INSURANCE CASES:

[G.R. No. 125678. March 18, 2002.]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS

and JULITA TRINOS, respondents.

Alvin B. Cunada for petitioner.

Ronald O. Layawen for private respondent.

SYNOPSIS

Ernani Trinos, deceased husband of respondent Julita Trinos, was issued a Health
Care Agreement for a health coverage with petitioner. During the period of his
coverage, he suffered a heart attack and was confined in the hospital. Respondent
tried to claim the benefits under the health care agreement, but petitioner denied her
claim. Thus, respondent paid the hospitalization expenses herself.

Respondent then filed with the RTC an action for damages against petitioner and its
president, Dr. Benito Reverente. The court ruled in favor of Julita and awarded
damages. On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente. Hence, petitioner
brought the instant petition for review, raising the primary argument that a health care
agreement is not an insurance contract. IAaCST

In affirming the decision of the Court of Appeals, the Supreme Court ruled that an
insurance contract exists when the following elements concur: (1) the insured has an
insurable interest; (2) the insured is subject to a risk of loss by the happening of the
designated peril; (3) the insurer assumes the risk; (4) such assumption of risk is part of
a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and (5) in consideration of the insurer's promise, the insured pays a
premium.

The health care agreement was in the nature of a non-life insurance, which is
primarily a contract of indemnity.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE LAW; CONTRACT OF

INSURANCE; DEFINED. — 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. aSIDCT
2. ID.; ID.; ID.; ELEMENTS. — An insurance contract exists where the
following elements concur: 1. The insured has an insurable interest; 2. The insured is
subject to a risk of loss by the happening of the designated peril; 3. The insurer
assumes the risk; 4. Such assumption of risk is part of a general scheme to distribute
actual losses among a large group of persons bearing a similar risk; and 5. In
consideration of the insurer's promise, the insured pays a premium.

3. ID.; ID.; ID.; INSURABLE INTEREST, CONSTRUED; CASE AT BAR. —

Section 3 of the Insurance Code states that any contingent or unknown event, whether
past or future, which may damnify a person having an insurable interest against him,
may be insured against. Every person has an insurable interest in the life and health of
himself. Section 10 provides: "Every person has an insurable interest in the life and
health: (1) of himself, of his spouse and of his children; (2) of any person on whom he
depends wholly or in part for education or support, or in whom he has a pecuniary
interest; (3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or prevent the
performance; and (4) of any person upon whose life any estate or interest vested in
him depends." In the case at bar, the insurable interest of respondent's husband in
obtaining the health care agreement was his own health. The health care agreement
was in the nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the same to
the extent agreed upon under the contract.

4. ID.; ID.; ID.; CONCEALMENT; AVOIDS A POLICY; EXCEPTION; CASE

AT BAR. — The answer assailed by petitioner was in response to the question
relating to the medical history of the applicant. This largely depends on opinion rather
than fact, especially coming from respondent's husband who was not a medical
doctor. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are untrue.
Thus, "(A)lthough false, a representation of the expectation, intention, belief, opinion,
or judgment of the insured will not avoid the policy if there is no actual fraud in
inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and
this is likewise the rule although the statement is material to the risk, if the statement
is obviously of the foregoing character, since in such case the insurer is not justified in
relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and
intentionally states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the facts
within his knowledge, since in such case the intent to deceive the insurer is obvious
and amounts to actual fraud." CAacTH

5. ID.; ID.; ID.; ID.; MUST BE ESTABLISHED BY SATISFACTORY AND

CONVINCING EVIDENCE BY INSURER. — The fraudulent intent on the part of
the insured must be established to warrant rescission of the insurance contract.
Concealment as a defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the provider or insurer.

6. ID.; ID.; ID.; HEALTH CARE AGREEMENT; HEALTH CARE

PROVIDER, WHEN LIABLE; CASE AT BAR. — In any case, with or without the
authority to investigate, petitioner is liable for claims made under the contract. Having
assumed a responsibility under the agreement, petitioner is bound to answer the same
to the extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement or
whenever he avails of the covered benefits which he has prepaid.

7. ID.; ID.; ID.; RESCISSION OF; CONDITIONS; NOT FULFILLED IN

CASE AT BAR. — Under Section 27 of the Insurance Code, "a concealment entitles
the injured party to rescind a contract of insurance." The right to rescind should be
exercised previous to the commencement of an action on the contract. In this case, no
rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions: 1. Prior notice
of cancellation to insured; 2. Notice must be based on the occurrence after effective
date of the policy of one or more of the grounds mentioned; 3. Must be in writing,
mailed or delivered to the insured at the address shown in the policy; 4. Must state the
grounds relied upon provided in Section 64 of the Insurance Code and upon request of
insured, to furnish facts on which cancellation is based. None of the above pre-
conditions was fulfilled in this case.

8. ID.; ID.; ID.; TERMS AND PHRASEOLOGY CONTAINED THEREIN

MUST BE STRICTLY INTERPRETED AGAINST THE INSURER AND
LIBERALLY IN FAVOR OF THE INSURED; CASE AT BAR. — When the terms
of insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation. Being
a contract of adhesion, the terms of an insurance contract are to be construed strictly
against the party which prepared the contract — the insurer. By reason of the
exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. This is equally
applicable to Health Care Agreements. The phraseology used in medical or hospital
service contracts, such as the one at bar, must be liberally construed in favor of the
subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of
doubtful import should be strictly construed against the provider. HScDIC
[G.R. No. 92492. June 17, 1993.]

THELMA VDA. DE CANILANG, petitioner, vs. HON. COURT OF APPEALS and

GREAT PACIFIC LIFE INSURANCE CORPORATION, respondents.

Simeon C. Sato for petitioner.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE; CONCEALMENT; MATERIALITY;

DEFINED. — The relevant statutory provisions as they stood at the time Great
Pacific issued the contract of insurance and at the time Jaime Canilang died, are set
out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into
effect on 11 June 1978. These provisions read as follows: "Sec. 26. A neglect to
communicate that which a party knows and ought to communicate, is called a
concealment." . . . Sec. 28. Each party to a contract of insurance must communicate to
the other, in good faith, all factors within his knowledge which are material to the
contract and as to which he makes no warranty, and which the other has not the means
of ascertaining." Under the foregoing provisions, the information concealed must be
information which the concealing party knew and "ought to [have] communicate[d],"
that is to say, information which was "material to the contract." The test of materiality
is contained in Section 31 of the Insurance Code of 1978 which reads: "Sec. 31.
Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his
inquiries."

2. ID.; ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. — We agree with
the Court of Appeals that the information which Jaime Canilang failed to disclose was
material to the ability of Great Pacific to estimate the probable risk he presented as a
subject of life insurance. Had Canilang disclosed his visits to his doctor, the diagnosis
made and the medicines prescribed by such doctor, in the insurance application, it
may be reasonably assumed that Great Pacific would have made further inquiries and
would have probably refused to issue a non-medical insurance policy or, at the very
least, required a higher premium for the same coverage. The materiality of the
information withheld by Great Pacific did not depend upon the state of mind of Jaime
Canilang. A man's state of mind or subjective belief is not capable of proof in our
judicial process, except through proof of external acts or failure to act from which
inferences as to his subjective belief may be reasonably drawn. Neither does
materiality depend upon the actual or physical events which ensue. Materiality relates
rather to the "probable and reasonable influence of the facts" upon the party to whom
the communication should have been made, in assessing the risk involved in making
or omitting to make further inquiries and in accepting the application for insurance;
that "probable and reasonable influence of the facts" concealed must, of course, be
determined objectively, by the judge ultimately.

3. ID.; ID.; ID.; REMEDY, WHEN AVAILABLE. — In 1985, the Insurance

Code of 1978 was amended by B.P. Blg. 874. This subsequent statute modified
Section 27 of the Insurance Code of 1978 so as to read as follows: "Sec. 27. A
concealment whether intentional or unintentional entitles the injured party to rescind a
contract of insurance." Section 27 of the Insurance Code of 1978 is properly read as
referring to "any concealment" without regard to whether such concealment is
intentional or unintentional. The phrase "whether intentional or unintentional" was in
fact superfluous. The deletion of the phrase "whether intentional or unintentional"
could not have had the effect of imposing an affirmative requirement that a
concealment must be intentional if it is to entitle the injured party to rescind a contract
of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase "whether
intentional or unintentional" merely underscored the fact that all throughout (from
1914 to 1985), the statute did not require proof that concealment must be "intentional"
in order to authorize rescission by the injured party. In any case, in the case at bar, the
nature of the facts not conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely inadvertent. For Jaime
Canilang could not have been unaware that his hear beat would at times rise to high
and alarming levels and that he had consulted a doctor twice in the two (2) months
before applying for non-medical insurance. Indeed, the last medical consultation took
place just the day before the insurance application was filed. In all probability, Jaime
Canilang went to visit his doctor precisely because of the discomfort and concern
brought about by his experiencing "sinus tachycardia."

DECISION

FELICIANO, J p:

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was
diagnosed as suffering from "sinus tachycardia." The doctor prescribed the following
for him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang
consulted the same doctor again on 3 August 1982 and this time was found to have
"acute bronchitis." LibLex

On the next day, 4 August 1982, Jaime Canilang applied for a "non-medical"
insurance policy with respondent Great Pacific Life Assurance Company ("Great
Pacific") naming his wife, petitioner Thelma Canilang, as his beneficiary. 1 Jaime
Canilang was issued ordinary life insurance Policy No. 345163, with the face value of
P19,700, effective as of 9 August 1982.

On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and
"chronic anemia." 2 Petitioner, widow and beneficiary of the insured, filed a claim
with Great Pacific which the insurer denied on 5 December 1983 upon the ground that
the insured had concealed material information from it.

Petitioner then filed a complaint against Great Pacific with the Insurance Commission
for recovery of the insurance proceeds. During the hearing called by the Insurance
Commissioner, petitioner testified that she was not aware of any serious illness
suffered by her late husband 3 and that, as far as she knew, her husband had died
because of a kidney disorder. 4 A deposition given by Dr. Wilfredo Claudio was
presented by petitioner. There Dr. Claudio stated that he was the family physician of
the deceased Jaime Canilang 5 and that he had previously treated him for "sinus
tachycardia" and "acute bronchitis." 6 Great Pacific for its part presented Dr.
Esperanza Quismorio, a physician and a medical underwriter working for Great
Pacific 7 She testified that the deceased's insurance application had been approved on
the basis of his medical declaration. 8 She explained that as a rule, medical
examinations are required only in cases where the applicant has indicated in his
application for insurance coverage that he has previously undergone medical
consultation and hospitalization. 9

In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo

ordered Great Pacific to pay P19,700.00 plus legal interest and P2,000.00 as attorney's
fees after holding that:

1. the ailment of Jaime Canilang was not so serious that, even if it had been
disclosed, it would not have affected Great Pacific's decision to insure him;

2. Great Pacific had waived its right to inquire into the health condition of the
applicant by the issuance of the policy despite the lack of answers to "some of the
pertinent questions" in the insurance application;

3. there was no intentional concealment on the part of the insured Jaime Canilang
as he had thought that he was merely suffering from a minor ailment and simple cold;
10 and

4. Batas Pambansa Blg. 874 which voids an insurance contract, whether or not
concealment was intentionally made, was not applicable to Canilang's case as that law
became effective only on 1 June 1985.

On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision
of the Insurance Commissioner and dismissed Thelma Canilang's complaint and Great
Pacific's counterclaim. The Court of Appeals found that the use of the word
"intentionally" by the Insurance Commissioner in defining and resolving the issue
agreed upon by the parties at pre-trial before the Insurance Commissioner was not
supported by the evidence; that the issue agreed upon by the parties had been whether
the deceased insured, Jaime Canilang, made a material concealment as to the state of
his health at the time of the filing of insurance application, justifying respondent's
denial of the claim. The Court of Appeals also found that the failure of Jaime
Canilang to disclose previous medical consultation and treatment constituted material
information which should have been communicated to Great Pacific to enable the
latter to make proper inquiries. The Court of Appeals finally held that the Ng Gan Zee
case which had involved misrepresentation was not applicable in respect of the case at
bar which involves concealment. LexLib

Petitioner Thelma Canilang is now before this Court on a Petition for Review on
Certiorari alleging that:

"1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not
holding that the issue in the case agreed upon between the parties before the Insurance
Commission is whether or not Jaime Canilang `intentionally' made material
concealment in stating his state of health;

2. . . . at any rate, the non-disclosure of certain facts about his previous health
conditions does not amount to fraud and private respondent is deemed to have waived
inquiry thereto." 11

The medical declaration which was set out in the application for insurance executed
by Jaime Canilang read as follows:

"MEDICAL DECLARATION

`I hereby declare that:

(1) I have not been confined in any hospital, sanitarium or infirmary, nor received
any medical or surgical advice/attention within the last five (5) years.

(2) I have never been treated nor consulted a physician for a heart condition, high
blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical
impairment.

(3) I am, to the best of my knowledge, in good health.

EXCEPTIONS:

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_

GENERAL DECLARATION

I hereby declare that all the foregoing answers and statements are complete, true and
correct. I hereby agree that if there be any fraud or misrepresentation in the above
statements material to the risk, the INSURANCE COMPANY upon discovery within
two (2) years from the effective date of insurance shall have the right to declare such
insurance null and void. That the liabilities of the Company under the said
Policy/TA/Certificate shall accrue and begin only from the date of commencement of
risk stated in the Policy/TA/Certificate, provided that the first premium is paid and the
Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in
actual good health.

Signed at Manila this 4th day of August, 1992.

Illegible

__________________________

Signature of Applicant." 12

We note that in addition to the negative statements made by Mr. Canilang in

paragraphs 1 and 2 of the medical declaration, he failed to disclose in the appropriate
space, under the caption "Exceptions," that he had twice consulted Dr. Wilfredo B.
Claudio who had found him to be suffering from "sinus tachycardia" and "acute
bronchitis."

The relevant statutory provisions as they stood at the time Great Pacific issued the
contract of insurance and at the time Jaime Canilang died, are set out in P.D. No.
1460, also known as the Insurance Code of 1978, which went into effect on 11 June
1978. These provisions read as follows:

"Sec. 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment."

xxx xxx xxx

Sec. 28. Each party to a contract of insurance must communicate to the other, in
good faith, all factors within his knowledge which are material to the contract and as
to which he makes no warranty, and which the other has not the means of
ascertaining." (Emphases supplied)
Under the foregoing provisions, the information concealed must be information which
the concealing party knew and "ought to [have] communicate[d]," that is to say,
information which was "material to the contract." The test of materiality is contained
in Section 31 of the Insurance Code of 1978 which reads:

"Sec. 31. Materiality is to be determined not by the event, but solely by the
probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the disadvantages of the proposed
contract, or in making his inquiries." (Emphases supplied)

"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per
minute." 13 The symptoms of this condition include pounding in the chest and
sometimes faintness and weakness of the person affected. The following elaboration
was offered by Great Pacific and set out by the Court of Appeals in its Decision:

"Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per
minute. (Harrison's Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is,
among others, a common reaction to hear disease, including myocardial infarction,
and heart failure per se. (Henry J.L. Marriot, M.D., Electrocardiograph, 6th ed.
[1977], p. 127.) The medication prescribed by Dr. Claudio for treatment of Canilang's
ailment on June 18, 1982, indicates the condition that said physician was trying to
manage. Thus, he prescribed Trazepam, (Philippine Index of Medical Specialties
(PIMS), Vol. 14, No. 3, Dec. 1985, p. 112.) which is anti-anxiety, anti-convulsant,
muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous
heart. Such treatment could have been a very material information to the insurer in
determining the action to be taken on Canilang's application for life insurance
coverage." 14

We agree with the Court of Appeals that the information which Jaime Canilang failed
to discloses was material to the ability of Great Pacific to estimate the probable risk
he presented as a subject of life insurance. Had Canilang disclosed his visits to his
doctor, the diagnosis made and the medicines prescribed by such doctor, in the
insurance application, it may be reasonably assumed that Great Pacific would have
made further inquiries and would have probably refused to issue a non-medical
insurance policy or, at the very least, required a higher premium for the same
coverage. 15 The materiality of the information withheld by Great Pacific did not
depend upon the state of mind of Jaime Canilang. A man's state of mind or subjective
belief is not capable of proof in our judicial process, except through proof of external
acts or failure to act from which inferences as to his subjective belief may be
reasonably drawn. Neither does materiality depend upon the actual or physical events
which ensue. Materiality relates rather to the "probable and reasonable influence of
the facts" upon the party to whom the communication should have been made, in
assessing the risk involved in making or omitting to make further inquiries and in
accepting the application for insurance; that "probable and reasonable influence of the
facts" concealed must, of course, be determined objectively, by the judge ultimately.

The insurance Great Pacific applied for was a "non-medical" insurance policy. In
Saturnino v. Philippine-American Life Insurance Company, 16 this Court held that:

". . . if anything, the waiver of medical examination [in a non-medical insurance

contract] renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer takes into consideration
in deciding whether to issue the policy or not . . .." 17 (Emphases supplied)

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey
certain information to the insurer was not "intentional" in nature, for the reason that
Jaime Canilang believed that he was suffering from minor ailment like a common
cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985,
that is, throughout the time range material for present purposes, provided that:

"Sec. 27. A concealment entitles the injured party to rescind a contract of

insurance."

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

"Sec. 26. A concealment, whether intentional or unintentional, entitles the

injured party to rescind a contract of insurance." (Emphases supplied)

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P. Blg.
874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as
to read as follows:

"Sec. 27. A concealment whether intentional or unintentional entitles the injured

party to rescind a contract of insurance." (Emphases supplied).

The unspoken theory of the Insurance Commissioner appears to have been that by
deleting the phrase "intentional or unintentional," the Insurance Code of 1978 (prior
to its amendment by B.P. Blg. 874) intended to limit the kinds of concealment which
generate a right to rescind on the part of the injured party to "intentional
concealments." This argument is not persuasive. As a simple matter of grammar, it
may be noted that "intentional" and "unintentional" cancel each other out. The net
result therefore of the phrase "whether intentional or unintentional" is precisely to
leave unqualified the term "concealment." Thus, Section 27 of the Insurance Code of
1978 is properly read as referring to "any concealment" without regard to whether
such concealment is intentional or unintentional. The phrase "whether intentional or
unintentional" was in fact superfluous. The deletion of the phrase "whether intentional
or unintentional" could not have had the effect of imposing an affirmative
requirement that a concealment must be intentional if it is to entitle the injured party
to rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the
phrase "whether intentional or unintentional" merely underscored the fact that all
throughout (from 1914 to 1985), the statute did not require proof that concealment
must be "intentional" in order to authorize rescission by the injured party.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was
such that the failure to communicate must have been intentional rather than merely
inadvertent. For Jaime Canilang could not have been unaware that this heart beat
would at times rise to high and alarming levels and that he had consulted a doctor
twice in the two (2) months before applying for non-medical insurance. Indeed, the
last medical consultation took place just the day before the insurance application was
filed. In all probability, Jaime Canilang went to visit his doctor precisely because of
the discomfort and concern brought about by his experiencing "sinus tachycardia."

We find it difficult to take seriously the argument that Great Pacific had waived
inquiry into the concealment by issuing the insurance policy notwithstanding
Canilang's failure to set out answers to some of the questions in the insurance
application. Such failure precisely constituted concealment on the part of Canilang.
Petitioner's argument, if accepted, would obviously erase Section 27 from the
Insurance Code of 1978. llcd

It remains only to note that the Court of Appeals finding that the parties had not
agreed in the pretrial before the Insurance Commission that the relevant issue was
whether or not Jaime Canilang had intentionally concealed material information from
the insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself
dated 17 October 1984 and the Minutes of the Pre-trial Conference dated 15 October
1984, which "readily shows that the word `intentional' does not appear in the
statement or definition of the issue in the said Order and Minutes." 18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision
of the Court of Appeals dated 16 October 1989 in C.A-G.R. SP No. 08696 is hereby
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

[G.R. No. 186983. February 22, 2012.]

MA. LOURDES S. FLORENDO, petitioner, vs. PHILAM PLANS, INC., PERLA
ABCEDE and MA. CELESTE ABCEDE, respondents.

DECISION

ABAD, J p:

This case is about an insured's alleged concealment in his pension plan application of
his true state of health and its effect on the life insurance portion of that plan in case
of death. HDacIT

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive

pension plan with respondent Philam Plans, Inc. (Philam Plans) after some convincing
by respondent Perla Abcede. The plan had a pre-need price of P997,050.00, payable
in 10 years, and had a maturity value of P2,890,000.00 after 20 years. 1 Manuel
signed the application and left to Perla the task of supplying the information needed in
the application. 2 Respondent Ma. Celeste Abcede, Perla's daughter, signed the
application as sales counselor. 3

Aside from pension benefits, the comprehensive pension plan also provided life
insurance coverage to Florendo. 4 This was covered by a Group Master Policy that
Philippine American Life Insurance Company (Philam Life) issued to Philam Plans. 5
Under the master policy, Philam Life was to automatically provide life insurance
coverage, including accidental death, to all who signed up for Philam Plans'
comprehensive pension plan. 6 If the plan holder died before the maturity of the plan,
his beneficiary was to instead receive the proceeds of the life insurance, equivalent to
the pre-need price. Further, the life insurance was to take care of any unpaid premium
until the pension plan matured, entitling the beneficiary to the maturity value of the
pension plan. 7

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 8 to
Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time,
Manuel paid his quarterly premiums. 9

Eleven months later or on September 15, 1998, Manuel died of blood poisoning.
Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits
under her husband's plan. 10 Because Manuel died before his pension plan matured
and his wife was to get only the benefits of his life insurance, Philam Plans forwarded
her claim to Philam Life. 11

On May 3, 1999 Philam Plans wrote Lourdes a letter, 12 declining her claim. Philam
Life found that Manuel was on maintenance medicine for his heart and had an
implanted pacemaker. Further, he suffered from diabetes mellitus and was taking
insulin. Lourdes renewed her demand for payment under the plan 13 but Philam Plans
rejected it, 14 prompting her to file the present action against the pension plan
company before the Regional Trial Court (RTC) of Quezon City. 15 IEAacS

On March 30, 2006 the RTC rendered judgment, 16 ordering Philam Plans, Perla and
Ma. Celeste, solidarily, to pay Lourdes all the benefits from her husband's pension
plan, namely: P997,050.00, the proceeds of his term insurance, and P2,890,000.00
lump sum pension benefit upon maturity of his plan; P100,000.00 as moral damages,
and to pay the costs of the suit. The RTC ruled that Manuel was not guilty of
concealing the state of his health from his pension plan application.

On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, 17
holding that insurance policies are traditionally contracts uberrimae fidae or contracts
of utmost good faith. As such, it required Manuel to disclose to Philam Plans
conditions affecting the risk of which he was aware or material facts that he knew or
ought to know. 18

Issues Presented

The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing his illness
when he kept blank and did not answer questions in his pension plan application
regarding the ailments he suffered from;

2. Whether or not the CA erred in holding that Manuel was bound by the failure
of respondents Perla and Ma. Celeste to declare the condition of Manuel's health in
the pension plan application; and

3. Whether or not the CA erred in finding that Philam Plans' approval of

Manuel's pension plan application and acceptance of his premium payments
precluded it from denying Lourdes' claim.

Rulings of the Court

One. Lourdes points out that, seeing the unfilled spaces in Manuel's pension plan
application relating to his medical history, Philam Plans should have returned it to
him for completion. Since Philam Plans chose to approve the application just as it
was, it cannot cry concealment on Manuel's part. Further, Lourdes adds that Philam
Plans never queried Manuel directly regarding the state of his health. Consequently, it
could not blame him for not mentioning it. 19

But Lourdes is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuel's health. She forgets that since Philam Plans
waived medical examination for Manuel, it had to rely largely on his stating the truth
regarding his health in his application. For, after all, he knew more than anyone that
he had been under treatment for heart condition and diabetes for more than five years
preceding his submission of that application. But he kept those crucial facts from
Philam Plans. ACHEaI

Besides, when Manuel signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes from Philam
Plans. The pertinent portion of his representations and declarations read as follows:

I hereby represent and declare to the best of my knowledge that:

xxx xxx xxx

(c) I have never been treated for heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment in the
last five years.

(d) I am in good health and physical condition.

If your answer to any of the statements above reveal otherwise, please give details in
the space provided for:

Date of confinement : ___________________

Name of Hospital or Clinic : ___________________

Name of Attending Physician : ___________________

Findings : ___________________

Others: (Please specify) : ___________________

xxx xxx xxx. 20 (Emphasis supplied)

Since Manuel signed the application without filling in the details regarding his
continuing treatments for heart condition and diabetes, the assumption is that he has
never been treated for the said illnesses in the last five years preceding his application.
This is implicit from the phrase "If your answer to any of the statements above
(specifically, the statement: I have never been treated for heart condition or diabetes)
reveal otherwise, please give details in the space provided for." But this is untrue
since he had been on "Coumadin," a treatment for venous thrombosis, 21 and insulin,
a drug used in the treatment of diabetes mellitus, at that time. 22
Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent,
knew that Manuel had a pacemaker implanted on his chest in the 70s or about 20
years before he signed up for the pension plan. 23 But by its tenor, the responsibility
for preparing the application belonged to Manuel. Nothing in it implies that someone
else may provide the information that Philam Plans needed. Manuel cannot sign the
application and disown the responsibility for having it filled up. If he furnished Perla
the needed information and delegated to her the filling up of the application, then she
acted on his instruction, not on Philam Plans' instruction. cCESTA

Lourdes next points out that it made no difference if Manuel failed to reveal the fact
that he had a pacemaker implant in the early 70s since this did not fall within the five-
year timeframe that the disclosure contemplated. 24 But a pacemaker is an electronic
device implanted into the body and connected to the wall of the heart, designed to
provide regular, mild, electric shock that stimulates the contraction of the heart
muscles and restores normalcy to the heartbeat. 25 That Manuel still had his
pacemaker when he applied for a pension plan in October 1997 is an admission that
he remained under treatment for irregular heartbeat within five years preceding that
application.

Besides, as already stated, Manuel had been taking medicine for his heart condition
and diabetes when he submitted his pension plan application. These clearly fell within
the five-year period. More, even if Perla's knowledge of Manuel's pacemaker may be
applied to Philam Plans under the theory of imputed knowledge, 26 it is not claimed
that Perla was aware of his two other afflictions that needed medical treatments.
Pursuant to Section 27 27 of the Insurance Code, Manuel's concealment entitles
Philam Plans to rescind its contract of insurance with him.

Two. Lourdes contends that the mere fact that Manuel signed the application in blank
and let Perla fill in the required details did not make her his agent and bind him to her
concealment of his true state of health. Since there is no evidence of collusion
between them, Perla's fault must be considered solely her own and cannot prejudice
Manuel. 28

But Manuel forgot that in signing the pension plan application, he certified that he
wrote all the information stated in it or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program
described herein in accordance with the General Provisions set forth in this
application and hereby certify that the date and other information stated herein are
written by me or under my direction. . . . . 29 (Emphasis supplied)
Assuming that it was Perla who filled up the application form, Manuel is still bound
by what it contains since he certified that he authorized her action. Philam Plans had
every right to act on the faith of that certification.

Lourdes could not seek comfort from her claim that Perla had assured Manuel that the
state of his health would not hinder the approval of his application and that what is
written on his application made no difference to the insurance company. But,
indubitably, Manuel was made aware when he signed the pension plan application
that, in granting the same, Philam Plans and Philam Life were acting on the truth of
the representations contained in that application. Thus: SCEHaD

DECLARATIONS AND REPRESENTATIONS

xxx xxx xxx

I agree that the insurance coverage of this application is based on the truth of the
foregoing representations and is subject to the provisions of the Group Life Insurance
Policy issued by THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to
PHILAM PLANS, INC. 30 (Emphasis supplied)

As the Court said in New Life Enterprises v. Court of Appeals: 31

It may be true that . . . insured persons may accept policies without reading them, and
that this is not negligence per se. But, this is not without any exception. It is and was
incumbent upon petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a businessman since 1965
and the contract concerns indemnity in case of loss in his money-making trade of
which important consideration he could not have been unaware as it was precisely the
reason for his procuring the same. 32

The same may be said of Manuel, a civil engineer and manager of a construction
company. 33 He could be expected to know that one must read every document,
especially if it creates rights and obligations affecting him, before signing the same.
Manuel is not unschooled that the Court must come to his succor. It could reasonably
be expected that he would not trifle with something that would provide additional
financial security to him and to his wife in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuel's pension plan,
Lourdes points out that any defect or insufficiency in the information provided by his
pension plan application should be deemed waived after the same has been approved,
the policy has been issued, and the premiums have been collected. 34

The Court cannot agree. The comprehensive pension plan that Philam Plans issued
contains a one-year incontestability period. It states:
VIII. INCONTESTABILITY

After this Agreement has remained in force for one ( 1) year, we can no longer contest
for health reasons any claim for insurance under this Agreement, except for the reason
that installment has not been paid (lapsed), or that you are not insurable at the time
you bought this pension program by reason of age. If this Agreement lapses but is
reinstated afterwards, the one (1) year contestability period shall start again on the
date of approval of your request for reinstatement. 35

The above incontestability clause precludes the insurer from disowning liability under
the policy it issued on the ground of concealment or misrepresentation regarding the
health of the insured after a year of its issuance. EcTaSC

Since Manuel died on the eleventh month following the issuance of his plan, 36 the
one year incontestability period has not yet set in. Consequently, Philam Plans was
not barred from questioning Lourdes' entitlement to the benefits of her husband's
pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of
Appeals in CA-G.R. CV 87085 dated December 18, 2007.

SO ORDERED.

[G.R. No. 175666. July 29, 2013.]

MANILA BANKERS LIFE INSURANCE CORPORATION, petitioner, vs.

CRESENCIA P. ABAN, respondent.

DECISION

DEL CASTILLO, J p:

The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit
business from or provide insurance coverage only to legitimate and bona fide clients,
by requiring them to thoroughly investigate those they insure within two years from
effectivity of the policy and while the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they issue, regardless of fraud, concealment
or misrepresentation. The law assumes that they will do just that and not sit on their
laurels, indiscriminately soliciting and accepting insurance business from any Tom,
Dick and Harry. CDAcIT

Assailed in this Petition for Review on Certiorari 1 are the September 28, 2005
Decision 2 of the Court of Appeals (CA) in CA-G.R. CV No. 62286 and its
November 9, 2006 Resolution 3 denying the petitioner's Motion for Reconsideration.
4

Factual Antecedents

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila
Bankers Life Insurance Corporation (Bankers Life), designating respondent Cresencia
P. Aban (Aban), her niece, 5 as her beneficiary.

Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of
P100,000.00, in Sotero's favor on August 30, 1993, after the requisite medical
examination and payment of the insurance premium. 6

On April 10, 1996, 7 when the insurance policy had been in force for more than two
years and seven months, Sotero died. Respondent filed a claim for the insurance
proceeds on July 9, 1996. Petitioner conducted an investigation into the claim, 8 and
came out with the following findings: AHSEaD

1. Sotero did not personally apply for insurance coverage, as she was illiterate;

2. Sotero was sickly since 1990;

3. Sotero did not have the financial capability to pay the insurance premiums on
Insurance Policy No. 747411;

4. Sotero did not sign the July 3, 1993 application for insurance; 9 [and]

5. Respondent was the one who filed the insurance application, and . . .
designated herself as the beneficiary. 10

For the above reasons, petitioner denied respondent's claim on April 16, 1997 and
refunded the premiums paid on the policy. 11 SaIEcA

On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the
policy, which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of
the Makati Regional Trial Court. The main thesis of the Complaint was that the policy
was obtained by fraud, concealment and/or misrepresentation under the Insurance
Code, 12 which thus renders it voidable under Article 1390 13 of the Civil Code.
Respondent filed a Motion to Dismiss 14 claiming that petitioner's cause of action
was barred by prescription pursuant to Section 48 of the Insurance Code, which
provides as follows:

Whenever a right to rescind a contract of insurance is given to the insurer by any

provision of this chapter, such right must be exercised previous to the commencement
of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two years from the date
of its issue or of its last reinstatement, the insurer cannot prove that the policy is void
ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. AHDacC

During the proceedings on the Motion to Dismiss, petitioner's investigator testified in

court, stating among others that the insurance underwriter who solicited the insurance
is a cousin of respondent's husband, Dindo Aban, 15 and that it was the respondent
who paid the annual premiums on the policy. 16

Ruling of the Regional Trial Court

On December 9, 1997, the trial court issued an Order 17 granting respondent's Motion
to Dismiss, thus: HTCDcS

WHEREFORE, defendant CRESENCIA P. ABAN's Motion to Dismiss is hereby

granted. Civil Case No. 97-867 is hereby dismissed.

SO ORDERED. 18

In dismissing the case, the trial court found that Sotero, and not respondent, was the
one who procured the insurance; thus, Sotero could legally take out insurance on her
own life and validly designate — as she did — respondent as the beneficiary. It held
further that under Section 48, petitioner had only two years from the effectivity of the
policy to question the same; since the policy had been in force for more than two
years, petitioner is now barred from contesting the same or seeking a rescission or
annulment thereof.

Petitioner moved for reconsideration, but in another Order 19 dated October 20, 1998,
the trial court stood its ground. IaAHCE

Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286.
Petitioner questioned the dismissal of Civil Case No. 97-867, arguing that the trial
court erred in applying Section 48 and declaring that prescription has set in. It
contended that since it was respondent — and not Sotero — who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable interest.
Ruling of the Court of Appeals

On September 28, 2005, the CA issued the assailed Decision, which contained the
following decretal portion:

WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for
lack of merit.

SO ORDERED. 20 CIaDTE

The CA thus sustained the trial court. Applying Section 48 to petitioner's case, the CA
held that petitioner may no longer prove that the subject policy was void ab initio or
rescindible by reason of fraudulent concealment or misrepresentation after the lapse
of more than two years from its issuance. It ratiocinated that petitioner was equipped
with ample means to determine, within the first two years of the policy, whether
fraud, concealment or misrepresentation was present when the insurance coverage
was obtained. If it failed to do so within the statutory two-year period, then the
insured must be protected and allowed to claim upon the policy.

Petitioner moved for reconsideration, 21 but the CA denied the same in its November
9, 2006 Resolution. 22 Hence, the present Petition.

Issues

Petitioner raises the following issues for resolution: ScTIAH

[WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER

OF THE TRIAL COURT DISMISSING THE COMPLAINT ON THE GROUND OF
PRESCRIPTION IN CONTRAVENTION (OF) PERTINENT LAWS AND
APPLICABLE JURISPRUDENCE.

II

[WHETHER] THE COURT OF APPEALS ERRED IN SUSTAINING THE

APPLICATION OF THE INCONTESTABILITY PROVISION IN THE
INSURANCE CODE BY THE TRIAL COURT.

III

[WHETHER] THE COURT OF APPEALS ERRED IN DENYING PETITIONER'S

MOTION FOR RECONSIDERATION. 23 AISHcD

Petitioner's Arguments
In praying that the CA Decision be reversed and that the case be remanded to the trial
court for the conduct of further proceedings, petitioner argues in its Petition and Reply
24 that Section 48 cannot apply to a case where the beneficiary under the insurance
contract posed as the insured and obtained the policy under fraudulent circumstances.
It adds that respondent, who was merely Sotero's niece, had no insurable interest in
the life of her aunt.

Relying on the results of the investigation that it conducted after the claim for the
insurance proceeds was filed, petitioner insists that respondent's claim was spurious,
as it appeared that Sotero did not actually apply for insurance coverage, was
unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently
obtaining insurance in the latter's name without her knowledge and consent.
ESTAIH

Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not
have given rise to rights and obligations; as such, the action for the declaration of its
nullity or inexistence does not prescribe. 25

Respondent's Arguments

Respondent, on the other hand, essentially argues in her Comment 26 that the CA is
correct in applying Section 48. She adds that petitioner's new allegation in its Petition
that the policy is void ab initio merits no attention, having failed to raise the same
below, as it had claimed originally that the policy was merely voidable.

On the issue of insurable interest, respondent echoes the CA's pronouncement that
since it was Sotero who obtained the insurance, insurable interest was present. Under
Section 10 of the Insurance Code, Sotero had insurable interest in her own life, and
could validly designate anyone as her beneficiary. Respondent submits that the CA's
findings of fact leading to such conclusion should be respected. TcCEDS

Our Ruling

The Court denies the Petition.

The Court will not depart from the trial and appellate courts' finding that it was Sotero
who obtained the insurance for herself, designating respondent as her beneficiary.
Both courts are in accord in this respect, and the Court is loath to disturb this. While
petitioner insists that its independent investigation on the claim reveals that it was
respondent, posing as Sotero, who obtained the insurance, this claim is no longer
feasible in the wake of the courts' finding that it was Sotero who obtained the
insurance for herself. This finding of fact binds the Court. SHaIDE
With the above crucial finding of fact — that it was Sotero who obtained the
insurance for herself — petitioner's case is severely weakened, if not totally
disproved. Allegations of fraud, which are predicated on respondent's alleged posing
as Sotero and forgery of her signature in the insurance application, are at once belied
by the trial and appellate courts' finding that Sotero herself took out the insurance for
herself. "[F]raudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract." 27 In the absence of proof of such fraudulent
intent, no right to rescind arises.

Moreover, the results and conclusions arrived at during the investigation conducted
unilaterally by petitioner after the claim was filed may simply be dismissed as self-
serving and may not form the basis of a cause of action given the existence and
application of Section 48, as will be discussed at length below. TDcAaH

Section 48 serves a noble purpose, as it regulates the actions of both the insurer and
the insured. Under the provision, an insurer is given two years — from the effectivity
of a life insurance contract and while the insured is alive — to discover or prove that
the policy is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy,
even though the policy was obtained by fraud, concealment, or misrepresentation.
This is not to say that insurance fraud must be rewarded, but that insurers who
recklessly and indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general.

Section 48 regulates both the actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire whether the policy was obtained by
fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming
individuals that their attempts at insurance fraud would be timely uncovered — thus
deterring them from venturing into such nefarious enterprise. At the same time,
legitimate policy holders are absolutely protected from unwarranted denial of their
claims or delay in the collection of insurance proceeds occasioned by allegations of
fraud, concealment, or misrepresentation by insurers, claims which may no longer be
set up after the two-year period expires as ordained under the law. SCaEcD

Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and
the insured are given the assurance that any dishonest scheme to obtain life insurance
would be exposed, and attempts at unduly denying a claim would be struck down.
Life insurance policies that pass the statutory two-year period are essentially treated
as legitimate and beyond question, and the individuals who wield them are made
secure by the thought that they will be paid promptly upon claim. In this manner,
Section 48 contributes to the stability of the insurance industry. aSACED
Section 48 prevents a situation where the insurer knowingly continues to accept
annual premium payments on life insurance, only to later on deny a claim on the
policy on specious claims of fraudulent concealment and misrepresentation, such as
what obtains in the instant case. Thus, instead of conducting at the first instance an
investigation into the circumstances surrounding the issuance of Insurance Policy No.
747411 which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums on the policy. For nearly three
years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied to
it with full force and effect.

The Court therefore agrees fully with the appellate court's pronouncement that —

[t]he "incontestability clause" is a provision in law that after a policy of life insurance
made payable on the death of the insured shall have been in force during the lifetime
of the insured for a period of two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindible by reason of fraudulent concealment or misrepresentation of the insured or
his agent. cITCAa

The purpose of the law is to give protection to the insured or his beneficiary by
limiting the rescinding of the contract of insurance on the ground of fraudulent
concealment or misrepresentation to a period of only two (2) years from the issuance
of the policy or its last reinstatement.

The insurer is deemed to have the necessary facilities to discover such fraudulent
concealment or misrepresentation within a period of two (2) years. It is not fair for the
insurer to collect the premiums as long as the insured is still alive, only to raise the
issue of fraudulent concealment or misrepresentation when the insured dies in order to
defeat the right of the beneficiary to recover under the policy.

At least two (2) years from the issuance of the policy or its last reinstatement, the
beneficiary is given the stability to recover under the policy when the insured dies.
The provision also makes clear when the two-year period should commence in case
the policy should lapse and is reinstated, that is, from the date of the last
reinstatement. cSIACD

After two years, the defenses of concealment or misrepresentation, no matter how

patent or well-founded, will no longer lie.

Congress felt this was a sufficient answer to the various tactics employed by
insurance companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses
of false representations or concealment of material facts insofar as health and previous
diseases are concerned if the insurance has been in force for at least two years during
the insured's lifetime. The phrase "during the lifetime" found in Section 48 simply
means that the policy is no longer considered in force after the insured has died. The
key phrase in the second paragraph of Section 48 is "for a period of two years."
HADTEC

As borne by the records, the policy was issued on August 30, 1993, the insured died
on April 10, 1996, and the claim was denied on April 16, 1997. The insurance policy
was thus in force for a period of 3 years, 7 months, and 24 days. Considering that the
insured died after the two-year period, the plaintiff-appellant is, therefore, barred from
proving that the policy is void ab initio by reason of the insured's fraudulent
concealment or misrepresentation or want of insurable interest on the part of the
beneficiary, herein defendant-appellee.

Well-settled is the rule that it is the plaintiff-appellant's burden to show that the
factual findings of the trial court are not based on substantial evidence or that its
conclusions are contrary to applicable law and jurisprudence. The plaintiff-appellant
failed to discharge that burden. 28 ETaSDc

Petitioner claims that its insurance agent, who solicited the Sotero account, happens to
be the cousin of respondent's husband, and thus insinuates that both connived to
commit insurance fraud. If this were truly the case, then petitioner would have
discovered the scheme earlier if it had in earnest conducted an investigation into the
circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two
years later, naturally it was unable to detect the scheme. For its negligence and
inaction, the Court cannot sympathize with its plight. Instead, its case precisely
provides the strong argument for requiring insurers to diligently conduct
investigations on each policy they issue within the two-year period mandated under
Section 48, and not after claims for insurance proceeds are filed with them.
TIEHDC

Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing
business. If they could not properly screen their agents or salesmen before taking
them in to market their products, or if they do not thoroughly investigate the insurance
contracts they enter into with their clients, then they have only themselves to blame.
Otherwise said, insurers cannot be allowed to collect premiums on insurance policies,
use these amounts collected and invest the same through the years, generating profits
and returns therefrom for their own benefit, and thereafter conveniently deny
insurance claims by questioning the authority or integrity of their own agents or the
insurance policies they issued to their premium-paying clients. This is exactly one of
the schemes which Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases
in court, hoping that the inevitable may be put off for years — or even decades — by
the pendency of these unnecessary court cases. In the meantime, they benefit from
collecting the interest and/or returns on both the premiums previously paid by the
insured and the insurance proceeds which should otherwise go to their beneficiaries.
The business of insurance is a highly regulated commercial activity in the country, 29
and is imbued with public interest. 30 "[A]n insurance contract is a contract of
adhesion which must be construed liberally in favor of the insured and strictly against
the insurer in order to safeguard the [former's] interest." 31 cHCIDE

WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision
and the November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No.
62286 are AFFIRMED.

SO ORDERED.

[G.R. No. 211212. June 8, 2016.]

SUN LIFE OF CANADA (PHILIPPINES), INC., petitioner, vs. MA. DAISY S.

SIBYA, JESUS MANUEL S. SIBYA III, JAIME LUIS S. SIBYA, and The Estate of
the deceased ATTY. JESUS SIBYA, JR., respondents.

DECISION

REYES, J p:

Before this Court is a petition for review on certiorari 1 under Rule 45 of the Rules of
Court seeking to annul and set aside the Decision 2 dated November 18, 2013 and
Resolution 3 dated February 13, 2014 of the Court of Appeals (CA) in CA-G.R. CV.
No. 93269. In both instances, the CA affirmed the Decision 4 dated March 16, 2009
of the Regional Trial Court (RTC) of Makati City, Branch 136, in Civil Case No. 01-
1506, ordering petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma.
Daisy S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya
(respondents) the amounts of P1,000,000.00 as death benefits, P100,000.00 as moral
damages, P100,000.00 as exemplary damages, and P100,000.00 as attorney's fees and
costs of suit. Insofar as the charges for violation of Sections 241 and 242 of
Presidential Decree No. 612, or the Insurance Code of the Philippines, however, the
CA modified the decision of the RTC and absolved Sun Life therein. cHECAS

Statement of Facts of the Case

On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance
with Sun Life. In his Application for Insurance, he indicated that he had sought advice
for kidney problems. 5 Atty. Jesus Jr. indicated the following in his application:

"Last 1987, had undergone lithotripsy due to kidney stone under Dr. Jesus Benjamin
Mendoza at National Kidney Institute, discharged after 3 days, no recurrence as
claimed." 6

On February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued
Insurance Policy No. 031097335. The policy indicated the respondents as
beneficiaries and entitles them to a death benefit of P1,000,000.00 should Atty. Jesus
Jr. dies on or before February 5, 2021, or a sum of money if Atty. Jesus Jr. is still
living on the endowment date. 7

On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin,
Iloilo. As such, Ma. Daisy filed a Claimant's Statement with Sun Life to seek the
death benefits indicated in his insurance policy. 8 AHDacC

In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground
that the details on Atty. Jesus Jr.'s medical history were not disclosed in his
application. Simultaneously, Sun Life tendered a check representing the refund of the
premiums paid by Atty. Jesus Jr. 9

The respondents reiterated their claim against Sun Life thru a letter dated September
17, 2001. Sun Life, however, refused to heed the respondents' requests and instead
filed a Complaint for Rescission before the RTC and prayed for judicial confirmation
of Atty. Jesus Jr.'s rescission of insurance policy. 10

In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance
application his previous medical treatment at the National Kidney Transplant Institute
in May and August of 1994. According to Sun Life, the undisclosed fact suggested
that the insured was in "renal failure" and at a high risk medical condition.
Consequently, had it known such fact, it would not have issued the insurance policy in
favor of Atty. Jesus Jr. 11

For their defense, the respondents claimed that Atty. Jesus Jr. did not commit
misrepresentation in his application for insurance. They averred that Atty. Jesus Jr.
was in good faith when he signed the insurance application and even authorized Sun
Life to inquire further into his medical history for verification purposes. According to
them, the complaint is just a ploy to avoid the payment of insurance claims. 12

Ruling of the RTC

On March 16, 2009, the RTC issued its Decision 13 dismissing the complaint for lack
of merit. The RTC held that Sun Life violated Sections 241, paragraph 1 (b), (d), and
(e) 14 and 242 15 of the Insurance Code when it refused to pay the rightful claim of
the respondents. Moreover, the RTC ordered Sun Life to pay the amounts of
P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00 as
exemplary damages, and P100,000.00 as attorney's fees and costs of suit.

The RTC held that Atty. Jesus Jr. did not commit material concealment and
misrepresentation when he applied for life insurance with Sun Life. It observed that
given the disclosures and the waiver and authorization to investigate executed by
Atty. Jesus Jr. to Sun Life, the latter had all the means of ascertaining the facts
allegedly concealed by the applicant. 16

Aggrieved, Sun Life elevated the case to the CA.

Ruling of the CA

On appeal, the CA issued its Decision 17 dated November 18, 2013 affirming the
RTC decision in ordering Sun Life to pay death benefits and damages in favor of the
respondents. The CA, however, modified the RTC decision by absolving Sun Life
from the charges of violation of Sections 241 and 242 of the Insurance Code. 18

The CA ruled that the evidence on records show that there was no fraudulent intent on
the part of Atty. Jesus Jr. in submitting his insurance application. Instead, it found that
Atty. Jesus Jr. admitted in his application that he had sought medical treatment for
kidney ailment. 19 IDSEAH

Sun Life filed a Motion for Partial Reconsideration 20 dated December 11, 2013 but
the same was denied in a Resolution 21 dated February 13, 2014.

Undaunted, Sun Life filed an appeal by way of petition for review on certiorari under
Rule 45 of the Rules of Court before this Court.

The Issue

Essentially, the main issue of the instant case is whether or not the CA erred when it
affirmed the RTC decision finding that there was no concealment or
misrepresentation when Atty. Jesus Jr. submitted his insurance application with Sun
Life.
Ruling of the Court

The petition has no merit.

In Manila Bankers Life Insurance Corporation v. Aban, 22 the Court held that if the
insured dies within the two-year contestability period, the insurer is bound to make
good its obligation under the policy, regardless of the presence or lack of concealment
or misrepresentation. The Court held:

Section 48 serves a noble purpose, as it regulates the actions of both the insurer and
the insured. Under the provision, an insurer is given two years — from the effectivity
of a life insurance contract and while the insured is alive — to discover or prove that
the policy is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy,
even though the policy was obtained by fraud, concealment, or misrepresentation.
This is not to say that insurance fraud must be rewarded, but that insurers who
recklessly and indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general. 23 (Emphasis ours)

In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus,
it has two years from its issuance, to investigate and verify whether the policy was
obtained by fraud, concealment, or misrepresentation. Upon the death of Atty. Jesus
Jr., however, on May 11, 2001, or a mere three months from the issuance of the
policy, Sun Life loses its right to rescind the policy. As discussed in Manila Bankers,
the death of the insured within the two-year period will render the right of the insurer
to rescind the policy nugatory. As such, the incontestability period will now set in.
aCIHcD

Assuming, however, for the sake of argument, that the incontestability period has not
yet set in, the Court agrees, nonetheless, with the CA when it held that Sun Life failed
to show that Atty. Jesus Jr. committed concealment and misrepresentation.

As correctly observed by the CA, Atty. Jesus Jr. admitted in his application his
medical treatment for kidney ailment. Moreover, he executed an authorization in
favor of Sun Life to conduct investigation in reference with his medical history. The
decision in part states:

Records show that in the Application for Insurance, [Atty. Jesus Jr.] admitted that he
had sought medical treatment for kidney ailment. When asked to provide details on
the said medication, [Atty. Jesus Jr.] indicated the following information: year
("1987"), medical procedure ("undergone lithotripsy due to kidney stone"), length of
confinement ("3 days"), attending physician ("Dr. Jesus Benjamin Mendoza") and the
hospital ("National Kidney Institute").

It appears that [Atty. Jesus Jr.] also signed the Authorization which gave [Sun Life]
the opportunity to obtain information on the facts disclosed by [Atty. Jesus Jr.] in his
insurance application. . . .

xxx xxx xxx

Given the express language of the Authorization, it cannot be said that [Atty. Jesus
Jr.] concealed his medical history since [Sun Life] had the means of ascertaining
[Atty. Jesus Jr.'s] medical record.

With regard to allegations of misrepresentation, we note that [Atty. Jesus Jr.] was not
a medical doctor, and his answer "no recurrence" may be construed as an honest
opinion. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are untrue.
24 (Citations omitted and italics in the original)

Indeed, the intent to defraud on the part of the insured must be ascertained to merit
rescission of the insurance contract. Concealment as a defense for the insurer to avoid
liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the provider or insurer. 25 In the
present case, Sun Life failed to clearly and satisfactorily establish its allegations, and
is therefore liable to pay the proceeds of the insurance.

Moreover, well-settled is the rule that this Court is not a trier of facts. Factual findings
of the lower courts are entitled to great weight and respect on appeal, and in fact
accorded finality when supported by substantial evidence on the record. 26

WHEREFORE, the petition for review is DENIED. The Decision dated November
18, 2013 and Resolution dated February 13, 2014 of the Court of Appeals in CA-G.R.
CV. No. 93269 are hereby AFFIRMED. cHaCAS

SO ORDERED.

[G.R. No. 151890. June 20, 2006.]

PRUDENTIAL GUARANTEE AND ASSURANCE INC., petitioner, vs. TRANS-
ASIA SHIPPING LINES, INC., respondent.

[G.R. No. 151991. June 20, 2006.]

TRANS-ASIA SHIPPING LINES, INC., petitioner, vs. PRUDENTIAL

GUARANTEE and ASSURANCE INC., respondent.

Arturo D. Lim Law Offices for Prudential Guarantee and Assurance, Inc.

Camacho & Associates for Trans-Asia Shipping Lines, Inc.

SYLLABUS

1. REMEDIAL LAW; APPEALS; PETITION FOR REVIEW ON

CERTIORARI; ONLY QUESTIONS OF LAW MAY BE RAISED THEREIN;
EXCEPTION. — Prefatorily, it must be emphasized that in a petition for review, only
questions of law, and not questions of fact, may be raised. This rule may be
disregarded only when the findings of fact of the Court of Appeals are contrary to the
findings and conclusions of the trial court, or are not supported by the evidence on
record. ACIESH

2. MERCANTILE LAW; INSURANCE; THE PARTY WHO ASSERTS THE

CLAIM FOR A BREACH OF WARRANTY IN THE POLICY BEARS THE
BURDEN OF EVIDENCE TO ESTABLISH THE FACT; APPLICATION IN CASE
AT BAR. — At the outset, it must be emphasized that the party which alleges a fact
as a matter of defense has the burden of proving it. PRUDENTIAL, as the party
which asserted the claim that TRANS-ASIA breached the warranty in the policy, has
the burden of evidence to establish the same. Hence, on the part of PRUDENTIAL
lies the initiative to show proof in support of its defense; otherwise, failing to
establish the same, it remains self-serving. Clearly, if no evidence on the alleged
breach of TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA
would be successful in claiming on the policy. It follows that PRUDENTIAL bears
the burden of evidence to establish the fact of breach. In our rule on evidence,
TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to show
proof of loss, and the coverage thereof, in the subject insurance policy. However, in
the course of trial in a civil case, once plaintiff makes out a prima facie case in his
favor, the duty or the burden of evidence shifts to defendant to controvert plaintiff's
prima facie case, otherwise, a verdict must be returned in favor of plaintiff. TRANS-
ASIA was able to establish proof of loss and the coverage of the loss, i.e., 25 October
1993: Fire on Board. Thereafter, the burden of evidence shifted to PRUDENTIAL to
counter TRANS-ASIA's case, and to prove its special and affirmative defense that
TRANS-ASIA was in violation of the particular condition on CLASSED AND
CLASS MAINTAINED.
3. ID.; ID.; THE PRIVILEGE AND POWER TO RESCIND AN INSURANCE
CONTRACT BY MERE EXPRESSION OF AN INTENTION TO DO SO MAY BE
WAIVED; PRESENT IN CASE AT BAR. — Breach of a warranty or of a condition
renders the contract defeasible at the option of the insurer; but if he so elects, he may
waive his privilege and power to rescind by the mere expression of an intention so to
do. In that event his liability under the policy continues as before. There can be no
clearer intention of the waiver of the alleged breach than the renewal of the policy
insurance granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and
MH95/1788, issued in the years 1994 and 1995, respectively. To our mind, the
argument is made even more credulous by PRUDENTIAL's lack of proof to support
its allegation that the renewals of the policies were taken only after a request was
made to TRANS-ASIA to furnish them a copy of the certificate attesting that "M/V
Asia Korea" was CLASSED AND CLASS MAINTAINED. Notwithstanding
PRUDENTIAL's claim that no certification was issued to that effect, it renewed the
policy, thereby, evidencing an intention to waive TRANS-ASIA's alleged breach.
Clearly, by granting the renewal policies twice and successively after the loss, the
intent was to benefit the insured, TRANS-ASIA, as well as to waive compliance of
the warranty.

4. ID.; ID.; THE DESIGNATION OF THE TRANSACTION AS "LOAN AND

TRUST RECEIPT" DOES NOT CONTROL THE NATURE OF THE
TRANSACTION AS AN ADVANCE PAYMENT ON THE PARTY'S CLAIM
OVER THE POLICY. — Notwithstanding its designation, the tenor of the "Loan and
Trust Receipt" evidences that the real nature of the transaction between the parties
was that the amount of P3,000,000.00 was not intended as a loan whereby TRANS-
ASIA is obligated to pay PRUDENTIAL, but rather, the same was a partial payment
or an advance on the policy of the claims due to TRANS-ASIA. First, the amount of
P3,000,000.00 constitutes an advance payment to TRANS-ASIA by PRUDENTIAL,
subrogating the former to the extent of "any net recovery made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other
parties, on account of loss by any casualty for which they may be liable, occasioned
by the 25 October 1993: Fire on Board." Second, we find that per the "Loan and Trust
Receipt," even as TRANS-ASIA agreed to "promptly prosecute suit against such
persons, corporation or corporations through whose negligence the aforesaid loss was
caused or who may otherwise be responsible therefore, with all due diligence" in its
name, the prosecution of the claims against such third persons are to be carried on "at
the expense of and under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE, INC." The clear import of the phrase "at the
expense of and under the exclusive direction and control" as used in the "Loan and
Trust Receipt" grants solely to PRUDENTIAL the power to prosecute, even as the
same is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely
an agent of PRUDENTIAL, the principal, in the prosecution of the suit against parties
who may have occasioned the loss. Third, per the subject "Loan and Trust Receipt,"
the obligation of TRANS-ASIA to repay PRUDENTIAL is highly speculative and
contingent, i.e., only in the event and to the extent that any net recovery is made by
TRANS-ASIA from any person on account of loss occasioned by the fire of 25
October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such
that, if no recovery from third parties is made, PRUDENTIAL cannot be repaid the
amount. Verily, we do not think that this is constitutive of a loan. The liberality in the
tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA leads to the
conclusion that the amount of P3,000,000.00 was a form of an advance payment on
TRANS-ASIA's claim on MH93/1353. cAEaSC

5. ID.; ID.; WHEN AWARDS OF DAMAGES AND ATTORNEY'S FEES

PROPER. — Sec. 244 of the Insurance Code grants damages consisting of attorney's
fees and other expenses incurred by the insured after a finding by the Insurance
Commissioner or the Court, as the case may be, of an unreasonable denial or
withholding of the payment of the claims due. Moreover, the law imposes an interest
of twice the ceiling prescribed by the Monetary Board on the amount of the claim due
the insured from the date following the time prescribed in Section 242 or in Section
243, as the case may be, until the claim is fully satisfied. Finally, Section 244
considers the failure to pay the claims within the time prescribed in Sections 242 or
243, when applicable, as prima facie evidence of unreasonable delay in payment. To
the mind of this Court, Section 244 does not require a showing of bad faith in order
that attorney's fees be granted. As earlier stated, under Section 244, a prima facie
evidence of unreasonable delay in payment of the claim is created by failure of the
insurer to pay the claim within the time fixed in both Sections 242 and 243 of the
Insurance Code. As established in Section 244, by reason of the delay and the
consequent filing of the suit by the insured, the insurers shall be adjudged to pay
damages which shall consist of attorney's fees and other expenses incurred by the
insured.

6. ID.; ID.; PAYMENT OF INSURANCE CLAIMS; SECTIONS 243 AND 244

OF THE INSURANCE CODE APPLY WHEN THE COURT FINDS AN
UNREASONABLE DELAY OR REFUSAL IN THE PAYMENT OF INSURANCE
CLAIMS. — Sections 243 and 244 of the Insurance Code apply when the court finds
an unreasonable delay or refusal in the payment of the insurance claims. In the case at
bar, the facts as found by the Court of Appeals, and confirmed by the records show
that there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid
balance of P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the
occurrence of the fire in "M/V Asia Korea," TRANS-ASIA filed its notice of claim.
On 13 August 1996, the adjuster, Richards Hogg International (Phils.), Inc.,
completed its survey report recommending the amount of P11,395,072.26 as the total
indemnity due to TRANS-ASIA. On 21 April 1997, PRUDENTIAL, in a letter
addressed to TRANS-ASIA denied the latter's claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent
a second letter to TRANS-ASIA seeking a return of the amount of P3,000,000.00. On
13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of money
against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing
the balance of the proceeds of the insurance claim. As can be gleaned from the
foregoing, there was an unreasonable delay on the part of PRUDENTIAL to pay
TRANS-ASIA, as in fact, it refuted the latter's right to the insurance claims, from the
time proof of loss was shown and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL's unreasonable delay in satisfying
TRANS-ASIA's unpaid claims compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the
policy as attorney's fees to TRANS-ASIA is reasonable under the circumstances, or
otherwise stated, ten percent (10%) of P8,395,072.26. In the case of Cathay Insurance
Co., Inc. v. Court of Appeals, where a finding of an unreasonable delay under Section
244 of the Insurance Code was made by this Court, we grant an award of attorney's
fees equivalent to ten percent (10%) of the total proceeds. We find no reason to
deviate from this judicial precedent in the case at bar.

7. ID.; ID.; ID.; INTEREST ON THE PROCEEDS FOR THE DURATION OF

THE DELAY IN PAYMENT, JUSTIFIED. — Section 244 of the Insurance Code is
categorical in imposing an interest twice the ceiling prescribed by the Monetary Board
due the insured, from the date following the time prescribed in Section 242 or in
Section 243, as the case may be, until the claim is fully satisfied. In the case at bar, we
find Section 243 to be applicable as what is involved herein is a marine insurance,
clearly, a policy other than life insurance. As specified, the assured is entitled to
interest on the proceeds for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board except when the failure or refusal of the insurer to
pay was founded on the ground that the claim is fraudulent. It is settled that an award
of double interest is lawful and justified under Sections 243 and 244 of the Insurance
Code. In Finman General Assurance Corporation v. Court of Appeals, this Court held
that the payment of 24% interest per annum is authorized by the Insurance Code.
There is no gainsaying that the term "double interest" as used in Sections 243 and 244
can only be interpreted to mean twice 12% per annum or 24% per annum interest,
thus: The term "ceiling prescribed by the Monetary Board" means the legal rate of
interest of twelve per centum per annum (12%) as prescribed by the Monetary Board
in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the Usury Law; so that
when Sections 242, 243 and 244 of the Insurance Code provide that the insurer shall
be liable to pay interest "twice the ceiling prescribed by the Monetary Board," it
means twice 12% per annum or 24% per annum interest on the proceeds of the
insurance. To be sure, Section 243 imposes interest on the proceeds of the policy for
the duration of the delay at the rate of twice the ceiling prescribed by the Monetary
Board. Significantly, Section 243 mandates the payment of any loss or damage for
which an insurer may be liable, under any policy other than life insurance policy,
within thirty days after proof of loss is received by the insurer and ascertainment of
the loss or damage is made either by agreement between the insured and the insurer or
by arbitration. It is clear that under Section 243, the insurer has until the 30th day after
proof of loss and ascertainment of the loss or damage to pay its liability under the
insurance, and only after such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.

8. CIVIL LAW; OBLIGATIONS; INTERESTS; RATE OF INTEREST IS

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

DECISION

CHICO-NAZARIO, J p:

This is a consolidation of two separate Petitions for Review on Certiorari filed by

petitioner Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No.
151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991,
assailing the Decision 1 dated 6 November 2001 of the Court of Appeals in CA G.R.
CV No. 68278, which reversed the Judgment 2 dated 6 June 2000 of the Regional
Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29
January 2002 Resolution 3 of the Court of Appeals, denying PRUDENTIAL's Motion
for Reconsideration and TRANS-ASIA's Partial Motion for Reconsideration of the 6
November 2001 Decision, is likewise sought to be annulled and set aside.

The Facts

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

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

On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated

"Loan and Trust receipt", a portion of which read (sic):

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

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff's claim

(Exhibit "5"). The letter reads:

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

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

Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint 5

for Sum of Money against PRUDENTIAL with the RTC of Cebu City, docketed as
Civil Case No. CEB-20709, wherein TRANS-ASIA sought the amount of
P8,395,072.26 from PRUDENTIAL, alleging that the same represents the balance of
the indemnity due upon the insurance policy in the total amount of P11,395,072.26.
TRANS-ASIA similarly sought interest at 42% per annum citing Section 243 6 of
Presidential Decree No. 1460, otherwise known as the "Insurance Code," as amended.

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

The Ruling of the Trial Court

On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein defendant)
PRUDENTIAL. It ruled that a determination of the parties' liabilities hinged on
whether TRANS-ASIA violated and breached the policy conditions on
WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It interpreted the
provision to mean that TRANS-ASIA is required to maintain the vessel at a certain
class at all times pertinent during the life of the policy. According to the court a quo,
TRANS-ASIA failed to prove compliance of the terms of the warranty, the violation
thereof entitled PRUDENTIAL, the insured party, to rescind the contract. 9

Further, citing Section 107 10 of the Insurance Code, the court a quo ratiocinated that
the concealment made by TRANS-ASIA that the vessel was not adequately
maintained to preserve its class was a material concealment sufficient to avoid the
policy and, thus, entitled the injured party to rescind the contract. The court a quo
found merit in PRUDENTIAL's contention that there was nothing in the adjustment
of the particular average submitted by the adjuster that would show that TRANS-
ASIA was not in breach of the policy. Ruling on the denominated loan and trust
receipt, the court a quo said that in substance and in form, the same is a receipt for a
loan. It held that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as
advance payment, it should have so clearly stated as such.

The court a quo did not award PRUDENTIAL's claim for P500,000.00, representing
expert survey fees on the ground of lack of sufficient basis in support thereof. Neither
did it award attorney's fees on the rationalization that the instant case does not fall
under the exceptions stated in Article 2208 11 of the Civil Code. However, the court a
quo granted PRUDENTIAL's counterclaim stating that there is factual and legal basis
for TRANS-ASIA to return the amount of P3,000,000.00 by way of loan without
interest.

The decretal portion of the Judgment of the RTC reads:

WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its

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

The Ruling of the Court of Appeals

On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6

November 2001, reversed the 6 June 2000 Judgment of the RTC.

On the issue of TRANS-ASIA's alleged breach of warranty of the policy condition

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

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

Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the
transaction between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead
of a loan. The Court of Appeals concluded that TRANS-ASIA has no obligation to
pay back the amount of P3,000.000.00 to PRUDENTIAL based on its finding that the
aforesaid amount was PRUDENTIAL's partial payment to TRANS-ASIA's claim
under the policy. Finally, the Court of Appeals denied TRANS-ASIA's prayer for
attorney's fees, but held TRANS-ASIA entitled to double interest on the policy for the
duration of the delay of payment of the unpaid balance, citing Section 244 13 of the
Insurance Code.

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

WHEREFORE, the foregoing consideration, We find for Appellant. The instant

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

All other claims and counterclaims are hereby DISMISSED.

All costs against appellee. 14

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

The Issues

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

I.

THE AWARD IS GROSSLY UNCONSCIONABLE.

II.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO

VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY,
WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.

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

IV.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY

CLAUSE EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A
MERE RIDER.

V.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED

RENEWALS OF THE POLICY CONSTITUTED A WAIVER ON THE PART OF
PRUDENTIAL OF THE BREACH OF THE WARRANTY BY TRANS-ASIA.

VI.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND

TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE
POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF.

VII.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE

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

VIII.

THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT,

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

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a

Petition for Review docketed as G.R. No. 151991, raising the following grounds for
the allowance of the petition, to wit:

I.

THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING

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

II.

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

NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST
BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT THE RATE OF
24% PER ANNUM. 16

In our Resolution of 2 December 2002, we granted TRANS-ASIA's Motion for

Consolidation 17 of G.R. Nos. 151890 and 151991; 18 hence, the instant consolidated
petitions.

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

Ruling of the Court

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

I.

A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached

the policy condition on WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED, as contained in the subject insurance contract.

In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA

violated an express and material warranty in the subject insurance contract, i.e.,
Marine Insurance Policy No. MH93/1363, specifically Warranty Clause No. 5 thereof,
which stipulates that the insured vessel, "M/V ASIA KOREA" is required to be
CLASSED AND CLASS MAINTAINED. According to PRUDENTIAL, on 25
October 1993, or at the time of the occurrence of the fire, "M/V ASIA KOREA" was
in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the
recovery of TRANS-ASIA under the policy, the violation of which entitled
PRUDENTIAL to rescind the contract under Sec. 74 21 of the Insurance Code.

The warranty condition CLASSED AND CLASS MAINTAINED was explained by

PRUDENTIAL's Senior Manager of the Marine and Aviation Division, Lucio
Fernandez. The pertinent portions of his testimony on direct examination is
reproduced hereunder, viz:

ATTY. LIM

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

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

Q To refer you (sic) the "policy warranty condition," I am showing to you a

policy here marked as Exhibits "1", "1-A" series, please point to the warranty in the
policy which you said was breached or violated by the plaintiff which constituted
your basis for denying the claim as you testified.

A Warranted Vessel Classed and Class Maintained.

ATTY. LIM

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

COURT

Q Will you explain that particular phrase?

A Yes, a warranty is a condition that has to be complied with by the insured.

When we say a class warranty, it must be entered in the classification society.

COURT

Slowly.
WITNESS

(continued)

A A classification society is an organization which sets certain standards for a

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

ATTY. LIM

Q Can you mention some classification societies that you know?

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

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

In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the
burden of proof to show proof of loss, and the coverage thereof, in the subject
insurance policy. However, in the course of trial in a civil case, once plaintiff makes
out a prima facie case in his favor, the duty or the burden of evidence shifts to
defendant to controvert plaintiff's prima facie case, otherwise, a verdict must be
returned in favor of plaintiff. 23 TRANS-ASIA was able to establish proof of loss and
the coverage of the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden
of evidence shifted to PRUDENTIAL to counter TRANS-ASIA's case, and to prove
its special and affirmative defense that TRANS-ASIA was in violation of the
particular condition on CLASSED AND CLASS MAINTAINED.

We sustain the findings of the Court of Appeals that PRUDENTIAL was not
successful in discharging the burden of evidence that TRANS-ASIA breached the
subject policy condition on CLASSED AND CLASS MAINTAINED.

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

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

WITNESS

A I recall that they were classed.

ATTY. LIM

Q With what classification society?

A I believe with Bureau Veritas. 24

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

We are in accord with the ruling of the Court of Appeals that the lack of a
certification in PRUDENTIAL's records to the effect that TRANS-ASIA's "M/V Asia
Korea" was CLASSED AND CLASS MAINTAINED at the time of the occurrence of
the fire cannot be tantamount to the conclusion that TRANS-ASIA in fact breached
the warranty contained in the policy. With more reason must we sustain the findings
of the Court of Appeals on the ground that as admitted by PRUDENTIAL, it was
likewise the responsibility of the average adjuster, Richards Hogg International
(Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-
ASIA cannot be gleaned from the average adjuster's survey report, or adjustment of
particular average per "M/V Asia Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which
provides that, "the violation of a material warranty, or other material provision of a
policy on the part of either party thereto, entitles the other to rescind." It is generally
accepted that "[a] warranty is a statement or promise set forth in the policy, or by
reference incorporated therein, the untruth or non-fulfillment of which in any respect,
and without reference to whether the insurer was in fact prejudiced by such untruth or
non-fulfillment, renders the policy voidable by the insurer." 25 However, it is
similarly indubitable that for the breach of a warranty to avoid a policy, the same must
be duly shown by the party alleging the same. We cannot sustain an allegation that is
unfounded. Consequently, PRUDENTIAL, not having shown that TRANS-ASIA
breached the warranty condition, CLASSED AND CLASS MAINTAINED, it
remains that TRANS-ASIA must be allowed to recover its rightful claims on the
policy.

B. Assuming arguendo that TRANS-ASIA violated the policy condition on

WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, PRUDENTIAL
made a valid waiver of the same.

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

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

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

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

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

The foregoing finding renders a determination of whether the subject warranty is a

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

II.

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

via a transaction between the parties evidenced by a document denominated as "Loan
and Trust Receipt," dated 29 May 1995 constituted partial payment on the policy.

It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of

P3,000,000.00. The same was evidenced by a transaction receipt denominated as a
"Loan and Trust Receipt," dated 29 May 1995, reproduced hereunder:

LOAN AND TRUST RECEIPT

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

P3,000,000.00

Check No. PCIB066755

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

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

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

TRANS-ASIA SHIPPING CORPORATION 29

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

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

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

Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the
Loan Receipt that the money was intended as a loan does not detract from its real
character as payment of claim, thus:

"The receipt of money by the insured employers from a surety company for losses on
account of forgery of drafts by an employee where no provision or repayment of the
money was made except upon condition that it be recovered from other parties and
neither interest nor security for the asserted debts was provided for, the money
constituted the payment of a liability and not a mere loan, notwithstanding recitals in
the written receipt that the money was intended as a mere loan."

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

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

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

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

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

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

III.

A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of

P8,395,072.26, representing the balance of the loss suffered by TRANS-ASIA and
covered by Marine Policy No. MH93/1363.

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

B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the

form of attorney's fees equivalent to 10% of P8,395,072.26.

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

We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorney's
fees and other expenses incurred by the insured after a finding by the Insurance
Commissioner or the Court, as the case may be, of an unreasonable denial or
withholding of the payment of the claims due. Moreover, the law imposes an interest
of twice the ceiling prescribed by the Monetary Board on the amount of the claim due
the insured from the date following the time prescribed in Section 242 35 or in
Section 243, 36 as the case may be, until the claim is fully satisfied. Finally, Section
244 considers the failure to pay the claims within the time prescribed in Sections 242
or 243, when applicable, as prima facie evidence of unreasonable delay in payment.

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

Section 244 reads:

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

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

In the case at bar, the facts as found by the Court of Appeals, and confirmed by the
records show that there was an unreasonable delay by PRUDENTIAL in the payment
of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day
after the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of
claim. On 13 August 1996, the adjuster, Richards Hogg International (Phils.), Inc.,
completed its survey report recommending the amount of P11,395,072.26 as the total
indemnity due to TRANS-ASIA. 38 On 21 April 1997, PRUDENTIAL, in a letter 39
addressed to TRANS-ASIA denied the latter's claim for the amount of P8,395,072.26
representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent
a second letter 40 to TRANS-ASIA seeking a return of the amount of P3,000,000.00.
On 13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of
money against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26
representing the balance of the proceeds of the insurance claim.

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

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

C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney's

fees) shall be imposed double interest in accordance with Section 244 of the Insurance
Code.

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

Section 243 is hereunder reproduced:

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

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

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

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

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

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

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

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

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

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

IV.

A. An interest of 12% per annum is similarly imposed on the TOTAL amount of

liability adjudged in section III herein, computed from the time of finality of judgment
until the full satisfaction thereof in conformity with this Court's ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the rule
of thumb 48 in the application of interest to be imposed on obligations, regardless of
their source. Eastern emphasized beyond cavil that when the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest,
regardless of whether the obligation involves a loan or forbearance of money, shall be
12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance 49 of credit.

We find application of the rule in the case at bar proper, thus, a rate of 12% per
annum from the finality of judgment until the full satisfaction thereof must be
imposed on the total amount of liability adjudged to PRUDENTIAL. It is clear that
the interim period from the finality of judgment until the satisfaction of the same is
deemed equivalent to a forbearance of credit, hence, the imposition of the aforesaid
interest.

Fallo

WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in
G.R. No. 151991 is GRANTED, thus, we award the grant of attorney's fees and make
a clarification that the term "double interest" as used in the 6 November 2001
Decision of the Court of Appeals in CA-G.R. CV No. 68278 should be construed to
mean interest at the rate of 24% per annum, with a further clarification, that the same
should be computed from 13 September 1996 until fully paid. The Decision and
Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November
2001 and 29 January 2002, respectively, are, thus, MODIFIED in the following
manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of
P8,395,072.26, representing the balance of the loss suffered by TRANS-ASIA and
covered by Marine Policy No. MH93/1363;

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

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

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney's fees)

shall be imposed double interest at the rate of 24% per annum to be computed from 13
September 1996 until fully paid; and

4. An interest of 12% per annum is similarly imposed on the TOTAL amount of

liability adjudged as abovestated in paragraphs (1), (2), and (3) herein, computed from
the time of finality of judgment until the full satisfaction thereof.

No costs.

SO ORDERED.

[G.R. No. 136914. January 25, 2002.]

COUNTRY BANKERS INSURANCE CORPORATION, petitioner, vs. LIANGA

BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., respondent.

Velasquez Meru & Associates for petitioner.

Alvizo Alvvizo Ranoco & Alvizo Law Offices for private respondent.

SYNOPSIS

For the loss it sustained fire as a result of the fire, respondent filed an insurance claim
with petitioner. Petitioner, however, denied the claim on the ground that based on the
submitted documents, the building of respondent was set on fire by two NPA rebels
who wanted to obtain provisions. This was an excepted risk under the policy contract.
SHECcT
The RTC decision, affirmed by the Court of Appeals, ordered petitioner to pay
respondent P200,000 with interest at 12% per annum from the date of the filing of the
complaint until paid, as well as actual damages, exemplary damages, litigation
expenses, attorney's fees and the costs of suit. Indeed, petitioner failed to prove the
facts upon which the excepted risk was based. Petitioner relied on the sworn
statements of two witnesses and the Spot Report of Pfc. Juarbal. The sworn
statements, however, were inadmissible for being hearsay inasmuch as the people
who executed them did not take the witness stand and could not, therefore, be cross-
examined. No investigation, independent of the statements, was conducted. The
testimony of Pfc. Juarbal relative to the sworn statements, on the other hand, may be
considered as independently relevant statements gathered in the course of
investigation and may be admitted as such but not necessarily to prove the truth
thereof. Nevertheless, the 12% interest and other monetary awards were held not
proper for lack of legal and valid basis. The interest rate should be and was set to 6%
from the date of filing of the complaint.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF; A PARTY MUST

PROVE HIS OWN AFFIRMATIVE ALLEGATIONS. — A party is bound by his
own affirmative allegations. This is a well-known postulate echoed in Section 1 of
Rule 131 of the Revised Rules of Court. Each party must prove his own affirmative
allegations by the amount of evidence required by law which in civil cases, as in this
case, is preponderance of evidence, to obtain a favorable judgment. Where a risk is
excepted by the terms of a policy which insures against other perils or hazards, loss
from such a risk constitutes a defense which the insurer may urge, since it has not
assumed that risk, and from this it follows that an insurer seeking to defeat a claim
because of an exception or limitation in the policy has the burden of proving that the
loss comes within the purview of the exception or limitation set up. If a proof is made
of a loss apparently within a contract of insurance, the burden is upon the insurer to
prove that the loss arose from a cause of loss which is expected or for which it is not
liable, or from a cause which limits its liability. Stated elsewise, since the petitioner in
this case is defending on the ground of non-coverage and relying upon an exemption
or exception clause in the fire insurance policy, it has the burden of proving the facts
upon which such excepted risk is based, by a preponderance of evidence. But
petitioner failed to do so. EDcIAC

2. ID.; ID.; ADMISSIBILITY; HEARSAY RULE; ELUCIDATED. — A

witness can testify only to those facts which he knows of his personal knowledge,
which means those facts which are derived from his perception. Consequently, a
witness may not testify as to what he merely learned from others either because he
was told or read or heard the same. Such testimony is considered hearsay and may not
be received as proof of the truth of what he has learned. Such is the hearsay rule
which applies not only to oral testimony or statements but also to written evidence as
well. The hearsay rule is based upon serious concerns about the trustworthiness and
reliability of hearsay evidence inasmuch as such evidence are not given under oath or
solemn affirmation and, more importantly, have not been subjected to cross-
examination by opposing counsel to test the perception, memory, veracity and
articulateness of the out-of-court declarant or actor upon whose reliability on which
the worth of the out-of-court statement depends. Thus, the Sworn Statements of Jose
Lomocso and Ernesto Urbiztondo are inadmissible in evidence, for being hearsay,
inasmuch as they did not take the witness stand and could not therefore be cross-
examined. There are exceptions to the hearsay rule, among which are entries in
official records. To be admissible in evidence, however, three (3) requisites must
concur, to wit: (a) that the entry was made by a public officer, or by another person
specially enjoined by law to do so; (b) that it was made by the public officer in the
performance of his duties, or by such other person in the performance of a duty
specially enjoined by law; and (c) that the public officer or other person had sufficient
knowledge of the facts by him stated, which must have been acquired by him
personally or through official information. The third requisite was not met in this case
since no investigation, independent of the statements gathered from Jose Lomocso,
was conducted by Pfc. Arturo V. Juarbal.

3. ID.; ID.; ID.; REPORT RELATIVE TO THE STATEMENT OF ANOTHER

MAY BE CONSIDERED AS INDEPENDENTLY RELEVANT STATEMENT BUT
NOT NECESSARILY TO PROVE THE TRUTH THEREOF. — The Spot Report of
Pfc. Arturo Juarbal relative to the statement of Jose Lomocso to the effect that NPA
rebels allegedly set fire to the respondent's building is inadmissible in evidence, for
the purpose of proving the truth of the statements contained in the said report, for
being hearsay. The said Spot Report is admissible only insofar as it constitutes part of
the testimony of Pfc. Arturo V. Juarbal since he himself took the witness stand and
was available for cross-examination. The portions of his Spot Report which were of
his personal knowledge or which consisted of his perceptions and conclusions are not
hearsay. The rest of the said report relative to the statement of Jose Lomocso may be
considered as independently relevant statements gathered in the course of Juarbal's
investigation and may be admitted as such but not necessarily to prove the truth
thereof. EDCcaS

4. CIVIL LAW; DAMAGES; AWARD OF INTEREST; PROPER INTEREST

RATE IN INSURANCE CLAIM IS 6%. — Concerning the application of the proper
interest rates, the guidelines were set in Eastern Shipping Lines, Inc. v. Court of
Appeals and Mercantile Insurance Co., Inc. The Court observed that a "forbearance"
in the context of the usury law is a "contractual obligation of lender or creditor to
refrain, during a given period of time, from requiring the borrower or debtor to repay
a loan or debt then due and payable." The insurance claim in this case is evidently not
a forbearance of money, goods or credit, and thus the interest rate should be as it is
hereby fixed at six percent (6%) computed from the date of filing of the complaint.
5. ID.; ID.; ACTUAL DAMAGES MUST BE PROVED. — We find no
justification for the award of actual damages of Fifty Thousand Pesos (P50,000.00).
Well-entrenched is the doctrine that actual, compensatory and consequential damages
must be proved, and cannot be presumed.

6. ID.; ID.; EXEMPLARY DAMAGES; WHEN PROPER. — Concerning the

award of exemplary damages for Fifty Thousand Pesos (P50,000.00), we likewise
find no legal and valid basis for granting the same. Article 2229 of the New Civil
Code provides that exemplary damages may be imposed by way of example or
correction for the public good. Exemplary damages are imposed not to enrich one
party or impoverish another but to serve as a deterrent against or as a negative
incentive to curb socially deleterious actions. They are designed to permit the courts
to mould behavior that has socially deleterious consequences, and its imposition is
required by public policy to suppress the wanton acts of an offender. However, it
cannot be recovered as a matter of right. It is based entirely on the discretion of the
court. We find no cogent and valid reason to award the same in the case at bar.
IcHTED

7. ID.; ID.; LITIGATION EXPENSES AND ATTORNEY'S FEES;

ELUCIDATED. — With respect to the award of litigation expenses and attorney's
fees, Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were to
be granted. Attorney's fees as part of damages are not meant to enrich the winning
party at the expense of the losing litigant. They are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on the right
to litigate. The award of attorney's fees is the exception rather than the general rule.
As such, it is necessary for the court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award.

DECISION

DE LEON, JR., J p:

Before us is a petition for review on certiorari of the Decision 1 of the Court of

Appeals 2 dated December 29, 1998 in CA-G.R. CV Case No. 36902 affirming in toto
the Decision 3 dated December 26, 1991 of the Regional Trial Court of Lianga,
Surigao del Sur, Branch 28, in Civil Case No. L-518 which ordered petitioner Country
Bankers Insurance Corporation to fully pay the insurance claim of respondent Lianga
Bay and Community Multi-Purpose Cooperative, Inc., under Fire Insurance Policy
No. F-1397, for loss sustained as a result of the fire that occurred on July 1, 1989 in
the amount of Two Hundred Thousand Pesos (P200,000.00), with interest at twelve
percent (12%) per annum from the date of filing of the complaint until fully paid, as
well as Fifty Thousand Pesos (P50,000.00) as actual damages, Fifty Thousand Pesos
(P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation
expenses, Ten Thousand Pesos (P10,000.00) as attorney's fees, and the costs of suit.

The facts are undisputed:

The petitioner is a domestic corporation principally engaged in the insurance business

wherein it undertakes, for a consideration, to indemnify another against loss, damage
or liability from an unknown or contingent event including fire while the respondent
is a duly registered cooperative judicially declared insolvent and represented by the
elected assignee, Cornelio Jamero.

It appears that sometime in 1989, the petitioner and the respondent entered into a
contract of fire insurance. Under Fire Insurance Policy No. F-1397, the petitioner
insured the respondent's stocks-in-trade against fire loss, damage or liability during
the period starting from June 20, 1989 at 4:00 p.m. to June 20, 1990 at 4:00 p.m., for
the sum of Two Hundred Thousand Pesos (P200,000.00).

On July 1, 1989, at or about 12:40 a.m., the respondent's building located at Barangay
Diatagon, Lianga, Surigao del Sur was gutted by fire and reduced to ashes, resulting
in the total loss of the respondent's stocks-in-trade, pieces of furniture and fixtures,
equipments and records.

Due to the loss, the respondent filed an insurance claim with the petitioner under its
Fire Insurance Policy No. F-1397, submitting: (a) the Spot Report of Pfc. Arturo V.
Juarbal, INP Investigator, dated July 1, 1989; (b) the Sworn Statement of Jose
Lomocso; and (c) the Sworn Statement of Ernesto Urbiztondo.

The petitioner, however, denied the insurance claim on the ground that, based on the
submitted documents, the building was set on fire by two (2) NPA rebels who wanted
to obtain canned goods, rice and medicines as provisions for their comrades in the
forest, and that such loss was an excepted risk under paragraph No. 6 of the policy
conditions of Fire Insurance Policy No. F-1397, which provides:

This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly, of any of the following occurrences, namely:

xxx xxx xxx

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

military or usurped power.

Any loss or damage happening during the existence of abnormal conditions (whether
physical or otherwise) which are occasioned by or through or in consequence, directly
or indirectly, of any of said occurrences shall be deemed to be loss or damage which
is not covered by this insurance, except to the extent that the Insured shall prove that
such loss or damage happened independently of the existence of such abnormal
conditions.

Finding the denial of its claim unacceptable, the respondent then instituted in the trial
court the complaint for recovery of "loss, damage or liability" against petitioner. The
petitioner answered the complaint and reiterated the ground it earlier cited to deny the
insurance claim, that is, that the loss was due to NPA rebels, an excepted risk under
the fire insurance policy.

In due time, the trial court rendered its Decision dated December 26, 1991 in favor of
the respondent, declaring that:

Based on its findings, it is therefore the considered opinion of this Court, as it so

holds, that the defenses raised by defendant — Country Bankers has utterly crumbled
on account of its inherent weakness, incredibility and unreliability, and after applying
those helpful tools like common sense, logic and the Court's honest appraisal of the
real and actual situation obtaining in this area, such defenses remains (sic)
unimpressive and unconvincing, and therefore, the defendant — Country Bankers has
to be irreversibly adjudged liable, as it should be, to plaintiff-Insolvent Cooperative,
represented in this action by its Assignee, Cornelio Jamero, and thus, ordering said
defendant — Country Bankers to pay the plaintiff-Insolvent Cooperative, as follows:

1. To fully pay the insurance claim for the loss the insured-plaintiff sustained as
a result of the fire under its Fire Insurance Policy No. F-1397 in its full face value of
P200,000.00 with interest of 12% per annum from date of filing of the complaint until
the same is fully paid;

2. To pay as and in the concept of actual or compensatory damages in the total

sum of P50,000.00;

3. To pay as and in the concept of exemplary damages in the total sum of

P50,000.00;

4. To pay in the concept of litigation expenses the sum of P5,000.00;

5. To pay by way of reimbursement the attorney's fees in the sum of P10,000.00;

and

6. To pay the costs of the suit.

For being unsubstantiated with credible and positive evidence, the "counterclaim" is
dismissed.

IT IS SO ORDERED.
Petitioner interposed an appeal to the Court of Appeals. On December 29, 1998, the
appellate court affirmed the challenged decision of the trial court in its entirety.
Petitioner now comes before us via the instant petition anchored on three (3) assigned
errors, 4 to wit:

1. THE HONORABLE COURT OF APPEALS FAILED TO APPRECIATE

AND GIVE CREDENCE TO THE SPOT REPORT OF PFC. ARTURO JUARBAL
(EXH. 3) AND THE SWORN STATEMENT OF JOSE LOMOCSO (EXH. 4) THAT
THE RESPONDENT'S STOCK-IN-TRADE WAS BURNED BY THE NPA
REBELS, HENCE AN EXCEPTED RISK UNDER THE FIRE INSURANCE
POLICY.

2. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING

PETITIONER LIABLE FOR 12% INTEREST PER ANNUM ON THE FACE
VALUE OF THE POLICY FROM THE FILING OF THE COMPLAINT UNTIL
FULLY PAID.

3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THE

PETITIONER LIABLE FOR ACTUAL AND EXEMPLARY DAMAGES,
LITIGATION EXPENSES, ATTORNEYS FEES AND COST OF SUIT.

A party is bound by his own affirmative allegations. This is a well-known postulate

echoed in Section 1 of Rule 131 of the Revised Rules of Court. Each party must prove
his own affirmative allegations by the amount of evidence required by law which in
civil cases, as in this case, is preponderance of evidence, to obtain a favorable
judgment. 5

In the instant case, the petitioner does not dispute that the respondent's stocks-in-trade
were insured against fire loss, damage or liability under Fire Insurance Policy No. F-
1397 and that the respondent lost its stocks-in-trade in a fire that occurred on July 1,
1989, within the duration of said fire insurance. The petitioner, however, posits the
view that the cause of the loss was an excepted risk under the terms of the fire
insurance policy.

Where a risk is excepted by the terms of a policy which insures against other perils or
hazards, loss from such a risk constitutes a defense which the insurer may urge, since
it has not assumed that risk, and from this it follows that an insurer seeking to defeat a
claim because of an exception or limitation in the policy has the burden of proving
that the loss comes within the purview of the exception or limitation set up. If a proof
is made of a loss apparently within a contract of insurance, the burden is upon the
insurer to prove that the loss arose from a cause of loss which is excepted or for which
it is not liable, or from a cause which limits its liability. 6 Stated elsewise, since the
petitioner in this case is defending on the ground of non-coverage and relying upon an
exemption or exception clause in the fire insurance policy, it has the burden of
proving the facts upon which such excepted risk is based, by a preponderance of
evidence. 7 But petitioner failed to do so.

The petitioner relies on the Sworn Statements of Jose Lomocso and Ernesto
Urbiztondo as well as on the Spot Report of Pfc. Arturo V. Juarbal dated July 1, 1989,
more particularly the following statement therein:

. . . investigation revealed by Jose Lomocso that those armed men wanted to get can
goods and rice for their consumption in the forest PD investigation further disclosed
that the perpetrator are member (sic) of the NPA PD end. . . .

A witness can testify only to those facts which he knows of his personal knowledge,
which means those facts which are derived from his perception. 8 Consequently, a
witness may not testify as to what he merely learned from others either because he
was told or read or heard the same. Such testimony is considered hearsay and may not
be received as proof of the truth of what he has learned. Such is the hearsay rule
which applies not only to oral testimony or statements but also to written evidence as
well. 9

The hearsay rule is based upon serious concerns about the trustworthiness and
reliability of hearsay evidence inasmuch as such evidence are not given under oath or
solemn affirmation and, more importantly, have not been subjected to cross-
examination by opposing counsel to test the perception, memory, veracity and
articulateness of the out-of-court declarant or actor upon whose reliability on which
the worth of the out-of-court statement depends. 10

Thus, the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo are
inadmissible in evidence, for being hearsay, inasmuch as they did not take the witness
stand and could not therefore be cross-examined.

There are exceptions to the hearsay rule, among which are entries in official records.
11 To be admissible in evidence, however, three (3) requisites must concur, to wit:

(a) that the entry was made by a public officer, or by another person specially
enjoined by law to do so;

(b) that it was made by the public officer in the performance of his duties, or by
such other person in the performance of a duty specially enjoined by law; and

(c) that the public officer or other person had sufficient knowledge of the facts by
him stated, which must have been acquired by him personally or through official
information. 12
The third requisite was not met in this case since no investigation, independent of the
statements gathered from Jose Lomocso, was conducted by Pfc. Arturo V. Juarbal. In
fact, as the petitioner itself pointed out, citing the testimony of Pfc. Arturo Juarbal, 13
the latter's Spot Report "was based on the personal knowledge of the caretaker Jose
Lomocso who witnessed every single incident surrounding the facts and
circumstances of the case." This argument undeniably weakens the petitioner's
defense, for the Spot Report of Pfc. Arturo Juarbal relative to the statement of Jose
Lomocso to the effect that NPA rebels allegedly set fire to the respondent's building is
inadmissible in evidence, for the purpose of proving the truth of the statements
contained in the said report, for being hearsay.

The said Spot Report is admissible only insofar as it constitutes part of the testimony
of Pfc. Arturo V. Juarbal since he himself took the witness stand and was available for
cross-examination. The portions of his Spot Report which were of his personal
knowledge or which consisted of his perceptions and conclusions are not hearsay. The
rest of the said report relative to the statement of Jose Lomocso may be considered as
independently relevant statements gathered in the course of Juarbal's investigation and
may be admitted as such but not necessarily to prove the truth thereof. 14

The petitioner's evidence to prove its defense is sadly wanting and thus, gives rise to
its liability to the respondent under Fire Insurance Policy No. F-1397. Nonetheless,
we do not sustain the trial court's imposition of twelve percent (12%) interest on the
insurance claim as well as the monetary award for actual and exemplary damages,
litigation expenses and attorney's fees for lack of legal and valid basis.

Concerning the application of the proper interest rates, the following guidelines were
set in Eastern Shipping Lines, Inc. v. Court of Appeals and Mercantile Insurance Co.,
Inc.: 15

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts, is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.

In the said case of Eastern Shipping, the Court further observed that a "forbearance"
in the context of the usury law is a "contractual obligation of lender or creditor to
refrain, during a given period of time, from requiring the borrower or debtor to repay
a loan or debt then due and payable."

Considering the foregoing, the insurance claim in this case is evidently not a
forbearance of money, goods or credit, and thus the interest rate should be as it is
hereby fixed at six percent (6%) computed from the date of filing of the complaint.

We find no justification for the award of actual damages of Fifty Thousand Pesos
(P50,000.00). Well-entrenched is the doctrine that actual, compensatory and
consequential damages must be proved, and cannot be presumed. 16 That part of the
dispositive portion of the Decision of the trial court ordering the petitioner to pay
actual damages of Fifty Thousand Pesos (P50,000.00) has no basis at all. The
justification, if any, for such an award of actual damages does not appear in the body
of the decision of the trial court. Neither is there any testimonial and documentary
evidence on the alleged actual damages of Fifty Thousand Pesos (P50,000.00) to
warrant such an award. Thus, the same must be deleted.

Concerning the award of exemplary damages for Fifty Thousand Pesos (P50,000.00),
we likewise find no legal and valid basis for granting the same. Article 2229 of the
New Civil Code provides that exemplary damages may be imposed by way of
example or correction for the public good. Exemplary damages are imposed not to
enrich one party or impoverish another but to serve as a deterrent against or as a
negative incentive to curb socially deleterious actions. They are designed to permit
the courts to mould behavior that has socially deleterious consequences, and its
imposition is required by public policy to suppress the wanton acts of an offender.
However, it cannot be recovered as a matter of right. It is based entirely on the
discretion of the court. We find no cogent and valid reason to award the same in the
case at bar.

With respect to the award of litigation expenses and attorney's fees, Article 2208 of
the New Civil Code 17 enumerates the instances where such may be awarded and, in
all cases, it must be reasonable, just and equitable if the same were to be granted.
Attorney's fees as part of damages are not meant to enrich the winning party at the
expense of the losing litigant. They are not awarded every time a party prevails in a
suit because of the policy that no premium should be placed on the right to litigate. 18
The award of attorney's fees is the exception rather than the general rule. As such, it is
necessary for the court to make findings of facts and law that would bring the case
within the exception and justify the grant of such award. We find none in this case to
warrant the award by the trial court of litigation expenses and attorney's fees in the
amounts of Five Thousand Pesos (P5,000.00) and Ten Thousand Pesos (P10,000.00),
respectively, and therefore, the same must also be deleted.

WHEREFORE, the appealed Decision is MODIFIED. The rate of interest on the

adjudged principal amount of Two Hundred Thousand Pesos (P200,000.00) shall be
six percent (6%) per annum computed from the date of filing of the Complaint in the
trial court. The awards in the amounts of Fifty Thousand Pesos (P50,000.00) as actual
damages, Fifty Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand
Pesos (P5,000.00) as litigation expenses, and Ten Thousand Pesos (P10,000.00) as
attorney's fees are hereby DELETED. Costs against the petitioner.

SO ORDERED.

[G.R. No. L-38613. February 25, 1982.]

PACIFIC TIMBER EXPORT CORPORATION, petitioner, vs. THE HONORABLE

COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY, INC.,
respondents.
Jose J. Ferrer, Jr. & Augusto Z. Fajardo for petitioner.

Augustin J. Guillermo for respondent Workmen's Ins. Co., Inc.

SYNOPSIS

After respondent insurance company issued to petitioner a Cover Note for the
temporary insurance of 1,250,000 board feet of logs for exportation to Okinawa and
Japan, which included loss during loading operations, but before the issuance of the
regular marine cargo policies which covered only loss during transit, thirty pieces of
said logs were lost while being loaded in petitioner's vessel. Petitioner sought to
recover the loss but private respondent refused on the ground that although said loss
was covered under the Cover Note, nevertheless, the same became null and void upon
the issuance of the marine policies which did not cover said loss. The Court of First
Instance of Manila rendered a decision in favor of petitioner but on appeal, said
decision was reversed by the Court of Appeals. cdtai

On review, the Supreme Court held that a Cover Note is not a mere application for
insurance but in a real sense a contract to be integrated to the regular policies
subsequently issued and the fact that no separate premium was paid on the Cover
Note before the loss occurred does not militate against recovery thereunder.

Appealed decision, set aside.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE; COVER NOTE; NO SEPARATE

PREMIUMS ARE REQUIRED TO BE PAID THEREON. — The fact that no
separate premium was paid on the Cover Note before the loss insured against
occurred, does not militate against the validity of petitioner's contention that the
Cover Note is not without a consideration, for no such premium could have been paid,
since by the nature of the Cover Note it did not contain, as all Cover Notes do not
contain, particulars of the shipment that would serve as basis for the computation of
the premiums. As a logical consequence, no separate premiums are intended or
required to be paid on a Cover Note.

2. ID.; ID.; ID.; A CONTRACT AND NOT A MERE APPLICATION FOR

INSURANCE; DEEMED INTEGRATED TO THE REGULAR POLICIES
SUBSEQUENTLY ISSUED. — Where the note is to be treated as a separate policy
instead of integrating it to the regular policies subsequently issued, the purpose and
function of the Cover Note would be set at naught or rendered meaningless, for it is in
a real sense a contract, not a mere application for insurance which is a mere offer.

3. ID.; ID.; ID.; RISK INSURED AGAINST NOT INCLUDED IN THE

REGULAR MARINE INSURANCE POLICIES; IMMATERIAL AS LOSS CAN BE
DETERMINED INDEPENDENTLY; CASE AT BAR. — While it may be true that
the marine insurance policies issued were for logs no longer including those which
had been lost during loading operations, this had to be so because the risk insured
against is not for loss during loading operations anymore, but for loss during transit,
the logs having already been safely placed aboard. This would make no difference,
however, insofar as the liability on the cover note is concerned, for the number or
volume of logs lost can be determined independently, as in fact it had been so
ascertained as the instance of private respondent itself when it sent its own adjuster to
investigate and assess the lost, after the issuance of the marine insurance policies.

4. ID.; ID.; ID.; FUNCTIONS AS A "BINDER"; SUPPORTED BY

PRESUMPTION OF VALIDITY OF POLICY DELIVERED WITHOUT
REQUIRING PAYMENT OF THE PREMIUM. — Now payment of premium on the
Cover Note is no cause for the petitioner to lose what is due it as if there had been
payment of premium, for non-payment by it was not chargeable against its fault. This
is how the cover note as a "binder" should legally operate; otherwise, it would serve
no practical purpose in the realm of commerce, and is supported by the doctrine that
where a policy is delivered without requiring payment of the premium, the
presumption is that a credit was intended and policy is valid (Miller vs. Brooklyn L.
Inc., Co. (U.S.) 12 Wall, 285, 20 Led. 39 Am. Jur. New 'Insurance' Sec. 1845, p. 907,
note 2; Sec. 1079, p. 246, note 20.).

5. ID.; ID.; CLAIM ON THE INSURANCE AGREEMENT; DEFENSE OF

DELAY MUST BE PROMPTLY AND SPECIFICALLY ASSERTED; CASE AT
BAR. — Section 84 of the Insurance Act requires that the ground of delay must be
promptly and specifically asserted when a claim on the insurance agreement is made.
The nature of this specific ground for resisting a claim places the insurer on duty to
inquire when the loss took place, so that it could determine whether delay would be a
valid ground upon which to object to a claim against it. In the case at bar, where the
undisputed facts show that instead of invoking the ground of delay in objecting to
petitioner's claim of recovery on the cover note, respondent company took steps
clearly indicative that this particular ground for objection to the claim was never in its
mind, the Supreme Court is satisfied and convinced, even on the assumption that there
was delay, that waiver can successfully be raised against private respondent.

DECISION

DE CASTRO, J p:

This petition seeks the review of the decision of the Court of Appeals reversing the
decision of the Court of First Instance of Manila in favor of petitioner and against
private respondent which ordered the latter to pay the sum of P11,042.04 with interest
at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the
complete payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby
dismissing petitioner's complaint with costs. 2 cdtai

The findings of fact of the Court of Appeals, which are generally binding upon this
Court, except as shall be indicated in the discussion of the opinion of this Court the
substantial correctness of such particular finding having been disputed, thereby
raising a question of law reviewable by this Court 3 are as follows:

"On March 19, 1963, the plaintiff secured temporary insurance from the defendant for
its exportation of 1,250,000 board feet of Philippine Lauan and Apitong logs to be
shipped from the Diapitan Bay, Quezon Province to Okinawa and Tokyo, Japan. The
defendant issued on said date Cover Note No. 1010, insuring the said cargo of the
plaintiff "Subject to the Terms and Conditions of the WORKMEN'S INSURANCE
COMPANY, INC. printed Marine Policy form as filed with and approved by the
Office of the Insurance Commissioner" (Exhibit A).

"The regular marine cargo policies were issued by the defendant in favor of the
plaintiff on April 2, 1963. The two marine policies bore the numbers of 53 HO 1032
and 53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 HO 1032 (Exhibit B)
was for 542 pieces of logs equivalent to 499,950 board feet. Policy No. 53 HO 1033
was for 853 pieces of logs equivalent to 695, 548 board feet (Exhibit C). The total
cargo insured under the two marine policies accordingly consisted of 1,395 logs, or
the equivalent of 1,195,498 bd. ft.

"After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of
the two marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended
to be exported were lost during loading operations in the Diapitan Bay. The logs were
to be loaded on the 'SS Woodlock' which Docked about 500 meters from the shortline
of the Diapitan Bay. The logs were taken from the log pond of the plaintiff and from
which they were towed in rafts to the vessel. At about 10:00 o'clock a.m. on March
29, 1963, while the logs were alongside the vessel, bad weather developed resulting in
75 pieces of logs which were rafted together to break loose from each other 45 pieces
of logs were salvaged, but 30 pieces were verified to have been lost or washed away
as a result of the accident.

"In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of
'approximately 32 pieces of logs' during loading of the 'SS Woodlock'. The said letter
(Exhibit F) reads as follows:

'April 4, 1963

Workmen's Insurance Company, Inc.

Manila, Philippines
 Gentlemen:

This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd.
ft., Philippine Lauan and Apitong Logs. We would like to inform you that we have
received advance preliminary report from our Office in Diapitan, Quezon that we
have lost approximately 32 pieces of logs during loading of the S.S. Woodlock.

We will send you an accurate report all the details including values as soon as same
will be reported to us.

Thank you for your attention, we wish to remain.

Very respectfully yours,

PACIFIC TIMBER EXPORT CORPORATION

(Sgd). EMMANUEL S. ATILANO

Asst. General Manager

Although dated April 4, 1963, the letter was received in the office of the defendant
only on April 15, 1963, as shown by the stamp impression appearing on the left
bottom corner of said letter. The plaintiff subsequently submitted a 'Claim Statement'
demanding payment of the loss under Policies Nos. 53 HO 1033, and 53 HO 1033, in
the total amount of P19,286.79 (Exhibit G).

"On July 17, 1963, the defendant requested the First Philippine Adjustment
Corporation to inspect the loss and assess the damage. The adjustment company
submitted its 'Report' on August 23, 1963 (Exhibit H). In said report, the adjuster
found that 'the loss of 30 pieces of logs is not covered by Policies Nos. 53 HO 1032
and 1033 inasmuch as said policies covered the actual number of logs loaded on board
the 'SS Woodlock'. However, the loss of 30 pieces of logs is within the 1,250,000 bd.
ft. covered by Cover Note No. 1010 insured for $70,000.00.

"On September 14, 1963, the adjustment company submitted a computation of the
defendant's probable liability on the loss sustained by the shipment, in the total
amount of P11,042.04 (Exhibit 4).

"On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on
the ground that defendant's investigation revealed that the entire shipment of logs
covered by the two marine policies No. 53 HO 1032 and 53 HO 1033 were received
in good order at their point of destination. It was further stated that the said loss may
not be considered as covered under Cover Note No. 1010 because the said Note had
become 'null and void by virtue of the issuance of Marine Policy Nos. 53 HO 1032
and 1033' (Exhibit J-1). The denial of the claim by the defendant was brought by the
plaintiff to the attention of the Insurance Commissioner by means of a letter dated
March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance
Commissioner Francisco Y. Mandanas observed that 'it is only fair and equitable to
indemnify the insured under Cover Note No. 1010,' and advised early settlement of
the said marine loss and salvage claim (Exhibit L).

"On June 26, 1964, the defendant informed the Insurance Commissioner that, on
advice of their attorneys, the claim of the plaintiff is being denied on the ground that
the cover note is null and void for lack of valuable consideration (Exhibit M)." 4

Petitioner assigned as errors of the Court of Appeals, the following:

"THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE

WAS NULL AND VOID FOR LACK OF VALUABLE CONSIDERATION
BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT
PREMIUMS FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO
SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON
ALL ITS COVER NOTES.

II

"THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE

RESPONDENT WAS RELEASED FROM LIABILITY UNDER THE COVER
NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS
BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE
RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE
CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND,
CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER
SECTION 84 OF THE INSURANCE ACT." 5

1. Petitioner contends that the Cover Note was issued with a consideration when,
by express stipulation, the cover note is made subject to the terms and conditions of
the marine policies, and the payment of premiums is one of the terms of the policies.
From this undisputed fact, We uphold petitioner's submission that the Cover Note was
not without consideration for which the respondent court held the Cover Note as null
and void, and denied recovery therefrom. The fact that no separate premium was paid
on the Cover Note before the loss insured against occurred, does not militate against
the validity of petitioner's contention, for no such premium could have been paid,
since by the nature of the Cover Note, it did not contain, as all Cover Notes do not
contain particulars of the shipment that would serve as basis for the computation of
the premiums. As a logical consequence, no separate premiums are intended or
required to be paid on a Cover Note. This is a fact admitted by an official of
respondent company, Juan Jose Camacho, in charge of issuing cover notes of the
respondent company (p. 33, tsn, September 24, 1965).

At any rate, it is not disputed that petitioner paid in full all the premiums as called for
by the statement issued by private respondent after the issuance of the two regular
marine insurance policies, thereby leaving no account unpaid by petitioner due on the
insurance coverage, which must be deemed to include the Cover Note. If the Note is
to be treated as a separate policy instead of integrating it to the regular policies
subsequently issued, the purpose and function of the Cover Note would be set at
naught or rendered meaningless, for it is in a real sense a contract, not a mere
application for insurance which is a mere offer. 6

It may be true that the marine insurance policies issued were for logs no longer
including those which had been lost during loading operations. This had to be so
because the risk insured against is not for loss during loading operations anymore, but
for loss during transit, the logs having already been safely placed aboard. This would
make no difference, however, insofar as the liability on the cover note is concerned,
for the number or volume of logs lost can be determined independently, as in fact it
had been so ascertained at the instance of private respondent itself when it sent its
own adjuster to investigate and assess the loss, after the issuance of the marine
insurance policies. LLjur

The adjuster went as far as submitting his report to respondent, as well as its
computation of respondent's liability on the insurance coverage. This coverage could
not have been no other than what was stipulated in the Cover Note, for no loss or
damage had to be assessed on the coverage arising from the marine insurance policies.
For obvious reasons, it was not necessary to ask petitioner to pay premium on the
Cover Note, for the loss insured against having already occurred, the more practical
procedure is simply to deduct the premium from the amount due the petitioner on the
Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause
for the petitioner to lose what is due it as if there had been payment of premium, for
non-payment by it was not chargeable against its fault. Had all the logs been lost
during the loading operations, but after the issuance of the Cover Note, liability on the
note would have already arisen even before payment of premium. This is how the
cover note as a "binder" should legally operate; otherwise, it would serve no practical
purpose in the realm of commerce, and is supported by the doctrine that where a
policy is delivered without requiring payment of the premium, the presumption is that
a credit was intended and policy is valid. 7

2. The defense of delay as raised by private respondent in resisting the claim

cannot be sustained. The law requires this ground of delay to be promptly and
specifically asserted when a claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the ground of delay in objecting to
petitioner's claim of recovery on the cover note, it took steps clearly indicative that
this particular ground for objection to the claim was never in its mind. The nature of
this specific ground for resisting a claim places the insurer on duty to inquire when
the loss took place, so that it could determine whether delay would be a valid ground
upon which to object to a claim against it.

As already stated earlier, private respondent's reaction upon receipt of the notice of
loss, which was on April 15, 1963, was to set in motion from July 1963 what would
be necessary to determine the cause and extent of the loss, with a view to the payment
thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess
the loss in July, 1963. The adjuster submitted his report on August 23, 1963 and his
computation of respondent's liability on September 14, 1963. From April 15,1963 to
July 1963, enough time was available for private respondent to determine if petitioner
was guilty of delay in communicating the loss to respondent company. In the
proceedings that took place later in the Office of the Insurance Commissioner, private
respondent should then have raised this ground of delay to avoid liability. It did not do
so. It must be because it did not find any delay, as this Court fails to find a real and
substantial sign thereof. But even on the assumption that there was delay, this Court is
satisfied and convinced that as expressly provided by law, waiver can successfully be
raised against private respondent. Thus Section 84 of the Insurance Act provides:
prLL

"Section 84. — Delay in the presentation to an insurer of notice or proof of loss is

waived if caused by any act of his or if he omits to take objection promptly and
specifically upon that ground."

From what has been said, We find duly substantiated petitioner's assignments of error.

ACCORDINGLY, the appealed decision is set aside and the decision of the Court of
First Instance is reinstated in toto with the affirmance of this Court. No special
pronouncement as to costs.

SO ORDERED.

[G.R. No. 130421. June 28, 1999.]

AMERICAN HOME ASSURANCE COMPANY, petitioner, vs. ANTONIO CHUA,
respondent.

Salonga & Associates for petitioner.

Rampi C. Hontanosas for respondent.

SYNOPSIS

On April 6, 1990, Moonlight Enterprises, respondent's business establishment, was

razed by fire. Respondent then filed an insurance claim with petitioner and four other
co-insurers. Petitioner refused to honor the claim, thus prompting respondent to file an
action. In its defense, petitioner claimed that there was no existing insurance contract
when the fire occurred since respondent did not pay the premium. It alleged that even
assuming there was a contract, respondent violated several conditions of the policy.
The trial court ruled in favor of respondent. This was affirmed in toto by the Court of
Appeals. Its motion for reconsideration having been denied, petitioner filed this
petition.

Petitioner accepted the check and issued an official receipt for the payment. Its agent
acknowledged receipt of payment. An acknowledgment of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding. AECacT

It cannot be said that petitioner was deceived by respondent by the latter's non-
disclosure of the other insurance contracts when petitioner actually had prior
knowledge thereof.

However, loss of profit cannot be shouldered by petitioner whose obligation is limited

to the object of insurance, which was the stock-in-trade and not the expected loss in
income or profit. The awards of moral and exemplary damages were also deleted.
Moral damages may be awarded in breaches of contracts where the defendant acted in
bad faith. The Court found no such fraud or bad faith. Exemplary damages may be
awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner. Nothing thereof can be attributed to petitioner. The award of
attorney's fees was reduced to a reasonable level. cCHETI

SYLLABUS

1. MERCANTILE LAW; INSURANCE; POLICY NOT VALID AND

BINDING UNLESS PREMIUM IS PAID. — The general rule in insurance laws is
that unless the premium is paid the insurance policy is not valid and binding. The only
exceptions are life and industrial life insurance. Whether payment was indeed made is
a question of fact which is best determined by the trial court.
2. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF TRIAL AND
APPELLATE COURTS, GENERALLY NOT DISTURBED ON APPEAL. — The
trial court found, as affirmed by the Court of Appeals, that there was a valid check
payment by respondent to petitioner. Well-settled is the rule that the factual findings
and conclusions of the trial court and the Court of Appeals are entitled to great weight
and respect, and will not be disturbed on appeal in the absence of any clear showing
that the trial court overlooked certain facts or circumstances which would
substantially affect the disposition of the case. We see no reason to depart from this
ruling. EADSIa

3. ID.; ID.; ID.; CASE AT BAR. — According to the trial court the renewal
certificate issued to respondent contained the acknowledgment that premium had been
paid. It is not disputed that the check drawn by respondent in favor of petitioner and
delivered to its agent was honored when presented and petitioner forthwith issued its
official receipt to respondent on 10 April 1990. Section 306 of the Insurance Code
provides that any insurance company which delivers a policy or contract of insurance
to an insurance agent or insurance broker shall be deemed to have authorized such
agent or broker to receive on its behalf payment of any premium which is due on such
policy or contract of insurance at the time of its issuance or delivery or which
becomes due thereon. In the instant case, the best evidence of such authority is the
fact that petitioner accepted the check and issued the official receipt for the payment.
It is, as well, bound by its agent's acknowledgment of receipt of payment. The
submission of the alleged fraudulent documents pertained to respondent's income tax
returns for 1987 to 1989. Respondent, however; presented a BIR certification that he
had paid the proper taxes for the said years. The trial court and the Court of Appeals
gave credence to the certification and it being a question of fact, we hold that said
finding is conclusive.

4. MERCANTILE LAW; INSURANCE; "OTHER INSURANCE CLAUSE";

COMPANY ESTOPPED FROM ASSAILING VIOLATION THEREOF WHERE
ITS AGENT KNEW OF OTHER INSURANCE SECURED; CASE AT BAR. —
Ordinarily, where the insurance policy specifies as a condition the disclosure of
existing co-insurers, non-disclosure thereof is a violation that entitles the insurer to
avoid the policy. This condition is common in fire insurance policies and is known as
the "other insurance clause." The purpose for the inclusion of this clause is to prevent
an increase in the moral hazard. We have ruled on its validity and the case of
Geagonia v. Court of Appeals clearly illustrates such principle. However, we see an
exception in the instant case. To constitute a violation the other existing insurance
contracts must be upon the same subject matter and with the same interest and risk.
Indeed, respondent acquired several co-insurers and he failed to disclose this
information to petitioner. Nonetheless, petitioner is estopped from invoking this
argument. The trial court cited the testimony of petitioner's loss adjuster who admitted
previous knowledge of the co-insurers. Indubitably, it cannot be said that petitioner
was deceived by respondent by the latter's non-disclosure of the other insurance
contracts when petitioner actually had prior knowledge thereof. Petitioner's loss
adjuster had known all along of the other existing insurance contracts, yet, he did not
use that as basis for his recommendation of denial. The loss adjuster, being an
employee of petitioner, is deemed a representative of the latter whose awareness of
the other insurance contracts binds petitioner. We, therefore, hold that there was no
violation of the "other insurance clause" by respondent.

5. CIVIL LAW; DAMAGES; LOSS OF PROFIT; NOT RECOVERABLE

WHERE CLAIMANT NO LONGER HAD ANY BUSINESS TO OPERATE. —
There is no legal and factual basis for the award of P200,000 for loss of profit. It
cannot be denied that the fire totally gutted respondent's business; thus, respondent no
longer had any business to operate. His loss of profit cannot be shouldered by
petitioner whose obligation is limited to the object of insurance, which was the stock-
in-trade, and not the expected loss in income or profit.

6. ID.; ID.; MORAL DAMAGES; ABSENCE OF FRAUD AND BAD FAITH

NEGATES RECOVERY THEREOF. — At the core of this case is petitioner's alleged
breach of its obligation under a contract of insurance. Under Article 2220 of the Civil
Code, moral damages may be awarded in breaches of contracts where the defendant
acted fraudulently or in bad faith. We find no such fraud or bad faith. It must again be
stressed that moral damages are emphatically not intended to enrich a plaintiff at the
expense of the defendant. Such damages are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to obviate the moral
suffering he has undergone, by reason of the defendant's culpable action. Its award is
aimed at the restoration, within the limits of the possible, of the spiritual status quo
ante, and it must be proportional to the suffering inflicted. When awarded, moral
damages must not be palpably and scandalously excessive as to indicate that it was
the result of passion, prejudice or corruption on the part of the trial court judge.

7. ID.; ID.; EXEMPLARY DAMAGES; DEFENDANT DID NOT ACT IN

OPPRESSIVE OR MALEVOLENT MANNER IN RESISTING CLAIM. — The law
is likewise clear that in contracts and quasi-contracts the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. Nothing thereof can be attributed to petitioner which merely tried
to resist what it claimed to be an unfounded claim for enforcement of the fire
insurance policy.

8. ID.; ID.; ATTORNEY'S FEES; NOT AWARDED EVERY TIME A PARTY

PREVAILS IN A SUIT. — As to attorney's fees, the general rule is that attorney's
fees cannot be recovered as part of damages because of the policy that no premium
should be placed on the right to litigate. In short, the grant of attorney's fees as part of
damages is the exception rather than the rule; counsel's fees are not awarded every
time a party prevails in a suit. It can be awarded only in the cases enumerated in
Article 2208 of the Civil Code, and in all cases it must be reasonable. Thereunder, the
trial court may award attorney's fees where it deems just and equitable that it be so
granted. While we respect the trial court's exercise of its discretion in this case, the
award of P50,000 is unreasonable and excessive. It should be reduced to P10,000.
HTCAED

[G.R. No. 137172. April 4, 2001.]

UCPB GENERAL INSURANCE CO., INC., petitioner, vs. MASAGANA

TELAMART, INC., respondent.

Abello Concepcion Regala & Cruz for petitioner.

Arturo S. Santos for respondent.

SYNOPSIS

The main issue to be resolved in this case is whether or not the fire insurance policies
issued by petitioner to the respondent for the period from May 22, 1991 to May 22,
1992 had been extended by an implied credit arrangement though actual payment of
premiums was tendered on a later date and after the occurence of the fire insured
against. The Supreme Court, in a decision dated June 15, 1999, held that prepayment
of premiums is required for the validity of the insurance policies, pursuant Section 77
of the Insurance Code of 1978 (P.D. No. 1460). Petitioner, in the instant motion for
reconsideration, contends that the court below correctly found that the policies were
renewed by operation of law and were effective on June 30, 1992 when the fire
occurred, since petitioner had the practice of grating respondent a 60 to 90 day credit
term for the payment of premiums which respondent later paid within the credit term.
AaSHED

In a resolution dated April 4, 2001, the Supreme Court reversed its earlier decision,
ruling that respondent should be allowed to recover on the policies because: there is
nothing in Section 77 which prohibits the parties in an insurance contract to provide
for a credit term within to pay the premiums; estoppel bars petitioner from taking
refuge under Section 77 since respondent relied in good faith on petitioner's practice
of granting a 60 to 90 day credit term for him to pay the premiums.

SYLLABUS
1. COMMERCIAL LAW; INSURANCE; CONTRACT; PREPAYMENT OF
PREMIUM IS A PREREQUISITE FOR ITS VALIDITY; EXCEPTIONS. — While
the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, . . . the first exception is provided by Section
77 itself, and that is, in case of a life or industrial life policy whenever the grace
period provision applies. The second is that covered by Section 78 of the Insurance
Code, which provides that any acknowledgment in a policy or contract of insurance of
the receipt of premium is conclusive evidence of its payment, so far as to make the
policy binding . . . A third exception was laid down in Makati Tuscany Condominium
Corporation vs. Court of Appeals, wherein we ruled that Section 77 may not apply if
the parties have agreed to the payment in installments of the premium and partial
payment has been made at the time of loss. . . . Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured
a credit term for the payment of the premium and loss occurs before the expiration of
the term, recovery on the policy should be allowed even though the premium is paid
after the loss but within the credit term. DcITHE

2. ID.; ID.; ID.; ID.; ESTOPPEL, ADDITIONAL EXCEPTION; CASE AT

BAR. — Finally in the instant case, it would be unjust and inequitable if recovery on
the policy would not be permitted against Petitioner, which had consistently granted a
60- to 90-day credit term for the payment of premiums despite its full awareness of
Section 77. Estoppel bars it from taking refuge under said Section, since respondent
relied in good faith on such practice. Estoppel then is the fifth exception to Section
77.

VITUG, J., separate opinion:

COMMERCIAL LAW; INSURANCE; CONTRACT; PREMIUM PAYMENT

ESTABLISHES THE VINCULUM JURIS BETWEEN THE INSURED AND THE
INSURER; CASE AT BAR. — By weight of authority, estoppel cannot create a
contract of insurance, neither can it be successfully invoked to create a primary
liability, nor can it give validity to what the law so proscribes as a matter of public
policy. So essential is the premium payment to the creation of the vinculum juris
between the insured and the insurer that it would be doubtful to have that payment
validly excused even for a fortuitous event. The law, however, neither requires for the
establishment of the judicial tie, nor measures the strength of such tie by, any specific
amount of premium payment. A part payment of the premium, if accepted by the
insurer, can thus perfect the contract and bring the parties into an obligatory relation.
Such a payment puts the contract into full binding force, not merely pro tanto, thereby
entitling and obligating the parties by their agreement. Hence, in case of loss, full
recovery less the unpaid portion of the premium (by the operative act of legal
compensation), can be had by the insured and, correlatively, if no loss occurs the
insurer can demand the payment of the unpaid balance of the premium.
PARDO, J., dissenting opinion:

COMMERCIAL LAW; INSURANCE; CONTRACT; FRAUD; PAYMENT OF

OVERDUE PREMIUMS BEFORE GIVING WRITTEN NOTICE TO THE
INSURER OF OCCURRENCE OF THE FIRE, A CASE OF. — Respondent
Masagana surreptitiously tried to pay the overdue premiums before giving written
notice to petitioner of the occurrence of the fire that razed the subject property. This
failure to give notice of the fire immediately upon its occurrence blatantly showed the
fraudulent character of its claim. The fire totally destroyed the property on June 13,
1992; the written notice of loss was given only more than a month later, on July 14,
1992, the day after respondent surreptitiously paid the overdue premiums. Respondent
very well knew that the policy was not renewed on time. Hence, the surreptitious
attempt to pay overdue premiums. Such act revealed a reprehensible disregard of the
principle that insurance is a contract uberrima fides, the most abundant good faith.
Respondent is required by law and by express terms of the policy to give immediate
written notice of loss. This must be complied with in the utmost good faith. Another
badge of fraud is that respondent deviated from its previous practice of coursing its
premium payments through its brokers. This time, respondent Masagana went directly
to petitioner and paid through its cashier with manager's checks. Naturally, the cashier
routinely accepted the premium payment because he had no written notice of the
occurrence of the fire. Such fact was concealed by the insured and not revealed to
petitioner at the time of payment. Indeed, if as contended by respondent, there was a
clear agreement regarding the grant of a credit extension, respondent would have
given immediate written notice of the fire that razed the property. This clearly showed
respondent's attempt to deceive petitioner into believing that the subject property still
existed and the risk insured against had not happened.

TIBAY VS COURT OF APPEALS

[G.R. No. 95546. November 6, 1992.]

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner, vs. THE

COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.

Agcaoili & Associates for petitioner.

Salonga & Associates for private respondent.

SYLLABUS

1. COMMERCIAL LAW; INSURANCE POLICY, VALID EVEN IF

PREMIUMS WERE PAID ON INSTALLMENTS. — We hold that the subject
policies are valid even if the premiums were paid on installments. The records clearly
show that petitioner and private respondent intended subject insurance policies to be
binding and effective notwithstanding the staggered payment of the premiums. The
initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In
those three (3) years, the insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurer's intention to honor the policies it
issued to petitioner. Certainly, basic principles of equity and fairness would not allow
the insurer to continue collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that the premiums were not
prepaid in full.

2. ID.; ID.; PREMIUMS; REFUND THEREOF, WHEN NOT AVAILABLE;

RULE. — As correctly observed by the appellate court, where the risk is entire and
the contract is indivisible, the insured is not entitled to a refund of the premiums paid
if the insurer was exposed to the risk insured for any period, however brief or
momentary.

DECISION

BELLOSILLO, J p:

This case involves a purely legal question: whether payment by installment of the
premiums due on an insurance policy invalidates the contract of insurance, in view of
Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which
provides: LibLex

"SECTION 77. An insurer is entitled to the payment of the premium as soon as

the thing is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies."
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., issued in favor of
petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy
No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1
March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The
premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982
and 16 November 1982, all of which were accepted by private respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy No.

AH-CPP-9210596, which replaced and renewed the previous policy, for a term
covering 1 March 1903 to 1 March 1984. The premium in the amount of P466,103.05
was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9
September 1983, and 21 November 1983. All payments were likewise accepted by
private respondent.

On 20 January 1984, the policy was again renewed and private respondent issued to
petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1
March 1985. On this renewed policy, petitioner made two installment payments, both
accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the
second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the
balance of the premium.

Consequently, private respondent filed an action to recover the unpaid balance of

P314,103.05 for Insurance Policy No. AH-CPP-9210651.

In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy
No. AH-CPP-9210651. It explained that it discontinued the payment of premiums
because the policy did not contain a credit clause in its favor and the receipts for the
installment payments covering the policy for 1984-85, as well as the two (2) previous
policies, stated the following reservations: cdll

"2. Acceptance of this payment shall not waive any of the company rights to deny
liability on any claim under the policy arising before such payments or after the
expiration of the credit clause of the policy; and

"3. Subject to no loss prior to premium payment. If there be any loss such is not
covered."

Petitioner further claimed that the policy was never binding and valid, and no risk
attached to the policy. It then pleaded a counterclaim for P152,000.00 for the
premiums already paid for 1984-85, and in its answer with amended counterclaim,
sought the refund of P924,206.10 representing the premium payments for 1982-85.

After some incidents, petitioner and private respondent moved for summary
judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon
the following findings:

"While it is true that the receipts issued to the defendant contained the aforementioned
reservations, it is equally true that payment of the premiums of the three
aforementioned policies (being sought to be refunded) were made during the lifetime
or term of said policies, hence, it could not be said, inspite of the reservations, that no
risk attached under the policies. Consequently, defendant's counterclaim for refund is
not justified.

"As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view
of the reservation in the receipts ordinarily issued by the plaintiff on premium
payments the only plausible conclusion is that plaintiff has no right to demand their
payment after the lapse of the term of said policy on March 1, 1985. Therefore, the
defendant was justified in refusing to pay the same." 1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of
Appeals rendered a decision 2 modifying that of the trial court by ordering herein
petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained —

"The obligation to pay premiums when due is ordinarily an indivisible obligation to

pay the entire premium. Here, the parties herein agreed to make the premiums payable
in installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years,
the second and third policies being a renewal/replacement for the previous one. And
the insured never informed the insurer that it was terminating the policy because the
terms were unacceptable.

"While it may be true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract as valid and
binding upon payment of the first premium. Otherwise, we would allow the insurer to
renege on its liability under the contract, had a loss incurred (sic) before completion
of payment of the entire premium, despite its voluntary acceptance of partial
payments, a result eschewed by basic considerations of fairness and equity.

"To our mind, the insurance contract became valid and binding upon payment of the
first premium, and the plaintiff could not have denied liability on the ground that
payment was not made in full, for the reason that it agreed to accept installment
payments . . ." 3
Petitioner now asserts that its payment by installment of the premiums for the
insurance policies for 1982, 1983 and 1984 invalidated said policies because of the
provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions
stipulated by the insurer in its receipts, disclaiming liability for loss occurring before
payment of premiums.

It argues that where the premium is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium
pursuant to Sec. 78 of the Insurance Code. The absence of an express
acknowledgment in the policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said premiums on or before the effective
dates of said policies rendered them invalid. Petitioner thus concludes that there
cannot be a perfected contract of insurance upon mere partial payment of the
premiums because under Sec. 77 of the Insurance Code, no contract of insurance is
valid and binding unless the premium thereof has been paid, notwithstanding any
agreement to the contrary. As a consequence, petitioner seeks a refund of all premium
payments made on the alleged invalid insurance policies. LLpr

We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent intended
subject insurance policies to be binding and effective notwithstanding the staggered
payment of the premiums. The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's
intention to honor the policies it issued to petitioner. Certainly, basic principles of
equity and fairness would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned
findings and conclusion of the appellate court contained in its Resolution denying the
motion to reconsider its Decision —

"While the import of Section 77 is that prepayment of premiums is strictly required as

a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even if
premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so proscribed. At
the very least, both parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted." 4

The reliance by petitioner on Arce v. Capital Surety and Insurance Co. 5 is unavailing
because the facts therein are substantially different from those in the case at bar. In
Arce, no payment was made by the insured at all despite the grace period given. In the
case before Us, petitioner paid the initial installment and thereafter made staggered
payments resulting in full payment of the 1982 and 1983 insurance policies. For the
1984 policy, petitioner paid two (2) installments although it refused to pay the
balance. llcd

It appearing from the peculiar circumstances that the parties actually intended to make
the three (3) insurance contracts valid, effective and binding, petitioner may not be
allowed to renege on its obligation to pay the balance of the premium after the
expiration of the whole term of the third policy (No. AH-CPP-9210651) in March
1985. Moreover, as correctly observed by the appellate court, where the risk is entire
and the contract is indivisible, the insured is not entitled to a refund of the premiums
paid if the insurer was exposed to the risk insured for any period, however brief or
momentary.

WHEREFORE, finding no reversible error in the judgment appealed from, the same is
AFFIRMED. Costs against petitioner.

SO ORDERED.

[G.R. No. L-20853. May 29, 1967.]

BONIFACIO BROS., INC., ET AL., plaintiffs-appellants, vs. ENRIQUE MORA, ET

AL., defendants-appellees.

G. Magsaysay for plaintiffs-appellants.

Abad Santos & Pablo for defendant-appellee H. E. Reyes, Inc.

J. P. Santilla & A. D. Hidalgo, Jr. for other defendant-appellee.

SYLLABUS

1. CONTRACTS; CONTRACTS TAKE EFFECT ONLY BETWEEN THE

PARTIES THERETO; EXCEPTION. — It is fundamental that contracts take effect
only between the parties thereto, except on some specific instances provided by law
where the contract contains some stipulation in favor of a third person (Art. 1311,
Civil Code). Such stipulation is known as stipulation pour autrui or a provision in
favor of a third person not a party to the contract. Under this doctrine, a third person is
allowed to avail himself of a benefit granted to him by the terms of the contract,
provided that the contracting parties have clearly and deliberately conferred a favor
upon such person (Art. 1311, Civil Code; Uy Tam, et al. vs. Leonard, 30 Phil.. 471 ).
Consequently, a third person not a party to the contract has no action against the
parties thereto, and cannot generally demand the enforcement of the same (Manila
Railroad Co. vs. Compañia Transatlantica, 38 Phil. 676).

2. ID.; STIPULATION POUR AUTRUI; HOW TO DETERMINE WHETHER

A THIRD PERSON HAS AN ENFORCEABLE INTEREST IN THE CONTRACT.
— The question of whether a third person has an enforceable interest in a contract,
must be settled by determining whether the contracting parties intended to tender him
such an interest by deliberately inserting terms in their agreement with the avowed
purpose of conferring a favor upon such third person. In this connection, this Court
has laid down the rule that the fairest test to determine whether the interest of a third
person in a contract is a stipulation pour autrui or merely an incidental interest, is to
rely upon the intention of the parties as disclosed by their contract ( Uy Tam, et al. vs.
Leonard, supra).

3. ID.; NATURE OF INSURANCE POLICY. — A policy of insurance is a

distinct and independent contract between the insured and insurer, and third persons
have no right either in a court of equity, or in a court of law, to the proceeds of it,
unless there be some contract of trust, expressed or implied, by the insured and third
person (Lampano vs. Jose, 30 Phil. 537).

DECISION

CASTRO, J p:

This is an appeal from the decision of the Court of First Instance of Manila, Branch
XV, in civil case 48823, affirming the decision of the Municipal Court of Manila,
declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros. Inc.
and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor
insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding &
Insurance Co. Inc., and directing payment of the said amount to the H.S. Reyes, Inc.
Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate No. QC -
8088, mortgaged the same to the H.S. Reyes, Inc., with the condition that the former
would insure the automobile, with the latter as beneficiary. The automobile was
thereafter insured on June 23, 1959 with the State Bonding & Insurance Co. Inc., and
motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent
provisions of which read:

"1. The Company (referring to the State Bonding & Insurance Co., Inc) will,
subject to the Limits of Liability, indemnify the Insured against loss of or damages to
the Motor Vehicle and its accessories and spare parts whilst thereon; (a) by accidental
collision or overturning or collision or overturning consequently upon mechanical
breakdown or consequent upon wear and tear.

xxx xxx xxx

2. At its own option the Company may pay in cash the amount of the loss or
damage or may repair, reinstate, or replace the Motor Vehicle or any part thereof or
its accessories or spare parts. The liability of the Company shall not exceed to value
of the parts whichever is the less. The Insured's estimate of value stated in the
schedule will be the maximum amount payable by the Company in respect of any
claim for loss or damage.

xxx xxx xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated by
damage for which the Company may be liable under this Policy provided that: — (a)
The estimated cost of such repair does not exceed the Authorized Repair Limit. (b) A
detailed estimate of the cost is forwarded to the Company without delay, subject to
the condition that 'Loss, if any, is payable to H.S. Reyes, Inc.', by virtue of the fact
that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and
that under a clause in said insurance policy, any loss was made payable to the H.S.
Reyes, Inc. as Mortgagee;

xxx xxx xxx

During the effectivity of an insurance contract, the car met with an accident. The
insurance company then assigned the accident to the H.H. Bayne Adjustment Co. for
investigation and appraisal of the damage. Enrique Mora, without the knowledge and
consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the
labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the
cost of labor and materials, Enrique Mora was billed at P2,102.73 through the H. H.
Bayne Adjustment Co. The insurance company, after claiming a franchise in the
amount of P100, drew a check in the amount of P2,002.73, as proceeds of the
insurance policy, payable to the order of Enrique Mora or H.S. Reyes, Inc., and
entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to
the proper party. In the meantime, the car was delivered to Enrique Mora without the
consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and
Ayala Auto Parts Co. of the cost of repairs and materials.

Upon the theory that the insurance proceeds should be paid directly to them, the
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint
with the Municipal Court of Manila against Enrique Mora and the State Bonding &
Insurance Co. Inc. for the collection of the sum of P2,002.73. The insurance company
filed its answer with a counterclaim for interpleader, requiring the Bonifacio Bros.
Inc. and the H.S. Reyes, Inc. to interplead in order to determine who has a better right
to the insurance proceeds in question. Enrique Mora was declared in default for
failure to appear at the hearing, and evidence against him was received ex parte.
However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and State
Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of which
the Municipal Court rendered a decision declaring the H.S. Reyes, Inc. as having a
better right to the disputed amount, and ordering the State Bonding & Insurance Co.
Inc. to pay to the H.S Reyes, Inc. the said sum of P2,002.73. From this decision, the
herein appellants elevated the case to the Court of First Instance of Manila before
which the stipulation of facts was reproduced. On October 19, 1962 the latter court
rendered a decision, affirming the decision of the Municipal Court. The Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. moved for reconsideration of the decision, but
the trial court denied the motion. Hence, this appeal.

The main issue raised is whether there is privity of contract between the Bonifacio
Bros. Inc and the Ayala Auto Parts Co. on the one hand and the insurance company
on the other. The appellants argue that the insurance company and Enrique Mora are
parties to the repair of the car as well as the to wage thereof performed. The authority
for this assertion is to be found, it is alleged, in paragraph 4 of the insurance contract
which provides that "the insured may authorize the repair of the Motor Vehicle
necessitated by damage for which the company may liable under the policy provided
that (a) the estimated cost of such repair does not exceed the Authorized Repair Limit,
and (b) a detailed estimate of the cost is forwarded to the company without delay." It
is stressed that the H.H. Bayne Adjustment Company's recommendation of payment
of the appellants' bill for materials and repairs for which the latter drew a check for
P2,002.73 indicates that Mora and the H.H. Bayne Adjustment Co. acted for and in
representation of the insurance company.

This argument is, in our view, beside the point, because from the undisputed facts and
from the pleadings it will be seen that the appellants' alleged cause of action rests
exclusively upon the terms of the insurance contract. The appellants seek to recover
the insurance proceeds, and for this purpose, they rely upon paragraph 4 of the
insurance contract document executed by and between the State Bonding & Insurance
Company, Inc. and Enrique Mora. The appellants are not mentioned in the contract as
parties thereto; nor is there any clause or provision thereof from which we can infer
that there is an obligation on the part of the insurance company to pay the cost of
repairs directly to them. It is fundamental that contracts take effect only between the
parties thereto, except in some specific instances provided by law where the contract
contains some stipulation in favor of a third person. 1 Such stipulation is known as
stipulation pour autrui or a provision in favor of a third person not a party to the
contract. Under this doctrine, a third person is allowed to avail himself of a benefit
granted to him by the terms of the contract, provided that the contracting parties have
clearly and deliberately conferred a favor upon such person. 2 Consequently a third
person not a party to the contract has no action against the parties thereto, and cannot
generally demand the enforcement of the same. 3 The question of whether a third
person has an enforceable interest in a contract, must be settled by determining
whether the contracting parties intended to tender him such an interest by deliberately
inserting terms in their agreement with the avowed purpose of conferring a favor upon
such third person. In this connection, this Court has laid down the rule that the fairest
test to determine whether the interest of a third person in a contract is a stipulation
pour autrui or merely an incidental interest, is to rely upon the intention of the parties
as disclosed by their contract. 4 In the instant case the insurance contract does not
contain any words or clauses to disclose an intent to give any benefit to any repairmen
or material men in case of repair of the car in question. The parties to the insurance
contract omitted such stipulation, which is a circumstance that supports the said
conclusion. On the other hand, the "loss payable" clause of the insurance policy
stipulates that "Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only
the H.S. Reyes, Inc. which they intended to benefit.

We likewise observe from the brief of the State Bonding & Insurance Company that it
has vehemently opposed the assertion or pretension of the appellants that they are
privy to the contract. If it were the intention of the Insurance Company to make itself
liable to the repair shop or material men, it could have easily inserted in the contract a
stipulation to that effect. To hold now that the original parties to the insurance
contract intended to confer upon the appellants the benefit claimed by them would
require as to ignore the indispensable requisite that a stipulation pour autrui must be
clearly expressed by the parties, which we cannot do.

As regards paragraph 4 of the insurance contract, a perusal thereof would show that
instead of establishing privity between the appellant and the insurance company, such
stipulation merely establishes the procedure that the insured has to follow in order to
be entitled to indemnity for repair. This paragraph therefore should not be construed
as bringing into existence in favor of the appellants a right of action against the
insurance company as such intention can never be inferred therefrom.

Another cogent reason for not recognizing a right of action by the appellants against
the insurance company is that "a policy of insurance is a distinct and independent
contract between the insured and insurer, and third persons have no right either in a
court of equity, or in a court of law, to the proceeds of it, unless there be some
contract of trust, expressed or implied, by the insured and third person". 5 In this case,
no contract of trust, expressed or implied exists. We, therefore, agree with the trial
court that no cause of action exists in favor of the appellants in so far as the proceeds
of insurance are concerned. The appellant's claim, if at all, is merely equitable in
nature and must be made effective through Enrique Mora who entered into a contract
with the Bonifacio Bros Inc. This conclusion is deducible not only from the principle
governing the operation and effect of insurance contracts in general, but is clearly
covered by the express provisions of section 50 of the Insurance Act which read:

"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."

The policy in question has been so framed that "Loss, if any, is payable to H. S.
Reyes, Inc." which unmistakably shows the intention of the parties.

The final contention of the appellants is that the right of the H. S. Reyes, Inc. to the
insurance proceeds arises only if there was loss and not where there is mere damage
as in the instant case. Suffice it to say that any attempt to draw a distinction between
"loss" and "damage" is uncalled for, because the word "loss" in insurance law
embraces injury or damage.

"Loss in insurance, defined. — The injury or damage sustained by the insured in

consequence of the happening of one or more of the accidents or misfortune against
which the insurer, in consideration of the premium, has undertaken to indemnify the
insured." (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic Law
Dictionary, cited in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).

Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or
partial.

Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.

Concepcion, C.J., Reyes, J. B. L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar,
Sanchez and Castro, JJ., concur.

[G.R. No. L-44059. October 28, 1977.]

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee, vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-
appellants.

DECISION

MARTIN, J p:

This is a novel question in insurance law: Can a common-law wife named as

beneficiary in the life insurance policy of a legally married man claim the proceeds
thereof in case of death of the latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Insular Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life plan for P5,882.00 with a
rider for Accidental Death Benefits for the same amount. Buenaventura C. Ebrado
designated Carponia T. Ebrado as the revocable beneficiary in his policy. He referred
to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an accident when he

was hit by a falling branch of a tree. As the insurance policy was in force, The Insular
Life Assurance Co., Ltd. stands liable to pay the coverage of the policy in an amount
of P11,745.73, representing the face value of the policy in the amount of P5,882.00
plus the additional benefits for accidental death also in the amount of P5,882.00 and
the refund of P18.00 paid for the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, 1969, in the sum of
P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit
of marriage. Pascuala Vda. de Ebrado also filed her claim as the widow of the
deceased insured. She asserts that she is the one entitled to the insurance proceeds, not
the common-law wife, Carponia T. Ebrado. LLjur

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular
Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of
First Instance of Rizal on April 29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972,
after which, a pre-trial order was entered reading as follows:

"During the pre-trial conference, the parties manifested to the court that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purposes of the pre-trial and make admissions for the
purpose of pre-trial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was married
to Pascuala Ebrado with whom she has six — (legitimate) namely; Hernando,
Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during the
lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy
No. 009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00 with
the rider for accidental death benefit as evidenced by Exhibits A for plaintiffs and
Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during
the lifetime of Buenaventura Ebrado, he was living with his common-law wife,
Carponia Ebrado, with whom she had 2 children although he was not legally
separated from his legal wife; 4) that Buenaventura Ebrado died by accident on
October 21, 1969 as evidenced by the death certificate Exhibit 3 and affidavit of the
police report of his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim
with the Insular Life Assurance Co. which was contested by Pascuala Ebrado who
also filed claim for the proceeds of said policy; 6) that in view of the adverse claims
the insurance company filed this action against the two herein claimants Carponia and
Pascuala Ebrado; 7) that there is now due from the Insular Life Assurance Co. as
proceeds of the policy P11,745.73; 8) that the beneficiary designated by the insured in
the policy is Carponia Ebrado and the insured made reservation to change the
beneficiary but although the insured made the option to change the beneficiary, same
was never changed up to the time of his death and the legal wife did not have any
opportunity to write the company that there was reservation to change the designation
of the beneficiary; 9) the parties agreed that a decision be rendered based on this
agreement and stipulation of facts as to who among the two claimants is entitled to the
policy.

"Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.

SO ORDERED."

On September 25, 1972, the trial court rendered judgment declaring, among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured
Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds to
the estate of the deceased insured. The trial court held:

"It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by preponderance
of evidence in the same proceeding (the action brought to declare the nullity of the
donation).
It is, however, essential that such adultery or concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T. Ebrado
were living together as husband and wife without being legally married and that the
marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid
and still existing at the time the insurance in question was purchased there is no
question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of
the insurance upon the death of the insured." Cdpr

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on
July 11, 1976, the Appellate Court certified the case to Us as involving only questions
of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even
the new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the Insurance
Act which provides that "(t)he insurance shall be applied exclusively to the proper
interest of the person in whose name it is made" 1 cannot be validly seized upon to
hold that the same includes the beneficiary. The word interest" highly suggests that
the provision refers only to the insured" and not to the beneficiary, since a contract of
insurance is personal in character. 2 Otherwise, the prohibitory laws against illicit
relationships especially on property and descent will be rendered nugatory, as the
same could easily be circumvented by modes of insurance. Rather, the general rules
of civil law should be applied to resolve this void in the Insurance Law Article 2011
of the New Civil Code states: "The contract of insurance is governed by special laws.
Matters not expressly provided for in such special laws shall be regulated by this
Code." When not otherwise specifically provided for by the Insurance Law, the
contract of life insurance is governed by the general rules of the civil law regulating
contracts. 3 And under Article 2012 of the same Code, "any person who is forbidden
from receiving any donation under Article 739 cannot be named beneficiary of a life
insurance policy by the person who cannot make a donation to him." 4 Common-law
spouses are, definitely, barred from receiving donations from each other. Article 739
of the new Civil Code provides:

"The following donations shall be void:

"1. Those made between persons who were guilty of adultery or concubinage at
the time of donation;
"Those made between persons found guilty of the same criminal offense, in
consideration thereof;

"3. Those made to a public officer or his wife, descendants or ascendants by

reason of his office.

"In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action."

2. In essence, a life insurance policy is no different from a civil donation insofar

as the beneficiary is concerned. Both are founded upon the same consideration:
liberality. A beneficiary is like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive the proceeds or
profits of said insurance. As a consequence, the proscription in Article 739 of the new
Civil Code should equally operate in life insurance contracts. The mandate of Article
2012 cannot be laid aside: any person who cannot receive a donation cannot be named
as beneficiary in the life insurance policy of the person who cannot make the
donation. 5 Under American law, a policy of life insurance is considered as a
testament and in construing it, the courts will, so far as possible treat it as a will and
determine the effect of a clause designating the beneficiary by rules under which wills
are interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a

barrier between common-law spouses in regard to property relations since such
relationship ultimately encroaches upon the nuptial and filial rights of the legitimate
family. There is every reason to hold that the bar in donations between legitimate
spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration. As above pointed out, a
beneficiary in a life insurance policy is no different from a donee. Both the recipients
of pure beneficence. So long as marriage remains the threshold of family laws, reason
and morality dictate that the impediments imposed upon married couple should
likewise be imposed upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this
Court, through Justice Fernando, said:

"If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), `to prohibit donations in favor of the other
consort and his descendants because of fear and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no se
enganen desponjandose el uno al otro por amor que han de consuno' (According to)
the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale `No Mutuato amore
invicem spoliarentur' of the Pandects (Bk, 24, Titl. 1 De donat, inter virum et
uxorem); then there is very reason to apply the same prohibitive policy to persons
living together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32
ad Sabinum, fr. 1), `it would not be just that such donations should subsist, lest the
condition of those who incurred guilt should turn out to be better.' So long as marriage
remains the cornerstone of our family law, reason and morality alike demand that the
disabilities attached to marriage should likewise attach to concubinage.

It is hardly necessary to add that even in the absence of the above pronouncement, any
other conclusion cannot stand the test of scrutiny. It would be to indict the framers of
the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it as
what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence to
its avowed objective." LLphil

4. We do not think that a conviction for adultery or concubinage is exacted

before the disabilities mentioned in Article 739 may effectuate. More specifically,
with regard to the disability on "persons who were guilty of adultery or concubinage
at the time of the donation," Article 739 itself provides:

"In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action."

The underscored clause neatly conveys that no criminal conviction for the
disqualifying offense is a condition precedent. In fact, it cannot even be gleaned from
the aforequoted provision that a criminal prosecution is needed. On the contrary, the
law plainly states that the guilt of the party may be proved "in the same action" for
declaration of nullity of donation. And, it would be sufficient if evidence
preponderates upon the guilt of the consort for the offense indicated. The quantum of
proof in criminal cases is not demanded.

In the case before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the case. It case agreed upon and
stipulated therein that the deceased insured Buenaventura C. Ebrado was married to
Pascuala Ebrado with whom she has six legitimate children; that during his lifetime,
the deceased insured was living with his common-law wife, Carponia Ebrado, with
whom he has two children. These stipulations are nothing less than judicial
admissions which, as a consequence, no longer require proof and cannot be
contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly
rendered without going through the rigors of a trial for the sole purpose of proving the
illicit liaison between the insured and the beneficiary. In fact, in that pre-trial, the
parties even agreed "that a decision be rendered based on this agreement and
stipulation of facts as to who among the two claimants is entitled to the policy." Cdpr

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.

Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds
of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.

SO ORDERED.

[G.R. No. L-28093. January 30, 1971.]

BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA

LOURDES, JOSE, JR., RODRIGO, LINEDA, and LUIS, all surnamed
CONSUEGRA, petitioners-appellants, vs. GOVERNMENT SERVICE INSURANCE
SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS, HIGHWAY DISTRICT
ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL SERVICE,
and ROSARIO DIAZ, respondents-appellees.

Bernardino O. Almeda for petitioners and appellants.

Binag & Arevalo, Jr. for respondent and appellee Government Service Insurance
System.

The Solicitor General for other respondents and appellees.

DECISION
ZALDIVAR, J p:

Appeal on purely questions of law from the decision of the Court of First Instance of
Surigao del Norte, dated March 7, 1967, in its Special Proceeding No. 1720.

The pertinent facts, culled from the stipulation of facts submitted by the parties, are
the following:

The late Jose Consuegra, at the time of his death, was employed as a shop foreman of
the office of the District Engineer in the province of Surigao-del Norte. In his lifetime,
Consuegra contracted two marriages, the first with herein respondent Rosario Diaz,
solemnized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on
July 15, 1937, out of which marriage were born two children, namely, Jose
Consuegra, Jr. and Pedro Consuegra, but both predeceased their father; and the
second, which was contracted in good faith while the first marriage was subsisting,
with herein petitioner Basilia Berdin, on May 1, 1957 in the same parish and
municipality, out of which marriage were born seven children, namely, Juliana,
Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, * all surnamed Consuegra.

Being a member of the Government Service Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the proceeds of his life insurance under
policy No. 601801 were paid by the GSIS to petitioner Basilia Berdin and her
children who were the beneficiaries named in the policy. Having been in the service
of the government for 22.5028 years, Consuegra was entitled to retirement insurance
benefits in the sum of P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186
as amended by Republic Acts 1616 and 3836. Consuegra did not designate any
beneficiary who would receive the retirement insurance benefits due to him.
Respondent Rosario Diaz, the widow by the first marriage, filed a claim with the
GSIS asking that the retirement insurance benefits be paid to her as the only legal heir
of Consuegra, considering that the deceased did not designate any beneficiary with
respect to his retirement insurance benefits. Petitioner Basilia Berdin and her children,
likewise, filed a similar claim with the GSIS, asserting that being the beneficiaries
named in the life insurance policy of Consuegra, they are the only ones entitled to
receive the retirement insurance benefits due the deceased Consuegra. Resolving the
conflicting claims, the GSIS ruled that the legal heirs of the late Jose Consuegra were
Rosario Diaz, his widow by his first marriage who is entitled to one-half, or 8/16, of
the retirement insurance benefits, on the one hand; and Basilia Berdin, his widow by
the second marriage and their seven children, on the other hand, who are entitled to
the remaining one-half, or 8/16, each of them to receive an equal share of 1/16.

Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia
Berdin and her children 1 filed on October 10, 1966 a petition for mandamus with
preliminary injunction in the Court of First Instance of Surigao naming as respondents
the GSIS, the Commissioner of Public Highways, the Highway District Engineer of
Surigao del Norte, the Commissioner of Civil Service, and Rosario Diaz, praying that
they (petitioners therein) be declared the legal heirs and exclusive beneficiaries of the
retirement insurance of the late Jose Consuegra, and that writ of preliminary
injunction be issued restraining implementation of the adjudication made by the GSIS.
October 26, 1966, the trial court issued an order requiring therein respondents to file
their respective answer refrained from issuing the writ of preliminary injunction
prayed for. On February 11, 1967, the parties submitted a stipulation of facts, prayed
that the same be admitted and approved and that judgment be rendered on the basis of
the stipulation of facts. On March 7, 1967, the court below rendered judgment, the
pertinent portions of which are quoted hereunder:

"This Court, in conformity with the foregoing stipulation of facts, likewise is in full
accord with the parties with respect to the authority cited by them in support of said
stipulation and which is herein-below cited for purposes of this judgment, to wit:

'When two women innocently and in good faith are legally united in holy matrimony
to the same man, they and their children, born of said wedlock, will be regarded as
legitimate children and each family be entitled to one half of the estate. Lao & Lao vs.
Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon vs.
Bejec, 74 Phil. 88.

"WHEREFORE, in view of the above premises, this Court is of the opinion that the
foregoing stipulation of facts is in order and in accordance with law and the same is
hereby approved. Judgment, therefore, is hereby rendered declaring the petitioner
Basilia Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria
Lourdes, Jose Jr., Rodrigo, Lenida and Luis, all surnamed Consuegra, beneficiary and
entitled to one-half (1/2) of the retirement benefit in the amount of Six Thousand
Three Hundred Four Pesos and Forty-Seven Centavos (P6,304.47) due to the
deceased Jose Consuegra from the Government Service Insurance System or the
amount of P3,152.235 to be divided equally among them in the proportional amount
of 1/16 each. Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby
declared beneficiary and entitled to the other half of the retirement benefit of the late
Jose Consuegra or the amount of P3,152.235. The case with respect to the Highway
District Engineer of Surigao del Norte is hereby ordered dismissed."

Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her
children.

It is the contention of appellants that the lower court erred in not holding that the
designated beneficiaries in the life insurance of the late Jose Consuegra are also the
exclusive beneficiaries in the retirement insurance of said deceased. In other words, it
is the submission of appellants that because the deceased Jose Consuegra failed to
designate the beneficiaries in his retirement insurance, the appellants who were the
beneficiaries named in the life insurance should automatically be considered the
beneficiaries to receive the retirement insurance benefits, to the exclusion of
respondent Rosario Diaz. From the arguments adduced by appellants in their brief We
gather that it is their stand that the system of life insurance and the system of
retirement insurance, that are provided for in Commonwealth Act 186 as amended,
are simply complementary to each other, or that one is a part or an extension of the
other, such that whoever is named the beneficiary in the life insurance is also the
beneficiary in the retirement insurance when no such beneficiary is named in the
retirement insurance.

The contention of appellants is untenable.

It should be noted that the law creating the Government Service Insurance System is
Commonwealth Act 186 which was enacted by the National Assembly on November
14, 1936. As originally approved, Commonwealth Act 186 provided for the
compulsory membership in the Government Service Insurance System of all regularly
and permanently appointed officials and employees of the government, considering as
automatically insured on life all such officials and employees, and issuing to them the
corresponding membership policy under the terms and conditions as provided in the
Act. 2

Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth
Act 186 was amended by Republic Act 660 which was enacted by the Congress of the
Philippines on June 16, 1951, and, among others, the amendatory Act provided that
aside from the system of life insurance under the Government Service Insurance
System there was also established the system of retirement insurance. Thus, We will
note in Republic Act 660 that there is a chapter on life insurance and another chapter
on retirement insurance. 3 Under the chapter on life insurance are sections 8, 9 and 10
of Commonwealth Act 186, as amended; and under the chapter on retirement
insurance are sections 11, 12, 13 and 13-A. On May 31, 1957, Republic Act 1616 was
enacted by Congress, amending section 12 of Commonwealth Act 186 as amended by
Republic Act 660, by adding thereto two new subsections, designated as subsections
(b) and (c). This subsection (c) of section 12 of Commonwealth Act 186, as amended
by Republic Acts 660,1616 and 3096, was again amended by Republic Act 3836
which was enacted on June 22, 1963. The pertinent provisions of subsection (c) of
Section 12 of Commonwealth Act 186, as thus amended and reamended, read as
follows:

"(c) Retirement is likewise allowed to a member, regardless of age, who has

rendered at least twenty years of service. The benefit shall, in addition to the return of
his personal contributions plus interest and the payment of the corresponding
employer's premiums described in subsection (a) of Section 5 hereof, without interest,
be only a gratuity equivalent to one month's salary for every year of service, based on
the highest rate received, but not to exceed twenty four months; Provided, That the
retiring officer or employee has been in the service of the said employer or office for
at least four years, immediately preceding his retirement.

xxx xxx xxx

"The gratuity is payable by the employer or office concerned which is hereby

authorized to provide the necessary appropriation to pay the same from any
unexpended items of appropriations.

"Elective or appointive officials and employees paid gratuity under this subsection
shall be entitled to the commutation of the unused vacation and sick leave, based on
the highest rate received, which they may have to their credit at the time of
retirement."

Jose Consuegra died on September 26, 1965, and so at the time of his death he had
acquired rights under the abovequoted provisions of subsection (c) of Section 12 of
Com. Act 186, as finally amended by Rep. Act 3836 on June 22, 1963. When
Consuegra died on September 26, 1965, he had to his credit 22.5028 years of service
in the government, and pursuant to the above-quoted provisions of subsection (c) of
Section 12 of Com. Act 186, as amended, on the basis of the highest rate of salary
received by him which was P282.83 per month, he was entitled to receive retirement
insurance benefits in the amount of P6,304.47. This is the retirement benefits that are
the subject of dispute between the appellants, on the one hand, and the appellee
Rosario Diaz, on the other, in the present case. The question posed is: to whom should
this retirement insurance benefits of Jose Consuegra be paid, because he did not, or
failed to, designate the beneficiary of his retirement insurance?

If Consuegra had 22.5028 years of service in the government when he died on

September 26, 1965, it follows that he started in the government service sometime
during the early part of 1943, or before 1943. In 1943 Com. Act 186 was not yet
amended, and the only benefits then provided for in said Com. Act 186 were those
that proceed from a life insurance. Upon entering the government service Consuegra
became a compulsory member of the GSIS, being automatically insured on his life,
pursuant to the provisions of Com. Act 186 which was in force at the time. During
1943 the operation of the Government Service Insurance System was suspended
because of the war, and the operation was resumed sometime in 1946. When
Consuegra designated his beneficiaries in his life insurance he could not have
intended those beneficiaries of his life insurance s also the beneficiaries of his
retirement insurance because the provisions on retirement insurance under the GSIS
came about only when Com. Act 186 was amended by Rep. 660 on June 16, 1951.
Hence, it cannot be said that cause herein appellants were designated beneficiaries
Consuegra's life insurance they automatically became beneficiaries also of his
retirement insurance. Rep. Act 660 added to Com. Act 186 provisions regarding
retirement insurance, which are Sections 11, 12, and 13 of Com. Act 186, as amended.
Subsection (b) of Section 11 of Com. Act 186, as amended by Rep. Act 660, provides
as follows:

"(b) Survivors benefit. — Upon death before he becomes eligible for retirement,
his beneficiaries as recorded in the application for retirement annuity filed with the
System shall be paid his own premiums with interest of three per centum per annum,
compounded monthly. If on his death he is eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him previously shall be paid
accordingly."

The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act

186, as amended by Rep. Act 660, clearly indicate that there is need for the employee
to file an application for retirement insurance benefits when he becomes a member of
the GSIS, and he should state in his application the beneficiary of his retirement
insurance. Hence, the beneficiary named in the life insurance does not automatically
become the beneficiary in the retirement insurance unless the same beneficiary in the
life insurance is so designated in the application for retirement insurance.

Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a
life insurance fund and for a retirement insurance fund. There was no such provision
in Com. Act 186 before it was amended by Rep. Act 660. Thus, subsections (a) and
(b) of Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, partly
read as follows:

"(a) Life insurance fund. — This shall consist of all premiums for life insurance
benefit and/or earnings and savings therefrom. It shall meet death claims as they may
arise or such equities as any member may be entitled to, under the conditions of his
policy, and shall maintain the required reserves to the end of guaranteeing the
fulfillment of the life insurance contracts issued by the System . . ."

"(b) Retirement insurance fund. — This shall consist of all contributions for
retirement insurance benefit and of earnings and savings therefrom. It shall meet
annuity payments an establish the required reserves to the end of guaranteeing the
fulfillment of the contracts issued by the System . . ."

Thus, We see that the GSIS offers two separate and distinct systems of benefits to its
members — one is the life insurance and the other is the retirement insurance. These
two distinct systems of benefits are paid out from two distinct and separate funds that
are maintained by the GSIS.

In the case of the proceeds of a life insurance, the same are paid to whoever is named
the beneficiary in the life insurance policy. As in the case of a life insurance provided
for in the Insurance Act (Act 2427, as amended), the beneficiary in a life insurance
under the GSIS may not necessarily be an heir of the insured. The insured in a life
insurance may designate any person as beneficiary unless disqualified to be so under
the provisions of the Civil Code. 4 And in the absence of any beneficiary named in
the life insurance policy, the proceeds of the insurance will go to the estate of the
insured.

Retirement insurance is primarily intended for the benefit of the employee — to

provide for his old age, or incapacity, after rendering service in the government for a
required number of years. If the employee reaches the age of retirement, he gets the
retirement benefits even to the exclusion of the beneficiary or beneficiaries named in
his application for retirement insurance. The beneficiary of the retirement insurance
can only claim the proceeds of the retirement insurance if the employee dies before
retirement. If the employee failed or overlooked to state the beneficiary of his
retirement insurance, the retirement benefits will accrue his estate and will be given to
his legal heirs in accordance with law, as in the case of a life insurance if no
beneficiary is named in the insurance policy.

It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled
that the proceeds of the retirement insurance of the late Jose Consuegra should
divided equally between his first living wife Rosario on the one hand, and his second
wife Basilia Berdin his children by her, on the other; and the lower court did not
commit error when it confirmed the action of the GSIS, it being accepted as a fact that
the second marriage of Jose Consuegra to Basilia Berdin was contracted in good faith.
The lower court has correctly applied the ruling of this Court in the case of Lao, et al.
vs. Dee Tim, et al., 45 Phil. 739, as cited in the stipulation of facts and in the decision
appealed from. 5 In the recent case of Gomez vs. Lipana, L-23214, June 30, 1970, 6
this Court, in construing the rights of two women who were married to the same man
— a situation more or less similar to the case of appellant Basilia Berdin and appellee
Rosario Diaz — held "that since the defendant's first marriage has not been dissolved
or declared void the conjugal partnership established by that marriage has not ceased.
Nor has the first wife lost or relinquished her status as putative heir of her husband
under the new Civil Code, entitled to share in his estate upon his death should she
survive him. Consequently, whether as conjugal partner in a still subsisting marriage
or as such putative heir she has an interest in the husband's share in the property here
in dispute.. " And with respect to the right of the second wife, this Court observed that
although the second marriage can be presumed to be void ab initio as it was
celebrated while the first marriage was still subsisting, still there is need for judicial
declaration of such nullity. And inasmuch as the conjugal partnership formed by the
second marriage was dissolved before judicial declaration of its nullity, "[t]he only
just and equitable solution in this case would be to recognize the right of the second
wife to her share of one-half in the property acquired by her and her husband, and
consider the other half as pertaining to the conjugal partnership of the first marriage."

WHEREFORE, the decision appealed from is affirmed. with costs against petitioners-
appellants. It is so ordered.
[G.R. No. 184300. July 11, 2012.]

MALAYAN INSURANCE CO., INC., petitioner, vs. PHILIPPINES FIRST

INSURANCE CO., INC. and REPUTABLE FORWARDER SERVICES, INC.,
respondents.

DECISION

REYES, J p:

Before the Court is a petition for review on certiorari filed by petitioner Malayan
Insurance Co., Inc. (Malayan) assailing the Decision 1 dated February 29, 2008 and
Resolution 2 dated August 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV
No. 71204 which affirmed with modification the decision of the Regional Trial Court
(RTC), Branch 38 of Manila. IaHCAD

Antecedent Facts

Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable Forwarder
Services, Inc. (Reputable) had been annually executing a contract of carriage,
whereby the latter undertook to transport and deliver the former's products to its
customers, dealers or salesmen. 3

On November 18, 1993, Wyeth procured Marine Policy No. MAR 13797 (Marine
Policy) from respondent Philippines First Insurance Co., Inc. (Philippines First) to
secure its interest over its own products. Philippines First thereby insured Wyeth's
nutritional, pharmaceutical and other products usual or incidental to the insured's
business while the same were being transported or shipped in the Philippines. The
policy covers all risks of direct physical loss or damage from any external cause, if by
land, and provides a limit of P6,000,000.00 per any one land vehicle.

On December 1, 1993, Wyeth executed its annual contract of carriage with Reputable.
It turned out, however, that the contract was not signed by Wyeth's representative/s. 4
Nevertheless, it was admittedly signed by Reputable's representatives, the terms
thereof faithfully observed by the parties and, as previously stated, the same contract
of carriage had been annually executed by the parties every year since 1989. 5
HDIaST
Under the contract, Reputable undertook to answer for "all risks with respect to the
goods and shall be liable to the COMPANY (Wyeth), for the loss, destruction, or
damage of the goods/products due to any and all causes whatsoever, including theft,
robbery, flood, storm, earthquakes, lightning, and other force majeure while the
goods/products are in transit and until actual delivery to the customers, salesmen, and
dealers of the COMPANY". 6 The contract also required Reputable to secure an
insurance policy on Wyeth's goods. 7 Thus, on February 11, 1994, Reputable signed a
Special Risk Insurance Policy (SR Policy) with petitioner Malayan for the amount of
P1,000,000.00.

On October 6, 1994, during the effectivity of the Marine Policy and SR Policy,
Reputable received from Wyeth 1,000 boxes of Promil infant formula worth
P2,357,582.70 to be delivered by Reputable to Mercury Drug Corporation in Libis,
Quezon City. Unfortunately, on the same date, the truck carrying Wyeth's products
was hijacked by about 10 armed men. They threatened to kill the truck driver and two
of his helpers should they refuse to turn over the truck and its contents to the said
highway robbers. The hijacked truck was recovered two weeks later without its cargo.
DcITaC

On March 8, 1995, Philippines First, after due investigation and adjustment, and
pursuant to the Marine Policy, paid Wyeth P2,133,257.00 as indemnity. Philippines
First then demanded reimbursement from Reputable, having been subrogated to the
rights of Wyeth by virtue of the payment. The latter, however, ignored the demand.

Consequently, Philippines First instituted an action for sum of money against

Reputable on August 12, 1996. 8 In its complaint, Philippines First stated that
Reputable is a "private corporation engaged in the business of a common carrier." In
its answer, 9 Reputable claimed that it is a private carrier. It also claimed that it
cannot be made liable under the contract of carriage with Wyeth since the contract
was not signed by Wyeth's representative and that the cause of the loss was force
majeure, i.e., the hijacking incident.

Subsequently, Reputable impleaded Malayan as third-party defendant in an effort to

collect the amount covered in the SR Policy. According to Reputable, "it was validly
insured with [Malayan] for P1,000,000.00 with respect to the lost products under the
latter's Insurance Policy No. SR-0001-02577 effective February 1, 1994 to February
1, 1995" and that the SR Policy covered the risk of robbery or hijacking. 10 DAEaTS

Disclaiming any liability, Malayan argued, among others, that under Section 5 of the
SR Policy, the insurance does not cover any loss or damage to property which at the
time of the happening of such loss or damage is insured by any marine policy and that
the SR Policy expressly excluded third-party liability.
After trial, the RTC rendered its Decision 11 finding Reputable liable to Philippines
First for the amount of indemnity it paid to Wyeth, among others. In turn, Malayan
was found by the RTC to be liable to Reputable to the extent of the policy coverage.
The dispositive portion of the RTC decision provides:

WHEREFORE, on the main Complaint, judgment is hereby rendered finding

[Reputable] liable for the loss of the Wyeth products and orders it to pay [Philippines
First] the following:

1. the amount of P2,133,257.00 representing the amount paid by [Philippines

First] to Wyeth for the loss of the products in question;

2. the amount of P15,650.00 representing the adjustment fees paid by

[Philippines First] to hired adjusters/surveyors;

3. the amount of P50,000.00 as attorney's fees; and

4. the costs of suit.

On the third-party Complaint, judgment is hereby rendered finding [Malayan] liable

to indemnify [Reputable] the following:

1. the amount of P1,000,000.00 representing the proceeds of the insurance

policy;

2. the amount of P50,000.00 as attorney's fees; and

3. the costs of suit. CaSHAc

SO ORDERED. 12

Dissatisfied, both Reputable and Malayan filed their respective appeals from the RTC
decision.

Reputable asserted that the RTC erred in holding that its contract of carriage with
Wyeth was binding despite Wyeth's failure to sign the same. Reputable further
contended that the provisions of the contract are unreasonable, unjust, and contrary to
law and public policy.

For its part, Malayan invoked Section 5 of its SR Policy, which provides:

Section 5. INSURANCE WITH OTHER COMPANIES. — The insurance does

not cover any loss or damage to property which at the time of the happening of such
loss or damage is insured by or would but for the existence of this policy, be insured
by any Fire or Marine policy or policies except in respect of any excess beyond the
amount which would have been payable under the Fire or Marine policy or policies
had this insurance not been effected.

Malayan argued that inasmuch as there was already a marine policy issued by
Philippines First securing the same subject matter against loss and that since the
monetary coverage/value of the Marine Policy is more than enough to indemnify the
hijacked cargo, Philippines First alone must bear the loss.

Malayan sought the dismissal of the third-party complaint against it. In the alternative,
it prayed that it be held liable for no more than P468,766.70, its alleged pro-rata share
of the loss based on the amount covered by the policy, subject to the provision of
Section 12 of the SR Policy, which states:

12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage

happening to any property hereby insured, there be any other subsisting insurance or
insurances, whether effected by the insured or by any other person or persons,
covering the same property, the company shall not be liable to pay or contribute more
than its ratable proportion of such loss or damage. caSEAH

On February 29, 2008, the CA rendered the assailed decision sustaining the ruling of
the RTC, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, the assailed Decision dated 29 September

2000, as modified in the Order dated 21 July 2001, is AFFIRMED with
MODIFICATION in that the award of attorney's fees in favor of Reputable is
DELETED.

SO ORDERED. 13

The CA ruled, among others, that: (1) Reputable is estopped from assailing the
validity of the contract of carriage on the ground of lack of signature of Wyeth's
representative/s; (2) Reputable is liable under the contract for the value of the goods
even if the same was lost due to fortuitous event; and (3) Section 12 of the SR Policy
prevails over Section 5, it being the latter provision; however, since the ratable
proportion provision of Section 12 applies only in case of double insurance, which is
not present, then it should not be applied and Malayan should be held liable for the
full amount of the policy coverage, that is, P1,000,000.00. 14

On March 14, 2008, Malayan moved for reconsideration of the assailed decision but it
was denied by the CA in its Resolution dated August 28, 2008. 15

Hence, this petition.

Malayan insists that the CA failed to properly resolve the issue on the "statutory
limitations on the liability of common carriers" and the "difference between an 'other
insurance clause' and an 'over insurance clause'."

Malayan also contends that the CA erred when it held that Reputable is a private
carrier and should be bound by the contractual stipulations in the contract of carriage.
This argument is based on its assertion that Philippines First judicially admitted in its
complaint that Reputable is a common carrier and as such, Reputable should not be
held liable pursuant to Article 1745 (6) of the Civil Code. 16 Necessarily, if Reputable
is not liable for the loss, then there is no reason to hold Malayan liable to Reputable.
HICSaD

Further, Malayan posits that there resulted in an impairment of contract when the CA
failed to apply the express provisions of Section 5 (referred to by Malayan as over
insurance clause) and Section 12 (referred to by Malayan as other insurance clause) of
its SR Policy as these provisions could have been read together there being no actual
conflict between them.

Reputable, meanwhile, contends that it is exempt from liability for acts committed by
thieves/robbers who act with grave or irresistible threat whether it is a common carrier
or a private/special carrier. It, however, maintains the correctness of the CA ruling
that Malayan is liable to Philippines First for the full amount of its policy coverage
and not merely a ratable portion thereof under Section 12 of the SR Policy.

Finally, Philippines First contends that the factual finding that Reputable is a private
carrier should be accorded the highest degree of respect and must be considered
conclusive between the parties, and that a review of such finding by the Court is not
warranted under the circumstances. As to its alleged judicial admission that Reputable
is a common carrier, Philippines First proffered the declaration made by Reputable
that it is a private carrier. Said declaration was allegedly reiterated by Reputable in its
third party complaint, which in turn was duly admitted by Malayan in its answer to
the said third-party complaint. In addition, Reputable even presented evidence to
prove that it is a private carrier.

As to the applicability of Sections 5 and 12 in the SR Policy, Philippines First

reiterated the ruling of the CA. Philippines First, however, prayed for a slight
modification of the assailed decision, praying that Reputable and Malayan be
rendered solidarily liable to it in the amount of P998,000.00, which represents the
balance from the P1,000,000.00 coverage of the SR Policy after deducting P2,000.00
under Section 10 of the said SR Policy. 17 SaETCI

Issues
The liability of Malayan under the SR Policy hinges on the following issues for
resolution:

1) Whether Reputable is a private carrier;

2) Whether Reputable is strictly bound by the stipulations in its contract of

carriage with Wyeth, such that it should be liable for any risk of loss or damage, for
any cause whatsoever, including that due to theft or robbery and other force majeure;

3) Whether the RTC and CA erred in rendering "nugatory" Section 5 and Section
12 of the SR Policy; and

4) Whether Reputable should be held solidarily liable with Malayan for the
amount of P998,000.00 due to Philippines First.

The Court's Ruling

On the first issue — Reputable is a

private carrier.

The Court agrees with the RTC and CA that Reputable is a private carrier. Well-
entrenched in jurisprudence is the rule that factual findings of the trial court,
especially when affirmed by the appellate court, are accorded the highest degree of
respect and considered conclusive between the parties, save for certain exceptional
and meritorious circumstances, none of which are present in this case. 18 cda

Malayan relies on the alleged judicial admission of Philippines First in its complaint
that Reputable is a common carrier. 19 Invoking Section 4, Rule 129 of the Rules on
Evidence that "an admission verbal or written, made by a party in the course of the
proceeding in the same case, does not require proof," it is Malayan's position that the
RTC and CA should have ruled that Reputable is a common carrier. Consequently,
pursuant to Article 1745 (6) of the Civil Code, the liability of Reputable for the loss of
Wyeth's goods should be dispensed with, or at least diminished.

It is true that judicial admissions, such as matters alleged in the pleadings do not
require proof, and need not be offered to be considered by the court. "The court, for
the proper decision of the case, may and should consider, without the introduction of
evidence, the facts admitted by the parties." 20 The rule on judicial admission,
however, also states that such allegation, statement, or admission is conclusive as
against the pleader, 21 and that the facts alleged in the complaint are deemed
admissions of the plaintiff and binding upon him. 22 In this case, the pleader or the
plaintiff who alleged that Reputable is a common carrier was Philippines First. It
cannot, by any stretch of imagination, be made conclusive as against Reputable whose
nature of business is in question.
It should be stressed that Philippines First is not privy to the SR Policy between
Wyeth and Reputable; rather, it is a mere subrogee to the right of Wyeth to collect
from Reputable under the terms of the contract of carriage. Philippines First is not in
any position to make any admission, much more a definitive pronouncement, as to the
nature of Reputable's business and there appears no other connection between
Philippines First and Reputable which suggests mutual familiarity between them.
TCcSDE

Moreover, records show that the alleged judicial admission of Philippines First was
essentially disputed by Reputable when it stated in paragraphs 2, 4, and 11 of its
answer that it is actually a private or special carrier. 23 In addition, Reputable stated
in paragraph 2 of its third-party complaint that it is "a private carrier engaged in the
carriage of goods." 24 Such allegation was, in turn, admitted by Malayan in paragraph
2 of its answer to the third-party complaint. 25 There is also nothing in the records
which show that Philippines First persistently maintained its stance that Reputable is a
common carrier or that it even contested or proved otherwise Reputable's position that
it is a private or special carrier.

Hence, in the face of Reputable's contrary admission as to the nature of its own
business, what was stated by Philippines First in its complaint is reduced to nothing
more than mere allegation, which must be proved for it to be given any weight or
value. The settled rule is that mere allegation is not proof. 26

More importantly, the finding of the RTC and CA that Reputable is a special or
private carrier is warranted by the evidence on record, primarily, the unrebutted
testimony of Reputable's Vice President and General Manager, Mr. William Ang Lian
Suan, who expressly stated in open court that Reputable serves only one customer,
Wyeth. 27 cTCADI

Under Article 1732 of the Civil Code, common carriers are persons, corporations,
firms, or associations engaged in the business of carrying or transporting passenger or
goods, or both by land, water or air for compensation, offering their services to the
public. On the other hand, a private carrier is one wherein the carriage is generally
undertaken by special agreement and it does not hold itself out to carry goods for the
general public. 28 A common carrier becomes a private carrier when it undertakes to
carry a special cargo or chartered to a special person only. 29 For all intents and
purposes, therefore, Reputable operated as a private/special carrier with regard to its
contract of carriage with Wyeth.

On the second issue — Reputable is

bound by the terms of the contract

of carriage.
The extent of a private carrier's obligation is dictated by the stipulations of a contract
it entered into, provided its stipulations, clauses, terms and conditions are not contrary
to law, morals, good customs, public order, or public policy. "The Civil Code
provisions on common carriers should not be applied where the carrier is not acting as
such but as a private carrier. Public policy governing common carriers has no force
where the public at large is not involved." 30

Thus, being a private carrier, the extent of Reputable's liability is fully governed by
the stipulations of the contract of carriage, one of which is that it shall be liable to
Wyeth for the loss of the goods/products due to any and all causes whatsoever,
including theft, robbery and other force majeure while the goods/products are in
transit and until actual delivery to Wyeth's customers, salesmen and dealers. 31
ADHCSE

On the third issue — other insurance

vis-à-vis over insurance.

Malayan refers to Section 5 of its SR Policy as an "over insurance clause" and to

Section 12 as a "modified 'other insurance' clause". 32 In rendering inapplicable said
provisions in the SR Policy, the CA ruled in this wise:

Since Sec. 5 calls for [Malayan's] complete absolution in case the other insurance
would be sufficient to cover the entire amount of the loss, it is in direct conflict with
Sec. 12 which provides only for a pro[-]rated contribution between the two insurers.
Being the later provision, and pursuant to the rules on interpretation of contracts, Sec.
12 should therefore prevail.

xxx xxx xxx

. . . [T]he intention of both Reputable and [Malayan] should be given effect as against
the wordings of Sec. 12 of their contract, as it was intended by the parties to operate
only in case of double insurance, or where the benefits of the policies of both
plaintiff-appellee and [Malayan] should pertain to Reputable alone. But since the
court a quo correctly ruled that there is no double insurance in this case inasmuch as
Reputable was not privy thereto, and therefore did not stand to benefit from the policy
issued by plaintiff-appellee in favor of Wyeth, then [Malayan's] stand should be
rejected. aICcHA

To rule that Sec. 12 operates even in the absence of double insurance would work
injustice to Reputable which, despite paying premiums for a [P]1,000,000.00
insurance coverage, would not be entitled to recover said amount for the simple
reason that the same property is covered by another insurance policy, a policy to
which it was not a party to and much less, from which it did not stand to benefit.
Plainly, this unfair situation could not have been the intention of both Reputable and
[Malayan] in signing the insurance contract in question. 33

In questioning said ruling, Malayan posits that Sections 5 and 12 are separate
provisions applicable under distinct circumstances. Malayan argues that "it will not be
completely absolved under Section 5 of its policy if it were the assured itself who
obtained additional insurance coverage on the same property and the loss incurred by
[Wyeth's] cargo was more than that insured by [Philippines First's] marine policy. On
the other hand, Section 12 will not completely absolve Malayan if additional
insurance coverage on the same cargo were obtained by someone besides [Reputable],
in which case [Malayan's] SR policy will contribute or share ratable proportion of a
covered cargo loss." 34

Malayan's position cannot be countenanced.

Section 5 is actually the other insurance clause (also called "additional insurance" and
"double insurance"), one akin to Condition No. 3 in issue in Geagonia v. CA, 35
which validity was upheld by the Court as a warranty that no other insurance exists.
The Court ruled that Condition No. 3 36 is a condition which is not proscribed by law
as its incorporation in the policy is allowed by Section 75 of the Insurance Code. It
was also the Court's finding that unlike the other insurance clauses, Condition No. 3
does not absolutely declare void any violation thereof but 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." ESCacI

In this case, similar to Condition No. 3 in Geagonia, Section 5 does not provide for
the nullity of the SR Policy but simply limits the liability of Malayan only up to the
excess of the amount that was not covered by the other insurance policy. In
interpreting the "other insurance clause" in Geagonia, the Court ruled that the
prohibition applies only in case of double insurance. The Court ruled that in order to
constitute a violation of the clause, the other insurance must be upon same subject
matter, the same interest therein, and the same risk. Thus, even though the multiple
insurance policies involved were all issued in the name of the same assured, over the
same subject matter and covering the same risk, it was ruled that there was no
violation of the "other insurance clause" since there was no double insurance.

Section 12 of the SR Policy, on the other hand, is the over insurance clause. More
particularly, it covers the situation where there is over insurance due to double
insurance. In such case, Section 15 provides that Malayan shall "not be liable to pay
or contribute more than its ratable proportion of such loss or damage." This is in
accord with the principle of contribution provided under Section 94 (e) of the
Insurance Code, 37 which states that "where the insured is over insured by double
insurance, each insurer is bound, as between himself and the other insurers, to
contribute ratably to the loss in proportion to the amount for which he is liable under
his contract." HEDaTA

Clearly, both Sections 5 and 12 presuppose the existence of a double insurance. The
pivotal question that now arises is whether there is double insurance in this case such
that either Section 5 or Section 12 of the SR Policy may be applied.

By the express provision of Section 93 of the Insurance Code, double insurance exists
where the same person is insured by several insurers separately in respect to the same
subject and interest. The requisites in order for double insurance to arise are as
follows: 38

1. The person insured is the same;

2. Two or more insurers insuring separately;

3. There is identity of subject matter;

4. There is identity of interest insured; and TCacIA

5. There is identity of the risk or peril insured against.

In the present case, while it is true that the Marine Policy and the SR Policy were both
issued over the same subject matter, i.e., goods belonging to Wyeth, and both covered
the same peril insured against, it is, however, beyond cavil that the said policies were
issued to two different persons or entities. It is undisputed that Wyeth is the
recognized insured of Philippines First under its Marine Policy, while Reputable is the
recognized insured of Malayan under the SR Policy. The fact that Reputable procured
Malayan's SR Policy over the goods of Wyeth pursuant merely to the stipulated
requirement under its contract of carriage with the latter does not make Reputable a
mere agent of Wyeth in obtaining the said SR Policy. aCHcIE

The interest of Wyeth over the property subject matter of both insurance contracts is
also different and distinct from that of Reputable's. The policy issued by Philippines
First was in consideration of the legal and/or equitable interest of Wyeth over its own
goods. On the other hand, what was issued by Malayan to Reputable was over the
latter's insurable interest over the safety of the goods, which may become the basis of
the latter's liability in case of loss or damage to the property and falls within the
contemplation of Section 15 of the Insurance Code. 39

Therefore, even though the two concerned insurance policies were issued over the
same goods and cover the same risk, there arises no double insurance since they were
issued to two different persons/entities having distinct insurable interests. Necessarily,
over insurance by double insurance cannot likewise exist. Hence, as correctly ruled by
the RTC and CA, neither Section 5 nor Section 12 of the SR Policy can be applied.
Apart from the foregoing, the Court is also wont to strictly construe the controversial
provisions of the SR Policy against Malayan. This is in keeping with the rule that:
ACTEHI

"Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a contract
of adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the insurer from
noncompliance with its obligations." 40

Moreover, the CA correctly ruled that:

To rule that Sec. 12 operates even in the absence of double insurance would work
injustice to Reputable which, despite paying premiums for a [P]1,000,000.00
insurance coverage, would not be entitled to recover said amount for the simple
reason that the same property is covered by another insurance policy, a policy to
which it was not a party to and much less, from which it did not stand to benefit. . . .
41 aESTAI

On the fourth issue — Reputable is

not solidarily liable with Malayan.

There is solidary liability only when the obligation expressly so states, when the law
so provides or when the nature of the obligation so requires. In Heirs of George Y.
Poe v. Malayan Insurance Company, Inc., 42 the Court ruled that:

[W]here the insurance contract provides for indemnity against liability to third
persons, the liability of the insurer is direct and such third persons can directly sue the
insurer. The direct liability of the insurer under indemnity contracts against third
party[-]liability does not mean, however, that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault, since they are being held liable
under different obligations. The liability of the insured carrier or vehicle owner is
based on tort, in accordance with the provisions of the Civil Code; while that of the
insurer arises from contract, particularly, the insurance policy. 43 (Citation omitted
and emphasis supplied)

Suffice it to say that Malayan's and Reputable's respective liabilities arose from
different obligations — Malayan's is based on the SR Policy while Reputable's is
based on the contract of carriage.

All told, the Court finds no reversible error in the judgment sought to be reviewed.
WHEREFORE, premises considered, the petition is DENIED. The Decision dated
February 29, 2008 and Resolution dated August 28, 2008 of the Court of Appeals in
CA-G.R. CV No. 71204 are hereby AFFIRMED.

Cost against petitioner Malayan Insurance Co., Inc. ScaCEH

SO ORDERED.

[G.R. No. L-66935. November 11, 1985.]

ISABELA ROQUE, doing business under the name and style of Isabela Roque
Timber Enterprises and ONG CHIONG, petitioners, vs. HON. INTERMEDIATE
APPELLATE COURT and PIONEER INSURANCE AND SURETY
CORPORATION, respondents.

DECISION

GUTIERREZ, J p:

This petition for certiorari asks for the review of the decision of the Intermediate
Appellate Court which absolved the respondent insurance company from liability on
the grounds that the vessel carrying the insured cargo was unseaworthy and the loss of
said cargo was caused not by the perils of the sea but by the perils of the ship.

On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay) a
common carrier, entered into a contract with the petitioners whereby the former
would load and carry on board its barge Mable 10 about 422.18 cubic meters of logs
from Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured
the logs against loss for P100,000.00 with respondent Pioneer Insurance and Surety
Corporation (Pioneer).

On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at
Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of
Manila, but the shipment never reached its destination because Mable 10 sank with
the 811 pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila.
As alleged by the petitioners in their complaint and as found by both the trial and
appellate courts, the barge where the logs were loaded was not seaworthy such that it
developed a leak. The appellate court further found that one of the hatches was left
open causing water to enter the barge and because the barge was not provided with
the necessary cover or tarpaulin, the ordinary splash of sea waves brought more water
inside the barge.

On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment of
P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits but
the latter ignored the demand. Another letter was sent to respondent Pioneer claiming
the full amount of P100,000.00 under the insurance policy but respondent refused to
pay on the ground that its liability depended upon the "Total loss by Total Loss of
Vessel only". Hence, petitioners commenced Civil Case No. 86599 against Manila
Bay and respondent Pioneer.

After hearing, the trial court found in favor of the petitioners. The dispositive portion
of the decision reads:

"FOR ALL THE FOREGOING, the Court hereby rendered judgment as follows:

"(a) Condemning defendants Manila Bay Lighterage Corporation and Pioneer

Insurance and Surety Corporation to pay plaintiffs, jointly and severally, the sum of
P100,000.00;

"(b) Sentencing defendant Manila Bay Lighterage Corporation to pay plaintiff, in

addition, the sum of P50,000.00, plus P12,500.00, that the latter advanced to the
former as down payment for transporting the logs in question;

"(c) Ordering the counterclaim of defendant Insurance against plaintiffs, dismissed,

for lack of merit, but as to its cross-claim against its co-defendant Manila Bay
Lighterage Corporation, the latter is ordered to reimburse the former for whatever
amount it may pay the plaintiffs as such surety;

"(d) Ordering the counterclaim of defendant Lighterage against plaintiffs,

dismissed for lack of merit;

"(e) Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as exemplary
damages are ordered dismissed, for lack of merits; plaintiffs' claim for attorney's fees
in the sum of P10,000.00 is hereby granted, against both defendants, who are,
moreover ordered to pay the costs; and

"(f) The sum of P150,000.00 award to plaintiffs, shall bear interest of six per cent
(6%) from March 25, 1975, until amount is fully paid."

Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did not
appeal. According to the petitioners, the transportation company is no longer doing
business and is without funds.
During the initial stages of the hearing, Manila Bay informed the trial court that it had
salvaged part of the logs. The court ordered them to be sold to the highest bidder with
the funds to be deposited in a bank in the name of Civil Case No. 86599.

On January 30, 1984, the appellate court modified the trial court's decision and
absolved Pioneer from liability after finding that there was a breach of implied
warranty of seaworthiness on the part of the petitioners and that the loss of the insured
cargo was caused by the "perils of the ship" and not by the "perils of the sea". It ruled
that the loss is not covered by the marine insurance policy. llcd

After the appellate court denied their motion for reconsideration, the petitioners filed
this petition with the following assignments of errors:

THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN

CASES OF MARINE CARGO INSURANCE, THERE IS A WARRANTY OF
SEAWORTHINESS BY THE CARGO OWNER.

II

THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT THE

LOSS OF THE CARGO IN THIS CASE WAS CAUSED BY 'PERILS OF THE
SHIP' AND NOT BY 'PERILS OF THE SEA.'.

III

THE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING THE

RETURN TO PETITIONER OF THE AMOUNT OF P8,000.00 WHICH WAS
DEPOSITED IN THE TRIAL COURT AS SALVAGE VALUE OF THE LOGS
THAT WERE RECOVERED.

In their first assignment of error, the petitioners contend that the implied warranty of
seaworthiness provided for in the Insurance Code refers only to the responsibility of
the shipowner who must see to it that his ship is reasonably fit to make in safety the
contemplated voyage.

The petitioners state that a mere shipper of cargo, having no control over the ship, has
nothing to do with its seaworthiness. They argue that a cargo owner has no control
over the structure of the ship, its cables, anchors, fuel and provisions, the manner of
loading his cargo and the cargo of other shippers, and the hiring of a sufficient
number of competent officers and seamen.

The petitioners' arguments have no merit.

There is no dispute over the liability of the common carrier Manila Bay. In fact, it did
not bother to appeal the questioned decision. However, the petitioners state that
Manila Bay has ceased operating as a firm and nothing may be recovered from it.
They are, therefore, trying to recover their losses from the insurer.

The liability of the insurance company is governed by law.

Section 113 of the Insurance Code provides:

"In every marine insurance upon a ship or freight, or freightage, or upon any thing
which is the subject of marine insurance, a warranty is implied that the ship is
seaworthy."

Section 99 of the same Code also provides in part.

'Marine insurance includes:

"(1) Insurance against loss of or damage to:

(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, . . . ."

From the above-quoted provisions, there can be no mistaking the fact that the term
"cargo" can be the subject of marine insurance and that once it is so made, the implied
warranty of seaworthiness immediately attaches to whoever is insuring the cargo
whether he be the shipowner or not.

As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of

Canton (40 Phil. 40):

"The same conclusion must be reached if the question be discussed with reference to
the seaworthiness of the ship. It is universally accepted that in every contract of
insurance upon anything which is the subject of marine insurance, a warranty is
implied that the ship shall be seaworthy at the time of the inception of the voyage.
This rule is accepted in our own Insurance Law (Act No. 2427, sec. 106). . . ."

Moreover, the fact that the unseaworthiness of the ship was unknown to the insured is
immaterial in ordinary marine insurance and may not be used by him as a defense in
order to recover on the marine insurance policy. LLjur

As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S.
406):

"There was no lookout, and both that and the rate of speed were contrary to the
Canadian Statute. The exception of losses occasioned by unseaworthiness was in
effect a warranty that a loss should not be so occasioned, and whether the fact of
unseaworthiness were known or unknown would be immaterial."

Since the law provides for an implied warranty of seaworthiness in every contract of
ordinary marine insurance, it becomes the obligation of a cargo owner to look for a
reliable common carrier which keeps its vessels in seaworthy condition. The shipper
of cargo may have no control over the vessel but he has full control in the choice of
the common carrier that will transport his goods. Or the cargo owner may enter into a
contract of insurance which specifically provides that the insurer answers not only for
the perils of the sea but also provides for coverage of perils of the ship.

We are constrained to apply Section 113 of the Insurance Code to the facts of this
case. As stated by the private respondents:

"In marine cases, the risks insured against are 'perils of the sea' (Chute v. North River
Ins. Co., Minn - 214 NW 472, 55 ALR 933). The purpose of such insurance is
protection against contingencies and against possible damages and such a policy does
not cover a loss or injury which must inevitably take place in the ordinary course of
things. There is no doubt that the term 'perils of the sea' extends only to losses caused
by sea damage, or by the violence of the elements, and does not embrace all losses
happening at sea. They insure against losses from extraordinary occurrences only,
such as stress of weather, winds and waves, lightning, tempests, rocks and the like.
These are understood to be the 'perils of the sea' referred in the policy, and not those
ordinary perils which every vessel must encounter. 'Perils of the sea' has been said to
include only such losses as are of extraordinary nature, or arise from some
overwhelming power, which cannot be guarded against by the ordinary exertion of
human skill and prudence. Damage done to a vessel by perils of the sea includes every
species of damages done to a vessel at sea, as distinguished from the ordinary wear
and tear of the voyage, and distinct from injuries suffered by the vessel in
consequence of her not being seaworthy at the outset of her voyage (as in this case). It
is also the general rule that everything which happens thru the inherent vice of the
thing, or by the act of the owners, master or shipper, shall not be reputed a peril, if not
otherwise borne in the policy. (14 RCL on 'Insurance', Sec. 384, pp. 1203-1204; Cia.
de Navegacion v. Firemen's Fund Ins. Co., 277 US 66, 72 L. ed. 787, 48 S. Ct. 459)."

With regard to the second assignment of error, petitioners maintain, that the loss of
the cargo was caused by the perils of the sea, not by the perils of the ship because as
found by the trial court, the barge was turned loose from the tugboat east of Cabuli
Point "where it was buffeted by storm and waves." Moreover, petitioners also
maintain that barratry, against which the cargo was also insured, existed when the
personnel of the tugboat and the barge committed a mistake by turning loose the barge
from the tugboat east of Cabuli Point. The trial court also found that the stranding and
foundering of Mable 10 was due to improper loading of the logs as well as to a leak in
the barge which constituted negligence.
On the contention of the petitioners that the trial court found that the loss was
occasioned by the perils of the sea characterized by the "storm and waves" which
buffeted the vessel, the records show that the court ruled otherwise. It stated:

xxx xxx xxx

" . . . The other affirmative defense of defendant Lighterage, 'That the supposed loss
of the logs was occasioned by force majeure . . . .', was not supported by the evidence.
At the time Mable 10 sank, there was no typhoon but ordinary strong wind and waves,
a condition which is natural and normal in the open sea. The evidence shows that the
sinking of Mable 10 was due to improper loading of the logs on one side so that the
barge was tilting on one side and for that it did not navigate on even keel; that it was
no longer seaworthy that was why it developed leak; that the personnel of the tugboat
and the barge committed a mistake when it turned loose the barge from the tugboat
east of Cabuli point where it was buffeted by storm and waves, while the tugboat
proceeded to west of Cabuli point where it was protected by the mountain side from
the storm and waves coming from the east direction. . . ."

In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of

defendant carrier developed a leak which allowed water to come in and that one of the
hatches of said barge was negligently left open by the person in charge thereof
causing more water to come in", and that "the loss of said plaintiffs' cargo was due to
the fault, negligence, and/or lack of skill of defendant carrier and/or defendant
carrier's representatives on barge Mable 10." LexLib

It is quite unmistakable that the loss of the cargo was due to the perils of the ship
rather than the perils of the sea. The facts clearly negate the petitioners' claim under
the insurance policy. In the case of Go Tiaoco y Hermanos v. Union Ins. Society of
Canton, supra, we had occasion to elaborate on the term "perils of the ship." We
ruled:

"It must be considered to be settled, furthermore, that a loss which, in the ordinary
course of events, results from the natural and inevitable action of the sea, from the
ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to
provide the vessel with proper equipment to convey the cargo under ordinary
conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly
called the 'peril of the ship.' The insurer undertakes to insure against perils of the sea
and similar perils, not against perils of the ship. As was well said by Lord Herschell in
Wilson, Sons & Co. v. Owners of Cargo per the Xantho ([1887], 12 A. C., 503, 509),
there must, in order to make the insurer liable, be 'some casualty, something which
could not be foreseen as one of the necessary incidents of the adventure. The purpose
of the policy is to secure an indemnity against accidents which may happen, not
against events which must happen.
"In the present case the entrance of the sea water into the ship's hold through the
defective pipe already described was not due to any accident which happened during
the voyage, but to the failure of the ship's owner properly to repair a defect of the
existence of which he was apprised. The loss was therefore more analogous to that
which directly results from simple unseaworthiness than to that which results from
perils of the sea.

xxx xxx xxx

"Suffice it to say that upon the authority of those cases there is no room to doubt the
liability of the shipowner for such a loss as occurred in this case. By parity of
reasoning the insurer is not liable; for generally speaking, the shipowner excepts the
perils of the sea from his engagement under the bill of lading, while this is the very
perils against which the insurer intends to give protection. As applied to the present
case it results that the owners of the damaged rice must look to the shipowner for
redress and not to the insurer. "

Neither can petitioners allege barratry on the basis of the findings showing negligence
on the part of the vessel's crew.

Barratry as defined in American Insurance Law is "any willful misconduct on the part
of master or crew in pursuance of some unlawful or fraudulent purpose without the
consent of the owners, and to the prejudice of the owner's interest." (Sec. 171, U.S.
Insurance Law, quoted in Vance, Handbook on Law of Insurance, 1961, p. 929.)

Barratry necessarily requires a willful and intentional act in its commission. No

honest error of judgment or mere negligence, unless criminally gross, can be barratry.
(See Vance on Law of Insurance, p. 929 and cases cited therein.)

In the case at bar, there is no finding that the loss was occasioned by the willful or
fraudulent acts of the vessel's crew. There was only simple negligence or lack of skill.
Hence, the second assignment of error must likewise be dismissed.

Anent the third assignment of error, we agree with the petitioners that the amount of
P8,000.00 representing the amount of the salvaged logs should have been awarded to
them. However, this should be deducted from the amounts which have been
adjudicated against Manila Bay Lighterage Corporation by the trial court. LibLex

WHEREFORE, the decision appealed from is AFFIRMED with the modification that
the amount of P8,000.00 representing the value of the salvaged logs which was
ordered to be deposited in the Manila Banking Corporation in the name of Civil Case
No. 86599 is hereby awarded and ordered paid to the petitioners. The liability
adjudged against Manila Bay Lighterage Corporation in the decision of the trial court
is accordingly reduced by the same amount.
SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, De la Fuente and Patajo, JJ.,

concur.

Relova J., is on leave.

[G.R. No. 149019. August 15, 2006.]

DELSAN TRANSPORT LINES, INC., petitioner, vs. AMERICAN HOME

ASSURANCE CORPORATION, respondent.

V.E. Del Rosario & Partners for petitioner.

Linsangan Linsangan & Linsangan Law Offices for respondent.

SYLLABUS

1. CIVIL LAW; COMMON CARRIERS; PRESUMED TO HAVE BEEN AT

FAULT OR TO HAVE ACTED NEGLIGENTLY IF THE GOODS ARE LOST,
DESTROYED OR DETERIORATED; INSTANCES WHEN PRESUMPTION OF
NEGLIGENCE DOES NOT ATTACH. — Common carriers are bound to observe
extraordinary diligence in the vigilance over the goods transported by them. They are
presumed to have been at fault or to have acted negligently if the goods are lost,
destroyed or deteriorated. To overcome the presumption of negligence in case of loss,
destruction or deterioration of the goods, the common carrier must prove that it
exercised extraordinary diligence. There are, however, exceptions to this rule. Article
1734 of the Civil Code enumerates the instances when the presumption of negligence
does not attach: Art. 1734. Common carriers are responsible for the loss, destruction,
or deterioration of the goods, unless the same is due to any of the following causes
only: 1) Flood storm, earthquake, lightning, or other natural disaster or calamity; 2)
Act of the public enemy in war, whether international or civil; 3) Act or omission of
the shipper or owner of the goods; 4) The character of the goods or defects in the
packing or in the containers; 5) Order or act of competent public authority.
AHCaES

2. ID.; ID.; PETITIONER FAILED TO PROVE CONTRIBUTORY

NEGLIGENCE ON THE PART OF THE OWNER OF THE GOODS AND THAT
THE LOSS WAS CAUSED BY ONE OF THE EXCEPTED CAUSES PROVIDED
FOR BY LAW. — Both the trial court and the CA uniformly ruled that Delsan failed
to prove its claim that there was a contributory negligence on the part of the owner of
the goods — Caltex. We see no reason to depart therefrom. As aptly pointed out by
the CA, it had been established that the proximate cause of the spillage and backflow
of the diesel oil was due to the severance of the port bow mooring line of the vessel
and the failure of the shore tender to close the storage tank gate valve even as a check
on the drain cock showed that there was still a product on the pipeline. To the two
courts below, the actuation of the gauger and the escort surveyor, both personnel from
the Caltex Bulk Depot, negates the allegation that Caltex was remiss in its duties. As
we see it, the crew of the vessel should have promptly informed the shore tender that
the port mooring line was cut off. However, Delsan did not do so on the lame excuse
that there was no available banca. As it is, Delsan's personnel signaled a "red light"
which was not a sufficient warning because such signal only meant that the pumping
of diesel oil had been finished. Neither did the blowing of whistle suffice considering
the distance of more than 2 kilometers between the vessel and the Caltex Bulk Depot,
aside from the fact that it was not the agreed signal. Had the gauger and the escort
surveyor from Caltex Bulk Depot not gone aboard the vessel to make inquiries, the
shore tender would have not known what really happened. The crew of the vessel
should have exerted utmost effort to immediately inform the shore tender that the port
bow mooring line was severed. To be sure, Delsan, as the owner of the vessel, was
obliged to prove that the loss was caused by one of the excepted causes if it were to
seek exemption from responsibility. Unfortunately, it miserably failed to discharge
this burden by the required quantum of proof.

3. ID.; ID.; EXTRAORDINARY RESPONSIBILITY OF COMMON

CARRIERS LASTS FROM THE TIME THE GOODS ARE UNCONDITIONALLY
PLACED IN THE POSSESSION OF, AND RECEIVED BY THE CARRIER FOR
TRANSPORTATION UNTIL THE SAME ARE DELIVERED, ACTUALLY OR
CONSTRUCTIVELY, BY THE CARRIER TO THE CONSIGNEE, OR TO A
PERSON WHO HAS THE RIGHT TO RECEIVE THEM. — Delsan's argument that
it should not be held liable for the loss of diesel oil due to backflow because the same
had already been actually and legally delivered to Caltex at the time it entered the
shore tank holds no water. It had been settled that the subject cargo was still in the
custody of Delsan because the discharging thereof has not yet been finished when the
backflow occurred. Since the discharging of the cargo into the depot has not yet been
completed at the time of the spillage when the backflow occurred, there is no reason
to imply that there was actual delivery of the cargo to the consignee. Delsan is
straining the issue by insisting that when the diesel oil entered into the tank of Caltex
on shore, there was legally, at that moment, a complete delivery thereof to Caltex. To
be sure, the extraordinary responsibility of common carrier lasts from the time the
goods are unconditionally placed in the possession of, and received by, the carrier for
transportation until the same are delivered, actually or constructively, by the carrier to
the consignee, or to a person who has the right to receive them. The discharging of oil
products to Caltex Bulk Depot has not yet been finished, Delsan still has the duty to
guard and to preserve the cargo. The carrier still has in it the responsibility to guard
and preserve the goods, a duty incident to its having the goods transported. TcDaSI

DECISION

GARCIA, J p:

By this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Delsan Transport Lines, Inc. (Delsan hereafter) assails and seeks to set
aside the Decision, 1 dated July 16, 2001, of the Court of Appeals (CA) in CA-G.R.
CV No. 40951 affirming an earlier decision of the Regional Trial Court (RTC) of
Manila, Branch IX, in two separate complaints for damages docketed as Civil Case
No. 85-29357 and Civil Case No. 85-30559.

The facts:

Delsan is a domestic corporation which owns and operates the vessel MT Larusan. On
the other hand, respondent American Home Assurance Corporation (AHAC for
brevity) is a foreign insurance company duly licensed to do business in the
Philippines through its agent, the American-International Underwriters, Inc. (Phils.).
It is engaged, among others, in insuring cargoes for transportation within the
Philippines. cDIaAS

On August 5, 1984, Delsan received on board MT Larusan a shipment consisting of

1,986.627 k/l Automotive Diesel Oil (diesel oil) at the Bataan Refinery Corporation
for transportation and delivery to the bulk depot in Bacolod City of Caltex Phils., Inc.
(Caltex), pursuant to a Contract of Affreightment. The shipment was insured by
respondent AHAC against all risks under Inland Floater Policy No. AH-IF64-
1011549P and Marine Risk Note No. 34-5093-6.

On August 7, 1984, the shipment arrived in Bacolod City. Immediately thereafter,

unloading operations commenced. The discharging of the diesel oil started at about
1:30 PM of the same day. However, at about 10:30 PM, the discharging had to be
stopped on account of the discovery that the port bow mooring of the vessel was
intentionally cut or stolen by unknown persons. Because there was nothing holding it,
the vessel drifted westward, dragged and stretched the flexible rubber hose attached to
the riser, broke the elbow into pieces, severed completely the rubber hose connected
to the tanker from the main delivery line at sea bed level and ultimately caused the
diesel oil to spill into the sea. To avoid further spillage, the vessel's crew tried water
flushing to clear the line of the diesel oil but to no avail. In the meantime, the shore
tender, who was waiting for the completion of the water flushing, was surprised when
the tanker signaled a "red light" which meant stop pumping. Unaware of what
happened, the shore tender, thinking that the vessel would, at any time, resume
pumping, did not shut the storage tank gate valve. As all the gate valves remained
open, the diesel oil that was earlier discharged from the vessel into the shore tank
backflowed. Due to non-availability of a pump boat, the vessel could not send
somebody ashore to inform the people at the depot about what happened. After almost
an hour, a gauger and an assistant surveyor from the Caltex's Bulk Depot Office
boarded the vessel. It was only then that they found out what had happened.
Thereafter, the duo immediately went ashore to see to it that the shore tank gate valve
was closed. The loss of diesel oil due to spillage was placed at 113.788 k/l while some
435,081 k/l thereof backflowed from the shore tank. cDSAEI

As a result of spillage and backflow of diesel oil, Caltex sought recovery of the loss
from Delsan, but the latter refused to pay. As insurer, AHAC paid Caltex the sum of
P479,262.57 for spillage, pursuant to Marine Risk Note No. 34-5093-6, and
P1,939,575.37 for backflow of the diesel oil pursuant to Inland Floater Policy No.
AH-1F64-1011549P.

On February 19, 1985, AHAC, as Caltex's subrogee, instituted Civil Case No. 85-
29357 against Delsan before the Manila RTC, Branch 9, for loss caused by the
spillage. It likewise prayed that it be indemnified for damages suffered in the amount
of P652,432.57 plus legal interest thereon.

Also, on May 5, 1985, in the Manila RTC, Branch 31, AHAC instituted Civil Case
No. 85-30559 against Delsan for the loss caused by the backflow. It likewise prayed
that it be awarded the amount of P1,939,575.37 for damages and reasonable attorney's
fees. As counterclaim in both cases, AHAC prayed for attorney's fees in the amount
of P200,000.00 and P500.00 for every court appearance.

Since the cause of action in both cases arose out of the same incident and involved the
same issues, the two were consolidated and assigned to Branch 9 of the court.
ECSaAc

On August 31, 1989, the trial court rendered its decision 2 in favor of AHAC holding
Delsan liable for the loss of the cargo for its negligence in its duty as a common
carrier. Dispositively, the decision reads:

WHEREFORE, judgment is hereby rendered:

A). In Civil Case No. 85-30559:

(1) Ordering the defendant (petitioner Delsan) to pay plaintiff (respondent

AHAC) the sum of P1,939,575.37 with interest thereon at the legal rate from
November 21, 1984 until fully paid and satisfied; and

(2) Ordering defendant to pay plaintiff the sum of P10,000.00 as and for attorney's
fees.
For lack of merit, the counterclaim is hereby dismissed.

B). In Civil Case No. 85-29357:

(1) Ordering defendant to pay plaintiff the sum of P479,262.57 with interest
thereon at the legal rate from February 6, 1985 until fully paid and satisfied;
SDHETI

(2) Ordering defendant to pay plaintiff the sum of P5,000.00 as and for attorney's
fees.

For lack of merit, the counterclaim is hereby dismissed.

Costs against the defendant.

SO ORDERED.

In time, Delsan appealed to the CA whereat its recourse was docketed as CA-G.R. CV
No. 40951.

In the herein challenged decision, 3 the CA affirmed the findings of the trial court. In
so ruling, the CA declared that Delsan failed to exercise the extraordinary diligence of
a good father of a family in the handling of its cargo. Applying Article 1736 4 of the
Civil Code, the CA ruled that since the discharging of the diesel oil into Caltex bulk
depot had not been completed at the time the losses occurred, there was no reason to
imply that there was actual delivery of the cargo to Caltex, the consignee. We quote
the fallo of the CA decision: aEIcHA

WHEREFORE, premises considered, the appealed Decision of the Regional Trial

Court of Manila, Branch 09 in Civil Case Nos. 85-29357 and 85-30559 is hereby
AFFIRMED with a modification that attorney's fees awarded in Civil Case Nos. 85-
29357 and 85-30559 are hereby DELETED.

SO ORDERED.

Delsan is now before the Court raising substantially the same issues proffered before
the CA.

Principally, Delsan insists that the CA committed reversible error in ruling that
Article 1734 of the Civil Code cannot exculpate it from liability for the loss of the
subject cargo and in not applying the rule on contributory negligence against Caltex,
the shipper-owner of the cargo, and in not taking into consideration the fact that the
loss due to backflow occurred when the diesel oil was already completely delivered to
Caltex.
We are not persuaded.

In resolving this appeal, the Court reiterates the oft-stated doctrine that factual
findings of the CA, affirmatory of those of the trial court, are binding on the Court
unless there is a clear showing that such findings are tainted with arbitrariness,
capriciousness or palpable error. 5

Delsan would have the Court absolve it from liability for the loss of its cargo on two
grounds. First, the loss through spillage was partly due to the contributory negligence
of Caltex; and Second, the loss through backflow should not be borne by Delsan
because it was already delivered to Caltex's shore tank. AaEDcS

Common carriers are bound to observe extraordinary diligence in the vigilance over
the goods transported by them. They are presumed to have been at fault or to have
acted negligently if the goods are lost, destroyed or deteriorated. 6 To overcome the
presumption of negligence in case of loss, destruction or deterioration of the goods,
the common carrier must prove that it exercised extraordinary diligence. There are,
however, exceptions to this rule. Article 1734 of the Civil Code enumerates the
instances when the presumption of negligence does not attach:

Art. 1734. Common carriers are responsible for the loss, destruction, or
deterioration of the goods, unless the same is due to any of the following causes only:

1) Flood storm, earthquake, lightning, or other natural disaster or calamity;

2) Act of the public enemy in war, whether international or civil;

3) Act or omission of the shipper or owner of the goods;

4) The character of the goods or defects in the packing or in the containers;

5) Order or act of competent public authority.

Both the trial court and the CA uniformly ruled that Delsan failed to prove its claim
that there was a contributory negligence on the part of the owner of the goods —
Caltex. We see no reason to depart therefrom. As aptly pointed out by the CA, it had
been established that the proximate cause of the spillage and backflow of the diesel oil
was due to the severance of the port bow mooring line of the vessel and the failure of
the shore tender to close the storage tank gate valve even as a check on the drain cock
showed that there was still a product on the pipeline. To the two courts below, the
actuation of the gauger and the escort surveyor, both personnel from the Caltex Bulk
Depot, negates the allegation that Caltex was remiss in its duties. As we see it, the
crew of the vessel should have promptly informed the shore tender that the port
mooring line was cut off. However, Delsan did not do so on the lame excuse that there
was no available banca. As it is, Delsan's personnel signaled a "red light" which was
not a sufficient warning because such signal only meant that the pumping of diesel oil
had been finished. Neither did the blowing of whistle suffice considering the distance
of more than 2 kilometers between the vessel and the Caltex Bulk Depot, aside from
the fact that it was not the agreed signal. Had the gauger and the escort surveyor from
Caltex Bulk Depot not gone aboard the vessel to make inquiries, the shore tender
would have not known what really happened. The crew of the vessel should have
exerted utmost effort to immediately inform the shore tender that the port bow
mooring line was severed. cEAIHa

To be sure, Delsan, as the owner of the vessel, was obliged to prove that the loss was
caused by one of the excepted causes if it were to seek exemption from responsibility.
7 Unfortunately, it miserably failed to discharge this burden by the required quantum
of proof.

Delsan's argument that it should not be held liable for the loss of diesel oil due to
backflow because the same had already been actually and legally delivered to Caltex
at the time it entered the shore tank holds no water. It had been settled that the subject
cargo was still in the custody of Delsan because the discharging thereof has not yet
been finished when the backflow occurred. Since the discharging of the cargo into the
depot has not yet been completed at the time of the spillage when the backflow
occurred, there is no reason to imply that there was actual delivery of the cargo to the
consignee. Delsan is straining the issue by insisting that when the diesel oil entered
into the tank of Caltex on shore, there was legally, at that moment, a complete
delivery thereof to Caltex. To be sure, the extraordinary responsibility of common
carrier lasts from the time the goods are unconditionally placed in the possession of,
and received by, the carrier for transportation until the same are delivered, actually or
constructively, by the carrier to the consignee, or to a person who has the right to
receive them. 8 The discharging of oil products to Caltex Bulk Depot has not yet been
finished, Delsan still has the duty to guard and to preserve the cargo. The carrier still
has in it the responsibility to guard and preserve the goods, a duty incident to its
having the goods transported. HSTCcD

To recapitulate, common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in vigilance over the
goods and for the safety of the passengers transported by them, according to all the
circumstances of each case. 9 The mere proof of delivery of goods in good order to
the carrier, and their arrival in the place of destination in bad order, make out a prima
facie case against the carrier, so that if no explanation is given as to how the injury
occurred, the carrier must be held responsible. It is incumbent upon the carrier to
prove that the loss was due to accident or some other circumstances inconsistent with
its liability. 10

All told, Delsan, being a common carrier, should have exercised extraordinary
diligence in the performance of its duties. Consequently, it is obliged to prove that the
damage to its cargo was caused by one of the excepted causes if it were to seek
exemption from responsibility. 11 Having failed to do so, Delsan must bear the
consequences. DTIACH

WHEREFORE, petition is DENIED and the assailed decision of the CA is

AFFIRMED in toto.

Cost against petitioner.

SO ORDERED.

[G.R. No. L-6393. January 31, 1955.]

A. MAGSAYSAY, INC., plaintiff-appellee, vs. ANASTACIO AGAN, defendant-

appellant.

Custodio A. Villalva for appellant.

Quijano, Alidio & Azores for appellee.

SYLLABUS

1. ADMIRALTY LAW; VESSELS; ACCIDENTAL STRANDING;

AVERAGES. — The law on averages is contained in the Code of Commerce. Under
that law, averages are classified into simple or particular and general or gross.
Generally speaking, simple or particular averages include all expenses and damages
caused to the vessel or cargo which have not inured to the common benefit (Art. 809)
and are, therefore, to be borne only by the owner of the property which gave rise to
the same (Art. 810); while general or gross averages include "all the damages and
expenses which are deliberately caused in order to save the vessel, its cargo, or both at
the same time, from a real and known risk" (Art. 811). Being for the common benefit,
gross averages are to be borne by the owners of the articles saved (Art. 812).

2. ID.; ID.; ID.; CLASSIFICATION OF AVERAGES. — In classifying

averages into simple or particular and general or gross and defining each class, the
Code (Arts. 809 and 811) at the same time enumerates certain specific cases as
coming specially under one or the other denomination. While the expenses incurred in
putting a vessel afloat may well come under number 2 of article 809 — which refers
to expenses suffered by the vessel "by reason of an accident of the sea or force
majeure" — and should therefore be classified as particular average, the said expenses
do not fit into any of the specific cases of general average enumerated in article 811.
No. 6 of this article does mention "expenses caused in order to float a vessel," but it
specifically refers to "a vessel intentionally stranded for the purpose of saving it" and
would have no application where the stranding was not intentional.

3. ID.; ID.; GENERAL AVERAGE; ITS REQUISITES. — The following are

the requisites for general average: (1) there must be a common danger; (2) for the
common safety part of the vessel or of the cargo or both is sacrificed deliberately; (3)
from the expenses or damages caused follows the successful saving of the vessel and
cargo; and (4) the expenses or damages should have been incurred or inflicted after
taking proper legal steps and authority.

4. ID.; ID.; ID.; ID. — It is the deliverance from an immediate peril, by a

common sacrifice, that constitutes the essence of general average (Columbian
Insurance Co. of Alejandria vs. Ashby & Stribling, 13 Peters 331, 10 L. ed. 186).
Where there is no proof that the stranded vessel had to be put afloat to save it from an
imminent danger, and what does appear is that the vessel had to be salvaged in order
to enable it "to proceed to its port or destination," the expenses incurred in floating the
vessel do not constitute general average. It is the safety of the property, and not of the
voyage, which constitutes the true foundation of general average.

5. ID.; ID.; ID.; ID. — Even if the salvage operation was a success, yet if the
sacrifice was for the benefit of the vessel - to enable it to proceed to its destination —
and not for the purpose of saving the cargo, the cargo owners are not in law bound to
contribute to the expense.

DECISION

REYES, A., J p:

The SS "San Antonio", a vessel owned and operated by plaintiff, left Manila on
October 6, 1949, bound for Basco, Batanes, via Aparri, Cagayan, with general cargo
belonging to different shippers, among them the defendant. The vessel reached Aparri
on the 10th of that month, and after a day's stopover in that port, weighed anchor to
proceed to Basco. But while still in port, it ran aground at the mouth of the Cagayan
river, and, attempts to refloat it under its own power having failed, plaintiff had it
refloated by the Luzon Stevedoring Co. at an agreed compensation. Once afloat, the
vessel returned to Manila to refuel and then proceeded to Basco, the port of
destination. There the cargoes were delivered to their respective owners or
consignees, who, with the exception of defendant, made a deposit or signed a bond to
answer for their contribution to the average.
On the theory that the expenses incurred in floating the vessel constitute general
average to which both ship and cargo should contribute, plaintiff brought the present
action in the Court of First Instance of Manila to make defendant pay his contribution,
which, as determined by the average adjuster, amounts to P841.40. Defendant, in his
answer, denies liability for this amount, alleging, among other things, that the
stranding of the vessel was due to the fault, negligence and lack of skill of its master,
that the expenses incurred in putting it afloat did not constitute general average, and
that the liquidation of the average was not made in accordance with law. After trial,
the lower court found for plaintiff and rendered judgment against the defendant for
the amount of the claim, with legal interests. From this judgment defendant has
appealed directly to this Court.

Although appellant assigns various errors, under our view of the case only the
following need be considered:

"The trial court erred in allowing the general average for floating a vessel
unintentionally stranded inside a port and at the mouth of a river during a fine
weather."

For the purposes of this assignment of error we may well accept the finding below
that the stranding of plaintiff's vessel was due to the sudden shifting of the sandbars at
the mouth of the river which the port pilot did not anticipate. The standing may,
therefore, be regarded as accidental, and the question is whether the expenses incurred
in floating a vessel so stranded should be considered general average and shared by
the cargo owners.

The law on averages is contained in the Code of Commerce. Under that law, averages
are classified into simple or particular and general or gross. Generally speaking,
simple or particular averages include all expenses and damages caused to the vessel or
cargo which have not inured to the common benefit (Art. 809, and are, therefore, to be
borne only by the owner of the property which gave rise to the same (Art. 810); while
general or gross averages include "all the damages and expenses which are
deliberately caused in order to save the vessel, its cargo, or both at the same time,
from a real and known risk" (Art. 811). Being for the common benefit, gross averages
are to be borne by the owners of the articles saved (Art. 812).

In classifying averages into simple or particular and general or gross and defining
each class, the Code (Art. 809 and 811) at the same time enumerates certain specific
cases as coming specially under one or the other denomination. Going over the
specific cases enumerated we find that, while the expenses incurred in putting
plaintiff's vessel afloat may well come under number 2 of article 809 — which refers
to expenses suffered by the vessel "by reason of an accident of the sea or force
majeure" — and should therefore be classified as particular average, the said expenses
do not fit into any of the specific cases of general average enumerated in article 811.
No. 6 of this article does mention "expenses caused in order to float a vessel," but it
specifically refers to "a vessel intentionally stranded for the purpose of saving it" and
would have no application where, as in the present case, the stranding was not
intentional.

Let us now see whether the expenses here in question could come within the legal
concept of general average. Tolentino, in his commentaries on the Code of
Commerce, gives the following requisites for general average:

"First, there must be a common danger. This means, that both the ship and the cargo,
after it has been loaded, are subject to the same danger, whether during the voyage, or
in the port of loading or unloading; that the danger arises from accidents of the sea,
dispositions of the authority, or faults of men, provided, that the circumstance
producing the peril should be ascertained and imminent - or may rationally be said to
be certain and imminent. This last requirement excludes measures undertaken against
a distant peril.

"Second, that for the common safety part of the vessel or of the cargo or both is
sacrificed deliberately.

"Third, that from the expenses or damages caused follows the successful saving of the
vessel and cargo.

"Fourth, that the expenses or damages should have been incurred or inflicted after
taking proper legal steps and authority." (Vol. I, 7th ed., p. 155.)

With respect to the first requisite, the evidence does not disclose that the expenses
sought to be recovered from defendant were incurred to save vessel and cargo from a
common danger. The vessel ran aground in fine weather inside the port at the mouth
of a river, a place described as "very shallow". It would thus appear that vessel and
cargo were at the time in no imminent danger or a danger which might "rationally be
sought to be certain and imminent." It is, of course, conceivable that, if left
indefinitely at the mercy of the elements, they would run the risk of being destroyed.
But as stated in the above quotation, "this last requirement excludes measures
undertaken against a distant peril." It is the deliverance from an immediate,
impending peril, by a common sacrifice, that constitutes the essence of general
average. (The Columbian Insurance Company of Alexandria vs. Ashby & Stribling et
al., 13 Peters 331; 10 L. Ed., 186). In the present case there is no proof that the vessel
had to be put afloat to save it from an imminent danger. What does appear from the
testimony of plaintiff's manager is that the vessel had to be salvaged in order to enable
it "to proceed to its port of destination." But as was said in the case just cited, it is the
safety of the property, and not of the voyage, which constitutes the true foundation of
general average.
As to the second requisite, we need only repeat that the expenses in question were not
incurred for the common safety of vessel and cargo, since they, or at least the cargo,
were not in imminent peril. The cargo could, without need of expensive salvage
operation, have been unloaded by the owners if they had been required to do so.

With respect to the third requisite, the salvage operation, it is true, was a success. But
as the sacrifice was for the benefit of the vessel — to enable it to proceed to
destination — and not for the purpose of saving the cargo, the cargo owners are not in
law bound to contribute to the expenses.

The final requisite has not been proved, for it does not appear that the expenses here
in question were incurred after following the procedure laid down in articles 813 et
seq.

In conclusion, we find that plaintiff has not made out a case for general average, with
the result that its claim for contribution against the defendant cannot be granted.

Wherefore, the decision appealed from is reversed and plaintiff's complaint ordered
dismissed with costs.

[G.R. No. 119446. January 21, 1999.]

PHILIPPINE HOME ASSURANCE CORPORATION, PHILIPPINE AMERICAN

ACCIDENT INSURANCE COMPANY, PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY and AMERICAN INTERNATIONAL
UNDERWRITERS (Phils.), INC., petitioners, vs. COURT OF APPEALS, and
COMMISSIONER OF INTERNAL REVENUE, respondents.

The Solicitor General for respondent.

Salonga & Associates for petitioner.

SYNOPSIS

Petitioners, domestic corporations engaged in the insurance business, filed claims for
refund of documentary stamp taxes from the Bureau of Internal Revenue on the
ground that the premiums on their insurance policies had not been paid. The claims
were raised to the Court of Tax Appeals when the Bureau failed to act on them. The
Court of Tax Appeals denied the claims. It ruled that a documentary stamp tax is in
the nature of an excise tax and the payment or non-payment of the premium is
immaterial. This decision was affirmed on appeal by the Court of Appeals which
ruled that a documentary stamp tax, as in the nature of an excise tax, is imposed on
the privilege of conducting a particular business or transaction and not on the business
or transaction itself. The documentary stamp tax accrues when the said privilege is
exercised and becomes due and payable at the time the transaction is accomplished.
Hence, this appeal. SETAcC

In general, documentary stamp taxes are levied on the exercise by persons of certain
privileges through the execution of specific instruments, independently of the legal
status of the transactions giving rise thereto, and must be paid upon the issuance of
said instruments without regard to whether the contracts are rescissible, void, voidable
or unenforceable.

Life and non-life insurance policies are subject to documentary stamp taxes pursuant
to Sections 183 and 184 of the National Internal Revenue Code, and the fact that the
policies have not become effective for non-payment of premiums cannot effect
petitioners' liability for payment thereof. Their claim for refund was correctly denied.
HDIaET

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE;

DOCUMENTARY STAMP TAXES; LEVIED ON EXERCISE OF PRIVILEGE. —
In general, documentary stamp taxes are 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. Examples of such
privileges, the exercise of which, as effected through the issuance of particular
documents, are subject to the payment of documentary stamp taxes are leases of
lands, mortgages, pledges, and trusts, and conveyances of real property. ASHECD

2. ID.; ID.; ID.; ID.; MUST BE PAID WITHOUT REGARD TO WHETHER

CONTRACTS ARE RESCISSIBLE, VOID, VOIDABLE, OR UNENFORCEABLE.
— Documentary stamp taxes are thus levied on the exercise of these privileges
through the execution of specific instruments, independently of the legal status of the
transactions giving rise thereto. The documentary stamp taxes must be paid upon the
issuance of the said instruments, without regard to whether the contracts which gave
rise to them are rescissible, void, voidable, or unenforceable. (Du Pont v. United
States, 300 U.S. 150, 153 [1936]).

3. ID.; ID.; ID.; ID.; ID.; CASE AT BAR. — The life and non-life insurance
policies in question are subject to documentary stamp taxes pursuant to §184 of the
National Internal Revenue Code by their mere issuance, and the fact that the policies
have not become effective for non-payment of the corresponding premiums as
required by §77 of the Insurance Code cannot affect petitioners, liability for payment
of documentary stamp taxes. Their claim for refund was correctly denied. caADIC

DECISION

MENDOZA, J p:

This is a petition for review on certiorari of the decision of the Court of Appeals,
dated April 27, 1994, which affirmed the decision of the Court of Tax Appeals
denying the claims filed by the petitioners for refund of documentary stamp taxes.
cdtai

Petitioners are the Philippine Home Assurance Corporation (PHAC), the Philippine
American Accident Insurance Company (PAAIC), the Philippine American General
Insurance Company (PAGIC), and the American International Underwriters (Phils.).
Inc. (AIUPI), which are domestic corporations engaged in the insurance business.

From January to June 1986, they paid under protest the total amount of
P10,456,067.83 as documentary stamp taxes on various life and non-life insurance
policies issued by them, broken down as follows:

PHAC 1,714,459.00

PAAIC 68,046.00

PAGIC 3,816,973.00

AIUPI 4,856,589.83

—————

TOTAL P10,456,067.83 1

===========

On August 4, 1987, petitioners filed separate claims for refund from the Bureau of
Internal Revenue. 2 They alleged that the premiums on the insurance policies issued
by them had not been paid thus, in accordance with §77 of the Insurance Code, 3 no
documentary stamp taxes were due on the policies. 4

As the Bureau of Internal Revenue failed to act on their claims, 5 the petitioners
appealed on December 29, 1987 to the Court of Tax Appeals. In its decision, dated
April 26, 1993, 6 the Tax Court denied petitioners' claims. It held: 7
. . . the documentary stamp must be affixed to the insurance policy, which is a
contract in itself, between the insurer and the insured, whereby for an agreed
premium, the former undertakes to compensate the latter for the loss of a specific
subject by reason of specific perils, on the date it is issued even if no premium has
been paid. The payment or non-payment of the premium by the insured is immaterial
since a documentary stamp tax is in the nature of an excise tax upon a facility used in
the transaction of a business which is separate and distinct from the business itself.
Such being the case . . . the subsequent cancellation of an insurance policy will not
exempt the issuer from the corresponding documentary stamp tax. And thus, no
refund can be allowed of the documentary stamp tax paid on an insurance policy
which for some reason or another has been cancelled or for that matter, the premium
was unpaid.

Petitioners filed a joint appeal in the Court of Appeals which, however, in a judgment,
8 dated April 27, 1994, affirmed the decision of the Court of Tax Appeals. In part the
appellate court said:

The respondent court correctly characterized a documentary stamp tax as in the nature
of an excise tax. As such, it is imposed on the privilege of conducting a particular
business or transaction and not on the business or transaction itself. Thus, the
documentary stamp tax on insurance policies is, in effect, imposed on the privilege to
conduct insurance business and not on the insurance business itself or on the
premiums paid under the said insurance policies. This means then that the
documentary stamp tax accrues when the said privilege is exercised. As the
respondent court stated, while it is true that a documentary stamp tax is levied on the
document and not on the property involved, the documentary stamp tax is not
intended to be a tax on the document alone. The law taxes the document because of
the transaction so that the tax becomes due and payable at the time the transaction is
had or accomplished, in this case, at the time of the issuance of the document. cda

This is the reason that the documentary stamp tax will not be refunded upon the
subsequent cancellation of the insurance policy. Likewise, when a policy already
issued becomes ineffective because of the non-payment of the first premium, the
documentary stamp tax cannot be refunded whether or not the policy has, in fact,
become effective, since the privilege subject of the tax has already been realized.

Hence, this appeal. Petitioners maintain that since the premiums on the subject life
and non-life insurance policies were not paid, the same are considered as never to
have taken effect pursuant to §77 of the Insurance Code and, therefore, no
documentary stamp taxes were due thereon.

The petition is without merit.

The pertinent provisions of the National Internal Revenue Code state:

Sec. 183. Stamp Tax on Life Insurance Policies. — On all policies of insurance
or other instruments by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives, there shall be collected a
documentary stamp tax of fifty centavos on each two hundred pesos or fractional part
thereof, of the amount issued by any such policy.

Sec. 184. Stamp Tax on Policies of Insurance Upon Property. — On all policies
of insurance or other instruments by whatever name the same may be called, by which
insurance shall be made or renewed upon property of any description, including rents
or profits, against peril by sea or on inland waters, or by fire or lightning, there shall
be collected a documentary stamp tax of thirty centavos on each four pesos, or
fractional part thereof, of the amount of the premium charged: Provided, however,
that no documentary stamp tax shall be collected on reinsurance contracts or on any
instrument by which cession or acceptance of insurance risks under any reinsurance
agreement is effected or recorded.

In general, documentary stamp taxes are 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. Examples of such
privileges, the exercise of which, as effected through the issuance of particular
documents, are subject to the payment of documentary stamp taxes are leases of
lands, 9 mortgages, pledges, and trusts, 10 and conveyances of real property. 11

Documentary stamp taxes are thus levied on the exercise of these privileges through
the execution of specific instruments, independently of the legal status of the
transactions giving rise thereto. The documentary stamp taxes must be paid upon the
issuance of the said instruments, without regard to whether the contracts which gave
rise to them are rescissible, void, voidable, or unenforceable. As the Supreme Court of
the United States held in Du Pont v. United States: 12

The tax is not upon the business transacted but is an excise upon the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. It is an
excise upon the facilities used in the transaction of the business separate and apart
from the business itself. In this view it is immaterial whether the transfer of the
account constituted a sale.

This case has been cited in several of this Court's decisions, first in Commissioner of
Internal Revenue v. Heald Lumber Co., 13 then in Philippine Consolidated Coconut
Industries, Inc. v. Collector of Internal Revenue, 14 then in Commissioner of Internal
Revenue v. Construction Resources of Asia, Inc., 15 and most recently in Lincoln
Philippine Life Insurance Company, Inc. v. Court of Appeals. 16 It is thus settled that
the life and non-life insurance policies in question are subject to documentary stamp
taxes pursuant to §183 and §184 of the National Internal Revenue Code by their mere
issuance, and the fact that the policies have not become effective for non-payment of
the corresponding premiums as required by §77 of the Insurance Code cannot affect
petitioners' liability for payment of documentary stamp taxes. Their claim for refund
was correctly denied. cda

WHEREFORE, the decision of the Court of Appeals, dated April 27, 1994, is
AFFIRMED.

SO ORDERED.

[G.R. No. 138737. July 12, 2001.]

FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. COURT OF

APPEALS and USIPHIL INCORPORATED, respondents.

Saludo Agpalo Fernandez & Aquino for petitioner.

Goño Law Office for private respondent.

SYNOPSIS

USIPHIL Inc. filed an insurance claim against petitioner for the loss of its insured
properties due to fire. USIPHIL submitted a Sworn Statement of Loss and Formal
Claim signed by USIPHIL Manager, and Proof of Loss signed by USIPHIL
Accounting Manager and countersigned by the Adjuster's representative. The amount
of insurance claim was later agreed upon by the parties, but petitioner refused to pay
the same. Petitioner alleged non-compliance of policy condition No. 13 on the
submission of certain documents to prove the loss. Both the trial court and the Court
of Appeals ruled in favor of USIPHIL. aIcSED

There was substantial compliance of policy condition No. 13. USIPHIL immediately
notified petitioner of the fire and thereafter submitted the required documents.
Further, petitioner acknowledged its liability when its Finance Manager signed the
document of the amount due to USIPHIL. The trial court also granted 24% interest
per annum until full payment of the amount. This is properly authorized by Sections
243 and 244 of the Insurance Code and Section 29 of the policy itself. Indeed, there
was prima facie evidence of unreasonable delay in payment of the claim when
petitioner failed to pay USIPHIL within the 30-day period fixed by both the law and
the policy.
SYLLABUS

1. REMEDIAL LAW; EVIDENCE; FINDINGS OF TRIAL COURT

AFFIRMED BY APPELLATE COURT, RESPECTED. — Well-settled is the rule
that factual findings and conclusions of the trial court and the CA are entitled to great
weight and respect, and will not be disturbed on appeal in the absence of any clear
showing that the trial court overlooked certain facts or circumstances which would
substantially affect the disposition of the case. There is no cogent reason to deviate
from this salutary rule in the present case.

2. COMMERCIAL LAW; INSURANCE; INSURANCE CLAIM;

SUBMISSION OF DOCUMENT TO PROVE LOSS; SUBSTANTIAL
COMPLIANCE WITH REQUIREMENT, SUFFICIENT. — A perusal of the records
shows that private respondent, after the occurrence of the fire, immediately notified
petitioner thereof. Thereafter, private respondent submitted the following documents:
(1) Sworn Statement of Loss and Formal Claim and; (2) Proof of Loss. The
submission of these documents, to the Court's mind, constitutes substantial
compliance to proof loss. Indeed, as regards the submission of documents to prove
loss, substantial, not strict as urged by petitioner, compliance with the requirements
will always be deemed sufficient. SHTcDE

3. ID.; ID.; ID.; TWENTY-FOUR PERCENT (24%) INTEREST PER ANNUM

UNTIL FULL PAYMENT IS AUTHORIZED BY THE INSURANCE CODE. —
Anent the payment of 24% interest per annum computed from the date insurance
claim should be paid until fully paid, suffice it to say that the same is authorized by
Sections 243 and 244 of the Insurance Code. Notably, under Section 244, a prima
facie evidence of unreasonable delay in payment of the claim is created by the failure
of the insurer to pay the claim within 30 days after proof of loss, the time fixed in
both Sections 243 and 244.

DECISION

KAPUNAN, J p:

Through this petition for review on certiorari Finman General Assurance Corporation
(petitioner) seeks to reverse and set aside the Decision, dated January 14, 1999, of the
Court of Appeals (CA) in CA-G.R. CV No. 46721 directing petitioner to pay the
insurance claim of Usiphil Incorporated (private respondent). The appellate court's
Resolution, dated May 13, 1999, which denied petitioner's motion for reconsideration,
is likewise sought to be reversed and set aside. IDCcEa

The antecedent facts, as culled from the decision of the trial court and the CA, are as
follows:
On September 15, 1981, private respondent obtained a fire insurance policy from
petitioner (then doing business under the name Summa Insurance Corporation)
covering certain properties, e.g., office, furniture, fixtures, shop machinery and other
trade equipment. Under Policy No. F3100 issued to private respondent, petitioner
undertook to indemnify private respondent for any damage to or loss of said
properties arising from fire.

Sometime in 1982, private respondent filed with petitioner an insurance claim

amounting to P987,126.11 for the loss of the insured properties due to fire. Acting
thereon, petitioner appointed Adjuster H.H. Bayne to undertake the valuation and
adjustment of the loss. H.H. Bayne then required private respondent to file a formal
claim and submit proof of loss. In compliance therewith, private respondent submitted
its Sworn Statement of Loss and Formal Claim, dated July 22, 1982, signed by
Reynaldo Cayetano, private respondent's Manager. Respondent likewise submitted
Proof of Loss signed by its Accounting Manager Pedro Palallos and countersigned by
H.H. Bayne's Adjuster F.C. Medina.

Palallos personally followed-up private respondent's claim with petitioner's President

Joaquin Ortega. During their meeting, Ortega instructed their Finance Manager,
Rosauro Maghirang, to reconcile the records. Thereafter, Maghirang and Palallos
signed a Statement/Agreement, dated February 28, 1985, which indicated that the
amount due respondent was P842,683.40.

Despite repeated demands by private respondent, petitioner refused to pay the

insurance claim. Thus, private respondent was constrained to file a complaint against
petitioner for the unpaid insurance claim. In its Answer, petitioner maintained that the
claim of private respondent could not be allowed because it failed to comply with
Policy Condition No. 13 regarding the submission of certain documents to prove the
loss.

Trial ensued. On July 6, 1994, the trial court rendered judgment in favor of private
respondent. The dispositive portion of the decision reads:

WHEREFORE, in view of the above observations and findings, judgment is hereby

rendered in favor of the plaintiff and against the defendant, ordering the latter:

1. To pay the plaintiff the sum of P842,683.40 and to pay 24% interest per
annum from February 28, 1985 until fully paid (par. 29 of Exh. K);

2. To pay the plaintiff the sum equivalent to 10% of the principal obligation as
and for attorney's fees, plus P1,500.00 per court appearance of counsel;

3. To pay the plaintiff the amount of P30,000.00 as exemplary damages in

addition to the actual and compensatory damages awarded;
4. Dismissing the claim of P30,000.00 for actual damages under par. 4 of the
prayer, since the actual damages. has been awarded under par. 1 of the decision's
dispositive portion;

5. Dismissing the claim of interest under par. 2 of the prayer, there being no
agreement to such effect;

6. Dismissing the counter-claim for lack of merit;

7. Ordering the defendant to pay the cost of suit.

SO ORDERED. 1

On appeal, the CA substantially affirmed the decision of the trial court. The
dispositive portion of the CA decision reads: HDIATS

WHEREFORE, the appealed decision is hereby AFFIRMED with the modification

that defendant-appellant is ordered to pay plaintiff-appellee the sum of P842,683.40
and to pay 24% interest per annum from 03 May 1985 until fully paid. In all other
respects, the appealed decision is AFFIRMED IN TOTO.

SO ORDERED. 2

Petitioner now comes to this Court assailing the decision of the appellate court.
Petitioner alleges that:

Respondent Court of Appeals erred in finding that there is evidence sufficient to

justify the Decision of the lower court;

Respondent Court of Appeals erred in failing to consider the fact that Private
Respondent committed a violation of the Insurance Policy which justifies the denial of
the claim by Petitioner;

Respondent Court of Appeals further erred in finding that Petitioner is liable to pay
the respondent, Usiphil, Inc., an interest of 24% per annum in addition to the principal
amount of P842,683.40. 3

Essentially, petitioner argues that the disallowance of private respondent's claim is

justified by its failure to submit the required documents in accordance with Policy
Condition No. 13. Said requirements were allegedly communicated to private
respondent in the two letters of H.H. Bayne to private respondent. The first letter
stated:

To be able to expedite adjustment of this case, please submit to us without delay the
following documents and/or particulars:
For FFF, Machineries/Equipment Claims

1. Your formal claim (which may be accomplished in the enclosed form)

accompanied by a detailed inventory of the documents submitted.

2. Certification from the appropriate government office indicating the date of the
occurrence of the fire, the property involved, its location and possible point of origin.

3. Proof of premium payment.

4. Three color photographs of the debris properly captioned/identified/dated and

initiated by the claimant at the back.

4.1 Close-up (not more than 2 meters away) of the most severely damaged.

4.2 Close-up (not more than 2 meters away) of the least damaged.

4.3 Original view of the debris (may be from farther than 2 meters away); splice
two or more frames if necessary.

Though our adjusters will also take photographs in the manner prescribed above,
please do not rely on his photographs in the preservations of your evidence of loss
thru pictures.

5. Copies of purchase invoices.

6. In the absence of No. 5, suppliers' certificates of sales and delivery. STECAc

7. Appraisal report, if any.

8. Where initial estimated loss is exceeding P20,000.00, submit estimate by at

least 2 contractors/suppliers.

9. Others (to be specified)

1. Repairs cost of the affected items including quotation or invoices in support

thereof ;

2. Complete lists of furniture, fixtures & fittings including date and cost of
acquisition, and;

3. Statement of salvage on burned items.

Your preferential attention to this request will be fully appreciated. 4

While the other letter stated:

Please submit to us without delay the following documents and/or particulars.

For Stock Claim

1. Your formal claim (which may be accomplished in the enclosed),

accompanied by a detailed inventory of the documents submitted.

2. Certification from the appropriate government office showing that the

Insured's property was involved in the fire as a consequence of which the claim is
being filed.

3. Proof of premium payment.

4. Three colored photographs of the debris, property captioned/identified/dated

and initiated by the claimant at the back; in a floor plan, indicate the point from where
the picture was taken and by an arrow where the camera was facing.

4.1 Close-up (not more than 2 meters away) of the most severely damaged.

4.2 Close-up (not more than 2 meters away) of the least damaged.

4.3 Overall view of the debris (may be from farther than 2 meters away); splice
two or more frames if necessary.

Our adjuster will also take photographs.

5. Books of accounts bill, invoices and other vouchers, or certified copies thereof
if originals be lost. This requirement includes, but. is not limited to, purchase and
sales invoices, delivery

6. Certified copies of income tax returns for the last three years and the
accompanying financial statements.

7. Latest inventory of merchandise filed with a financial institution, the Bureau

of Internal Revenue or any government entity prior to the loss.

8. A detailed inventory of the articles damaged or destroyed, showing the cost

price of each, extent of loss, if any, if the risk sustained partial or water damaged.
CTEaDc

9. Certificates of registration.

10. Bank Statements.

11. For losses where the estimated value of stocks claimed which are burned but
of sight and/or which may no longer be subject to actual physical count exceeds
P50,000.00, a CPA's detailed computations in support of such estimated value.

12. In the absence of purchase invoices/delivery receipts (state reason for

absence), submit suppliers' certificate of sales and delivery.

13. Others (to be specified).

Statement of salvage of the affected stocks in trade.

Your compliance with this request will enable us to expedite adjustment of the loss in
caption. 5

According to petitioner, in complete disregard of the foregoing requirements, private

respondent never submitted any of the documents mentioned therein. Further,
petitioner assails the award in favor of private respondent of an interest rate of 24%
per annum. Since there was allegedly no express finding that petitioner unreasonably
denied or withheld the payment of the subject insurance claim, then the award of 24%
per annum is not proper. Petitioner opines that the judgment should only bear the
legal interest rate of 12% per annum for the delay in the payment of the claim.

The petition is bereft of merit.

Well-settled is the rule that factual findings and conclusions of the trial court and the
CA are entitled to great weight and respect, and will not be disturbed on appeal in the
absence of any clear showing that the trial court overlooked certain facts or
circumstances which would substantially affect the disposition of the case. 6 There is
no cogent reason to deviate from this salutary rule in the present case.

Both the trial court and the CA concur in holding that private respondent had
substantially complied with Policy Condition No. 13 which reads:

13. The insured shall give immediate written notice to the Company of any loss,
protect the property from further damage, forthwith separate the damaged and
undamaged personal property, put it in the best possible order, furnish a complete
inventory of the destroyed, damaged, and undamaged property, showing in detail
quantities, costs, actual cash value and the amount of loss claimed; AND WITHIN
SIXTY DAYS AFTER THE LOSS, UNLESS SUCH TIME IS EXTENDED IN
WRITING BY THE COMPANY, THE INSURED SHALL RENDER TO THE
COMPANY A PROOF OF LOSS, signed and sworn to by the insured, stating the
knowledge and belief of the insured as to the following: the time and origin of the
loss, the interest of the insured and of all others in the property, the actual cash value
of each item thereof and the amount of loss thereto, all encumbrances thereon, all
other contracts of insurance, whether valid or not, covering any of said property, any
changes in the title, use, occupation, location, possession or exposures of said
property since the issuing of this policy by whom and for what purpose any buildings
herein described and the several parts thereof were occupied at the time of loss and
whether or not it then stood on leased ground, and shall furnish a copy of all the
descriptions and schedules in all policies, and if required verified plans and
specifications of any building, fixtures, or machinery destroyed or damaged. The
insured, as often as may be reasonably required, shall exhibit to any person designated
by the company all that remains of any property herein described, and submit to
examination under oath by any person named by the Company, and subscribe the
same; and, as often as may be reasonably required, shall produce for examination all
books of account, bills, invoices, and other vouchers or certified copies thereof if
originals be lost, at such reasonable time and place as may be designated by the
Company or its representative and shall permit extracts and copies thereof to be made.
DIAcTE

No claim under this policy shall be payable unless the terms of this condition have
been complied with. 7

A perusal of the records shows that private respondent, after the occurrence of the
fire, immediately notified petitioner thereof. Thereafter, private respondent submitted
the following documents: (1) Sworn Statement of Loss and Formal Claim (Exhibit C)
and; (2) Proof of Loss (Exhibit D). The submission of these documents, to the Court's
mind, constitutes substantial compliance with the above provision. Indeed, as regards
the submission of documents to prove loss, substantial, not strict as urged by
petitioner, compliance with the requirements will always be deemed sufficient. 8

In any case, petitioner itself acknowledged its liability when through its Finance
Manager, Rosauro Maghirang, it signed the document indicating that the amount due
private respondent is P842,683.40 (Exhibit E). As correctly held by the appellate
court:

Under the aforequoted provision of the insurance policy, the insured was required to
submit to the insurer written notice of the loss; and a complete inventory of the
properties damaged within 60 days after the fire, as well as a signed and sworn
statement of Proof of Loss. It is admitted by all parties that plaintiff-appellee notified
the insurer Summa Corporation of the fire which occurred on 27 May 1982. It is
likewise admitted by all parties that plaintiff-appellee submitted the following
documents in support of its claim: (1) Sworn Statement of Loss (Exhibit C); (2)
formal claim dated 22 July 1982; (3) unnotarized sworn statement of proof of loss
(Exhibit D). There was, therefore, sufficient compliance with the requirements in
Section 13 of the policy. But, even assuming that plaintiff-appellee indeed failed to
submit certain required documents as proof of loss per Section 13, such violation was
waived by the insurer Summa when it signed the document marked Exhibit E, a
breakdown of the amount due to plaintiff-appellee as of February 1985 on the
insurance claim. By such act, defendant-appellant acknowledged its liability under the
insurance policy.

Antecedent to the execution of Exhibit E, there was a conference between Pallalos,

representing plaintiff-appellee and Ortega representing Summa Insurance. There is no
evidence that in that meeting, Summa Insurance questioned plaintiff-appellee's
submission of the required documents. What happened was that Ortega summoned
Maghirang so that be could settle with Pallalos regarding the amount due to plaintiff-
appellee from insurance claim. The result is a reconciliation of claim in Exhibit E
which shows that as of February 1985, the net due sum is P842,683.49.

Defendant-appellant alleges that Maghirang was without authority to sign Exhibit E,

and therefore without authority to bind defendant-appellant corporation. We de not
agree. The evidence indicate that at a meeting between plaintiff-appellee's corporate
president Pedro. Pallalos and his counterpart in defendant-appellant corporation,
Joaquin Ortega, the latter summoned Rosauro Maghirang to reconcile the claims of
plaintiff-appellee. One who clothes another with apparent authority as his agent and
holds him to the public as such, cannot. later be allowed to deny the. authority of such
person to act as his agent when such third person entered into the contract in good
faith and in an honest belief that he is such, agent. Witness for defendant-appellant
Luis Manapat's testimony that Maghirang was without authority to bind the
defendant-appellant cannot be given credence because, as he himself testified, he was
not yet part of the Summa Corporation at the time the negotiations in question were
going on. 9

Anent the payment of 24% interest per annum computed from May 3, 1985 until fully
paid, suffice it to say that the same is authorized by Sections 243 and 244 of the
Insurance Code: SAEHaC

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

SECTION 244. In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty of the Commissioner or the Court, as the
case may be, to make a finding as to whether the payment of the claim of the insured
has been unreasonably denied or withheld; and in the affirmative case, the insurance
company shall be adjudged to pay damages which shall consist of attorney's fees and
other expenses incurred by the insured person by reason of such unreasonable denial
or withholding of payment plus interest of twice the ceiling prescribed by the
Monetary Board of the amount of the claim due the insured, from the date following
the time prescribed in section two hundred forty-two or in section two hundred forty-
three, as the case may be, until the claim is fully satisfied: Provided, That the failure
to pay any such claim within the time prescribed in said sections shall be considered
prima facie evidence of reasonable delay in payment.

Notably, under Section 244, a prima facie evidence of unreasonable delay in payment
of the claim is created by the failure of the insurer to pay the claim within the time
fixed in both Sections 243 and 244. 10 Further, Section 29 of the policy itself
provides for the payment of such interest:

29. Settlement of claim clause. The amount of any .loss or damage for which the
company may be liable, under this policy shall be paid within thirty days after proof
of loss is received by the company and ascertainment of the loss or damage is made
either in an agreement between the insured and the company or by arbitration; but if
such ascertainment is not had or made within sixty days after such receipt by the
company of the proof of loss, then the loss or damage shall be paid within ninety days
after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the
policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board. unless such failure or refusal to pay is based on the grounds (sic)
that the claim is fraudulent. 11

The policy itself obliges petitioner to pay the insurance claim within thirty days after
proof of loss and ascertainment of the loss made in an agreement between private
respondent and petitioner. In this case, as found by the CA, petitioner and private
respondent signed the agreement (Exhibit E) indicating that the amount due private
respondent was P842,683.40 on April 2, 1985. Petitioner thus had until May 2, 1985
to pay private respondent's insurance. 12 For its failure to do so, the CA and the trial
court rightfully directed petitioner to pay, inter alia, 24% interest per annum in
accordance with the above quoted provisions.

WHEREFORE, the instant petition is hereby DENIED for lack of merit. The
Decision, dated January 14, 1999, of the Court of Appeals in CA-G.R. CV No. 46721
and its Resolution, dated May 13, 1999, are AFFIRMED IN TOTO. DcSEHT

SO ORDERED.

Davide, Jr., C.J., Puno, Pardo and Ynares-Santiago, JJ., concur.

[G.R. No. L-25579. March 29, 1972.]

EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T.

BIAGTAN and GRACIA T. BIAGTAN, plaintiffs-appellees, vs. THE INSULAR
LIFE ASSURANCE COMPANY, LTD., defendant-appellant.

Tanopo, Millora, Serafica & Sañez for plaintiffs and appellees.

Araneta, Mendoza, Papa & Associates for defendant and appellant.

SYLLABUS

1. INSURANCE LAW; INSURANCE CONTRACT; EXCEPTION TO

ACCIDENTAL BENEFIT CLAUSE, CONSTRUED. — It should be noted that the
exception in the accidental benefit clause invoked by the appellant does not speak of
the purpose whether homicidal or not — of a third party in causing the injuries, but
only of the fact that such injuries have been "intentionally" inflicted — this obviously
to distinguish the from injuries which, although received at the hands of a third party,
are purely accidental.

2. ID.; ID.; ID.; CASE AT BAR. — But where a gang of robbers enter a house
and coming face to face with the owner, even if unexpectedly, stab him repeatedly, it
is contrary to all reason and logic to say that his injuries are not intentionally inflicted,
regardless of whether they prove fatal or not. As it was, in the present case they did
prove fatal, and the robbers have been accused and convicted of the crime of robbery
with homicide. Under the circumstance, the insurance company was correct in
refusing to pay the additional sum of P2,000.00 under the accidental death benefit
clause which expressly provided that it would not apply where death resulted from an
injury "intentionally" inflicted by a third party.

3. ID.; ID.; ID.; CASE OF CALANOC vs. COURT OF APPEALS

DISTINGUISHED FROM CASE AT BAR. — Where a shot was fired and it turned
out afterwards that the watchman was hit in the abdomen, the wound causing his
death, the Court held that it could not be said that the killing was intentional for there
was the possibility that the malefactor had fired the shot to scare the people around for
his own protection and not necessarily to kill or hit the victim. A similar possibility is
clearly ruled out by the facts in the case now before Us. For while a single shot fired
from a distance, and by a person who was not even seen aiming at the victim, could
indeed have been fired without intent to kill or injure, nine wounds inflicted with
bladed weapons at close range cannot conceivably be considered as innocent insofar
as such intent is concerned. The manner of execution of the crime permits no other
conclusion.

4. ID.; ID.; ID.; INTENTIONAL, CONSTRUED IN AMERICAN

JURISDICTION. — It has been held in American jurisdiction that "intentional" as
used in an accident policy excepting intentional injuries inflicted by the insured or any
other person, etc., implies the exercise of the reasoning faculties, consciousness, and
volition.

5. ID.; ID.; ID.; INTENTION OF PARTIES CONTROLLING; AMERICAN

JURISPRUDENCE. — Where a provision of the policy excludes intentional injury, it
is the intention of the person inflicting the injury that is controlling.

6. ID.; ID.; ID.; INJURIES INTENTIONAL; INSURER RELIEVED FROM

LIABILITY. — If the injuries suffered by the insured clearly resulted from the
intentional act of a third party the insurer is relieved from liability.

7. ID.; ID.; ID.; ID.; CASE OF HUTCHCRAFT'S EX'R vs. TRAVELERS' INS.
CO. — In the case of Hutchcraft's Ex'r vs. Travelers' Ins. Co. where the insured was
waylaid and assassinated for the purpose of robbery, the court rendered judgment for
the insurance company and held that while the assassination of the insured was as to
him an unforeseen event and therefore accidental, "the clause of the proviso that
excludes the (insurer's) liability, in case death or injury is intentionally inflicted by
any other person, applies to this case."

DECISION

MAKALINTAL, J p:

This is an appeal from the decision of the Court of First Instance of Pangasinan in its
Civil Case No. D-1700.

The facts are stipulated. Juan S. Biagtan was insured with defendant Insular Life
Assurance Company under Policy No. 398075 for the sum of P5,000.00 and, under a
supplementary contract denominated "Accidental Death Benefit Clause, for an
additional sum of P5,000.00 if "the death of the Insured resulted directly from bodily
injury effected solely through external and violent means sustained in an accident . . .
and independently of all other causes." The clause, however, expressly provided that
it would not apply where death resulted from an injury "intentionally inflicted by a
third party."
On the night of May 20, 1964 or during the first hours of the following day a band of
robbers entered the house of the insured Juan S. Biagtan. What happened then is
related in the decision of the trial court as follows:

". . .; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the
said life policy and supplementary contract were in full force and effect, the house of
insured Juan S. Biagtan was robbed by a band of robbers who were charged in and
convicted by the Court of First Instance of Pangasinan for robbery with homicide; that
in committing the robbery, the robbers, on reaching the staircase landing of the
second floor, rushed towards the doors of the second floor room, where they suddenly
met a person near the door of one of the rooms who turned out to be the insured Juan
S. Biagtan who received thrusts from their sharp-pointed instruments, causing wounds
on the body of said Juan S. Biagtan resulting in his death at about 7 a.m. on the same
day, May 21, 1964;"

Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance
company paid the basic amount of P5,000.00 but refused to pay the additional sum of
P5,000.00 under the accidental death benefit clause, on the ground that the insured's
death resulted from injuries intentionally inflicted by third parties and therefore was
not covered. Plaintiffs filed suit to recover, and after due hearing the court a quo
rendered judgment in their favor. Hence the present appeal by the insurer.

The only issue here is whether under the facts are stipulated and found by the trial
court the wounds received by the insured at the hands of the robbers — nine in all,
five of them mortal and four non-mortal — were inflicted intentionally. The court, in
ruling negatively on the issue, stated that since the parties presented no evidence and
submitted the case upon stipulation, there was no "proof that the act of receiving
thrust (sic) from the sharp-pointed instrument of the robbers was intended to inflict
injuries upon the person of the insured or any other person or merely to scare away
any person so as to ward off any resistance or obstacle that might be offered in the
pursuit of their main objective which was robbery."

The trial court committed a plain error in drawing the conclusion it did from the
admitted facts. Nine wounds were inflicted upon the deceased, all by means of thrusts
with sharp-pointed instruments wielded by the robbers. This is a physical fact as to
which there is no dispute. So is the fact that five of those wounds caused the death of
the insured. Whether the robbers had the intent to kill or merely to scare the victim or
to ward off any defense he might offer, it cannot be denied that the act itself of
inflicting the injuries was intentional. It should he noted that the exception in the
accidental benefit clause invoked by the appellant does not speak of the purpose —
whether homicidal or not — of a third party in causing the injuries, but only of the
fact that such injuries have been "intentionally" inflicted — this obviously to
distinguish them from injuries which, although received at the hands of a third party,
are purely accidental. This construction is the basic idea expressed in the coverage of
the clause itself, namely, that "the death of the insured resulted directly from bodily
injury effected solely through external and violent means sustained in an accident . . .
and independently of all other causes." A gun which discharges while being cleaned
and kills a bystander; a hunter who shoots at his prey and hits a person instead; an
athlete in a competitive game involving physical effort who collides with an opponent
and fatally injures him as a result: these are instances where the infliction of the injury
is unintentional and therefore would be within the coverage of an accidental death
benefit clause such as that in question in this case. But where a gang of robbers enter a
house and coming face to face with the owner, even if unexpectedly, stab him
repeatedly, it is contrary to all reason and logic to say that his injuries are not
intentionally inflicted, regardless of whether they prove fatal or not. As it was, in the
present case they did prove fatal, and the robbers have been accused and convicted of
the crime of robbery with homicide.

The case of Calanoc vs. Court of Appeals, 98 Phil 79, is relied upon by the trial court
in support of its decision. The facts in that case, however, are different from those
obtaining here. The insured there was a watchman in a certain company, who
happened to be invited by a policeman to come along as the latter was on his way to
investigate a reported robbery going on in a private house. As the two of them,
together with the owner of the house, approached and stood in front of the main gate,
a shot was fired and it turned out afterwards that the watchman was hit in the
abdomen, the wound causing his death. Under those circumstances this Court held
that it could not be said that the killing was intentional for there was the possibility
that the malefactor had fired the shot to scare the people around for his own protection
and not necessarily to kill of hit the victim. A similar possibility is clearly ruled out by
the facts in the case now before Us. For while a single shot fired from a distance, and
by a person who was not even seen aiming at the victim, could indeed have been fired
without intent to kill or injure, nine wounds inflicted with bladed weapons at close
range cannot conceivably be considered as innocent insofar as such intent is
concerned. The manner of execution of the crime permits no other conclusion.

Court decisions in the American jurisdiction, where similar provisions in accidental

death benefit clauses in insurance policies have been construed, may shed light on the
issue before Us. Thus, it has been held that "intentional" as used in an accident policy
excepting intentional injuries inflicted by the insured or any other person, etc., implies
the exercise of the reasoning faculties, consciousness, and volition. 1 Where a
provision of the policy excludes intentional injury, it is the intention of the person
inflicting the injury that is controlling. 2 If the injuries suffered by the insured clearly
resulted from the intentional act of a third person the insurer is relieved from liability
as stipulated. 3

In the case of Hutchcraft's Ex'r. v. Travelers' Ins. Co., 87 Ky. 300, 8 S.W. 570, 12
Am. St. Rep. 484, the insured was waylaid and assassinated for the purpose of
robbery. Two (2) defenses were interposed to the action to recover indemnity,
namely: (1) that the insured having been killed by intentional means, his death was
not accidental, and (2) that the proviso in the policy expressly exempted the insurer
from liability in case the insured died from injuries intentionally inflicted by another
person. In rendering judgment for the insurance company the Court held that while
the assassination of the insured was as to him an unforeseen event and therefore
accidental, "the clause of the proviso "that excludes the (insurer's) liability, in case
death or injury is intentionally inflicted by any other person, applies to this case."

In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811,
the insured was shot three times by a person unknown late on a dark and stormy night,
while working in the coal shed of a railroad company. The policy did not cover death
resulting from "intentional injuries inflicted by the insured or any other person." The
inquiry was as to the question whether the shooting that caused the insured's death
was accidental or intentional; and the Court found that under the facts, showing that
the murderer knew his victim and that he fired with intent to kill, there could be no
recovery under the policy which excepted death from intentional injuries inflicted by
any person.

WHEREFORE, the decision appealed from is reversed and the complaint dismissed,
without pronouncement as to costs.

Zaldivar, Castro, Fernando and Villamor, JJ., concur.

Concepcion, C.J. and Reyes, J.B.L., J., concur in the dissent of Justice Teehankee.

Teehankee, J., dissents in a separate opinion.

Barredo, J., concurs in separate opinion.

Makasiar, J., reserves his vote.

[G.R. No. 138060. September 1, 2004.]

WILLIAM TIU, doing business under the name and style of “D’ Rough Riders,” and
VIRGILIO TE LASPIÑAS, petitioners, vs. PEDRO A. ARRIESGADO, BENJAMIN
CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX SURETY AND
INSURANCE, INC., respondents.
Rufino L. Remoreras, Jr. and Sixto Rey M. Orig for petitioners.

Ramirez Corro & Associates for private respondent P.A. Arriesgado.

Glenn N. Jumao-as for private respondent B. Condor.

Ma. Cristina G. Laderas for respondent PPSII.

SYNOPSIS

Respondent Pedro Arriesgado and his spouse, Felisa (now deceased), rode a
passenger bus driven by petitioner Laspiñas bound for Cebu City. As the bus was
approaching a bridge, petitioner Laspiñas saw the stalled truck which was driven by
Pedrano. It was then parked along the right side of the national highway because one
of its tires exploded. Laspiñas tried to swerve to the left to avoid hitting the truck, but
the bus rammed into the truck, and left several passengers injured, including Pedro
and Felisa Arriesgado. Felisa died shortly thereafter. Pedro filed a complaint for
breach of contract of carriage against the petitioners, operator Tiu and his driver
Laspiñas of the passenger bus. Petitioners filed a Third Party Complaint against Tiu's
insurer and against Condor, the owner of the cargo truck, and Pedrano, its driver. The
trial court rendered judgment in favor of Arriesgado, ruling that petitioner Laspiñas
could have avoided hitting the truck had he not been driving at a fast pace. The CA
affirmed the trial court's decision with modification as to the amount of damages The
CA ruled that Arriesgado's action was based on breach of contract of carriage and that
the insurer could not be held liable because no evidence was presented against him.
TaCDIc

On appeal, the Supreme Court held that in actions for breach of contract, only the
existence of such contract and the fact that the obligor, in this case the common
carrier, failed to transport his passenger safely to his destination are the matters that
need to be proved. Any injury suffered by the passengers in the course thereof is
immediately attributable to the negligence of the carrier. Upon the happening of the
accident, it must be shown that the common carrier observed the required
extraordinary diligence in the care of his passengers, which means that the carrier
must show the utmost diligence of very cautious persons as far as human care and
foresight can provide, or that the accident was caused by fortuitous event.

Both the trial and appellate courts found that the proximate cause of the collision was
the fast speed at which petitioner Laspiñas drove the bus. This is a factual finding not
reviewable by the Court in a petition for review under Rule 45. The Supreme Court,
however, held that the manner in which the truck was parked without an early
warning device clearly endangered oncoming traffic on both sides. Hence, petitioners
(passenger bus owner and driver) as well as the respondents (truck owner and driver)
were held jointly and severally liable for damages to respondent Arriesgado, and
surviving spouse, and heir of Felisa Arriesgado. cCAIES

SYLLABUS

1. REMEDIAL LAW; APPEALS; PETITION FOR REVIEW UNDER RULE

45; FACTUAL FINDINGS OF THE TRIAL COURT AND THE COURT OF
APPEALS ARE NOT REVIEWABLE BY THE SUPREME COURT IN A
PETITION FOR REVIEW THEREUNDER; CASE AT BAR. — At the outset, it
must be stressed that this Court is not a trier of facts. Factual findings of the Court of
Appeals are final and may not be reviewed on appeal by this Court, except when the
lower court and the CA arrived at diverse factual findings. The petitioners in this case
assail the finding of both the trial and the appellate courts that petitioner Laspiñas was
driving at a very fast speed before the bus owned by petitioner Tiu collided with
respondent Condor's stalled truck. This is clearly one of fact, not reviewable by the
Court in a petition for review under Rule 45.

2. CIVIL LAW; CIVIL CODE; COMMON CARRIERS; THE DUTY TO

EXERCISE EXTRAORDINARY DILIGENCE IN TRANSPORTING
PASSENGERS TO THEIR DESTINATION; BREACH OF CONTRACT OF
CARRIAGE, A CASE OF. — The rules which common carriers should observe as to
the safety of their passengers are set forth in the Civil Code, Articles 1733, 1755 and
1756. In this case, respondent Arriesgado and his deceased wife contracted with
petitioner Tiu, as owner and operator of D' Rough Riders bus service, for
transportation from Maya, Daanbantayan, Cebu, to Cebu City for the price of P18.00.
It is undisputed that the respondent and his wife were not safely transported to the
destination agreed upon. In actions for breach of contract, only the existence of such
contract, and the fact that the obligor, in this case the common carrier, failed to
transport his passenger safely to his destination are the matters that need to be proved.
This is because under the said contract of carriage, the petitioners assumed the express
obligation to transport the respondent and his wife to their destination safely and to
observe extraordinary diligence with due regard for all circumstances. Any injury
suffered by the passengers in the course thereof is immediately attributable to the
negligence of the carrier.

3. ID.; ID.; ID.; ID.; ID.; INAPPLICABILITY OF DOCTRINE OF LAST

CLEAR CHANCE IN CASE AT BAR. — Contrary to the petitioner's contention, the
principle of last clear chance is inapplicable in the instant case, as it only applies in a
suit between the owners and drivers of two colliding vehicles. It does not arise where
a passenger demands responsibility from the carrier to enforce its contractual
obligations, for it would be inequitable to exempt the negligent driver and its owner
on the ground that the other driver was likewise guilty of negligence. The common
law notion of last clear chance permitted courts to grant recovery to a plaintiff who
has also been negligent provided that the defendant had the last clear chance to avoid
the casualty and failed to do so. Accordingly, it is difficult to see what role, if any, the
common law of last clear chance doctrine has to play in a jurisdiction where the
common law concept of contributory negligence as an absolute bar to recovery by the
plaintiff, has itself been rejected, as it has been in Article 2179 of the Civil Code.
Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgado's
wife due to the negligence of petitioner Laspiñas, his employee, on this score.
HCTEDa

4. ID.; ID.; ID.; ID.; ID.; OTHER COLLIDING VEHICLE RENDERED

JOINTLY AND SEVERALLY LIABLE FOR DAMAGES DUE TO
CONTRIBUTORY NEGLIGENCE; CASE AT BAR. — In this case, both the trial
and the appellate courts failed to consider that respondent Pedrano was also negligent
in leaving the truck parked askew without any warning lights or reflector devices to
alert oncoming vehicles, and that such failure created the presumption of negligence
on the part of his employer, respondent Condor, in supervising his employees
properly and adequately. The manner in which the truck was parked clearly
endangered oncoming traffic on both sides, considering that the tire blowout which
stalled the truck in the first place occurred in the wee hours of the morning. The Court
can only now surmise that the unfortunate incident could have been averted had
respondent Condor, the owner of the truck, equipped the said vehicle with lights,
flares, or, at the very least, an early warning device. Hence, we cannot subscribe to
respondents Condor and Pedrano's claim that they should be absolved from liability
because, as found by the trial and appellate courts, the proximate cause of the
collision was the fast speed at which petitioner Laspiñas drove the bus. To accept this
proposition would be to come too close to wiping out the fundamental principle of
law that a man must respond for the foreseeable consequences of his own negligent
act or omission. . . . The petitioners, as well as the respondents Benjamin Condor and
Sergio Pedrano are jointly and severally liable for said amount, conformably with the
following pronouncement of the Court in Fabre, Jr. vs. Court of Appeals.

5. ID.; ID.; ID.; EXTENT OF LIABILITY OF AN INSURER IN AN

INDEMNITY CONTRACT FOR THIRD PARTY LIABILITY; CASE AT BAR. —
As can be gleaned from the Certificate of Cover, such insurance contract was issued
pursuant to the Compulsory Motor Vehicle Liability Insurance Law. It was expressly
provided therein that the limit of the insurer's liability for each person was P12,000,
while the limit per accident was pegged at P50,000. An insurer in an indemnity
contract for third party liability is directly liable to the injured party up to the extent
specified in the agreement but it cannot be held solidarily liable beyond that amount.
The respondent PPSII could not then just deny petitioner Tiu's claim; it should have
paid P12,000 for the death of Felisa Arriesgado, and respondent Arriesgado's
hospitalization expenses of P1,113.80, which the trial court found to have been duly
supported by receipts. The total amount of the claims, even when added to that of the
other injured passengers which the respondent PPSII claimed to have settled, would
not exceed the P50,000 limit under the insurance agreement.
6. ID.; ID.; ID.; BREACH OF CONTRACT OF CARRIAGE; DAMAGES TO
BE AWARDED IN CASE AT BAR. — The trial court correctly awarded moral
damages in the amount of P50,000 in favor of respondent Arriesgado. The award of
exemplary damages by way of example or correction of the public good, is likewise in
order. As the Court ratiocinated in Kapalaran Bus Line v. Coronado: . . . The
respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa
Arriesgado, is entitled to indemnity in the amount of P50,000.00. ACIDTE

DECISION

CALLEJO, SR., J p:

This is a petition for review on certiorari under Rule 45 of the Rules of Court from the
Decision 1 of the Court of Appeals in CA-G.R. CV No. 54354 affirming with
modification the Decision 2 of the Regional Trial Court, 7th Judicial Region, Cebu
City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of carriage,
damages and attorney’s fees, and the Resolution dated February 26, 1999 denying the
motion for reconsideration thereof. aATHIE

The following facts are undisputed:

At about 10:00 p.m. of March 15, 1987, the cargo truck marked “Condor Hollow
Blocks and General Merchandise” bearing plate number GBP-675 was loaded with
firewood in Bogo, Cebu and left for Cebu City. Upon reaching Sitio Aggies,
Poblacion, Compostela, Cebu, just as the truck passed over a bridge, one of its rear
tires exploded. The driver, Sergio Pedrano, then parked along the right side of the
national highway and removed the damaged tire to have it vulcanized at a nearby
shop, about 700 meters away. 3 Pedrano left his helper, Jose Mitante, Jr. to keep
watch over the stalled vehicle, and instructed the latter to place a spare tire six
fathoms away 4 behind the stalled truck to serve as a warning for oncoming vehicles.
The truck’s tail lights were also left on. It was about 12:00 a.m., March 16, 1987.

At about 4:45 a.m., D’ Rough Riders passenger bus with plate number PBP-724
driven by Virgilio Te Laspiñas was cruising along the national highway of Sitio
Aggies, Poblacion, Compostela, Cebu. The passenger bus was also bound for Cebu
City, and had come from Maya, Daanbantayan, Cebu. Among its passengers were the
Spouses Pedro A. Arriesgado and Felisa Pepito Arriesgado, who were seated at the
right side of the bus, about three (3) or four (4) places from the front seat. cAEaSC

As the bus was approaching the bridge, Laspiñas saw the stalled truck, which was
then about 25 meters away. 5 He applied the breaks and tried to swerve to the left to
avoid hitting the truck. But it was too late; the bus rammed into the truck’s left rear.
The impact damaged the right side of the bus and left several passengers injured.
Pedro Arriesgado lost consciousness and suffered a fracture in his right colles. 6 His
wife, Felisa, was brought to the Danao City Hospital. She was later transferred to the
Southern Island Medical Center where she died shortly thereafter. 7

Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of

carriage, damages and attorney’s fees before the Regional Trial Court of Cebu City,
Branch 20, against the petitioners, D’ Rough Riders bus operator William Tiu and his
driver, Virgilio Te Laspiñas on May 27, 1987. The respondent alleged that the
passenger bus in question was cruising at a fast and high speed along the national
road, and that petitioner Laspiñas did not take precautionary measures to avoid the
accident. 8 Thus:

6. That the accident resulted to the death of the plaintiff’s wife, Felisa Pepito
Arriesgado, as evidenced by a Certificate of Death, a xerox copy of which is hereto
attached as integral part hereof and marked as ANNEX — “A”, and physical injuries
to several of its passengers, including plaintiff himself who suffered a “COLLES
FRACTURE RIGHT,” per Medical Certificate, a xerox copy of which is hereto
attached as integral part hereof and marked as ANNEX — “B” hereof. EaHcDS

7. That due to the reckless and imprudent driving by defendant Virgilio Te

Laspiñas of the said Rough Riders passenger bus, plaintiff and his wife, Felisa Pepito
Arriesgado, failed to safely reach their destination which was Cebu City, the
proximate cause of which was defendant-driver’s failure to observe utmost diligence
required of a very cautious person under all circumstances.

8. That defendant William Tiu, being the owner and operator of the said Rough
Riders passenger bus which figured in the said accident, wherein plaintiff and his wife
were riding at the time of the accident, is therefore directly liable for the breach of
contract of carriage for his failure to transport plaintiff and his wife safely to their
place of destination which was Cebu City, and which failure in his obligation to
transport safely his passengers was due to and in consequence of his failure to
exercise the diligence of a good father of the family in the selection and supervision
of his employees, particularly defendant-driver Virgilio Te Laspiñas. 9

The respondent prayed that judgment be rendered in his favor and that the petitioners
be condemned to pay the following damages:

1). To pay to plaintiff, jointly and severally, the amount of P30,000.00 for the
death and untimely demise of plaintiff’s wife, Felisa Pepito Arriesgado;

2). To pay to plaintiff, jointly and severally, the amount of P38,441.50,

representing actual expenses incurred by the plaintiff in connection with the
death/burial of plaintiff’s wife;
3). To pay to plaintiff, jointly and severally, the amount of P1,113.80,
representing medical/hospitalization expenses incurred by plaintiff for the injuries
sustained by him; EDaHAT

4). To pay to plaintiff, jointly and severally, the amount of P50,000.00 for moral
damages;

5). To pay to plaintiff, jointly and severally, the amount of P50,000.00 by way of
exemplary damages;

6). To pay to plaintiff, jointly and severally, the amount of P20,000.00 for
attorney’s fees;

7). To pay to plaintiff, jointly and severally, the amount of P5,000.00 for litigation
expenses.

PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES

IN LAW AND EQUITY. 10

The petitioners, for their part, filed a Third-Party Complaint 11 on August 21, 1987
against the following: respondent Philippine Phoenix Surety and Insurance, Inc.
(PPSII), petitioner Tiu’s insurer; respondent Benjamin Condor, the registered owner
of the cargo truck; and respondent Sergio Pedrano, the driver of the truck. They
alleged that petitioner Laspiñas was negotiating the uphill climb along the national
highway of Sitio Aggies, Poblacion, Compostela, in a moderate and normal speed. It
was further alleged that the truck was parked in a slanted manner, its rear portion
almost in the middle of the highway, and that no early warning device was displayed.
Petitioner Laspiñas promptly applied the brakes and swerved to the left to avoid
hitting the truck head-on, but despite his efforts to avoid damage to property and
physical injuries on the passengers, the right side portion of the bus hit the cargo
truck’s left rear. The petitioners further alleged, thus:

5. That the cargo truck mentioned in the aforequoted paragraph is owned and
registered in the name of the third-party defendant Benjamin Condor and was left
unattended by its driver Sergio Pedrano, one of the third-party defendants, at the time
of the incident;

6. That third-party defendant Sergio Pedrano, as driver of the cargo truck with
marked (sic) “Condor Hollow Blocks & General Merchandise,” with Plate No. GBP-
675 which was recklessly and imprudently parked along the national highway of
Compostela, Cebu during the vehicular accident in question, and third-party defendant
Benjamin Condor, as the registered owner of the cargo truck who failed to exercise
due diligence in the selection and supervision of third-party defendant Sergio
Pedrano, are jointly and severally liable to the third-party plaintiffs for whatever
liability that may be adjudged against said third-party plaintiffs or are directly liable
of (sic) the alleged death of plaintiff’s wife; IcSHTA

7. That in addition to all that are stated above and in the answer which are
intended to show reckless imprudence on the part of the third-party defendants, the
third-party plaintiffs hereby declare that during the vehicular accident in question,
third-party defendant was clearly violating Section 34, par. (g) of the Land
Transportation and Traffic Code . . .

xxx xxx xxx

10. That the aforesaid passenger bus, owned and operated by third-party plaintiff
William Tiu, is covered by a common carrier liability insurance with Certificate of
Cover No. 054940 issued by Philippine Phoenix Surety and Insurance, Inc., Cebu City
Branch, in favor of third-party plaintiff William Tiu which covers the period from
July 22, 1986 to July 22, 1987 and that the said insurance coverage was valid, binding
and subsisting during the time of the aforementioned incident (Annex “A” as part
hereof);

11. That after the aforesaid alleged incident, third-party plaintiff notified third-
party defendant Philippine Phoenix Surety and Insurance, Inc., of the alleged incident
hereto mentioned, but to no avail;

12. That granting, et arguendo et arguendi, if herein third-party plaintiffs will be

adversely adjudged, they stand to pay damages sought by the plaintiff and therefore
could also look up to the Philippine Phoenix Surety and Insurance, Inc., for
contribution, indemnification and/or reimbursement of any liability or obligation that
they might [be] adjudged per insurance coverage duly entered into by and between
third-party plaintiff William Tiu and third-party defendant Philippine Phoenix Surety
and Insurance, Inc.; . . . 12

The respondent PPSII, for its part, admitted that it had an existing contract with
petitioner Tiu, but averred that it had already attended to and settled the claims of
those who were injured during the incident. 13 It could not accede to the claim of
respondent Arriesgado, as such claim was way beyond the scheduled indemnity as
contained in the contract of insurance. 14

After the parties presented their respective evidence, the trial court ruled in favor of
respondent Arriesgado. The dispositive portion of the decision reads: aSITDC

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of

plaintiff as against defendant William Tiu ordering the latter to pay the plaintiff the
following amounts:

1. The sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

2. The sum of FIFTY THOUSAND PESOS (P50,000.00) as exemplary
damages;

3. The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-ONE

PESOS (P38,441.00) as actual damages;

4. The sum of TWENTY THOUSAND PESOS (P20,000.00) as attorney’s fees;

5. The sum of FIVE THOUSAND PESOS (P5,000.00) as costs of suit;

SO ORDERED. 15

According to the trial court, there was no dispute that petitioner William Tiu was
engaged in business as a common carrier, in view of his admission that D’ Rough
Rider passenger bus which figured in the accident was owned by him; that he had
been engaged in the transportation business for 25 years with a sole proprietorship;
and that he owned 34 buses. The trial court ruled that if petitioner Laspiñas had not
been driving at a fast pace, he could have easily swerved to the left to avoid hitting the
truck, thus, averting the unfortunate incident. It then concluded that petitioner
Laspiñas was negligent.

The trial court also ruled that the absence of an early warning device near the place
where the truck was parked was not sufficient to impute negligence on the part of
respondent Pedrano, since the tail lights of the truck were fully on, and the vicinity
was well lighted by street lamps. 16 It also found that the testimony of petitioner Tiu,
that he based the selection of his driver Laspiñas on efficiency and in-service training,
and that the latter had been so far an efficient and good driver for the past six years of
his employment, was insufficient to prove that he observed the diligence of a good
father of a family in the selection and supervision of his employees. SIcEHD

After the petitioner’s motion for reconsideration of the said decision was denied, the
petitioners elevated the case to the Court of Appeals on the following issues:

I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS

RECKLESS AND IMPRUDENT WHEN HE PARKED THE CARGO TRUCK IN
AN OBLIQUE MANNER;

II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND

SEVERALLY LIABLE DIRECTLY TO PLAINTIFF-APPELLEE OR TO
DEFENDANTS-APPELLANTS FOR WHATEVER LIABILITY THAT MAY BE
ADJUDGED TO THE SAID DEFENDANTS-APPELLANTS;

III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIÑAS WAS

GUILTY OF GROSS NEGLIGENCE;
IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD
EXERCISED THE DUE DILIGENCE OF A GOOD FATHER OF A FAMILY IN
THE SELECTION AND SUPERVISION OF HIS DRIVERS;

V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-

APPELLANT WILLIAM TIU IS LIABLE TO PLAINTIFF-APPELLEE,
WHETHER THERE IS LEGAL AND FACTUAL BASIS IN AWARDING
EXCESSIVE MORAL DAMAGES, EX[E]MPLARY DAMAGES, ATTORNEY’S
FEES AND LITIGATION EXPENSES TO PLAINTIFF-APPELLEE;

VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX

SURETY AND INSURANCE, INC. IS LIABLE TO DEFENDANT-APPELLANT
WILLIAM TIU. 17

The appellate court rendered judgment affirming the trial court’s decision with the
modification that the awards for moral and exemplary damages were reduced to
P25,000. The dispositive portion reads: HDTcEI

WHEREFORE, the appealed Decision dated November 6, 1995 is hereby MODIFIED

such that the awards for moral and exemplary damages are each reduced to
P25,000.00 or a total of P50,000.00 for both. The judgment is AFFIRMED in all other
respects.

SO ORDERED. 18

According to the appellate court, the action of respondent Arriesgado was based not
on quasi-delict but on breach of contract of carriage. As a common carrier, it was
incumbent upon petitioner Tiu to prove that extraordinary diligence was observed in
ensuring the safety of passengers during transportation. Since the latter failed to do so,
he should be held liable for respondent Arriesgado’s claim. The CA also ruled that no
evidence was presented against the respondent PPSII, and as such, it could not be held
liable for respondent Arriesgado’s claim, nor for contribution, indemnification and/or
reimbursement in case the petitioners were adjudged liable.

The petitioners now come to this Court and ascribe the following errors committed by
the appellate court:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING

RESPONDENTS BENJAMIN CONDOR AND SERGIO PEDRANO GUILTY OF
NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A.
ARRIESGADO OR TO PETITIONERS FOR WHATEVER LIABILITY THAT
MAY BE ADJUDGED AGAINST THEM.
II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING
PETITIONERS GUILTY OF NEGLIGENCE AND HENCE, LIABLE TO
RESPONDENT PEDRO A. ARRIESGADO.

III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING

PETITIONER WILLIAM TIU LIABLE FOR EXEMPLARY DAMAGES,
ATTORNEY’S FEES AND LITIGATION EXPENSES. TcEDHa

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING

RESPONDENT PHILIPPINE PHOENIX SURETY AND INSURANCE, INC.
LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR TO PETITIONER
WILLIAM TIU. 19

According to the petitioners, the appellate court erred in failing to appreciate the
absence of an early warning device and/or built-in reflectors at the front and back of
the cargo truck, in clear violation of Section 34, par. (g) of the Land Transportation
and Traffic Code. They aver that such violation is only a proof of respondent
Pedrano’s negligence, as provided under Article 2185 of the New Civil Code. They
also question the appellate court’s failure to take into account that the truck was
parked in an oblique manner, its rear portion almost at the center of the road. As such,
the proximate cause of the incident was the gross recklessness and imprudence of
respondent Pedrano, creating the presumption of negligence on the part of respondent
Condor in supervising his employees, which presumption was not rebutted. The
petitioners then contend that respondents Condor and Pedrano should be held jointly
and severally liable to respondent Arriesgado for the payment of the latter’s claim.

The petitioners, likewise, aver that expert evidence should have been presented to
prove that petitioner Laspiñas was driving at a very fast speed, and that the CA could
not reach such conclusion by merely considering the damages on the cargo truck. It
was also pointed out that petitioner Tiu presented evidence that he had exercised the
diligence of a good father of a family in the selection and supervision of his drivers.

The petitioners further allege that there is no legal and factual basis to require
petitioner Tiu to pay exemplary damages as no evidence was presented to show that
the latter acted in a fraudulent, reckless and oppressive manner, or that he had an
active participation in the negligent act of petitioner Laspiñas.

Finally, the petitioners contend that respondent PPSII admitted in its answer that
while it had attended to and settled the claims of the other injured passengers,
respondent Arriesgado’s claim remained unsettled as it was beyond the scheduled
indemnity under the insurance contract. The petitioners argue that said respondent
PPSII should have settled the said claim in accordance with the scheduled indemnity
instead of just denying the same. HIAESC
On the other hand, respondent Arriesgado argues that two of the issues raised by the
petitioners involved questions of fact, not reviewable by the Supreme Court: the
finding of negligence on the part of the petitioners and their liability to him; and the
award of exemplary damages, attorney’s fees and litigation expenses in his favor.
Invoking the principle of equity and justice, respondent Arriesgado pointed out that if
there was an error to be reviewed in the CA decision, it should be geared towards the
restoration of the moral and exemplary damages to P50,000 each, or a total of
P100,000 which was reduced by the Court of Appeals to P25,000 each, or a total of
only P50,000.

Respondent Arriesgado also alleged that respondents Condor and Pedrano, and
respondent Phoenix Surety, are parties with whom he had no contract of carriage, and
had no cause of action against. It was pointed out that only the petitioners needed to
be sued, as driver and operator of the ill-fated bus, on account of their failure to bring
the Arriesgado Spouses to their place of destination as agreed upon in the contract of
carriage, using the utmost diligence of very cautious persons with due regard for all
circumstances.

Respondents Condor and Pedrano point out that, as correctly ruled by the Court of
Appeals, the proximate cause of the unfortunate incident was the fast speed at which
petitioner Laspiñas was driving the bus owned by petitioner Tiu. According to the
respondents, the allegation that the truck was not equipped with an early warning
device could not in any way have prevented the incident from happening. It was also
pointed out that respondent Condor had always exercised the due diligence required in
the selection and supervision of his employees, and that he was not a party to the
contract of carriage between the petitioners and respondent Arriesgado.

Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu,
it settled all the claims of those injured in accordance with the insurance contract. It
further avers that it did not deny respondent Arriesgado’s claim, and emphasizes that
its liability should be within the scheduled limits of indemnity under the said contract.
The respondent concludes that while it is true that insurance contracts are contracts of
indemnity, the measure of the insurer’s liability is determined by the insured’s
compliance with the terms thereof. HCaDET

The Court’s Ruling

At the outset, it must be stressed that this Court is not a trier of facts. 20 Factual
findings of the Court of Appeals are final and may not be reviewed on appeal by this
Court, except when the lower court and the CA arrived at diverse factual findings. 21
The petitioners in this case assail the finding of both the trial and the appellate courts
that petitioner Laspiñas was driving at a very fast speed before the bus owned by
petitioner Tiu collided with respondent Condor’s stalled truck. This is clearly one of
fact, not reviewable by the Court in a petition for review under Rule 45. 22
On this ground alone, the petition is destined to fail.

However, considering that novel questions of law are likewise involved, the Court
resolves to examine and rule on the merits of the case.

Petitioner Laspiñas

Was negligent in driving

The Ill-fated bus

In his testimony before the trial court, petitioner Laspiñas claimed that he was
traversing the two-lane road at Compostela, Cebu at a speed of only forty (40) to fifty
(50) kilometers per hour before the incident occurred. 23 He also admitted that he saw
the truck which was parked in an “oblique position” at about 25 meters before impact,
24 and tried to avoid hitting it by swerving to the left. However, even in the absence
of expert evidence, the damage sustained by the truck 25 itself supports the finding of
both the trial court and the appellate court, that the D’ Rough Rider bus driven by
petitioner Laspiñas was traveling at a fast pace. Since he saw the stalled truck at a
distance of 25 meters, petitioner Laspiñas had more than enough time to swerve to his
left to avoid hitting it; that is, if the speed of the bus was only 40 to 50 kilometers per
hour as he claimed. As found by the Court of Appeals, it is easier to believe that
petitioner Laspiñas was driving at a very fast speed, since at 4:45 a.m., the hour of the
accident, there were no oncoming vehicles at the opposite direction. Petitioner
Laspiñas could have swerved to the left lane with proper clearance, and, thus, could
have avoided the truck. 26 Instinct, at the very least, would have prompted him to
apply the breaks to avert the impending disaster which he must have foreseen when he
caught sight of the stalled truck. As we had occasion to reiterate: IacHAE

A man must use common sense, and exercise due reflection in all his acts; it is his
duty to be cautious, careful and prudent, if not from instinct, then through fear of
recurring punishment. He is responsible for such results as anyone might foresee and
for acts which no one would have performed except through culpable abandon.
Otherwise, his own person, rights and property, and those of his fellow beings, would
ever be exposed to all manner of danger and injury. 27

We agree with the following findings of the trial court, which were affirmed by the
CA on appeal:

A close study and evaluation of the testimonies and the documentary proofs submitted
by the parties which have direct bearing on the issue of negligence, this Court as
shown by preponderance of evidence that defendant Virgilio Te Laspiñas failed to
observe extraordinary diligence as a driver of the common carrier in this case. It is
quite hard to accept his version of the incident that he did not see at a reasonable
distance ahead the cargo truck that was parked when the Rough Rider [Bus] just came
out of the bridge which is on an (sic) [more] elevated position than the place where
the cargo truck was parked. With its headlights fully on, defendant driver of the
Rough Rider was in a vantage position to see the cargo truck ahead which was parked
and he could just easily have avoided hitting and bumping the same by maneuvering
to the left without hitting the said cargo truck. Besides, it is (sic) shown that there was
still much room or space for the Rough Rider to pass at the left lane of the said
national highway even if the cargo truck had occupied the entire right lane thereof. It
is not true that if the Rough Rider would proceed to pass through the left lane it would
fall into a canal considering that there was much space for it to pass without hitting
and bumping the cargo truck at the left lane of said national highway. The records,
further, showed that there was no incoming vehicle at the opposite lane of the national
highway which would have prevented the Rough Rider from not swerving to its left in
order to avoid hitting and bumping the parked cargo truck. But the evidence showed
that the Rough Rider instead of swerving to the still spacious left lane of the national
highway plowed directly into the parked cargo truck hitting the latter at its rear
portion; and thus, the (sic) causing damages not only to herein plaintiff but to the
cargo truck as well. 28

Indeed, petitioner Laspiñas’ negligence in driving the bus is apparent in the records.
By his own admission, he had just passed a bridge and was traversing the highway of
Compostela, Cebu at a speed of 40 to 50 kilometers per hour before the collision
occurred. The maximum speed allowed by law on a bridge is only 30 kilometers per
hour. 29 And, as correctly pointed out by the trial court, petitioner Laspiñas also
violated Section 35 of the Land Transportation and Traffic Code, Republic Act No.
4136, as amended: HSCAIT

Sec. 35. Restriction as to speed. — (a) Any person driving a motor vehicle on a
highway shall drive the same at a careful and prudent speed, not greater nor less than
is reasonable and proper, having due regard for the traffic, the width of the highway,
and or any other condition then and there existing; and no person shall drive any
motor vehicle upon a highway at such speed as to endanger the life, limb and property
of any person, nor at a speed greater than will permit him to bring the vehicle to a stop
within the assured clear distance ahead. 30

Under Article 2185 of the Civil Code, a person driving a vehicle is presumed
negligent if at the time of the mishap, he was violating any traffic regulation. 31

Petitioner Tiu failed to

Overcome the presumption

Of negligence against him as

One engaged in the business

Of common carriage

The rules which common carriers should observe as to the safety of their passengers
are set forth in the Civil Code, Articles 1733, 32 1755 33 and 1756. 34 In this case,
respondent Arriesgado and his deceased wife contracted with petitioner Tiu, as owner
and operator of D’ Rough Riders bus service, for transportation from Maya,
Daanbantayan, Cebu, to Cebu City for the price of P18.00. 35 It is undisputed that the
respondent and his wife were not safely transported to the destination agreed upon. In
actions for breach of contract, only the existence of such contract, and the fact that the
obligor, in this case the common carrier, failed to transport his passenger safely to his
destination are the matters that need to be proved. 36 This is because under the said
contract of carriage, the petitioners assumed the express obligation to transport the
respondent and his wife to their destination safely and to observe extraordinary
diligence with due regard for all circumstances. 37 Any injury suffered by the
passengers in the course thereof is immediately attributable to the negligence of the
carrier. 38 Upon the happening of the accident, the presumption of negligence at once
arises, and it becomes the duty of a common carrier to prove that he observed
extraordinary diligence in the care of his passengers. 39 It must be stressed that in
requiring the highest possible degree of diligence from common carriers and in
creating a presumption of negligence against them, the law compels them to curb the
recklessness of their drivers. 40

While evidence may be submitted to overcome such presumption of negligence, it

must be shown that the carrier observed the required extraordinary diligence, which
means that the carrier must show the utmost diligence of very cautious persons as far
as human care and foresight can provide, or that the accident was caused by fortuitous
event. 41 As correctly found by the trial court, petitioner Tiu failed to conclusively
rebut such presumption. The negligence of petitioner Laspiñas as driver of the
passenger bus is, thus, binding against petitioner Tiu, as the owner of the passenger
bus engaged as a common carrier. 42

The Doctrine of

Last Clear Chance

Is Inapplicable in the

Case at Bar

Contrary to the petitioner’s contention, the principle of last clear chance is

inapplicable in the instant case, as it only applies in a suit between the owners and
drivers of two colliding vehicles. It does not arise where a passenger demands
responsibility from the carrier to enforce its contractual obligations, for it would be
inequitable to exempt the negligent driver and its owner on the ground that the other
driver was likewise guilty of negligence. 43 The common law notion of last clear
chance permitted courts to grant recovery to a plaintiff who has also been negligent
provided that the defendant had the last clear chance to avoid the casualty and failed
to do so. Accordingly, it is difficult to see what role, if any, the common law of last
clear chance doctrine has to play in a jurisdiction where the common law concept of
contributory negligence as an absolute bar to recovery by the plaintiff, has itself been
rejected, as it has been in Article 2179 of the Civil Code. 44

Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgado’s
wife due to the negligence of petitioner Laspiñas, his employee, on this score.
EcHTCD

Respondents Pedrano and

Condor were likewise

Negligent

In Phoenix Construction, Inc. v. Intermediate Appellate Court, 45 where therein

respondent Dionisio sustained injuries when his vehicle rammed against a dump truck
parked askew, the Court ruled that the improper parking of a dump truck without any
warning lights or reflector devices created an unreasonable risk for anyone driving
within the vicinity, and for having created such risk, the truck driver must be held
responsible. In ruling against the petitioner therein, the Court elucidated, thus:
aTADcH

. . . In our view, Dionisio’s negligence, although later in point of time than the truck
driver’s negligence, and therefore closer to the accident, was not an efficient
intervening or independent cause. What the petitioners describe as an “intervening
cause” was no more than a foreseeable consequence of the risk created by the
negligent manner in which the truck driver had parked the dump truck. In other
words, the petitioner truck driver owed a duty to private respondent Dionisio and
others similarly situated not to impose upon them the very risk the truck driver had
created. Dionisio’s negligence was not that of an independent and overpowering
nature as to cut, as it were, the chain of causation in fact between the improper
parking of the dump truck and the accident, nor to sever the juris vinculum of
liability. . .

xxx xxx xxx

We hold that private respondent Dionisio’s negligence was “only contributory,” that
the “immediate and proximate cause” of the injury remained the truck driver’s “lack
of due care.”. . . 46
In this case, both the trial and the appellate courts failed to consider that respondent
Pedrano was also negligent in leaving the truck parked askew without any warning
lights or reflector devices to alert oncoming vehicles, and that such failure created the
presumption of negligence on the part of his employer, respondent Condor, in
supervising his employees properly and adequately. As we ruled in Poblete v. Fabros:
47

It is such a firmly established principle, as to have virtually formed part of the law
itself, that the negligence of the employee gives rise to the presumption of negligence
on the part of the employer. This is the presumed negligence in the selection and
supervision of employee. The theory of presumed negligence, in contrast with the
American doctrine of respondeat superior, where the negligence of the employee is
conclusively presumed to be the negligence of the employer, is clearly deducible from
the last paragraph of Article 2180 of the Civil Code which provides that the
responsibility therein mentioned shall cease if the employers prove that they observed
all the diligence of a good father of a family to prevent damages. . . . 48

The petitioners were correct in invoking respondent Pedrano’s failure to observe

Article IV, Section 34(g) of the Rep. Act No. 4136, which provides:

(g) Lights when parked or disabled. — Appropriate parking lights or flares visible
one hundred meters away shall be displayed at a corner of the vehicle whenever such
vehicle is parked on highways or in places that are not well-lighted or is placed in
such manner as to endanger passing traffic. TCHcAE

The manner in which the truck was parked clearly endangered oncoming traffic on
both sides, considering that the tire blowout which stalled the truck in the first place
occurred in the wee hours of the morning. The Court can only now surmise that the
unfortunate incident could have been averted had respondent Condor, the owner of
the truck, equipped the said vehicle with lights, flares, or, at the very least, an early
warning device. 49 Hence, we cannot subscribe to respondents Condor and Pedrano’s
claim that they should be absolved from liability because, as found by the trial and
appellate courts, the proximate cause of the collision was the fast speed at which
petitioner Laspiñas drove the bus. To accept this proposition would be to come too
close to wiping out the fundamental principle of law that a man must respond for the
foreseeable consequences of his own negligent act or omission. Indeed, our law on
quasi-delicts seeks to reduce the risks and burdens of living in society and to allocate
them among its members. To accept this proposition would be to weaken the very
bonds of society. 50

The Liability of

Respondent PPSII
as Insurer

The trial court in this case did not rule on the liability of respondent PPSII, while the
appellate court ruled that, as no evidence was presented against it, the insurance
company is not liable.

A perusal of the records will show that when the petitioners filed the Third-Party
Complaint against respondent PPSII, they failed to attach a copy of the terms of the
insurance contract itself. Only Certificate of Cover No. 054940 51 issued in favor of
“Mr. William Tiu, Lahug, Cebu City” signed by Cosme H. Boniel was appended to
the third-party complaint. The date of issuance, July 22, 1986, the period of insurance,
from July 22, 1986 to July 22, 1987, as well as the following items, were also
indicated therein: aTcSID

SCHEDULED VEHICLE

MODEL MAKE TYPE OF COLOR BLT FILE NO.

BODY

Isuzu Forward Bus blue mixed

PLATE NO. SERIAL/CHASSIS MOTOR NO. AUTHORIZED

UNLADEN

NO. CAPACITY WEIGHT

PBP-724 SER450-1584124 677836 50 6 Cyls. Kgs.

SECTION 1/11 *LIMITS OF LIABILITY PREMIUMS

PAID

A. THIRD PARTY LIABILITY P50,000.00

B. PASSENGER LIABILITY Per Person Per Accident

P12,000.00 P50,000 P540.00 52

In its Answer 53 to the Third-Party Complaint, the respondent PPSII admitted the
existence of the contract of insurance, in view of its failure to specifically deny the
same as required under then Section 8(a), Rule 8 of the Rules of Court, 54 which
reads:

Sec. 8. How to contest genuineness of such documents. — When an action or defense

is founded upon a written instrument copied in or attached to the corresponding
pleading as provided in the preceding section, the genuineness and due execution of
the instrument shall be deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be the facts; but the
requirement of an oath does not apply when the adverse party does not appear to be a
party to the instrument or when compliance with an order for inspection of the
original instrument is refused.

In fact, respondent PPSII did not dispute the existence of such contract, and admitted
that it was liable thereon. It claimed, however, that it had attended to and settled the
claims of those injured during the incident, and set up the following as special
affirmative defenses:

Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates
and incorporates by way of reference the preceding paragraphs and further states
THAT —

8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and

Neptali Palces who sustained injuries during the incident in question. In fact, it settled
financially their claims per vouchers duly signed by them and they duly executed
Affidavit[s] of Desistance to that effect, xerox copies of which are hereto attached as
Annexes 1, 2, 3, 4, 5, and 6 respectively; HDAaIc

9. With respect to the claim of plaintiff, herein answering third party defendant
through its authorized insurance adjuster attended to said claim. In fact, there were
negotiations to that effect. Only that it cannot accede to the demand of said claimant
considering that the claim was way beyond the scheduled indemnity as per contract
entered into with third party plaintiff William Tiu and third party defendant
(Philippine Phoenix Surety and Insurance, Inc.). Third party Plaintiff William Tiu
knew all along the limitation as earlier stated, he being an old hand in the
transportation business; 55 . . .

Considering the admissions made by respondent PPSII, the existence of the insurance
contract and the salient terms thereof cannot be dispatched. It must be noted that after
filing its answer, respondent PPSII no longer objected to the presentation of evidence
by respondent Arriesgado and the insured petitioner Tiu. Even in its Memorandum 56
before the Court, respondent PPSII admitted the existence of the contract, but averred
as follows:
Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification
and/or reimbursement. This has no basis under the contract. Under the contract, PPSII
will pay all sums necessary to discharge liability of the insured subject to the limits of
liability but not to exceed the limits of liability as so stated in the contract. Also, it is
stated in the contract that in the event of accident involving indemnity to more than
one person, the limits of liability shall not exceed the aggregate amount so specified
by law to all persons to be indemnified. 57

As can be gleaned from the Certificate of Cover, such insurance contract was issued
pursuant to the Compulsory Motor Vehicle Liability Insurance Law. It was expressly
provided therein that the limit of the insurer’s liability for each person was P12,000,
while the limit per accident was pegged at P50,000. An insurer in an indemnity
contract for third party liability is directly liable to the injured party up to the extent
specified in the agreement but it cannot be held solidarily liable beyond that amount.
58 The respondent PPSII could not then just deny petitioner Tiu’s claim; it should
have paid P12,000 for the death of Felisa Arriesgado, 59 and respondent Arriesgado’s
hospitalization expenses of P1,113.80, which the trial court found to have been duly
supported by receipts. The total amount of the claims, even when added to that of the
other injured passengers which the respondent PPSII claimed to have settled, 60
would not exceed the P50,000 limit under the insurance agreement. DHIcET

Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is
primarily intended to provide compensation for the death or bodily injuries suffered
by innocent third parties or passengers as a result of the negligent operation and use of
motor vehicles. The victims and/or their dependents are assured of immediate
financial assistance, regardless of the financial capacity of motor vehicle owners. 61
As the Court, speaking through Associate Justice Leonardo A. Quisumbing, explained
in Government Service Insurance System v. Court of Appeals: 62

However, although the victim may proceed directly against the insurer for indemnity,
the third party liability is only up to the extent of the insurance policy and those
required by law. While it is true that where the insurance contract provides for
indemnity against liability to third persons, and such persons can directly sue the
insurer, the direct liability of the insurer under indemnity contracts against third party
liability does not mean that the insurer can be held liable in solidum with the insured
and/or the other parties found at fault. For the liability of the insurer is based on
contract; that of the insured carrier or vehicle owner is based on tort . . .

Obviously, the insurer could be held liable only up to the extent of what was provided
for by the contract of insurance, in accordance with the CMVLI law. At the time of
the incident, the schedule of indemnities for death and bodily injuries, professional
fees and other charges payable under a CMVLI coverage was provided for under the
Insurance Memorandum Circular (IMC) No. 5-78 which was approved on November
10, 1978. As therein provided, the maximum indemnity for death was twelve
thousand (P12,000.00) pesos per victim. The schedules for medical expenses were
also provided by said IMC, specifically in paragraphs (C) to (G). 63

Damages to be

Awarded

The trial court correctly awarded moral damages in the amount of P50,000 in favor of
respondent Arriesgado. The award of exemplary damages by way of example or
correction of the public good, 64 is likewise in order. As the Court ratiocinated in
Kapalaran Bus Line v. Coronado: 65

. . . While the immediate beneficiaries of the standard of extraordinary diligence are,

of course, the passengers and owners of cargo carried by a common carrier, they are
not the only persons that the law seeks to benefit. For if common carriers carefully
observed the statutory standard of extraordinary diligence in respect of their own
passengers, they cannot help but simultaneously benefit pedestrians and the
passengers of other vehicles who are equally entitled to the safe and convenient use of
our roads and highways. The law seeks to stop and prevent the slaughter and maiming
of people (whether passengers or not) on our highways and buses, the very size and
power of which seem to inflame the minds of their drivers. Article 2231 of the Civil
Code explicitly authorizes the imposition of exemplary damages in cases of quasi-
delicts “if the defendant acted with gross negligence.” . . . 66

The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa
Arriesgado, is entitled to indemnity in the amount of P50,000.00. 67

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are
jointly and severally liable for said amount, conformably with the following
pronouncement of the Court in Fabre, Jr. vs. Court of Appeals: 68

The same rule of liability was applied in situations where the negligence of the driver
of the bus on which plaintiff was riding concurred with the negligence of a third party
who was the driver of another vehicle, thus causing an accident. In Anuran v. Buño,
Batangas Laguna Tayabas Bus Co. v. Intermediate Appellate Court, and Metro
Manila Transit Corporation v. Court of Appeals, the bus company, its driver, the
operator of the other vehicle and the driver of the vehicle were jointly and severally
held liable to the injured passenger or the latter’s heirs. The basis of this allocation of
liability was explained in Viluan v. Court of Appeals, thus: CTaSEI

“Nor should it make difference that the liability of petitioner [bus owner] springs from
contract while that of respondents [owner and driver of other vehicle] arises from
quasi-delict. As early as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil.
177, that in case of injury to a passenger due to the negligence of the driver of the bus
on which he was riding and of the driver of another vehicle, the drivers as well as the
owners of the two vehicles are jointly and severally liable for damages. Some
members of the Court, though, are of the view that under the circumstances they are
liable on quasi-delict.” 69

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED.

The Decision of the Court of Appeals is AFFIRMED with MODIFICATIONS:

(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner
William Tiu are ORDERED to pay, jointly and severally, respondent Pedro A.
Arriesgado the total amount of P13,113.80;

(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are
ORDERED to pay, jointly and severally, respondent Pedro A. Arriesgado P50,000.00
as indemnity; P26,441.50 as actual damages; P50,000.00 as moral damages;
P50,000.00 as exemplary damages; and P20,000.00 as attorney’s fees.

SO ORDERED. cCDAHE

Austria-Martinez, Tinga and Chico-Nazario, JJ ., concur.