1. ARMANDO GEAGONIA, petitioner, vs.
COURT the two policies issued by the PFIC were already in
OF APPEALS and COUNTRY BANKERS
INSURANCE CORPORATION, respondents.
FACTS: Petitioner is the owner of Norman's Mart
located in a public market, of which he obtained from
the private respondent fire insurance policy 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 that the
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.
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.
Later, a fire of accidental origin broke out at the public
market. The petitioner's insured stock-in-trade were
completely destroyed prompting him to file with the
private respondent a claim under the policy. The latter
denied the claim because it found that at the time of
the loss the petitioner's stocks-in-trade were likewise
covered by two fire insurance policies for P100,000.00
each, issued by the Cebu Branch of the Philippines
First Insurance Co., Inc. (hereinafter PFIC). 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.
The basis of the private respondent's denial was the
petitioner's alleged violation of Condition 3 of the
policy.
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.
The Insurance Commission favored petitioner,
however, the CA, reversed and found that the
petitioner knew of the existence of the two other
policies issued by the PFIC. It said that it is apparent
from the face of the two fire policies that the insurance
was taken in the name of 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 petitioner, not by the Tesing Textiles.
ISSUE: Whether the petitioner violates the Condition
3 of the policy, and now is precluded from recovering
therefrom.
HELD: YES, petitioner violated the said condition but
he is not precluded from recovering therefrom.
The SC agreed with the CA that the petitioner knew of
the prior policies issued by the PFIC. His letter to the
private respondent conclusively proves this
knowledge.
Condition 3 of the said Policy is a condition which is
not proscribed by law. Its incorporation in the policy is
allowed by Section 75 of the Insurance Code 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. However, in
order to constitute a violation, the other insurance
must be upon same subject matter, the same interest
therein, and the same risk.
It must, however, be underscored that unlike the
"other insurance" clauses involved in different cases
that failure to comply will immediately forfeit the
policy. In this case, Condition 3 in the private
respondent's policy 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."
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. 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.
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 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. However, 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.
interest, either at the same or at separate times. 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. 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. 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.
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. This kind of policy covers only such
interest as the mortgagee has at the issuing of the
policy.
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. 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
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,” which is clearly a simple loss payable clause,
not a standard mortgage clause.
BENEFICIARY: El Oriente Fabrica Tabacos, plaintiff
FACTS: Plaintiff, a domestic corporation, in order to
protect itself against the loss that it might suffer by
reason of the death of its manager A. Velhagen and
whose death would be a serious loss to the plaintiff,
procured from the Manufacturers Life Insurance Co
an insurance policy on the life of the said A. Velhagen
for the sum of $50,000.
During the time the life insurance policy referred to
was in force and effect, plaintiff paid from its funds all
the insurance premiums due thereon. Plaintiff charged
as expenses of its business all the said premiums and
deducted the same from its gross incomes as
reported in its annual income tax returns.
Upon the death of A. Velhagen in the year 1929, the
plaintiff received all the proceeds of the said life
insurance policy, together with the interests and the
dividends accruing thereon
Later, defendant CIR assessed and levied the sum of
P3,148.74 as income tax on the proceeds of the
insurance policy, however, plaintiff, claimed
exemption under section 4 of the Income Tax Law.
ISSUE: Whether the proceeds of insurance are
taxable as income law.
RULING: No, the proceeds of the life insurance policy
in question as representing an indemnity and not
taxable income, it is a capital.
In the case at bar, El Oriente, Fabrica de Tabacos,
Inc., took out the insurance on the life of its manager,
to protect itself against the loss it might suffer by
reason of the death of its manager. The Court do not
believe that this fact signifies that when the plaintiff
received P104,957.88 from the insurance on the life of
its manager, it thereby realized a net profit in this
amount. It is true that the Income Tax Law, in
exempting individual beneficiaries, speaks of the
proceeds of life insurance policies as income, but this
is a very slight indication of legislative intention. In
reality, what the plaintiff received was in the nature of
an indemnity for the loss which it actually suffered
because of the death of its manager.
To quote the exact words in the cited case of Chief
Justice Taft delivering the opinion of the court:
It is earnestly pressed upon us that proceeds
of life insurance paid on the death of the
insured are in fact capital, and cannot be
taxed as income … that proceeds of a life
insurance policy paid on the death of the
insured are not usually classed as income.
Considering, therefore, the purport of the stipulated
facts, considering the uncertainty of Philippine law,
and considering the lack of express legislative
policy in question as representing an indemnity and
not taxable income.
NOTE: Guys, wala guy gidiscuss sa case bahin sa
Insurable Interest. I checked the book, mao ni akong
nakita ra didto nga nakacite ni nga case:
It is generally held that a corporation has an insurable
interest in the life of an officer on whose services the
corporation depends for its prosperity, and whose
death will be the cause of a substantial pecuniary loss
to it.
3. VIOLETA R. LALICAN, Petitioner, - versus - THE
INSULAR LIFE ASSURANCE COMPANY LIMITED,
AS REPRESENTED BY THE PRESIDENT VICENTE
R. AVILON, Respondent.
Facts: During his lifetime, Eulogio applied for an
insurance policy with Insular Life. On 24 April 1997,
Insular Life, through its agent, Malaluan, issued in
favor of Eulogio an insurance policy which contained
a 20-Year Endowment Variable Income Package Flexi
Plan worth P500,000.00, with two riders valued at
P500,000.00 each. Thus, the value of the policy
amounted to P1,500,000.00. Violeta was named as
the primary beneficiary.
Under the terms of the said policy, Eulogio was to pay
the premiums on a quarterly basis in the amount of
P8,062.00, payable every 24 April, 24 July, 24
October and 24 January of each year, until the end of
the 20-year period of the policy. According to the
Policy Contract, there was a grace period of 31 days
for the payment of each premium subsequent to the
first. If any premium was not paid on or before the due
date, the policy would be in default, and if the
premium remained unpaid until the end of the grace
period, the policy would automatically lapse and
become void.
Eulogio paid the premiums due on 24 July 1997 and
24 October 1997. However, he failed to pay the
premium due on 24 January 1998, even after the
lapse of the grace period of 31 days. Policy No.
9011992, therefore, lapsed and became void.
Eulogio submitted to Insular Life an application for
reinstatement for the said policy, together with the
payment for the premium due on 24 January 1998.
Insular Life notified Eulogio that his application could
not be fully processed because he left unpaid the
overdue interest thereon. Thus, Insular Life instructed
Eulogio to pay the amount of interest and to file
another application for reinstatement; and to pay the
premiums that subsequently became due on 24 April
1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluan’s
house and submitted a second Application for
Reinstatement of the said Policy, including the
amount of P17,500.00, representing payments for the
Malaluan forwarded Eulogio’s second application on
18 September 1998. However, upon knowing of
Eulogio’s death, Insular life no longer acted upon the
said application.
On 28 September 1998, Violeta, Eulogio’s widow,
filed with Insular Life a claim for payment of the full
proceeds of the Policy.
In a letter, Insular Life informed Violeta that her claim
could not be granted since, at the time of Eulogios
death, the said Policy had already lapsed, and
Eulogio failed to reinstate the same. According to the
application, the policy would only be considered
reinstated upon approval of the application by Insular
Life during the applicants’ lifetime and good health,
and whatever amount the applicant paid in connection
thereto was considered to be a deposit only until
approval of said application. Enclosed with the said
letter was a check, drawn in Violeta’s favour,
representing the full refund of the payments made by
Eulogio on the Policy. Subsequently, it agreed to re-
evaluate Violeta’s claim.
However, without waiting for the result of the re-
evaluation by Insular Life, Violeta filed with the RTC a
Complaint for Death Claim Benefit.
The RTC, taking into account the clear provisions of
the Policy Contract between Eulogio and Insular Life
and the Application for Reinstatement Eulogio
subsequently signed and submitted to Insular Life,
held that Eulogio was not able to fully comply with the
requirements for the reinstatement.
Issue: whether Eulogio was able to reinstate the
lapsed insurance policy on his life before his death on
17 September 1998.
Ruling: No. Policy No. 9011992 had lapsed and
become void on 24 February 1998, upon the
expiration of the 31-day grace period for payment of
the premium, which fell due on 24 January 1998,
without any payment having been made.
Eulogio’s filing of his first Application for
Reinstatement with Insular Life constitutes an
admission that Policy No. 9011992 had lapsed by
then. Insular Life did not act on Eulogio’s first
Application for Reinstatement, since the amount
Eulogio simultaneously deposited was sufficient to
cover only the P8,062.00 overdue premium for 24
January 1998, but not the P322.48 overdue interests
thereon. On 17 September 1998, Eulogio submitted a
second Application for Reinstatement to Insular Life,
again through Malaluan, depositing at the same
time P17,500.00, to cover payment for the overdue
interest on the premium for 24 January 1998, and the
premiums that had also become due on 24 April
1998 and 24 July 1998. On the very same day,
Eulogio passed away.
In the instant case, Eulogios death rendered
impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True, Eulogio,
before his death, managed to file his Application for
Reinstatement and deposit the amount for payment of
his overdue premiums and interests thereon with
Malaluan; but the Policy could only be considered
reinstated after the Application for Reinstatement had
been processed and approved by Insular
Life during Eulogio’s lifetime and good health.
The conditions for reinstatement under the Policy
Contract and Application for Reinstatement were
written in clear and simple language, which could not
admit of any meaning or interpretation other than
those that they so obviously embody. Violeta did not
adduce any evidence that Eulogio might have failed to
fully understand the import and meaning of the
provisions of his Policy Contract and/or Application for
Reinstatement, both of which he voluntarily signed.
While it is a cardinal principle of insurance law that a
policy or contract of insurance is to be construed
liberally in favor of the insured and strictly as against
the insurer company, yet, contracts of insurance, like
other contracts, are to be construed according to the
sense and meaning of the terms, which the parties
themselves have used.
Policy No. 9011992 remained lapsed and void, not
having been reinstated in accordance with the Policy
Contract and Application for Reinstatement before
Eulogios death. Violeta, therefore, cannot claim any
death benefits from Insular Life on the basis of Policy
No. 9011992; but she is entitled to receive the full
refund of the payments made by Eulogio thereon.
4. HILARIO GERCIO, plaintiff-appellee, vs. SUN LIFE
ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
The question of first impression in the law of life
insurance to be here decided is whether the insured
— the husband — has the power to change the
beneficiary — the former wife — and to name instead
his actual wife, where the insured and the beneficiary
have been divorced and where the policy of insurance
does not expressly reserve to the insured the right to
change the beneficiary. Although the authorities have
been exhausted, no legal situation exactly like the one
before us has been encountered.
ESSENTIAL FACTS:
Insured: Hilario Gercio
Insurer: SUN LIFE ASSURANCE OF CANADA
Beneficiary: Andrea Zialcita, former wife of Insured
1. the Sun Life Assurance Co. of Canada issued
insurance on the life of Hilario Gercio. The
policy was what is known as a twenty-year
endowment policy. By its terms, the insurance
company agreed to insure the life of Hilario
 2. The policy did not include any provision
reserving to the insured the right to change
the beneficiary.
3. On the date the policy was issued, Andrea
Zialcita was the lawful wife of Hilario Gercio.
Towards the end of the year 1919, she was
convicted of the crime of adultery. On
September 4, 1920, a decree of divorce was
issued in civil case no. 17955, which had the
effect of completely dissolving the bonds of
matrimony contracted by Hilario Gercio and
Andrea Zialcita.
4. On March 4, 1922, Hilario Gercio formally
notified the Sun Life Assurance Co. of
Canada that he had revoked his donation in
favor of Andrea Zialcita, and that he had
designated in her stead his present wife,
Adela Garcia de Gercio, as the beneficiary of
the policy. Gercio requested the insurance
company to eliminate Andrea Zialcita as
beneficiary. This, the insurance company has
refused and still refuses to do.
Issue:
1. Should the insurance contract, whereby the
husband names the wife as the beneficiary,
be denominated a donation inter vivos, a
donation causa mortis, a contract in favor of a
third person, or an aleatory contract?
2. Won the insured — the husband — has the
power to change the beneficiary — the former
wife — and to name instead his actual wife,
where the insured and the beneficiary have
been divorced and where the policy of
insurance does not expressly reserve to the
insured the right to change the beneficiary.
Ruling:
1. The subject is further complicated by the fact
that if an insurance contract should be
considered a donation, a husband may then
never insure his life in favor of his wife
and vice versa, inasmuch as article 1334
prohibits all donations between spouses
during marriage. It would seem, therefore,
that this court was right when in the case
of Del Val vs. Del Val ([1915]), 29 Phil., 534),
it declined to consider the proceeds of the
insurance policy as a donation or gift, saying
"the contract of life insurance is a special
contract and the destination of the proceeds
thereof is determined by special laws which
deal exclusively with that subject. The Civil
Code has no provisions which relate directly
and specifically to life-insurance contracts or
to the destination of life-insurance proceeds. .
. ." Some satisfaction is gathered from the
perplexities of the Louisiana Supreme Court,
2. On the admitted facts and the authorities
supporting the nearly universally accepted
principles of insurance, we are irresistibly led
to the conclusion that the question at issue
must be answered in the negative.
The wife has an insurable interest in the life of
her husband. The beneficiary has an absolute
vested interest in the policy from the date of
its issuance and delivery. So when a policy of
life insurance is taken out by the husband in
which the wife is named as beneficiary, she
has a subsisting interest in the policy. And
this applies to a policy to which there are
attached the incidents of a loan value, cash
surrender value, an automatic extension by
premiums paid, and to an endowment policy,
as well as to an ordinary life insurance policy.
If the husband wishes to retain to himself the
control and ownership of the policy he may so
provide in the policy. But if the policy contains
no provision authorizing a change of
beneficiary without the beneficiary's consent,
the insured cannot make such change.
Accordingly, it is held that a life insurance
policy of a husband made payable to the wife
as beneficiary, is the separate property of the
beneficiary and beyond the control of the
husband.
As to the effect produced by the divorce, the
Philippine Divorce Law, Act No. 2710, merely
provides in section 9 that the decree of
divorce shall dissolve the community property
as soon as such decree becomes final. Unlike
the statutes of a few jurisdictions, there is no
provision in the Philippine Law permitting the
beneficiary in a policy for the benefit of the
wife of the husband to be changed after a
divorce. It must follow, therefore, in the
absence of a statute to the contrary, that if a
policy is taken out upon a husband's life the
wife is named as beneficiary therein, a
subsequent divorce does not destroy her
rights under the policy.
Somewhat the same question came before the
Supreme Court of Kansas in the leading case of Filley
vs. Illinois Life Insurance Company ([1914]), 91
Kansas, 220; L.R.A. [1915 D], 130). It was held,
following consideration extending to two motions for
rehearing, as follows:
The benefit accruing from a policy of life
insurance upon the life of a married man,
payable upon his death to his wife, naming
her, is payable to the surviving beneficiary
named, although she may have years
thereafter secured a divorce from her
and can thereafter, during the life of the beneficiary,
be defeated only as provided by the terms of the
policy
5. Spouses NILO CHA and STELLA UY CHA, and
UNITED INSURANCE CO., INC., petitioners, vs.
COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
INSURED: Merchandise and goods
INSURANCE: United Insurance Co
BENEFICIARY: CKS Development Corporation
FACTS: Petitioner-spouses Nilo Cha and Stella Uy-
Cha, as lessees, entered into a lease contract with
private respondent CKS Development Corporation
(CKS), as lessor. One of the stipulations of the one
year lease contract states is that the lessee shall not
insure against fire the, merchandise and goods placed
in the leased premises without first obtaining the
written consent and approval of the LESSOR and if
the LESSEE obtain the insurance thereof without the
consent of the LESSOR then the policy is deemed
assigned and transferred to the LESSOR for its own
benefit. Notwithstanding such stipulation in the lease
contract, the Cha spouses insured against loss by fire
the merchandise inside the leased premises for Php
500,000.00 with the United Insurance Co., Inc.
(United) without the written consent of private
respondent CKS. On the day that the lease contract
was to expire, fire broke out inside the leased
premises.
When CKS learned of the insurance earlier procured
by the Cha spouses, it wrote the insurer (United) a
demand letter asking that the proceeds of the
insurance contract be paid directly to CKS, based on
its lease contract with the Cha spouses. However,
United refused to pay CKS. The latter filed a
complaint against the Cha spouses and United to
which the RTC rendered a decision in favor of CKS.
ISSUE: Whether or not CKS, the lessor, has insurable
interest in the goods and merchandise inside the
leased premises.
RULING: No, the lessor has no insurable interest over
the goods and merchandise inside the leased
premises.
A non-life insurance policy such as the fire insurance
policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity.
Insurable interest in the property insured must exist at
the time the insurance takes effect and at the time the
loss occurs. The basis of such requirement of
insurable interest in property insured is based on
sound public policy: to prevent a person from taking
out an insurance policy on property upon which he
has no insurable interest and collecting the proceeds
of said policy in case of loss of the property.
Section 17 of the Insurance Code provides:
Therefore, respondent CKS cannot, under the
Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This
insurable interest over said merchandise remains with
the insured, the Cha spouses. The automatic
assignment of the policy to CKS under the provision
of the lease contract previously quoted is void for
being contrary to law and/or public policy. The
proceeds of the fire insurance policy thus rightfully
belong to the spouses Nilo Cha and Stella Uy-Cha
(herein co-petitioners). The insurer (United) cannot be
compelled to pay the proceeds of the fire insurance
policy to a person (CKS) who has no insurable
interest in the property insured.
6. VICENTE ONG LIM SING, JR., petitioner, vs.
FEB LEASING & FINANCE CORPORATION,
respondent.
Facts: On March 9, 1995, FEB entered into a lease of
equipment and motor vehicles with JVL Food
Products (JVL). On the same date, Vicente executed
an Individual Guaranty Agreement with FEB to
guarantee the prompt and faithful performance of the
terms and conditions of the aforesaid lease
agreement. Under the contract, JVL was obliged to
pay FEB an aggregate gross monthly rental of
P170,494.00.
JVL defaulted in the payment of the monthly rentals.
As of July 31, 2000, the amount in arrears, including
penalty charges and insurance premiums, amounted
to P3,414,468.75. On August 23, 2000, FEB sent a
letter to JVL demanding payment of the said amount.
However, JVL failed to pay.
On December 6, 2000, FEB filed a Complaint with the
RTC of Manila for sum of money, damages, and
replevin against JVL, Lim, and John Doe.
JVL and Lim admitted the existence of the lease
agreement but asserted that it is in reality a sale of
equipment on installment basis, with FEB acting as
the financier. JVL and Lim claimed that this intention
was apparent from the fact that they were made to
believe that when full payment was effected, a Deed
of Sale will be executed by FEB as vendor in favor of
JVL and Lim as vendees. FEB purportedly assured
them that documenting the transaction as a lease
agreement is just an industry practice and that the
proper documentation would be effected as soon as
full payment for every item was made.
The trial court stated, among others, that if JVL and
Lim (then defendants) were to be regarded as only a
lessee, logically the lessor who asserts ownership will
be the one directly benefited or injured and therefore
the lessee is not supposed to be the assured as he
has no insurable interest.
ISSUE: Whether or not petitioner has an insurable
interest in the equipment and motor vehicles leased.
RULING: Yes.
The stipulation in Section 14 of the leased contract,
that the equipment shall be insured at the cost and
expense of the lessee against loss, damage, or
destruction from fire, theft, accident, or other insurable
risk for the full term of the lease, is a binding and valid
stipulation. Petitioner, as a lessee, has an insurable
interest in the equipment and motor vehicles leased.
Section 17 of the Insurance Code provides that the
measure of an insurable interest in property is the
extent to which the insured might be damnified by loss
or injury thereof. It cannot be denied that JVL will be
directly damnified in case of loss, damage, or
destruction of any of the properties leased.
7. ORIENTAL ASSURANCE
CORPORATION, petitioner,
vs. COURT OF APPEALS AND PANAMA SAW
MILL CO., INC., respondents.
ESSENTIAL FACTS:
Insured: Panama Sawmill Co., Inc
Insurer: Oriental Assurance Corporation
Carrier: Transpacific Towage, Inc
Amount insured: P1-M
1. private respondent Panama Sawmill Co., Inc.
(Panama) bought, in Palawan, 1,208 pieces
of apitong logs, with a total volume of 2,000
cubic meters. It hired Transpacific Towage,
Inc., to transport the logs by sea to Manila
and insured it against loss for P1-M with
petitioner Oriental Assurance Corporation
(Oriental Assurance).
2. There is a claim by Panama, however, that
the insurance coverage should have been for
P3-M were it not for the fraudulent act of one
Benito Sy Yee Long to whom it had entrusted
the amount of P6,000.00 for the payment of
the premium for a P3-M policy.
3. Oriental Assurance Warranted that this
Insurance is against TOTAL LOSS ONLY.
4. The logs were loaded on two (2) barges. But,
as fate would have it, during the voyage,
rough seas and strong winds caused damage
to Barge resulting in the loss of 497 pieces of
logs out of the 598 pieces loaded thereon.
5. Panama demanded payment for the loss but
Oriental Assurance refuse on the ground that
its contracted liability was for "TOTAL LOSS
ONLY."
Issue: whether or not Oriental Assurance can be held
liable under its marine insurance policy based on the
theory of a divisible contract of insurance and,
consequently, a constructive total loss.
The terms of the contract constitute the measure of
the insurer liability and compliance therewith is a
condition precedent to the insured's right to recovery
from the insurer (Perla Compania de Seguros, Inc. v.
Court of Appeals, G.R. No. 78860, May 28, 1990, 185
SCRA 741). Whether a contract is entire or severable
is a question of intention to be determined by the
language employed by the parties. The policy in
question shows that the subject matter insured was
the entire shipment of 2,000 cubic meters of apitong
logs. The fact that the logs were loaded on two
different barges did not make the contract several and
divisible as to the items insured. The logs on the two
barges were not separately valued or separately
insured. Only one premium was paid for the entire
shipment, making for only one cause or consideration.
The insurance contract must, therefore, be considered
indivisible.
More importantly, the insurer's liability was for "total
loss only." A total loss may be either actual or
constructive (Sec. 129, Insurance Code). An actual
total loss is caused by:
(a) A total destruction of the thing
insured;
(b) The irretrievable loss of the thing
by sinking, or by being broken up;
(c) Any damage to the thing which
renders it valueless to the owner for
the purpose for which he held it; or
(d) Any other event which effectively
deprives the owner of the possession,
at the port of destination, of the thing
insured. (Section 130, Insurance
Code).
A constructive total loss is one which gives to a
person insured a right to abandon, under Section 139
of the Insurance Code. This provision reads:
SECTION 139. A person insured by a
contract of marine insurance may
abandon the thing insured, or any
particular portion thereof separately
valued by the policy, or otherwise
separately insured, and recover for a
total loss thereof, when the cause of
the loss is a peril injured against,
(a) If more than three-fourths thereof
in value is actually lost, or would have
to be expended to recover it from the
peril;
(b) If it is injured to such an extent as
to reduce its value more than three-
fourths;
xxx xxx xxx
as separate from the logs in the other. Thus, it
concluded that the loss of 497 pieces of logs from
barge TPAC-1000, mathematically speaking, is more
than three-fourths (¾) of the 598 pieces of logs
loaded in that barge and may, therefore, be
considered as constructive total loss.

The basis thus used is, in our opinion, reversible

error. The requirements for the application of Section
139 of the Insurance Code, quoted above, have not
been met. The logs involved, although placed in two
barges, were not separately valued by the policy, nor
separately insured. Resultantly, the logs lost in barge
TPAC-1000 in relation to the total number of logs
loaded on the same barge can not be made the basis
for determining constructive total loss. The logs
having been insured as one inseparable unit, the
correct basis for determining the existence of
constructive total loss is the totality of the shipment of
logs. Of the entirety of 1,208, pieces of logs, only 497
pieces thereof were lost or 41.45% of the entire
shipment. Since the cost of those 497 pieces does not
exceed 75% of the value of all 1,208 pieces of logs,
the shipment can not be said to have sustained a
constructive total loss under Section 139(a) of the
Insurance Code.

In the absence of either actual or constructive total

loss, there can be no recovery by the insured Panama
against the insurer, Oriental Assurance.