G.R. No.

147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision 1 dated October 11, 2000 of the
Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31,
1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America (respondent) against
Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.)
Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC
and LSPI separately obtained from respondent fire insurance policies with book debt endorsements.
The insurance policies provide for coverage on "book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."2 The policies defined book debts as the "unpaid account still appearing
in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for
a period in excess of six (6) months from the date of the covering invoice or actual delivery of
the merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the
close of every calendar month all amount shown in their books of accounts as unpaid and
thus become receivable item from their customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.
Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that
IMC and LSPI filed with respondent their claims under their respective fire insurance policies with
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held
liable because the property covered by the insurance policies were destroyed due to fortuities event
or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no
breach of contract committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the
merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that
the fire was purely accidental; that the cause of the fire was not attributable to the negligence of the
petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since
the sales invoices state that "it is further agreed that merely for purpose of securing the payment of
purchase price, the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bear
the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and
a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until
fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the
insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code,
to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the
thing at the time the loss under the principle of res perit domino; that petitioner's obligation to IMC
and LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such the
obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that by
subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the vendor's interest as a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April
11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS
IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to
be over credit since an insurance "on credit" belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit that was insured since respondent paid on the
occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of
any obligation; that, even if the insurance is deemed as one over credit, there was no loss as the
accounts were not yet due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only after it had already paid IMC
and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and
LSPI assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as
no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or the
payment between respondent and its insured nor was its consent or approval ever secured; that this
lack of privity forecloses any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as
creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable
for loss of the ready-made clothing materials since it failed to overcome the presumption of liability
under Article 126516 of the Civil Code; that the fire was caused through petitioner's negligence in
failing to provide stringent measures of caution, care and maintenance on its property because
electric wires do not usually short circuit unless there are defects in their installation or when there is
lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable to respondent for
contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from
the CA is limited to reviewing questions of law which involves no examination of the probative value
of the evidence presented by the litigants or any of them.18 The Supreme Court is not a trier of facts;
it is not its function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the
appellate court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises
or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts;
(5) when the findings of facts are conflicting; (6) when in making its findings the CA went beyond the
issues of the case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of evidence and contradicted by
the evidence on record; and (11) when the CA manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA
erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of
IMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold and
delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room
for construction.22 In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines."23 ; and defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the
loss covered under this Policy."24 Nowhere is it provided in the questioned insurance policies that the
subject of the insurance is the goods sold and delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to
read into it any alleged intention of the parties, the terms are to be understood literally just as they
appear on the face of the contract.25 Thus, what were insured against were the accounts of IMC and
LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
securing the payment of the purchase price the above described merchandise remains the property
of the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein
is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are
at the buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller merely to
secure performance by the buyer of his obligations under the contract, the goods are at the buyer's
risk from the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss
is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until
full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured has substantial economic
interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same
Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an interest, it is sufficient that the insured is so situated
with reference to the property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured.29 Anyone has an insurable interest in property who derives a benefit
from its existence or would suffer loss from its destruction.30Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other words, so long
as he would suffer by its destruction, as where he has a vendor's lien.31 In this case, the insurable
interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days
after the time of the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of
the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the
Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to make the payment even by
reason of a fortuitous event shall not relieve him of his liability.33 The rationale for this is that the rule
that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only
holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is
pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has incurred in
delay will not have the effect of extinguishing the obligation.35 This rule is based on the principle that
the genus of a thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this
case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"38 show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00.
Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt
executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these
documents have been properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the insurance company of the insurance
claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil
Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00
in the fire that razed petitioner's building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt
was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any
right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal
to petitioner's case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.

Republic of the Philippines

Supreme Court
Manila

FIRST DIVISION

DBP POOL OF ACCREDITED G.R. NO. 147039

INSURANCE COMPANIES,
Petitioner, Present:

PANGANIBAN, C.J.
(Chairman)
YNARES-SANTIAGO,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

RADIO MINDANAO NETWORK,

INC., Promulgated:
Respondent. January 27, 2006
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

AUSTRIA-MARTINEZ, J.:

This refers to the petition for certiorari under Rule 45 of the Rules of Court
seeking the review of the Decision[1] dated November 16, 2000 of the Court of
Appeals (CA) in CA-G.R. CV No. 56351, the dispositive portion of which reads:

Wherefore, premises considered, the appealed Decision of

the Regional Trial Court of Makati City, Branch 138 in Civil Case No. 90-602 is
hereby AFFIRMED with MODIFICATION in that the interest rate is hereby
reduced to 6% per annum.

Costs against the defendants-appellants.

SO ORDERED.[2]

The assailed decision originated from Civil Case No. 90-602 filed by Radio
Mindanao Network, Inc. (respondent) against DBP Pool of Accredited Insurance
Companies (petitioner) and Provident Insurance Corporation (Provident) for
recovery of insurance benefits. Respondent owns several broadcasting stations all
over the country. Provident covered respondents transmitter equipment and
generating set for the amount of P13,550,000.00 under Fire Insurance Policy No.
30354, while petitioner covered respondents transmitter, furniture, fixture and other
transmitter facilities for the amount of P5,883,650.00 under Fire Insurance Policy
No. F-66860.
In the evening of July 27, 1988, respondents radio station located
in SSS Building, Bacolod City, was razed by fire causing damage in the amount
of P1,044,040.00. Respondent sought recovery under the two insurance policies
but the claims were denied on the ground that the cause of loss was an excepted
risk excluded under condition no. 6 (c) and (d), to wit:

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 consequences,
namely:

(c) War, invasion, act of foreign enemy, hostilities, or warlike operations (whether
war be declared or not), civil war.

(d) Mutiny, riot, military or popular rising, insurrection, rebellion, revolution,

military or usurped power.[3]

The insurance companies maintained that the evidence showed that the fire was
caused by members of the Communist Party of the Philippines/New Peoples Army
(CPP/NPA); and consequently, denied the claims. Hence, respondent was
constrained to file Civil Case No. 90-602 against petitioner and Provident.
After trial on the merits, the Regional Trial Court of Makati, Branch 138, rendered
a decision in favor of respondent. The dispositive portion of the decision reads:

IN VIEW THEREOF, judgment is rendered in favor of plaintiff. Defendant

Provident Insurance Corporation is directed to pay plaintiff the amount
of P450,000.00 representing the value of the destroyed property insured under its
Fire Insurance Policy plus 12% legal interest from March 2, 1990 the date of the
filing of the Complaint. Defendant DBP Pool Accredited Insurance Companies is
likewise ordered to pay plaintiff the sum of P602,600.00 representing the value of
the destroyed property under its Fire Insurance Policy plus 12% legal interest
from March 2, 1990.

SO ORDERED.[4]

Both insurance companies appealed from the trial courts decision but the CA
affirmed the decision, with the modification that the applicable interest rate was
reduced to 6% per annum. A motion for reconsideration was filed by petitioner
DBP which was denied by the CA per its Resolution dated January 30, 2001.[5]
Hence, herein petition by DBP Pool of Accredited Insurance Companies, [6] with
the following assignment of errors:

Assignment of Errors

THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT

THERE WERE NO SUFFICIENT EVIDENCE SHOWING THAT THE
APPROXIMATELY TENTY [sic] (20) ARMED MEN WHO CUSED [sic] THE
FIRE AT RESPONDENTS RMN PROPERTY AT BACOLOD CITY WERE
MEMBERS OF THE CPP-NPA.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED

THAT RESPONDENT RMN CANNOT BEHELD [sic] FOR DAMAGES AND
ATTORNEYS FEES FOR INSTITUTING THE PRESENT ACTION AGAINST
THE PETITIONER UNDER ARTICLES 21, 2208, 2229 AND 2232 OF THE
CIVIL CODE OF THE PHILIPPINES.[7]
Petitioner assails the factual finding of both the trial court and the CA that its
evidence failed to support its allegation that the loss was caused by an excepted
risk, i.e., members of the CPP/NPA caused the fire.In upholding respondents claim
for indemnity, the trial court found that:

The only evidence which the Court can consider to determine if the fire was due
to the intentional act committed by the members of the New Peoples Army
(NPA), are the testimony [sic] of witnesses Lt. Col. Nicolas Torres and SPO3
Leonardo Rochar who were admittedly not present when the fire occurred. Their
testimony [sic] was [sic] limited to the fact that an investigation was conducted
and in the course of the investigation they were informed by bystanders that
heavily armed men entered the transmitter house, poured gasoline in (sic) it and
then lighted it. After that, they went out shouting Mabuhay ang NPA (TSN, p. 12.,
August 2, 1995). The persons whom they investigated and actually saw the
burning of the station were not presented as witnesses. The documentary evidence
particularly Exhibits 5 and 5-C do not satisfactorily prove that the author of the
burning were members of the NPA. Exhibit 5-B which is a letter released by the
NPA merely mentions some dissatisfaction with the activities of some people in
the media in Bacolod. There was no mention there of any threat on media
facilities.[8]
The CA went over the evidence on record and sustained the findings of the trial
court, to wit:

To recapitulate, defendants-appellants presented the following to support its

claim, to wit: police blotter of the burning of DYHB, certification of the Negros
Occidental Integrated National Police, Bacolod City regarding the incident, letter
of alleged NPA members Celso Magsilang claiming responsibility for the burning
of DYHB, fire investigation report dated July 29, 1988, and the testimonies of Lt.
Col. Nicolas Torres and SFO III LeonardoRochas. We examined carefully the
report on the police blotter of the burning of DYHB, the certification issued by
the Integrated National Police of Bacolod City and the fire investigation report
prepared by SFO III Rochas and there We found that none of them categorically
stated that the twenty (20) armed men which burned DYHB were members of the
CPP/NPA. The said documents simply stated that the said armed men
were believed to be orsuspected of being members of the said group. Even SFO
III Rochas admitted that he was not sure that the said armed men were members
of the CPP-NPA, thus:

In fact the only person who seems to be so sure that that the CPP-NPA had
a hand in the burning of DYHB was Lt. Col. Nicolas Torres. However, though
We found him to be persuasive in his testimony regarding how he came to arrive
at his opinion, We cannot nevertheless admit his testimony as conclusive proof
that the CPP-NPA was really involved in the incident considering that he admitted
that he did not personally see the armed men even as he tried to pursue
them. Note that when Lt. Col. Torres was presented as witness, he was presented
as an ordinary witness only and not an expert witness. Hence, his opinion on the
identity or membership of the armed men with the CPP-NPA is not admissible in
evidence.

Anent the letter of a certain Celso Magsilang, who claims to be a member of

NPA-NIROC, being an admission of person which is not a party to the present
action, is likewise inadmissible in evidence under Section 22, Rule 130 of
the Rules of Court. The reason being that an admission is competent only when
the declarant, or someone identified in legal interest with him, is a party to the
action.[9]

The Court will not disturb these factual findings absent compelling or
exceptional reasons. It should be stressed that a review by certiorari under Rule 45
is a matter of discretion. Under this mode of review, the jurisdiction of the Court is
limited to reviewing only errors of law, not of fact.[10]
 Moreover, when supported by substantial evidence, findings of fact of the
trial court as affirmed by the CA are conclusive and binding on the
parties,[11] which this Court will not review unless there are exceptional
circumstances. There are no exceptional circumstances in this case that would have
impelled the Court to depart from the factual findings of both the trial court and the
CA.

Both the trial court and the CA were correct in ruling that petitioner failed to
prove that the loss was caused by an excepted risk.

Petitioner argues that private respondent is responsible for proving that the
cause of the damage/loss is covered by the insurance policy, as stipulated in the
insurance policy, to wit:
Any loss or damage happening during the existence of abnormal
conditions (whether physical or otherwise) which are occasioned by or through in
consequence directly or indirectly, of any of the said occurrences shall be deemed
to be loss or damage which is not covered by the insurance, except to the extent
that the Insured shall prove that such loss or damage happened independently of
the existence of such abnormal conditions.

In any action, suit or other proceeding where the Companies allege that by
reason of the provisions of this condition any loss or damage is not covered by
this insurance, the burden of proving that such loss or damage is covered shall be
upon the Insured.[12]

An insurance contract, being a contract of adhesion, should be so interpreted

as to carry out the purpose for which the parties entered into the contract which is
to insure against risks of loss or damage to the goods. 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.[13]
 The burden of proof contemplated by the aforesaid provision actually refers
to the burden of evidence (burden of going forward).[14] As applied in this case, it
refers to the duty of the insured to show that the loss or damage is covered by the
policy. The foregoing clause notwithstanding, the burden of proof still rests upon
petitioner to prove that the damage or loss was caused by an excepted risk in order
to escape any liability under the contract.

Burden of proof is the duty of any party to present evidence to establish his
claim or defense by the amount of evidence required by law, which is
preponderance of evidence in civil cases. The party, whether plaintiff or defendant,
who asserts the affirmative of the issue has the burden of proof to obtain a
favorable judgment. For the plaintiff, the burden of proof never parts.[15] For the
defendant, an affirmative defense is one which is not a denial of an essential
ingredient in the plaintiffs cause of action, but one which, if established, will be a
good defense i.e. an avoidance of the claim.[16]

Particularly, in insurance cases, where a risk is excepted by the terms of a

policy which insures against other perils or hazards, loss from such a risk
constitutes a defense which the insurer may urge, since it has not assumed that risk,
and from this it follows that an insurer seeking to defeat a claim because of an
exception or limitation in the policy has the burden of proving that the loss
comes within the purview of the exception or limitation set up. If a proof is
made of a loss apparently within a contract of insurance, the burden is upon the
insurer to prove that the loss arose from a cause of loss which is excepted or for
which it is not liable, or from a cause which limits its liability.[17]

Consequently, it is sufficient for private respondent to prove the fact of

damage or loss. Once respondent makes out a prima facie case in its favor, the duty
or the burden of evidence shifts to petitioner to controvert respondents prima
facie case.[18] In this case, since petitioner alleged an excepted risk, then the burden
of evidence shifted to petitioner to prove such exception. It is only when petitioner
has sufficiently proven that the damage or loss was caused by an excepted risk
does the burden of evidence shift back to respondent who is then under a duty of
producing evidence to show why such excepted risk does not release petitioner
from any liability. Unfortunately for petitioner, it failed to discharge its primordial
burden of proving that the damage or loss was caused by an excepted risk.

Petitioner however, insists that the evidence on record established the

identity of the author of the damage. It argues that the trial court and the CA erred
in not appreciating the reports of witnesses Lt. Col Torres and SFO II Rochar that
the bystanders they interviewed claimed that the perpetrators were members of the
CPP/NPA as an exception to the hearsay rule as part of res gestae.

A witness can testify only to those facts which he knows of his personal
knowledge, which means those facts which are derived from his perception. [19] A
witness may not testify as to what he merely learned from others either because he
was told or read or heard the same. Such testimony is considered hearsay and may
not be received as proof of the truth of what he has learned. The hearsay rule is
based upon serious concerns about the trustworthiness and reliability of hearsay
evidence inasmuch as such evidence are not given under oath or solemn
affirmation and, more importantly, have not been subjected to cross-examination
by opposing counsel to test the perception, memory, veracity and articulateness of
the out-of-court declarant or actor upon whose reliability on which the worth of the
out-of-court statement depends.[20]

Res gestae, as an exception to the hearsay rule, refers to those exclamations

and statements made by either the participants, victims, or spectators to a crime
immediately before, during, or after the commission of the crime, when the
circumstances are such that the statements were made as a spontaneous reaction or
utterance inspired by the excitement of the occasion and there was no opportunity
for the declarant to deliberate and to fabricate a false statement. The rule in res
gestae applies when the declarant himself did not testify and provided that the
testimony of the witness who heard the declarant complies with the following
requisites: (1) that the principal act, the res gestae, be a startling occurrence; (2)
the statements were made before the declarant had the time to contrive or devise a
falsehood; and (3) that the statements must concern the occurrence in question and
its immediate attending circumstances.[21]

The Court is not convinced to accept the declarations as part of res

gestae. While it may concede that these statements were made by the bystanders
during a startling occurrence, it cannot be said however, that these utterances were
made spontaneously by the bystanders and before they had the time to contrive
or devise a falsehood. Both SFO III Rochar and Lt. Col. Torres received the
bystanders statements while they were making their investigations during and after
the fire. It is reasonable to assume that when these statements were noted down,
the bystanders already had enough time and opportunity to mill around, talk to one
another and exchange information, not to mention theories and speculations, as is
the usual experience in disquieting situations where hysteria is likely to take
place. It cannot therefore be ascertained whether these utterances were the products
of truth. That the utterances may be mere idle talk is not remote.

At best, the testimonies of SFO III Rochar and Lt. Col. Torres that these
statements were made may be considered as independently relevant statements
gathered in the course of their investigation, and are admissible not as to the
veracity thereof but to the fact that they had been thus uttered.[22]

Furthermore, admissibility of evidence should not be equated with its weight

and sufficiency.[23] Admissibility of evidence depends on its relevance and
competence, while the weight of evidence pertains to evidence already admitted
and its tendency to convince and persuade.[24] Even assuming that the declaration
of the bystanders that it was the members of the CPP/NPA who caused the fire
may be admitted as evidence, it does not follow that such declarations are
sufficient proof. These declarations should be calibrated vis--vis the other evidence
on record. And the trial court aptly noted that there is a need for additional
convincing proof, viz.:

The Court finds the foregoing to be insufficient to establish that the cause of the
fire was the intentional burning of the radio facilities by the rebels or an act of
insurrection, rebellion or usurped power. Evidence that persons who burned the
radio facilities shouted Mabuhay ang NPA does not furnish logical conclusion
that they are member [sic] of the NPA or that their act was an act of rebellion or
insurrection. Additional convincing proof need be submitted. Defendants failed to
discharge their responsibility to present adequate proof that the loss was due to a
risk excluded.[25]

While the documentary evidence presented by petitioner, i.e., (1) the police
blotter; (2) the certification from the Bacolod Police Station; and (3) the Fire
Investigation Report may be considered exceptions to the hearsay rule, being
entries in official records, nevertheless, as noted by the CA, none of these
documents categorically stated that the perpetrators were members of the
CPP/NPA.[26] Rather, it was stated in the police blotter that: a group of persons
accompanied by one (1) woman all believed to be CPP/NPA more or less 20
persons suspected to be CPP/NPA,[27] while the certification from the Bacolod
Police station stated that some 20 or more armed men believed to be members of
the New Peoples Army NPA,[28] and the fire investigation report concluded that (I)t
is therefore believed by this Investigating Team that the cause of the fire is
intentional, and the armed men suspected to be members of the CPP/NPA where
(sic) the ones responsible [29] All these documents show that indeed, the suspected
executor of the fire were believed to be members of the CPP/NPA. But suspicion
alone is not sufficient, preponderance of evidence being the quantum of proof.

All told, the Court finds no reason to grant the present petition.
WHEREFORE, the petition is DISMISSED. The Court of Appeals Decision
dated November 16, 2000 and Resolution dated January 30, 2001 rendered in CA-
G.R. CV No. 56351 are AFFIRMED in toto.

G.R. No. 151890 June 20, 2006

PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,

vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.

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

G.R. No. 151991 June 20, 2006

TRANS-ASIA SHIPPING LINES, INC., petitioner,

vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.

DECISION

CHICO-NAZARIO, J:

This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner Prudential
Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines,
Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated 6 November 2001 of the Court
of Appeals in CA G.R. CV No. 68278, which reversed the Judgment2 dated 6 June 2000 of the
Regional Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January
2002 Resolution3 of the Court of Appeals, denying PRUDENTIAL’s Motion for Reconsideration and
TRANS-ASIA’s Partial Motion for Reconsideration of the 6 November 2001 Decision, is likewise
sought to be annulled and set aside.

The Facts

The material antecedents as found by the court a quo and adopted by the appellate court are as
follows:

Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of
premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and
machinery arising from perils, inter alia, of fire and explosion for the sum of P40 Million, beginning
[from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No.
MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the policy was in force, a fire broke
out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to
subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim upon final survey
and determination by average adjuster Richard Hogg International (Phil.) of the damage sustained
by reason of fire. An adjuster’s report on the fire in question was submitted by Richard Hogg
International together with the U-Marine Surveyor Report (Exhibits "4" to "4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust
receipt", a portion of which read (sic):

"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION
ONLY (P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable only
in the event and to the extent that any net recovery is made by Trans-Asia Shipping Corporation,
from any person or persons, corporation or corporations, or other parties, on account of loss by any
casualty for which they may be liable occasioned by the 25 October 1993: Fire on Board." (Exhibit
"4")

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff’s claim (Exhibit "5"). The
letter reads:

"After a careful review and evaluation of your claim arising from the above-captioned incident, it has
been ascertained that you are in breach of policy conditions, among them "WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED". Accordingly, we regret to advise that your claim is not
compensable and hereby DENIED."

This was followed by defendant’s letter dated 21 July 1997 requesting the return or payment of the
P3,000,000.00 within a period of ten (10) days from receipt of the letter (Exhibit "6").4

Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of Money
against PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709, wherein
TRANS-ASIA sought the amount of P8,395,072.26 from PRUDENTIAL, alleging that the same
represents the balance of the indemnity due upon the insurance policy in the total amount of
P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per annum citing Section 2436 of
Presidential Decreee No. 1460, otherwise known as the "Insurance Code," as amended.

In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed the
defense that TRANS-ASIA breached insurance policy conditions, in particular: "WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged that it acted as facts
and law require and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no cause of action;
and, that its claim has been effectively waived and/or abandoned, or it is estopped from pursuing the
same. By way of a counterclaim, PRUDENTIAL sought a refund of P3,000,000.00, which it allegedly
advanced to TRANS-ASIA by way of a loan without interest and without prejudice to the final
evaluation of the claim, including the amounts of P500,000.00, for survey fees and P200,000.00,
representing attorney’s fees.

The Ruling of the Trial Court

On 6 June 2000, the court a quo rendered Judgment8 finding for (therein defendant) PRUDENTIAL.
It ruled that a determination of the parties’ liabilities hinged on whether TRANS-ASIA violated and
breached the policy conditions on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It
interpreted the provision to mean that TRANS-ASIA is required to maintain the vessel at a certain
class at all times pertinent during the life of the policy. According to the court a quo, TRANS-ASIA
failed to prove compliance of the terms of the warranty, the violation thereof entitled PRUDENTIAL,
the insured party, to rescind the contract.9

Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that the
concealment made by TRANS-ASIA that the vessel was not adequately maintained to preserve its
class was a material concealment sufficient to avoid the policy and, thus, entitled the injured party to
rescind the contract. The court a quo found merit in PRUDENTIAL’s contention that there was
nothing in the adjustment of the particular average submitted by the adjuster that would show that
TRANS-ASIA was not in breach of the policy. Ruling on the denominated loan and trust receipt, the
court a quo said that in substance and in form, the same is a receipt for a loan. It held that if TRANS-
ASIA intended to receive the amount of P3,000,000.00 as advance payment, it should have so
clearly stated as such.

The court a quo did not award PRUDENTIAL’s claim for P500,000.00, representing expert survey
fees on the ground of lack of sufficient basis in support thereof. Neither did it award attorney’s fees
on the rationalization that the instant case does not fall under the exceptions stated in Article
220811 of the Civil Code. However, the court a quo granted PRUDENTIAL’s counterclaim stating that
there is factual and legal basis for TRANS-ASIA to return the amount of P3,000,000.00 by way of
loan without interest.

The decretal portion of the Judgment of the RTC reads:

WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a
cause of action.

On defendant’s counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing the
loan extended to it by the defendant, within a period of ten (10) days from and after this judgment
shall have become final and executory.12

The Ruling of the Court of Appeals

On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001,
reversed the 6 June 2000 Judgment of the RTC.

On the issue of TRANS-ASIA’s alleged breach of warranty of the policy condition CLASSED AND
CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the non-
compensability of the loss had the burden of proof to show that TRANS-ASIA breached the
warranty, which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of certification to
the effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole basis for
reaching the conclusion that the warranty was breached. The Court of Appeals opined that the lack
of a certification does not necessarily mean that the warranty was breached by TRANS-ASIA.
Instead, the Court of Appeals considered PRUDENTIAL’s admission that at the time the insurance
contract was entered into between the parties, the vessel was properly classed by Bureau Veritas, a
classification society recognized by the industry. The Court of Appeals similarly gave weight to the
fact that it was the responsibility of Richards Hogg International (Phils.) Inc., the average adjuster
hired by PRUDENTIAL, to secure a copy of such certification to support its conclusion that mere
absence of a certification does not warrant denial of TRANS-ASIA’s claim under the insurance
policy.

In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-
ASIA to be a rider which, while contained in the policy, was inserted by PRUDENTIAL without the
intervention of TRANS-ASIA. As such, it partakes of a nature of a contract d’adhesion which should
be construed against PRUDENTIAL, the party which drafted the contract. Likewise, according to the
Court of Appeals, PRUDENTIAL’s renewal of the insurance policy from noon of 1 July 1994 to noon
of 1 July 1995, and then again, until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL
of any breach of warranty committed by TRANS-ASIA.

Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction
between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan. The Court of
Appeals concluded that TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00 to
PRUDENTIAL based on its finding that the aforesaid amount was PRUDENTIAL’s partial payment to
TRANS-ASIA’s claim under the policy. Finally, the Court of Appeals denied TRANS-ASIA’s prayer
for attorney’s fees, but held TRANS-ASIA entitled to double interest on the policy for the duration of
the delay of payment of the unpaid balance, citing Section 24413 of the Insurance Code.

Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:

WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is ALLOWED
and the Judgment appealed from REVERSED. The P3,000,000.00 initially paid by appellee
Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and covered by a "Loan and
Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the loss suffered by
appellant and covered by Marine Policy No. MH93/1363 issued by appellee. Further, appellee is
hereby ORDERED to pay appellant the additional amount of P8,395,072.26 representing the
balance of the loss suffered by the latter as recommended by the average adjuster Richard Hogg
International (Philippines) in its Report, with double interest starting from the time Richard Hogg’s
Survey Report was completed, or on 13 August 1996, until the same is fully paid.

All other claims and counterclaims are hereby DISMISSED.

All costs against appellee.14

Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for Reconsideration
and Partial Motion for Reconsideration thereon, respectively, which motions were denied by the
Court of Appeals in the Resolution dated 29 January 2002.

The Issues

Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No.
151890, relying on the following grounds, viz:

I.

THE AWARD IS GROSSLY UNCONSCIONABLE.

II.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY TRANS-
ASIA OF A MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE
INSURANCE POLICY.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD THE
BURDEN OF PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL
WARRANTY.

IV.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE EMBODIED IN
THE INSURANCE POLICY CONTRACT WAS A MERE RIDER.
 V.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE
POLICY CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH OF THE
WARRANTY BY TRANS-ASIA.

VI.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT"
EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS CONSTITUTING
PARTIAL PAYMENT THEREOF.

VII.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL OF

THE FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART OF
PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA OF THE WARRANTY.

VIII.

THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING THAT
PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN ORDERING
PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13
AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review
docketed as G.R. No. 151991, raising the following grounds for the allowance of the petition, to wit:

I.

THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEY’S FEES TO

PETITIONER TRANS-ASIA ON THE GROUND THAT SUCH CAN ONLY BE AWARDED IN THE
CASES ENUMERATED IN ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD
FAITH ON THE PART OF RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER
TRANS-ASIA’S INSURANCE CLAIM.

II.

THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001

SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL INTEREST
OF 12%, OR INTEREST AT THE RATE OF 24% PER ANNUM.16

In our Resolution of 2 December 2002, we granted TRANS-ASIA’s Motion for Consolidation17 of G.R.
Nos. 151890 and 151991;18 hence, the instant consolidated petitions.

In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising
from the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL arising
from the transaction between the parties as evidenced by a document denominated as "Loan and
Trust Receipt," dated 29 May 1995; and (3) the amount of interest to be imposed on the liability, if
any, of either or both parties.
Ruling of the Court

Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not
questions of fact, may be raised.19 This rule may be disregarded only when the findings of fact of the
Court of Appeals are contrary to the findings and conclusions of the trial court, or are not supported
by the evidence on record.20 In the case at bar, we find an incongruence between the findings of fact
of the Court of Appeals and the court a quo, thus, in our determination of the issues, we are
constrained to assess the evidence adduced by the parties to make appropriate findings of facts as
are necessary.

I.

A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy
condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in
the subject insurance contract.

In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express
and material warranty in the subject insurance contract, i.e., Marine Insurance Policy No.
MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that the insured vessel,
"M/V ASIA KOREA" is required to be CLASSED AND CLASS MAINTAINED. According to
PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of the fire, "M/V ASIA KOREA"
was in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED. PRUDENTIAL
submits that Warranty Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA
under the policy, the violation of which entitled PRUDENTIAL to rescind the contract under Sec.
7421 of the Insurance Code.

The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIAL’s
Senior Manager of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of his
testimony on direct examination is reproduced hereunder, viz:

ATTY. LIM

Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was
taken?

A It was eventually determined that there was a breach of the policy condition, and basically there is
a breach of policy warranty condition and on that basis the claim was denied.

Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as
Exhibits "1", "1-A" series, please point to the warranty in the policy which you said was breached or
violated by the plaintiff which constituted your basis for denying the claim as you testified.

A Warranted Vessel Classed and Class Maintained.

ATTY. LIM

Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy
below the printed words: "Clauses, Endorsements, Special Conditions and Warranties," below this
are several typewritten clauses and the witness pointed out in particular the clause reading:
"Warranted Vessel Classed and Class Maintained."
COURT

Q Will you explain that particular phrase?

A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class
warranty, it must be entered in the classification society.

COURT

Slowly.

WITNESS

(continued)

A A classification society is an organization which sets certain standards for a vessel to maintain in
order to maintain their membership in the classification society. So, if they failed to meet that
standard, they are considered not members of that class, and thus breaching the warranty, that
requires them to maintain membership or to maintain their class on that classification society. And it
is not sufficient that the member of this classification society at the time of a loss, their membership
must be continuous for the whole length of the policy such that during the effectivity of the policy,
their classification is suspended, and then thereafter, they get reinstated, that again still a breach of
the warranty that they maintained their class (sic). Our maintaining team membership in the
classification society thereby maintaining the standards of the vessel (sic).

ATTY. LIM

Q Can you mention some classification societies that you know?

A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification Society,
The Philippine Registration of Ships Society, China Classification, NKK and Company Classification
Society, and many others, we have among others, there are over 20 worldwide. 22

At the outset, it must be emphasized that the party which alleges a fact as a matter of defense has
the burden of proving it. PRUDENTIAL, as the party which asserted the claim that TRANS-ASIA
breached the warranty in the policy, has the burden of evidence to establish the same. Hence, on
the part of PRUDENTIAL lies the initiative to show proof in support of its defense; otherwise, failing
to establish the same, it remains self-serving. Clearly, if no evidence on the alleged breach of
TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA would be successful in
claiming on the policy. It follows that PRUDENTIAL bears the burden of evidence to establish the
fact of breach.

In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to
show proof of loss, and the coverage thereof, in the subject insurance policy. However, in the course
of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or the burden
of evidence shifts to defendant to controvert plaintiff’s prima facie case, otherwise, a verdict must be
returned in favor of plaintiff.23 TRANS-ASIA was able to establish proof of loss and the coverage of
the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of evidence shifted to
PRUDENTIAL to counter TRANS-ASIA’s case, and to prove its special and affirmative defense that
TRANS-ASIA was in violation of the particular condition on CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in discharging
the burden of evidence that TRANS-ASIA breached the subject policy condition on CLASSED AND
CLASS MAINTAINED.

Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio
Fernandez, made a categorical admission that at the time of the procurement of the insurance
contract in July 1993, TRANS-ASIA’s vessel, "M/V Asia Korea" was properly classed by Bureau
Veritas, thus:

Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia
Korea was classed at the time (sic) policy was procured perthe (sic) insurance was procured that
Exhibit "1" on 1st July 1993 (sic).

WITNESS

A I recall that they were classed.

ATTY. LIM

Q With what classification society?

A I believe with Bureau Veritas.24

As found by the Court of Appeals and as supported by the records, Bureau Veritas is a classification
society recognized in the marine industry. As it is undisputed that TRANS-ASIA was properly
classed at the time the contract of insurance was entered into, thus, it becomes incumbent upon
PRUDENTIAL to show evidence that the status of TRANS-ASIA as being properly CLASSED by
Bureau Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL failed to support
the allegation.

We are in accord with the ruling of the Court of Appeals that the lack of a certification in
PRUDENTIAL’s records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED AND
CLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the warranty contained in the policy. With more
reason must we sustain the findings of the Court of Appeals on the ground that as admitted by
PRUDENTIAL, it was likewise the responsibility of the average adjuster, Richards Hogg International
(Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-ASIA cannot
be gleaned from the average adjuster’s survey report, or adjustment of particular average per "M/V
Asia Korea" of the 25 October 1993 fire on board.

We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that,
"the violation of a material warranty, or other material provision of a policy on the part of either party
thereto, entitles the other to rescind." It is generally accepted that "[a] warranty is a statement or
promise set forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment of
which in any respect, and without reference to whether the insurer was in fact prejudiced by such
untruth or non-fulfillment, renders the policy voidable by the insurer."25However, it is similarly
indubitable that for the breach of a warranty to avoid a policy, the same must be duly shown by the
party alleging the same. We cannot sustain an allegation that is unfounded. Consequently,
PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition, CLASSED
AND CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to recover its rightful
claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same.

The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA breached
the warranty provision on CLASSED AND CLASS MAINTAINED, underscored that PRUDENTIAL
can be deemed to have made a valid waiver of TRANS-ASIA’s breach of warranty as alleged,
ratiocinating, thus:

Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive
years, from noon of 01 July 1994 to noon of 01 July 1995, and then again until noon of 01 July 1996.
This renewal is deemed a waiver of any breach of warranty.26

PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal policies
are deemed a waiver of TRANS-ASIA’s alleged breach, averring herein that the subsequent policies,
designated as MH94/1595 and MH95/1788 show that they were issued only on 1 July 1994 and 3
July 1995, respectively, prior to the time it made a request to TRANS-ASIA that it be furnished a
copy of the certification specifying that the insured vessel "M/V Asia Korea" was CLASSED AND
CLASS MAINTAINED. PRUDENTIAL posits that it came to know of the breach by TRANS-ASIA of
the subject warranty clause only on 21 April 1997. On even date, PRUDENTIAL sent TRANS-ASIA a
letter of denial, advising the latter that their claim is not compensable. In fine, PRUDENTIAL would
have this Court believe that the issuance of the renewal policies cannot be a waiver because they
were issued without knowledge of the alleged breach of warranty committed by TRANS-ASIA.27

We are not impressed. We do not find that the Court of Appeals was in error when it held that
PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive years after the loss
covered by Policy No. MH93/1363, was considered to have waived TRANS-ASIA’s breach of the
subject warranty, if any. Breach of a warranty or of a condition renders the contract defeasible at the
option of the insurer; but if he so elects, he may waive his privilege and power to rescind by the mere
expression of an intention so to do. In that event his liability under the policy continues as
before.28 There can be no clearer intention of the waiver of the alleged breach than the renewal of
the policy insurance granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788,
issued in the years 1994 and 1995, respectively.

To our mind, the argument is made even more credulous by PRUDENTIAL’s lack of proof to support
its allegation that the renewals of the policies were taken only after a request was made to TRANS-
ASIA to furnish them a copy of the certificate attesting that "M/V Asia Korea" was CLASSED AND
CLASS MAINTAINED. Notwithstanding PRUDENTIAL’s claim that no certification was issued to that
effect, it renewed the policy, thereby, evidencing an intention to waive TRANS-ASIA’s alleged
breach. Clearly, by granting the renewal policies twice and successively after the loss, the intent was
to benefit the insured, TRANS-ASIA, as well as to waive compliance of the warranty.

The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as
raised by the PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively alter
the result for the reasons that: (1) PRUDENTIAL was not able to discharge the burden of evidence
to show that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo the commission
of a breach by TRANS-ASIA, the same was shown to have been waived by PRUDENTIAL.

II.

A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction

between the parties evidenced by a document denominated as "Loan and Trust Receipt," dated 29
May 1995 constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The
same was evidenced by a transaction receipt denominated as a "Loan and Trust Receipt," dated 29
May 1995, reproduced hereunder:

LOAN AND TRUST RECEIPT

Claim File No. MH-93-025 May 29, 1995

P3,000,000.00
Check No. PCIB066755

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE
MILLION ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353, repayable
only in the event and to the extent that any net recovery is made by TRANS ASIA SHIPPING
CORP., from any person or persons, corporation or corporations, or other parties, on account of loss
by any casualty for which they may be liable, occasioned by the 25 October 1993: Fire on Board.

As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND

ASSURANCE INC. whatever recovery we may make and deliver to it all documents necessary to
prove our interest in said property. We also hereby agree to promptly prosecute suit against such
persons, corporation or corporations through whose negligence the aforesaid loss was caused or
who may otherwise be responsible therefore, with all due diligence, in our own name, but at the
expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.

TRANS-ASIA SHIPPING CORPORATION29

PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties evidenced
a loan of P3,000,000.00 which it granted to TRANS-ASIA, and not an advance payment on the
policy or a partial payment for the loss. It further submits that it is a customary practice for insurance
companies in this country to extend loans gratuitously as part of good business dealing with their
assured, in order to afford their assured the chance to continue business without embarrassment
while awaiting outcome of the settlement of their claims.30 According to PRUDENTIAL, the "Trust
and Loan Agreement" did not subrogate to it whatever rights and/or actions TRANS-ASIA may have
against third persons, and it cannot by no means be taken that by virtue thereof, PRUDENTIAL was
granted irrevocable power of attorney by TRANS-ASIA, as the sole power to prosecute lies solely
with the latter.

The Court of Appeals held that the real character of the transaction between the parties as
evidenced by the "Loan and Trust Receipt" is that of an advance payment by PRUDENTIAL of
TRANS-ASIA’s claim on the insurance, thus:

The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law Act
No. 2427 of the Philippine Legislature during the American Regime. The Insurance Act was lifted
verbatim from the law of California, except Chapter V thereof, which was taken largely from the
insurance law of New York. Therefore, ruling case law in that jurisdiction is to Us persuasive in
interpreting provisions of our own Insurance Code. In addition, the application of the adopted statute
should correspond in fundamental points with the application in its country of origin x x x.

xxxx

Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt that
the money was intended as a loan does not detract from its real character as payment of claim, thus:
"The receipt of money by the insured employers from a surety company for losses on account of
forgery of drafts by an employee where no provision or repayment of the money was made except
upon condition that it be recovered from other parties and neither interest nor security for the
asserted debts was provided for, the money constituted the payment of a liability and not a mere
loan, notwithstanding recitals in the written receipt that the money was intended as a mere loan."

What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that
appellant is obligated to hand over to appellee "whatever recovery (Trans Asia) may make and
deliver to (Prudential) all documents necessary to prove its interest in the said property." For all
intents and purposes therefore, the money receipted is payment under the policy, with Prudential
having the right of subrogation to whatever net recovery Trans-Asia may obtain from third parties
resulting from the fire. In the law on insurance, subrogation is an equitable assignment to the insurer
of all remedies which the insured may have against third person whose negligence or wrongful act
caused the loss covered by the insurance policy, which is created as the legal effect of payment by
the insurer as an assignee in equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer. It has been referred to as the
doctrine of substitution and rests on the principle that substantial justice should be attained
regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between
all the parties without regard to form.31

We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences that
the real nature of the transaction between the parties was that the amount of P3,000,000.00 was not
intended as a loan whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but rather, the same
was a partial payment or an advance on the policy of the claims due to TRANS-ASIA.

First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by

PRUDENTIAL, subrogating the former to the extent of "any net recovery made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993:
Fire on Board."32

Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly
prosecute suit against such persons, corporation or corporations through whose negligence the
aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence" in
its name, the prosecution of the claims against such third persons are to be carried on "at the
expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC."33 The clear import of the phrase "at the expense of and under the exclusive
direction and control" as used in the "Loan and Trust Receipt" grants solely to PRUDENTIAL the
power to prosecute, even as the same is carried in the name of TRANS-ASIA, thereby making
TRANS-ASIA merely an agent of PRUDENTIAL, the principal, in the prosecution of the suit against
parties who may have occasioned the loss.

Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay
PRUDENTIAL is highly speculative and contingent, i.e., only in the event and to the extent that any
net recovery is made by TRANS-ASIA from any person on account of loss occasioned by the fire of
25 October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such that, if no
recovery from third parties is made, PRUDENTIAL cannot be repaid the amount. Verily, we do not
think that this is constitutive of a loan.34 The liberality in the tenor of the "Loan and Trust Receipt" in
favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was a form of an
advance payment on TRANS-ASIA’s claim on MH93/1353.

III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the
balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363.

Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid claims
covered by Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.

B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorney’s fees
equivalent to 10% of P8,395,072.26.

The Court of Appeals denied the grant of attorney’s fees. It held that attorney’s fees cannot be
awarded absent a showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIA’s
claim, notwithstanding that the rejection was erroneous. According to the Court of Appeals,
attorney’s fees can be awarded only in the cases enumerated in Article 2208 of the Civil Code which
finds no application in the instant case.

We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorney’s fees and
other expenses incurred by the insured after a finding by the Insurance Commissioner or the Court,
as the case may be, of an unreasonable denial or withholding of the payment of the claims due.
Moreover, the law imposes an interest of twice the ceiling prescribed by the Monetary Board on the
amount of the claim due the insured from the date following the time prescribed in Section 24235 or in
Section 243,36 as the case may be, until the claim is fully satisfied. Finally, Section 244 considers the
failure to pay the claims within the time prescribed in Sections 242 or 243, when applicable, as prima
facie evidence of unreasonable delay in payment.

To the mind of this Court, Section 244 does not require a showing of bad faith in order that attorney’s
fees be granted. As earlier stated, under Section 244, a prima facie evidence of unreasonable delay
in payment of the claim is created by failure of the insurer to pay the claim within the time fixed in
both Sections 242 and 243 of the Insurance Code. As established in Section 244, by reason of the
delay and the consequent filing of the suit by the insured, the insurers shall be adjudged to pay
damages which shall consist of attorney’s fees and other expenses incurred by the insured.37

Section 244 reads:

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

Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay or
refusal in the payment of the insurance claims.

In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show
that there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid balance of
P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the occurrence of the fire in "M/V
Asia Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster, Richards Hogg
International (Phils.), Inc., completed its survey report recommending the amount of P11,395,072.26
as the total indemnity due to TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a
letter39 addressed to TRANS-ASIA denied the latter’s claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent a second
letter40 to TRANS-ASIA seeking a return of the amount of P3,000,000.00. On 13 August 1997,
TRANS-ASIA was constrained to file a complaint for sum of money against PRUDENTIAL praying,
inter alia, for the sum of P8,395,072.26 representing the balance of the proceeds of the insurance
claim.

As can be gleaned from the foregoing, there was an unreasonable delay on the part of
PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latter’s right to the insurance claims,
from the time proof of loss was shown and the ascertainment of the loss was made by the insurance
adjuster. Evidently, PRUDENTIAL’s unreasonable delay in satisfying TRANS-ASIA’s unpaid claims
compelled the latter to file a suit for collection.

Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as
attorney’s fees to TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten
percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v. Court of
Appeals,41 where a finding of an unreasonable delay under Section 244 of the Insurance Code was
made by this Court, we grant an award of attorney’s fees equivalent to ten percent (10%) of the total
proceeds. We find no reason to deviate from this judicial precedent in the case at bar.

C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest in accordance with Section 244 of the Insurance Code.

Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling prescribed
by the Monetary Board due the insured, from the date following the time prescribed in Section 242 or
in Section 243, as the case may be, until the claim is fully satisfied. In the case at bar, we find
Section 243 to be applicable as what is involved herein is a marine insurance, clearly, a policy other
than life insurance.

Section 243 is hereunder reproduced:

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

As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the
rate of twice the ceiling prescribed by the Monetary Board except when the failure or refusal of the
insurer to pay was founded on the ground that the claim is fraudulent.

D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted to
mean 24% per annum.

PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS-
ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIAL’s stance that the award is
extortionate and grossly unsconscionable. In support thereto, PRUDENTIAL makes a reference to
TRANS-ASIA’s prayer in the Complaint filed with the court a quo wherein the latter sought, "interest
double the prevailing rate of interest of 21% per annum now obtaining in the banking business or
plus 42% per annum pursuant to Article 243 of the Insurance Code x x x."42

The contention fails to persuade. It is settled that an award of double interest is lawful and justified
under Sections 243 and 244 of the Insurance Code.43 In Finman General Assurance Corporation v.
Court of Appeals,44 this Court held that the payment of 24% interest per annum is authorized by the
Insurance Code.45 There is no gainsaying that the term "double interest" as used in Sections 243
and 244 can only be interpreted to mean twice 12% per annum or 24% per annum interest, thus:

The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per
centum per annum (12%) as prescribed by the Monetary Board in C.B. Circular No. 416, pursuant to
P.D. No. 116, amending the Usury Law; so that when Sections 242, 243 and 244 of the Insurance
Code provide that the insurer shall be liable to pay interest "twice the ceiling prescribed by the
Monetary Board", it means twice 12% per annum or 24% per annum interest on the proceeds of the
insurance.46

E. The payment of double interest should be counted from 13 September 1996.

The Court of Appeals, in imposing double interest for the duration of the delay of the payment of the
unpaid balance due TRANS-ASIA, computed the same from 13 August 1996 until such time when
the amount is fully paid. Although not raised by the parties, we find the computation of the duration
of the delay made by the appellate court to be patently erroneous.

To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the delay
at the rate of twice the ceiling prescribed by the Monetary Board. Significantly, Section 243
mandates the payment of any loss or damage for which an insurer may be liable, under any policy
other than life insurance policy, within thirty days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement between the insured and the
insurer or by arbitration. It is clear that under Section 243, the insurer has until the 30th day after
proof of loss and ascertainment of the loss or damage to pay its liability under the insurance, and
only after such time can the insurer be held to be in delay, thereby necessitating the imposition of
double interest.

In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was
completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996.
PRUDENTIAL had thirty days from 13 August 1996 within which to pay its liability to TRANS-ASIA
under the insurance policy, or until 13 September 1996. Therefore, the double interest can begin to
run from 13 September 1996 only.

IV.

A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged in
section III herein, computed from the time of finality of judgment until the full satisfaction thereof in
conformity with this Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals,47 inscribed the rule of thumb48 in the
application of interest to be imposed on obligations, regardless of their source. Eastern emphasized
beyond cavil that when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, regardless of whether the obligation involves a loan or
forbearance of money, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance49 of credit.
We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the
finality of judgment until the full satisfaction thereof must be imposed on the total amount of liability
adjudged to PRUDENTIAL. It is clear that the interim period from the finality of judgment until the
satisfaction of the same is deemed equivalent to a forbearance of credit, hence, the imposition of the
aforesaid interest.

Fallo

WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No.
151991 is GRANTED, thus, we award the grant of attorney’s fees and make a clarification that the
term "double interest" as used in the 6 November 2001 Decision of the Court of Appeals in CA GR
CV No. 68278 should be construed to mean interest at the rate of 24% per annum, with a further
clarification, that the same should be computed from 13 September 1996 until fully paid. The
Decision and Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001
and 29 January 2002, respectively, are, thus, MODIFIED in the following manner, to wit:

1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26,

representing the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy
No. MH93/1363;

2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of

attorney’s fees equivalent to 10% of the amount of P8,395,072.26;

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest at the rate of 24% per annum to be computed from 13 September
1996 until fully paid; and

4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability
adjudged as abovestated in paragraphs (1), (2), and (3) herein, computed from the time of
finality of judgment until the full satisfaction thereof.

No costs.

REPUBLIC OF THE G.R. No. 156956

PHILIPPINES, Represented
by EDUARDO T. MALINIS, Present:
in His Capacity as Insurance
Commissioner, PANGANIBAN, CJ, Chairperson,
Petitioner, YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
- versus - CHICO-NAZARIO, JJ
DEL MONTE MOTORS, INC., Promulgated:
Respondent. October 9, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
 DECISION

PANGANIBAN, CJ:

The securities required by the Insurance Code to be deposited with

the Insurance Commissioner are intended to answer for the claims
of all policy holders in the event that the depositing insurance company
becomes insolvent or otherwise unable to satisfy their claims. The
security deposit must be ratably distributed among all the insured who
are entitled to their respective shares; it cannot be garnished or levied
upon by a single claimant, to the detriment of the others.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,

seeking to reverse the January 16, 2003 Order[2] of the Regional Court
(RTC) of Quezon City (Branch 221) in Civil Case No. Q-97-30412. The
RTC found Insurance Commissioner Eduardo T. Malinis guilty of
indirect contempt for refusing to comply with the December 18,
2002Resolution[3] of the lower court. The January 16, 2003 Order states
in full:

On January 8, 2003, [respondent] filed a Motion to Cite

Commissioner Eduardo T. Malinis of the Office of the Insurance
Commission in Contempt of Court because of his failure and refusal
 to obey the lawful order of this court embodied in a Resolution dated
December 18, 2002 directing him to allow the withdrawal of the
security deposit of Capital Insurance and Surety Co. (CISCO) in the
amount of P11,835,375.50 to be paid to Sheriff Manuel Paguyo in the
satisfaction of the Notice of Garnishment pursuant to a Decision of
this Court which has become final and executory.

During the hearing of the Motion set last January 10, 2003,
Commissioner Malinis or his counsel or his duly authorized
representative failed to appear despite notice in utter disregard of the
order of this Court. However, Commissioner Malinis filed on January
15, 2003 a written Comment reiterating the same grounds already
passed upon and rejected by this Court. This Court finds no lawful
justification or excuse for Commissioner Malinis refusal to implement
the lawful orders of this Court.

Wherefore, premises considered and after due hearing,

Commissioner Eduardo T. Malinis is hereby declared guilty of
Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of the
1997 Rules of Civil Procedure for willfully disobeying and refusing to
implement and obey a lawful order of this Court.[4]

The Facts

On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-
97-30412, finding the defendants (Vilfran Liner, Inc., Hilaria Villegas
and Maura Villegas) jointly and severally liable to pay Del Monte
Motors, Inc., P11,835,375.50 representing the balance of Vilfran Liners
service contracts with respondent. The trial court further ordered the
execution of the Decision against the counterbond posted
by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).

On April 18, 2002, CISCO opposed the Motion for Execution filed by
respondent, claiming that the latter had no record or document regarding
the alleged issuance of thecounterbond; thus, the bond was not valid and
enforceable.

On June 13, 2002, the RTC granted the Motion for Execution and issued
the corresponding Writ. Armed with this Writ, Sheriff Manuel
S. Paguyo proceeded to levy on the properties of CISCO. He also issued
a Notice of Garnishment on several depository banks of the insurance
company. Moreover, he served a similar notice on the Insurance
Commission, so as to enforce the Writ on the security deposit filed by
CISCO with the Commission in accordance with Section 203 of the
Insurance Code.

On December 18, 2002, after a hearing on all the pending Motions, the
RTC ruled that the Notice of Garnishment served by Sheriff Paguyo on
the insurance commission was valid.The trial court added that the letter
and spirit of the law made the security deposit answerable for
contractual obligations incurred by CISCO under the insurance contracts
the latter had entered into. The RTC resolved thus:
 Furthermore, the Commissioner of the Office of the Insurance
Commission is hereby ordered to comply with its obligations under
the Insurance Code by upholding the integrity and efficacy of bonds
validly issued by duly accredited Bonding and Insurance Companies;
and to safeguard the public interest by insuring the faithful
performance to enforce contractual obligations under existing
bonds. Accordingly said office is ordered to withdraw from the
security deposit of Capital Insurance & Surety Company, Inc. the
amount of P11,835.50 to be paid to Sheriff Manuel S.Paguyo in
satisfaction of the Notice of Garnishment served on August 16,
2002.[5]

On January 8, 2003, respondent moved to cite Insurance Commissioner

Eduardo T. Malinis in contempt of court for his refusal to obey the
December 18, 2002 Resolution of the trial court.

Ruling of the Trial Court

The RTC held Insurance Commissioner Malinis in contempt for his

refusal to implement its Order. It explained that the commissioner had
no legal justification for his refusal to allow the withdrawal
of CISCOs security deposit.

Hence, this Petition.[6]

 Issues

Petitioner raises this sole issue for the Courts consideration:

Whether or not the security deposit held by the Insurance

Commissioner pursuant to Section 203 of the Insurance Code may be
levied or garnished in favor of only one insured.[7]

The Courts Ruling

The Petition is meritorious.

Preliminary Issue:
Propriety of Review

Before discussing the principal issue, the Court will first dispose of the
question of mootness.
Prior to the filing of the instant Petition, Insurance
Commissioner Malinis sent the treasurer of the Philippines a letter dated
March 26, 2003, stating that the former had no objection to the release of
the security deposit to Del Monte Motors. Portions of the fund were
consequently released to respondent in July, October, and December
2003. Thus, the issue arises: whether these circumstances render the case
moot.
 Petitioner, however, contends that the partial releases should not be
construed as an abandonment of its stand that security deposits under
Section 203 of the Insurance Code are exempt from levy and
garnishment. The Republic claims that the releases were made pursuant
to the commissioners power of control over the fund, not to the lower
courts Order of garnishment. Petitioner further invokes the jurisdiction
of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and
garnished.

The issue is not totally moot. To stress, only a portion of respondents

claim was satisfied, and the Insurance Commission has required CISCO
to replenish the latters security deposit.Respondent, therefore, may one
day decide to further garnish the security deposit, once
replenished. Moreover, after the questioned Order of the lower court was
issued, similar claims on the security deposits of various insurance
companies have been made before the Insurance Commission. To set
aside the resolution of the issue will only postpone a task that is certain
to crop up in the future.

Besides, the business of insurance is imbued with public interest. It is

subject to regulation by the State, with respect not only to the relations
between the insurer and the insured, but also to the internal affairs of
insurance companies.[8] As this case is undeniably endowed with public
interest and involves a matter of public policy, this Court shall not shirk
from its duty to educate the bench and the bar by formulating guiding
and controlling principles, precepts, doctrines and rules.[9]

Principal Issue:
Exemption of Security Deposit
from Levy or Garnishment

Section 203 of the Insurance Code provides as follows:

Sec. 203. Every domestic insurance company shall, to the extent of an

amount equal in value to twenty-five per centum of the minimum
paid-up capital required under section one hundred eighty-eight,
invest its funds only in securities, satisfactory to the Commissioner,
consisting of bonds or other evidences of debt of the Government of
the Philippines or its political subdivisions or instrumentalities, or of
government-owned or controlled corporations and entities, including
the Central Bank of the Philippines: Provided, That such investments
shall at all times be maintained free from any lien or encumbrance;
and Provided, further, That such securities shall be deposited with and
held by the Commissioner for the faithful performance by the
depositing insurer of all its obligations under its insurance
contracts. The provisions of section one hundred ninety-two shall, so
far as practicable, apply to the securities deposited under this section.

Except as otherwise provided in this Code, no judgment creditor or

other claimant shall have the right to levy upon any of the
 securities of the insurer held on deposit pursuant to the
requirement of the Commissioner. (Emphasis supplied)

Respondent notes that Section 203 does not provide for an absolute
prohibition on the levy and garnishment of the security deposit. It
contends that the law requires the deposit, precisely to ensure faithful
performance of all the obligations of the depositing insurer under the
latters various insurance contracts. Hence, respondent claims that the
security deposit should be answerable for the counterbond issued by
CISCO.

The Court is not convinced. As worded, the law expressly and

clearly states that the security deposit shall be (1) answerable for all the
obligations of the depositing insurer under its insurance contracts; (2) at
all times free from any liens or encumbrance; and (3) exempt from levy
by any claimant.

To be sure, CISCO, though presently under conservatorship, has

valid outstanding policies. Its policy holders have a right under the law
to be equally protected by its security deposit. To allow the garnishment
of that deposit would impair the fund by decreasing it to less than the
percentage of paid-up capital that the law requires to be
maintained. Further, this move would create, in favor of respondent, a
preference of credit over the other policy holders and beneficiaries.

Our Insurance Code is patterned after that of California.[10] Thus,

the ruling of the states Supreme Court on a similar concept as that of the
security deposit is instructive.Engwicht v. Pacific States Life Assurance
Co.[11] held that the money required to be deposited by a mutual
assessment insurance company with the state treasurer was a trust fund
to be ratably distributed amongst all the claimants entitled to share in
it. Such a distribution cannot be had except in an action in the nature of a
creditors bill, upon the hearing of which, and with all the parties
interested in the fund before it, the court may make equitable
distribution of the fund, and appoint a receiver to carry that distribution
into effect.[12]

Basic is the statutory construction rule that provisions of a statute

should be construed in accordance with the purpose for which it was
enacted.[13] That is, the securities are held as a contingency fund to
answer for the claims against the insurance company by all its policy
holders and their beneficiaries. This step is taken in the event that the
company becomes insolvent or otherwise unable to satisfy the claims
against it. Thus, a single claimant may not lay stake on the securities to
the exclusion of all others. The other parties may have their own claims
against the insurance company under other insurance contracts it has
entered into.

Respondents Inchoate Right

The right to lay claim on the fund is dependent on the solvency of

the insurer and is subject to all other obligations of the company arising
from its insurance contracts. Thus, respondents interest is merely
inchoate. Being a mere expectancy, it has no attribute of property. At
this time, it is nonexistent and may never exist.[14] Hence, it would be
premature to make the security deposit answerable for CISCOs present
obligation to Del Monte Motors.

Moreover, since insolvency proceedings against CISCO have yet

to be conducted, it would be impossible to establish at this time which
claimants are entitled to the security deposit and in what pro-rated
amounts. Only after all other claimants under subsisting policies issued
by CISCO have been heard can respondents share be determined.

Powers of the Commissioner

 The Insurance Code has vested the Office of the Insurance
Commission with both regulatory and adjudicatory authority over
insurance matters.[15]
The general regulatory authority of the insurance commissioner is
described in Section 414 of the Code as follows:

Sec. 414. 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, and shall, notwithstanding any
existing laws to the contrary, have sole and exclusive authority to
regulate the issuance and sale of variable contracts as defined in
section two hundred thirty-two and to provide for the licensing of
persons selling such contracts, and to issue such reasonable rules and
regulations governing the same.

The Commissioner may issue such rulings, instructions,

circulars, orders and decisions as he may deem necessary to secure
the enforcement of the provisions of this Code, subject to the approval
of the Secretary of Finance. Except as otherwise specified, decisions
made by the Commissioner shall be appealable to the Secretary of
Finance. (Emphasis supplied)

Pursuant to these regulatory powers, the commissioner is

authorized to (1) issue (or to refuse to issue) certificates of authority to
persons or entities desiring to engage in insurance business in the
Philippines;[16] (2) revoke or suspend these certificates of authority upon
finding grounds for the revocation or suspension;[17] (3) impose upon
insurance companies, their directors and/or officers and/or agents
appropriate penalties -- fines, suspension or removal from office -- for
failing to comply with the Code or with any of the commissioners
orders, instructions, regulations or rulings, or for otherwise conducting
business in an unsafe or unsound manner.[18]
Included in the above regulatory responsibilities is the duty to hold the
security deposits under Sections 191[19] and 203 of the Code, for the
benefit and security of all policy holders.In relation to these provisions,
Section 192 of the Insurance Code states:

Sec. 192. The Commissioner shall hold the securities, deposited as

aforesaid, for the benefit and security of all the policyholders of the
company depositing the same, but shall as long as the company is
solvent, permit the company to collect the interest or dividends on the
securities so deposited, and, from time to time, with his assent, to
withdraw any of such securities, upon depositing with said
Commissioner other like securities, the market value of which shall be
equal to the market value of such as may be withdrawn. In the event
of any company ceasing to do business in the Philippines the
securities deposited as aforesaid shall be returned upon the companys
making application therefor and proving to the satisfaction of the
Commissioner that it has no further liability under any of its policies
in the Philippines. (Emphasis supplied)

Undeniably, the insurance commissioner has been given a wide

latitude of discretion to regulate the insurance industry so as to protect
the insuring public. The law specifically confers custody over the
securities upon the commissioner, with whom these investments are
required to be deposited. An implied trust[20] is created by the law for the
benefit of all claimants under subsisting insurance contracts issued by
the insurance company.[21]
As the officer vested with custody of the security deposit, the
insurance commissioner is in the best position to determine if and when
it may be released without prejudicing the rights of other policy
holders. Before allowing the withdrawal or the release of the deposit, the
commissioner must be satisfied that the conditions contemplated by the
law are met and all policy holders protected.

Commissioners Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security

deposit of CISCO. Believing that the funds were exempt from execution
as provided by law, he sought to protect other policy holders. His
interpretation of the provisions of the law carries great weight and
consideration,[22] as he is the head of a specialized body tasked with the
regulation of insurance matters and primarily charged with the
implementation of the Insurance Code.

The emergence of the multifarious needs of modern society

necessitates the establishment of diverse administrative agencies. In
addressing these needs, the administrative agencies charged with
applying and implementing particular statutes have accumulated
experience and specialized capabilities. Thus, in a long line of cases, this
Court has recognized that their construction of a statute is entitled to
great respect and should ordinarily be controlling, unless clearly shown
to be in sharp conflict with the governing statute or the Constitution and
other laws.[23]

Clearly, then, the trial court erred in issuing the Writ of

Garnishment against the security deposit of CISCO. It follows that
without the issuance of a valid order, the insurance commissioner could
not have been in contempt of court.[24]

WHEREFORE, the Petition is GRANTED and the assailed

Order SET ASIDE. No costs.

INSULAR LIFE G.R. No. 163255

ASSURANCE COMPANY,

LIMITED, Present:

Petitioner,

Puno, C.J.,

Chairperson,

Sandoval-Gutierrez,
- versus - Corona,

Azcuna, and

Garcia, JJ.

Promulgated:

MANUEL M. SERRANO,

Respondent. June 22, 2007

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

DECISION

PUNO, C.J.:

Before us is a petition for review of the October 9, 2003 decision[1] and April 15,
2004 resolution[2] of the Court of Appeals in CA-G.R. SP No. 76341.

First, the antecedent facts.

In June 1987 respondent Manuel M. Serrano bought from petitioner Insular

Life Assurance Company, Limited, a life insurance policy called Diamond Jubilee,
Participating on his understanding that he shall be
paying premiums for seven (7) years only. Dividend accumulations and earned
interests were to be applied to subsequent premium payments. Respondent
obtained six Diamond Jubilee Life Insurance policies, and religiously paid the
premiums.
 In early 1996, respondent was informed by his accountant that he had been
paying premiums on some of his policies even beyond the seven-year period of
their effectivity. Consequently, respondent wrote a letter to Atty. Ernesto
G. Montalban, petitioners Senior Vice President, Sales Operations Group,
requesting that the overpayments be applied as premium payments of his other
policies which have not reached the seven-year period. The request was denied on
the ground that the self-liquidating option of the policies was not guaranteed
because it was based on dividends which vary. Atty. Montalban, however, assured
respondent that some of his policies will self-liquidate but on the following dates,
to wit:
Policy Number Issue Date Date of Self-Liquidation

PN 2156675 June 9, 1987 June 9, 1997

PN 2160551 November 24, 1987 November 24, 1996
PN 2164830 December 23, 1987 December 23, 1997

PN 2168149 April 18, 1988 April 18, 1997

Insisting that petitioners agents represented to him that the Diamond Jubilee Life
Insurance policies are self-liquidating after 7 years, respondent repeatedly
demanded that petitioner make good the representation, to no avail.

On October 8 and 11, 1996, respondent caused a notice to be published in

the Manila Bulletin, viz:
URGENT NOTICE
TO ALL
INSULAR LIFE DIAMOND JUBILEE

POLICY-HOLDERS
 IF YOU ARE A VICTIM OF INSULAR LIFE ASSURANCES REFUSAL TO
HONOR ITS REPRESENTATION THAT YOUR POLICY BECOMES SELF-
LIQUIDATING AFTER A LAPSE OF SEVEN (7) YEARS, PLEASE ATTEND
A SPECIAL MEETING OF SIMILARLY SITUATED POLICY HOLDERS AND
CO-OWNERS OF INSULAR LIFE ON OCTOBER 16, 1996,2:00 P.M. AT
THE MAKATI SPORTS CLUB, ALFARO ST., SALCEDO VILLAGE, MAKATI,
TO CONSIDER COLLECTIVE ACTION TO PROTECT YOUR
INTERESTS. RSVP CALL MRS. VILLAROYA OR MRS. CARIAGA AT 817-
22-35 OR 816-25-64

In addition, respondent filed on December 11, 1996 a civil case for specific
performance, sum of money, and damages before
the Regional Trial Court of Makati City against petitioner, Atty. Montalban,
Insurance Underwriter Mila Ramos, Agency Manager Portia Valdez, and District
Sales Manager Alfredo Sta. Maria, docketed as Civil Case No. 96-2009.

In turn, petitioner filed in May 1997 a complaint for libel against

respondent before the City Prosecution Office of Makati City.[3] The complaint
alleged that the published notice was libelous as it depicted petitioner as having
victimized or conned its policyholders by refusing to honor an alleged
representation that its Diamond Jubilee Life Insurance policies were self-
liquidating after 7 years. Petitioner maintained that the policies it issued bore no
such representation. As a result of the libelous publication, petitioner allegedly
suffered dishonor, discredit and damage in an amount not less
than P100,000,000.00.

In his answer to the complaint, respondent contended that the word victim
truthfully signified his situation as owner of six Diamond Jubilee Life Insurance
policies which petitioners agents represented to be self-liquidating after 7 years but
which turned out to be not.

On October 6, 1997, the City Prosecutor of Makati dismissed petitioners

complaint for lack of probable cause, ruling that there was no defamatory
imputation, and no malice in the publication.[4]Petitioners
motion for reconsideration was denied.[5]

Petitioner sought a review before the Secretary of Justice. On April 18,

2002,[6] the Secretary of Justice affirmed the dismissal of petitioners complaint for
lack of probable cause.

Petitioner assailed the ruling before the Court of Appeals via a petition
for certiorari.[7] On October 9, 2003, the Court of Appeals dismissed the petition,
finding no grave abuse of discretion on the part of the Secretary of Justice in
affirming the dismissal of petitioners complaint.[8] Petitioners motion for
reconsideration was denied.[9] Hence, this petition.

Petitioner assigns the following errors:

I.

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE

INCORRECT FINDINGS OF THE DEPARTMENT OF JUSTICE INSOFAR
AS IT CONCLUDED THAT THE ELEMENT OF DEFAMATORY
IMPUTATION IS MISSING, HENCE, THE PUBLICATION, SUBJECT OF
THE CRIMINAL COMPLAINT IS NOT LIBELOUS.

II.

THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING THAT

THERE WAS GRAVE ABUSE OF DISCRETION ON THE PART OF THE
DEPARTMENT OF JUSTICE WHEN IT REFUSED TO FILE THE
INFORMATION AGAINST RESPONDENT DESPITE THE PUBLICATION
OF THE SUBJECT LIBELOUS NOTICE.
 The general rule is that the courts do not interfere with the discretion of the
public prosecutor in determining the specificity and adequacy of the averments in a
criminal complaint.[10] The determination of probable cause
for the purpose of filing an information in court is an executive function [11] which
pertains at the first instance to the public prosecutor and then to the Secretary of
Justice.[12] The duty of the Court in appropriate cases is merely
to determine whether the executive determination was done without or in excess of
jurisdiction or with grave abuse of discretion.[13] Resolutions of the Secretary of
Justice are not subject to review unless made with grave abuse.[14]

In the case at bar, the City Prosecutor dismissed petitioners complaint for
libel because two elements of the crime were missing, defamatory imputation and
malice. Under Article 353 of the Revised Penal Code,[15] an accused may be held
liable for the crime if the following elements concur, viz: (1) the allegation of a
discreditable act or condition concerning another, (2) publication of the charge, (3)
identity of the person defamed, and (4) existence of malice.[16]

It is not disputed that the second and third elements are present. The subject
article was published in the October 8 and 11, 1996 issues of the Manila Bulletin,
and alluded to petitioners refusal to honor an alleged representation that its
Diamond Jubilee Life Insurance policies were self-liquidating after 7
years. Determination of probable cause in the case at bar, therefore, hinged on the
existence of the first and last elements.

In concluding that there was no defamatory imputation and that there was no
attendant malice, the City Prosecutor explained:

x x x [P]robable cause does not exist against respondent Manuel Serrano

to warrant his indictment in Court for the crime of libel, considering that he did
not act with malice in causing the publication of the notice in question in the
issues of Manila Bulletin, on October 8 and 11, 1996, since he can be considered
as a victim or was made to suffer from an act of the Insular Life Assurance Co.
Ltd. in not honoring that his insurance policies will self-liquidate after paying
premiums thereon for a period of seven (7) years. The notice in question did not
portray Insular Life Assurance Co. Ltd. as a swindler but it merely notifies
 (sic) Diamond Jubilee policy holders similarly situated as himself to meet and
consider collective action in order to protect their rights and interests which to
the respondents personal perception have been violated by the said insurance
company for its refusal to honor the representation of its agents that his insurance
policies will become self-liquidating after the lapse of seven (7) years. It must be
noted that Serrano even filed a complaint before the Regional Trial Court
of Makati, Branch 150, for Specific Performance, Sum of Money and Damages
against the Insular Life Assurance Co. Ltd. and its agents in order to vindicate the
wrong committed against him by the said insurance company and its agents.

Furthermore, the fact that it took the complainant insurance company

seven (7) months to file the case against herein respondent Serrano from the last
day of the publication of the notice in question x x x certainly cast doubts (sic),
[on] the veracity of the instant complaint.[17] (emphases ours)

Corroborating the City Prosecutors conclusion, the Secretary of Justice

added:

x x x x It is our perception that respondent acted with utmost good faith

and without malice when he caused the publication of the alleged libelous
urgent notice to all those who may feel victim of Insular Lifes refusal to honor its
representation that their policy becomes self-liquidating after a lapse of seven (7)
years. In the first place, we see nothing libelous in the published urgent notice.

To say in public that Insular Life Assurance refused to honor its

representation that the policy issued becomes self-liquidating after a lapse of
seven (7) years does not amount to an imputation of a crime, or of a vice or
defect, real or imaginary, or any act, omission, condition, status or circumstance
that tends to cause the dishonor, discredit or contempt of the person defamed.
x x x But if it is [at] all defamatory, it is qualified privileged communication made
on an occasion of privilege without actual malice. Through the published urgent
notice, respondent apparently made in good faith a communication on a subject
matter in which he has an interest or in reference to which he has duty of reaching
out to other persons having corresponding interest or duty, although it may
contain matters which, without this privilege would be actionable, and although
the duty is not a legal one but only a moral or social duty of imperfect obligation.
Circumstances exist or are reasonably believed to exist which cast upon
respondent the duty of making a communication to certain third persons in the
performance of such duty or where the person [is] so situated that it becomes right
in the interest of society that he should tell third persons certain facts which he, in
good faith, proceeds to do (People v. Cantos [CA] 51 O.G. 2995; 33 Am. Jur.
124-125).[18] (emphases ours)
 In determining whether there was prima facie case for libel against
respondent, the City Prosecutor and the Secretary of Justice viewed the subject
article in its entirety, and considered the same as a mere notice of meeting
addressed to Diamond Jubilee policyholders. The words victim and refusal to
honor its representation, although used in the notice, were dismissed
as not defamatory per se. Mere assertion that a person failed or refused to perform
a contractual obligation does not, in and of itself, injure that persons business
reputation or deprive him of public confidence.[19] Whatever defamatory
interpretation of which the subject notice may have been susceptible of was
considered debunked by the good faith that motivated the respondent in causing
the publication of the notice, i.e., to redress what he considered to be a violation of
his rights and those of others similarly situated as himself. Respondents action was
considered inconsistent with malice which is characterized by a reckless disregard
of the truth or falsity of ones remarks.[20]

In arriving at their unanimous conclusionthat no probable cause for libel

existsthe public prosecutor and the Secretary of Justice had deliberated on the
factual and legal backdrops of the case. Their shared conclusion was arrived at
neither whimsically nor capriciously as to be correctable by certiorari. Grave
abuse of discretion is familiarly defined as a capricious and whimsical exercise of
judgment that is so patent and gross as to amount to an evasion or a virtual refusal
to perform a duty enjoined by law or to act at all in contemplation of law, as when
the power is exercised in an arbitrary and despotic manner by reason of passion or
hostility.[21] Such grave abuse of discretion was not shown in the case at bar, as
correctly ruled by the Court of Appeals. Even assuming that the Secretary of
Justice may have erred in considering the subject publication as qualifiedly
privileged,[22] the error does not appear to be so grave or malevolent as to be
correctable by certiorari. A reading of the Justice Secretarys resolution datedApril
18, 2002 shows that his supposition as to the privileged character of the subject
notice was merely his riposte to the assumption that the notice was defamatory. At
any rate, not every erroneous conclusion of law or fact is an abuse of
discretion.[23] Erroneous inferences of fact or conclusions of law are correctable
by certiorari only if they are of such a degree as to amount to a clear case of abuse
of discretion of the grave and malevolent kind.[24]

Considering the foregoing, application of the Courts policy of non-

interference in the conduct of preliminary investigations [25] is warranted. The Court
will not interfere with the executive determination of probable cause for the
purpose of filing an information in court, in the absence of grave abuse of
discretion. We reiterate:

The institution of a criminal action depends upon the sound discretion of

the [prosecutor]. He may or may not file the complaint or information, follow or
not follow that presented by the offended party, according to whether the
evidence in his opinion, is sufficient or not to establish the guilt of the accused
beyond reasonable doubt. The reason for placing the criminal prosecution under
the direction and control of the [prosecutor] is to prevent malicious or unfounded
prosecution by private persons. x x x Prosecuting officers under the power vested
in them by law, not only have the authority but also the duty of prosecuting
persons who, according to the evidence received from the complainant, are shown
to be guilty of a crime committed within the jurisdiction of their office. They have
equally the legal duty not to prosecute when after an investigation they become
convinced that the evidence adduced is not sufficient to establish a prima
facie case.

x x x The Courts cannot interfere with the [prosecutor]s discretion and

control of the criminal prosecution. It is not prudent or even permissible for a
Court to compel the [prosecutor] to prosecute a proceeding originally initiated by
him on an information, if he finds that the evidence relied upon by him is
insufficient for conviction. Neither has the Court any power to order a
[prosecutor] to prosecute or file an information within a certain period of time,
since this would interfere with the [prosecutor]s discretion and control of criminal
prosecutions. x x x In a clash of views between a judge who did not investigate
and the [prosecutor] who did, or between the [prosecutor] and the offended party
or the defendant, those of the [prosecutor]s should normally prevail. x x x[26]

IN VIEW WHEREOF, the petition is DENIED. The assailed Decision

dated October 9, 2003 and Resolution dated April 15, 2004 of the Court of Appeals
in CA-G.R. SP No. 76341 are AFFIRMED. SO ORDERED.