FIRST DIVISION MV Asilda was unseaworthy when it left the port of Zamboanga.
In a joint statement, the captain
[G.R. No. 116940. June 11, 1997]
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs. COURT OF
APPEALS and FELMAN SHIPPING LINES, respondents.
DECISION
BELLOSILLO, J.:
This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe
the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to
be subrogated to the rights of the insured upon payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board MV Asilda, a vessel owned
and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-
Cola softdrink bottles to be transported from Zamboanga City to Cebu City forconsignee Coca-
Cola Bottlers Philippines, Inc., Cebu.[1] The shipment was insured with petitioner Philippine American
General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG.
MV Asilda left the port of Zamboanga in fine weather at eight oclock in the evening of the same
day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of
Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter
Coca-Cola softdrink bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with
respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles
that sank with MV Asilda. Respondent denied the claim thus prompting the consignee to file an insurance
claim with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN
which disclaimed any liability for the loss.Consequently, on 29 November 1983 PHILAMGEN sued the
shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of MV Asilda and its cargo
were due to the vessels unseaworthiness as she was put to sea in an unstable condition. It further alleged
that the vessel was improperly manned and that its officers were grossly negligent in failing to take
appropriate measures to proceed to a nearby port or beach after the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no
right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event,
FELMAN had abandoned all its rights, interests and ownership over MV Asilda together with her freight
and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of
Commerce.[2]
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court
of Appeals set aside the dismissal and remanded the case to the lower court for trial on the
merits. FELMAN filed a petition for certiorari with this Court but it was subsequently denied on 13
February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN.[3] It ruled that MV
Asilda was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the
Philippine Coast Guard and the shipowners surveyor attesting to its seaworthiness. Thus the loss of the
vessel and its entire shipment could only be attributed to either a fortuitous event, in which case, no
liability should attach unless there was a stipulation to the contrary, or to the negligence of the captain
and his crew, in which case, Art. 587 of the Code of Commerce should apply.
The lower court further ruled that assuming MV Asilda was unseaworthy, still PHILAMGEN could
not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its
implied warranty on the vessels seaworthiness. Resultantly, the payment made by PHILAMGEN to the
assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give
PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August
1994 respondent appellate court rendered judgment finding MV Asilda unseaworthy for being top- heavy
as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the
vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to
the structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate
court denied the claim of PHILAMGEN on the ground that the assureds implied warranty of
seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the
rights and interests of the shipper. Furthermore, respondent court held that the filing of notice of
abandonment had absolved the shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether MV Asilda was seaworthy when it left the
port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should
apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the
shipper had against FELMAN, the shipowner.
as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of
Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink
bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes
for fresh eggs.They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on
deck.[4] The ship captain stated that around four oclock in the morning of 7 July 1983 he was awakened
by the officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the
weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he
observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy
rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel
was balanced. At about seven oclock in the morning, the master of the vessel stopped the engine
because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to
starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to resume full
speed.
At around eight forty-five, the vessel suddenly listed to portside and before the captain could
decide on his next move, some of the cargo ondeck were thrown overboard and seawater entered the
engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew
to abandon ship. Shortly thereafter, MV Asilda capsized and sank. He ascribed the sinking to the entry
of seawater through a hole in the hull caused by the vessels collision with a partially submerged log.[5]
The Elite Adjusters, Inc., submitted a report regarding the sinking of MV Asilda. The report, which
was adopted by the Court of Appeals, reads -
We found in the course of our investigation that a reasonable explanation for the series of lists experienced by the
vessel that eventually led to her capsizing and sinking, was that the vessel was top-heavy which is to say that
while the vessel may not have been overloaded, yet the distribution or stowage of the cargo on board was done in
such a manner that the vessel was in top-heavy condition at the time of her departure and which condition
rendered her unstable and unseaworthy for that particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel x x x x and
it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we believe strongly that
had her cargo been confined to those that could have been accommodated under deck, her stability would not
have been affected and the vessel would not have been in any danger of capsizing, even given the prevailing
weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered
unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so decreased the
vessels metacentric height as to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that ships are
precisely designed to be able to navigate safely even during heavy weather and frequently we hear of ships safely
and successfully weathering encounters with typhoons and although they may sustain some amount of damage,
the sinking of ship during heavy weather is not a frequent occurrence and is not likely to occur unless they are
inherently unstable and unseaworthy x x x x
We believe, therefore, and so hold that the proximate cause of the sinking of the M/V Asilda was her condition of
unseaworthiness arising from her having beentop-heavy when she departed from the Port of Zamboanga. Her
having capsized and eventually sunk was bound to happen and was therefore in the category of an inevitable
occurrence (underscoring supplied).[6]
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the
proximate cause of the sinking of MV Asilda was its being top-heavy. Contrary to the ship captains
allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on
deck. Several days after MV Asilda sank, an estimated 2,500 empty Coca-Cola plastic cases were
recovered near the vicinity of the sinking.Considering that the ships hatches were properly secured, the
empty Coca-Cola cases recovered could have come only from the vessels deck cargo. It is settled that
carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck
cargo will not interfere with the proper management of the ship. However, in this case it was established
that MV Asilda was not designed to carry substantial amount of cargo on deck. The inordinate loading of
cargo deck resulted in the decrease of the vessels metacentric height[7] thus making it unstable. The
strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and
as such merely contributed to its already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at
bar.[8] Simply put, the ship agent is liable for the negligent acts of the captain in the care of
goods loaded on the vessel. This liability however can be limited through abandonment of the vessel, its
equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances
wherein the ship agent could still be held answerable despite the abandonment, as where the loss or
injury was due to the fault of the shipowner and the captain.[9] The international rule is to the effect that
the right of abandonment of vessels, as a legal limitation of a shipowners liability, does not apply to cases
where the injury or average was occasioned by the shipowners own fault. [10] It must be stressed at this
point that Art. 587 speaks only of situations where the fault or negligence is committed solely by the
captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be
covered by the provisions of the Civil Code on common carrier.[11]
It was already established at the outset that the sinking of MV Asilda was due to its
unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as an
excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner could
have prevented this fatal miscalculation. As such, FELMAN was equally negligent. It cannot therefore
escape liability through the expedient of filing a notice of abandonment of the vessel by virtue of Art. 587
of the Code of Commerce.
Under Art 1733 of the Civil Code, (c)ommon carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them, according to all the circumstances of each
case x x x x" In the event of loss of goods, common carriers are presumed to have acted
negligently. FELMAN, the shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found MV
Asilda unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of
seaworthiness that rendered the assured not entitled to the payment of is claim under the policy.Hence,
when PHILAMGEN paid the claim of the bottling firm there was in effect a voluntary payment and no
right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the assured impliedly warrants to the
assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly
written on the face of the policy.[12] Thus Sec. 113 of the Insurance Code provides that (i)n every marine
insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance,
a warranty is implied that the ship is seaworthy. Under Sec. 114, a ship is seaworthy when reasonably
fit to perform the service, and to encounter the ordinary perilsof the voyage, contemplated by the parties
to the policy. Thus it becomes the obligation of the cargo owner to look for a reliable common carrier
which keeps its vessels in seaworthy condition. He may have no control over the vessel but he has full
control in the selection of the common carrier that will transport his goods. He also has full discretion in
the choice of assurer that will underwrite a particular venture.
We need not belabor the alleged breach of warranty of seaworthiness by the assured as
painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In policies
where the law will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing
in the policy in the clearest language.[13] And where the policy stipulates that the seaworthiness of the
vessel as between the assured and the assurer is admitted, the question of seaworthiness cannot be
raised by the assurer without showing concealment or misrepresentation by the assured.[14]
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2)
instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy
No. 100367-PAG reads (t)he liberties as per Contract of Affreightment the presence of the Negligence
Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of
Affreightment as between the Assured and the Company shall not prejudice the insurance. The
seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted.[15]
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which
states (t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted x
x x x" [16]
The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two
things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of
unseaworthiness is assumed by the insurance company.[17] The insertion of such waiver clauses in cargo
policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus
it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness
so that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.
Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGENs
action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
In Pan Malayan Insurance Corporation v. Court of Appeals,[18] we said that payment by the assurer
to the assured operates as an equitable assignment to the assurer of all the remedies
which the assured may have against the third party whose negligence or wrongful act caused the
loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract or
upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the
insurance company of the insurance claim.
The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in
justice, equity and good conscience ought to pay.[19] Therefore, the payment made by PHILAMGEN to
Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against
FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the 7,500
cases of 1-liter Coca-Cola softdrink bottles is inevitable.
WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to
pay petitioner PHILIPPINE AMERICANGENERAL INSURANCE CO., INC., Seven Hundred Fifty-five
Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29
November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code.[20]
SO ORDERED.
SECOND DIVISION
[G.R. No. 127897. November 15, 2001]
DELSAN TRANSPORT LINES, INC., petitioner, vs. THE HON. COURT OF APPEALS and AMERICAN
HOME ASSURANCE CORPORATION, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CA-G.R. CV
No. 39836 promulgated on June 17, 1996, reversing the decision of the Regional Trial Court of Makati City, Branch
137, ordering petitioner to pay private respondent the sum of Five Million Ninety-Six Thousand Six Hundred
Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and the Resolution[2] dated January 21,
1997 which denied the subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the
petitioner, Delsan Transport Lines, Inc., for a period of one year whereby the said common carrier agreed to
transport Caltexs industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country. Under the
contract, petitioner took on board its vessel, MT Maysun, 2,277.314 kiloliters of industrial fuel oil of Caltex to be
delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with the private respondent,
American Home Assurance Corporation.
On August 14, 1986, MT Maysun set sail from Batangas for Zamboanga City. Unfortunately, the vessel
sank in the early morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel
oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred
Thirty-Five Pesos and Fifty-Seven Centavos(P5,096,635.57) representing the insured value of the lost
cargo. Exercising its right of subrogation under Article 2207 of the New Civil Code, the private respondent
demanded of the petitioner the same amount it paid to Caltex.
Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint
with the Regional Trial Court of Makati City, Branch 137, for collection of a sum of money. After the trial and
upon analyzing the evidence adduced, the trial court rendered a decision on November 29, 1990 dismissing the
complaint against herein petitioner without pronouncement as to cost. The trial court found that the vessel, MT
Maysun, was seaworthy to undertake the voyage as determined by the Philippine Coast Guard per Survey
Certificate Report No. M5-016-MH upon inspection during its annual dry-docking and that the incident was caused
by unexpected inclement weather condition or force majeure, thus exempting the common carrier (herein
petitioner) from liability for the loss of its cargo.[3]
The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals. The appellate
court gave credence to the weather report issued by the Philippine Atmospheric, Geophysical and Astronomical
Services Administration (PAGASA for brevity) which showed that from 2:00 oclock to 8:00 oclock in the morning
on August 16, 1986, the wind speed remained at 10 to 20 knots per hour while the waves measured from .7 to two
(2) meters in height only in the vicinity of the Panay Gulf where the subject vessel sank, in contrast to herein
petitioners allegation that the waves were twenty (20) feet high. In the absence of any explanation as to what may
have caused the sinking of the vessel coupled with the finding that the same was improperly manned, the appellate
court ruled that the petitioner is liable on its obligation as common carrier[4] to herein private respondent insurance
company as subrogee of Caltex. The subsequent motion for reconsideration of herein petitioner was denied by the
appellate court.
Petitioner raised the following assignments of error in support of the instant petition, [5] to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL
COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL
PRESUMPTION THAT THE VESSEL MT MAYSUN WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN
THE CASE OF HOME INSURANCE CORPORATION V. COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance Code of the
Philippines, which states that in every marine insurance upon a ship or freight, or freightage, or upon any thing
which is the subject of marine insurance there is an implied warranty by the shipper that the ship is
seaworthy. Consequently, the insurer will not be liable to the assured for any loss under the policy in case the vessel
would later on be found as not seaworthy at the inception of the insurance. It theorized that when private respondent
paid Caltex the value of its lost cargo, the act of the private respondent is equivalent to a tacit recognition that the
ill-fated vessel was seaworthy; otherwise, private respondent was not legally liable to Caltex due to the latters
breach of implied warranty under the marine insurance policy that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not seaworthy on
the ground that the marine officer who served as the chief mate of the vessel, Francisco Berina, was allegedly not
qualified. Under Section 116 of the Insurance Code of the Philippines, the implied warranty of seaworthiness of
the vessel, which the private respondent admitted as having been fulfilled by its payment of the insurance proceeds
to Caltex of its lost cargo, extends to the vessels complement. Besides, petitioner avers that although Berina had
merely a 2nd officers license, he was qualified to act as the vessels chief officer under Chapter IV(403), Category
III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In fact, all the crew and officers of MT
Maysun were exonerated in the administrative investigation conducted by the Board of Marine Inquiry after the
subject accident.[6]
In any event, petitioner further avers that private respondent failed, for unknown reason, to present in
evidence during the trial of the instant case the subject marine cargo insurance policy it entered into with Caltex. By
virtue of the doctrine laid down in the case of Home Insurance Corporation vs. CA,[7] the failure of the private
respondent to present the insurance policy in evidence is allegedly fatal to its claim inasmuch as there is no way to
determine the rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy the vessel owners
Whether or not the payment made by the private respondent to Caltex for the insured value of the lost cargo
amounted to an admission that the vessel was seaworthy, thus precluding any action for recovery against the
petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the complaint for recovery of sum of
money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo operates as waiver of
its (private respondent) right to enforce the term of the implied warranty against Caltex under the marine insurance
policy. However, the same cannot be validly interpreted as an automatic admission of the vessels seaworthiness by
the private respondent as to foreclose recourse against the petitioner for any liability under its contractual obligation
as a common carrier. The fact of payment grants the private respondent subrogatory right which enables it to
exercise legal remedies that would otherwise be available to Caltex as owner of the lost cargo against the petitioner
common carrier.[8] Article 2207 of the New Civil Code provides that:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is
the mode which equity adopts to compel the ultimate payment of a debt by one who in justice and good conscience
ought to pay.[9] It is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment
of claim. It accrues simply upon payment by the insurance company of the insurance claim.[10] Consequently, the
payment made by the private respondent (insurer) to Caltex (assured) operates as an equitable assignment to the
former of all the remedies which the latter may have against the petitioner.
From the nature of their business and for reasons of public policy, common carriers are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of passengers transported by them,
according to all the circumstances of each case.[11] In the event of loss, destruction or deterioration of the insured
goods, common carriers shall be responsible unless the same is brought about, among others, by flood, storm,
earthquake, lightning or other natural disaster or calamity.[12] In all other cases, if the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence.[13]
In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, petitioner
attributes the sinking of MT Maysun to fortuitous event or force majeure. From the testimonies of Jaime Jarabe
and Francisco Berina, captain and chief mate, respectively of the ill-fated vessel, it appears that a sudden and
unexpected change of weather condition occurred in the early morning of August 16, 1986; that at around 3:15
oclock in the morning a squall (unos) carrying strong winds with an approximate velocity of 30 knots per hour and
big waves averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun causing it to tilt, take
in water and eventually sink with its cargo.[14] This tale of strong winds and big waves by the said officers of the
petitioner however, was effectively rebutted and belied by the weather report [15] from the Philippine Atmospheric,
Geophysical and Astronomical Services Administration (PAGASA), the independent government agency charged
with monitoring weather and sea conditions, showing that from 2:00 oclock to 8:00 oclock in the morning on
August 16, 1986, the wind speed remained at ten (10) to twenty (20) knots per hour while the height of the waves
ranged from .7 to two (2) meters in the vicinity of Cuyo East Pass and Panay Gulf where the subject vessel
sank. Thus, as the appellate court correctly ruled, petitioners vessel, MT Maysun, sank with its entire cargo for the
reason that it was not seaworthy. There was no squall or bad weather or extremely poor sea condition in the vicinity
when the said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and Francisco Berina,
ship captain and chief mate, respectively, of the said vessel, could not be expected to testify against the interest of
their employer, the herein petitioner common carrier.
Neither may petitioner escape liability by presenting in evidence certificates [16] that tend to show that at the
time of dry-docking and inspection by the Philippine Coast Guard, the vessel MT Maysun, was fit for voyage. These
pieces of evidence do not necessarily take into account the actual condition of the vessel at the time of the
commencement of the voyage. As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit. The certificates issued, however, do
not negate the presumption of unseaworthiness triggered by an unexplained sinking. Of certificates issued in this
regard, authorities are likewise clear as to their probative value, (thus):
Seaworthiness relates to a vessels actual condition. Neither the granting of classification or the issuance of
certificates establishes seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62)
And also:
obligation. Also securing the approval of the shipper of the cargo, or his surveyor, of the condition of the vessel
or her stowage does not establish due diligence if the vessel was in fact unseaworthy, for the cargo owner has no
obligation in relation to seaworthiness. (Ibid.)[17]
Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine Inquiry merely
concerns their respective administrative liabilities.It does not in any way operate to absolve the petitioner common
carrier from its civil liability arising from its failure to observe extraordinary diligence in the vigilance over the
goods it was transporting and for the negligent acts or omissions of its employees, the determination of which
properly belongs to the courts.[18] In the case at bar, petitioner is liable for the insured value of the lost cargo of
industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or negligence as common
carrier[19] occasioned by the unexplained sinking of its vessel, MT Maysun, while in transit.
Anent the second issue, it is our view and so hold that the presentation in evidence of the marine insurance
policy is not indispensable in this case before the insurer may recover from the common carrier the insured value
of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish
not only the relationship of herein private respondent as insurer and Caltex, as the assured shipper of the lost cargo
of industrial fuel oil, 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.[20]
The presentation of the insurance policy was necessary in the case of Home Insurance Corporation v.
CA[21] (a case cited by petitioner) because the shipment therein (hydraulic engines) passed through several stages
with different parties involved in each stage. First, from the shipper to the port of departure; second, from the port
of departure to the M/S Oriental Statesman; third, from the M/S Oriental Statesman to the M/S Pacific Conveyor;
fourth, from the M/S Pacific Conveyor to the port of arrival; fifth, from the port of arrival to the arrastre operator;
sixth, from the arrastre operator to the hauler, Mabuhay Brokerage Co., Inc. (private respondent therein); and lastly,
from the hauler to the consignee. We emphasized in that case that in the absence of proof of stipulations to the
contrary, the hauler can be liable only for any damage that occurred from the time it received the cargo until it
finally delivered it to the consignee. Ordinarily, it cannot be held responsible for the handling of the cargo before
it actually received it. The insurance contract, which was not presented in evidence in that case would have
indicated the scope of the insurers liability, if any, since no evidence was adduced indicating at what stage in the
handling process the damage to the cargo was sustained.
Hence, our ruling on the presentation of the insurance policy in the said case of Home Insurance Corporation
is not applicable to the case at bar. In contrast, there is no doubt that the cargo of industrial fuel oil belonging to
Caltex, in the case at bar, was lost while on board petitioners vessel, MT Maysun, which sank while in transit in
the vicinity of Panay Gulf and Cuyo East Pass in the early morning of August 16, 1986.
 WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court of Appeals
in CA-G.R. CV No. 39836 is AFFIRMED.Costs against the petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. L-27427 April 7, 1976
FIREMAN'S FUND INSURANCE COMPANY and FIRESTONE TIRE AND RUBBER COMPANY OF THE
PHILIPPINES, plaintiffs-appellants,
vs.
JAMILA & COMPANY, INC. and FIRST QUEZON CITY INSURANCE CO., INC., defendants-appellees.
Conrado R. Ayuyao for plaintiffs-appellees.
Ponciano U. Pitargue for defendant-appellee First quezon City Insurance Co., Inc.
Fernando B. Zamora for defendant-appellee Jamila & Company, Inc.
AQUINO, J.:
Fireman's Fund and Insurance Company (Fireman's Fund for short) and Firestone Tire and Rubber Company of
the Philippines appealed from the order dated October 18, 1966 of the Court of First Instance of Manila,
dismissing their complaint against Jamila & Co., Inc. (hereinafter called Jamila) for the recovery of the sum of
P11,925.00 plus interest, damages and attorney's fees (Civil Case No. 65658).
The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security Agency contracted to supply
security guards to Firestone; that Jamila assumed responsibility for the acts of its security guards; that First
Quezon City Insurance Co., Inc. executed a bond in the sum of P20,000.00 to guarantee Jamila's obligations
under that contract; that on May 18, 1963 properties of Firestone valued at P11,925.00 were lost allegedly due
to the acts of its employees who connived with Jamila's security guard; that Fireman's Fund, as insurer, paid to
Firestone the amount of the loss; that Fireman's Fund was subrogated to Firestone's right to get reimbursement
from Jamila, and that Jamila and its surety, First Quezon City Insurance Co., Inc., failed to pay the amount of the
loss in spite of repeated demands.
Upon defendants' motions, the lower court in its order of July 22, 1966 dismissed the complaint as to Jamila on
the ground that there was no allegation that it had consented to the subrogation and, therefore, Fireman's
Fund had no cause of action against it.
In the same order the lower court dismissed the complaint as to First Quezon City Insurance Co., Inc. on the
ground of res judicata. It appears that the same action was previously filed in Civil Case No. 56311 which was
dismiss because of the failure of the same plaintiffs and their counsel to appear at the pre trial.
Firestone and Fireman's Fund moved for the reconsideration of the order of dismissal. The lower court on
September 3, 1966 set aside its order of dismissal. It sustained plaintiffs' contention that there was no res
judicata as to First Quezon City Insurance Co., Inc. because Civil Case No. 56311 was dismissed without
prejudice. Later, First Quezon City Insurance Co., Inc. filed its answer to the complaint.
However, due to inadvertence, the lower court did not state in its order of September 3, 1966 why it set aside
its prior order dismissing the complaint with respect to Jamila.
What is now to be recounted shows the lack of due care on the part of the lower court and the opposing
lawyers in their management of the case. Such lack of due care has given the case a farcical ambiance and might
partially explain the long delay in its adjudication.
Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory without any reason
therefor, filed a motion for reconsideration. It had originally moved for the dismissal of the complaint on the
ground of lack of cause of action. Its contention was based on two grounds, to wit: (1) that the complaint did
not allege that Firestone, pursuant to the contractual stipulation quoted in the complaint, had investigated the
loss and that Jamila was represented in the investigation and (2) that Jamila did not consent to the subrogation
of Fireman's Fund to Firestone's right to get reimbursement from Jamila and its surety. The lower court in its
order of dismissal had sustained the second ground.
Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked the first ground which
had never been passed upon by the lower court. Firestone and Fireman's Fund in their opposition joined battle,
in a manner of speaking, on that first ground.
But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration, completely
ignored that first ground. It reverted to the second ground which was relied upon in its order of September 3,
1966. The lower court reiterated its order of July 22, 1966 that Fireman's Fund had no cause of action against
Jamila because Jamila did not consent to the subrogation. The court did not mention Firestone, the co-plaintiff
of Fireman's Fund.
At this juncture, it may be noted that motions for reconsideration become interminable when the court's orders
follow a seesaw pattern. That phenomenon took place in this case.
Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of October 18,
1966 on the ground that Fireman's Fund Insurance Company was suing on the basis of legal subrogation
whereas the lower court erroneously predicated its dismissal order on the theory that there was
no conventional subrogation because the debtor's consent was lacking.
The plaintiffs cited article 2207 of the Civil Code which provides that "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".
The lower court denied plaintiffs' motion. They filed a second motion for reconsideration. In that motion they
sensibly called the lower court's attention to the fact that the issue of subrogation was of no moment because
Firestone, the subrogor, is a party-plaintiff and could sue directly Jamila in its own right. Without resolving that
contention, the lower court denied plaintiffs' second motion for reconsideration.
In this appeal Firestone and Fireman's Fund contend that the trial court's dismissal of their complaint is contrary
to the aforementioned article 2207 which provides for legal subrogation.
Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires the debtor's consent; that
legal subrogation takes place in the cases mentioned in article 1302 of the Civil Code and the instant case is not
among the three cases enumerated in that article, and that there could be no subrogation in this case because
according to the plaintiffs the contract between. Jamila and Firestone was entered into on June 1, 1965 but the
loss complained of occurred on May 18, 1963.
With respect to the factual point raised by Jamila, it should be stated that plaintiffs' counsel gratuitously alleged
in their brief that Firestone and Jamila entered into a "contract of guard services" on June 1, 1965. That
allegation, which was uncalled for because it is not found in the complaint, created confusion which heretofore
did not exist. No copy of the contract was annexed to the complaint.
That confusing statement was an obvious error since it was expressly alleged in the complaint that the loss
occurred on May 18, 1963. The fact that such an error was committed is another instance substantiating our
previous observation that plaintiffs' counsel had not exercised due care in the presentation of his case.
The issue is whether the complaint of Firestone and Fireman's Fund states a cause of action against Jamila.
We hold that Firestone is really a nominal, party in this case. It had already been indemnified for the loss which
it had sustained. Obviously, it joined as a party-plaintiff in order to help Fireman's Fund to recover the amount
of the loss from Jamila and First Quezon City Insurance Co., Inc. Firestone had tacitly assigned to Fireman's Fund
its cause of action against Jamila for breach of contract. Sufficient ultimate facts are alleged in the complaint to
sustain that cause of action.
On the other hand, Fireman's Fund's action against Jamila is squarely sanctioned by article 2207. As the insurer,
Fireman's Fund is entitled to go after the person or entity that violated its contractual commitment to answer
for the loss insured against (Cf. Philippine Air Lines, Inc. vs. Heald Lumber Co., 101 Phil. 1032; Rizal Surety &
Insurance Co. vs. Manila Railroad Company, L-24043, April 25, 1968, 23 SCRA 205).
The trial court erred in applying to this case the rules on novation. The plaintiffs in alleging in their complaint
that Fireman's Fund "became a party in interest in this case by virtue of a subrogation right given in its favor by"
Firestone, were not relying on the novation by change of creditors as contemplated in articles 1291 and 1300 to
1303 of the Civil Code but rather on article 2207.
Article 2207 is a restatement of a settled principle of American jurisprudence. Subrogation has been referred to
as the doctrine of substitution. It "is an arm of equity that may guide or even force one to pay a debt for which
an obligation was incurred but which was in whole or in part paid by another" (83 C.J.S. 576, 678, note 16, citing
Fireman's Fund Indemnity Co. vs. State Compensation Insurance Fund, 209 Pac. 2d 55).
"Subrogation is founded on principles of justice and equity, and its operation is governed by principles of equity.
It 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"(83 C.J.S. 579-
80)
Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530, 77 L. ed. 477).
Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the
insured may have against the third person whose. negligence or wrongful act caused the loss (44 Am. Jur. 2nd
745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U. S. 294, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d 746, note 16, citing
Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).
"Although many policies including policies in the standard form, now provide for subrogation, and thus
determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of
payment inures to the insurer without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment
operates as an equitable assignment to the insurer of the property and all remedies which the insured may have
for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or
upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity
(Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N. C. 456,142 SE 2d 18).
Whether the plaintiffs would be able to prove their cause of action against Jamila is another question.
Finding the trial court's order of dismissal to be legally untenable, the same is set aside with costs against
defendant-appellee Jamila & Co., Inc.
SO ORDERED.
THIRD DIVISION
G.R. No. 81026 April 3, 1990
PAN MALAYAN INSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.
Regulus E. Cabote & Associates for petitioner.
Benito P. Fabie for private respondents.
CORTES, J.:
Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of
Appeals which upheld an order of the trial court dismissing for no cause of action PANMALAY's complaint for
damages against private respondents Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may
institute an action to recover the amount it had paid its assured in settlement of an insurance claim against
private respondents as the parties allegedly responsible for the damage caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private
respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt
Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources Corporation
[CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence" of the unknown
driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in the amount of
P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated to
the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite
repeated demands, defendants, failed and refused to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In
compliance therewith, PANMALAY clarified, among others, that the damage caused to the insured car was
settled under the "own damage", coverage of the insurance policy, and that the driver of the insured car was, at
the time of the accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also submitted a
copy of the insurance policy and the Release of Claim and Subrogation Receipt executed by CANLUBANG in
favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of
action against them. They argued that payment under the "own damage" clause of the insurance policy
precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on the
assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order dated
June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC denied
PANMALAY's motion for reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27, 1987.
Consequently, PANMALAY filed the present petition for review.
After private respondents filed its comment to the petition, and petitioner filed its reply, the Court considered
the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified
CANLUBANG for the damage to the insured car resulting from a traffic accident allegedly caused by the
negligence of the driver of private respondent, Erlinda Fabie. PANMALAY contended, therefore, that its cause of
action against private respondents was anchored upon Article 2207 of the Civil Code, which reads:
If the plaintiffs 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. . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is
destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon
payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the
extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an
equitable assignment to the former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow
out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965,
October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-
27427, April 7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the
wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is
defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886);
Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly,
where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good
faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer, and the
latter cannot bring an action against the carrier on his right of subrogation [McCarthy v. Barber Steamship Lines,
Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by the
policy, thereby effecting "voluntary payment", the former has no right of subrogation against the third party
liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5,
1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally subrogated
under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have any cause of action
against private respondents. On the one hand, the trial court held that payment by PANMALAY of
CANLUBANG's claim under the "own damage" clause of the insurance policy was an admission by the insurer
that the damage was caused by the assured and/or its representatives. On the other hand, the Court of Appeals
in applying the ejusdem generis rule held that Section III-1 of the policy, which was the basis for settlement of
CANLUBANG's claim, did not cover damage arising from collision or overturning due to the negligence of third
parties as one of the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article
2207 and claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the
damage.
The above conclusion is without merit.
It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy
implies damage to the insured car caused by the assured itself, instead of third parties, proceeds from an
incorrect comprehension of the phrase "own damage" as used by the insurer. When PANMALAY utilized the
phrase "own damage" — a phrase which, incidentally, is not found in the insurance policy — to define the basis
for its settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the
costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion
for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage" coverage under
Section III of the insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability"
coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from Section IV-2
which refer to "Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to the
properties of third parties).
Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1 of the
policy does not include to the insured vehicle arising from collision or overturning due to the negligent acts of
the third party. Not only does it stem from an erroneous interpretation of the provisions of the section, but it
also violates a fundamental rule on the interpretation of property insurance contracts.
It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to
the sense and meaning of the terms which the parties thereto have used. In the case of property insurance
policies, the evident intention of the contracting parties, i.e., the insurer and the assured, determine the import
of the various terms and provisions embodied in the policy. It is only when the terms of the policy are
ambiguous, equivocal or uncertain, such that the parties themselves disagree about the meaning of particular
provisions, that the courts will intervene. In such an event, the policy will be construed by the courts liberally in
favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co.,
Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R.
No. L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-
41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].
Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is liable
to indemnify the assured CANLUBANG against damage to or loss of the insured vehicle, reads as follows:
SECTION III — LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to the
Scheduled Vehicle and its accessories and spare parts whilst thereon: —
(a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or
consequent upon wear and tear;
(b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading) incidental to such transit by road, rail,
inland, waterway, lift or elevator.
xxx xxx xxx
[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars; Record, p. 34;
Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section, specifically Section III-1(a), is
comprehensive enough to include damage to the insured vehicle arising from collision or overturning due to the
fault or negligence of a third party. CANLUBANG is apparently of the same understanding. Based on a police
report wherein the driver of the insured car reported that after the vehicle was sideswiped by a pick-up, the
driver thereof fled the scene [Record, p. 20], CANLUBANG filed its claim with PANMALAY for indemnification of
the damage caused to its car. It then accepted payment from PANMALAY, and executed a Release of Claim and
Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to be in disagreement regarding the meaning
and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the appellate court to
indulge in contract construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to the clear
intention and understanding of these parties.
It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental collision
or overturning" found in the first paint of sub-paragraph (a) is untenable. Although the terms "accident" or
"accidental" as used in insurance contracts have not acquired a technical meaning, the Court has on several
occasions defined these terms to mean that which takes place "without one's foresight or expectation, an event
that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected"
[De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino
Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be
inferred from jurisprudence that these terms, without qualification, exclude events resulting in damage or loss
due to the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily
synonymous with the concept of "no fault". It may be utilized simply to distinguish intentional or malicious acts
from negligent or careless acts of man.
Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured
vehicle due to negligent or careless acts of third parties is not listed under the general and specific exceptions to
the coverage of insured risks which are enumerated in detail in the insurance policy itself [See Annex "A-1" of
PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the coverage
of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that insisted upon by
respondents herein. By arguing that this section covers losses or damages due not only to malicious, but also to
negligent acts of third parties, PANMALAY in effect advocates for a more comprehensive coverage of insured
risks. And this, in the final analysis, is more in keeping with the rationale behind the various rules on the
interpretation of insurance contracts favoring the assured or beneficiary so as to effect the dominant purpose
of indemnity or payment [SeeCalanoc v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable
Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R.
No. L-35529, July 16, 1984, 130 SCRA 327].
Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does not
cover damage to the insured vehicle caused by negligent acts of third parties, and that PANMALAY's settlement
of CANLUBANG's claim for damages allegedly arising from a collision due to private respondents' negligence
would amount to unwarranted or "voluntary payment", dismissal of PANMALAY's complaint against private
respondents for no cause of action would still be a grave error of law.
For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its
assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private
respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court
ruled that the insurer who may have no rights of subrogation due to "voluntary" payment may nevertheless
recover from the third party responsible for the damage to the insured property under Article 1236 of the Civil
Code.
In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely prays
that it be allowed to institute an action to recover from third parties who allegedly caused damage to the
insured vehicle, the amount which it had paid its assured under the insurance policy. Having thus shown from
the above discussion that PANMALAY has a cause of action against third parties whose negligence may have
caused damage to CANLUBANG's car, the Court holds that there is no legal obstacle to the filing by PANMALAY
of a complaint for damages against private respondents as the third parties allegedly responsible for the
damage. Respondent Court of Appeals therefore committed reversible error in sustaining the lower court's
order which dismissed PANMALAY's complaint against private respondents for no cause of action. Hence, it is
now for the trial court to determine if in fact the damage caused to the insured vehicle was due to the
"carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages
against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the
merits.
SO ORDERED.
EN BANC
G.R. No. L-22146 September 5, 1967
SVERIGES ANGFARTYGS ASSURANS FORENING, plaintiff-appellant,
vs.
QUA CHEE GAN, defendant-appellee.
Ross, Selph & Carrascoso for plaintiff-appellant.
Ponce Enrile, S. Reyna, Monticello & Belo for defendant-appellee.
BENGZON, J.P., J.
On August 23 and 24, 1947, defendant Qua Chee Gan, a sole proprietorship, shipped on board the S.S. NAGARA,
as per bills of lading Exhs. A and B, 2,032,000 kilos of bulk copra at Siain, Quezon, consigned to DAL
International Trading Co., in Gdynia, Poland. The vessel first called at the port of Karlshamn, Sweden, where it
unloaded 969,419 kilos of bulk copra. Then, it proceeded to Gdynia where it unloaded the remaining copra
shipment. The actual outturn weights in the latter port showed that only 1,569,429 kilos were discharged.
Because of the alleged confirmed cargo shortage, the Polish cargo insurers had to indemnify the consignee for
the value thereof. Thereafter, the former sued the shipowner, the Swedish East Asia Company, in Gothenburg,
Sweden. The latter, in turn sued, defendant and had it summoned to Gothenburg. Defendant, however, refused
to submit to that court's jurisdiction and its objection was sustained.
In March, 1951, a settlement was effected between the Polish cargo insurers and the shipowner. Plaintiff, as the
indemnity insurer for the latter, paid approximately $60,733.53 to the Polish insurers. On August 16, 1954,
claiming to have been subogated to the rights of the carrier, plaintiff sued defendant before the Court of First
Instance of Manila to recover U.S. $60,733.53 plus 17% exchange tax, with legal interest, as the value of the
alleged cargo short shipment, and P10,000 as attorney's fees. Defendant answered in due time and countered
with a P15,000 counterclaim for attorney's fees.
On August 1, 1955, defendant filed a motion to dismiss on the ground of prescription under the Carriage of
Goods by Sea Act. The lower court sustained the motion and plaintiff appealed here. We reversed the order of
dismissal and remanded the case for further proceedings.1
After trial, the lower court on September 28, 1963, rendered its decision dismissing the complaint and awarding
P10,000 as attorney's fees to defendant. It ruled (a) that there was no short shipment on defendant's part; (b)
that plaintiff's insurance policy did not cover the short shipment, and (c) defendant was merely acting as an
agent of Louis Dreyfus & Co., who was the real shipper.
Taking issue with all the foregoing, plaintiff has interposed the present appeal to Us on questions of fact and
law, the amount involved exceeding P200,000.00.
Was the non-presentation of the insurance policy fatal to plaintiff's case? The lower court ruled so, reasoning
that unless the same — as the best evidence — were presented, it could not be conclusively determined if
"liability for short shipment" was a covered risk. And the rule is that an insurer who pays the insured for loss or
liability not covered by the policy is not subrogated to the latter.2 However, even assuming that there was
unwarranted — or "volunteer" — payment, plaintiff could still recover what it paid — in effect — to the carrier
from defendant shipper under Art. 1236 of the Civil Code which allows a third person who pays on behalf of
another to recover from the latter, although there is no subrogation. But since the payment here was without
the knowledge and consent of defendant, plaintiff's right of recovery is defeasible by the former's defenses
since the Code is clear that the recovery is only up to the amount by which the defendant was benefited.
This brings Us to the crux of the case: Was there a short-shipment? To support its case, plaintiff theorizes that
defendant had two shipments at Siain, Quezon province (1) 812,800 kilos for Karlshamn and (2) 2,032,000 kilos
for Gdynia. The Karlshamn shipment was asserted to have been covered by a separate bill of lading which,
however, was allegedly lost subsequently. Thus, the 696,419 kilos of copra unloaded in Karlshamn was not part
of the Gdynia shipment and cannot explain the confirmed shortage at the latter port.
Plaintiff's cause of action suffers from several fatal defects and inconsistencies. The alleged shipment of 812,800
kilos for Karlshamn is contradicted by plaintiff's admission in paragraphs 2 and 3 of its complaint that defendant
shipped only 2,032,000 kilos of copra at Siain, purportedly for both Gdynia and Karlshamn.3 Needless to state,
plaintiff is bound by such judicial admission.4 Moreover, the alleged existence of the Karlshamn bills of lading is
negatived by the fact that Exhibits A and B — the bills of lading presented by plaintiff — show that the
2,032,000 kilos of copra loaded in Siain were for Gdynia only. Further destroying its case is the testimony of
plaintiff's own witness, Mr. Claro Pasicolan, who on direct examination affirmed5 that these two exhibits
connstituted the complete set of documents which the shipping agent in charge of the vessel S.S. NAGARA
issued covering the copra cargo loaded at Siain. In view of this admission and for want of evidentiary support,
plaintiff's belated claim that there is another complete set of documents can not be seriously taken.1awphîl.nèt
Lastly, if there really was a separate bill of lading for the Karlshamn shipment, plaintiff could not have failed to
present a copy thereof. Mr. Pasicolan testified6 that the shipping agent makes 20 copies of the documents of
which three signed ones are given to the shipper and the rest, marked as non-negotiable bills of lading — like
Exhibits A and B — are kept on its file. For the three signed copies to be lost, We may believe, but not for all the
remaining 17 other copies. Under the circumstances it is more reasonable to hold that there was no separate
shipment intended for Karlshamn, Sweden.
As a corollary to the foregoing conclusion, it stands to reason that the copra unloaded in Karlshamn formed part
of the same — and only — shipment of defendant intended for Gdynia. Now the fact that the sum total of the
cargo unloaded at Karlshamn and Gdynia would exceed what appears to have been loaded at Siain by as much
as 233,848 kilos can only show that defendant really overshipped, not shortshipped. And while this would not
tally with defendant's claim of having weighed the copra cargo 100% at Siain, thus exposing a flaw in
defendant's case, yet it is elementary that plaintiff must rely on the strength of its own case to recover, and not
bank on the weakness of the defense. Plaintiff here failed to establish its case by preponderance on evidence.
On the question whether defendant is the real shipper or merely an agent of Louis Dreyfus & Co., suffice it to
say that altho on Exhibits A and B his name appears as the shipper, yet the very loading certificate, Exhibit 3 [5-
Deposition of Horle], issued and signed by the Chief Mate and Master of the S.S. NAGARA shows that defendant
was acting merely for account of Louis Dreyfus & Co. The other documentary exhibits7 confirm this. Anyway, in
whatever capacity defendant is considered, it cannot be liable since no shortshipment was shown.
Plaintiff's action against defendant cannot, however, be considered as clearly unfounded as to warrant an
award of attorney's fees as damages to defendant under par. 4, Art. 2208 of the Civil Code. The facts do not
show that plaintiff's cause of action was so frivolous or untenable as to amount to gross and evident bad faith.8
WHEREFORE, but for the award of attorney's fees to defendant which is eliminated, the decision appealed from
is, in all other respects, hereby affirmed.
EN BANC
G.R. No. L-24043 April 25, 1968
RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant,
vs.
MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants-appellees.
Gil R. Carlos and Associates for plaintiff-appellant.
D. F. Macaranas and M. C. Gonzales for defendants-appellees.
FERNANDO, J.:
In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and Insurance Company, to the
consignee based on the applicable Civil Code provision,1 which speak to the effect that the Insurance Company
"shall be subrogated to the rights of the insured," it is its contention that it is entitled to the amount paid by it in
full, by virtue of the insurance contract. The lower court, however, relying on the limited liability clause on a
management contract with the defendants, could not go along with such a theory. Hence, this appeal.
The facts were stipulated. The more pertinent follows: That on or about November 29, 1960, the vessel, SS
Flying Trader, loaded on board at Genoa, Italy for shipment to Manila, Philippines, among other cargoes, 6 cases
OMH, Special Single Colour Offset Press Machine, for which Bill of Lading No. 1 was issued, consigned to Suter
Inc.; that such vessel arrived at the Port of Manila, Philippines on or about January 16, 1961 and subsequently
discharged complete and in good order the aforementioned shipment into the custody of defendant Manila
Port Service as arrastre operator; that in the course of the handling, one of the six cases identified as Case No.
2143 containing the OMH, Special Single Colour Offset Press, while the same was being lifted and loaded by the
crane of the Manila Port Service into the consignee's truck, it was dropped by the crane and as a consequence,
the machine was heavily damaged for which plaintiff as insurer paid to the consignee, Suter Inc. the amount of
P16,500.00, representing damages by way of costs of replacement parts and repairs to put the machine in
working condition, plus the sum of P180.70 which plaintiff paid to the International Adjustment Bureau as
adjuster's fee for the survey conducted on the damaged cargo or a total of P16,680.70 representing plaintiff's
liability under the insurance contract; and that the arrastre charges in this particular shipment was paid on the
weight or measurement basis whichever is higher, and not on the value thereof.2
Clause 15 of the management contract which as admitted by the plaintiff, appeared "at the dorsal part of the
Delivery Permit" and was "used in taking delivery of the subject shipment from the defendants' (Manila Port
Service and Manila Railroad Co.) custody and control, issued in the name of consignee's broker," contained
what was referred to as "an important notice." Such permit "is presented subject to all the terms and conditions
of the Management Contract between the Bureau of Customs and Manila Port Service and amendments
thereto or alterations thereof, particularly but not limited to paragraph 15 thereof limiting the Company liability
to P500.00 per package, unless the value of the goods is otherwise, specified, declared or manifested and the
corresponding arrastre charges have been paid. . . ."3
On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc.,4 the lower court rendered the
judgment "ordering defendants, jointly and severally, to pay plaintiff the amount of Five Hundred Pesos
(P500.00), with legal interest thereon from January 13, 1962, the date of the filing of the complaint, with costs
against said defendants."5
As noted at the outset, in this appeal, the point is pressed that under the applicable Civil Code provision,
plaintiff-appellant Insurance Company could recover in full. The literal language of Article 2207, however, does
not warrant such an interpretation. It is there made clear that in the event that the property has been insured
and the Insurance Company has paid the indemnity for the injury or loss sustained, it "shall be subrogated to
the rights of the insured against the wrong-doer or the person who has violated the contract."
Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants an amount greater than that
to which the consignee could lawfully lay claim. The management contract is clear. The amount is limited to Five
Hundred Pesos (P500.00). Such a stipulation has invariably received the approval of this Court from the leading
case of Bernabe & Co. v. Delgado Bros., Inc.6 Such a decision was quoted with approval in the following
subsequent cases: Atlantic Mutual Insurance Co. v. Manila Port Service,7 Insurance Service Co. of North America
v. Manila Port Service,8 Insurance Company of North America v. U.S. Lines, Co.,9 and Insurance Company of
North America v. Manila Port Service.10
In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this Court, through the then Justice,
now Chief Justice, Concepcion, restated the doctrine thus: "Plaintiff maintains that, not being a party to the
management contract, the consignee — into whose shoes plaintiff had stepped in consequence of said payment
— is not subject to the provisions of said stipulation, and that the same is furthermore invalid. The lower court
correctly rejected this pretense because, having taken delivery of the shipment aforementioned by virtue of a
delivery permit, incorporating thereto, by reference, the provisions of said management contract, particularly
paragraph 15 thereof, the gist of which was set forth in the permit, the consignee became bound by said
provisions, and because it could have avoided the application of said maximum limit of P500.00 per package by
stating the true value thereof in its claim for delivery of the goods in question, which, admittedly, the consignee
failed to do. . . ."11
Plaintiff-appellant Rizal Surety and Insurance Company, having been subrogated merely to the rights of the
consignee, its recovery necessarily should be limited to what was recoverable by the insured. The lower court
therefore did not err when in the decision appealed from, it limited the amount which defendants were jointly
and severally to pay plaintiff-appellants to "Five Hundred Pesos (P500.00) with legal interest thereon from
January 31, 1962, the date of the filing of the complaint, . . . ."
WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety and Insurance Company.
SECOND DIVISION
G.R. No. L-27796 March 25, 1976
ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant,
vs.
MACONDRAY & CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN MANILA PORT SERVICE
and/or MANILA RAILROAD COMPANY, defendants-appellees.
Chuidian Law Office for appellant.
Salcedo, Del Rosario Bito & Mesa for appellee Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen
Macaranas & Abrenica for appellee Manila Port Service and/or Manila Railroad Company.
ANTONIO, J.:
Certified to this Court by the Court of Appeals in its Resolution of May 8, 1967, 1 on the ground that the appeal
involves purely questions of law, thus: (a) whether or not, in case of loss or damage, the liability of the carrier to
the consignee is limited to the C.I.F. value of the goods which were lost or damaged, and (b) whether the
insurer who has paid the claim in dollars to the consignee should be reimbursed in its peso equivalent on the
date of discharge of the cargo or on the date of the decision.
According to the records, on June 29, 1960, Winthrop Products, Inc., of New York, New York, U.S.A., shipped
aboard the SS "Tai Ping", owned and operated by Wilhelm Wilhelmsen 218 cartons and drums of drugs and
medicine, with the freight prepaid, which were consigned to Winthrop-Stearns Inc., Manila, Philippines. Barber
Steamship Lines, Inc., agent of Wilhelm Wilhelmsen issued Bill of Lading No. 34, in the name of Winthrop
Products, Inc. as shipper, with arrival notice in Manila to consignee Winthrop-Stearns, Inc., Manila, Philippines.
The shipment was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine Insurance
Company under its insurance Special Policy No. OC-173766 dated June 23, 1960 (Exhibit "S").
On August 7, 1960, the SS "Tai Ping" arrived at the Port of Manila and discharged its aforesaid shipment into the
custody of Manila Port Service, the arrastre contractor for the Port of Manila. The said shipment was discharged
complete and in good order with the exception of one (1) drum and several cartons which were in bad order
condition. Because consignee failed to receive the whole shipment and as several cartons of medicine were
received in bad order condition, the consignee filed the corresponding claim in the amount of Fl,109.67
representing the C.I.F. value of the damaged drum and cartons of medicine with the carrier, herein defendants-
appellees (Exhibits "G" and "H") and the Manila Port Service (Exhibits "I" & "J" However, both refused to pay
such claim. consequently, the consignee filed its claim with the insurer, St. Paul Fire & Marine insurance Co.
(Exhibit "N"), and the insurance company, on the basis of such claim, paid to the consignee the insured value of
the lost and damaged goods, including other expenses in connection therewith, in the total amount of
$1,134.46 U.S. currency (Exhibit "U").
On August 5, 1961, as subrogee of the rights of the shipper and/or consignee, the insurer, St. Paul Fire & Marine
Insurance Co., instituted with the Court of First Instance of Manila the present action 2 against the defendants
for the recovery of said amount of $1,134.46, plus costs.
On August 23, 1961, the defendants Manila Port Service and Manila Railroad Company resisted the action,
contending, among others, that the whole cargo was delivered to the consignee in the same condition in which
it was received from the carrying vessel; that their rights, duties and obligations as arrastre contractor at the
Port of Manila are governed by and subject to the terms, conditions and limitations contained in the
Management Contract between the Bureau of Customs and Manila Port Service, and their liability is limited to
the invoice value of the goods, but in no case more than P500.00 per package, pursuant to paragraph 15 of the
said Management Contract; and that they are not the agents of the carrying vessel in the receipt and delivery of
cargoes in the Port of Manila.
On September 7, 1961, the defendants Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen also contested the claim alleging, among others, that the carrier's liability for the shipment ceased
upon discharge thereof from the ship's tackle; that they and their co-defendant Manila Port Service are not the
agents of the vessel; that the said 218 packages were discharged from the vessel SS "Tai Ping" into the custody
of defendant Manila Port Service as operator of the arrastre service for the Port of Manila; that if any damage
was sustained by the shipment while it was under the control of the vessel, such damage was caused by
insufficiency of packing, force majeure and/or perils of the sea; and that they, in good faith and for the purpose
only of avoiding litigation without admitting liability to the consignee, offered to settle the latter's claim in full
by paying the C.I.F. value of 27 lbs. caramel 4.13 kilos methyl salicylate and 12 pieces pharmaceutical vials of the
shipment, but their offer was declined by the consignee and/or the plaintiff.
After due trial, the lower court, on March 10, 1965 rendered judgment ordering defendants Macondray & Co.,
Inc., Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the plaintiff, jointly and severally, the sum
of P300.00, with legal interest thereon from the filing of the complaint until fully paid, and defendants Manila
Railroad Company and Manila Port Service to pay to plaintiff, jointly and severally, the sum of P809.67, with
legal interest thereon from the filing of the complaint until fully paid, the costs to be borne by all the said
defendants. 3
On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46, or its equivalent in
pesos at the rate of P3.90, instead of P2.00, for every US$1.00, filed a motion for reconsideration, but this was
denied by the lower court on May 5, 1965. Hence, the present appeal.
Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to recover from the
defendants-appellees the amount of $1,134.46 which it actually paid to the consignee (Exhibits "N" & "U") and
which represents the value of the lost and damaged shipment as well as other legitimate expenses such as the
duties and cost of survey of said shipment, and that the exchange rate on the date of the judgment, which was
P3.90 for every US$1.00, should have been applied by the lower court.
Defendants-appellees countered that their liability is limited to the C.I.F. value of the goods, pursuant to
contract of sea carriage embodied in the bill of lading that the consignee's (Winthrop-Stearns Inc.) claim against
the carrier (Macondray & Co., Inc., Barber Steamship Lines, Inc., Wilhelm Wilhelmsen and the arrastre operators
(Manila Port Service and Manila Railroad Company) was only for the sum of Pl,109.67 (Exhibits "G", "H", "I" &
"J"), representing the C.I.F. value of the loss and damage sustained by the shipment which was the amount
awarded by the lower court to the plaintiff-appellant; 4 defendants appellees are not insurers of the goods and
as such they should not be made to pay the insured value therefor; the obligation of the defendants-appellees
was established as of the date of discharge, hence the rate of exchange should be based on the rate existing on
that date, i.e., August 7, 1960, 5 and not the value of the currency at the time the lower court rendered its
decision on March 10, 1965.
The appeal is without merit.
The purpose of the bill of lading is to provide for the rights and liabilities of the parties in reference to the
contract to carry. 6 The stipulation in the bill of lading limiting the common carrier's liability to the value of the
goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. 7 This
limitation of the carrier's liability is sanctioned by the freedom of the contracting parties to establish such
stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs and public policy. 8 A stipulation fixing or limiting the sum that may be recovered from
the carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and just under the
circumstances, 9 and (b) has been fairly and freely agreed upon.10 In the case at bar, the liabilities of the
defendants- appellees with respect to the lost or damaged shipments are expressly limited to the C.I.F. value of
the goods as per contract of sea carriage embodied in the bill of lading, which reads:
Whenever the value of the goods is less than $500 per package or other freight unit, their value in the
calculation and adjustment of claims for which the Carrier may be liable shall for the purpose of avoiding
uncertainties and difficulties in fixing value be deemed to be the invoice value, plus frieght and insurance if paid,
irrespective of whether any other value is greater or less.
The limitation of liability and other provisions herein shall inure not only to the benefit of the carrier, its agents,
servants and employees, but also to the benefit of any independent contractor performing services including
stevedoring in connection with the goods covered hereunder. (Paragraph 17, emphasis supplied.)
It is not pretended that those conditions are unreasonable or were not freely and fairly agreed upon. The
shipper and consignee are, therefore, bound by such stipulations since it is expressly stated in the bill of lading
that in "accepting this Bill of Lading, the shipper, owner and consignee of the goods, and the holder of the Bill of
Lading agree to be bound by all its stipulations, exceptions and conditions, whether written, stamped or
printed, as fully as if they were all signed by such shipper, owner, consignee or holder. It is obviously for this
reason that the consignee filed its claim against the defendants-appellees on the basis of the C.I.F. value of the
lost or damaged goods in the aggregate amount of Pl,109.67 (Exhibits "G", "H", "I", and "J"). 11
The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the insurance, is
subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is recoverable
by the latter. Since the right of the assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to like limitations and
restrictions.
The insurer after paying the claim of the insured for damages under the insurance is subrogated merely to the
rights of the insured and therefore can necessarily recover only that to what was recoverable by the insured.12
Upon payment for a total loss of goods insured, the insurance is only subrogated to such rights of action as the
assured has against 3rd persons who caused or are responsible for the loss. The right of action against another
person, the equitable interest in which passes to the insurer, being only that which the assured has, it follows
that if the assured has no such right of action, none passes to the insurer, and if the assured's right of action is
limited or restricted by lawful contract between him and the person sought to be made responsible for the loss, a
suit by the insurer, in the Tight of the assured, is subject to like limitations or restrictions. 13
Equally untenable is the contention of the plaintiff-appellant that because of extraordinary inflation, it should
be reimbursed for its dollar payments at the rate of — exchange on the date of the judgment and not on the
date of the loss or damage. The obligation of the carrier to pay for the damage commenced on the date it failed
to deliver the shipment in good condition to the consignee.
The C.I.F. Manila value of the goods which were lost or damaged, according to the claim of the consignee dated
September 26, 1960 is $226.37 (for the pilferage, Exhibit "G") and $324.33 (shortlanded, Exhibit "H") or P456.14
and P653.53, respectively, in Philippine Currency. The peso equivalent was based by the consignee on the
exchange rate of P2.015 to $1.00 which was the rate existing at that time. We find, therefore, that the trial
court committed no error in adopting the aforesaid rate of exchange.
WHEREFORE, the appealed decision is hereby affirmed, with costs against the plaintiff-appellant.
SECOND DIVISION
G.R. No. 87958 April 26, 1990
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURG, PA/AMERICAN INTERNATIONAL
UNDERWRITER (PHIL.) INC., petitioners,
vs.
STOLT-NIELSEN PHILIPPINES, INC. and COURT OF APPEALS, respondents.
Fajardo Law Offices for petitioners.
Sycip, Salazar, Hernandez & Gatmaitan for Stolt-Nielsen Phil., Inc.
MELENCIO-HERRERA, J.:
We uphold the ruling of respondent Court of Appeals that the claim or dispute herein is arbitrable.
On 9 January 1985, United Coconut Chemicals, Inc. (hereinafter referred to as SHIPPER) shipped 404.774 metric
tons of distilled C6-C18 fatty acid on board MT "Stolt Sceptre," a tanker owned by Stolt-Nielsen Philippines Inc.
(hereinafter referred to as CARRIER), from Bauan, Batangas, Philippines, consigned to "Nieuwe Matex" at
Rotterdam, Netherlands, covered by Tanker Bill of Lading BL No. BAT-1. The shipment was insured under a
marine cargo policy with Petitioner National Union Fire Insurance Company of Pittsburg (hereinafter referred to
as INSURER), a non-life American insurance corporation, through its settling agent in the Philippines, the
American International Underwriters (Philippines), Inc., the other petitioner herein.
It appears that the Bill of Lading issued by the CARRIER contained a general statement of incorporation of the
terms of a Charter Party between the SHIPPER and Parcel Tankers, Inc., entered into in Greenwich, Connecticut,
U.S.A.
Upon receipt of the cargo by the CONSIGNEE in the Netherlands, it was found to be discolored and totally
contaminated. The claim filed by the SHIPPER-ASSURED with the CARRIER having been denied, the INSURER
indemnified the SHIPPER pursuant to the stipulation in the marine cargo policy covering said shipment.
On 21 April 1986, as subrogee of the SHIPPER-ASSURED, the INSURER filed suit against the CARRIER, before the
Regional Trial Court of Makati, Branch 58 (RTC), for recovery of the sum of P1,619,469.21, with interest,
representing the amount the INSURER had paid the SHIPPER-ASSURED. The CARRIER moved to dismiss/suspend
the proceedings on the ground that the RTC had no jurisdiction over the claim the same being an arbitrable one;
that as subrogee of the SHIPPER-ASSURED, the INSURER is subject to the provisions of the Bill of Lading, which
includes a provision that the shipment is carried under and pursuant to the terms of the Charter Party, dated 21
December 1984, between the SHIPPER-ASSURED and Parcel Tankers, Inc. providing for arbitration.
The INSURER opposed the dismissal/suspension of the proceedings on the ground that it was not legally bound
to submit the claim for arbitration inasmuch as the arbitration clause provided in the Charter Party was not
incorporated into the Bill of Lading, and that the arbitration clause is void for being unreasonable and unjust. On
28 July 1987, the RTC 1 denied the Motion, but subsequently reconsidered its action on 19 November 1987, and
deferred resolution on the Motion to Dismiss/Suspend Proceedings until trial on the merits "since the ground
alleged in said motion does not appear to be indubitable."
The CARRIER then resorted to a Petition for Certiorari and Prohibition with prayer for Preliminary Injunction
and/or Temporary Restraining Order before the respondent Appellate Court seeking the annulment of the 19
November 1987 RTC Order. On 12 April 1989, the respondent Court 2 promulgated the Decision now under
review, with the following dispositive tenor:
WHEREFORE', the order of respondent Judge dated November 19, 1987 deferring resolution on petitioner Stolt-
Nielsen's Motion to Dismiss/Suspend Proceedings is hereby SET ASIDE; private respondent NUFIC (the INSURER)
is ordered to refer its claims for arbitration; and respondent Judge is directed to suspend the proceedings in
Civil case No. 13498 pending the return of the corresponding arbitral award.
On 21 August 1989, we resolved to give due course and required the parties to submit their respective
Memoranda, which they have done, the last filed having been Noted on 23 October 1989.
First, herein petitioner-INSURER alleges that the RTC Order deferring resolution of the CARRIER's Motion to
Dismiss constitutes an interlocutory order, which can not be the subject of a special civil action on certiorari and
prohibition.
Generally, this would be true. However, the case before us falls under the exception. While a Court Order
deferring action on a motion to dismiss until the trial is interlocutory and cannot be challenged until final
judgment, still, where it clearly appears that the trial Judge or Court is proceeding in excess or outside of its
jurisdiction, the remedy of prohibition would lie since it would be useless and a waste of time to go ahead with
the proceedings (University of Sto. Tomas vs. Villanueva, 106 Phil. 439, [1959] citing Philippine International
Fair, Inc., et al., vs. Ibanez, et al., 94 Phil. 424 [1954]; Enrique vs. Macadaeg, et al., 84 Phil. 674 [1949]; San Beda
College vs. CIR, 97 Phil. 787 [1955]). Even a cursory reading of the subject Bill of Lading, in relation to the
Charter Party, reveals the Court's patent lack of jurisdiction to hear and decide the claim.
We proceed to the second but more crucial issue: Are the terms of the Charter Party, particularly the provision
on arbitration, binding on the INSURER?
The INSURER postulates that it cannot be bound by the Charter Party because, as insurer, it is subrogee only
with respect to the Bill of Lading; that only the Bill of Lading should regulate the relation among the INSURER,
the holder of the Bill of Lading, and the CARRIER; and that in order to bind it, the arbitral clause in the Charter
Party should have been incorporated into the Bill of Lading.
We rule against that submission.
The pertinent portion of the Bill of Lading in issue provides in part:
This shipment is carried under and pursuant to the terms of the Charter dated December 21st 1984 at
Greenwich, Connecticut, U.S.A. between Parcel Tankers. Inc. and United Coconut Chemicals, Ind. as Charterer
and all the terms whatsoever of the said Charter except the rate and payment of freight specified therein apply
to and govern the rights of the parties concerned in this shipment. Copy of the Charter may be obtained from
the Shipper or Charterer. (Emphasis supplied)
While the provision on arbitration in the Charter Party reads:
H. Special Provisions.
xxx xxx xxx
4. Arbitration. Any dispute arising from the making, performance or termination of this Charter Party shall be
settled in New York, Owner and Charterer each appointing an arbitrator, who shall be a merchant, broker or
individual experienced in the shipping business; the two thus chosen, if they cannot agree, shall nominate a
third arbitrator who shall be an admiralty lawyer. Such arbitration shall be conducted in conformity with the
provisions and procedure of the United States arbitration act, and a judgment of the court shall be entered
upon any award made by said arbitrator. Nothing in this clause shall be deemed to waive Owner's right to lien
on the cargo for freight, deed of freight, or demurrage.
Clearly, the Bill of Lading incorporates by reference the terms of the Charter Party. It is settled law that the
charter may be made part of the contract under which the goods are carried by an appropriate reference in the
Bill of Lading (Wharton Poor, Charter Parties and Ocean Bills of Lading (5th ed., p. 71). This should include the
provision on arbitration even without a specific stipulation to that effect. The entire contract must be read
together and its clauses interpreted in relation to one another and not by parts. Moreover, in cases where a Bill
of Lading has been issued by a carrier covering goods shipped aboard a vessel under a charter party, and the
charterer is also the holder of the bill of lading, "the bill of lading operates as the receipt for the goods, and as
document of title passing the property of the goods, but not as varying the contract between the charterer and
the shipowner" (In re Marine Sulphur Queen, 460 F 2d 89, 103 [2d Cir. 1972]; Ministry of Commerce vs. Marine
Tankers Corp. 194 F. Supp 161, 163 [S.D.N.Y. 1960]; Greenstone Shipping Co., S.A. vs. Transworld Oil, Ltd., 588 F
Supp [D.El. 1984]). The Bill of Lading becomes, therefore, only a receipt and not the contract of carriage in a
charter of the entire vessel, for the contract is the Charter Party (Shell Oil Co. vs. M/T Gilda, 790 F 2d 1209, 1212
[5th Cir. 1986]; Home Insurance Co. vs. American Steamship Agencies, Inc., G.R. No. L-25599, 4 April 1968, 23
SCRA 24), and is the law between the parties who are bound by its terms and condition provided that these are
not contrary to law, morals, good customs, public order and public policy (Article 1306, Civil Code).
As the respondent Appellate Court found, the INSURER "cannot feign ignorance of the arbitration clause since it
was already charged with notice of the existence of the charter party due to an appropriate reference thereof in
the bill of lading and, by the exercise of ordinary diligence, it could have easily obtained a copy thereof either
from the shipper or the charterer.
We hold, therefore, that the INSURER cannot avoid the binding effect of the arbitration clause. By subrogation,
it became privy to the Charter Party as fully as the SHIPPER before the latter was indemnified, because as
subrogee it stepped into the shoes of the SHIPPER-ASSURED and is subrogated merely to the latter's rights. It
can recover only the amount that is recoverable by the assured. And since the right of action of the SHIPPER-
ASSURED is governed by the provisions of the Bill of Lading, which includes by reference the terms of the
Charter Party, necessarily, a suit by the INSURER is subject to the same agreements (see St. Paul Fire and Marine
Insurance Co. vs. Macondray, G.R. No. L-27796, 25 March 1976, 70 SCRA 122).
Stated otherwise, as the subrogee of the SHIPPER, the INSURER is contractually bound by the terms of the
Charter party.1âwphi1 Any claim of inconvenience or additional expense on its part should not render the
arbitration clause unenforceable.
Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in our
jurisdiction (Chapter 2, Title XIV, Book IV, Civil Code). Republic Act No. 876 (The Arbitration Law) also expressly
authorizes arbitration of domestic disputes. Foreign arbitration as a system of settling commercial disputes of
an international character was likewise recognized when the Philippines adhered to the United Nations
"Convention on the Recognition and the Enforcement of Foreign Arbitral Awards of 1958," under the 10 May
1965 Resolution No. 71 of the Philippine Senate, giving reciprocal recognition and allowing enforcement of
international arbitration agreements between parties of different nationalities within a contracting state. Thus,
it pertinently provides:
1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit
to arbitration all or any differences which have arisen or which may arise between them in respect of a defined
legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
2. The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement,
signed by the parties or contained in an exchange of letters or telegrams.
3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have
made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the
parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being
performed.
It has not been shown that the arbitral clause in question is null and void, inoperative, or incapable of being
performed. Nor has any conflict been pointed out between the Charter Party and the Bill of Lading.
In fine, referral to arbitration in New York pursuant to the arbitration clause, and suspension of the proceedings
in Civil Case No. 13498 below, pending the return of the arbitral award, is, indeed called for.
WHEREFORE, finding no reversible error in respondent Appellate Court's 12 April 1989 Decision, the instant
Petition for Review on certiorari is DENIED and the said judgment is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
THIRD DIVISION
[G.R. No. 132607. May 5, 1999]
CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner, vs. WILLIAM LINES, INC. and PRUDENTIAL
GUARANTEE and ASSURANCE COMPANY, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal of the
decision of the Court of Appeals[1]which affirmed the decision of the trial court of origin finding the petitioner
herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for damages to the private
respondent, William Lines, Inc., and to the insurer, Prudential Guarantee Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business of dry-
docking and repairing of marine vessels while the private respondent, Prudential Guarantee and Assurance, Inc.
(Prudential), also a domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It was the owner of M/V Manila City, a luxury
passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time of the unfortunate
occurrence sued upon, subject vessel was insured with Prudential for P45,000,000.00 pesos for hull and
machinery. The Hull Policy included an Additional Perils (INCHMAREE) Clause covering loss of or damage to the
vessel through the negligence of, among others, ship repairmen. The Policy provided as follows:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to Vessel directly caused by
the following:
xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an Assured
hereunder.
xxx
provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or
Managers of the Vessel, of any of them. Masters, Officers, Crew or Pilots are not to be considered Owners
within the meaning of this Clause should they hold shares in the Vessel.[2]
Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairers Legal Liability
Insurance Policy. The policy was for P10 million only, under the limited liability clause, to wit:
7. Limit of Liability
The limit of liability under this insurance, in respect of any one accident or series of accidents, arising out of one
occurrence, shall be [P10 million], including liability for costs and expense which are either:
(a) incurred with the written consent of the underwriters hereon; or
(b) awarded against the Assured.[3]
On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in Lapulapu
City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and CSEW to
discuss the work to be undertaken on the M/V Manila City.
The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:
10. The Contractor shall replace at its own work and at its own cost any work or material which can be shown
to be defective and which is communicated in writing within one (1) month of redelivery of the vessel or if the
vessel was not in the Contractors Possession, the withdrawal of the Contractors workmen, or at its option to
pay a sum equal to the cost of such replacement at its own works. These conditions shall apply to any such
replacements.
11. Save as provided in Clause 10, the Contractor shall not be under any liability to the Customer either in
contract or for delict or quasi-delict or otherwise except for negligence and such liability shall itself be subject to
the following overriding limitations and exceptions, namely:
(a) The total liability of the Contractor to the Customer (over and above the liability to replace under Clause 10)
or of any sub-contractor shall be limited in respect of any defect or event (and a series of accidents arising out
of the same defect or event shall constitute one defect or event) to the sum of Pesos Philippine Currency One
Million only.
(b) In no circumstance whatsoever shall the liability of the Contractor or any Sub-Contractor include any sum in
respect of loss of profit or loss of use of the vessel or damages consequential on such loss of use.
xxx
20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the
period the contract is in effect.[4]
While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the master,
officers and crew of M/V Manila City stayed in the vessel, using their cabins as living quarters. Other employees
hired by William Lines to do repairs and maintenance work on the vessel were also present during the dry-
docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and sank, resulting
to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the fire
which broke out in M/V Manila City was caused by CSEWs negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter had paid
William Lines, Inc. the value of the hulland machinery insurance on the M/V Manila City. As a result of such
payment Prudential was subrogated to the claim of P45 million, representing the value of the said insurance it
paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering the
latter:
1. To pay unto plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the amount of Forty-five Million
(P45 million) Pesos, with interest at the legal rate until full payment is made;
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven Hundred Fifteen Thousand
(P56,715,000.00) Pesos representing loss of income of M/V MANILA CITY, with interest at the legal rate until full
payment is made;
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as payment, in addition to
what it received from the insurance company to fully cover the injury or loss, in order to replace the M/V
MANILA CITY, with interest at the legal rate until full payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven Thousand Thirty-nine
(P927,039.00) Pesos for the loss of fuel and lub (sic) oil on board the vessel when she was completely gutted by
fire at defendant, Cebu Shipyards quay, with interest at the legal rate until full payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six Hundred Seventy-
seven Pesos and Ninety-five centavos (P3,054,677.95) as payment for the spare parts and materials used in the
M/V MANILA CITY during dry-docking with interest at the legal rate until full payment is made;
6. To pay unto plaintiff William Lines, Inc. the sum of Five Hundred Thousand (P500,000.00) Pesos in moral
damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million (P10,000,000.00) Pesos in attorneys fees;
and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency of the
appeal, CSEW and William Lines presented a Joint Motion for Partial Dismissal with prejudice, on the basis of
the amicable settlement inked between Cebu Shipyard and William Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and William
Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard and Engineering Works,
Inc. to pay the plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the sum of P45 Million, with
interest at the legal rate until full payment is made, as contained in the decision of Civil Case No. CEB-9935 is
hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeals Resolution dated February 13, 1998,
CSEW found its way to this court via the present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT CSEW HAD MANAGEMENT AND
SUPERVISORYCONTROL OF THE M/V MANILA CITY AT THE TIME THE FIRE BROKE OUT.
II. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE DOCTRINE OF RES IPSA LOQUITUR
AGAINST CSEW.
III. THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY LIABLE FOR THE LOSS OF THE
M/V MANILA CITY IS BASED ON FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.
IV. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEWS EXPERT EVIDENCE AS
INADMISSIBLE OR OF NO PROBATIVE VALUE.
V. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT PRUDENTIAL HAS THE RIGHT OF
SUBROGATION AGAINST ITS OWN INSURED.
VI. ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT CSEW WAS
NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS, THE COURT OF
APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE CONTRACTUAL PROVISIONS LIMITING
CSEWS LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P1 MILLION IS NOT VALID, CONTRARY TO THE
APPLICABLE RULINGS OF THIS HONORABLE COURT.
Petitioners version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave dock. It was then
transferred to the docking quay of CSEW where the remaining repair to be done was the replating of the top of
Water Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB General Services. Tank
Top No. 12 was at the rear section of the vessel, on level with the flooring of the crew cabins located on the
vessels second deck.
At around seven o clock in the morning of February 16, 1991, the JNB workers trimmed and cleaned the tank
top framing which involved minor hotworks (welding/cutting works). The said work was completed at about
10:00 a. m. The JNB workers then proceeded to rig the steel plates, after which they had their lunch break. The
rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed smoke coming from the
passageway along the crew cabins. When one of the workers, Mr. Casas, proceeded to the passageway to
ascertain the origin of the smoke, he noticed that smoke was gathering on the ceiling of the passageway but did
not see any fire as the crew cabins on either side of the passageway were locked. He immediately sought out
the proprietor of JNB, Mr. Buenavista, and the Safety Officer of CSEW, Mr. Aves, who sounded the fire
alarm. CSEWs fire brigade immediately responded as well as the other fire fighting units in Metro Cebu.
However, there were no WLI representative, officer or crew to guide the firemen inside the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue Fire Department,
Cordova Fire Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW, the fire was not
controlled until 2:00 a.m. of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel and fire again broke
out. Then the huge amounts of water pumped into the vessel, coupled with the strong current, caused the
vessel to tilt until it capsized and sank
When M/V Manila City capsized, steel and angle bars were noticed to have been newly welded along the port
side of the hull of the vessel, at the level of the crew cabins. William Lines did not previously apply for a permit
to do hotworks on the said portion of the ship as it should have done pursuant to its work order with CSEW.[5]
Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner :
At around eleven o clock in the morning of February 16, 1991, the Chief Mate of M/V Manila City was
inspecting the various works being done by CSEW on the vessel, when he saw that some workers of CSEW were
cropping out steel plates on Tank Top No. 12 using acetylene, oxygen and welding torch. He also observed that
the rubber insulation wire coming out of the air-conditioning unit was already burning, prompting him to scold
the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12. The vessels
reeferman reported such occurence to the Chief Mate who immediately assembled the crew members to put
out the fire. When it was too hot for them to stay on board and seeing that the fire cannot be controlled, the
vessels crew were forced to withdraw from CSEWs docking quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential
Guarantee, William Lines filed a claim for constructive total loss, and after a thorough investigation of the
surrounding circumstances of the tragedy, Prudential Guarantee found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P45 million pesos representing the
total value of M/V Manila Citys hull and machinery insurance.[6]
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages to the
respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioners submission that
the finding of negligence by the Court of Appeals is not supported by the evidence on record, and contrary to
what the Court of Appeals found, petitioner did not have management and control over M/V Manila City.
Although it was brought to the premises of CSEW for annual repair, William Lines, Inc. retained control over the
vessel as the ship captain remained in command and the ships crew were still present. While it imposed certain
rules and regulations on William Lines, it was in the exercise of due diligence and not an indication of CSEWs
exclusive control over subject vessel. Thus, CSEW maintains that it did not have exclusive control over the M/V
Manila City and the trial court and the Court of Appeals erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the Court
of Appeals are conclusive on the parties and are not reviewable by this Court. They are entitled to great weight
and respect, even finality, especially when, as in this case, the Court of Appeals affirmed the factual findings
arrived at by the trial court.[7] When supported by sufficient evidence, findings of fact by the Court of Appeals
affirming those of the trial court, are not to be disturbed on appeal. The rationale behind this doctrine is that
review of the findings of fact of the Court of Appeals is not a function that the Supreme Court normally
undertakes.[8]
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which caused the
total loss of subject M/V Manila City was due to the negligence of the employees and workers of CSEW. Both
courts found that the M/V Manila City was under the custody and control of petitioner CSEW, when the ill-fated
vessel caught fire. The decisions of both the lower court and the Court of Appeals set forth clearly the evidence
sustaining their finding of actionable negligence on the part of CSEW. This factual finding is accorded great
weight and is conclusive on the parties. The court discerns no basis for disturbing such finding firmly anchored
on enough evidence. As held in the case of Roblett Industrial Construction Corporation vs. Court of Appeals, in
the absence of any showing that the trial court failed to appreciate facts and circumstances of weight and
substance that would have altered its conclusion, no compelling reason exists for the Court to impinge upon
matters more appropriately within its province.[9]
Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of fact
cannot be entertained. The finding of negligence by the Court of Appeals is a question which this Court cannot
look into as it would entail going into factual matters on which the finding of negligence was based. Such an
approach cannot be allowed by this Court in the absence of clear showing that the case falls under any of the
exceptions[10] to the well-established principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason of
the negligence of the workers of CSEW, when the said vessel was under the exclusive custody and control of
CSEW is accordingly upheld. Under the circumstances of the case, the doctrine of res ipsa loquitur applies. For
the doctrine of res ipsa loquitur to apply to a given situation, the following conditions must concur: (1) the
accident was of a kind which does not ordinarily occur unless someone is negligent; and (2) that the
instrumentality or agency which caused the injury was under the exclusive control of the person charged with
negligence.
The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the
fire that occurred and consumed M/V Manila City would not have happened in the ordinary course of things if
reasonable care and diligence had been exercised. In other words, some negligence must have occurred.
Second, the agency charged with negligence, as found by the trial court and the Court of Appeals and as shown
by the records, is the herein petitioner, Cebu Shipyard and Engineering Works, Inc., which had control over
subject vessel when it was docked for annual repairs. So also, as found by the regional trial court, other
responsible causes, including the conduct of the plaintiff, and third persons, are sufficiently eliminated by the
evidence.[11]
What is more, in the present case the trial court found direct evidence to prove that the workers and/or
employees of CSEW were remiss in their duty of exercising due diligence in the care of subject vessel. The direct
evidence substantiates the conclusion that CSEW was really negligent. Thus, even without applying the doctrine
of res ipsa loquitur, in light of the direct evidence on record, the ineluctable conclusion is that the petitioner,
Cebu Shipyard and Engineering Works, Inc., was negligent and consequently liable for damages to the
respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the
inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and origin of the fire.
Petitioner maintains that the Court of Appeals erred in disregarding the testimonies of the fire experts, Messrs.
David Grey and Gregory Michael Southeard, who testified on the probable origin of the fire in M/V Manila City.
Petitioner avers that since the said fire experts were one in their opinion that the fire did not originate in the
area of Tank Top No. 12 where the JNB workers were doing hotworks but on the crew accommodation cabins
on the portside No. 2 deck, the trial court and the Court of Appeals should have given weight to such finding
based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they may have probative value,
reception in evidence of expert testimonies is within the discretion of the court. Section 49, Rule 130 of the
Revised Rules of Court, provides:
SEC. 49. Opinion of expert witness. - The opinion of a witness on a matter requiring special knowledge, skill,
experience or training which he is shown to possess, may be received in evidence.
The word may signifies that the use of opinion of an expert witness as evidence is a prerogative of the courts. It
is never mandatory for judges to give substantial weight to expert testimonies. If from the facts and evidence on
record, a conclusion is readily ascertainable, there is no need for the judge to resort to expert opinion evidence.
In the case under consideration, the testimonies of the fire experts were not the only available evidence on the
probable cause and origin of the fire. There were witnesses who were actually on board the vessel when the fire
occurred. Between the testimonies of the fire experts who merely based their findings and opinions on
interviews and the testimonies of those present during the fire, the latter are of more probative value. Verily,
the trial court and the Court of Appeals did not err in giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the rights of
William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk and (2) it is a
co-assured under the Marine Hull Insurance Policy.
It is petitioners submission that the loss of M/V Manila City or damage thereto is expressly excluded from the
coverage of the insurance because the same resulted from want of due diligence by the Assured, Owners or
Managers which is not included in the risks insured against. Again, this theory of petitioner is bereft of any
factual or legal basis. It proceeds from a wrong premise that the fire which gutted subject vessel was caused by
the negligence of the employees of William Lines, Inc. To repeat, the issue of who between the parties was
negligent has already been resolved against Cebu Shipyard and Engineering Works, Inc. Upon proof of payment
by Prudential to William Lines, Inc., the former was subrogated to the right of the latter to indemnification from
CSEW. As aptly ruled by the Court of Appeals, the law on the matter is succinct and clear, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated
the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the loss or injury.[12]
Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William Lines,
Inc., paid the latter the total amount covered by its insurance policy, it was subrogated to the right of the latter
to recover the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under the
subject insurance policy. To buttress its stance that it is a co-assured, petitioner placed reliance on Clause 20 of
of the Work Order which states:
20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during the
period the contract is in effect.[13]
According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk of loss of the
vessel while under drydock or repair and to such extent, it is benefited and effectively constituted as a co-
assured under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in the
sense that it requires William Lines to maintain insurance on the vessel during the period of dry-docking or
repair. Concededly, such a stipulation works to the benefit of CSEW as the shiprepairer. However, the fact that
CSEW benefits from the said stipulation does not automatically make it as a co-assured of William Lines. The
intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally
from the insurance contract or policy itself and not from any other contract or agreement because the
insurance policy denominates the assured and the beneficiaries of the insurance. The hull and machinery
insurance procured by William Lines, Inc. from Prudential named only William Lines, Inc. as the assured. There
was no manifestation of any intention of William Lines, Inc. to constitute CSEW as a co-assured under subject
policy. It is axiomatic that when the terms of a contract are clear its stipulations control.[14] Thus, when the
insurance policy involved named only William Lines, Inc. as the assured thereunder, the claim of CSEW that it is
a co-assured is unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to vessel directly caused by
the following:
xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an Assured
hereunder.[15] (emphasis supplied)
As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy, it
would nullify any claim of William Lines, Inc. from Prudential for any loss or damage caused by the negligence of
CSEW. Certainly, no shipowner would agree to make a shiprepairer a co-assured under such insurance policy;
otherwise, any claim for loss or damage under the policy would be invalidated. Such result could not have been
intended by William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines, Inc., by
stipulation in the Contract or Work Order its liability is limited to One Million (P1,000,000.00) Pesos only, and
Prudential a mere subrogee of William Lines, Inc., should only be entitled to collect the sum stipulated in the
said contract.
Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as binding as
an ordinary contract, the Court recognizes instances when reliance on such contracts cannot be favored
especially where the facts and circumstances warrant that subject stipulations be disregarded.[16]Thus, in ruling
on the validity and applicability of the stipulation limiting the liability of CSEW for negligence to One Million
(P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of the provision sought to be
enforced should be considered, bearing in mind the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00)
Pesos. To determine the validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential
conducted its own inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was found to be
beyond economical salvage and repair.[17] The evaluation of the average adjuster also reported a constructive
total loss.[18] The said claim of William Lines, Inc., was then found to be valid and compensable such that
Prudential paid the latter the total value of its insurance claim. Furthermore, it was ascertained that the
replacement cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to Fifty-five Million
(P55,000,000.00) Pesos.[19]
Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has been
sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One Million
Pesos only. As aptly held by the trial court, it is rather unconscionable if not overstrained. To allow CSEW to limit
its liability to One Million Pesos notwithstanding the fact that the total loss suffered by the assured and paid for
by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree of
diligence short of what is ordinarily required because, then, it would not be difficult for petitioner to escape
liability by the simple expedient of paying an amount very much lower than the actual damage or loss suffered
by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3, 1997, and
Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.
SECOND DIVISION
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.
PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979,
ordering petitioner Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance
Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973,
attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the resolution of the same
Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with respondent
insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a truck owned by San
Miguel Corporation. For the damage caused, respondent company paid petitioner five thousand pesos
(P5,000.00) in amicable settlement. Petitioner's general manager executed a Release of Claim, subrogating
respondent company to all its right to action against San Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement from
San Miguel Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused reimbursement,
alleging that San Miguel Corporation had already paid petitioner P4,500.00 for the damages to petitioner's
motor vehicle, as evidenced by a cash voucher and a Release of Claim executed by the General Manager of
petitioner discharging San Miguel Corporation from "all actions, claims, demands the rights of action that now
exist or hereafter [sic] develop arising out of or as a consequence of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00 paid
by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit in the City Court of Manila
for the recovery of P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On appeal the
Court of First Instance of Manila affirmed the City Court's decision in toto, which CFI decision was affirmed by
the Court of Appeals, with the modification that petitioner was to pay respondent the total amount of
P5,000.00 that it had earlier received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent company
as the subrogation in the Release of Claim it executed in favor of respondent was conditioned on recovery of
the total amount of damages petitioner had sustained. Since total damages were valued by petitioner at
P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner argues that it was entitled
to go after San Miguel Corporation to claim the additional P4,500.00 eventually paid to it by the latter, without
having to turn over said amount to respondent. Respondent of course disputes this allegation and states that
there was no qualification to its right of subrogation under the Release of Claim executed by petitioner, the
contents of said deed having expressed all the intents and purposes of the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner cites Art.
2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract complained of the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the injury or loss the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be
preferred to the person who has been subrogated in his place in virtue of the partial payment of the same
credit.
We find petitioners arguments to be untenable and without merit. In the absence of any other evidence to
support its allegation that a gentlemen's agreement existed between it and respondent, not embodied in the
Release of Claim, such ease of Claim must be taken as the best evidence of the intent and purpose of the
parties. Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating Private respondent to any right of action it had
against San Miguel Corporation did not preclude Manila Mahogany from filing a deficiency claim against the
wrongdoer. Citing Article 2207, New Civil Code, to the effect that if the amount paid by an insurance company
does not fully cover the loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss, petitioner claims a preferred right to retain the amount coming from San Miguel Corporation,
despite the subrogation in favor of Private respondent.
Although petitioners right to file a deficiency claim against San Miguel Corporation is with legal basis, without
prejudice to the insurer's right of subrogation, nevertheless when Manila Mahogany executed another release
claim (Exhibit K) discharging San Miguel Corporation from "all actions, claims, demands and rights of action that
now exist or hereafter arising out of or as a consequence of the accident" after the insurer had paid the
proceeds of the policy- the compromise agreement of P5,000.00 being based on the insurance policy-the
insurer is entitled to recover from the insured the amount of insurance money paid (Metropolitan Casualty
Insurance Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and Insolvency
Law with comments and annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts released San
Miguel Corporation, thereby defeating private respondents, the right of subrogation, the right of action of
petitioner against the insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391)
Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co., 2
If a property is insured and the owner receives the indemnity from the insurer, it is provided in [Article 2207 of
the New Civil Code] that the insurer is deemed subrogated to the rights of the insured against the wrongdoer
and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled
to recover the deficiency. ... Under this legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500.00 as
originally asked for, but P5,000.00, the amount respondent company paid petitioner as insurance, is also in
accord with law and jurisprudence. In disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation under its clear right to file
a deficiency claim for damages incurred, against the wrongdoer, should the insurance company not fully pay for
the injury caused (Article 2207, New Civil Code). However, when petitioner released San Miguel Corporation
from any liability, petitioner's right to retain the sum of P5,000.00 no longer existed, thereby entitling private
respondent to recover the same. (Emphasis supplied)
As has been observed:
... The right of subrogation can only exist after the insurer has paid the otherwise the insured will be deprived of
his right to full indemnity. If the insurance proceeds are not sufficient to cover the damages suffered by the
insured, then he may sue the party responsible for the damage for the the [sic] remainder. To the extent of the
amount he has already received from the insurer enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after
receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights
against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid
to the latter, unless the release was made with the consent of the insurer. 4(Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still, the
respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by the insurer.
The Court of Appeals rightly reasoned as follows:
It is to be noted that private respondent, in its companies, prays for the recovery, not of P5,000.00 it had paid
under the insurance policy but P4,500.00 San Miguel Corporation had paid to petitioner. On this score, We
believe the City Court and Court of First Instance erred in not awarding the proper relief. Although private
respondent prays for the reimbursement of P4,500.00 paid by San Miguel Corporation, instead of P5,000.00
paid under the insurance policy, the trial court should have awarded the latter, although not prayed for, under
the general prayer in the complaint "for such further or other relief as may be deemed just or equitable, (Rule 6,
Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim, 50 Phil. 844; Baguiro
vs. Barrios Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby AFFIRMED
with costs against petitioner.
SO ORDERED.
THIRD DIVISION
DANZAS CORPORATION and G.R. No. 141462
ALL TRANSPORT NETWORK,
INC., On December 5, 1997, petitioners filed a manifestation and motion for reconsideration of the order of the trial
Petitioners, Present: court dated November 14, 1997, questioning the propriety of the preliminary hearing.
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ, On February 18, 1998, the trial court issued an order denying: (1) the motion for reconsideration of the
- v e r s u s - CORONA, December 9, 1996 order filed by petitioners, private respondent Skylanders and KAL; (2) the motion to dismiss
CARPIO-MORALES and filed by Skylanders and (3) petitioners motion for reconsideration of the November 14, 1997 order.
GARCIA, JJ.
On April 6, 1998, petitioners filed in the Court of Appeals a special civil action for certiorari under Rule 65 of the
HON. ZEUS C. ABROGAR, Rules of Court. On March 5, 1999, the CA dismissed the petition.[6] Petitioners filed[7] a motion for
Presiding Judge of Br. 150 of reconsideration but this was denied.[8]
Makati City, SEABOARD
EASTERN INSURANCE CO., Hence, this petition.
INC. and PHILIPPINE
SKYLANDERS, INC., Petitioners principal contention is that private respondents right of subrogation was extinguished when IFTI
Respondents. Promulgated : received payment from KAL in settlement of its obligation. They also claim that public respondent committed
grave abuse of discretion by refusing to dismiss the case on that ground. Finally, they claim that, by granting
December 15, 2005 private respondent Skylanders a preliminary hearing on an affirmative defense other than one of the grounds
stated in Section 1, Rule 16 of the 1997 Rules of Civil Procedure, public respondent committed another grave
x------------------------------------------x abuse of discretion.

DECISION
CORONA, J.:
Petitioner Danzas Corporation, through its agent, petitioner All Transport Network brings to us this petition for
review on certiorari[1] questioning the decision[2] and resolution[3] of the Court of Appeals which affirmed two
orders issued by the Regional Trial Court, Makati City, Branch 150.[4]
For its part, private respondent Seaboard argues that the payment made by the tortfeasor did not relieve it of
liability because at the time of payment, its (Seaboards) suit against petitioners was already ongoing. It also
insists that because the assailed order was interlocutory, it was not a proper subject for certiorari.[9]
Private respondent Skylanders likewise contends that the order denying dismissal cannot be the subject of
certiorari in the absence of grave abuse of discretion. It also defends the trial courts order granting a
preliminary hearing, saying that, assuming the trial court had erroneously granted such a hearing, such error
was merely one of judgment and not of jurisdiction as to merit certiorari.[10]

The facts of the case follow.[5] The petition has no merit.

On February 22, 1994, petitioner Danzas took a shipment of nine packages of ICS watches for transport to
Manila. The consignee, International Freeport Traders, Inc. (IFTI) secured Marine Risk Note No. 0000342 from
private respondent Seaboard.
On March 2, 1994, the Korean Airlines plane carrying the goods arrived in Manila and discharged the goods to
the custody of private respondent Philippine Skylanders, Inc. for safekeeping. On withdrawal of the shipment
from private respondent Skylanders warehouse, IFTI noted that one package containing 475 watches was
shortlanded while the remaining eight were found to have sustained tears on sides and the retape of flaps. On
further examination and inventory of the cartons, it was discovered that 176 Guess watches were missing.
Private respondent Seaboard, as insurer, paid the losses to IFTI.
On February 23, 1995, Seaboard, invoking its right of subrogation, filed a complaint against Skylanders,
petitioner and its authorized representative, petitioner All Transport Network, Inc. (ATN), praying for actual
damages in the amount of P612,904.97 plus legal interest, attorneys fees and cost of suit. Petitioners impleaded
Korean Airlines (KAL) as third-party defendant.
While the case was pending, IFTIs treasurer, Mary Eileen Gozon accepted the proposal of KAL to settle
consignees claim by paying the amount of US $522.20. On May 8, 1996, Felipe Acebedo, IFTIs representative
received a check from KAL and correspondingly signed a release form.
On July 2, 1996, petitioners filed a motion to dismiss the case on the ground that private respondent Seaboards
demand had been paid or otherwise extinguished by KAL.
On December 9, 1996, the trial court issued an order denying the motion to dismiss. Petitioners, private
respondent Skylanders and KAL filed separate motions for reconsideration. Prior to the resolution of these
motions, the trial court allowed private respondent Skylanders to present evidence in a preliminary hearing on
November 14, 1997, after which the court set a date to hear the presentation of rebuttal evidence.
It is true that the doctrine in Manila Mahogany Manufacturing Corporation v. Court of Appeals[11]remains the
controlling doctrine on the issue of whether the tortfeasor, by settling with the insured, defeats the right to
subrogation of the insurer. According to Manila Mahogany:
Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after
receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights
against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of the insurer.
This is buttressed by a later decision, Pan Malayan Insurance Corporation v. Court of Appeals,[12] in which we
cited a number of exceptions to the rule laid down in Article 2207 of the Civil Code.[13] Under the first of these
exceptions, if the assured by his own act releases the wrongdoer or third party liable for the loss or damage
from liability, the insurers right of subrogation is defeated.
However, certain factual differences pointed out by private respondent Seaboard render this doctrine
inapplicable. In Manila Mahogany, the tortfeasor San Miguel Corporation paid the insured without knowing
that the insurer had already made such payment. KAL was not similarly situated, being fully aware of the prior
payment made by the insurer to the consignee. Private respondent Seaboard asserts that, being in bad faith,
KAL should bear the consequences of its actions. [14]
While Manila Mahogany is silent on whether the existence of good faith or bad faith on the tortfeasors part
affects the insurers right of subrogation, there exists a wealth of U.S. jurisprudence holding that whenever the
wrongdoer settles with the insured without the consent of the insurer and with knowledge of the insurers
payment and right of subrogation, such right is not defeated by the settlement.[15] Because this doctrine is
actually consistent with the facts of Mahogany and helps fill a slight gap left by our ruling in that case, we adopt
it now. The trial court correctly refused to dismiss the case. In that respect, therefore, the trial court did not
commit grave abuse of discretion which would justify certiorari.

We likewise find that no grave abuse of discretion was committed by public respondent when it granted private
respondent Skylanders motion for a preliminary hearing.
In California and Hawaiian Sugar Company v. Pioneer Insurance and Surety Corporation,[16] we held that a
preliminary hearing was not mandatory but was rather subject to the discretion of the trial court. We found in
that instance that the trial court had committed grave abuse of discretion in refusing the partys motion for a
preliminary hearing on the ground that the case was premature, not having been submitted for arbitration. A
preliminary hearing could have settled the entire case, thereby helping decongest the dockets. It was therefore
the refusal to allow the most efficient and expeditious process which we condemned.
In the instant case, we are not convinced that public respondents act of allowing a preliminary hearing
constituted grave abuse of discretion.
In Land Bank of the Philippines v. the Court of Appeals[17] we discussed the meaning of grave abuse of
discretion:
Grave abuse of discretion implies such capricious and whimsical exercise of judgment as is equivalent to lack of
jurisdiction or, in other words, where the power is exercised in an arbitrary manner by reason of passion,
prejudice, or personal hostility, and it must be so patent or gross as to amount to an evasion of a positive duty
or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.
The special civil action for certiorari is a remedy designed for the correction of errors of jurisdiction and not
errors of judgment. The raison detre for the rule is when a court exercises its jurisdiction, an error committed
while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did,
every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a
void judgment. In such a scenario, the administration of justice would not survive. Hence, where the issue or
question involved affects the wisdom or legal soundness of the decisionnot the jurisdiction of the court to
render said decisionthe same is beyond the province of a special civil action for certiorari. (emphasis supplied)
Public respondents order granting the preliminary hearing does not at all fit the description above. At worst, it
was an error in judgment which is beyond the domain of certiorari.
WHEREFORE, in view of the foregoing, the petition is hereby DENIED. The decision and resolution of the Court
of Appeals are AFFIRMED.
Costs against petitioners.
SO ORDERED.
THIRD DIVISION
G.R. No. L-52732 August 29, 1988
F.F. CRUZ and CO., INC., petitioner,
vs.
THE COURT OF APPEALS, GREGORIO MABLE as substituted by his wife LUZ ALMONTE MABLE and children
DOMING, LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME, ANTONIO, and BERNARDO all surnamed
MABLE, respondents.
Luis S. Topacio for petitioner.
Mauricio M. Monta for respondents.
CORTES, J.:
This petition to review the decision of the Court of Appeals puts in issue the application of the common law
doctrine of res ipsa loquitur.
The essential facts of the case are not disputed.
The furniture manufacturing shop of petitioner in Caloocan City was situated adjacent to the residence of
private respondents. Sometime in August 1971, private respondent Gregorio Mable first approached Eric Cruz,
petitioner's plant manager, to request that a firewall be constructed between the shop and private
respondents' residence. The request was repeated several times but they fell on deaf ears. In the early morning
of September 6, 1974, fire broke out in petitioner's shop. Petitioner's employees, who slept in the shop
premises, tried to put out the fire, but their efforts proved futile. The fire spread to private respondents' house.
Both the shop and the house were razed to the ground. The cause of the conflagration was never discovered.
The National Bureau of Investigation found specimens from the burned structures negative for the presence of
inflammable substances.
Subsequently, private respondents collected P35,000.00 on the insurance on their house and the contents
thereof.
On January 23, 1975, private respondents filed an action for damages against petitioner, praying for a judgment
in their favor awarding P150,000.00 as actual damages, P50,000.00 as moral damages, P25,000.00 as exemplary
damages, P20,000.00 as attorney's fees and costs. The Court of First Instance held for private respondents:
WHEREFORE, the Court hereby renders judgment, in favor of plaintiffs, and against the defendant:
1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for damages suffered by said
plaintiffs for the loss of their house, with interest of 6% from the date of the filing of the Complaint on January
23, 1975, until fully paid;
2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss of plaintiffs' furnitures,
religious images, silverwares, chinawares, jewelries, books, kitchen utensils, clothing and other valuables, with
interest of 6% from date of the filing of the Complaint on January 23, 1975, until fully paid;
3. Ordering the defendant to pay to the plaintiffs the sum of P5,000.00 as moral damages, P2,000.00 as
exemplary damages, and P5,000.00 as and by way of attorney's fees;
4. With costs against the defendant;
5. Counterclaim is ordered dismissed, for lack of merit. [CA Decision, pp. 1-2; Rollo, pp. 29-30.]
On appeal, the Court of Appeals, in a decision promulgated on November 19, 1979, affirmed the decision of the
trial court but reduced the award of damages:
WHEREFORE, the decision declaring the defendants liable is affirmed. The damages to be awarded to plaintiff
should be reduced to P70,000.00 for the house and P50,000.00 for the furniture and other fixtures with legal
interest from the date of the filing of the complaint until full payment thereof. [CA Decision, p. 7; Rollo, p. 35.]
A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution dated February 18,
1980. Hence, petitioner filed the instant petition for review on February 22, 1980. After the comment and reply
were filed, the Court resolved to deny the petition for lack of merit on June 11, 1980.
However, petitioner filed a motion for reconsideration, which was granted, and the petition was given due
course on September 12, 1980. After the parties filed their memoranda, the case was submitted for decision on
January 21, 1981.
Petitioner contends that the Court of Appeals erred:
1. In not deducting the sum of P35,000.00, which private respondents recovered on the insurance on their
house, from the award of damages.
2. In awarding excessive and/or unproved damages.
3. In applying the doctrine of res ipsa loquitur to the facts of the instant case.
The pivotal issue in this case is the applicability of the common law doctrine of res ipsa loquitur, the issue of
damages being merely consequential. In view thereof, the errors assigned by petitioner shall be discussed in the
reverse order.
1. The doctrine of res ipsa loquitur, whose application to the instant case petitioner objects to, may be stated as
follows:
Where the thing which caused the injury complained of is shown to be under the management of the defendant
or his servants and the accident is such as in the ordinary course of things does not happen if those who have its
management or control use proper care, it affords reasonable evidence, in the absence of explanation by the
defendant, that the accident arose from want of care. [Africa v. Caltex (Phil.), Inc., G.R. No. L-12986, March 31,
1966, 16 SCRA 448.]
Thus, in Africa, supra, where fire broke out in a Caltex service station while gasoline from a tank truck was being
unloaded into an underground storage tank through a hose and the fire spread to and burned neighboring
houses, this Court, applying the doctrine of res ipsa loquitur, adjudged Caltex liable for the loss.
The facts of the case likewise call for the application of the doctrine, considering that in the normal course of
operations of a furniture manufacturing shop, combustible material such as wood chips, sawdust, paint, varnish
and fuel and lubricants for machinery may be found thereon.
It must also be noted that negligence or want of care on the part of petitioner or its employees was not merely
presumed. The Court of Appeals found that petitioner failed to construct a firewall between its shop and the
residence of private respondents as required by a city ordinance; that the fire could have been caused by a
heated motor or a lit cigarette; that gasoline and alcohol were used and stored in the shop; and that workers
sometimes smoked inside the shop [CA Decision, p. 5; Rollo, p. 33.]
Even without applying the doctrine of res ipsa loquitur, petitioner's failure to construct a firewall in accordance
with city ordinances would suffice to support a finding of negligence.
Even then the fire possibly would not have spread to the neighboring houses were it not for another negligent
omission on the part of defendants, namely, their failure to provide a concrete wall high enough to prevent the
flames from leaping over it. As it was the concrete wall was only 2-1/2 meters high, and beyond that height it
consisted merely of galvanized iron sheets, which would predictably crumble and melt when subjected to
intense heat. Defendant's negligence, therefore, was not only with respect to the cause of the fire but also with
respect to the spread thereof to the neighboring houses.[Africa v. Caltex (Phil.), Inc., supra; Emphasis supplied.]
In the instant case, with more reason should petitioner be found guilty of negligence since it had failed to
construct a firewall between its property and private respondents' residence which sufficiently complies with
the pertinent city ordinances. The failure to comply with an ordinance providing for safety regulations had been
ruled by the Court as an act of negligence [Teague v. Fernandez, G.R. No. L-29745, June 4, 1973, 51 SCRA 181.]
The Court of Appeals, therefore, had more than adequate basis to find petitioner liable for the loss sustained by
private respondents.
2. Since the amount of the loss sustained by private respondents constitutes a finding of fact, such finding by
the Court of Appeals should not be disturbed by this Court [M.D. Transit & Taxi Co., Inc. v. Court of Appeals, G.R.
No. L-23882, February 17, 1968, 22 SCRA 559], more so when there is no showing of arbitrariness.
In the instant case, both the CFI and the Court of Appeals were in agreement as to the value of private
respondents' furniture and fixtures and personal effects lost in the fire (i.e. P50,000.00). With regard to the
house, the Court of Appeals reduced the award to P70,000.00 from P80,000.00. Such cannot be categorized as
arbitrary considering that the evidence shows that the house was built in 1951 for P40,000.00 and, according to
private respondents, its reconstruction would cost P246,000.00. Considering the appreciation in value of real
estate and the diminution of the real value of the peso, the valuation of the house at P70,000.00 at the time it
was razed cannot be said to be excessive.
3. While this Court finds that petitioner is liable for damages to private respondents as found by the Court of
Appeals, the fact that private respondents have been indemnified by their insurer in the amount of P35,000.00
for the damage caused to their house and its contents has not escaped the attention of the Court. Hence, the
Court holds that in accordance with Article 2207 of the Civil Code the amount of P35,000.00 should be deducted
from the amount awarded as damages. Said article provides:
Art. 2207. If the plaintiffs 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 is subrogated to the rights of the insured against the wrongdoer or the person who violated the
contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the person causing the loss or injury. (Emphasis supplied.]
The law is clear and needs no interpretation. Having been indemnified by their insurer, private respondents are
only entitled to recover the deficiency from petitioner.
On the other hand, the insurer, if it is so minded, may seek reimbursement of the amount it indemnified private
respondents from petitioner. This is the essence of its right to be subrogated to the rights of the insured, as
expressly provided in Article 2207. Upon payment of the loss incurred by the insured, the insurer is entitled to
be subrogated pro tanto to any right of action which the insured may have against the third person whose
negligence or wrongful act caused the loss [Fireman's Fund Insurance Co. v. Jamila & Co., Inc., G.R. No. L-27427,
April 7, 1976, 70 SCRA 323.]
Under Article 2207, the real party in interest with regard to the indemnity received by the insured is the insurer
[Phil. Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031, (1957).] Whether or not the insurer should exercise the
rights of the insured to which it had been subrogated lies solely within the former's sound discretion. Since the
insurer is not a party to the case, its identity is not of record and no claim is made on its behalf, the private
respondent's insurer has to claim his right to reimbursement of the P35,000.00 paid to the insured.
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED with the
following modifications as to the damages awarded for the loss of private respondents' house, considering their
receipt of P35,000.00 from their insurer: (1) the damages awarded for the loss of the house is reduced to
P35,000.00; and (2) the right of the insurer to subrogation and thus seek reimbursement from petitioner for the
P35,000.00 it had paid private respondents is recognized.
SO ORDERED.
FIRST DIVISION
[G.R. No. 154514. July 28, 2005]
WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND
THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No.
60144, affirming the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277.
Both decisions held that there was no violation of the Insurance Code and the respondents do not need license
as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels
from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer
Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to
fully pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the
latters unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission
claiming that Steamship Mutual violated Sections 186[4] and 187[5]of the Insurance Code, while Pioneer violated
Sections 299,[6] 300[7] and 301[8] in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to
secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual was a
Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance
agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the insurance
business. Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker of
Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court
distinguished between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer
merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE
PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER
HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT
STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN
CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING]
THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in
the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to
do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the
certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its
assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an
association composed of shipowners in general who band together for the specific purpose of providing
insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of
third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and provide
protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its
agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business
in the Philippines. It is merely an association of vessel owners who have come together to provide mutual
protection against liabilities incidental to shipowning.[11]Respondents aver Hyopsung is inapplicable in this case
because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an
insurance business. These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.
...
The same provision also provides, the fact that no profit is derived from the making of insurance contracts,
agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude
the existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the
act required to be performed, and the exact nature of the agreement in the light of the occurrence,
contingency, or circumstances under which the performance becomes requisite. It is not by what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event.[14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses
incident to a marine adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of marine
insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and
insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund
from which all losses and liabilities are paid, and where the profits are divided among themselves, in proportion
to their interest.[17] Additionally, mutual insurance associations, or clubs, provide three types of coverage,
namely, protection and indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the P
& I Club and the members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of
authority mandated by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to
solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I
Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing business here,
Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance business without a license or a certificate of authority
from the Insurance Commission.[21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration[22] issued by
the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate
of authority[23] issued by the same agency. However, a Certification from the Commission states that Pioneer
does not have a separate license to be an agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance
agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of
applications for insurance, or receive for services in obtaining insurance, any commission or other
compensation from any insurance company doing business in the Philippines or any agent thereof, without first
procuring a license so to act from the Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers.
Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals
affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The
Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are
ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent,
respectively. The petitioners prayer for the revocation of Pioneers Certificate of Authority and removal of its
directors and officers, is DENIED. Costs against respondents.
SO ORDERED.
FIRST DIVISION
G.R. No. 76452 July 26, 1994
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON MONTILLA PATERNO,
JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.
QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with preliminary
injunction or temporary restraining order, to annul and set aside the Order dated November 6, 1986 of the
Insurance Commissioner and the entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr. dated April 17,
1986, to respondent Commissioner, alleging certain problems encountered by agents, supervisors, managers
and public consumers of the Philippine American Life Insurance Company (Philamlife) as a result of certain
practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los Reyes, in his
capacity as Philamlife's president, to comment on respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested that private
respondent "submit some sort of a 'bill of particulars' listing and citing actual cases, facts, dates, figures,
provisions of law, rules and regulations, and all other pertinent data which are necessary to enable him to
prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the Insurance Commissioner to
private respondent for his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private respondent maintaining that his
letter-complaint of April 17, 1986 was sufficient in form and substance, and requested that a hearing thereon
be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated his claim that
private respondent's letter of May 16, 1986 did not supply the information he needed to enable him to answer
the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the validity of the
Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to specify the provisions of the
agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent Commissioner dated July 31,
1986, reiterating his letter of April 17, 1986 and praying that the provisions on charges and fees stated in the
Contract of Agency executed between Philamlife and its agents, as well as the implementing provisions as
published in the agents' handbook, agency bulletins and circulars, be declared as null and void. He also asked
that the amounts of such charges and fees already deducted and collected by Philamlife in connection
therewith be reimbursed to the agents, with interest at the prevailing rate reckoned from the date when they
were deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private respondent's letter of July
31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the particular information which
Philamlife was seeking from him and which he promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with regard to the complaint, private
respondent must file a verified formal complaint before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the hearings on his
complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President and Executive
Assistant to the President, asked that respondent Commission first rule on the questions of the jurisdiction of
the Insurance Commissioner over the subject matter of the letters-complaint and the legal standing of private
respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds;
1. The Subpoena/Notice has no legal basis and is premature because:
(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued nor received by the respondent De los Reyes, and hence, no jurisdiction has
been acquired over his person;
(3) No answer has been filed, and hence, the hearing scheduled on November 5, 1986 in the Subpoena/Notice,
and wherein the respondent is required to appear, is premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash. The dispositive
portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable and considering the fact that the
instant case is an informal administrative litigation falling outside the operation of the aforecited memorandum
circular but cognizable by this Commission, the hearing officer, in open session ruled as it is hereby ruled to
deny the Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the Contract of Agency falls
within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take cognizance of the
complaint in the exercise of its quasi-judicial powers. The Solicitor General, upholding the jurisdiction of the
Insurance Commissioner, claims that under Sections 414 and 415 of the Insurance Code, the Commissioner has
authority to nullify the alleged illegal provisions of the Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance
Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies
and other insurance matters, mutual benefit associations and trusts for charitable uses are faithfully executed
and to perform the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the Insurance Commissioner is
hereby authorized, at his discretion, to impose upon insurance companies, their directors and/or officers and/or
agents, for any willful failure or refusal to comply with, or violation of any provision of this Code, or any order,
instruction, regulation or ruling of the Insurance Commissioner, or any commission of irregularities, and/or
conducting business in an unsafe and unsound manner as may be determined by the the Insurance
Commissioner, the following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing, removal of directors and/or officers and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to
regulate the business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance business," within the meaning of this
Code, shall include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a
reinsurance business, specifically recognized as constituting the doing of an insurance business within the
meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not included within the meaning
of an insurance business, Section 2 of the Insurance Code cannot be invoked to give jurisdiction over the same
to the Insurance Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance Commissioner
under Section 416 of the Insurance Code applies in his case, we likewise rule in the negative. Section 416 of the
Code in pertinent part, provides:
The Commissioner shall have the power to adjudicate claims and complaints involving any loss, damage or
liability for which an insurer may be answerable under any kind of policy or contract of insurance, or for which
such insurer may be liable under a contract of suretyship, or for which a reinsurer may be used under any
contract or reinsurance it may have entered into, or for which a mutual benefit association may be held liable
under the membership certificates it has issued to its members, where the amount of any such loss, damage or
liability, excluding interest, costs and attorney's fees, being claimed or sued upon any kind of insurance, bond,
reinsurance contract, or membership certificate does not exceed in any single claim one hundred thousand
pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner is limited by
law "to claims and complaints involving any loss, damage or liability for which an insurer may be answerable
under any kind of policy or contract of insurance, . . ." Hence, this power does not cover the relationship
affecting the insurance company and its agents but is limited to adjudicating claims and complaints filed by the
insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the Insurance Code,
the provisions of said Chapter speak only of the licensing requirements and limitations imposed on insurance
agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance companies and their
agents. It follows that the Insurance Commissioner cannot, in the exercise of its quasi-judicial powers, assume
jurisdiction over controversies between the insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445 (1989),
and Investment Planning Corporation of the Philippines v. Social Security Commission, 21 SCRA 904 (1962), that
an insurance company may have two classes of agents who sell its insurance policies: (1) salaried employees
who keep definite hours and work under the control and supervision of the company; and (2) registered
representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its agents is governed by the
Contract of Employment and the provisions of the Labor Code, while under the second category, the same is
governed by the Contract of Agency and the provisions of the Civil Code on the Agency. Disputes involving the
latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance Commission is SET
ASIDE.
SO ORDERED.
SPECIAL FIRST DIVISION
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services available to all the people at affordable cost.
There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The
State shall endeavor to provide free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10,
2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a
prepaid group practice health care delivery system or a health maintenance organization to take care of the sick
and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership
fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand
letter and the corresponding assessment notices demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care agreement
with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the
protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the
deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is
hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the
said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment.
He claimed that petitioner’s health care agreement was a contract of insurance subject to DST under Section
185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement was in the
nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency Documentary
Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully
paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We held that
petitioner’s health care agreement during the pertinent period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v.
CA.4We also ruled that petitioner’s contention that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries
under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but
an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion
for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged
in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CA’s disposition
that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light
of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not those
contemplated under Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health insurance is not
covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years.
Therefore, the questioned assessments on the DST are now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8,
2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA
94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount of ₱5,127,149.08 representing
5% of its net worth as of the year ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30,
1987.9 It is engaged in the dispensation of the following medical services to individuals who enter into health
care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning counseling,
consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood
count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic processes in the
event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year
basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It
negotiates with such health care practitioners regarding payment schemes, financing and other procedures for
the delivery of health services. Except in cases of emergency, the professional services are to be provided only
by petitioner's physicians, i.e. those directly employed by it11 or whose services are contracted by it.12 Petitioner
also provides hospital services such as room and board accommodation, laboratory services, operating rooms,
x-ray facilities and general nursing care.13 If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the services rendered, at pre-
agreed rates.14
To avail of petitioner’s health care programs, the individual members are required to sign and execute a
standard health care agreement embodying the terms and conditions for the provision of the health care
services. The same agreement contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical
service offered, the enrolled member may actually make use of the health care services being offered by
petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because
its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is,
to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the
issue of whether or not it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner
are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
association or company or corporation transacting the business of accident, fidelity, employer’s liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of
the duties of any office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or
corporation, there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each four pesos
(₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall
be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which
renders every word operative is preferred over that which makes some words idle and nugatory.17 This principle
is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect
to the whole of the statute – its every word.18
From the language of Section 185, it is evident that two requisites must concur before the DST can apply,
namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2) the
maker should be transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is
"an entity that provides, offers or arranges for coverage of designated health services needed by plan members
for a fixed prepaid premium."19 The payments do not vary with the extent, frequency or type of services
provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable
years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an
insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental
to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not
be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an
insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,21 have
determined that HMOs are not in the insurance business. One test that they have applied is whether the
assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal
object and purpose of the organization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law supporting the
argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to
provide the members of a group with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the District of
Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities
since it was created primarily for the distribution of health care services rather than the assumption of
insurance risk.
xxx Although Group Health’s activities may be considered in one aspect as creating security against loss from
illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service
by its members. xxx The functions of such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of
its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not
the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally
with getting service rendered to its members and doing so at lower prices made possible by quantity
purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it;
to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than
merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills
and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the
distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification for cost after the services is rendered. Except the
last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way for the rendering of service, even on the contingency
that it be needed, and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh all other
factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of
legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract
is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance
statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to
engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in
looking only at the risk element, to the exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)
In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service rather than indemnity which stood as its principal
purpose.
There is another and more compelling reason for holding that the service is not engaged in the insurance
business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining
its status. The question, more broadly, is whether, looking at the plan of operation as a whole, ‘service’ rather
than ‘indemnity’ is its principal object and purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide scope in the field of social service. Probably
there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is
‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance company is that
HMOs undertake to provide or arrange for the provision of medical services through participating physicians
while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a
pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is
clear on this point:
The basic distinction between medical service corporations and ordinary health and accident insurers is that the
former undertake to provide prepaid medical services through participating physicians, thus relieving
subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who
will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the
medical service corporation’s plan, not only will the subscribers be deprived of the protection which they
might reasonably have expected would be provided, but the corporation will, in effect, be doing business
solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject
to the more stringent financial requirements of the General Insurance Laws….
A participating provider of health care services is one who agrees in writing to render health care services to or
for persons covered by a contract issued by health service corporation in return for which the health service
corporation agrees to make payment directly to the participating provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business
to provide medical services as needed, with payment made directly to the provider of these services.29 In short,
even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the
member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case of emergency
by non-participating health providers would still be incidental to petitioner’s purpose of providing and arranging
for health care services and does not transform it into an insurer. To fulfill its obligations to its members under
the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical services intended
to keep members from developing medical conditions or diseases.30 As an HMO, it is its obligation to maintain
the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize
thepossibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to
indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to
provide the health and medical services needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them medical care.
The "insurance-like" aspect of petitioner’s business is miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care services rather than insurance services, it cannot be
considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases,
we are not saying that petitioner’s operations are identical in every respect to those of the HMOs or health
providers which were parties to those cases. What we are stating is that, for the purpose of determining what
"doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not
its mere components. This is of course only prudent and appropriate, taking into account the burdensome and
strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the
fact that it is not supervised by the Insurance Commission but by the Department of Health.33 In fact, in a letter
dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the
insurance business. This determination of the commissioner must be accorded great weight. It is well-settled
that the interpretation of an administrative agency which is tasked to implement a statute is accorded great
respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was
explained in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and satisfying
those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court stressed that executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give much weight to the
government agency officials charged with the implementation of the law, their competence, expertness,
experience and informed judgment, and the fact that they frequently are the drafters of the law they
interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of indemnity
for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that petitioner’s health care
agreements are contracts of indemnity and are therefore insurance contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage because, under the said
agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in
case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of
the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from
the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each
member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying
for the costs of the services even if they are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of
persons bearing a similar risk, that is, among all the other members of the health care program. This is
insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
association or company or corporation transacting the business of accident, fidelity, employer’s liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly construed against
the taxing authority.38 This is because taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property for the support of the
government.39 Hence, tax laws may not be extended by implication beyond the clear import of their language,
nor their operation enlarged so as to embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the
nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve
the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a
member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally
interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling
that Blue Cross and Philamcareare applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes
for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent
event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains
all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned above would
be an insurance contract. The primary purpose of the parties in making the contract may negate the existence
of an insurance contract. For example, a law firm which enters into contracts with clients whereby in
consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On
the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss and
damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To
begin with, there is no loss, damage or liability on the part of the member that should be indemnified by
petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in
exchange for the hospital, medical and professional services rendered by the petitioner’s physician or affiliated
physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not
reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who
pays the participating physicians and other health care providers for the services rendered at pre-agreed rates.
The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of
the member to any third party-provider of medical services which might in turn necessitate indemnification
from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or
already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or
her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to the happening of a contingency but includes
incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care
contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-
designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration of
prepayment for such services."44 Since indemnity of the insured was not the focal point of the agreement but
the extension of medical services to the member at an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is
sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree
of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner)
from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that
it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to
insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims
might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions
made relative to the insured.45
However, assuming that petitioner’s commitment to provide medical services to its members can be construed
as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an
insurance contract because petitioner’s objective is to provide medical services at reduced cost, not to
distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is not an
insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health care
agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The text of Section 185
came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the "Internal
Revenue Law of 1904")46enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of
tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or
certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and
described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument,
matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or
issue the same, on and after January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association, company, or corporation transacting the business of
accident, fidelity, employer’s liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating
the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189
was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l),
Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST
provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified
all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of
1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively,
the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered
as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became
Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of
tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the
subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions
were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom
Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health
Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO
industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in
1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total
enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the
law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of
HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter
of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the
business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that
health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the
business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it.51 So potent indeed is the power that it
was once opined that "the power to tax involves the power to destroy."52
Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is way beyond its net worth of
₱259 million.54 Respondent never disputed these assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private
business. On the contrary, the government ought to encourage private enterprise.55 Petitioner, just like any
concern organized for a lawful economic activity, has a right to maintain a legitimate business.56 As aptly held
in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses
because of a tax imposition may be an acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately subversive of the nation’s thrust
towards a better economy which will ultimately benefit the majority of our people.59
Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997
became moot and academic60 when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid
₱5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of
taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997
NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of
the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this case as
discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have
been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.62 (Emphasis
supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under
RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST for the taxable years 1996
and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the
ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of Philamcare Health Systems
is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the
appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680
by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a
health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the
merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a
result, our ruling in that case has already become final.67 When a minute resolution denies or dismisses a
petition for failure to comply with formal and substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata.69 However, if other parties or another subject matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a
previous case, CIR v. Baier-Nickel71 involving the same parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The
constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts
and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices,
unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks
of a decision.73Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding
precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for DST on its
health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the
minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the
reasons already discussed, this does not detract in any way from the fact that petitioner’s health care
agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and
there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be
arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical services at a cost
which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and inexpensive health care system made possible by
quantity purchasing of services and economies of scale. They offer advantages over the pay-for-service system
(wherein individuals are charged a fee each time they receive medical services), including the ability to control
costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the
State in achieving its constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will elevate
the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in
either placing health services beyond the reach of the ordinary wage earner or driving the industry to the
ground. At the end of the day, neither side wins, considering the indispensability of the services offered by
HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals
in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
FIRST DIVISION
PHILIPPINE HEALTH CARE G.R. No. 167330
PROVIDERS, INC.,
Petitioner, Present:
PUNO, C.J., Chairperson,
CARPIO,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
June 12, 2008
x-----------------------------------------x
DECISION
CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore subject to the documentary
stamp tax (DST) imposed under Section 185 of Republic Act 8424 (Tax Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16, 2004
decision[1] in CA-G.R. SP No. 70479. Petitioner Philippine Health Care Providers, Inc. believes otherwise and
assails the CA decision in this petition for review under Rule 45 of the Rules of Court.
Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and operate a
prepaid group practice health care delivery system or a health maintenance organization to take care of the sick
and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization.[2] Individuals enrolled in its health care programs pay an annual membership
fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.[3]
The pertinent part of petitioners membership or health care agreement[4] provides:
VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of this
Agreement, Members shall have the following Benefits under this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires
confinement in a participating Hospital[,] the services or benefits stated below shall be provided to the Member
free of charge, but in no case shall [petitioner] be liable to pay more than P75,000.00 in benefits with respect to
anyone sickness, injury or related causes. If a member has exhausted such maximum benefits with respect to a
particular sickness, injury or related causes, all accounts in excess of P75,000.00 shall be borne by the enrollee.
It is[,] however, understood that the payment by [petitioner] of the said maximum in In-Patient Benefits to any
one member shall preclude a subsequent payment of benefits to such member in respect of an unrelated
sickness, injury or related causes happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in the
vascular systems (i.e., trombolytic agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
 human blood products, (e) dressings, casts and sutures and (f) x-rays, laboratory and diagnostic examinations
Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately preceding and other medical services related to the emergency treatment of the patient.][5] Provided, however, that in no
paragraph shall be subject to the following conditions: case shall the total amount payable by [petitioner] for said Emergency, inclusive of hospital bill and professional
(a) The Hospital Confinement must be approved by [petitioners] Physician, Participating Physician or fees, exceed P75,000.00.
[petitioners] Medical Coordinator in that Hospital prior to confinement. If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him][6] 80% of the
(b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance with the hospital bill or the amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of non-
Member[]s benefit classification. participating physicians based on [petitioners] schedule of fees provided that the total amount[,] inclusive of
(c) Professional services shall be provided only by the [petitioners] Physicians or Participating Physicians. hospital bills and professional fee shall not exceed P5,000.00.
(d) If discharge from the Hospital has been authorized by [petitioners] attending Physician or Participating
Physician and the Member shall fail or refuse to do so, [petitioner] shall not be responsible for any charges
incurred after discharge has been authorized. On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand letter and
the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and
Out-Patient Services. A Member is entitled free of charge to the following services or benefits which shall be interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. The assessment
rendered or administered either in [petitioners] Clinic or in a Participating Hospital under the direction or represented the following:
supervision of [petitioners] Physician, Participating Physician or [petitioners] Medical Coordinator.
Value Added Tax (VAT) DST
(a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done at 1996 P 45,767,596.23 P 55,746,352.19
[petitioners] designated hospital/clinic, to wit: 1997 54,738,434.03__ 68,450,258.73__
(i) Taking a medical history P 100,506,030.26 P 124,196,610.92
(ii) Physical examination
(iii) Chest x-ray The deficiency DST assessment was imposed on petitioners health care agreement with the members of its
(iv) Stool examination health care program pursuant to Section 185 of the 1997 Tax Code which provides:
(v) Complete Blood Count
(vi) Urinalysis Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or
(vii) Fasting Blood Sugar (FBS) obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person,
(viii) SGPT association or company or corporation transacting the business of accident, fidelity, employers liability, plate,
(ix) Creatinine glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine,
(x) Uric Acid inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of
(xi) Resting Electrocardiogram the duties of any office or position, for the doing or not doing of anything therein specified, and on all
(xii) Pap Smear (Optional for women 40 years and above) obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city,
(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination. municipality, or other public body or organization, and on all obligations guaranteeing the title to any real
The following tests are to be done as part of the Member[]s Annual check-up program at [petitioners] estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or
designated clinic, to wit: corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four
1) Routine Physical Examination pesos (P4.00), or fractional part thereof, of the premium charged. (emphasis supplied)
2) CBC (Complete Blood Count)
* Hemoglobin * Hematocrit
* Differential * RBC/WBC Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the
3) Chest X-ray protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the
4) Urinalysis deficiency VAT and DST assessments.
5) Fecalysis
(c) Preventive Health Care, which shall include: On April 5, 2002, the CTA rendered a decision,[7] the dispositive portion of which read:
(i) Periodic Monitoring of Health Problems
(ii) Family planning counseling WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is
(iii) Consultation and advices on diet, exercise and other healthy habits hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20%
(iv) Immunization but excluding drugs for vaccines used interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
(d) Out-Patient Care, which shall include: surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
(i) Consultation, including specialist evaluation Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment
(ii) Treatment of injury or illness against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the
(iii) Necessary x-ray and laboratory examination said DST deficiency tax.
(iv) Emergency medicines needed for the immediate
relief of symptoms SO ORDERED.[8]
(v) Minor surgery not requiring confinement

Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below, a
Member is entitled to receive emergency care [in case of emergency. For this purpose, all hospitals and all
attending physician(s) in the Emergency Room automatically become accredited. In participating hospitals, the
member shall be entitled to the following services free of charge: (a) doctors fees, (b) emergency room fees, (c)
medicines used for immediate relief and during treatment, (d) oxygen, intravenous fluids and whole blood and
Respondent appealed the CTA decision to the CA[9] insofar as it cancelled the DST assessment. He claimed that
petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax
Code.
On August 16, 2004, the CA rendered its decision.[10] It held that petitioners health care agreement was in the
nature of a non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary
Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully
paid.
SO ORDERED.[11]
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract for the
provision on a prepaid basis of medical services, including medical check-up, that are not based on loss or
damage. Petitioner also insists that it is not engaged in the insurance business. It is a health maintenance
organization regulated by the Department of Health, not an insurance company under the jurisdiction of the
Insurance Commission. For these reasons, petitioner asserts that the health care agreement is not subject to
DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of specific instruments.[12] It is an excise upon
the privilege, opportunity, or facility offered at exchanges for the transaction of the business.[13] In
particular, the DST under Section 185 of the 1997 Tax Code is imposed on the privilege of making or renewing
any policy of insurance (except life, marine, inland and fire insurance), bond or obligation in the nature of
indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.[14] The event
insured against must be designated in the contract and must either be unknown or contingent.[15]
Petitioners health care agreement is primarily a contract of indemnity. And in the recent case of Blue Cross
Healthcare, Inc. v. Olivares,[16] this Court ruled that a health care agreement is in the nature of a non-life
insurance policy.
Contrary to petitioners claim, its health care agreement is not a contract for the provision of medical services.
Petitioner does not actually provide medical or hospital services but merely arranges for the same[17] and pays
for them up to the stipulated maximum amount of coverage. It is also incorrect to say that the health care
agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability
and indemnifies its member for hospital, medical and related expenses (such as professional fees of
physicians). The term loss or damage is broad enough to cover the monetary expense or liability a member will
incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in
case of sickness, injury or emergency or his availment of so-called out-patient services (including physical
examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of
the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from
the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each
member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying
for the costs of the services even if they are significantly and substantially more than what the member has
prepaid. Petitioner does not bear the costs alone but distributes or spreads them out among a large group of
persons bearing a similar risk, that is, among all the other members of the health care program. This is
insurance.
Petitioners health care agreement is substantially similar to that involved in Philamcare Health Systems, Inc. v.
CA.[18] The health care agreement in that case entitled the subscriber to avail of the hospitalization benefits,
whether ordinary or emergency, listed therein. It also provided for out-patient benefits such as annual physical
examinations, preventive health care and other out-patient services. This Court ruled in Philamcare Health
Systems, Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care agreement was his own health. The
health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated
contingency, the health care provider must pay for the same to the extent agreed upon under the
contract.[19] (emphasis supplied)
Similarly, the insurable interest of every member of petitioners health care program in obtaining the health care
agreement is his own health. Under the agreement, petitioner is bound to indemnify any member who incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingency to the
extent agreed upon under the contract.
Petitioners contention that it is a health maintenance organization and not an insurance company is irrelevant.
Contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance
contracts.[20]
Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or facility
offered at exchanges for the transaction of the business.[21] It is an excise on the facilities used in the
transaction of the business, separate and apart from the business itself.[22]
WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency documentary
stamp tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000 until full payment thereof.
Costs against petitioner.
SO ORDERED.
EN BANC
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in the sum
of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street, Binondo Manila.
On February 27, 1942, or during the Japanese military occupation, the building and insured merchandise were
burned. In due time the respondent submitted to the petitioner its claim under the policy. The salvage goods
were sold at public auction and, after deducting their value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the ground that the policy in favor of the respondent had
ceased to be in force on the date the United States declared war against Germany, the respondent Corporation
(though organized under and by virtue of the laws of the Philippines) being controlled by the German subjects
and the petitioner being a company under American jurisdiction when said policy was issued on October 1,
1941. The petitioner, however, in pursuance of the order of the Director of Bureau of Financing, Philippine
Executive Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is that the
insured merchandise were burned up after the policy issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war between the United States and Germany on
December 10, 1941, and that the payment made by the petitioner to the respondent corporation during the
Japanese military occupation was under pressure. After trial, the Court of First Instance of Manila dismissed the
action without pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs. The case is now before us on appeal by certiorari from the
decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation became an
enemy when the United States declared war against Germany, relying on English and American cases which
held that a corporation is a citizen of the country or state by and under the laws of which it was created or
organized. It rejected the theory that nationality of private corporation is determine by the character or
citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were German subjects.
This being so, we have to rule that said respondent became an enemy corporation upon the outbreak of the
war between the United States and Germany. The English and American cases relied upon by the Court of
Appeals have lost their force in view of the latest decision of the Supreme Court of the United States in
Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp.
148-153, in which the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a paper
presented to the Second International Conference of the Legal Profession held at the Hague (Netherlands) in
August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been discussion in many
countries, belligerent and neutral. A corporation was subject to enemy legislation when it was controlled by
enemies, namely managed under the influence of individuals or corporations, themselves considered as
enemies. It was the English courts which first the Daimler case applied this new concept of "piercing the
corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established after
the First World War.
The United States of America did not adopt the control test during the First World War. Courts refused to
recognized the concept whereby American-registered corporations could be considered as enemies and thus
subject to domestic legislation and administrative measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy interests were cloaked by
domestic corporation structure. It was not only by legal ownership of shares that a material influence could be
exercised on the management of the corporation but also by long term loans and other factual situations. For
that reason, legislation on enemy property enacted in various countries during World War II adopted by
statutory provisions to the control test and determined, to various degrees, the incidents of control. Court
decisions were rendered on the basis of such newly enacted statutory provisions in determining enemy
character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during the last war, include as
did other legislations the applications of the control test and again, as in World War I, courts refused to apply
this concept whereby the enemy character of an American or neutral-registered corporation is determined by
the enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other administrative practice in the
treatment of foreign-owned property in the United States allowed to large degree the determination of enemy
interest in domestic corporations and thus the application of the control test. Court decisions sanctioned such
administrative practice enacted under the First War Powers Act of 1941, and more recently, on December 8,
1947, the Supreme Court of the United States definitely approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss corporation allegedly controlled by German interest, the Court:
"The property of all foreign interest was placed within the reach of the vesting power (of the Alien Property
Custodian) not to appropriate friendly or neutral assets but to reach enemy interest which masqueraded under
those innocent fronts. . . . The power of seizure and vesting was extended to all property of any foreign country
or national so that no innocent appearing device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we
already held that China Banking Corporation came within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not only because it was incorporated under the laws of an
enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a public
enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as soon as an
insured becomes a public enemy.
Effect of war, generally. — All intercourse between citizens of belligerent powers which is inconsistent with a
state of war is prohibited by the law of nations. Such prohibition includes all negotiations, commerce, or trading
with the enemy; all acts which will increase, or tend to increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts concerning the transmission of money or goods; and all
contracts relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the enemy,
upon the life or lives of aliens engaged in service with the enemy; this for the reason that the subjects of one
country cannot be permitted to lend their assistance to protect by insurance the commerce or property of
belligerent, alien subjects, or to do anything detrimental too their country's interest. The purpose of war is to
cripple the power and exhaust the resources of the enemy, and it is inconsistent that one country should
destroy its enemy's property and repay in insurance the value of what has been so destroyed, or that it should
in such manner increase the resources of the enemy, or render it aid, and the commencement of war
determines, for like reasons, all trading intercourse with the enemy, which prior thereto may have been lawful.
All individuals therefore, who compose the belligerent powers, exist, as to each other, in a state of utter
exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified term it
is plain that when the parties become alien enemies, the contractual tie is broken and the contractual rights of
the parties, so far as not vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its
favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and enforcible, and
since the insured goods were burned after December 10, 1941, and during the war, the respondent was not
entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the
period covered by its policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether the
policy in question became null and void upon the declaration of war between the United States and Germany
on December 10, 1941, and its judgment in favor of the respondent corporation was predicated on its
conclusion that the policy did not cease to be in force. The Court of Appeals necessarily assumed that, even if
the payment by the petitioner to the respondent was involuntary, its action is not tenable in view of the ruling
on the validity of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to by
the appellee was not unjust but the exercise of its lawful right to claim for and received the payment of the
insurance policy," and that the ruling of the Bureau of Financing to the effect that "the appellee was entitled to
payment from the appellant was, well founded." Factually, there can be no doubt that the Director of the
Bureau of Financing, in ordering the petitioner to pay the claim of the respondent, merely obeyed the
instruction of the Japanese Military Administration, as may be seen from the following: "In view of the findings
and conclusion of this office contained in its decision on Administrative Case dated February 9, 1943 copy of
which was sent to your office and the concurrence therein of the Financial Department of the Japanese Military
Administration, and following the instruction of said authority, you are hereby ordered to pay the claim of
Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of
crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the circumstances on this
case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines currency of
P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to the
petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired term of the policy in question, beginning December
11, 1941. Without costs. So ordered.
EN BANC
G.R. No. L-1669 August 31, 1950
PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670 August 31, 1950
AGUSTINA PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for decision of the question whether
the beneficiary in a life insurance policy may recover the amount thereof although the insured died after
repeatedly failing to pay the stipulated premiums, such failure having been caused by the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life Insurance
Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued on September 27,
1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino for a term of twenty
years. The first premium covered the period up to September 26, 1942. The plaintiff Paz Lopez de Constantino
was regularly appointed beneficiary. The policy contained these stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed application here for a copy of
which is attached hereto and is hereby made a part hereof made a part hereof, and of the payment in advance
during the lifetime and good health of the Insured of the annual premium of One Hundred fifty-eight and 4/100
pesos Philippine currency1 and of the payment of a like amount upon each twenty-seventh day of September
hereafter during the term of Twenty years or until the prior death of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any such payment shall cause this
policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace
of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in Manila by
reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No. 78145 (Joint
Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the spouses Tomas Ruiz
and Agustina Peralta, for the sum of P3,000. The annual premium stipulated in the policy was regularly paid
from August 1, 1938, up to and including September 30, 1941. Effective August 1, 1941, the mode of payment
of premiums was changed from annual to quarterly, so that quarterly premiums were paid, the last having been
delivered on November 18, 1941, said payment covering the period up to January 31, 1942. No further
payments were handed to the insurer. Upon the Japanese occupation, the insured and the insurer became
separated by the lines of war, and it was impossible and illegal for them to deal with each other. Because the
insured had borrowed on the policy an mount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died on February
16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met with defendant's
refusal, grounded on non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed application herefor, a copy of
which is attached hereto and is hereby made apart hereof, and of the payment in advance during the life time
and good health of the Insured of the annual premium of Two hundred and 43/100 pesos Philippine
currency and of the payment of a like amount upon each first day of August hereafter during the term of Twenty
years or until the prior death of either of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any such payment shall cause this
policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace
of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus all sums
due for premiums in arrears. They allege that non-payment of the premiums was caused by the closing of
defendant's offices in Manila during the Japanese occupation and the impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in accordance
with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the benefit of
extensive and exhaustive memoranda including those of amici curiae. The matter has received careful
consideration, inasmuch as it affects the interest of thousands of policy-holders and the obligations of many
insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the Civil
Code.2Act No. 2427 was largely copied from the Civil Code of California.3 And this court has heretofore
announced its intention to supplement the statutory laws with general principles prevailing on the subject in
the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are contracts of
indemnity upon the terms and conditions specified in the policy. The parties have a right to impose such
reasonable conditions at the time of the making of the contract as they may deem wise and necessary. The rate
of premium is measured by the character of the risk assumed. The insurance company, for a comparatively
small consideration, undertakes to guarantee the insured against loss or damage, upon the terms and
conditions agreed upon, and upon no other, and when called upon to pay, in case of loss, the insurer, therefore,
may justly insists upon a fulfillment of these terms. If the insured cannot bring himself within the conditions of
the policy, he is not entitled for the loss. The terms of the policy constitute the measure of the insurer's liability,
and in order to recover the insured must show himself within those terms; and if it appears that the contract
has been terminated by a violation, on the part of the insured, of its conditions, then there can be no right of
recovery. The compliance of the insured with the terms of the contract is a condition precedent to the right of
recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate that "all premium
payments are due in advance and any unpunctuality in making any such payment shall cause this policy to
lapse." Wherefore, it would seem that pursuant to the express terms of the policy, non-payment of premium
produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding upon the parties and
should be enforced by the courts, if the evidence brings the case clearly within their meaning and intent. It
tends to bring the law itself into disrepute when, by astute and subtle distinctions, a plain case is attempted to
be taken without the operation of a clear, reasonable and material obligation of the contract.
Mack vs.Rochester German Ins. Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because the premium
had not been paid within the time fixed, since by its express terms, non-payment of any premium when due or
within the thirty-day period of grace, ipso facto caused the policy to lapse. This goes to show that although we
take the view that insurance policies should be conserved5 and should not lightly be thrown out, still we do not
hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse to enforce an
insurance contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the consequence
of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of non-
payment of premiums occasioned by war, the American cases may be divided into three groups, according as
they support the so-called Connecticut Rule, the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the consideration for which the annual premium is paid
— First, the mere protection for the year, and second, the privilege of renewing the contract for each
succeeding year by paying the premium for that year at the time agreed upon. According to this view of the
contract, the payment of premiums is a condition precedent, the non-performance would be illegal necessarily
defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between states in
which the parties reside merely suspends the contracts of the life insurance, and that, upon tender of all
premiums due by the insured or his representatives after the war has terminated, the contract revives and
becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by reason of non-
payments is peculiarly of the essence of the contract. It additionally holds that it would be unjust to allow the
insurer to retain the reserve value of the policy, which is the excess of the premiums paid over the actual risk
carried during the years when the policy had been in force. This rule was announced in the well-known
Statham6 case which, in the opinion of Professor Vance, is the correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here. The appellee and
other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories. Besides the respect and high
regard we have always entertained for decisions of the Supreme Court of the United States, we cannot resist
the conviction that the reasons expounded in its decision of the Statham case are logically and judicially sound.
Like the instant case, the policy involved in the Statham decision specifies that non-payment on time shall cause
the policy to cease and determine. Reasoning out that punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business of life insurance. All the
calculations of the insurance company are based on the hypothesis of prompt payments. They not only
calculate on the receipt of the premiums when due, but on compounding interest upon them. It is on this basis
that they are enabled to offer assurance at the favorable rates they do. Forfeiture for non-payment is an
necessary means of protecting themselves from embarrassment. Unless it were enforceable, the business
would be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous
undertakings. There must be power to cut-off unprofitable members, or the success of the whole scheme is
endangered. The insured parties are associates in a great scheme. This associated relation exists whether the
company be a mutual one or not. Each is interested in the engagements of all; for out of the co-existence of
many risks arises the law of average, which underlies the whole business. An essential feature of this scheme is
the mathematical calculations referred to, on which the premiums and amounts assured are based. And these
calculations, again, are based on the assumption of average mortality, and of prompt payments and compound
interest thereon. Delinquency cannot be tolerated nor redeemed, except at the option of the company. This has
always been the understanding and the practice in this department of business. Some companies, it is true,
accord a grace of thirty days, or other fixed period, within which the premium in arrear may be paid, on certain
conditions of continued good health, etc. But this is a matter of stipulation, or of discretion, on the part of the
particular company. When no stipulation exists, it is the general understanding that time is material, and that
the forfeiture is absolute if the premium be not paid. The extraordinary and even desperate efforts sometimes
made, when an insured person is in extremes to meet a premium coming due, demonstrates the common view
of this matter.
The case, therefore, is one in which time is material and of the essence and of the essence of the contract. Non-
payment at the day involves absolute forfeiture if such be the terms of the contract, as is the case here. Courts
cannot with safety vary the stipulation of the parties by introducing equities for the relief of the insured against
their own negligence.
In another part of the decision, the United States Supreme Court considers and rejects what is, in effect, the
New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the war is one based on
considerations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or
inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of the contract, another strong
reason exists why the policy should not be revived. The parties do not stand on equal ground in reference to
such a revival. It would operate most unjustly against the company. The business of insurance is founded on the
law of average; that of life insurance eminently so. The average rate of mortality is the basis on which it rests.
By spreading their risks over a large number of cases, the companies calculate on this average with reasonable
certainty and safety. Anything that interferes with it deranges the security of the business. If every policy lapsed
by reason of the war should be revived, and all the back premiums should be paid, the companies would have
the benefit of this average amount of risk. But the good risks are never heard from; only the bar are sought to
be revived, where the person insured is either dead or dying. Those in health can get the new policies cheaper
than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company necessarily lose the
cases which are desirable, would be manifestly unjust. An insured person, as before stated, does not stand
isolated and alone. His case is connected with and co-related to the cases of all others insured by the same
company. The nature of the business, as a whole, must be looked at to understand the general equities of the
parties.
The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as alleged,
the consequences of war should not prejudice the insured, neither should they bear down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured to pay
premiums was excused during the war owing to impossibility of performance, and that consequently no
unfavorable consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the first, is
not an obligation of the insured, so much so that it is not a debt enforceable by action of the insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation upon which the
insurer can maintain an action against insured; nor is its settlement governed by the strict rule controlling
payments of debts. So, the court in a Kentucky case declares, in the opinion, that it is not a debt. . . . The fact
that it is payable annually or semi-annually, or at any other stipulated time, does not of itself constitute a
promise to pay, either express or implied. In case of non-payment the policy is forfeited, except so far as the
forfeiture may be saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is
entirely optional, while a debt may be enforced at law, and the fact that the premium is agreed to be paid is
without force, in the absence of an unqualified and absolute agreement to pay a specified sum at some certain
time. In the ordinary policy there is no promise to pay, but it is optional with the insured whether he will
continue the policy or forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While the insured by an observance of the conditions
may hold the insurer to his contract, the latter has not the power or right to compel the insured to maintain the
contract relation with it longer than he chooses. Whether the insured will continue it or not is optional with him.
There being no obligation to pay for the premium, they did not constitute a debt. (Noble vs. Southern States
M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for times of war,
because the policies contained provisions applicable expressly to wartime days. The logical inference, therefore,
is that the parties contemplated uninterrupted operation of the contract even if armed conflict should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since the
Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation of rules relating
to insurance is in direct proportion to the growth of the business. If there were only 100 men, for example,
insured by a Company or a mutual Association, the death of one will distribute the insurance proceeds among
the remaining 99 policy-holders. Because the loss which each survivor will bear will be relatively great, death
from certain agreed or specified causes may be deemed not a compensable loss. But if the policy-holders of the
Company or Association should be 1,000,000 individuals, it is clear that the death of one of them will not
seriously prejudice each one of the 999,999 surviving insured. The loss to be borne by each individual will be
relatively small."
The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be considered
will not be the death of one but the death of ten thousand, since the proportion of 1 to 100 should be
maintained. And certainly such losses for 10,000 deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such a vital
defense of insurance companies that since the very beginning, said Act no. 2427 expressly preserved it, by
providing that after the policy shall have been in force for two years, it shall become incontestable (i.e. the
insurer shall have no defense) except for fraud, non-payment of premiums, and military or naval service in time
of war (sec. 184 [b], Insurance Act). And when Congress recently amended this section (Rep. Act No. 171), the
defense of fraud was eliminated, while the defense of nonpayment of premiums was preserved. Thus the
fundamental character of the undertaking to pay premiums and the high importance of the defense of non-
payment thereof, was specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is in effect a
variation of the Connecticut rule for the sake of equity. In this connection, it appears that the first policy had no
reserve value, and that the equitable values of the second had been practically returned to the insured in the
form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all liability on the policies in
question, is hereby affirmed, without costs.
EN BANC
G.R. No. L-4197 March 20, 1952
FIDELA SALES DE GONZAGA, plaintiff-appellant,
vs.
THE CROWN LIFE INSURANCE COMPANY, defendant-appellee.
Beltran and Anuat for appellant.
Nicodemus L. Dasig for appellee.
TUASON, J.:
This is one more case wherein the question of the effects of war in a pre-war insurance contracts is presented.
Reduced to their absolute essentials, the facts are that, on September 26, 1939 the Crown Life Insurance Co.,
whose home office is in Toronto, Canada, issued to Ramon Gonzaga through its branch office in Manila a 20-
year endowment policy for P15,000. The insured paid in due time the agreed yearly premium, which was
P591.00, for three consecutive years, the last payment having been effected on September 6, 1941. On account
of the outbreak of war, no premiums were paid after that date, although the policy was continued in force up to
June 12, 1943, under its automatic premium loan clause.
Ramon Gonzaga died on June 27, 1945 from an accident. Unsuccessful in her attempt to collect the amount of
the policy his widow and the beneficiary named in the policy began this suit on December 18, 1947. The
defendant set up the defense that the policy had lapsed by non-payment of the stipulated premiums of the
stipulated dates. And the trial court in a carefully written decision ruled against the plaintiff.
Since this action was decided by the court below, several cases analogous to this one in its main characteristics
have come up before this Court. (Paz Lopez de Constantino vs. Asia Life Insurance Company,1 G.R. No. L-1669;
Agustina Peralta vs. Asia Life Insurance Company,2 G.R. No. L-1670; James McGuire vs. The Manufacturers Life
Insurance Co;3 G. R. No. L-3581; National Leather Co; Inc. vs. The United States Life Insurance Co.,4 G.R. No. L-
2668; Victoria Hidalgo Vda. de Carrero, et al., vs. The Manufacturers Life Insurance Co.,5 G. R. No. L-3032; and
West Coast Life Insurance Co. vs. Patricio H. Gubagaras,6 G. R. No. L-2810) In Paz Lopez de Constantinos. Asia
Life Insurance Company, G. R. No. L-1669, the leading case, the Court speaking through Mr. Justice Bengzon,
adopted this doctrine:
The case, therefore, is one in which time is material and of the essence of the contract. Non-payment at the day
involves absolute forfeiture is such be the terms of the contract, as is the case here. Courts cannot with safety
vary the stipulation of the parties by introducing equities for the relief of the insured against their own
negligence.
The aforecited decisions are decisive of the proposition that non-payment of premiums by reason of war puts
an end to the contract.
There is, however, one aspect of the case at bar not raised before and upon which the plaintiff rest her case in
the alternative.
In its answer, the defendant alleged that "through its General Agents, Hanson, Orth and Stevenson, Inc., it had
its offices open in the city of Manila during the Japanese occupation in the Philippines." Taking advantage of this
allegation, and ignoring her own in her complaint — that "for the whole duration of the (war) and from thence
to sometime thereafter, that is, in October, 1945, . . . defendant closed its business in the Islands, and had
absolutely no agency or representative here to represent it, with authority to collect premiums from the
Insured." — the plaintiff asserts that it was the defendant's duty to notify her husbands of its postal address
during the war, and that its failure to do so excused deliquency in the payment of the premiums. The plaintiff
cites the provision of the contract which states that "all premiums subsequent to the first year are payable to
the Company's authorized cashier at the place stated in the fourth page hereof, or at such other place instead
thereof as may be designated from time to time by noticed to the Company mailed to the Insured at his last
known post office address."
The evidence on this feature of the case reveals that, the defendant being an enemy corporation, its offices,
which were housed at the Chaco building when the hostilities broke out, were ordered closed by the Japanese
Military authorities in January 1942, and the officers of Hanson, Orth and Stevenson, Inc., defendants general
agents, being American citizens, were entered. In addition, on August 25 the Japanese administration issued
"Instruction No. 71" by which enemy alien insurance companies were expressly prohibited from doing business.
But before that instruction was promulgated Hanson, Orth and Stevenson, had opened in the house of one of
their Filipino employees on Gonzales Street in Ermita an office with skeleton force, all Filipinos, for the purpose
of receiving premiums from their policy holders; and notwithstanding the prohibition that office was not closed.
In the face of the Japanese Military decrees, which found sanctions in international law, the failure of the
defendant or its Filipino employees to advise the insured of the defendant's new address did not work as a
forfeiture of the right to have the premiums satisfied promptly. While clandestine transactions between the
parties during the war might be binding, it was not obligatory on the insurer, and it was well-nigh risky for its
employees, to send out notices to its widely scattered policy holders, what with the postal service under the
control and administration of the ruthless occupants.
There is no duty when the law forbids; and there is no obligation without corresponding right enjoyed by
another. The insured had no right to demand that the defendant maintain an office during the war, and the
defendant was not obligated to do so. Had the defendant not opened any office at all during the occupation and
stopped receiving premiums absolutely, the plaintiff's position would not have been any better or worse for the
closing and suspension of the defendant's business. Had the plaintiff's husband actually tendered his premiums
and the defendant's employees rejected them, he could not have insisted on the payment as a matter of right.
Stated otherwise, the defendant's opening of an interim office partook of the nature of the privilege to the
policy holders to keep their policies operative rather than a duty to them under the contract.
Of this privilege, incidentally, Gonzaga could have taken advantage if he was really intent on preserving his
policy. Uncontroverted or admitted is the fact that the defendant's agent, through whom he had been insured,
lived in Malabon, Rizal, and was his close acquaintance; and so were some of the defendant's Filipino
employees who handled the insurance business of Hanson, Orth and Stevenson during the occupation. And
Gonzaga admittedly come to Manila on a visit every now and then, and could have, without difficulty, contacted
any of those people.
For another thing, the policy carried a clause providing for its reinstatement under certain conditions within
three years from the date of lapse on application of the insured. The present policy lapsed on June 12, 1943, the
Company's Manila branch was reopened on May 1, 1945 and resumed regular business through the same
general agents at the Wilson Building on Juan Luna Street, Manila and Ramon Gonzaga died on June 27, 1945. It
is undoubted that Gonzaga knew all that. It is not denied that he was an employee in the United States Navy,
that the united States Navy had an office in the same Wilson Building, and that he came at least twice a month
to that office for his salary.
Both in law and in reason, the action was properly dismissed and the appealed decision is hereby affirmed, with
costs.
EN BANC
G.R. No. L-7667 November 28, 1955
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the
transaction entered into between them on December 18, 1951 be declared as one of loan, and the document
executed covering the transaction as one of equitable mortgage to secure the payment of said loan; (2) the
defendant be ordered to credit to the plaintiff with the necessary amount from the sum received by the
defendant from the Associated Insurance & Surety Co., Inc. and to apply the same to the payment of plaintiff's
obligation thus considering it as fully paid; and (3) the defendant be ordered to pay to plaintiff the difference
between the alleged indebtedness of plaintiff and the sum received by defendant from the aforementioned
insurance company, plus the sum allegedly paid to defendant as interest on the alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special defense that the transaction entered
into between the plaintiff and defendant is one of sale with option to repurchase but that the period for
repurchase had expired without plaintiff having returned the price agreed upon as a result of which the
ownership of the property had become consolidated in the defendant. Defendant also set up certain
counterclaims which involve a total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the
parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor her
counsel appeared, even if the latter had been notified of the postponement almost a month earlier, and so the
court received the evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence
presented, rendered judgment granting the relief prayed for in the complaint.
On February 2, 1954, the original counsel for the defendant was substituted and the new counsel immediately
moved that the judgment be set aside on the ground that, due to mistake or excusable negligence, defendant
was unable to present her evidence and the decision was contrary to law, and this motion having been denied,
defendant took the present appeal.
The important issue to be determined in this appeal is whether the lower court committed a grave abuse of
discretion in not reopening the case to give defendant an opportunity to present her evidence considering that
the failure of her original counsel to appear was due to mistake or execusable negligence which ordinary
prudence could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel
showed interest in the early disposal of this case by moving the court to have it set for trial. The first date set
was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The case
was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred to
November 6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15, 1953, and
because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing was
postponed to January 18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed
Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected
that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at
all. It is averred that "The days that followed his appointment were very busy days for defendant's former
counsel. There was an immediate need for clearing the backlog of official business, including the reorganization
of the Department of Foreign Affairs and our Foreign Service, and more importantly, he had to assist the
Secretary of Foreign Affairs in negotiations of national importance like the Japanese reparations, and the
revision of the trade agreement with the United States, that, Atty. Guerrero had to work as much as fourteen
hours daily . . . Because of all these unavoidable confusion that followed in the wake of Atty. Guerrero's sudden
and unexpected appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and
consequently, Atty. Guerrero and the defendant were unable to appear when the case was called for trial."
These reasons, — it is intimated, — constitute excusable negligence which ordinary prudence could not have
guarded against and should have been considered by the trial court as sufficient justification to grant the
petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of mistake
or excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos, 24 Phil., 446;
Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to be
disturbed unless it is shown that the court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70;
Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821;
Salva vs. Palacio and Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said: "After
going over the same arguments, this Court is of the opinion, and so holds that the decision of this Court of
January 18, 1954 should not be disturbed." Considering the stature, ability and experience of counsel Leon Ma.
Guerrero, and the fact that he was given almost one month notice before the date set for trial, we are
persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision.
Coming now to the merits of the case, we note that the lower court made the following findings: On December
18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following conditions: (a)
that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that defendant shall deduct
from the loan certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as
interest for the first month; and (c) that after making the above deductions, defendant shall deliver to plaintiff
only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more than
the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant required
plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to convey to
defendant, with right to repurchase, a two-story building of strong materials belonging to plaintiff. This
document did not express the true intention of the parties which was merely to place said property as security
for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the Associated
Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in the name of
defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the
insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that she be credited with
the necessary amount to pay her obligation out of the insurance proceeds but defendant refused to do so. And
on the strength of these facts, the court rendered decision the dispositive part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as
shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the
defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from the
Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the sum of P12,000.00 as
stated in the complaint, thus considering the agreement of December 18, 1951 between the herein plaintiff and
defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance collected by
defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as interest on the
sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction does not exceed 12
per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of P810 to
the defendant, which this Court hereby likewise orders the said defendant to refund to herein plaintiff, plus the
balance of P1,107 representing the difference of the sum loan of P12,000 and the collected insurance of
P13,107 from the insurance company abovementioned to which the herein plaintiff is entitled to receive, and to
pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107
representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from the
insurance company notwithstanding the fact that it was not proven that the insurance was taken for the benefit
of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an
insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee,
independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is
entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim against
the mortgagor, but is passed by subrogation to the insurer to the extent of the money paid." (Vance on
Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure his interest in the property
independently of the mortgagor. In that event, upon the destruction of the property the insurance money paid
to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt
remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it
passes by subrogation to the insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed.,
pp. 772-773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the case
mentioned, an insurance contract was taken out by the mortgagee upon his own interest, it being stipulated
that the proceeds would be paid to him only and when the case came up for decision, this Court held that the
mortgagee, in case of loss, may only recover upon the policy to the extent of his credit at the time of the loss. It
was declared that the mortgaged had no right of action against the mortgagee on the policy. (San Miguel
Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate interest
at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto,
the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds applied in
reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the mortgagee "has still a right to
recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden
9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg.
Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But
these authorities merely represent the minority view (See case note, 3 Lawyers' Report Annotated, new series,
p. 79). "The general rule and the weight of authority is, that the insurer is thereupon subrogated to the rights of
the mortgagee under the mortgage. This is put upon the analogy of the situation of the insurer to that of a
surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of the
insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in
ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the amount of
insurance received by the defendant, for, in the light of the majority rule we have above enunciated, the correct
solution should be that the proceeds of the insurance should be delivered to the defendant but that her claim
against the plaintiff should be considered assigned to the insurance company who is deemed subrogated to the
rights of the defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as
follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an equitable
mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the insurance
amounting to P13,107.00 was properly collected by defendant who is not required to account for it to the
plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have compensated the
obligation of the plaintiff to the defendant, but bars the latter from claiming its payment from the former; and
(4) defendant shall pay to the plaintiff the sum of P810.00 representing the overpayment made by plaintiff by
way of interest on the loan. No pronouncement as to costs.
EN BANC
G.R. No. L-14300 January 19, 1920
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compañia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff, the
San Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten respectively by
Law Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of P7,500
each, insuring certain property which has been destroyed by fire. The plaintiff, the San Miguel Brewery, is
named as the party assured in the two policies referred to, but it is alleged in the complaint that said company
was in reality interested in the property which was the subject of insurance in the character of a mortgage
creditor only, and that the owner of said property upon the date the policies were issued was one D. P. Dunn
who was later succeeded as owner by one Henry Harding. Accordingly said Harding was made a defendant, as a
person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies
named for the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of
P4,505.30 due to the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff
be absolved from liability to the defendants or any of them. The peculiar form of the latter part of the prayer is
evidently due to the design of the plaintiff to lay a foundation for Harding to recover the difference between the
plaintiff's credit and the amount for which the property was insured. Accordingly, as was to be expected,
Harding answered, admitting the material allegations of the complaint and claiming for himself the right to
recover the difference between the plaintiff's mortgage credit and the face value of the policies. The two
insurance companies also answered, admitting in effect their liability to the San Miguel Brewery to the extent of
its mortgage credit, but denying liability to Harding on the ground that under the contracts of insurance the
liability of the insurance companies was limited to the insurable interest of the plaintiff therein. Soon after the
action was begun the insurance companies effected a settlement with the San Miguel Brewery by paying the
full amount of the credit claimed by it, with the result that the litigation as between the original plaintiff and the
two insurance companies came to an end, leaving the action to be prosecuted to final judgement by the
defendant Harding with respect to the balance claimed to be due to him upon the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action whatever
against the companies and absolved them from liability without special finding as to costs. From this decision
the said Henry Harding has appealed.
The two insurance companies who are named as defendants do not dispute their liability to the San Miguel
Brewery, to the extent already stated, and the only question here under discussion is that of the liability of the
insurance companies to Harding. It is therefore necessary to take account of such facts only as bear upon this
aspect of the case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which the
insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the contract
of mortgage Dunn agreed to keep the property insured at his expense to the full amount of its value in
companies to be selected by the Brewery Company and authorized the latter in case of loss to receive the
proceeds of the insurance and to retain such part as might be necessary to cover the mortgage debt. At the
same time, in order more conveniently to accomplish the end in view, Dunn authorized and requested the
Brewery Company to effect said insurance itself. Accordingly on the same date Antonio Brias, general manager
of the Brewery, made a verbal application to the Law Union and Rock Insurance Company for insurance to the
extent of P15,000 upon said property. In reply to a question of the company's agent as to whether the Brewery
was the owner of the property, he stated that the company was interested only as a mortgagee. No information
was asked as to who was the owner of the property, and no information upon this point was given.
It seems that the insurance company to whom this application was directed did not want to carry more than
one-half the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be
issued by the "Filipinas" Compania de Seguros. Both policies were issued in the name of the San Miguel Brewery
as the assured, and contained no reference to any other interest in the property. Both policies contain the usual
clause requiring assignments to be approved and noted on the policy. The premiums were paid by the Brewery
and charged to Dunn. A year later the policies were renewed, without change, the renewal premiums being
paid by the Brewery, supposedly for the account of the owner. In the month of March of the year 1917 Dunn
sold the insured property to the defendant Henry Harding, but not assignment of the insurance, or of the
insurance policies, was at any time made to him.
We agree with the trial court that no cause of action in Henry Harding against the insurance companies is show.
He is not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy Tam and Uy
Yet vs.Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be made
effective, if at all, through the San Miguel Brewery in whose name the contracts are written. Now the Brewery,
as mortgagee of the insured property, undoubtedly had an insurable interest therein; but it could not, in any
event, recover upon these policies an amount in excess of its mortgage credit. In this connection it will be
remembered that Antonio Brias, upon making application for the insurance, informed the company with which
the insurance was placed that the Brewery was interested only as a mortgagee. It would, therefore, be
impossible for the Brewery mortgage on the insured property.
This conclusion is not only deducible from the principles governing the operation and effect of insurance
contracts in general but the point is clearly covered by the express provisions of sections 16 and 50 of the
Insurance Act (Act No. 2427). In the first of the sections cited, it is declared that "the measure of an insurable
interest in property is the extent to which the insured might be damnified by loss or injury thereof" (sec. 16);
while in the other it is stated that "the insurance shall be applied exclusively to the proper interest of the person
in whose name it is made unless otherwise specified in the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of the
property had continued in him up to the time of the loss; and as regards Harding, an additional insuperable
obstacle is found in the fact that the ownership of the property had been charged, prior to the loss, without any
corresponding change having been effected in the policy of insurance. In section 19 of the Insurance Act we find
it stated that "a change of interest in any part of a thing insured unaccompanied by a corresponding change of
interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the
interest in the insurance are vested in the same person." Again in section 55 it is declared that "the mere
transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the
owner of both the policy and the thing insured."
Undoubtedly these policies of insurance might have been so framed as to have been "payable to the Sane
Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the continuance of
the risk, may become the owner of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have
proved an intention to insure the entire interest in the property, not merely the insurable interest of the San
Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the
policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of
Brias, the manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of the
insurance companies was different from that contemplated by Dunn, at whose request the insurance was
written, and Brias. In the contract of mortgage Dunn had agreed, at his own expense, to insure the mortgaged
property for its full value and to indorse the policies in such manner as to authorize the Brewery Company to
receive the proceeds in case of loss and to retain such part thereof as might be necessary to satisfy the
remainder then due upon the mortgage debt. Instead, however, of effecting the insurance himself Dunn
authorized and requested the Brewery Company to procure insurance on the property in the amount of
P15,000 at Dunn's expense. The Brewery Company undertook to carry this mandate into effect, and it of course
became its duty to procure insurance of the character contemplated, that is, to have the policies so written as
to protect not only the insurable interest of the Brewery, but also the owner. Brias seems to have supposed that
the policies as written had this effect, but in this he was mistaken. It was certainly a hardship on the owner to
be required to pay the premiums upon P15,000 of insurance when he was receiving no benefit whatever except
in protection to the extent of his indebtedness to the Brewery. The blame for the situation thus created rests,
however, with the Brewery rather than with the insurance companies, and there is nothing in the record to
indicate that the insurance companies were requested to write insurance upon the insurable interest of the
owner or intended to make themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had been agreed between the
contracting parties that the insurance should be so written as to protect not only the interest of the mortgagee
but also the residuary interest of the owner, and the policies had been, by inadvertence, ignorance, or mistake
written in the form in which they were issued, a court would have the power to reform the contracts and give
effect to them in the sense in which the parties intended to be bound. But in order to justify this, it must be
made clearly to appear that the minds of the contracting parties did actually meet in agreement and that they
labored under some mutual error or mistake in respect to the expression of their purpose. Thus, in Bailey vs.
American Central Insurance Co. (13 Fed., 250), it appeared that a mortgage desiring to insure his own insurable
interest only, correctly stated his interest, and asked that the same be insured. The insurance company agreed
to accept the risk, but the policy was issued in the name of the owner, because of the mistaken belief of the
company's agent that the law required it to be so drawn. It was held that a court of equity had the power, at the
suit of the mortgage, to reform the instrument and give judgment in his favor for the loss thereunder, although
it had been exactly as it was. Said the court: "If the applicant correctly states his interest and distinctly asks for
an insurance thereon, and the agent of the insurer agrees to comply with his request, and assumes to decide
upon the form of the policy to be written for that purpose, and by mistake of law adopts the wrong form, a
court of equity will reform the instrument so as to make it insurance upon the interest named." (See
also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep.,
443; Woodbury Savings etc., Co., vs. Charter Oak Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance
Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation and
permit a recovery by the mortgage in his character as such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa,
377; Spare vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co. (136 U.S., 287;
34 L. 3d., 408), it appeared that one Kearney made application to an insurance company for insurance on
certain property in his hands as receiver and it was understood between him and the company's agent that, in
case of loss, the proceeds of the policy should accrue to him and his successors as receiver and to others whom
it might concern. However, the policy, as issued, was so worded as to be payable only to him as receiver. In an
action brought on the policy by a successor of Kearney, it was alleged that the making of the contract in this
form was due to inadvertence, accident, and mistake upon the part of both Kearney and the company.
Said the court:
If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the
plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have been omitted, whereby the
true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded
agreement as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and this
is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the
parties. In the agreement there has been a mutual mistake, caused chiefly by that contracting party who now
seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written
agreement did not effect that which the parties intended. That a court of equity can afford relief in such a case,
is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must
clearly appear that the contract failed to express the real agreement between the parties. (Philippine Sugar
Estates Development Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government
of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state in
the foregoing cases, for it is by means clear from the testimony of Brias — and none other was offered — that
the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results
that the defendant Harding is not entitled to relief in any aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.
FIRST DIVISION
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision1 of the Court of Appeals in CA-G.R. SP No.
31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of
the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia
against private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On
22 December 1989, he obtained from the private respondent fire insurance policy No. F-146222 for
P100,000.00. The period of the policy was from 22 December 1989 to 22 December 1990 and covered the
following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and women wear and other
usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance
Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks
amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
—————
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of any insurance or insurances already affected, or which may
subsequently be effected, covering any of the property or properties consisting of stocks in trade, goods in
process and/or inventories only hereby insured, and unless such notice be given and the particulars of such
insurance or insurances be stated therein or endorsed in this policy pursuant to Section 50 of the Insurance
Code, by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this
policy shall be deemed forfeited, provided however, that this condition shall not apply when the total insurance
or insurances in force at the time of the loss or damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco,
Agusan del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with
the private respondent a claim under the policy. On 28 December 1990, the private respondent denied the
claim because it found that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire
insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the
Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs.
Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear
subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F 24758.4
The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.
The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission (Case No.
3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs
of litigation. He attached as Annex "AM"6 thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the time he obtained the private
respondent's fire insurance policy he knew that the two policies issued by the PFIC were already in existence;
however, he had no knowledge of the provision in the private respondent's policy requiring him to inform it of
the prior policies; this requirement was not mentioned to him by the private respondent's agent; and had it
been mentioned, he would not have withheld such information. He further asserted that the total of the
amounts claimed under the three policies was below the actual value of his stocks at the time of loss, which was
P1,000,000.00.
In its answer,7 the private respondent specifically denied the allegations in the complaint and set up as its
principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner did not violate Condition 3
as he had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was
Cebu Tesing Textiles which procured the PFIC policies without informing him or securing his consent; and that
Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These findings were based on the
petitioner's testimony that he came to know of the PFIC policies only when he filed his claim with the private
respondent and that Cebu Tesing Textile obtained them and paid for their premiums without informing him
thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the sum of
P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus the amount of
P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in its
resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a petition
for review. The petition was docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance Commission
because it found that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the
name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART (MR. ARMANDO
GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by the Tesing Textiles which
is alleged to have taken out the other insurance without the knowledge of private respondent. This is shown by
Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be
only the mortgagee of the goods insured but the party to which they were issued were the "DISCOUNT MART
(MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the policies on the same property
subject of the insurance with petitioner. Hence, in failing to disclose the existence of these insurances private
respondent violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by his letter to
petitioner [of 18 January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision requiring me to inform your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not mention about said
requirement at the time he was convincing me to insure with you. If he only die or even inquired if I had other
existing policies covering my establishment, I would have told him so. You will note that at the time he talked to
me until I decided to insure with your company the two policies aforementioned were already in effect.
Therefore I would have no reason to withhold such information and I would have desisted to part with my hard
earned peso to pay the insurance premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my investments. The actual value of my stocks
damaged by the fire was estimated by the Police Department to be P1,000,000.00 (Please see xerox copy of
Police Report Annex "A"). My Income Statement as of December 31, 1989 or five months before the fire, shows
my merchandise inventory was already some P595,455.75. . . . These will support my claim that the amount
claimed under the three policies are much below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know that there were other insurances
taken on the stock-in-trade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He
contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of
jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-JUDICIAL
BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED
RESPECT AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE DURING
THE HEARING OR TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior
knowledge of the two insurance policies issued by the PFIC when he obtained the fire insurance policy from the
private respondent, thereby, for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had,
whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration
of 18 January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and
thus should not have been considered in deciding the case. However, as correctly pointed out by the Court of
Appeals, a copy of this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M"
thereof and made integral part of the complaint. 12 It has attained the status of a judicial admission and since its
due execution and authenticity was not denied by the other party, the petitioner is bound by it even if it were
not introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two
policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner
in his letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the
Court of Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions
for review under Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are
conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter
of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary
before the Insurance Commissioner and which the latter relied upon cannot prevail over a written admission
made ante litem motam. It was, indeed, incredible that he did not know about the prior policies since these
policies were not new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-
28146 had been renewed twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its
incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which invariably appears in fire insurance
policies and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or
"other insurance" clause and has been upheld as valid and as a warranty that no other insurance exists. Its
violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject matter,
the same interest therein, and the same risk.17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest
therein and both interests may be one policy, or each may take out a separate policy covering his interest,
either at the same or at separate times. 18 The mortgagor's insurable interest covers the full value of the
mortgaged property, even though the mortgage debt is equivalent to the full value of the property.19 The
mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security thereof,
and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima
facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the
mortgaged property. 20 Thus, separate insurances covering different insurable interests may be obtained by the
mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice.
The mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy
with the consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a
mortgage clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be
attached; or a "standard mortgage clause," containing a collateral independent contract between the
mortgagee and insurer, may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's
benefit, in which case the mortgagee acquires an equitable lien upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may
appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not
made a party to the contract himself. Hence, any act of the mortgagor which defeats his right will also defeat
the right of the mortgagee. 22 This kind of policy covers only such interest as the mortgagee has at the issuing of
the policy.23
On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms
of an agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted,
however, that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains on the assurance that it insures him, the policy
is in fact in the form used to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause
which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the
terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and
Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or insurances already effected, or which may
subsequently be effected covering any of the property hereby insured, and unless such notice be given and the
particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the
Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby
assured must be declared by the insured in writing and he must cause the company to add or insert it in the
policy, without which such policy shall be null and void, and the insured will not be entitled to indemnity in case
of loss," Condition 3 in the private respondent's policy No. F-14622 does not absolutely declare void any
violation thereof. It expressly provides that the condition "shall not apply when the total insurance or
insurances in force at the time of the loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the
insured and strictly against the company, the reason being, undoubtedly, to afford the greatest protection
which the insured was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law
that forfeitures are not favored and that any construction which would result in the forfeiture of the policy
benefits for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a manner
which would permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently,
provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance policies should be
construed most strictly against those for whose benefits they are inserted, and most favorably toward those
against whom they are intended to operate. 30 The reason for this is that, except for riders which may later be
inserted, the insured sees the contract already in its final form and has had no voice in the selection or
arrangement of the words employed therein. On the other hand, the language of the contract was carefully
chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of the
insurers and the technical language employed therein is rarely understood by ordinary laymen. 31
With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free
from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the
prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other insurance "covering any of
the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby
insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-
insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same
person is insured by several insurers separately in respect of the same subject and interest. As earlier stated,
the insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate.
Since the two policies of the PFIC do not cover the same interest as that covered by the policy of the private
respondent, no double insurance exists. The non-disclosure then of the former policies was not fatal to the
petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in
force at the time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-
insurer's liability up to a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance.
Indeed, the rationale behind the incorporation of "other insurance" clause in fire policies is to prevent over-
insurance and thus avert the perpetration of fraud. When a property owner obtains insurance policies from two
or more insurers in a total amount that exceeds the property's value, the insured may have an inducement to
destroy the property for the purpose of collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured.32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No.
31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.
EN BANC
G.R. No. L-15184 May 31, 1963
SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant,
vs.
PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL BANK, defendants-appellees.
Saura, Magno & Associates for plaintiff-appellant.
Tolentino, Garcia and D. R. Cruz for defendant-appellee Philippine International Surety Co., Inc.
Ramon B. de los Reyes and Antonio P. Cruz for defendant-appellee Philippine National Bank.
PAREDES, J.:
Instant case was certified by the Court of Appeals to Us, it appearing that the issues involved are purely of law.
On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel of
land covered by T.C.T. No. 40445 of the Registry of Deeds of Davao, issued in its name, to secure the payment of
promissory note of P27,000.00 (Exhs. P, B-2). On April 30, 1953, the mortgage was amended to guarantee an
increased amount, bringing the total mortgaged debt to P37,000.00 (Exhs. P-2, B-3). The provisions of the
mortgaged contact, pertinent to the resolution of the present case, provide as follows —
2. . . . he shall insure the mortgaged property at all times against fire and earthquake for an amount and with
such company satisfactory to the Mortgagee, indorsing to the latter the corresponding policies; he shall keep
the mortgaged property in good condition, making repairs and protecting walls that may be necessary; . . .
xxx xxx xxx
Erected on the land mortgaged, was a building of strong materials owned by the mortgagor Saura Import &
Export Co., Inc., which had always been covered by insurance, many years prior to the mortgage contract.
Pursuant to the requirement, Saura insured the building and its contents with the Philippine International
Surety, an insurance firm acceptable to mortgagee Bank, for P29,000.00 against fire for the period of one year
from October 2, 1954. As required therefor, the insurance policy was endorsed to the mortgagee PNB, in a
Memo which states —
Loss if any, payable to the Philippine National Bank as their interest may appear, subject to the terms,
conditions and warranties of this policy (Exh. A).
The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely thirteen (13) days after
the issuance of the fire insurance policy (October 2, 1954), the insurer cancelled the same, effective as of the
date of issue (Exh. A-2). Notice of the cancellation was given to appellee bank in writing, sent by Registered Mail
and personally addressed to Fortunato Domingo, Branch Manager of the appellee Bank's Davao Branch, and
was received by the Bank on November 8, 1954. On April 6, 1955, the building and its contents, worth
P40,685.69 were burned. On April 11, 1955, Saura filed a claim with the Insurer and mortgagee Bank. Upon the
presentation of notice of loss with the PNB, Saura learned for the first time that the policy had previously been
cancelled on October 2, 1954, by the insurer, when Saura's folder in the Bank's filed was opened and the notice
of cancellation (original and duplicate) sent by the Insurer to the Bank, was found. Upon refusal of the Insurer
Philippine International Surety to pay the amount of the insurance, Civil Case No. 26847 was filed with the
Manila CFI against the Insurer, and the PNB was later included as party defendant, after it had refused to
prosecute the case jointly with Saura Import & Export Co., Inc.
At the trial, it was established that neither the Insurer nor the mortgagee Bank informed the plaintiff Saura of
the cancellation of the policy. On April 30, 1957, the court a quo rendered the following judgment —
. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is no proof on the
counterclaim of the Philippines International Surety, the same is also dismissed.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by
this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered
by this stipulation of facts. 1äwphï1.ñët
A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was subsequently denied.
The decision rendered and the resolution denying the motion for reconsideration constitute the subject of the
instant appeal by plaintiff Saura on the three alleged errors, which converge on the correctness of the ruling,
wholly dismissing the complaint absolving both the insurance company and the bank from liability.
In the determination of liabilities of the parties herein, let us look into the general principles of insurance, in
matters of cancellations of policy by the insurer. Fire insurance policies and other contracts of insurance upon
property, in addition to the common provision for cancellation of the policy upon request of the insured,
generally provide for cancellation by the insurer by notice to the insured for a prescribed period, which is
usually 5 days, and the return of the unearned portion of the premium paid by the insured, such provision for
cancellation upon notice being authorized by statutes in some jurisdiction, either specifically or as a provision of
an adopted standard form of policy. The purpose of provisions or stipulations for notice to the insured, is to
prevent the cancellation of the policy, without allowing the insured ample opportunity to negotiate for other
insurance in its stead. The form and sufficiency of a notice of cancellation is determined by policy provisions. In
order to form the basis for the cancellation of a policy, notice to the insured n not be in any particular form, in
the absence of a statute or policy provision prescribing such form, and it is sufficient, so long as it positively and
unequivocally indicates to the insured, that it is the intention of the company that the policy shall cease to be
binding. Where the policy contains no provisions that a certain number of days notice shall be given, a
reasonable notice and opportunity to obtain other insurance must be given. Actual personal notice to the
insured is essential to a cancellation under a provision for cancellation by notice. The actual receipt by the
insured of a notice of cancellation is universally recognized as a condition precedent to a cancellation of the
policy by the insurer, and consequently a letter containing notice of cancellation which is mailed by the insurer
but not received by the insured, is ineffective as cancellation (29 Am. Jur. pp. 732-741).
The policy in question (Exh. A), does not provide for the notice, its form or period. The Insurance Law, Act No.
2427, does not likewise provide for such notice. This being the case, it devolves upon the Court to apply the
generally accepted principles of insurance, regarding cancellation of the insurance policy by the insurer. From
what has been heretofore stated, actual notice of cancellation in a clear and unequivocal manner, preferably in
writing, in view of the importance of an insurance contract, should be given by the insurer to the insured, so
that the latter might be given an opportunity to obtain other insurance for his own protection. The notice
should be personal to the insured and not to and/or through any unauthorized person by the policy. In the case
at bar, the defendant insurance company, must have realized the paramount importance of sending a notice of
cancellation, when it sent the notice of cancellation of the policy to the defendant bank (as mortgagee), but not
to the insured with which it (insurance company) had direct dealing. It was the primary duty of the defendant-
appellee insurance company to notify the insured, but it did not. It should be stated that the house and its
contents were burned on April 6, 1955, at the time when the policy was enforced (October 2, 1954 to October
2, 1955); and that under the facts, as found by the trial court, to which We are bound, it is evident that both the
insurance company and the appellee bank failed, wittingly or unwittingly, to notify the insured appellant Saura
of the cancellation made.
Of course, the defendant insurance company contends that it gave notice to the defendant-appellee bank as
mortgagee of the property, and that was already a substantial compliance with its duty to notify the insured of
the cancellation of the policy. But notice to the bank, as far appellant herein is concerned, is not effective
notice.
If a mortgage or lien exists against the property insured, and the policy contains a clause stating that loss, if any,
shall be payable to such mortgagee or the holder of such lien as interest may appear, notice of cancellation to
the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property.
(Connecticut Ins. Co. v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743).
Upon authority of the above case, therefore, the liability of the insurance company becomes a fact.
It may be argued that in the appeal brief of appellant, no error has been assigned against the insurance
company and no prayer is found therein asking that it be made liable. It must be noted, however, that the case
was dismissed the lower court and the main object of the appeal is to secure a reversal of the said judgment.
This Court is clothed with ample authority to review matters, even if they are not assigned as errors in the
appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Thus it was held:
While an assignment of error which is required by law or rule of court has been held essential to appellate
review, only those assigned will be considered, there are a number of cases which appear to accord to the
appellate court a broad discretionary power to waive the lack of proper assignment of errors and consider
errors not assigned. And an unassigned error closely related to an error properly assigned, or upon which the
determination of the question raised by the error properly assigned is dependent, will be considered by the
appellate court notwithstanding the failure to assign it as error. (Hernandez v. Andal, 78 Phil. 198-199).
Although assigned errors apparently appear to be directed against the appellee bank alone, they in essence,
seek a reversal of the decision on dismissal, entered by the lower court, which in the main has for its purpose
the finding of liability on the policy. In the course of our examination of the records of the case, the decision and
the errors assigned, We found that liability attached principally the insurance company, for its failure to give
notice of the cancellation of the policy to herein appellant itself.
Because of the conclusions reached, We find it unnecessary to discuss the errors assigned against appellee
bank.
WHEREFORE, the decision appealed from is hereby reversed, and another is entered, condemning the
defendant-appellee Philippine International Surety Co., Inc., to pay Saura Import & Export Co., Inc., appellant
herein, the sum of P29,000.00, the amount involved in Policy No. 429, subject-matter of the instant case.
Without costs.
FIRST DIVISION
G.R. No. L-57757 August 31, 1987
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, PRAGMACIO VITUG AND MAXIMO VITUG, respondents.
GANCAYCO, J.:
Does the presumption of conjugality of properties acquired by the spouses during coverture provided for in
Article 160 of the Civil Code apply to property covered by a Torrens certificate of title in the name of the
widow? This is the issue posed in this petition to review on certiorari of the decision of the Court of Appeals in
CA-G.R. No. 60903 which is an action for reconveyance and damages. *
On November 28, 1952, Donata Montemayor, through her son, Salvador M. Vitug, mortgaged to the Philippine
National Bank (PNB) several parcels of land covered by Transfer Certificate of Title (TCT) No. 2289 — Pampanga
to guarantee the loan granted by the PNB to Salvador Jaramilla and Pedro Bacani in the amount of P40,900.00
which was duly registered in the Office of the Register of Deeds of Pampanga. 1
On December 1, 1963, Donata Montemayor also mortgaged in favor of PNB certain properties covered by TCT
Nos. 2887 and 2888-Pampanga to guarantee the payment of the loan account of her son Salvador Vitug in the
amount of P35,200.00, which mortgage was duly registered in the Register of Deeds of Pampanga. 2
The above-mentioned Transfer Certificates of Titles covering said properties were all in the name of Donata
Montemayor, of legal age, Filipino, widow and a resident of Lubao, Pampanga at the time they were mortgaged
to PNB 3 and were free from all hens and encumbrances. 4
Salvador Vitug failed to pay his account so the bank foreclosed the mortgaged properties covered by TCT Nos.
2887 and 2888. They were sold at public auction on May 20, 1968 in which the PNB was the highest bidder. The
titles thereto were thereafter consolidated in the name of PNB.
Likewise, Salvador Jaramilla and Pedro Bacani failed to settle their accounts with the PNB so the latter
foreclosed the properties covered by TCT No. 2889 which were sold at public auction and likewise PNB was the
buyer thereof. On August 30, 1968, a certificate of sale was issued by the Register of Deeds covering said
properties in favor of the PNB. When the title of the PNB was consolidated a new title was issued in its name. 5
On September 2, 1969, the PNB sold the properties covered by TCT Nos. 2887 and 2888 — Pampanga to Jesus
M. Vitug, Anunciacion V. de Guzman, Prudencia V. Fajardo, Salvador Vitug and Aurora V. Gutierrez in those
names the corresponding titles were issued. 6
During the lifetime of Clodualdo Vitug he married two times. His first wife was Gervacia Flores with whom he
had 3 children, namely, Victor, Lucina and Julio all surnamed Vitug. Victor now dead is survived by his 5
children: Leonardo, Juan, Candida Francisco and Donaciano, an surnamed Vitug. Juan Vitug is also dead and is
survived by his only daughter Florencia Vitug.
The second wife of Clodualdo Vitug was Donata Montemayor with whom he had 8 children, namely, Pragmacio,
Maximo, Jesus, Salvador, Prudencio and Anunciacion, all surnamed Vitug, the late Enrique Vitug represented by
his wife Natalia Laquian, and the late Francisco Vitug who is survived by 11 children, namely, Antonio, Francisco,
Aurora, Pedro, Honorio, Corazon, Anselmo, Benigno, Eligio Jesus and Luz.
Clodualdo Vitug died intestate on May 20, 1929 so his estate was settled and distributed in Special Proceeding
No. 422 in the Court of First Instance of Pampanga wherein Donata Montemayor was the Administratrix. 7
Meanwhile, on May 12,1958, Donata Montemayor executed a contract of lease of Lot No. 24, which is covered
by TCT No. 2887-R in favor of her children Pragmacio and Maximo both surnamed Vitug. This lease was
extended on August 31, 1963. By virtue of a general power of attorney executed by Donata Montemayor on
Sept. 19, 1966 in favor of Pragmacio Vitug, the latter executed a contract of lease on Sept. 19, 1967 of the said
lot in favor of Maximo Vitug. 8
On March 21, 1970 Pragmacio Vitug and Maximo Vitug filed an action for partition and reconveyance with
damages in the Court of First Instance of Pampanga against Marcelo Mendiola, special administrator of the
intestate estate of Donata Montemayor who died earlier, Jesus Vitug, Sr., Salvador, Natalia, Prudencia,
Anunciacion, all surnamed Vitug, Antonio, Francisco, Aurora, Pedro, Honorio, Corazon, Anselmo, Benigno, Eligio
Jesus and Luz, all surnamed Fajardo and the PNB.
The subject of the action is 30 parcels of land which they claim to be the conjugal property of the spouses
Donata Montemayor and Clodualdo Vitug of which they claim a share of 2/11 of 1/2 thereof. They assailed the
mortgage to the PNB and the public auction of the properties as null and void. They invoked the case of Vitug
vs. Montemayor, L-5297 decided by this Court on Oct. 20, 1953 which is an action for partition and liquidation
of the said 30 parcels of land wherein the properties were found to be conjugal in nature.
In a decision of Sept. 15, 1975, the lower court dismissed the complaint with costs against the plaintiffs and
ordered them to pay attorney's fees of P5,000.00 to the defendant's counsel. Plaintiffs then interposed an
appeal to the Court of Appeals, wherein in due course a decision was rendered on May 20, 1981, the dispositive
part of which reads as follows:
WHEREFORE, in the light of the foregoing, the decision appealed from is hereby reversed and set aside, and
another one entered in accordance with the tenor of the prayer of appellant's complaint with the modification
that the sale at public auction of the 22 parcels be considered valid with respect to the 1/2 thereof. No costs.
Hence the herein petition for certiorari filed by the PNB raising the following assignments of error:
I
THE RESPONDENT COURT OF APPEALS ERRED IN APPLYING TO THE CASE AT BAR THE RULING OF THIS
HONORABLE SUPREME COURT IN FLORENCIA VITUG VS. DONATA MONTEMAYOR, ET AL., 91 PHIL. 286 (1953)
BECAUSE:
A. BETWEEN A PROVISION OF A SPECIAL LAW AND THE JUDICIAL INTERPRETATION AND/OR APPLICATION OF A
PROVISION OF A GENERAL LAW, THE FORMER PREVAILS.
B. THE DOCTRINE OF STARE DECISIS IS NOT A MECHANICAL FORMULA OF ADHERENCE.
C. PNB WAS NOT A PARTY, AND HAD NO KNOWLEDGE OF THE ABOVECITED CASE.
D. SIMILARLY, PRAGMACIO VITUG AND MAXIMO VITUG WERE NOT PARTIES IN SAID CASE.
II
THE RESPONDENT COURT OF APPEALS ERRED IN NOT RECOGNIZING THE CONCLUSIVENESS OF THE
CERTIFICATE, OF TITLE, AS PROVIDED IN ACT 496, AS AMENDED (THE LAND REGISTRATION).
III
THE RESPONDENT COURT OF APPEALS ERRED IN IGNORING THE CONCLUSIVENESS OF OWNERSHIP OF DONATA
MONTEMAYOR OVER THE PROPERTIES WHICH WERE REGISTERED EXCLUSIVELY IN HER NAME WHEN PRIVATE
RESPONDENTS (PRAGMACIO VITUG AND MAXIMO VITUG), AS LESSEES, ENTERED INTO A CONTRACT OF LEASE
WITH DONATA MONTEMAYOR AS THE OWNER-LESSOR.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT PNB WAS A MORTGAGEE IN BAD FAITH.
The petition is impressed with merit.
When the subject properties were mortgaged to the PNB they were registered in the name of Donata
Montemayor, widow. Relying on the torrens certificate of title covering said properties the mortgage loan
applications of Donata were granted by the PNB and the mortgages were duly constituted and registered in the attomey's fees and expenses of litigation to petitioner PNB in the amount of P20,000.00 and the costs of the
office of the Register of Deeds. suit.
In processing the loan applications of Donata Montemayor, the PNB had the right to rely on what appears in the SO ORDERED.
certificates of title and no more. On its face the properties are owned by Donata Montemayor, a widow. The
PNB had no reason to doubt nor question the status of said registered owner and her ownership thereof.
Indeed, there are no liens and encumbrances covering the same.
The well-known rule in this jurisdiction is that a person dealing with a registered land has a right to rely upon
the face of the torrens certificate of title and to dispense with the need of inquiring further, except when the
party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man
make such inquiry. 9
A torrens title concludes all controversy over ownership of the land covered by a final degree of
registration. 10 Once the title is registered the owner may rest assured without the necessity of stepping into
the portals of the court or sitting in the mirador de su casa to avoid the possibility of losing his land. 11
Article 160 of the Civil Code provides as follows:
Art. 160. All property of the marriage is presumed to belong to the conjugal partnership, unless it be proved
that it pertains exclusively to the husband or to the wife.
The presumption applies to property acquired during the lifetime of the husband and wife. In this case, it
appears on the face of the title that the properties were acquired by Donata Montemayor when she was
already a widow. When the property is registered in the name of a spouse only and there is no showing as to
when the property was acquired by said spouse, this is an indication that the property belongs exclusively to
said spouse. 12 And this presumption under Article 160 of the Civil Code cannot prevail when the title is in the
name of only one spouse and the rights of innocent third parties are involved. 13
The PNB had a reason to rely on what appears on the certificates of title of the properties mortgaged. For all
legal purposes, the PNB is a mortgagee in goodfaith for at the time the mortgages covering said properties were
constituted the PNB was not aware to any flaw of the title of the mortgagor. 14
True it is that in the earlier cases decided by this Court, namely Vitug VS. Montemayor decided on May 15,
1952, which is an action for recovery of possession of a share in said parcels of land, 15 and in the subsequent
action for partition between the same parties decided on Oct. 20, 1953, 16 this court found the 30 parcels of
land in question to be conjugal in nature and awarded the corresponding share to the property of Florencia
Vitug, an heir of the late Clodualdo Vitug from the first marriage. In said cases this Court affirmed the decision
of the lower court. In the dispositive part of the decision of the trial court it made the observation that "but
from the conduct of Clodualdo Vitug and Donata Montemayor during the existence of their marital life, the
inference is clear that Clodualdo had the unequivocal intention of transmitting the full ownership of the 30
parcels of land to his wife Donata Montemayor, thus considering the 1/2 of the funds of the conjugal property
so advanced for the purchase of said parcels of land as reimbursible to the estate of Clodualdo Vitug on his
death. 17 That must be the reason why the property was registered in the name of Donata Montemayor as
widow after the death of Clodualdo Vitug. 18
At any rate, although actions for recovery of real property and for partition are real actions, however, they are
actions in personam that bind only the particular individuals who are parties thereto. 19 The PNB not being a
party in said cases is not bound by the said decisions. Nor does it appear that the PNB was aware of the said
decisions when it extended the above describe mortgage loans. Indeed, if the PNB knew of the conjugal nature
of said properties it would not have approved the mortgage applications covering said properties of Donata
Montemayor without requiring the consent of all the other heirs or co-owners thereof. Moreover, when said
properties were sold at public auction, the PNB was a purchaser for value in good faith. So its right thereto is
beyond question. 20
Pragmacio and Maximo Vitug are now estopped from questioning the title of Donata Montemayor to the said
properties. They never raised the conjugal nature of the property nor took issue as to the ownership of their
mother, Donata Montemayor, over the same. Indeed private respondents were among the defendants in said
two cases wherein in their answers to the complaint they asserted that the properties in question are
paraphernal properties belonging exclusively to Donata Montemayor and are not conjugal in nature. 21 Thus
they leased the properties from their mother Donata Montemayor for many years knowing her to be the
owner. They were in possession of the property for a long time and they knew that the same were mortgaged
by their mother to the PNB and thereafter were sold at public auction, but they did not do anything. 22 It is only
after 17 years that they remembered to assert their rights. Certainly, they are guilty of laches. 23
Moreover, as correctly held by the lower court. Pragmacio and Maximo Vitug as occupants and lessees of the
property in question cannot now dispute the ownership of their mother over the same who was their lessor. 24
WHEREFORE, the subject decision of the respondent Court of Appeals is hereby REVERSED and set aside and
another decision is hereby rendered DISMISSING the complaint and ordering private respondents to pay