Expressio unius est exclusio alterius.

With regard to private respondent's contention that the quasi-judicial power of the Insurance Commissioner
under Section 416 of the Insurance Code applies in his case, we likewise rule in the negative. Section 416
of the Code in pertinent part, provides:
 16
I. General Concepts

The Commissioner shall have the power to adjudicate claims and complaints involving any
loss, damage or liability for which an insurer may be answerable under any kind of policy
or contract of insurance, or for which such insurer may be liable under a contract of
suretyship, or for which a reinsurer may be used under any contract or reinsurance it may
have entered into, or for which a mutual benefit association may be held liable under the
membership certificates it has issued to its members, where the amount of any such loss,
damage or liability, excluding interest, costs and attorney's fees, being claimed or sued
upon any kind of insurance, bond, reinsurance contract, or membership certificate does not
exceed in any single claim one hundred thousand pesos.

A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited
by law "to claims and complaints involving any loss, damage or liability for which an insurer may be
answerable under any kind of policy or contract of insurance, . . ." Hence, this power does not cover the
relationship affecting the insurance company and its agents but is limited to adjudicating claims and
complaints filed by the insured against the insurance company.

While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance
Code, the provisions of said Chapter speak only of the licensing requirements and limitations imposed on
insurance agents and brokers.

The Insurance Code does not have provisions governing the relations between insurance companies and
their agents. It follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers,
assume jurisdiction over controversies between the insurance companies and their agents.

We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989),
and Investment Planning Corporation of the Philippines v. Social Security Commission, 21 SCRA 904
(1962), that an insurance company may have two classes of agents who sell its insurance policies: (1)
salaried employees who keep definite hours and work under the control and supervision of the company;
and (2) registered representatives, who work on commission basis.

Under the first category, the relationship between the insurance company and its agents is governed by the
Contract of Employment and the provisions of the Labor Code, while under the second category, the same
is governed by the Contract of Agency and the provisions of the Civil Code on the Agency. Disputes
involving the latter are cognizable by the regular courts.

WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance
Commission is SET ASIDE.

SO ORDERED.

WHITE GOLD MARINE SERVICES, INC., vs. PIONEER INSURANCE AND SURETY
CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD.

QUISUMBING, J.:

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

The facts are undisputed.

 17
I. General Concepts

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

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

The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual
to secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual
was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the
insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker
of Steamship Mutual was already superfluous.

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

In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

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

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

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

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND
[IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER. [9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance
business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship
Mutual?
 18
I. General Concepts

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license
to do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the
certifications issued by the Insurance Commission.

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

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

Is Steamship Mutual engaged in the insurance business?

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

(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, the fact that no profit is derived from the making of insurance contracts,
agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude
the existence of an insurance business.[12]

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the
act required to be performed, and the exact nature of the agreement in the light of the occurrence,
contingency, or circumstances under which the performance becomes requisite. It is not by what it is
called.[13]

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.[14]

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

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer
and insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a
 19
I. General Concepts

fund from which all losses and liabilities are paid, and where the profits are divided among themselves, in
proportion to their interest.[17] Additionally, mutual insurance associations, or clubs, provide three types of
coverage, namely, protection and indemnity, war risks, and defense costs.[18]

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

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

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

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

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

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance
agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

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. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and
officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court
of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED
AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer
Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to
do business as insurer and insurance agent, respectively. The petitioners prayer for the revocation of
Pioneers Certificate of Authority and removal of its directors and officers, is DENIED. Costs against
respondents.

SO ORDERED.

THE INSULAR LIFE ASSURANCE COMPANY, LTD., vs. CARPONIA T. EBRADO and
PASCUALA VDA. DE EBRADO,
 20
I. General Concepts

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
 21
I. General Concepts

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:

 22
I. General Concepts

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
 23
I. General Concepts

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

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 than judicial 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.

PAZ LOPEZ DE CONSTANTINO, vs. ASIA LIFE INSURANCE COMPANY.

x---------------------------------------------------------x

G.R. No. L-1670 August 31, 1950

AGUSTINA PERALTA, vs. ASIA LIFE INSURANCE COMPANY.

BENGZON, J.:
 24
I. General Concepts

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

The facts are these:

First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life Insurance
Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued on September
27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino for a term of
twenty years. The first premium covered the period up to September 26, 1942. The plaintiff Paz Lopez de
Constantino was regularly appointed beneficiary. The policy contained these stipulations, among others:

This POLICY OF INSURANCE is issued in consideration of the written and printed application here for a
copy of which is attached hereto and is hereby made a part hereof made a part hereof, and of the payment
in advance during the lifetime and good health of the Insured of the annual premium of One Hundred fifty-
eight and 4/100 pesos Philippine currency1 and of the payment of a like amount upon each twenty-seventh
day of September hereafter during the term of Twenty years or until the prior death of the Insured.
(Emphasis supplied.)

xxx xxx xxx

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

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

It is admitted that the defendant, being an American corporation , had to close its branch office in Manila
by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.

Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No. 78145
(Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the spouses
Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium stipulated in the policy was
regularly paid from August 1, 1938, up to and including September 30, 1941. Effective August 1, 1941, the
mode of payment of premiums was changed from annual to quarterly, so that quarterly premiums were
paid, the last having been delivered on November 18, 1941, said payment covering the period up to January
31, 1942. No further payments were handed to the insurer. Upon the Japanese occupation, the insured and
the insurer became separated by the lines of war, and it was impossible and illegal for them to deal with
each other. Because the insured had borrowed on the policy an mount of P234.00 in January, 1941, the cash
surrender value of the policy was sufficient to maintain the policy in force only up to September 7, 1942.
Tomas Ruiz died on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for
payment met with defendant's refusal, grounded on non-payment of the premiums.

The policy provides in part:

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

xxx xxx xxx

 25
I. General Concepts

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

Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus all
sums due for premiums in arrears. They allege that non-payment of the premiums was caused by the closing
of defendant's offices in Manila during the Japanese occupation and the impossible circumstances created
by war.

Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.

The lower court absolved the defendant. Hence this appeal.

The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the benefit
of extensive and exhaustive memoranda including those of amici curiae. The matter has received careful
consideration, inasmuch as it affects the interest of thousands of policy-holders and the obligations of many
insurance companies operating in this country.

Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the Civil
Code.2Act No. 2427 was largely copied from the Civil Code of California.3 And this court has heretofore
announced its intention to supplement the statutory laws with general principles prevailing on the subject
in the United State.4

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

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

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

In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because the
premium had not been paid within the time fixed, since by its express terms, non-payment of any premium
when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This goes to show
that although we take the view that insurance policies should be conserved5 and should not lightly be thrown
out, still we do not hesitate to enforce the agreement of the parties.
 26
I. General Concepts

Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse to enforce
an insurance contract according to its meaning. (45 C.J.S., p. 150.)

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

Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of non-
payment of premiums occasioned by war, the American cases may be divided into three groups, according
as they support the so-called Connecticut Rule, the New York Rule, or the United States Rule.

The first holds the view that "there are two elements in the consideration for which the annual premium is
paid First, the mere protection for the year, and second, the privilege of renewing the contract for each
succeeding year by paying the premium for that year at the time agreed upon. According to this view of the
contract, the payment of premiums is a condition precedent, the non-performance would be illegal
necessarily defeats the right to renew the contract."

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

The United States rule declares that the contract is not merely suspended, but is abrogated by reason of non-
payments is peculiarly of the essence of the contract. It additionally holds that it would be unjust to allow
the insurer to retain the reserve value of the policy, which is the excess of the premiums paid over the actual
risk carried during the years when the policy had been in force. This rule was announced in the well-known
Statham6 case which, in the opinion of Professor Vance, is the correct rule.7

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

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

. . . it must be conceded that promptness of payment is essential in the business of life insurance. All the
calculations of the insurance company are based on the hypothesis of prompt payments. They not only
calculate on the receipt of the premiums when due, but on compounding interest upon them. It is on this
basis that they are enabled to offer assurance at the favorable rates they do. Forfeiture for non-payment is
an necessary means of protecting themselves from embarrassment. Unless it were enforceable, the business
would be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or the success of the whole
scheme is endangered. The insured parties are associates in a great scheme. This associated relation exists
whether the company be a mutual one or not. Each is interested in the engagements of all; for out of the co-
existence of many risks arises the law of average, which underlies the whole business. An essential feature
of this scheme is the mathematical calculations referred to, on which the premiums and amounts assured
are based. And these calculations, again, are based on the assumption of average mortality, and of prompt
payments and compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at the
option of the company. This has always been the understanding and the practice in this department of
business. Some companies, it is true, accord a grace of thirty days, or other fixed period, within which the
premium in arrear may be paid, on certain conditions of continued good health, etc. But this is a matter of
stipulation, or of discretion, on the part of the particular company. When no stipulation exists, it is the
 27
I. General Concepts

general understanding that time is material, and that the forfeiture is absolute if the premium be not paid.
The extraordinary and even desperate efforts sometimes made, when an insured person is in extremes to
meet a premium coming due, demonstrates the common view of this matter.

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

In another part of the decision, the United States Supreme Court considers and rejects what is, in effect, the
New York theory in the following words and phrases:

The truth is, that the doctrine of the revival of contracts suspended during the war is one based on
considerations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or
inequitable to revive.

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

The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as
alleged, the consequences of war should not prejudice the insured, neither should they bear down on the
insurer.

Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured
to pay premiums was excused during the war owing to impossibility of performance, and that consequently
no unfavorable consequences should follow from such failure.

The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the first,
is not an obligation of the insured, so much so that it is not a debt enforceable by action of the insurer.

Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation upon which the
insurer can maintain an action against insured; nor is its settlement governed by the strict rule controlling
payments of debts. So, the court in a Kentucky case declares, in the opinion, that it is not a debt. . . . The
fact that it is payable annually or semi-annually, or at any other stipulated time, does not of itself constitute
a promise to pay, either express or implied. In case of non-payment the policy is forfeited, except so far as
the forfeiture may be saved by agreement, by waiver, estoppel, or by statute. The payment of the premium
is entirely optional, while a debt may be enforced at law, and the fact that the premium is agreed to be paid
is without force, in the absence of an unqualified and absolute agreement to pay a specified sum at some
certain time. In the ordinary policy there is no promise to pay, but it is optional with the insured whether he
will continue the policy or forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)
 28
I. General Concepts

It is well settled that a contract of insurance is sui generis. While the insured by an observance of the
conditions may hold the insurer to his contract, the latter has not the power or right to compel the insured
to maintain the contract relation with it longer than he chooses. Whether the insured will continue it or not
is optional with him. There being no obligation to pay for the premium, they did not constitute a
debt. (Noble vs. Southern States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)

It should be noted that the parties contracted not only for peacetime conditions but also for times of war,
because the policies contained provisions applicable expressly to wartime days. The logical inference,
therefore, is that the parties contemplated uninterrupted operation of the contract even if armed conflict
should ensue.

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

The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to 100 should
be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."

After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such a vital
defense of insurance companies that since the very beginning, said Act no. 2427 expressly preserved it, by
providing that after the policy shall have been in force for two years, it shall become incontestable (i.e. the
insurer shall have no defense) except for fraud, non-payment of premiums, and military or naval service in
time of war (sec. 184 [b], Insurance Act). And when Congress recently amended this section (Rep. Act No.
171), the defense of fraud was eliminated, while the defense of nonpayment of premiums was preserved.
Thus the fundamental character of the undertaking to pay premiums and the high importance of the defense
of non-payment thereof, was specifically recognized.

In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is in
effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that the first
policy had no reserve value, and that the equitable values of the second had been practically returned to the
insured in the form of loan and advance for premium.

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

DIOSDADO C. TY, vs. FIRST NATIONAL SURETY & ASSURANCE CO., INC.,

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Gregorio S. Narvasa, presiding,
dismissing the actions filed in the above-entitled cases.

The facts found by the trial court, which are not disputed in this appeal, are as follows:

At different times within a period of two months prior to December 24, 1953, the plaintiff herein Diosdado
C. Ty, employed as operator mechanic foreman in the Broadway Cotton Factory, in Grace Park, Caloocan,
 29
I. General Concepts

Rizal, at a monthly salary of P185.00, insured himself in 18 local insurance companies, among which being
the eight above named defendants, which issued to him personal accident policies, upon payment of the
premium of P8.12 for each policy. Plaintiff's beneficiary was his employer, Broadway Cotton Factory,
which paid the insurance premiums.

On December 24, 1953, a fire broke out which totally destroyed the Broadway Cotton Factory. Fighting his
way out of the factory, plaintiff was injured on the left hand by a heavy object. He was brought to the
Manila Central University hospital, and after receiving first aid there, he went to the National Orthopedic
Hospital for treatment of his injuries which were as follows:

1. Fracture, simple, proximal phalanx index finger, left;

2. Fracture, compound, comminuted, proximal phalanx, middle finger, left and 2nd phalanx, simple;

3. Fracture, compound, comminute phalanx, 4th finger, left;

4. Fracture, simple, middle phalanx, middle finger, left;

5. Lacerated wound, sutured, volar aspect, small finger, left;

6. Fracture, simple, chip, head, 1st phalanx, 5th digit, left. He underwent medical treatment in the
Orthopedic Hospital from December 26, 1953 to February 8, 1954. The above-described physical injuries
have caused temporary total disability of plaintiff's left hand. Plaintiff filed the corresponding notice of
accident and notice of claim with all of the abovenamed defendants to recover indemnity under Part II of
the policy, which is similarly worded in all of the policies, and which reads pertinently as follows:

INDEMNITY FOR TOTAL OR PARTIAL DISABILITY

If the Insured sustains any Bodily Injury which is effected solely through violent, external, visible and
accidental means, and which shall not prove fatal but shall result, independently of all other causes and
within sixty (60) days from the occurrence thereof, in Total or Partial Disability of the Insured, the Company
shall pay, subject to the exceptions as provided for hereinafter, the amount set opposite such injury:

PARTIAL DISABILITY

LOSS OF:

xxx xxx xxx

Either hand ............................................................................ P650.00

xxx xxx xxx

... The loss of a hand shall mean the loss by amputation through the bones of the wrist....

Defendants rejected plaintiff's claim for indemnity for the reason that there being no severance of
amputation of the left hand, the disability suffered by him was not covered by his policy. Hence, plaintiff
sued the defendants in the Municipal Court of this City, and from the decision of said Court dismissing his
complaints, plaintiff appealed to this Court. (Decision of the Court of First Instance of Manila, pp. 223-
226, Records).

In view of its finding, the court absolved the defendants from the complaints. Hence this appeal.
 30
I. General Concepts

The main contention of appellant in these cases is that in order that he may recover on the insurance policies
issued him for the loss of his left hand, it is not necessary that there should be an amputation thereof, but
that it is sufficient if the injuries prevent him from performing his work or labor necessary in the pursuance
of his occupation or business. Authorities are cited to the effect that "total disability" in relation to one's
occupation means that the condition of the insurance is such that common prudence requires him to desist
from transacting his business or renders him incapable of working. (46 C.J.S., 970). It is also argued that
obscure words or stipulations should be interpreted against the person who caused the obscurity, and the
ones which caused the obscurity in the cases at bar are the defendant insurance companies.

While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued, we can
not go beyond the clear and express conditions of the insurance policies, all of which define partial disability
as loss of either hand by amputation through the bones of the wrist." There was no such amputation in the
case at bar. All that was found by the trial court, which is not disputed on appeal, was that the physical
injuries "caused temporary total disability of plaintiff's left hand." Note that the disability of plaintiff's hand
was merely temporary, having been caused by fracture of the index, the middle and the fourth fingers of
the left hand.

We might add that the agreement contained in the insurance policies is the law between the parties. As the
terms of the policies are clear, express and specific that only amputation of the left hand should be
considered as a loss thereof, an interpretation that would include the mere fracture or other temporary
disability not covered by the policies would certainly be unwarranted.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the plaintiff-appellant.

QUA CHEE GAN, vs. LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent,
WARNER, BARNES AND CO., LTD.,
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;
(c) Under the third cause of action, the sum of P5,000;
(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;
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.
The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on
Appeal, 166-167.)
 31
I. General Concepts

From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated
as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and
of hemp, baled and loose, in which the appellee dealth extensively. They had been, with their contents,
insured with the defendant Company since 1937, and the lose made payable to the Philippine National Bank
as mortgage of the hemp and crops, to the extent of its interest. On June, 1940, the insurance stood as
follows:

Policy No. Property Insured Amount

2637164 (Exhibit
Bodega No. 1 (Building) P15,000.00
"LL")

Bodega No. 2 (Building) 10,000.00

Bodega No. 3 (Building) 25,000.00

2637165 (Exhibit "JJ")
Bodega No. 4 (Building) 10,000.00

Hemp Press moved by steam engine 5,000.00

Merchandise contents (copra and empty sacks of Bodega No.

2637345 (Exhibit "X") 150,000.00
1)

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit
Merchandise contents (loose hemp) of Bodega No. 4 5,000.00
"GG")

Total P370,000.00

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 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 company arrived and proceeded to examine and photograph the premises,
pored over the books of the insured and conducted an extensive investigation. The plaintiff having
submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the
insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and
conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by
other persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with 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 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 dismissed because
the appellee had managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite
the fire losses.
 32
I. General Concepts

In its first assignment of error, the insurance company alleges that the trial Court should have held that the
policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with other
similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first
time in 1939, and the pertinent portions read as follows:
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.
 33
I. General Concepts

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
 34
I. General Concepts

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"
 35
I. General Concepts

(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
 36
I. General Concepts

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"
 37
I. General Concepts

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
 38
I. General Concepts

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.

RAFAEL (REX) VERENDIA, vs. COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES,

G.R. No. 76399 January 22, 1993

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., vs. RAFAEL VERENDIA and THE
COURT OF APPEALS,

MELO, J.:

The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety Insurance
Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876 effective between
June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential building located at Tulip
Drive, Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the
Monte de Piedad & Savings Bank. Verendia also insured the same building with two other companies,
namely, The Country Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May
12, 1981, and The Development Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30,
198l.

While the three fire insurance policies were in force, the insured property was completely destroyed by fire
on the early morning of December 28, 1980. Fidelity was accordingly informed of the loss and despite
demands, refused payment under its policy, thus prompting Verendia to file a complaint with the then Court
of First Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus attorney's
fees and litigation expenses. The complaint was later amended to include Monte de Piedad as an "unwilling
defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the policy was avoided by reason of
over-insurance; that Verendia maliciously represented that the building at the time of the fire was leased
under a contract executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo
Garcia who was the lessee.

On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of Fidelity.
In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the policy was also
violated by Verendia in that the insured failed to inform Fidelity of his other insurance coverages with
Country Bankers Insurance and Development Insurance.

Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on March 31,
1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court
reversed for the following reasons: (a) there was no misrepresentation concerning the lease for the contract
was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy contract
requiring Verendia to give notice to Fidelity of other contracts of insurance was waived by Fidelity as
shown by its conduct in attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).

Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of directly filing a
motion for reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a motion for
extension of 3 days within which to file a motion for reconsideration. The motion for extension was not
filed on April 19, 1986 which was the 15th day after receipt of the decision because said 15th day was a
Saturday and of course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion for
 39
I. General Concepts

extension was granted by the appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the
meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the ground that
the motion for extension was filed out of time because the 15th day from receipt of the decision which fell
on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate Court
has personnel receiving pleadings even on Saturdays.

The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration
was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605
was initiated. Subsequently, or more specifically on October 21, 1986, the appellate court denied Fidelity's
motion for reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition for review
on certiorari now docketed as G.R. No. 76399. The two petitions, inter-related as they are, were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

Before we can even begin to look into the merits of the main case which is the petition for review
on certiorari, we must first determine whether the decision of the appellate court may still be reviewed, or
whether the same is beyond further judicial scrutiny. Stated otherwise, before anything else, inquiry must
be made into the issue of whether Fidelity could have legally asked for an extension of the 15-day
reglementary period for appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the pendency of a
motion for extension of time to perfect an appeal does not suspend the running of the period sought to be
extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs vs.
CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King (20 SCRA
1120 [1967]).

The above cases notwithstanding and because the Rules of Court do not expressly prohibit the filing of a
motion for extension of time to file a motion for reconsideration in regard to a final order or judgment,
magistrates, including those in the Court of Appeals, held sharply divided opinions on whether the period
for appealing which also includes the period for moving to reconsider may be extended. The matter was
not definitely settled until this Court issued its Resolution in Habaluyas Enterprises, Inc. vs. Japson (142
SCRA [1986]), declaring that beginning one month from the promulgation of the resolution on May 30,
1986

. . . the rule shall be strictly enforced that no motion for extension of time to file a motion
for new trial or reconsideration shall be filed . . . (at p. 212.)

In the instant case, the motion for extension was filed and granted before June 30, 1986, although, of course,
Verendia's motion to expunge the motion for reconsideration was not finally disposed until July 22, 1986,
or after the dictum in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for
extension came before its formal proscription under Habaluyas, for which reason we now turn our attention
to G.R. No. 76399.

Reduced to bare essentials, the issues Fidelity raises therein are: (a) 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 and (b) whether or not, in submitting the
subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's claim in the amount stated
in said receipt.1

Verging on the factual, the issue of the veracity or falsity of the lease contract could have been better
resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the jurisdiction of
this Court is limited to the review of errors of law. The appellate court's findings of fact are, therefore,
 40
I. General Concepts

conclusive upon this Court except in the following cases: (1) when the conclusion is a finding grounded
entirely on speculation, surmises, or conjectures; (2) when the inference made is manifestly absurd,
mistaken, or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when
the judgment is premised on a misapprehension of facts; (5) when the findings of fact are conflicting; and
(6) when the Court of Appeals in making its findings went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433
[1991]). In view of the conflicting findings of the trial court and the appellate court on important issues in
these consolidated cases and it appearing that the appellate court judgment is based on a misapprehension
of facts, this Court shall review the evidence on record.

The contract of lease upon which Verendia relies to support his claim for insurance benefits, was entered
into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple
of days after the effectivity of the insurance policy. When the rented residential building was razed to the
ground on December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within the
premises. However, according to the investigation report prepared by Pat. Eleuterio M. Buenviaje of the
Antipolo police, the building appeared to have "no occupant" and that Mr. Roberto Garcia was "renting on
the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo Garcia, whom
he considered as the real lessee, was occupying the building when it was burned (TSN, July 27, 1982, p.10).

Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to locate
him. Robert Garcia then executed an affidavit before the National Intelligence and Security Authority
(NISA) to the effect that he was not the lessee of Verendia's house and that his signature on the contract of
lease was a complete forgery. Thus, on the strength of these facts, the adjuster submitted a report dated
December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").

Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease contract.
According to Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had been paying the rentals
all the while. Verendia, however, failed to explain why Marcelo had to sign his cousin's name when he in
fact was paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity's
conclusions on these proven facts appear, therefore, to have sufficient bases; Verendia concocted the lease
contract to deflect responsibility for the fire towards an alleged "lessee", inflated the value of the property
by the alleged monthly rental of P6,500 when in fact, the Provincial Assessor of Rizal had assessed the
property's fair market value to be only P40,300.00, insured the same property with two other insurance
companies for a total coverage of around P900,000, and created a dead-end for the adjuster by the
disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific Banking
Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions constitute the measure of
the insurer's liability and compliance therewith is a condition precedent to the insured's right to recovery
from the insurer (Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla
Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). 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 (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652
[1980]).

Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease contract
to support his claim under Fire Insurance Policy No. F-18876, the terms of the policy should be strictly
construed against the insured. Verendia failed to live by the terms of the policy, specifically Section 13
thereof which is expressed in terms that are clear and unambiguous, that all benefits under the policy shall
be forfeited "If the claim be in any respect fraudulent, or if any false declaration be made or used in support
thereof, 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". Verendia, having presented a false declaration to support his claim for
benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of Section 13
 41
I. General Concepts

of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking Corporation vs.
Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia, reprehensibly
disregarded the principle that insurance contracts are uberrimae fidae and demand the most abundant good
faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

There is also no reason to conclude that by submitting the subrogation receipt as evidence in court, Fidelity
bound itself to a "mutual agreement" to settle Verendia's claims in consideration of the amount of
P142,685.77. While the said receipt appears to have been a filled-up form of Fidelity, no representative of
Fidelity had signed it. It is even incomplete as the blank spaces for a witness and his address are not filled
up. More significantly, the same receipt states that Verendia had received the aforesaid amount. However,
that Verendia had not received the amount stated therein, is proven by the fact that Verendia himself filed
the complaint for the full amount of P385,000.00 stated in the policy. It might be that there had been efforts
to settle Verendia's claims, but surely, the subrogation receipt by itself does not prove that a settlement had
been arrived at and enforced. Thus, to interpret Fidelity's presentation of the subrogation receipt in evidence
as indicative of its accession to its "terms" is not only wanting in rational basis but would be substituting
the will of the Court for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then Intermediate Appellate Court under review is REVERSED and
SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.

SO ORDERED.

GULF RESORTS, INC., vs. PHILIPPINE CHARTER INSURANCE CORPORATION,

PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION.
Petitioner assails the appellate court decision[1] which dismissed its two appeals and affirmed the judgment
of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its
earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties
within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the
two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort
insured originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance
policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also
Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only to plaintiffs two
swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2) swimming
pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2) swimming pools
only (Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No.
206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said
policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F-1 was deleted
and the entry under Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with
AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh.
H) which carried the entry under Endorsement/Warranties at Time of Issue, which read Endorsement to
Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14 (Exhs. 6-A and
6-B) as premium thereof, computed as follows:
 42
I. General Concepts

Item -P7,691,000.00 - on the Clubhouse only

@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-
4568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy to be
issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of March 14,
1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium
against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-
 43
I. General Concepts

B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy
No. 31944 issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the sum includedadditional premium the
Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the contrary,
that this insurance covers loss or damage to shock to any of the property insured by this Policy occasioned
by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an
earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944
issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim,
then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and
Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its
Vice-President A.R. de Leon,[4]rendered a preliminary report[5] finding extensive damage caused by the
earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that except for the
swimming pools, all affected items have no coverage for earthquake shocks.[6]On August 11, 1990,
petitioner filed its formal demand[7] for settlement of the damage to all its properties in the Agoo Playa
Resort. On August 23, 1990, respondent denied petitioners claim on the ground that its insurance policy
only afforded earthquake shock coverage to the two swimming pools of the resort. [8]Petitioner and
respondent failed to arrive at a settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] with
the regional trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest thereon,
as computed under par. 29 of the policy (Annex B) until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of
defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of
earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools in
all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider (Exhibit 7-C) means that only
the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language
used in an insurance contract or application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which prepared the contract. To the mind
of [the] Court, the language used in the policy in litigation is clear and unambiguous hence there is no need
for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake shock
coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having
 44
I. General Concepts

admitted that the damage to the swimming pools was appraised by defendants adjuster at P386,000.00,
defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is
liable only for the damage caused to the two (2) swimming pools and that defendant has made known to
plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the
action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED
EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools,
with interest at 6% per annum from the date of the filing of the Complaint until defendants obligation to
plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO.
31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE
EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING ITSELF
TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED
TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS
ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys
fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that the
last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU) and
upon which the subject insurance contract with Philippine Charter Insurance Corporation is said to have
been based and copied (Exh. I), covered an extended earthquake shock insurance on all the insured
properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the
imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting
to P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused on
the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it then
cannot be said that it was in default and therefore liable for interest.
 45
I. General Concepts

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award
thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not
be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the
award thereof an exception rather than a rule, it is necessary for the court to make findings of facts and law
that would bring the case within the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25,
2002). Therefore, holding that the plaintiff-appellants action is not baseless and highly speculative, We find
that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the
Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues:[16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS
INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL
THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR
DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND
EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not
only the swimming pools. It used the words any property insured by this policy, and it should be interpreted
as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the
body of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake
shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted
the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate expression of the agreement of the contracting
parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and
against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools
from the coverage for the risk of fire. It should not be used to limit the respondents liability for earthquake
shock to the two swimming pools only.
 46
I. General Concepts

Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the
extended coverage. The premium for the earthquake shock coverage was already included in the premium
paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake
shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner
told respondent that it wanted an exact replica of its latest insurance policy from American Home Assurance
Company (AHAC-AIU), which covered all the resorts properties for earthquake shock damage and
respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it was covered
for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc., likewise
requested petitioner to submit the necessary documents for its building claims and other repair costs. Thus,
under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner
covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised
Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the
facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage
against earthquake shock to petitioners insured properties other than on the two swimming pools. Petitioner
admitted that from 1984 to 1988, only the two swimming pools were insured against earthquake shock.
From 1988 until 1990, the provisions in its policy were practically identical to its earlier policies, and there
was no increase in the premium paid. AHAC-AIU, in a letter[19] by its representative Manuel C. Quijano,
categorically stated that its previous policy, from which respondents policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only
covered earthquake shock damage on the two swimming pools. The amount was the same amount paid by
petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional
premium was paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the
two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner, respondent copied its policy from the AHAC-
AIU policy provided by petitioner. Although the first five policies contained the said qualification in their
riders title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J.
Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make the policy
incomplete, nor did it broaden the scope of the endorsement whose descriptive title was merely enumerated.
Any ambiguity in the policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as covered for earthquake
shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item
5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that
only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two swimming pools as Item
3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for
coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the qualifier ANY instead of ALL to describe
 47
I. General Concepts

the property covered was done deliberately to enable the parties to specify the properties included for
earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in
the earthquake shock coverage. Petitioners own evidence shows that it only required respondent to follow
the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this requirement.
Respondents only deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders of the old policy and the
policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect
the parties clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any
deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be
considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only)[20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly
or indirectly of any of the following occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
 48
I. General Concepts

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN
EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF
THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE
UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .
additional premium the Company agrees, notwithstanding what is stated in the printed conditions of this
Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to any
of the property insured by this Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also
to loss or damage occasioned by or through or in consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake
shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance
with each other.[25] All its parts are reflective of the true intent of the parties. The policy cannot be construed
piecemeal. Certain stipulations cannot be segregated and then made to control; neither do particular words
or phrases necessarily determine its character. Petitioner cannot focus on the earthquake shock endorsement
to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together,
indubitably show the intention of the parties to extend earthquake shock coverage to the two swimming
pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event. Thus, an insurance
contract exists where the following elements concur:
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 insurer's promise, the insured pays a premium.[26](Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against
a specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as
the risk attaches.[28] In the subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium payable for the other
resort properties with regard to earthquake shock. This is consistent with the history of petitioners previous
insurance policies from AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
 49
I. General Concepts

Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period
from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming
pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision
here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools
only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your
instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give
written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend
to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake
tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your
instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit
G?
Atty. Mejia: Yes.
 50
I. General Concepts

Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was contented already that the previous limitation
pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA
Warranty & Annual Payment Agreement on Long Term Policies[29] to the insurance policy as proof of
the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy
is subject, as required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to
the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the
testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by counsel
for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6) policies
issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in
Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as
provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in each of the six
(6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses and
Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
 51
I. General Concepts

Witness referring to Exhibit C-1, your Honor.

WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we do
cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake
shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other things other than
swimming pool? You are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either insuring
a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and
H respectively entend the coverage against earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you
that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if
we are going to look at the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a
substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the
other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do some computation
based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
 52
I. General Concepts

No, we dont, sir.

Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during
your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for
the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with
no specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to the
issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the earthquake
shock endorsement included all its properties in the resort. Respondent only insured the properties as
intended by the petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas
(sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter Insurance
Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will
be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
 53
I. General Concepts

Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as
scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings
and rates were copied from the insurance policy I sent them but it was only when this case erupted that we
discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00
on the two (2) swimming pools only against the peril of earthquake shock which I understood before that
this provision will have to be placed here because this particular provision under the peril of earthquake
shock only is requested because this is an insurance policy and therefore cannot be insured against fire, so
this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty.
Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors,
Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake shock covered
properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy
issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake
shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in
the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage
for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming
pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that under
Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in parenthesis
(against the peril[s] of earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for premium payment for
earthquake shock and all the other items have no computation for payment of premiums.
 54
I. General Concepts

In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the general
rule that insurance contracts are contracts of adhesion which should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it.[31] A contract of adhesion is one
wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely
affixes his signature or his "adhesion" thereto. Through the years, the courts have held that in these type of
contracts, the parties do not bargain on equal footing, the weaker party's participation being reduced to the
alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.[32] Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.[34] Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the
claims of contending parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did
not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is
reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo
Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had
with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that
the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9
in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in
the replacement cost endorsement, but the principal provisions of the policy remained essentially similar to
AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties intent to limit the coverage of the policy to the two swimming pools only is not
ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
 55
I. General Concepts

SO ORDERED.

FORTUNE INSURANCE AND SURETY CO., INC., vs. COURT OF APPEALS and PRODUCERS
BANK OF THE PHILIPPINES

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable
under the Money, Security, and Payroll Robbery policy it issued to the private respondent or whether
recovery thereunder is precluded under the general exceptions clause thereof. Both the trial court and the
Court of Appeals held that there should be recovery. The petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private
respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune Insurance
and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of P725,000.00 under the
policy issued by Fortune. The sum was allegedly lost during a robbery of Producer's armored vehicle while
it was in transit to transfer the money from its Pasay City Branch to its head office in Makati. The case was
docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following stipulation
of facts:

1. The plaintiff was insured by the defendants and an insurance policy was issued, the
duplicate original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in the sum of
P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to
its Head Office at 8737 Paseo de Roxas, Makati, Metro Manila on June 29, 1987, was
robbed of the said cash. The robbery took place while the armored car was traveling along
Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security
Guard Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management
Systems with the plaintiff by virtue of an Agreement executed on August 7, 1983, a
duplicate original copy of which is hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the
plaintiff by virtue of a contract of Security Service executed on October 25, 1982, a
duplicate original copy of which is hereto attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver Magalong
and guard Atiga were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo
Aquino and John Doe, with violation of P.D. 532 (Anti-Highway Robbery Law) before the
Fiscal of Pasay City. A copy of the complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with
the said crime before Branch 112 of the Regional Trial Court of Pasay City. A copy of the
said information is hereto attached as Exhibit "E." The case is still being tried as of this
date;

7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss
of P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of
the insurance policy, attached hereto as Exhibit "A," specifically under page 1 thereof,
 56
I. General Concepts

"General Exceptions" Section (b), which is marked as Exhibit "A-1," and which reads as
follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . .

8. The plaintiff opposes the contention of the defendant and contends that Atiga
and Magalong are not its "officer, employee, . . . trustee or authorized
representative . . . at the time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion thereof
reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant,
and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as

liability under Policy No. 0207 (as mitigated by the P40,000.00 special
clause deduction and by the recovered sum of P145,000.00), with interest
thereon at the legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for
attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong
and Atiga, their services as armored car driver and as security guard having been merely
offered by PRC Management and by Unicorn Security and which latter firms assigned
them to plaintiff. The wages and salaries of both Magalong and Atiga are presumably paid
by their respective firms, which alone wields the power to dismiss them. Magalong and
Atiga are assigned to plaintiff in fulfillment of agreements to provide driving services and
property protection as such in a context which does not impress the Court as translating
into plaintiff's power to control the conduct of any assigned driver or security guard,
beyond perhaps entitling plaintiff to request are replacement for such driver guard. The
finding is accordingly compelled that neither Magalong nor Atiga were plaintiff's
"employees" in avoidance of defendant's liability under the policy, particularly the general
exceptions therein embodied.
 57
I. General Concepts

Neither is the Court prepared to accept the proposition that driver Magalong and guard
Atiga were the "authorized representatives" of plaintiff. They were merely an assigned
armored car driver and security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a
specified money route, and hence plaintiff's then designated "messenger" adverted to in the
policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No. 32946.
In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither
employees nor authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and

strictly against the insurance company (New Life Enterprises vs. Court of Appeals, 207
SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). Contracts
of insurance, like other contracts, are to be construed according to the sense and meaning
of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense
(New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of Appeals,
195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary
and simple. No other interpretation is necessary. The word "employee" must be taken to
mean in the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships insofar as
the application/enforcement of said Code is concerned must necessarily be inapplicable to
an insurance contract which defendant-appellant itself had formulated. Had it intended to
apply the Labor Code in defining what the word "employee" refers to, it must/should have
so stated expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee

bank because it has no power to hire or to dismiss said driver and security guard under the
contracts (Exhs. 8 and C) except only to ask for their replacements from the contractors. 5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the
Court of Appeals erred in holding it liable under the insurance policy because the loss falls within the
general exceptions clause considering that driver Magalong and security guard Atiga were Producers'
authorized representatives or employees in the transfer of the money and payroll from its branch office in
Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one
branch to another, they effectively and necessarily became its authorized representatives in the care and
custody of the money. Assuming that they could not be considered authorized representatives, they were,
nevertheless, employees of Producers. It asserts that the existence of an employer-employee relationship
"is determined by law and being such, it cannot be the subject of agreement." Thus, if there was in reality
an employer-employee relationship between Producers, on the one hand, and Magalong and Atiga, on the
other, the provisions in the contracts of Producers with PRC Management System for Magalong and with
Unicorn Security Services for Atiga which state that Producers is not their employer and that it is absolved
from any liability as an employer, would not obliterate the relationship.
 58
I. General Concepts

Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner of
selection and engagement of the putative employee; (2) the mode of payment of wages; (3) the presence or
absence of a power to dismiss; and (4) the presence and absence of a power to control the putative
employee's conduct. Of the four, the right-of-control test has been held to be the decisive factor. 6 It asserts
that the power of control over Magalong and Atiga was vested in and exercised by Producers. Fortune
further insists that PRC Management System and Unicorn Security Services are but "labor-only"
contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. There is "labor-only" contracting where the

person supplying workers to an employer does not have substantial capital or investment
in the form of tools, equipment, machineries, work premises, among others, and the
workers recruited and placed by such persons are performing activities which are directly
related to the principal business of such employer. In such cases, the person or intermediary
shall be considered merely as an agent of the employer who shall be responsible to the
workers in the same manner and extent as if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the project
and the employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had nothing
to do with their selection and engagement, the payment of their wages, their dismissal, and the control of
their conduct. Producers argued that the rule in International Timber Corp. is not applicable to all cases but
only when it becomes necessary to prevent any violation or circumvention of the Labor Code, a social
legislation whose provisions may set aside contracts entered into by parties in order to give protection to
the working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs.
Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following elements

are generally considered, namely: (1) the selection and engagement of the employee; (2)
the payment of wages; (3) the power of dismissal; and (4) the power to control the
employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong
as the driver of Producers' armored car and was responsible for his faithful discharge of his duties and
responsibilities, and since Producers paid the monthly compensation of P1,400.00 per driver to PRC
Management Systems and not to Magalong, it is clear that Magalong was not Producers' employee. As to
Atiga, Producers relies on the provision of its contract with Unicorn Security Services which provides that
the guards of the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance policy
which is a form of casualty insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of insurance such as fire or marine. It includes, but is not
limited to, employer's liability insurance, public liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and theft insurance, personal accident and health
 59
I. General Concepts

insurance as written by non-life insurance companies, and other substantially similar kinds
of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These contracts are,
therefore, governed by the general provisions applicable to all types of insurance. Outside of these, the
rights and obligations of the parties must be determined by the terms of their contract, taking into
consideration its purpose and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the
insurer the moral hazard is so great that insurers have found it necessary to fill up their policies with
countless restrictions, many designed to reduce this hazard. Seldom does the insurer assume the risk of all
losses due to the hazards insured against." 10 Persons frequently excluded under such provisions are those
in the insured's service and employment. 11 The purpose of the exception is to guard against liability should
the theft be committed by one having unrestricted access to the property. 12 In such cases, the terms
specifying the excluded classes are to be given their meaning as understood in common speech. 13 The terms
"service" and "employment" are generally associated with the idea of selection, control, and
compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the
insurer, 15 or it should be construed liberally in favor of the insured and strictly against the
insurer. 16 Limitations of liability should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying
then that if the terms of the contract are clear and unambiguous, there is no room for construction and such
terms cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is
settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their obligations not inconsistent with
public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general exceptions clause
of the policy which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee" and
"authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or
having unrestricted access to Producers' money or payroll. When it used then the term "employee," it must
 60
I. General Concepts

have had in mind any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of the employer-
employee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of
the Labor Code which considers the employees under a "labor-only" contract as employees of the party
employing them and not of the party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services
are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong.
Notwithstanding such express assumption of PRC Management Systems and Unicorn Security
Services that the drivers and the security guards each shall supply to Producers are not the latter's
employees, it may, in fact, be that it is because the contracts are, indeed, "labor-only" contracts.
Whether they are is, in the light of the criteria provided for in Article 106 of the Labor Code, a
question of fact. Since the parties opted to submit the case for judgment on the basis of their
stipulation of facts which are strictly limited to the insurance policy, the contracts with PRC
Management Systems and Unicorn Security Services, the complaint for violation of P.D. No. 532,
and the information therefor filed by the City Fiscal of Pasay City, there is a paucity of evidence as
to whether the contracts between Producers and PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC
Management Systems and Unicorn Security Services were truly independent contractors, we are satisfied
that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City branch to
its head office in Makati, its "authorized representatives" who served as such with its teller Maribeth
Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the
money to its head office, with Alampay to be responsible for its custody in transit; Magalong to drive the
armored vehicle which would carry the money; and Atiga to provide the needed security for the money, the
vehicle, and his two other companions. In short, for these particular tasks, the three acted as agents of
Producers. A "representative" is defined as one who represents or stands in the place of another; one who
represents others or another in a special capacity, as an agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-
G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati
in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.

No pronouncement as to costs.

SO ORDERED.