1
G.R. No. L-14373 January 30, 1960
GENERAL INSURANCE AND SURETY
CORPORATION, petitioner,
vs.
NG HUA, respondent.
BENGZON, J.:
Suit to recover on a fire insurance policy. The insurer presented
several defenses in the Manila court of first instance. After trial,
it was required to pay.
On appeal to the Courts of Appeal, the judgment was affirmed.
This is now a revision on certiorari, upon the insurer's insistence
on two of its main defenses: prescription and breach of warranty.
The principal of facts on which adjudication may rest are these:
On April 15, 1952, the defendant General Insurance and Surety
Corporation issued its insurance Policy No. 471, insuring against
fire, for one year, the stock in trade of the Central Pomade
Factory owned by Ng Hua, the court insured. The next day, the
Pomade factory building burned, resulting in destruction by fire
of the insured properties. Ng Hua claimed indemnity from the
insurer. The policy covered damages up to P10,000.00; but after
some negotiations and upon suggestion of the Manila
Adjustment Company, he reduced the claim of P5,000.00.
Nevertheless, the defendant insurer refused to pay for various
reasons, namely (a) action was not filed in time; (b) violation of
warranty; (c) submission of fraudulent claim; and (f) failure to
pay the premium.
The aforesaid Policy No. 471 contains this stipulation on the
back thereof;.
3. The insured shall give notice to the company of any insurance
or insurances already affected, or which may subsequently be
effected, covering any of the property hereby insured, and
unless such notice be given and the particulars of such
insurance or insurances be stated in or endorsed on this Policy
by or on behalf of the Company before the occurrence of any
loss or damage, all benefits under the policy shall be forfeited.
(Emphasis ours.)
The face of the policy bore the annotation: "Co-Insurance
Declared — NIL"
It is undenied that Ng Hua had obtained fire insurance on the
same goods, for the same period of time, in the amount of
P20,000.00 from General Indemnity Co. However, the Court of
Appeals referring to the annotation and overruling the defense,
held that there was no violation of the above clause, inasmuch
as "co-insurance exists when a condition of the policy
requires the insured to bear ratable proportion of the loss when
the value of the insured property exceeds the face value of the
policy," hence there is no co-insurance here.
Discussion — Undoubtedly, co-insurance exists under the
condition described by the appellate court. But that is one kind of
co-insurance. It is not the only situation where co-insurance
exists. Other insurers of the same property against the same
hazard are sometimes referred as co-insurers and the ensuing
combination as co-insurance.1 And considering the terms of the
policy which required the insured to declare other insurances,
the statement in question must be deemed to be a statement
(warranty) binding on both insurer and insured, that there were
no other insurance on the property. Remember it runs "Co-
Insurance declared"; emphasis on the last word. If "Co-
Insurance" means that the Court of Appeals says, the annotation
served no purpose. It would even be contrary to the policy itself,
which in its clause No. 17 made the insured a co-insurer for the
excess of the value of the property over the amount of the policy.
The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof
entitles the insurer to rescind. (Sec. 69. Insurance Act) Such
misrepresentation is fatal in the light of our views in Santa Ana
vs. Commercial Union Assurance Company, Ltd., 55 Phil., 329.
The materiality of non-disclosure of other insurance policies is
not open to doubt.
Furthermore, even if the annotations were overlooked, the
defendant insurer would still be free from liability because there
is no question that the policy issued by General Indemnity had
not been stated in nor endorsed on Policy No. 471 of defendant.
And as stipulated in the above-quoted provisions of such policy
"all benefit under this policy shall be forfeited."2
To avoid the dissastrous effect of the misrepresentation or
concealment of the other insurance policy, Ng Hua alleges
"actual knowledge" on the part of General insurance of the fact
that he had taken out additional insurance with General
Indemnity. He does not say when such knowledge was acquired
or imparted. If General Insurance know before issuing its policy
or before the fire, such knowledge might overcome the insurer's
defense.3 However, the Court of Appeals found no evidence of
such knowledge. We have read the pages of the stenographic
notes cited by Ng Hua and we all gather is evidence of the
existence of the Insurance General Indemnity Company. As to
knowledge of General Insurance before issuance of its policy or
the fire, there was none.
Indeed, this concealment and violation was expressly set up as
a special defense in the answer. Yet plaintiff did not, in
avoidance, reply nor assert such knowledge. And it is doubtful
whether the evidence on the point would be admissible under
the pleadings. (See Rule 11, sec. 1.)
All the above considerations lead to the conclusion that the
defendant insurer successfully established its defense of
warranty breach or concealment of the other insurance and/or
violation of the provision of the policy above-mentioned.
Having reached the conclusion, we deem it unnecessary to
discuss the other defenses.
Wherefore, the judgment under review will be revoked, and the
defendant insurer (herein petitioner) acquitted from all the
liability under the policy. Costs against respondent. So ordered.

G.R. No. 138941 October 8, 2001
AMERICAN HOME ASSURANCE COMPANY, petitioner,
vs.
TANTUCO ENTERPRISES, INC., respondent.
PUNO, J.:
Before us is a Petition for Review on Certiorari assailing the
Decision of the Court of Appeals in CA-G.R. CV No. 52221
promulgated on January 14, 1999, which affirmed in toto the
Decision of the Regional Trial Court, Branch 53, Lucena City in
Civil Case No. 92-51 dated October 16, 1995.
Respondent Tantuco Enterprises, Inc. is engaged in the coconut
oil milling and refining industry. It owns two oil mills. Both are
located at factory compound at Iyam, Lucena City. It appears
that respondent commenced its business operations with only
one oil mill. In 1988, it started operating its second oil mill. The
latter came to be commonly referred to as the new oil mill.
The two oil mills were separately covered by fire insurance
policies issued by petitioner American Home Assurance Co.,
Philippine Branch.1 The first oil mill was insured for three million
pesos (P3,000,000.00) under Policy No. 306-7432324-3 for the
period March 1, 1991 to 1992.2 The new oil mill was insured for
six million pesos (P6,000,000.00) under Policy No. 306-
7432321-9 for the same term.3 Official receipts indicating
payment for the full amount of the premium were issued by the
petitioner's agent.4
A fire that broke out in the early morning of September 30,1991
gutted and consumed the new oil mill. Respondent immediately
notified the petitioner of the incident. The latter then sent its
appraisers who inspected the burned premises and the
properties destroyed. Thereafter, in a letter dated October 15,
1991, petitioner rejected respondent's claim for the insurance
proceeds on the ground that no policy was issued by it covering
the burned oil mill. It stated that the description of the insured
establishment referred to another building thus: "Our policy nos.
306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend
insurance coverage to your oil mill under Building No. 5, whilst
the affected oil mill was under Building No. 14. " 5
A complaint for specific performance and damages was
consequently instituted by the respondent with the RTC, Branch
53 of Lucena City. On October 16, 1995, after trial, the lower
court rendered a Decision finding the petitioner liable on the
insurance policy thus:
"WHEREFORE, judgment is rendered in favor of the plaintiff
ordering defendant to pay plaintiff:
(a) P4,406,536.40 representing damages for loss by fire of its
insured property with interest at the legal rate;
(b) P80,000.00 for litigation expenses;
(c) P300,000.00 for and as attorney's fees; and
(d) Pay the costs.
SO ORDERED."6
2
Petitioner assailed this judgment before the Court of Appeals.
The appellate court upheld the same in a Decision promulgated
on January 14, 1999, the pertinent portion of which states:
"WHEREFORE, the instant appeal is hereby DISMISSED for
lack of merit and the trial court's Decision dated October 16,
1995 is hereby AFFIRMED in toto.
SO ORDERED."7
Petitioner moved for reconsideration. The motion, however, was
denied for lack of merit in a Resolution promulgated on June 10,
1999.
Hence, the present course of action, where petitioner ascribes
to the appellate court the following errors:
"(1) The Court of Appeals erred in its conclusion that the issue
of non-payment of the premium was beyond its jurisdiction
because it was raised for the first time on appeal."8
"(2) The Court of Appeals erred in its legal interpretation of 'Fire
Extinguishing Appliances Warranty' of the policy."9
"(3) With due respect, the conclusion of the Court of Appeals
giving no regard to the parole evidence rule and the principle of
estoppel is erroneous."10
The petition is devoid of merit.
The primary reason advanced by the petitioner in resisting the
claim of the respondent is that the burned oil mill is not covered
by any insurance policy. According to it, the oil mill insured is
specifically described in the policy by its boundaries in the
following manner:
"Front: by a driveway thence at 18 meters distance by Bldg. No.
2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance."
However, it argues that this specific boundary description clearly
pertains, not to the burned oil mill, but to the other mill. In other
words, the oil mill gutted by fire was not the one described by
the specific boundaries in the contested policy.
What exacerbates respondent's predicament, petitioner posits,
is that it did not have the supposed wrong description or mistake
corrected. Despite the fact that the policy in question was issued
way back in 1988, or about three years before the fire, and
despite the "Important Notice" in the policy that "Please read and
examine the policy and if incorrect, return it immediately for
alteration," respondent apparently did not call petitioner's
attention with respect to the misdescription.
By way of conclusion, petitioner argues that respondent is
"barred by the parole evidence rule from presenting evidence
(other than the policy in question) of its self-serving intention
(sic) that it intended really to insure the burned oil mill," just as it
is "barred by estoppel from claiming that the description of the
insured oil mill in the policy was wrong, because it retained the

policy without having the same corrected before the fire by an
endorsement in accordance with its Condition No. 28."
These contentions can not pass judicial muster.
In construing the words used descriptive of a building insured,
the greatest liberality is shown by the courts in giving effect to
the insurance.11 In view of the custom of insurance agents to
examine buildings before writing policies upon them, and since
a mistake as to the identity and character of the building is
extremely unlikely, the courts are inclined to consider that the
policy of insurance covers any building which the parties
manifestly intended to insure, however inaccurate the
description may be.12
Notwithstanding, therefore, the misdescription in the policy, it is
beyond dispute, to our mind, that what the parties manifestly
intended to insure was the new oil mill. This is obvious from the
categorical statement embodied in the policy, extending its
protection:
"On machineries and equipment with complete accessories
usual to a coconut oil mill including stocks of copra, copra cake
and copra mills whilst contained in the new oil mill building,
situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO.
IYAM, LUCENA CITY UNBLOCKED.''13 (emphasis supplied.)
If the parties really intended to protect the first oil mill, then there
is no need to specify it as new.
Indeed, it would be absurd to assume that respondent would
protect its first oil mill for different amounts and leave uncovered
its second one. As mentioned earlier, the first oil mill is already
covered under Policy No. 306-7432324-4 issued by the
petitioner. It is unthinkable for respondent to obtain the other
policy from the very same company. The latter ought to know
that a second agreement over that same realty results in its over
insurance.
The imperfection in the description of the insured oil mill's
boundaries can be attributed to a misunderstanding between the
petitioner's general agent, Mr. Alfredo Borja, and its policy
issuing clerk, who made the error of copying the boundaries of
the first oil mill when typing the policy to be issued for the new
one. As testified to by Mr. Borja:
"Atty. G. Camaligan:
Q: What did you do when you received the report?
A: I told them as will be shown by the map the intention
really of Mr. Edison Tantuco is to cover the new oil mill that is
why when I presented the existing policy of the old policy, the
policy issuing clerk just merely (sic) copied the wording from the
old policy and what she typed is that the description of the
boundaries from the old policy was copied but she inserted
covering the new oil mill and to me at that time the
important thing is that it covered the new oil mill because it
is just within one compound and there are only two oil
mill[s] and so just enough, I had the policy prepared. In fact, two
policies were prepared having the same date one for the old one
and the other for the new oil mill and exactly the same policy
period, sir."14(emphasis supplied)
3
It is thus clear that the source of the discrepancy happened
during the preparation of the written contract.
These facts lead us to hold that the present case falls within one
of the recognized exceptions to the parole evidence rule. Under
the Rules of Court, a party may present evidence to modify,
explain or add to the terms of the written agreement if he puts in
issue in his pleading, among others, its failure to express the
true intent and agreement of the parties thereto.15 Here, the
contractual intention of the parties cannot be understood from a
mere reading of the instrument. Thus, while the contract
explicitly stipulated that it was for the insurance of the new oil
mill, the boundary description written on the policy concededly
pertains to the first oil mill. This irreconcilable difference can only
be clarified by admitting evidence aliunde, which will explain the
imperfection and clarify the intent of the parties.
Anent petitioner's argument that the respondent is barred by
estoppel from claiming that the description of the insured oil mill
in the policy was wrong, we find that the same proceeds from a
wrong assumption. Evidence on record reveals that
respondent's operating manager, Mr. Edison Tantuco, notified
Mr. Borja (the petitioner's agent with whom respondent
negotiated for the contract) about the inaccurate description in
the policy. However, Mr. Borja assured Mr. Tantuco that the use
of the adjective new will distinguish the insured property. The
assurance convinced respondent, despite the impreciseness in
the specification of the boundaries, the insurance will cover the
new oil mill. This can be seen from the testimony on cross of Mr.
Tantuco:
"ATTY. SALONGA:
Q: You mentioned, sir, that at least in so far as Exhibit A is
concern you have read what the policy contents. (sic)
Kindly take a look in the page of Exhibit A which was marked as
Exhibit A-2 particularly the boundaries of the property insured by
the insurance policy Exhibit A, will you tell us as the manager of
the company whether the boundaries stated in Exhibit A-2 are
the boundaries of the old (sic) mill that was burned or not.
A: It was not, I called up Mr. Borja regarding this matter and
he told me that what is important is the word new oil mill. Mr.
Borja said, as a matter of fact, you can never insured (sic) one
property with two (2) policies, you will only do that if you will
make to increase the amount and it is by indorsement not by
another policy, sir.,16
We again stress that the object of the court in construing a
contract is to ascertain the intent of the parties to the contract
and to enforce the agreement which the parties have entered
into. In determining what the parties intended, the courts will
read and construe the policy as a whole and if possible, give
effect to all the parts of the contract, keeping in mind always,
however, the prime rule that in the event of doubt, this doubt is
to be resolved against the insurer. In determining the intent of
the parties to the contract, the courts will consider the purpose
and object of the contract.17
In a further attempt to avoid liability, petitioner claims that
respondent forfeited the renewal policy for its failure to pay the

full amount of the premium and breach of the Fire Extinguishing
Appliances Warranty.
The amount of the premium stated on the face of the policy was
P89,770.20. From the admission of respondent's own witness,
Mr. Borja, which the petitioner cited, the former only paid it
P75,147.00, leaving a difference of P14,623.20. The deficiency,
petitioner argues, suffices to invalidate the policy, in accordance
with Section 77 of the Insurance Code.18
The Court of Appeals refused to consider this contention of the
petitioner. It held that this issue was raised for the first time on
appeal, hence, beyond its jurisdiction to resolve, pursuant to
Rule 46, Section 18 of the Rules of Court.19
Petitioner, however, contests this finding of the appellate court.
It insists that the issue was raised in paragraph 24 of its Answer,
viz.:
"24. Plaintiff has not complied with the condition of the policy and
renewal certificate that the renewal premium should be paid on
or before renewal date."
Petitioner adds that the issue was the subject of the cross-
examination of Mr. Borja, who acknowledged that the paid
amount was lacking by P14,623.20 by reason of a discount or
rebate, which rebate under Sec. 361 of the Insurance Code is
illegal.
The argument fails to impress. It is true that the asseverations
petitioner made in paragraph 24 of its Answer ostensibly spoke
of the policy's condition for payment of the renewal premium on
time and respondent's non-compliance with it. Yet, it did not
contain any specific and definite allegation that respondent did
not pay the premium, or that it did not pay the full amount, or that
it did not pay the amount on time.
Likewise, when the issues to be resolved in the trial court were
formulated at the pre-trial proceedings, the question of the
supposed inadequate payment was never raised. Most
significant to point, petitioner fatally neglected to present, during
the whole course of the trial, any witness to testify that
respondent indeed failed to pay the full amount of the premium.
The thrust of the cross-examination of Mr. Borja, on the other
hand, was not for the purpose of proving this fact. Though it
briefly touched on the alleged deficiency, such was made in the
course of discussing a discount or rebate, which the agent
apparently gave the respondent. Certainly, the whole tenor of
Mr. Borja's testimony, both during direct and cross
examinations, implicitly assumed a valid and subsisting
insurance policy. It must be remembered that he was called to
the stand basically to demonstrate that an existing policy issued
by the petitioner covers the burned building.
Finally, petitioner contends that respondent violated the express
terms of the Fire Extinguishing Appliances Warranty. The said
warranty provides:
"WARRANTED that during the currency of this Policy, Fire
Extinguishing Appliances as mentioned below shall be
maintained in efficient working order on the premises to which
insurance applies:
- PORTABLE EXTINGUISHERS
4
- INTERNAL HYDRANTS
- EXTERNAL HYDRANTS
- FIRE PUMP
- 24-HOUR SECURITY SERVICES
BREACH of this warranty shall render this policy null and void
and the Company shall no longer be liable for any loss which
may occur."20
Petitioner argues that the warranty clearly obligates the insured
to maintain all the appliances specified therein. The breach
occurred when the respondent failed to install internal fire
hydrants inside the burned building as warranted. This fact was
admitted by the oil mill's expeller operator, Gerardo Zarsuela.
Again, the argument lacks merit. We agree with the appellate
court's conclusion that the aforementioned warranty did not
require respondent to provide for all the fire extinguishing
appliances enumerated therein. Additionally, we find that neither
did it require that the appliances are restricted to those
mentioned in the warranty. In other words, what the warranty
mandates is that respondent should maintain in efficient working
condition within the premises of the insured property, fire fighting
equipments such as, but not limited to, those identified in the list,
which will serve as the oil mill's first line of defense in case any
part of it bursts into flame.
To be sure, respondent was able to comply with the warranty.
Within the vicinity of the new oil mill can be found the following
devices: numerous portable fire extinguishers, two fire
hoses,21 fire hydrant,22 and an emergency fire engine.23 All of
these equipments were in efficient working order when the fire
occurred.
It ought to be remembered that not only are warranties strictly
construed against the insurer, but they should, likewise, by
themselves be reasonably interpreted.24 That reasonableness is
to be ascertained in light of the factual conditions prevailing in
each case. Here, we find that there is no more need for an
internal hydrant considering that inside the burned building
were: (1) numerous portable fire extinguishers, (2) an
emergency fire engine, and (3) a fire hose which has a
connection to one of the external hydrants.
IN VIEW WHEREOF, finding no reversible error in the impugned
Decision, the instant petition is hereby DISMISSED. SO
ORDERED.
Footnotes
11
See Martinez, Philippine Insurance Code Annotated, p. 324,
citing Richard vs. Ins. Co., 27 N.W. 586 (1886), which gives the
following illustration: A policy upon a "school house" was held
sufficient to identify the building insured in which a school was
kept, although it was not an ordinary school house; the term
"store" was held to be a sufficient description of a building used
as a restaurant and bakery.
18 The provision states:
Sec. 77. An insurer is entitled to payment of the premium as
soon as the thing insured 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.
19 Now Rule 44, Section 15 of the 1997 Rules of Civil Procedure:
Sec. 15. Questions that may be raised on appeal. — Whether or
not the appellant has filed a motion for new trial in the court
below, he may include in his assignment of errors any question
of law or fact that has been raised in the court below and which
is within the issues framed by the parties.
G.R. No. 116940 June 11, 1997
THE PHILIPPINE AMERICAN GENERAL INSURANCE
COMPANY, INC., petitioner, vs.
COURT OF APPEALS and FELMAN SHIPPING
LINES, respondents.
BELLOSILLO, J.:
This case deals with the liability, if any, of a shipowner for loss
of cargo due to its failure to observe the extraordinary diligence
required by Art. 1733 of the Civil Code as well as the right of the
insurer to be subrogated to the rights of the insured upon
payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on
board "MV Asilda," a vessel owned and operated by respondent
Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-
liter Coca-Cola softdrink bottles to be transported from
Zamboanga City to Cebu City for consignee Coca-Cola Bottlers
Philippines, Inc., Cebu.1 The shipment was insured with
petitioner Philippine American General Insurance Co., Inc.
(PHILAMGEN for brevity), under Marine Open Policy No.
100367-PAG.
"MV Asilda" left the port of Zamboanga in fine weather at eight
o'clock in the evening of the same day. At around eight forty-five
the following morning, 7 July 1983, the vessel sank in the waters
of Zamboanga del Norte bringing down her entire cargo with her
including the subject 7,500 cases of 1-liter Coca-Cola softdrink
bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines,
Inc., Cebu plant, filed a claim with respondent FELMAN for
recovery of damages it sustained as a result of the loss of its
softdrink bottles that sank with "MV Asilda." Respondent denied
the claim thus prompting the consignee to file an insurance claim
with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse
against respondent FELMAN which disclaimed any liability for
the loss. Consequently, on 29 November 1983 PHILAMGEN
sued the shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total
loss of "MV Asilda" and its cargo were due to the vessel's
unseaworthiness as she was put to sea in an unstable condition.
It further alleged that the vessel was improperly manned and
5
that its officers were grossly negligent in failing to take
appropriate measures to proceed to a nearby port or beach after
the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based
on the affirmative defense that no right of subrogation in favor of
PHILAMGEN was transmitted by the shipper, and that, in any
event, FELMAN had abandoned all its rights, interests and
ownership over "MV Asilda" together with her freight and
appurtenances for the purpose of limiting and extinguishing its
liability under Art. 587 of the Code of Commerce.2
On 17 February 1986 the trial court dismissed the complaint of
PHILAMGEN. On appeal the Court of Appeals set aside the
dismissal and remanded the case to the lower court for trial on
the merits. FELMAN filed a petition for certiorari with this Court
but it was subsequently denied on 13 February 1989.
On 28 February 1992 the trial court rendered judgment in favor
of FELMAN.3 It ruled that "MV Asilda" was seaworthy when it left
the port of Zamboanga as confirmed by certificates issued by
the Philippine Coast Guard and the shipowner's surveyor
attesting to its seaworthiness. Thus the loss of the vessel and its
entire shipment could only be attributed to either a fortuitous
event, in which case, no liability should attach unless there was
a stipulation to the contrary, or to the negligence of the captain
and his crew, in which case, Art. 587 of the Code of Commerce
should apply.
The lower court further ruled that assuming "MV Asilda" was
unseaworthy, still PHILAMGEN could not recover from FELMAN
since the assured (Coca-Cola Bottlers Philippines, Inc.) had
breached its implied warranty on the vessel's seaworthiness.
Resultantly, the payment made by PHILAMGEN to the assured
was an undue, wrong and mistaken payment. Since it was not
legally owing, it did not give PHILAMGEN the right of
subrogation so as to permit it to bring an action in court as a
subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the
Court of Appeals. On 29 August 1994 respondent appellate
court rendered judgment finding "MV Asilda" unseaworthy for
being top-heavy as 2,500 cases of Coca-Cola softdrink bottles
were improperly stowed on deck. In other words, while the
vessel possessed the necessary Coast Guard certification
indicating its seaworthiness with respect to the structure of the
ship itself, it was not seaworthy with respect to the cargo.
Nonetheless, the appellate court denied the claim of
PHILAMGEN on the ground that the assured's implied warranty
of seaworthiness was not complied with. Perfunctorily,
PHILAMGEN was not properly subrogated to the rights and
interests of the shipper. Furthermore, respondent court held that
the filing of notice of abandonment had absolved the
shipowner/agent from liability under the limited liability rule.
The issues for resolution in this petition are: (a) whether "MV
Asilda" was seaworthy when it left the port of Zamboanga; (b)
whether the limited liability under Art. 587 of the Code of
Commerce should apply; and, (c) whether PHILAMGEN was
properly subrogated to the rights and legal actions which the
shipper had against FELMAN, the shipowner.

"MV Asilda" was unseaworthy when it left the port of
Zamboanga. In a joint statement, the captain as well as the chief
mate of the vessel confirmed that the weather was fine when
they left the port of Zamboanga. According to them, the vessel
was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles,
300 sacks of seaweeds, 200 empty CO2 cylinders and an
undetermined quantity of empty boxes for fresh eggs. They
loaded the empty boxes for eggs and about 500 cases of Coca-
Cola bottles on deck.4 The ship captain stated that around four
o'clock in the morning of 7 July 1983 he was awakened by the
officer on duty to inform him that the vessel had hit a floating log.
At that time he noticed that the weather had deteriorated with
strong southeast winds inducing big waves. After thirty minutes
he observed that the vessel was listing slightly to starboard and
would not correct itself despite the heavy rolling and pitching. He
then ordered his crew to shift the cargo from starboard to
portside until the vessel was balanced. At about seven o'clock
in the morning, the master of the vessel stopped the engine
because the vessel was listing dangerously to portside. He
ordered his crew to shift the cargo back to starboard. The shifting
of cargo took about an hour afterwhich he rang the engine room
to resume full speed.
At around eight forty-five, the vessel suddenly listed to portside
and before the captain could decide on his next move, some of
the cargo on deck were thrown overboard and seawater entered
the engine room and cargo holds of the vessel. At that instance,
the master of the vessel ordered his crew to abandon ship.
Shortly thereafter, "MV Asilda" capsized and sank. He ascribed
the sinking to the entry of seawater through a hole in the hull
caused by the vessel's collision with a partially submerged log.5
The Elite Adjusters, Inc., submitted a report regarding the
sinking of "MV Asilda." The report, which was adopted by the
Court of Appeals, reads —
We found in the course of our investigation that a reasonable
explanation for the series of lists experienced by the vessel that
eventually led to her capsizing and sinking, was that the vessel
was top-heavy which is to say that while the vessel may not
have been overloaded, yet the distribution or stowage of the
cargo on board was done in such a manner that the vessel was
in top-heavy condition at the time of her departure and which
condition rendered her unstable and unseaworthy for that
particular voyage.
In this connection, we wish to call attention to the fact that this
vessel was designed as a fishing vessel . . . and it was not
designed to carry a substantial amount or quantity of cargo on
deck. Therefore, we believe strongly that had her cargo been
confined to those that could have been accommodated under
deck, her stability would not have been affected and the vessel
would not have been in any danger of capsizing, even given the
prevailing weather conditions at that time of sinking.
But from the moment that the vessel was utilized to load heavy
cargo on its deck, the vessel was rendered unseaworthy for the
purpose of carrying the type of cargo because the weight of the
deck cargo so decreased the vessel's metacentric height as to
cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered
big waves, it must be pointed out that ships are precisely
6
designed to be able to navigate safely even during heavy
weather and frequently we hear of ships safely and successfully
weathering encounters with typhoons and although they may
sustain some amount of damage, the sinking of ship during
heavy weather is not a frequent occurrence and is not likely to
occur unless they are inherently unstable and unseaworthy . . .
We believe, therefore, and so hold that the proximate cause of
the sinking of the M/V "Asilda" was her condition of
unseaworthiness arising from her having been top-heavy when
she departed from the Port of Zamboanga. Her having capsized
and eventually sunk was bound to happen and was therefore in
the category of an inevitable occurrence (emphasis supplied). 6
We subscribe to the findings of the Elite Adjusters, Inc., and the
Court of Appeals that the proximate cause of the sinking of "MV
Asilda" was its being top-heavy. Contrary to the ship captain's
allegations, evidence shows that approximately 2,500 cases of
softdrink bottles were stowed on deck. Several days after "MV
Asilda" sank, an estimated 2,500 empty Coca-Cola plastic cases
were recovered near the vicinity of the sinking. Considering that
the ship's hatches were properly secured, the empty Coca-Cola
cases recovered could have come only from the vessel's deck
cargo. It is settled that carrying a deck cargo raises the
presumption of unseaworthiness unless it can be shown that the
deck cargo will not interfere with the proper management of the
ship. However, in this case it was established that "MV Asilda"
was not designed to carry substantial amount of cargo on deck.
The inordinate loading of cargo deck resulted in the decrease of
the vessel's metacentric height 7 thus making it unstable. The
strong winds and waves encountered by the vessel are but the
ordinary vicissitudes of a sea voyage and as such merely
contributed to its already unstable and unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not
applicable to the case at bar.8 Simply put, the ship agent is liable
for the negligent acts of the captain in the care of goods loaded
on the vessel. This liability however can be limited through
abandonment of the vessel, its equipment and freightage as
provided in Art. 587. Nonetheless, there are exceptional
circumstances wherein the ship agent could still be held
answerable despite the abandonment, as where the loss or
injury was due to the fault of the shipowner and the captain. 9 The
international rule is to the effect that the right of abandonment of
vessels, as a legal limitation of a shipowner's liability, does not
apply to cases where the injury or average was occasioned by
the shipowner's own fault. 10 It must be stressed at this point that
Art. 587 speaks only of situations where the fault or negligence
is committed solely by the captain. Where the shipowner is
likewise to be blamed, Art. 587 will not apply, and such situation
will be covered by the provisions of the Civil Code on common
carrier. 11
It was already established at the outset that the sinking of "MV
Asilda" was due to its unseaworthiness even at the time of its
departure from the port of Zamboanga. It was top-heavy as an
excessive amount of cargo was loaded on deck. Closer
supervision on the part of the shipowner could have prevented
this fatal miscalculation. As such, FELMAN was equally
negligent. It cannot therefore escape liability through the
expedient of filing a notice of abandonment of the vessel by
virtue of Art. 587 of the Code of Commerce.

Under Art 1733 of the Civil Code, "(c)ommon carriers, from the
nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over
the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case . . ." In the
event of loss of goods, common carriers are presumed to have
acted negligently. FELMAN, the shipowner, was not able to
rebut this presumption.
In relation to the question of subrogation, respondent appellate
court found "MV Asilda" unseaworthy with reference to the cargo
and therefore ruled that there was breach of warranty of
seaworthiness that rendered the assured not entitled to the
payment of is claim under the policy. Hence, when PHILAMGEN
paid the claim of the bottling firm there was in effect a "voluntary
payment" and no right of subrogation accrued in its favor. In
other words, when PHILAMGEN paid it did so at its own risk.
It is generally held that in every marine insurance policy the
assured impliedly warrants to the assurer that the vessel is
seaworthy and such warranty is as much a term of the contract
as if expressly written on the face of the policy. 12 Thus Sec. 113
of the Insurance Code provides that "(i)n every marine insurance
upon a ship or freight, or freightage, or upon anything which is
the subject of marine insurance, a warranty is implied that the
ship is seaworthy." Under Sec. 114, a ship is "seaworthy when
reasonably fit to perform the service, and to encounter the
ordinary perils of the voyage, contemplated by the parties to the
policy." Thus it becomes the obligation of the cargo owner to
look for a reliable common carrier which keeps its vessels in
seaworthy condition. He may have no control over the vessel but
he has full control in the selection of the common carrier that will
transport his goods. He also has full discretion in the choice of
assurer that will underwrite a particular venture.
We need not belabor the alleged breach of warranty of
seaworthiness by the assured as painstakingly pointed out by
FELMAN to stress that subrogation will not work in this case. In
policies where the law will generally imply a warranty of
seaworthiness, it can only be excluded by terms in writing in the
policy in the clearest language. 13 And where the policy
stipulates that the seaworthiness of the vessel as between the
assured and the assurer is admitted, the question of
seaworthiness cannot be raised by the assurer without showing
concealment or misrepresentation by the assured. 14
The marine policy issued by PHILAMGEN to the Coca-Cola
bottling firm in at least two (2) instances has dispensed with the
usual warranty of worthiness. Paragraph 15 of the Marine Open
Policy No. 100367-PAG reads "(t)he liberties as per Contract of
Affreightment the presence of the Negligence Clause and/or
Latent Defect Clause in the Bill of Lading and/or Charter Party
and/or Contract of Affreightment as between the Assured and
the Company shall not prejudice the insurance. The
seaworthiness of the vessel as between the Assured and the
Assurers is hereby admitted."15
The same clause is present in par. 8 of the Institute Cargo
Clauses (F.P.A.) of the policy which states "(t)he seaworthiness
of the vessel as between the Assured and Underwriters in
hereby admitted . . . ." 16
7
The result of the admission of seaworthiness by the assurer
PHILAMGEN may mean one or two things: (a) that the warranty
of the seaworthiness is to be taken as fulfilled; or, (b) that the
risk of unseaworthiness is assumed by the insurance
company. 17 The insertion of such waiver clauses in cargo
policies is in recognition of the realistic fact that cargo owners
cannot control the state of the vessel. Thus it can be said that
with such categorical waiver, PHILAMGEN has accepted the
risk of unseaworthiness so that if the ship should sink by
unseaworthiness, as what occurred in this case, PHILAMGEN
is liable.
Having disposed of this matter, we move on to the legal basis
for subrogation. PHILAMGEN's action against FELMAN is
squarely sanctioned by Art. 2207 of the Civil Code which
provides:
Art. 2207. If the plaintiff's property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person
causing the loss or injury.
In Pan Malayan Insurance Corporation v. Court of
Appeals, 18 we said that payment by the assurer to the assured
operates as an equitable assignment to the assurer of all the
remedies which the assured may have against the third party
whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of any
privity of contract or upon payment by the insurance company of
the insurance claim. It accrues simply upon payment by the
insurance company of the insurance claim.
The doctrine of subrogation has its roots in equity. It is designed
to promote and to accomplish justice and is the mode which
equity adopts to compel the ultimate payment of a debt by one
who in justice, equity and good conscience ought to
pay. 19 Therefore, the payment made by PHILAMGEN to Coca-
Cola Bottlers Philippines, Inc., gave the former the right to bring
an action as subrogee against FELMAN. Having failed to rebut
the presumption of fault, the liability of FELMAN for the loss of
the 7,500 cases of 1-liter Coca-Cola softdrink bottles is
inevitable.
WHEREFORE, the petition is GRANTED. Respondent FELMAN
SHIPPING LINES is ordered to pay petitioner PHILIPPINE
AMERICAN GENERAL INSURANCE CO., INC., Seven
Hundred Fifty-five Thousand Two Hundred and Fifty Pesos
(P755,250.00) plus legal interest thereon counted from 29
November 1983, the date of judicial demand, pursuant to Arts.
2212 and 2213 of the Civil Code. SO ORDERED.
Footnotes
2 Art. 587 states: he ship agent shall also be civilly liable for the
indemnities in favor of third parties which may arise from the conduct of
the captain in the care of the goods which he loaded on the vessel; but
he may exempt himself therefrom by abandoning the vessel with all her
equipments and the freight it may have earned during the voyage.

G.R. No. L-4611 December 17, 1955
QUA CHEE GAN, plaintiff-appellee, vs.
LAW UNION AND ROCK INSURANCE CO., LTD.,
represented by its agent, WARNER, BARNES AND CO.,
LTD., defendant-appellant.
REYES, J. B. L., J.:
Qua Chee Gan, a merchant of Albay, instituted this action in
1940, in the Court of First Instance of said province, seeking to
recover the proceeds of certain fire insurance policies totalling
P370,000, issued by the Law Union & Rock Insurance Co., Ltd.,
upon certain bodegas and merchandise of the insured that were
burned on June 21, 1940. The records of the original case were
destroyed during the liberation of the region, and were
reconstituted in 1946. After a trial that lasted several years, the
Court of First Instance rendered a decision in favor of the
plaintiff, the dispositive part whereof reads as follows:
Wherefore, judgment is rendered for the plaintiff and against the
defendant condemning the latter to pay the former —
(a) Under the first cause of action, the sum of P146,394.48;
(b) Under the second cause of action, the sum of P150,000;
(c) Under the third cause of action, the sum of P5,000;
(d) Under the fourth cause of action, the sum of P15,000; and
(e) Under the fifth cause of action, the sum of P40,000;
all of which shall bear interest at the rate of 8% per annum in
accordance with Section 91 (b) of the Insurance Act from
September 26, 1940, until each is paid, with costs against the
defendant.
The complaint in intervention of the Philippine National Bank is
dismissed without costs. (Record on Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed
directly to this Court.
The record shows that before the last war, plaintiff-appellee
owned four warehouses or bodegas (designated as Bodegas
Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the
storage of stocks of copra and of hemp, baled and loose, in
which the appellee dealth extensively. They had been, with their
contents, insured with the defendant Company since 1937, and
the lose made payable to the Philippine National Bank as
mortgage of the hemp and crops, to the extent of its interest. On
June, 1940, the insurance stood as follows:
Policy No. Property Insured Amount
2637164
Bodega No. 1 (Building) P15,000.00
(Exhibit "LL")
Bodega No. 2 (Building) 10,000.00
2637165
(Exhibit "JJ")
Bodega No. 3 (Building) 25,000.00
8
Bodega No. 4 (Building) 10,000.00
Hemp Press — moved by steam
engine
5,000.00
2637345 Merchandise contents (copra and
150,000.00
(Exhibit "X") empty sacks of Bodega No. 1)
2637346 Merchandise contents (hemp) of
150,000.00
(Exhibit "Y") Bodega No. 3
2637067 Merchandise contents (loose hemp) of
(Exhibit "GG") Bodega No. 4
5,000.00
Total P370,000.00
Fire of undetermined origin that broke out in the early morning
of July 21, 1940, and lasted almost one week, gutted and
completely destroyed Bodegas Nos. 1, 2 and 4, with the
merchandise stored theren. Plaintiff-appellee informed the
insurer by telegram on the same date; and on the next day, the
fire adjusters engaged by appellant insurance company arrived
and proceeded to examine and photograph the premises, pored
over the books of the insured and conducted an extensive
investigation. The plaintiff having submitted the corresponding
fire claims, totalling P398,562.81 (but reduced to the full amount
of the insurance, P370,000), the Insurance Company resisted
payment, claiming violation of warranties and conditions, filing
of fraudulent claims, and that the fire had been deliberately
caused by the insured or by other persons in connivance with
him.
With counsel for the insurance company acting as private
prosecutor, Que Chee Gan, with his brother, Qua Chee Pao,
and some employees of his, were indicted and tried in 1940 for
the crime of arson, it being claimed that they had set fire to the
destroyed warehouses to collect the insurance. They were,
however, acquitted by the trial court in a final decision dated July
9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the
insurance money proceeded to its trial and termination in the
Court below, with the result noted at the start of this opinion. The
Philippine National Bank's complaint in intervention was
dismissed because the appellee had managed to pay his
indebtedness to the Bank during the pendecy of the suit, and
despite the fire losses.
In its first assignment of error, the insurance company alleges
that the trial Court should have held that the policies were
avoided for breach of warranty, specifically the one appearing
on a rider pasted (with other similar riders) on the face of the
policies (Exhibits X, Y, JJ and LL). These riders were attached
for the first time in 1939, and the pertinent portions read as
follows:
Memo. of Warranty. — The undernoted Appliances for the
extinction of fire being kept on the premises insured hereby, and
it being declared and understood that there is an ample and
constant water supply with sufficient pressure available at all
seasons for the same, it is hereby warranted that the said
appliances shall be maintained in efficient working order during

the currency of this policy, by reason whereof a discount of 2 1/2
per cent is allowed on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each
150 feet of external wall measurement of building, protected,
with not less than 100 feet of hose piping and nozzles for every
two hydrants kept under cover in convenient places, the
hydrants being supplied with water pressure by a pumping
engine, or from some other source, capable of discharging at the
rate of not less than 200 gallons of water per minute into the
upper story of the highest building protected, and a trained
brigade of not less than 20 men to work the same.'
It is argued that since the bodegas insured had an external wall
perimeter of 500 meters or 1,640 feet, the appellee should have
eleven (11) fire hydrants in the compound, and that he actually
had only two (2), with a further pair nearby, belonging to the
municipality of Tabaco.
We are in agreement with the trial Court that the appellant is
barred by waiver (or rather estoppel) to claim violation of the so-
called fire hydrants warranty, for the reason that knowing fully all
that the number of hydrants demanded therein never existed
from the very beginning, the appellant neverthless issued the
policies in question subject to such warranty, and received the
corresponding premiums. It would be perilously close to
conniving at fraud upon the insured to allow appellant to claims
now as void ab initio the policies that it had issued to the plaintiff
without warning of their fatal defect, of which it was informed,
and after it had misled the defendant into believing that the
policies were effective.
The insurance company was aware, even before the policies
were issued, that in the premises insured there were only two
fire hydrants installed by Qua Chee Gan and two others nearby,
owned by the municipality of TAbaco, contrary to the
requirements of the warranty in question. Such fact appears
from positive testimony for the insured that appellant's agents
inspected the premises; and the simple denials of appellant's
representative (Jamiczon) can not overcome that proof. That
such inspection was made is moreover rendered probable by its
being a prerequisite for the fixing of the discount on the premium
to which the insured was entitled, since the discount depended
on the number of hydrants, and the fire fighting equipment
available (See "Scale of Allowances" to which the policies were
expressly made subject). The law, supported by a long line of
cases, is expressed by American Jurisprudence (Vol. 29, pp.
611-612) to be as follows:
It is usually held that where the insurer, at the time of the
issuance of a policy of insurance, has knowledge of existing
facts which, if insisted on, would invalidate the contract from its
very inception, such knowledge constitutes a waiver of
conditions in the contract inconsistent with the facts, and the
insurer is stopped thereafter from asserting the breach of such
conditions. The law is charitable enough to assume, in the
absence of any showing to the contrary, that an insurance
company intends to executed a valid contract in return for the
premium received; and when the policy contains a condition
which renders it voidable at its inception, and this result is known
to the insurer, it will be presumed to have intended to waive the
conditions and to execute a binding contract, rather than to have
9
deceived the insured into thinking he is insured when in fact he
is not, and to have taken his money without consideration. (29
Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent.
To allow a company to accept one's money for a policy of
insurance which it then knows to be void and of no effect, though
it knows as it must, that the assured believes it to be valid and
binding, is so contrary to the dictates of honesty and fair dealing,
and so closely related to positive fraud, as to the abhorent to
fairminded men. It would be to allow the company to treat the
policy as valid long enough to get the preium on it, and leave it
at liberty to repudiate it the next moment. This cannot be
deemed to be the real intention of the parties. To hold that a
literal construction of the policy expressed the true intention of
the company would be to indict it, for fraudulent purposes and
designs which we cannot believe it to be guilty of (Wilson vs.
Commercial Union Assurance Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance
company in this case is heightened by the fact that after the
insured had incurred the expense of installing the two hydrants,
the company collected the premiums and issued him a policy so
worded that it gave the insured a discount much smaller than
that he was normaly entitledto. According to the "Scale of
Allowances," a policy subject to a warranty of the existence of
one fire hydrant for every 150 feet of external wall entitled the
insured to a discount of 7 1/2 per cent of the premium; while the
existence of "hydrants, in compund" (regardless of number)
reduced the allowance on the premium to a mere 2 1/2 per cent.
This schedule was logical, since a greater number of hydrants
and fire fighting appliances reduced the risk of loss. But the
appellant company, in the particular case now before us, so
worded the policies that while exacting the greater number of fire
hydrants and appliances, it kept the premium discount at the
minimum of 2 1/2 per cent, thereby giving the insurance
company a double benefit. No reason is shown why appellant's
premises, that had been insured with appellant for several years
past, suddenly should be regarded in 1939 as so hazardous as
to be accorded a treatment beyond the limits of appellant's own
scale of allowances. Such abnormal treatment of the insured
strongly points at an abuse of the insurance company's selection
of the words and terms of the contract, over which it had
absolute control.
These considerations lead us to regard the parol evidence rule,
invoked by the appellant as not applicable to the present case.
It is not a question here whether or not the parties may vary a
written contract by oral evidence; but whether testimony is
receivable so that a party may be, by reason of inequitable
conduct shown, estopped from enforcing forfeitures in its favor,
in order to forestall fraud or imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture
Other than Nonpayment. — It is a well settled rule of law that an
insurer which with knowledge of facts entitling it to treat a policy
as no longer in force, receives and accepts a preium on the
policy, estopped to take advantage of the forfeiture. It cannot
treat the policy as void for the purpose of defense to an action
to recover for a loss thereafter occurring and at the same time

treat it as valid for the purpose of earning and collecting further
premiums." (29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy
under circumstances which it knew rendered the policy void and
then to accept and retain premiums under such a void policy.
Neither law nor good morals would justify such conduct and the
doctrine of equitable estoppel is peculiarly applicable to the
situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)
Moreover, taking into account the well known rule that
ambiguities or obscurities must be strictly interpreted aganst the
prty that caused them, 1the "memo of warranty" invoked by
appellant bars the latter from questioning the existence of the
appliances called for in the insured premises, since its initial
expression, "the undernoted appliances for the extinction of
fire being kept on the premises insured hereby, . . . it is hereby
warranted . . .", admists of interpretation as an admission of the
existence of such appliances which appellant cannot now
contradict, should the parol evidence rule apply.
The alleged violation of the warranty of 100 feet of fire hose for
every two hydrants, must be equally rejected, since the
appellant's argument thereon is based on the assumption that
the insured was bound to maintain no less than eleven hydrants
(one per 150 feet of wall), which requirement appellant is
estopped from enforcing. The supposed breach of the wter
pressure condition is made to rest on the testimony of witness
Serra, that the water supply could fill a 5-gallon can in 3 seconds;
appellant thereupon inferring that the maximum quantity
obtainable from the hydrants was 100 gallons a minute, when
the warranty called for 200 gallons a minute. The transcript
shows, however, that Serra repeatedly refused and professed
inability to estimate the rate of discharge of the water, and only
gave the "5-gallon per 3-second" rate because the insistence of
appellant's counsel forced the witness to hazard a guess.
Obviously, the testimony is worthless and insufficient to
establish the violation claimed, specially since the burden of its
proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record
is preponderant that the same was organized, and drilled, from
time to give, altho not maintained as a permanently separate
unit, which the warranty did not require. Anyway, it would be
unreasonable to expect the insured to maintain for his
compound alone a fire fighting force that many municipalities in
the Islands do not even possess. There is no merit in appellant's
claim that subordinate membership of the business manager
(Co Cuan) in the fire brigade, while its direction was entrusted to
a minor employee unders the testimony improbable. A business
manager is not necessarily adept at fire fighting, the qualities
required being different for both activities.
Under the second assignment of error, appellant insurance
company avers, that the insured violated the "Hemp Warranty"
provisions of Policy No. 2637165 (Exhibit JJ), against the
storage of gasoline, since appellee admitted that there were 36
cans (latas) of gasoline in the building designed as "Bodega No.
2" that was a separate structure not affected by the fire. It is well
to note that gasoline is not specifically mentioned among the
prohibited articles listed in the so-called "hemp warranty." The
cause relied upon by the insurer speaks of "oils (animal and/or
10
vegetable and/or mineral and/or their liquid products having a
flash point below 300o Fahrenheit", and is decidedly ambiguous
and uncertain; for in ordinary parlance, "Oils" mean "lubricants"
and not gasoline or kerosene. And how many insured, it may
well be wondered, are in a position to understand or determine
"flash point below 003o Fahrenheit. Here, again, by reason of
the exclusive control of the insurance company over the terms
and phraseology of the contract, the ambiguity must be held
strictly against the insurer and liberraly in favor of the insured,
specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am.
Jur. 180).
Insurance is, in its nature, complex and difficult for the layman
to understand. Policies are prepared by experts who know and
can anticipate the hearing and possible complications of every
contingency. So long as insurance companies insist upon the
use of ambiguous, intricate and technical provisions, which
conceal rather than frankly disclose, their own intentions, the
courts must, in fairness to those who purchase insurance,
construe every ambiguity in favor of the insured. (Algoe vs.
Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases
and exceptions, to defeat the very purpose for which the policy
was procured (Moore vs. Aetna Life Insurance Co., LRA 1915D,
264).
We see no reason why the prohibition of keeping gasoline in the
premises could not be expressed clearly and unmistakably, in
the language and terms that the general public can readily
understand, without resort to obscure esoteric expression (now
derisively termed "gobbledygook"). We reiterate the rule stated
in Bachrach vs. British American Assurance Co. (17 Phil. 555,
561):
If the company intended to rely upon a condition of that
character, it ought to have been plainly expressed in the policy.
This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts
cannot ignore that nowadays monopolies, cartels and
concentrations of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with
them cunningly prepared "agreements" that the weaker party
may not change one whit, his participation in the "agreement"
being reduced to the alternative to take it or leave it" labelled
since Raymond Baloilles" contracts by adherence" (con tracts
d'adhesion), in contrast to these entered into by parties
bargaining on an equal footing, such contracts (of which policies
of insurance and international bills of lading are prime examples)
obviously call for greater strictness and vigilance on the part of
courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the
unwarry (New Civil Coee, Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro
envolvia alguna oscuridad, habra de ser tenido en cuenta que al
seguro es, practicamente un contrato de los llamados de
adhesion y por consiguiente en caso de duda sobre la
significacion de las clausulas generales de una poliza —
redactada por las compafijas sin la intervencion alguna de sus
clientes — se ha de adoptar de acuerdo con el articulo 1268 del

Codigo Civil, la interpretacion mas favorable al asegurado, ya
que la obscuridad es imputable a la empresa aseguradora, que
debia haberse explicado mas claramante. (Dec. Trib. Sup. of
Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal
fidei) not for the insured alone, but equally so for the insurer; in
fact, it is mere so for the latter, since its dominant bargaining
position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline
kept in Bodega No. 2 was only incidental to his business, being
no more than a customary 2 day's supply for the five or six motor
vehicles used for transporting of the stored merchandise (t. s. n.,
pp. 1447-1448). "It is well settled that the keeping of inflammable
oils on the premises though prohibited by the policy does not
void it if such keeping is incidental to the business." Bachrach
vs. British American Ass. Co., 17 Phil. 555, 560); and "according
to the weight of authority, even though there are printed
prohibitions against keeping certain articles on the insured
premises the policy will not be avoided by a violation of these
prohibitions, if the prohibited articles are necessary or in
customary use in carrying on the trade or business conducted
on the premises." (45 C. J. S., p. 311; also 4 Couch on
Insurance, section 966b). It should also be noted that the "Hemp
Warranty" forbade storage only "in the building to which this
insurance applies and/or in any building communicating
therewith", and it is undisputed that no gasoline was stored in
the burned bodegas, and that "Bodega No. 2" which was not
burned and where the gasoline was found, stood isolated from
the other insured bodegas.
The charge that the insured failed or refused to submit to the
examiners of the insurer the books, vouchers, etc. demanded by
them was found unsubstantiated by the trial Court, and no
reason has been shown to alter this finding. The insured gave
the insurance examiner all the date he asked for (Exhibits AA,
BB, CCC and Z), and the examiner even kept and photographed
some of the examined books in his possession. What does
appear to have been rejected by the insured was the demand
that he should submit "a list of all books, vouchers, receipts and
other records" (Age 4, Exhibit 9-c); but the refusal of the insured
in this instance was well justified, since the demand for a list of
all the vouchers (which were not in use by the insured) and
receipts was positively unreasonable, considering that such
listing was superfluous because the insurer was not denied
access to the records, that the volume of Qua Chee Gan's
business ran into millions, and that the demand was made just
after the fire when everything was in turmoil. That the
representatives of the insurance company were able to secure
all the date they needed is proved by the fact that the adjuster
Alexander Stewart was able to prepare his own balance sheet
(Exhibit L of the criminal case) that did not differ from that
submitted by the insured (Exhibit J) except for the valuation of
the merchandise, as expressly found by the Court in the criminal
case for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being
involved, was strikingly illustrated in the decision of the arson
case (Exhibit WW) acquiting Qua Choc Gan, appellee in the
present proceedings. The decision states (Exhibit WW, p. 11):
11
Alexander D. Stewart declaro que ha examinado los libros de
Qua Choc Gan en Tabaco asi como su existencia de copra y
abaca en las bodega al tiempo del incendio durante el periodo
comprendido desde el 1.o de enero al 21 de junio de 1940 y ha
encontrado que Qua Choc Gan ha sufrico una perdida de
P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a
este conclusion el ha tenidoen cuenta el balance de
comprobacion Exhibit 'J' que le ha entregado el mismo acusado
Que Choc Gan en relacion con sus libros y lo ha encontrado
correcto a excepcion de los precios de abaca y copra que alli
aparecen que no estan de acuerdo con los precios en el
mercado. Esta comprobacion aparece en el balance mercado
exhibit J que fue preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured
and the adjuster Stewart for the insurer, the Court referred the
controversy to a government auditor, Apolonio Ramos; but the
latter reached a different result from the other two. Not only that,
but Ramos reported two different valuations that could be
reached according to the methods employed (Exhibit WW, p.
35):
La ciencia de la contabilidad es buena, pues ha tenido sus
muchos usos buenos para promovar el comercio y la finanza,
pero en el caso presente ha resultado un tanto cumplicada y
acomodaticia, como lo prueba el resultado del examen hecho
por los contadores Stewart y Ramos, pues el juzgado no
alcanza a ver como habiendo examinado las mismas partidas y
los mismos libros dichos contadores hayan de llegara dos
conclusiones que difieron sustancialmente entre si. En otras
palabras, no solamente la comprobacion hecha por Stewart
difiere de la comprobacion hecha por Ramos sino que, segun
este ultimo, su comprobacion ha dado lugar a dos resultados
diferentes dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be
seriously entertained. The insurer attempted to bolster its case
with alleged photographs of certain pages of the insurance book
(destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A
and 26-B) and allegedly showing abnormal purchases of hemp
and copra from June 11 to June 20, 1940. The Court below
remained unconvinced of the authenticity of those photographs,
and rejected them, because they were not mentioned not
introduced in the criminal case; and considering the evident
importance of said exhibits in establishing the motive of the
insured in committing the arson charged, and the absence of
adequate explanation for their omission in the criminal case, we
cannot say that their rejection in the civil case constituted
reversible error.
The next two defenses pleaded by the insurer, — that the
insured connived at the loss and that the fraudulently inflated the
quantity of the insured stock in the burnt bodegas, — are closely
related to each other. Both defenses are predicted on the
assumption that the insured was in financial difficulties and set
the fire to defraud the insurance company, presumably in order
to pay off the Philippine National Bank, to which most of the
insured hemp and copra was pledged. Both defenses are fatally
undermined by the established fact that, notwithstanding the
insurer's refusal to pay the value of the policies the extensive
resources of the insured (Exhibit WW) enabled him to pay off the
National Bank in a short time; and if he was able to do so, no

motive appears for attempt to defraud the insurer. While the
acquittal of the insured in the arson case is not res judicata on
the present civil action, the insurer's evidence, to judge from the
decision in the criminal case, is practically identical in both cases
and must lead to the same result, since the proof to establish
the defense of connivance at the fire in order to defraud the
insurer "cannot be materially less convincing than that required
in order to convict the insured of the crime of arson"(Bachrach
vs. British American Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly
have contained the quantities of copra and hemp stated in the
fire claims, the insurer's case rests almost exclusively on the
estimates, inferences and conclusionsAs to the defense that the
burned bodegas could not possibly have contained the
quantities of copra and hemp stated in the fire claims, the
insurer's case rests almost exclusively on the estimates,
inferences and conclusions of its adjuster investigator,
Alexander D. Stewart, who examined the premises during and
after the fire. His testimony, however, was based on inferences
from the photographs and traces found after the fire, and must
yield to the contradictory testimony of engineer Andres Bolinas,
and specially of the then Chief of the Loan Department of the
National Bank's Legaspi branch, Porfirio Barrios, and of Bank
Appraiser Loreto Samson, who actually saw the contents of the
bodegas shortly before the fire, while inspecting them for the
mortgagee Bank. The lower Court was satisfied of the veracity
and accuracy of these witnesses, and the appellant insurer has
failed to substantiate its charges aganst their character. In fact,
the insurer's repeated accusations that these witnesses were
later "suspended for fraudulent transactions" without giving any
details, is a plain attempt to create prejudice against them,
without the least support in fact.
Stewart himself, in testifying that it is impossible to determine
from the remains the quantity of hemp burned (t. s. n., pp. 1468,
1470), rebutted appellant's attacks on the refusal of the Court
below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that
the adjuster's calculations of the maximum contents of the
destroyed warehouses rested on the assumption that all the
copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite
amounts of sacked copra. The error in the estimates thus arrived
at proceeds from the fact that a large amount of the insured's
stock were in loose form, occupying less space than when kept
in sacks; and from Stewart's obvious failure to give due
allowance for the compression of the material at the bottom of
the piles (t. s. n., pp. 1964, 1967) due to the weight of the
overlying stock, as shown by engineer Bolinas. It is probable that
the errors were due to inexperience (Stewart himself admitted
that this was the first copra fire he had investigated); but it is
clear that such errors render valueles Stewart's computations.
These were in fact twice passed upon and twice rejected by
different judges (in the criminal and civil cases) and their
concordant opinion is practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly
disregarded by the Court below, since the opinions stated
therein were based on ex parte investigations made at the back
of the insured; and the appellant did not present at the trial the
12
original testimony and documents from which the conclusions in
the report were drawn.lawphi1.net
Appellant insurance company also contends that the claims filed
by the insured contained false and fraudulent statements that
avoided the insurance policy. But the trial Court found that the
discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and
claim forms, caused by his imperfect knowledge of English, and
that the misstatements were innocently made and without intent
to defraud. Our review of the lengthy record fails to disclose
reasons for rejecting these conclusions of the Court below. For
example, the occurrence of previous fires in the premises
insured in 1939, altho omitted in the claims, Exhibits EE and FF,
were nevertheless revealed by the insured in his claims Exhibits
Q (filed simultaneously with them), KK and WW. Considering
that all these claims were submitted to the smae agent, and that
this same agent had paid the loss caused by the 1939 fire, we
find no error in the trial Court's acceptance of the insured's
explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such
circumstances, that the 1939 would pass unnoticed by the
insurance agents. Similarly, the 20 per cent overclaim on 70 per
cent of the hemo stock, was explained by the insured as caused
by his belief that he was entitled to include in the claim his
expected profit on the 70 per cent of the hemp, because the
same was already contracted for and sold to other parties before
the fire occurred. Compared with other cases of over-valuation
recorded in our judicial annals, the 20 per cent excess in the
case of the insured is not by itself sufficient to establish
fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41
Phil. 134, the claim was fourteen (14) times (1,400 per cent)
bigger than the actual loss; in Go Lu vs. Yorkshire Insurance
Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs.
North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in
Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled
P31,860.85 while the goods insured were inventoried at
O13,113. Certainly, the insured's overclaim of 20 per cent in the
case at bar, duly explained by him to the Court a quo, appears
puny by comparison, and can not be regarded as "more than
misstatement, more than inadvertence of mistake, more than a
mere error in opinion, more than a slight exaggeration" (Tan It
vs. Sun Insurance Office, ante) that would entitle the insurer to
avoid the policy. It is well to note that the overchange of 20 per
cent was claimed only on a part (70 per cent) of the hemp stock;
had the insured acted with fraudulent intent, nothing prevented
him from increasing the value of all of his copra, hemp and
buildings in the same proportion. This also applies to the alleged
fraudulent claim for burned empty sacks, that was likewise
explained to our satisfaction and that of the trial Court. The rule
is that to avoid a policy, the false swearing must be wilful and
with intent to defraud (29 Am. Jur., pp. 849-851) which was not
the cause. Of course, the lack of fraudulent intent would not
authorize the collection of the expected profit under the terms of
the polices, and the trial Court correctly deducte the same from
its award.
We find no reversible error in the judgment appealed from,
wherefore the smae is hereby affirmed. Costs against the
appellant. So ordered.

G.R. No. 190702, February 27, 2017
JAIME T. GAISANO, Petitioner, v. DEVELOPMENT
INSURANCE AND SURETY CORPORATION, Respondent.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari1 seeking to nullify the
Court of Appeals' (CA) September 11, 2009 Decision2 and
November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The
CA reversed the September 24, 2003 Decision4 of the Regional
Trial Court (RTC) in Civil Case No. 97-85464. The RTC granted
Jaime T. Gaisano's (petitioner) claim on the proceeds of the
comprehensive commercial vehicle policy issued by
Development Insurance and Surety Corporation
(respondent), viz.:
IN VIEW OF THE FOREGOING, the decision appealed from is
reversed, and the defendant-appellant ordered to pay the
plaintiff-appellee the sum of P55,620.60 with interest at 6
percent per annum from the date of the denial of the claim on
October 9, 1996 until payment.
SO ORDERED.
I was no known loss covered by the policy to which the payment
The facts are undisputed. Petitioner was the registered owner of
a 1992 Mitsubishi Montero with plate number GTJ-777 (vehicle),
while respondent is a domestic corporation engaged in the
insurance business.6 On September 27, 1996, respondent
issued a comprehensive commercial vehicle policy7 to petitioner
in the amount of P1,500,000.00 over the vehicle for a period of
one year commencing on September 27, 1996 up to September
27, 1997.8 Respondent also issued two other commercial
vehicle policies to petitioner covering two other motor vehicles
for the same period.9
To collect the premiums and other charges on the policies,
respondent's agent, Trans-Pacific Underwriters Agency (Trans-
Pacific), issued a statement of account to petitioner's company,
Noah's Ark Merchandising (Noah's Ark).10 Noah's Ark
immediately processed the payments and issued a Far East
Bank check dated September 27, 1996 payable to Trans-Pacific
on the same day.11 The check bearing the amount of
P140,893.50 represents payment for the three insurance
policies, with P55,620.60 for the premium and other charges
over the vehicle.12 However, nobody from Trans-Pacific picked
up the check that day (September 27) because its president and
general manager, Rolando Herradura, was celebrating his
birthday. Trans-Pacific informed Noah's Ark that its messenger
would get the check the next day, September 28. 13
In the evening of September 27, 1996, while under the official
custody of Noah's Ark marketing manager Achilles Pacquing
(Pacquing) as a service company vehicle, the vehicle was stolen
in the vicinity of SM Megamall at Ortigas, Mandaluyong City.
Pacquing reported the loss to the Philippine National Police
Traffic Management Command at Camp Crame in Quezon
City.14 Despite search and retrieval efforts, the vehicle was not
13
recovered.15
Oblivious of the incident, Trans-Pacific picked up the check the
next day, September 28. It issued an official receipt numbered
124713 dated September 28, 1996, acknowledging the receipt
of P55,620.60 for the premium and other charges over the
vehicle.16 The check issued to Trans-Pacific for P140,893.50
was deposited with Metrobank for encashment on October 1,
1996.17
On October 1, 1996, Pacquing informed petitioner of the
vehicle's loss. Thereafter, petitioner reported the loss and filed a
claim with respondent for the insurance proceeds of
P1,500,000.00.18 After investigation, respondent denied
petitioner's claim on the ground that there was no insurance
contract.19 Petitioner, through counsel, sent a final demand on
July 7, 1997.20 Respondent, however, refused to pay the
insurance proceeds or return the premium paid on the vehicle.
On October 9, 1997, petitioner filed a complaint for collection of
sum of money and damages21 with the RTC where it sought to
collect the insurance proceeds from respondent. In its
Answer,22 respondent asserted that the non-payment of the
premium rendered the policy ineffective. The premium was
received by the respondent only on October 2, 1996, and there
could be applied.23
In its Decision24 dated September 24, 2003, the RTC ruled in
favor of petitioner. It considered the premium paid as of
September 27, even if the check was received only on
September 28 because (1) respondent's agent, Trans-Pacific,
acknowledged payment of the premium on that date, September
27, and (2) the check that petitioner issued was honored by
respondent in acknowledgment of the authority of the agent to
receive it.25 Instead of returning the premium, respondent sent a
checklist of requirements to petitioner and assigned an
underwriter to investigate the claim.26 The RTC ruled that it
would be unjust and inequitable not to allow a recovery on the
policy while allowing respondent to retain the premium
paid.27 Thus, petitioner was awarded an indemnity of
P1,500,000.00 and attorney's fees of P50,000.00.28
After respondent's motion for reconsideration was denied, 29 it
filed a Notice of Appeal.30 Records were forwarded to the CA.31
The CA granted respondent's appeal.32 The CA upheld
respondent's position that an insurance contract becomes valid
and binding only after the premium is paid pursuant to Section
77 of the Insurance Code (Presidential Decree No. 612, as
amended by Republic Act No. 10607).33 It found that the
premium was not yet paid at the time of the loss on September
27, but only a day after or on September 28, 1996, when the
check was picked up by Trans-Pacific.34 It also found that none
of the exceptions to Section 77 obtains in this
case.35 Nevertheless, the CA ordered respondent to return the
premium it received in the amount of P55,620.60, with interest
at the rate of 6% per annum from the date of the denial of the
claim on October 9, 1996 until payment.36
Hence petitioner filed this petition. He argues that there was a

valid and binding insurance contract between him and
respondent.37 He submits that it comes within the exceptions to
the rule in Section 77 of the Insurance Code that no contract of
insurance becomes binding unless and until the premium
thereof has been paid. The prohibitive tenor of Section 77 does
not apply because the parties stipulated for the payment of
premiums.38 The parties intended the contract of insurance to be
immediately effective upon issuance, despite non-payment of
the premium, because respondent trusted petitioner. 39He adds
that respondent waived its right to a pre-payment in full of the
terms of the policy, and is in estoppel.40
Petitioner also argues that assuming he is not entitled to recover
insurance proceeds, but only to the return of the premiums paid,
then he should be able to recover the full amount of
P140,893.50, and not merely P55,620.60.41 The insurance
policy covered three vehicles yet respondent's intention was
merely to disregard the contract for only the lost
vehicle.42 According to petitioner, the principle of mutuality of
contracts is violated, at his expense, if respondent is allowed to
be excused from performance on the insurance contract only for
one vehicle, but not as to the two others, just because no loss is
suffered as to the two. To allow this "would be to place
exclusively in the hands of one of the contracting parties the right
to decide whether the contract should stand or not x x x." 43
For failure of respondent to tile its comment to the petition, we
declared respondent to have waived its right to file a comment
in our June 15, 2011 Resolution.44
The lone issue here is whether there is a binding insurance
contract between petitioner and respondent.
II
We deny the petition.
Insurance is a contract whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.45 Just like
any other contract, it requires a cause or consideration. The
consideration is the premium, which must be paid at the time
and in the way and manner specified in the policy. 46 If not so
paid, the policy will lapse and be forfeited by its own terms.47
The law, however, limits the parties' autonomy as to when
payment of premium may be made for the contract to take effect.
The general rule in insurance laws is that unless the premium is
paid, the insurance policy is not valid and binding.48 Section 77
of the Insurance Code, applicable at the time of the issuance of
the policy, provides:
Sec. 77. An insurer is entitled to payment of the premium as
soon as the thing insured 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.
14
In Tibay v. Court of Appeals,49 we emphasized the importance
of this rule. We explained that in an insurance contract, both the
insured and insurer undertake risks. On one hand, there is the
insured, a member of a group exposed to a particular peril, who
contributes premiums under the risk of receiving nothing in
return in case the contingency does not happen; on the other,
there is the insurer, who undertakes to pay the entire sum
agreed upon in case the contingency happens. This risk-
distributing mechanism operates under a system where, by
prompt payment of the premiums, the insurer is able to meet its
legal obligation to maintain a legal reserve fund needed to meet
its contingent obligations to the public. The premium, therefore,
is the elixir vitae or source of life of the insurance business:
In the desire to safeguard the interest of the assured, it must not
be ignored that the contract of insurance is primarily a risk-
distributing device, a mechanism by which all members of a
group exposed to a particular risk contribute premiums to an
insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party
therefore takes a risk: the insurer, that of being compelled upon
the happening of the contingency to pay the entire sum agreed
upon, and the insured, that of parting with the amount required
as premium. without receiving anything therefor in case the
contingency does not happen. To ensure payment tor these
losses, the law mandates all insurance companies to maintain a
legal reserve fund in favor of those claiming under their policies.
It should be understood that the integrity of this fund cannot be
secured and maintained if by judicial fiat partial offerings of
premiums were to be construed as a legal nexus between the
applicant and the insurer despite an express agreement to the
contrary. For what could prevent the insurance applicant from
deliberately or willfully holding back full premium payment and
wait for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be deducted
from the proceeds of the insurance? x x x
xxx
And so it must be. For it cannot be disputed that premium is
the elixir vitae of the insurance business because by law the
insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its
prompt payment and full satisfaction. It must be emphasized
here that all actuarial calculations and various tabulations of
probabilities of losses under the risks insured against are based
on the sound hypothesis of prompt payment of premiums. Upon
this bedrock insurance firms are enabled to other the assurance
of security to the public at favorable rates. x x x50(Citations
omitted.)
Here, there is no dispute that the check was delivered to and
was accepted by respondent's agent, Trans-Pacific, only on
September 28, 1996. No payment of premium had thus been
made at the time of the loss of the vehicle on September 27,
1996. While petitioner claims that Trans-Pacific was informed
that the check was ready for pick-up on September 27, 1996,
the notice of the availability of the check, by itself, does not
produce the effect of payment of the premium. Trans-Pacific
could not be considered in delay in accepting the check because
when it informed petitioner that it will only be able to pick-up the
check the next day, petitioner did not protest to this, but instead

allowed Trans-Pacific to do so. Thus, at the time of loss, there
was no payment of premium yet to make the insurance policy
effective.
There are, of course, exceptions to the rule that no insurance
contract takes effect unless premium is paid. In UCPB General
Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said:
It can be seen at once that Section 77 does not restate the
portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there exceptions
to Section 77?
The answer is in the affirmative.
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:
SEC. 78. 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, notwithstanding
any stipulation therein that it shall not be binding until premium
is actually paid.
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. We said therein, thus:
We hold that the subject policies are valid even if the premiums
were paid on installments. The records clearly show that the
petitioners 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 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.
Not only that. In Tuscany, we also quoted with approval the
following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of 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
15
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 docs 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, p. 175). So is an
understanding to allow insured to pay premiums in installments
not so prescribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of
the Court of Appeals, 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.
x x x
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 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the
exceptions as follows: (1) in case of life or industrial life policy,
whenever the grace period provision applies, as expressly
provided by Section 77 itself; (2) where the insurer
acknowledged in the policy or contract of insurance itself the
receipt of premium, even if premium has not been actually paid,
as expressly provided by Section 78 itself; (3) where the parties
agreed that premium payment shall be in installments and partial
payment has been made at the time of loss, as held in Makati
Tuscany Condominium Corp. v. Court of Appeals;53 (4) where
the insurer granted the insured a credit term for the payment of
the premium, and loss occurs before the expiration of the term,
as held in Makati Tuscany Condominium Corp.; and (5) where
the insurer is in estoppel as when it has consistently granted a
60 to 90-day credit term for the payment of premiums.
The insurance policy in question does not fall under the first to
third exceptions laid out in UCPB General Insurance Co., Inc.:
(1) the policy is not a life or industrial life policy; (2) the policy
does not contain an acknowledgment of the receipt of premium
but merely a statement of account on its face;54 and (3) no
payment of an installment was made at the time of loss on
September 27.
Petitioner argues that his case falls under the fourth and fifth
exceptions because the parties intended the contract of
insurance to be immediately effective upon issuance, despite
non-payment of the premium. This waiver to a pre-payment in
full of the premium places respondent in estoppel.

We do not agree with petitioner.
The fourth and fifth exceptions to Section 77 operate under the
facts obtaining in Makati Tuscany Condominium
Corp. and UCPB General Insurance Co., Inc. Both contemplate
situations where the insurers have consistently granted the
insured a credit extension or term for the payment of the
premium. Here, however, petitioner failed to establish the fact of
a grant by respondent of a credit term in his favor, or that the
grant has been consistent. While there was mention of a credit
agreement between Trans-Pacific and respondent, such
arrangement was not proven and was internal between agent
and principal.55 Under the principle of relativity of contracts,
contracts bind the parties who entered into it. It cannot favor or
prejudice a third person, even if he is aware of the contract and
has acted with knowledge.56
We cannot sustain petitioner's claim that the parties agreed that
the insurance contract is immediately effective upon issuance
despite non payment of the premiums. Even if there is a waiver
of pre-payment of premiums, that in itself does not become an
exception to Section 77, unless the insured clearly gave a credit
term or extension. This is the clear import of the fourth exception
in the UCPB General Insurance Co., Inc. To rule otherwise
would render nugatory the requirement in Section 77 that
"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,
x x x." Moreover, the policy itself states:
WHEREAS THE INSURED, by his corresponding proposal and
declaration, and which shall be the basis of this Contract and
deemed incorporated herein, has applied to the company for the
insurance hereinafter contained, subject to the payment of the
Premium as consideration for such insurance.57 (Emphasis
supplied.)
The policy states that the insured's application for the insurance
is subject to the payment of the premium. There is no waiver of
pre-payment, in full or in installment, of the premiums under the
policy. Consequently, respondent cannot be placed in estoppel.
Thus, we find that petitioner is not entitled to the insurance
proceeds because no insurance policy became effective for lack
of premium payment.
The consequence of this declaration is that petitioner is entitled
to a return of the premium paid for the vehicle in the amount of
P55,620.60 under the principle of unjust enrichment. There is
unjust enrichment when a person unjustly retains a benefit to the
loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and
good conscience.58Petitioner cannot claim the full amount of
P140,893.50, which includes the payment of premiums for the
two other vehicles. These two policies are not affected by our
ruling on the policy subject of this case because they were
issued as separate and independent contracts of
insurance.59 We, however, find that the award shall earn legal
interest of 6% from the time of extrajudicial demand on July 7,
1997.60
16
WHEREFORE, the petition is DENIED. The assailed Decision
of the CA dated September 11, 2009 and the Resolution dated
November 24, 2009 are AFFIRMED with
the MODIFICATION that respondent should return the amount
of P55,620.60 with the legal interest computed at the rate of
6% per annum reckoned from July 7, 1997 until finality of this
judgment. Thereafter, the total amount shall earn interest at the
rate of 6% per annum from the finality of this judgment until its
full satisfaction. SO ORDERED.
[G.R. No. 137172. April 4, 2001]
UCPB GENERAL INSURANCE CO. INC., petitioner,
vs. MASAGANA TELAMART, INC., respondent.
RESOLUTION
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and
set aside the assailed decision[1] of the Court of Appeals, which
affirmed with modification the judgment of the trial court (a)
allowing Respondent to consign the sum of P225,753.95 as full
payment of the premiums for the renewal of the five insurance
policies on Respondents properties; (b) declaring the
replacement-renewal policies effective and binding from 22 May
1992 until 22 May 1993; and (c) ordering Petitioner to pay
Respondent P18,645,000.00 as indemnity for the burned
properties covered by the renewal-replacement policies. The
modification consisted in the (1) deletion of the trial courts
declaration that three of the policies were in force from August
1991 to August 1992; and (2) reduction of the award of the
attorneys fees from 25% to 10% of the total amount due the
Respondent.
The material operative facts upon which the appealed judgment
was based are summarized by the Court of Appeals in its
assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein
Petitioner] five (5) insurance policies (Exhibits "A" to "E", Record,
pp. 158-175) on its properties [in Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from
4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On
June 13, 1992, plaintiff's properties located at 2410-2432 and
2442-2450 Taft Avenue, Pasay City were razed by fire. On July
13, 1992, plaintiff tendered, and defendant accepted, five (5)
Equitable Bank Manager's Checks in the total amount of
P225,753.45 as renewal premium payments for which Official
Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191)
was issued by defendant. On July 14, 1992, Masagana made its
formal demand for indemnification for the burned insured
properties. On the same day, defendant returned the five (5)
manager's checks stating in its letter (Exhibit "R"/"8", Record, p.
192) that it was rejecting Masagana's claim on the following
grounds:
"a) Said policies expired last May 22, 1992 and were not
renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of
non-renewal earlier; and
c) The properties covered by the said policies were burned in a
fire that took place last June 13, 1992, or before tender of
premium payment."
(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that
Respondents tender of payment of the premiums on 13 July
1992 did not result in the renewal of the policies, having been
made beyond the effective date of renewal as provided under
Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five
days in advance of the end of the policy period mails or delivers
to the assured at the address shown in the policy notice of its
intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall
be entitled to renew the policy upon payment of the premium
due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient
proof exists that Respondent, which had procured insurance
coverage from Petitioner for a number of years, had been
granted a 60 to 90-day credit term for the renewal of the
policies. Such a practice had existed up to the time the claims
were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May
22, 1991 was issued on May 7, 1990 but premium was paid
more than 90 days later on August 31, 1990 under O.R. No.
4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22, 1990 to May 22, 1991
was issued by UCPB on May 4, 1990 but premium was collected
by UCPB only on July 13, 1990 or more than 60 days later under
O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other
policies: Fire Insurance Policy No. 34657 covering risks from
May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium therefor was paid only on July 19, 1990 under O.R. No.
46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued
on May 3, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46582 (Exhs. "X' and "X-1"). Fire Insurance
Policy No. 34688 for insurance coverage from May 22, 1990 to
May 22, 1991 was issued on May 7, 1990 but premium was paid
only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-
1").Fire Insurance Policy No. 29126 to cover insurance risks
from May 22, 1989 to May 22, 1990 was issued on May 22, 1989
but premium therefor was collected only on July 25, 1990[sic]
under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance
Policy No. HO/F-26408 covering risks from January 12, 1989 to
January 12, 1990 was issued to Intratrade Phils. (Masagana's
sister company) dated December 10, 1988 but premium therefor
was paid only on February 15, 1989 under O.R. No. 38075
(Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was
issued on May 22, 1989 but premium was paid only on July 25,
1989 under O.R. No. 40800 for insurance coverage from May
22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire
Insurance Policy No. 29127 was issued on May 22, 1989 but
17
premium was paid only on July 17, 1989 under O.R. No. 40682
for insurance risk coverage from May 22, 1989 to May 22, 1990
(Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362
was issued on June 15, 1989 but premium was paid only on
February 13, 1990 under O.R. No. 39233 for insurance
coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and
"EE-1"). Fire Insurance Policy No. 26303 was issued on
November 22, 1988 but premium therefor was collected only on
March 15, 1989 under O.R. NO. 38573 for insurance risks
coverage from December 15, 1988 to December 15, 1989
(Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following
circumstances constitute preponderant proof that no timely
notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11,
Record, p. 350) from Ultramar Reinsurance Brokers that
plaintiffs reinsurance facility had been confirmed up to 67.5%
only on April 15, 1992 as indicated on Exhibit 11. Apparently,
the notice of non-renewal (Exhibit 7, Record, p. 320) was sent
not earlier than said date, or within 45 days from the expiry dates
of the policies as provided under Policy Condition No. 26; (2)
Defendant insurer unconditionally accepted, and issued an
official receipt for, the premium payment on July 1[3], 1992
which indicates defendant's willingness to assume the risk
despite only a 67.5% reinsurance cover[age]; and (3) Defendant
insurer appointed Esteban Adjusters and Valuers to investigate
plaintiffs claim as shown by the letter dated July 17, 1992
(Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to
be whether the fire insurance policies issued by petitioner to the
respondent covering the period from May 22, 1991 to May 22,
1992 had been extended or renewed by an implied credit
arrangement though actual payment of premium was tendered
on a later date and after the occurrence of the (fire) risk insured
against.We resolved this issue in the negative in view of Section
77 of the Insurance Code and our decisions in Valenzuela v.
Court of Appeals[2]; South Sea Surety and Insurance Co., Inc. v.
Court of Appeals[3]; and Tibay v. Court of
[4]
Appeals. Accordingly, we reversed and set aside the decision
of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of
the adverse verdict. It alleges in the motion that we had made in
the decision our own findings of facts, which are not in accord
with those of the trial court and the Court of Appeals. The courts
below correctly found that no notice of non-renewal was made
within 45 days before 22 May 1992, or before the expiration date
of the fire insurance policies. Thus, the policies in question were
renewed by operation of law and were effective and valid on 30
June 1992 when the fire occurred, since the premiums were
paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may
neither agree expressly or impliedly on the extension of credit or
time to pay the premium nor consider a policy binding before
actual payment. It urges the Court to take judicial notice of the
fact that despite the express provision of Section 77 of the
Insurance Code, extension of credit terms in premium payment
has been the prevalent practice in the insurance industry. Most

insurance companies, including Petitioner, extend credit terms
because Section 77 of the Insurance Code is not a prohibitive
injunction but is merely designed for the protection of the parties
to an insurance contract. The Code itself, in Section 78,
authorizes the validity of a policy notwithstanding non-payment
of premiums.
Respondent also asserts that the principle of estoppel applies to
Petitioner. Despite its awareness of Section 77 Petitioner
persuaded and induced Respondent to believe that payment of
premium on the 60- to 90-day credit term was perfectly alright;
in fact it accepted payments within 60 to 90 days after the due
dates. By extending credit and habitually accepting payments 60
to 90 days from the effective dates of the policies, it has implicitly
agreed to modify the tenor of the insurance policy and in effect
waived the provision therein that it would pay only for the loss or
damage in case the same occurred after payment of the
premium.
Petitioner filed an opposition to the Respondents motion for
reconsideration. It argues that both the trial court and the Court
of Appeals overlooked the fact that on 6 April 1992 Petitioner
sent by ordinary mail to Respondent a notice of non-renewal and
sent by personal delivery a copy thereof to Respondents broker,
Zuellig. Both courts likewise ignored the fact that Respondent
was fully aware of the notice of non-renewal. A reading of
Section 66 of the Insurance Code readily shows that in order for
an insured to be entitled to a renewal of a non-life policy,
payment of the premium due on the effective date of renewal
should first be made. Respondents argument that Section 77 is
not a prohibitive provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the
issues raised in the motion for reconsideration and the pleadings
filed thereafter by the parties, we resolved to grant the motion
for reconsideration. The following facts, as found by the trial
court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the
Respondent, and these policies were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day
credit term within which to pay the premiums on the renewed
policies.
3. There was no valid notice of non-renewal of the policies in
question, as there is no proof at all that the notice sent by
ordinary mail was received by Respondent, and the copy thereof
allegedly sent to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate
amount of P225,753.95 were paid by Respondent within the 60-
to 90-day credit term and were duly accepted and received by
Petitioners cashier.
The instant case has to rise or fall on the core issue of whether
Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must
be strictly applied to Petitioners advantage despite its practice
of granting a 60- to 90-day credit term for the payment of
premiums.
Section 77 of the Insurance Code of 1978 provides:
18
SEC. 77. An insurer is entitled to payment of the premium as
soon as the thing insured 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.
This Section is a reproduction of Section 77 of P.D. No. 612 (The
Insurance Code) promulgated on 18 December 1974. In turn,
this Section has its source in Section 72 of Act No. 2427
otherwise known as the Insurance Act as amended by R.A. No.
3540, approved on 21 June 1963, which read:
SEC. 72. An insurer is entitled to payment of premium as soon
as the thing insured is exposed to the peril insured
against, unless there is clear agreement to grant the insured
credit extension of the premium due. No policy issued by an
insurance company is valid and binding unless and until the
premium thereof has been paid. (Underscoring supplied)
It can be seen at once that Section 77 does not restate the
portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there exceptions
to Section 77?
The answer is in the affirmative.
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:
SEC. 78. 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, notwithstanding
any stipulation therein that it shall not be binding until premium
is actually paid.
A third exception was laid down in Makati Tuscany
Condominium Corporation vs. Court of Appeals,[5] 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. We said therein, thus:
We hold that the subject policies are valid even if the premiums
were paid on installments. The records clearly show that the
petitioners 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 years, the insurer accepted all the
installment payments. Such acceptance of payments speaks
loudly of the insurers 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.
Not only that. In Tuscany, we also quoted with approval the
following pronouncement of the Court of Appeals in its

Resolution denying the motion for reconsideration of 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, p. 175). So is an
understanding to allow insured to pay premiums in installments
not so prescribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of
the Court of Appeals, 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.
Moreover, there is nothing in Section 77 which prohibits the
parties in an insurance contract to provide a credit term within
which to pay the premiums. That agreement is not against the
law, morals, good customs, public order or public policy. The
agreement binds the parties. Article 1306 of the Civil Code
provides:
ART. 1306. The contracting parties may establish such
stipulations clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
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.
WHEREFORE, the Decision in this case of 15 June 1999
is RECONSIDERED and SET ASIDE, and a new one is hereby
entered DENYING the instant petition for failure of Petitioner to
sufficiently show that a reversible error was committed by the
Court of Appeals in its challenged decision, which is
hereby AFFIRMED in toto.
No pronouncement as to cost. SO ORDERED.
19
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.
BELLOSILLO, J.:
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:
Sec. 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 1983
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:

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 2modifying
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 as
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
20
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 a 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
payment. . . . 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 for occurring before payment of premiums.
It argues that where the premiums 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.
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 prepared 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 vs. 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.
It appearing from the peculiar circumstances that the parties
actually intended to make 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-22375 July 18, 1975
THE CAPITAL INSURANCE & SURETY CO.,
INC., petitioner, vs. PLASTIC ERA CO., INC., AND COURT OF
APPEALS, respondents.
MARTIN, J.:
Petition for review of a decision of the Court of Appeals affirming
the decision of the Court of First Instance of Manila in Civil Case
No. 47934 entitled "Plastic Era Manufacturing Co., Inc. versus
The Capital Insurance and Surety Co., Inc."
On December 17, 1960, petitioner Capital Insurance & Surety
Co., Inc. (hereinafter referred to as Capital Insurance) delivered
to the respondent Plastic Era Manufacturing Co., Inc.,
(hereinafter referred to as Plastic Era) its open Fire Policy No.
227601 wherein the former undertook to insure the latter's
building, equipments, raw materials, products and accessories
located at Sheridan Street, Mandaluyong, Rizal. The policy
expressly provides that if the property insured would be
destroyed or damaged by fire after the payment of the
premiums, at anytime between the 15th day of December 1960
and one o'clock in the afternoon of the 15th day of December
21
1961, the insurance company shall make good all such loss or
damage in an amount not exceeding P100,000.00. When the
policy was delivered, Plastic Era failed to pay the corresponding
insurance premium. However, through its duly authorized
representative, it executed the following acknowledgment
receipt:
This acknowledged receipt of Fire Policy) NO. 22760 Premium
x x x x x) (I promise to pay)
(P2,220.00) (has been paid)
THIRTY DAYS AFTER on effective date ---------------------
(Date)
On January 8, 1961, in partial payment of the insurance
premium, Plastic Era delivered to Capital Insurance, a check 2 for
the amount of P1,000.00 postdated January 16, 1961 payable
to the order of the latter and drawn against the Bank of America.
However, Capital Insurance tried to deposit the check only on
February 20, 1961 and the same was dishonored by the bank
for lack of funds. The records show that as of January 19, 1961
Plastic Era had a balance of P1,193.41 with the Bank of
America.
On January 18, 1961 or two days after the insurance premium
became due, at about 4:00 to 5:00 o'clock in the morning, the
property insured by Plastic Era was destroyed by fire. In due
time, the latter notified Capital Insurance of the loss of the
insured property by fire3 and accordingly filed its claim for
indemnity thru the Manila Adjustment Company. 4 The loss
and/or damage suffered by Plastic Era was estimated by the
Manila Adjustment Company to be P283,875. However,
according to the records the same property has been insured by
Plastic Era with the Philamgen Insurance Company for
P200,000.00.
In less than a month Plastic Era demanded from Capital
Insurance the payment of the sum of P100,000.00 as indemnity
for the loss of the insured property under Policy No. 22760 but
the latter refused for the reason that, among others, Plastic Era
failed to pay the insurance premium.
On August 25, 1961, Plastic Era filed its complaint against
Capital Insurance for the recovery of the sum of P100,000.00
plus P25,000.00 for attorney's fees and P20,000.00 for
additional expenses. Capital Insurance filed a counterclaim of
P25,000.00 as and for attorney's fees.
On November 15, 1961, the trial court rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendant for the sum of P88,325.63 with interest at
the legal rate from the filing of the complaint and to pay the costs.
From said decision, Capital Insurance appealed to the Court of
Appeals.
On December 5, 1963, the Court of Appeals rendered its
decision affirming that of the trial court. Hence, this petition for
review by certiorari to this Court.
Assailing the decision of the Court of Appeals petitioner assigns
the following errors, to wit:

1. THE COURT OF APPEALS ERRED IN SENTENCING
PETITIONER TO PAY PLASTIC ERA THE SUM OF P88,325.63
PLUS INTEREST, AND COST OF SUIT, ALTHOUGH PLASTIC
ERA NEVER PAID PETITIONER THE INSURANCE PREMIUM
OF P2,220.88.
2. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER SHOULD HAVE INSTITUTED AN ACTION FOR
RESCISSION OF THE INSURANCE CONTRACT ENTERED
INTO BETWEEN IT AND PLASTIC ERA BEFORE
PETITIONER COULD BE RELIEVED OF RESPONSIBILITY
UNDER ITS FIRE INSURANCE POLICY.
3. WE HAVE SHOWN ABOVE THAT PLASTIC ERA'S ACTION
WAS UNWARRANTED AND THAT THE PETITIONER
SHOULD HAVE BEEN ABSOLVED FROM THE COMPLAINT,
AND CONSEQUENTLY, THE LOWER COURT SHOULD HAVE
AWARDED PETITIONER A REASONABLE SUM AND AS
ATTORNEY'S FEES P25,000.00.
The pivotal issue in this petition is whether or not a contract of
insurance has been duly perfected between the petitioner,
Capital Insurance, and respondent Plastic Era. Necessarily, the
issue calls for a correct interpretation of the insurance policy
which states:
This Policy of Insurance Witnesseth That in consideration
of PLASTIC ERA MANUFACTURING COMPANY, INC.
hereinafter called the Insured, paying to the Capital Insurance &
Surety Co., Inc., hereinafter called the Company, the sum of
PESOS TWO THOUSAND ONE HUNDRED EIGHTY EIGHT
the premium for the first period hereinafter mentioned, for
insuring against Loss or Damage by only Fire or Lightning, as
hereinafter appears, the Property hereinafter described and
contained, or described herein and not elsewhere, in the several
sums following namely: PESOS ONE HUNDRED THOUSAND
ONLY, PHILIPPINE CURRENCY; ... THE COMPANY HEREBY
AGREES with the Insured but subject to the terms and
conditions endorsed or otherwise expressed hereon, which are
to be taken as part of this Policy), that if the Property described,
or any part thereof, shall be destroyed or damaged by Fire or
Lightning after payment of the Premiums, at anytime between
the 15th day of December One Thousand Nine Hundred and
Sixty and 1 'clock in the afternoon of the 15th day of December
One Thousand Nine Hundred and Sixty-One of the last day of
any subsequent period in respect of which the insured, or a
successor in interest to whom the insurance is by an
endorsement hereon declared to be or is otherwise continued,
shall pay to the Company and the Company shall accept the
sum required for the renewal of this Policy, the Company will pay
or make good all such loss or Damage, to an amount not
exceeding during any one period of the insurance in respect of
the several matters specified, the sum; set opposite thereto
respectively, and not exceeding the whole sum of PESOS, ONE
HUNDRED THOUSAND ONLY, PHIL. CUR....
In clear and unequivocal terms the insurance policy provides
that it is only upon payment of the premiums by Plastic Era that
Capital Insurance agrees to insure the properties of the former
against loss or damage in an amount not exceeding
P100,000.00.
22
The crux of the problem then is whether at the time the insurance
policy was delivered to Plastic Era on December 17, 1960, the
latter was able to pay the stipulated premium. It appears on
record that on the day the insurance policy was delivered,
Plastic Era did not pay the Capital Insurance, but instead
executed an acknowledgment receipt of Policy No. 22760. In
said receipt Plastic Era promised to pay the premium within thirty
(30) days from the effectivity date of the policy on December 17,
1960 and Capital Insurance accepted it. What then is the effect
of accepting such acknowledgment receipt from the Plastic Era?
Did the Capital Insurance mean to agree to make good its
undertaking under the policy if the premium could be paid on or
before January 16, 1961? And what would be the effect of the
delivery to Capital Insurance on January 8, 1961 of a postdated
check (January 16, 1961) in the amount of P1,000.00, payable
to the order of the latter? Could not this have been considered a
valid payment of the insurance premium? Pursuant to Article
1249 of the New Civil Code:
xxx xxx xxx
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
xxx xxx xxx
In the meantime, the action derived from the original obligation
shall be held in abeyance.
Under this provision the mere delivery of a bill of exchange in
payment of a debt does not immediately effect payment. It
simply suspends the action arising from the original obligation in
satisfaction of which it was delivered, until payment is
accomplished either actually or presumptively.5 Tender of draft
or check in order to effect payment that would extinguish the
debtor's liability should be actually cashed.6 If the delivery of the
check of Plastic Era to Capital Insurance were to be viewed in
the light of the foregoing, no payment of the premium had been
effected, for it is only when the check is cashed that it is said to
effect payment.
Significantly, in the case before Us the Capital Insurance
accepted the promise of Plastic Era to pay the insurance
premium within thirty (30) days from the effective date of policy.
By so doing, it has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived the provision therein that
it would only pay for the loss or damage in case the same occurs
after the payment of the premium. Considering that the
insurance policy is silent as to the mode of payment, Capital
Insurance is deemed to have accepted the promissory note in
payment of the premium. This rendered the policy immediately
operative on the date it was delivered. The view taken in most
cases in the United States:
... is that although one of conditions of an insurance policy is that
"it shall not be valid or binding until the first premium is paid", if
it is silent as to the mode of payment, promissory notes received
by the company must be deemed to have been accepted in
payment of the premium. In other words, a requirement for the
payment of the first or initial premium in advance or actual cash
may be waived by acceptance of a promissory note ...7

Precisely, this was what actually happened when the Capital
Insurance accepted the acknowledgment receipt of the Plastic
Era promising to pay the insurance premium within thirty (30)
days from December 17, 1960. Hence, when the damage or loss
of the insured property occurred, the insurance policy was in full
force and effect. The fact that the check issued by Plastic Era in
partial payment of the promissory note was later on dishonored
did not in any way operate as a forfeiture of its rights under the
policy, there being no express stipulation therein to that effect.
In the absence of express agreement or stipulation to that effect
in the policy, the non-payment at maturity of a note given for and
accepted as premium on a policy does not operate to forfeit the
rights of the insured even though the note is given for an initial
premium, nor does the fact that the collection of the note had
been enjoined by the insured in any way affect the policy. 8
... If the check is accepted as payment of the premium even
though it turns out to be worthless, there is payment which will
prevent forfeiture. 9
By accepting its promise to pay the insurance premium within
thirty (30) days from the effectivity date of the policy —
December 17, 1960 Capital Insurance had in effect extended
credit to Plastic Era. The payment of the premium on the
insurance policy therefore became an independent obligation
the non-fulfillment of which would entitle Capital Insurance to
recover. It could just deduct the premium due and unpaid upon
the satisfaction of the loss under the policy. 10 It did not have the
right to cancel the policy for nonpayment of the premium except
by putting Plastic Era in default and giving it personal notice to
that effect. This Capital Insurance failed to do.
... Where credit is given by an insurance company for the
payment of the premium it has no right to cancel the policy for
nonpayment except by putting the insured in default and giving
him personal notice.... 11
On the contrary Capital Insurance had accepted a check for
P1,000.00 from Plastic Era in partial payment of the premium on
the insurance policy. Although the check was due for payment
on January 16, 1961 and Plastic Era had sufficient funds to
cover it as of January 19, 1961, Capital Insurance decided to
hold the same for thirty-five (35) days before presenting it for
payment. Having held the check for such an unreasonable
period of time, Capital Insurance was estopped from claiming a
forfeiture of its policy for non-payment even if the check had
been dishonored later.1äwphï1.ñët
Where the check is held for an unreasonable time before
presenting it for payment, the insurer may be held estopped from
claiming a forfeiture if the check is dishonored. 12
Finally, it is submitted by petitioner that:
We are here concerned with a case of reciprocal obligations,
and respondent having failed to comply with its obligation to pay
the insurance premium due on the policy within thirty days from
December 17, 1960, petitioner was relieved of its obligation to
pay anything under the policy, without the necessity of first
instituting an action for rescission of the contract of insurance
entered into by the parties.
23
But precisely in this case, Plastic Era has complied with its
obligation to pay the insurance premium and therefore Capital
Insurance is obliged to make good its undertaking to Plastic Era.
WHEREFORE, finding no reversible error in the decision
appealed from, We hereby affirm the same in toto. Costs against
the petitioner. SO ORDERED.
G.R. No. L-25317 August 6, 1979
PHILIPPINE PHOENIX SURETY & INSURANCE
COMPANY, plaintiff-appellee, vs.
WOODWORKS, INC., defendant-appellant.
MELENCIO-HERRERA, J.:
This case was certified to this Tribunal by the Court of Appeals
in its Resolution of October 4, 1965 on a pure question of law
and "because the issues raised are practically the same as
those in CA-G.R. No. 32017-R" between the same parties,
which case had been forwarded to us on April 1, 1964. The latter
case, "Philippine Phoenix Surety & Insurance Inc. vs.
Woodworks, Inc.," docketed in this Court as L-22684, was
decided on August 31, 1967 and has been reported in 20 SCRA
1270.
Specifically, this action is for recovery of unpaid premium on a
fire insurance policy issued by plaintiff, Philippine Phoenix
Surety & Insurance Company, in favor of defendant Woodworks,
Inc.
The following are the established facts:
On July 21, 1960, upon defendant's application, plaintiff issued
in its favor Fire Insurance Policy No. 9749 for P500,000.00
whereby plaintiff insured defendant's building, machinery and
equipment for a term of one year from July 21, 1960 to July 21,
1961 against loss by fire. The premium and other charges
including the margin fee surcharge of P590.76 and the
documentary stamps in the amount of P156.60 affixed on the
Policy, amounted to P10,593.36.
It is undisputed that defendant did not pay the premium
stipulated in the Policy when it was issued nor at any time
thereafter.
On April 19, 1961, or before the expiration of the one-year term,
plaintiff notified defendant, through its Indorsement No. F-
6963/61, of the cancellation of the Policy allegedly upon request
of defendant. 1 The latter has denied having made such a
request. In said Indorsement, plaintiff credited defendant with
the amount of P3,110.25 for the unexpired period of 94 days,
and claimed the balance of P7,483.11 representing ,learned
premium from July 21, 1960 to 18th April 1961 or, say 271 days."
On July 6, 1961, plaintiff demanded in writing for the payment of
said amount. 2 Defendant, through counsel, disclaimed any
liability in its reply- letter of August 15, 1961, contending, in
essence, that it need not pay premium "because the Insurer did
not stand liable for any indemnity during the period the
premiums were not paid." 3

On January 30, 1962, plaintiff commenced action in the Court of
First Instance of Manila, Branch IV (Civil Case No. 49468), to
recover the amount of P7,483.11 as "earned premium."
Defendant controverted basically on the theory that its failure "to
pay the premium after the issuance of the policy put an end to
the insurance contract and rendered the policy unenforceable." 4
On September 13, 1962, judgment was rendered in plaintiff's
favor "ordering defendant to pay plaintiff the sum of P7,483.11,
with interest thereon at the rate of 6%, per annum from January
30, 1962, until the principal shall have been fully paid, plus the
sum of P700.00 as attorney's fees of the plaintiff, and the costs
of the suit." From this adverse Decision, defendant appealed to
the Court of Appeals which, as heretofore stated, certified the
case to us on a question of law.
The errors assigned read:
1. The lower court erred in sustaining that Fire Insurance Policy,
Exhibit A, was a binding contract even if the premium stated in
the policy has not been paid.
2. That the lower court erred in sustaining that the premium in
Insurance Policy, Exhibit B, became an obligation which was
demandable even after the period in the Policy has expired.
3. The lower court erred in not deciding that a premium not paid
is not a debt enforceable by action of the insurer.
We find the appeal meritorious.
Insurance is "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event." 5 The
consideration is the "premium". "The premium must be paid at
the time and in the way and manner specified in the policy and,
if not so paid, the policy will lapse and be forfeited by its own
terms." 6
The provisions on premium in the subject Policy read:
THIS POLICY OF INSURANCE WITNESSETH, THAT in
consideration of — MESSRS. WOODWORKS, INC. —
hereinafter called the Insured, paying to the PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC., hereinafter called
the Company, the sum of — PESOS NINE THOUSAND EIGHT
HUNDRED FORTY SIX ONLY — the Premium for the first
period hereinafter mentioned. ...
xxx xxx xxx
THE COMPANY HEREBY AGREES with the Insured ... that if
the Property above described, or any part thereof, shall be
destroyed or damaged by Fire or Lightning after payment of
Premium, at any time between 4:00 o'clock in the afternoon of
the TWENTY FIRST day of JULY One Thousand Nine Hundred
and SIXTY and 4:00 o'clock in the afternoon of the TWENTY
FIRST day of JULY One Thousand Nine Hundred and SIXTY
ONE. ... (Emphasis supplied)
Paragraph "2" of the Policy further contained the following
condition:
2. No payment in respect of any premium shall be deemed to be
payment to the Company unless a printed form of receipt for the
24
same signed by an Official or duly-appointed Agent of the
Company shall have been given to the Insured.
Paragraph "10" of the Policy also provided:
10. This insurance may be terminated at any time at the request
of the Insured, in which case the Company will retain the
customary short period rate for the time the policy has been in
force. This insurance may also at any time be terminated at the
option of the Company, on notice to that effect being given to
the Insured, in which case the Company shall be liable to repay
on demand a ratable proportion of the premium for the unexpired
term from the date of the cancelment.
Clearly, the Policy provides for pre-payment of premium.
Accordingly; "when the policy is tendered the insured must pay
the premium unless credit is given or there is a waiver, or some
agreement obviating the necessity for prepayment." 7 To
constitute an extension of credit there must be a clear and
express agreement therefor." 8
From the Policy provisions, we fail to find any clear agreement
that a credit extension was accorded defendant. And even if it
were to be presumed that plaintiff had extended credit from the
circumstances of the unconditional delivery of the Policy without
prepayment of the premium, yet it is obvious that defendant had
not accepted the insurer's offer to extend credit, which is
essential for the validity of such agreement.
An acceptance of an offer to allow credit, if one was made, is as
essential to make a valid agreement for credit, to change a
conditional delivery of an insurance policy to an unconditional
delivery, as it is to make any other contract. Such an acceptance
could not be merely a mental act or state of mind, but would
require a promise to pay made known in some manner to
defendant. 9
In this respect, the instant case differs from that involving the
same parties entitled Philippine Phoenix Surety & Insurance Inc.
vs. Woodworks, Inc., 10 where recovery of the balance of the
unpaid premium was allowed inasmuch as in that case "there
was not only a perfected contract of insurance but a partially
performed one as far as the payment of the agreed premium
was concerned." This is not the situation obtaining here where
no partial payment of premiums has been made whatsoever.
Since the premium had not been paid, the policy must be
deemed to have lapsed.
The non-payment of premiums does not merely suspend but
put, an end to an insurance contract, since the time of the
payment is peculiarly of the essence of the contract. 11
... the rule is that under policy provisions that upon the failure to
make a payment of a premium or assessment at the time
provided for, the policy shall become void or forfeited, or the
obligation of the insurer shall cease, or words to like effect,
because the contract so prescribes and because such a
stipulation is a material and essential part of the contract. This
is true, for instance, in the case of life, health and accident, fire
and hail insurance policies. 12
In fact, if the peril insured against had occurred, plaintiff, as
insurer, would have had a valid defense against recovery under

the Policy it had issued. Explicit in the Policy itself is plaintiff's
agreement to indemnify defendant for loss by fire only "after
payment of premium," supra. Compliance by the insured with
the terms of the contract is a condition precedent to the right of
recovery.
The burden is on an insured to keep a policy in force by the
payment of premiums, rather than on the insurer to exert every
effort to prevent the insured from allowing a policy to elapse
through a failure to make premium payments. The continuance
of the insurer's obligation is conditional upon the payment of
premiums, so that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having ceased. 13
Moreover, "an insurer cannot treat a contract as valid for the
purpose of collecting premiums and invalid for the purpose of
indemnity." 14
The foregoing findings are buttressed by section 77 of the
Insurance Code (Presidential Decree No. 612, promulgated on
December 18, 1974), which now provides that no contract of
insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid,
notwithstanding any agreement to the contrary.
WHEREFORE, the judgment appealed from is reversed, and
plaintiff's complaint hereby dismissed.
[G.R. No. 119655. May 24, 1996]
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and
OFELIA M. RORALDO, VICTORINA M. RORALDO, VIRGILIO
M. RORALDO, MYRNA M. RORALDO and ROSABELLA M.
RORALDO, petitioners, vs. COURT OF APPEALS and
FORTUNE LIFE AND GENERAL INSURANCE CO.,
INC., respondents.
D E C I S I O N*
BELLOSILLO, J.:
May a fire insurance policy be valid, binding and enforceable
upon mere partial payment of premium?
On 22 January 1987 private respondent Fortune Life and
General Insurance Co., Inc. (FORTUNE) issued
Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay
and/or Nicolas Roraldo on their two-storey residential building
located at 5855 Zobel Street, Makati City, together with all their
personal effects therein. The insurance was for P600,000.00
covering the period from 23 January 1987 to 23 January
1988. On 23 January 1987, of the total premium of P2,983.50,
petitioner Violeta Tibay only paid P600.00 thus leaving a
considerable balance unpaid.
On 8 March 1987 the insured building was completely destroyed
by fire. Two days later or on 10 March 1987 Violeta Tibay paid
the balance of the premium. On the same day, she filed with
FORTUNE a claim on the fire insurance policy. Her claim was
accordingly referred to its adjuster, Goodwill Adjustment
Services, Inc. (GASI), which immediately wrote Violeta
requesting her to furnish it with the necessary documents for the
25
investigation and processing of her claim. Petitioner forthwith
complied. On 28 March 1987 she signed a non-waiver
agreement with GASI to the effect that any action taken by the
companies or their representatives in investigating the claim
made by the claimant for his loss which occurred at 5855 Zobel
Roxas, Makati on March 8, 1987, or in the investigating or
ascertainment of the amount of actual cash value and loss, shall
not waive or invalidate any condition of the policies of such
companies held by said claimant, nor the rights of either or any
of the parties to this agreement, and such action shall not be, or
be claimed to be, an admission of liability on the part of said
companies or any of them.[1]
In a letter dated 11 June 1987 FORTUNE denied the claim of
Violeta for violation of Policy Condition No. 2 and of Sec. 77 of
the Insurance Code. Efforts to settle the case before the
Insurance Commission proved futile. On 3 March 1988 Violeta
and the other petitioners sued FORTUNE for damages in the
amount of P600,000.00 representing the total coverage of the
fire insurance policy plus 12% interest per annum, P 100,000.00
moral damages, and attorneys fees equivalent to 20% of the
total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged
FORTUNE liable for the total value of the insured building and
personal properties in the amount of P600,000.00 plus interest
at the legal rate of 6% per annum from the filing of the complaint
until full payment, and attorneys fees equivalent to 20% of the
total amount claimed plus costs of suit.[2]
On 24 March 1995 the Court of Appeals reversed the court a
quo by declaring FORTUNE not to be liable to plaintiff-appellees
therein but ordering defendant-appellant to return to the former
the premium of P2,983.50 plus 12% interest from 10 March 1987
until full payment.[3]
Hence this petition for review with petitioners contending mainly
that contrary to the conclusion of the appellate court, FORTUNE
remains liable under the subject fire insurance policy inspite of
the failure of petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of
Appeals.
Insurance is a contract whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. [4] The
consideration is the premium, which must be paid at the time
and in the way and manner specified in the policy, and if not so
paid, the policy will lapse and be forfeited by its own terms. [5]
The pertinent provisions in the Policy on premium read
THIS POLICY OF INSURANCE WITNESSETH, THAT only after
payment to the Company in accordance with Policy Condition
No. 2 of the total premiums by the insured as stipulated above
for the period aforementioned for insuring against Loss or
Damage by Fire or Lightning as herein appears, the Property
herein described x x x
2. This policy including any renewal thereof and/or any
endorsement thereon is not in force until the premium has been

fully paid to and duly receipted by the Company in the manner
provided herein.
Any supplementary agreement seeking to amend this condition
prepared by agent, broker or Company official, shall be deemed
invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules
and regulations which are or may hereafter be in force provide
for the payment of the stipulated premiums in periodic
installments at fixed percentage, it is hereby declared, agreed
and warranted that this policy shall be deemed effective, valid
and binding upon the Company only when the premiums
therefor have actually been paid in full and duly acknowledged in
a receipt signed by any authorized official or
representative/agent of the Company in such manner as
provided herein, (Italics supplied).[6]
Clearly the Policy provides for payment of premium in
full. Accordingly, where the premium has only been partially paid
and the balance paid only after the peril insured against has
occurred, the insurance contract did not take effect and the
insured cannot collect at all on the policy. This is fully supported
by Sec. 77 of the Insurance Code which provides
SEC. 77. An insurer is entitled to payment of the premium as
soon as the thing insured 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 (Italics supplied).
Apparently the crux of the controversy lies in the phrase unless
and until the premium thereof has been paid. This leads us to
the manner of payment envisioned by the law to make the
insurance policy operative and binding. For whatever judicial
construction may be accorded the disputed phrase must
ultimately yield to the clear mandate of the law. The principle
that where the law does not distinguish the court should neither
distinguish assumes that the legislature made no qualification
on the use of a general word or expression. In Escosura v. San
Miguel Brewery, inc.,[7] the Court through Mr. Justice Jesus G.
Barrera, interpreting the phrase with pay used in connection with
leaves of absence with pay granted to employees, ruled -
x x x the legislative practice seems to be that when the intention
is to distinguish between full and partial payment, the modifying
term is used x x x
Citing C. A. No. 647 governing maternity leaves of married
women in government, R. A. No. 679 regulating employment of
women and children, R.A. No. 843 granting vacation and sick
leaves to judges of municipal courts and justices of the peace,
and finally, Art. 1695 of the New Civil Code providing that every
househelp shall be allowed four (4) days vacation each month,
which laws simply stated with pay, the Court concluded that it
was undisputed that in all these laws the phrase with pay used
without any qualifying adjective meant that the employee was
entitled to full compensation during his leave of absence.
26
Petitioners maintain otherwise. Insisting that FORTUNE is liable
on the policy despite partial payment of the premium due and
the express stipulation thereof to the contrary, petitioners rely
heavily on the 1967 case of Philippine Phoenix and Insurance
Co., Inc. v. Woodworks, Inc.[8] where the Court through Mr.
Justice Arsenio P. Dizon sustained the ruling of the trial court
that partial payment of the premium made the policy effective
during the whole period of the policy. In that case, the insurance
company commenced action against the insured for the unpaid
balance on a fire insurance policy. In its defense the insured
claimed that nonpayment of premium produced the cancellation
of the insurance contract. Ruling otherwise the Court held
It is clear x x x that on April 1, 1960, Fire Insurance Policy No.
9652 was issued by appellee and delivered to appellant, and
that on September 22 of the same year, the latter paid to the
former the sum of P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no doubt at all
that, as between the insurer and the insured, there was not only
a perfected contract of insurance but a partially performed one
as far as the payment of the agreed premium was
concerned. Thereafter the obligation of the insurer to pay the
insured the amount, for which the policy was issued in case the
conditions therefor had been complied with, arose and became
binding upon it, while the obligation of the insured to pay the
remainder of the total amount of the premium due became
demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive
of the instant dispute. For one, the factual scenario is
different. In Phoenix it was the insurance company that sued for
the balance of the premium, i.e., it recognized and admitted the
existence of an insurance contract with the insured. In the case
before us, there is, quite unlike in Phoenix, a specific stipulation
that (t)his policy xxx is not in force until the premium has been
fully paid and duly receipted by the Company x x x. Resultantly,
it is correct to say that in Phoenix a contract was perfected upon
partial payment of the premium since the parties had not
otherwise stipulated that prepayment of the premium in full was
a condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and
then later demanding the remainder of the premium without any
other precondition to its enforceability as in the instant case, the
insurer in effect had shown its intention to continue with the
existing contract of insurance, as in fact it was enforcing its right
to collect premium, or exact specific performance from the
insured. This is not so here. By express agreement of the
parties, no vinculum juris or bond of law was to be established
until full payment was effected prior to the occurrence of the risk
insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals[9] the
parties mutually agreed that the premiums could be paid in
installments, which in fact they did for three (3) years, hence,
this Court refused to invalidate the insurance policy. In giving
effect to the policy, the Court quoted with approval the Court of
Appeals
The obligation to pay premiums when due is ordinarily an
indivisible obligation to pay the entire premium. Here, the parties
x x x 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 maybe 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 x x x.
These two (2) cases, Phoenix and Tuscany, adequately
demonstrate the waiver, either express or implied, of
prepayment in full by the insurer: impliedly, by suing for the
balance of the premium as inPhoenix, and expressly, by
agreeing to make premiums payable in installments as
in Tuscany. But contrary to the stance taken by petitioners, there
is no waiver express or implied in the case at bench. Precisely,
the insurer and the insured expressly stipulated that (t)his policy
including any renewal thereof and/or any indorsement thereon
is not in force until the premium has been fully paid to and duly
receipted by the Company x x x and that this policy shall be
deemed effective, valid and binding upon the Company only
when the premiums therefor have actually been paid in full and
duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded
and taken in conjunction with Sec. 77 of the Insurance Code the
payment of partial premium by the assured in this particular
instance should not be considered the payment required by the
law and the stipulation of the parties. Rather, it must be taken in
the concept of a deposit to be held in trust by the insurer until
such time that the full amount has been tendered and duly
receipted for. In other words, as expressly agreed upon in the
contract, full payment must be made before the risk occurs for
the policy to be considered effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to
indemnify the assured according to law ever resulted from the
fractional payment of premium. The insurance contract itself
expressly provided that the policy would be effective only when
the premium was paid in full. It would have been altogether
different were it not so stipulated. Ergo, petitioners had absolute
freedom of choice whether or not to be insured by FORTUNE
under the terms of its policy and they freely opted to adhere
thereto.
Indeed, and far more importantly, the cardinal polestar in the
construction of an insurance contract is the intention of the
parties as expressed in the policy.[10] Courts have no other
function but to enforce the same. The rule that contracts of
insurance will be construed in favor of the insured and most
strongly against the insurer should not be permitted to have the
effect of making a plain agreement ambiguous and then
27
construe it in favor of the insured.[11] Verily, it is elemental law
that the payment of premium is requisite to keep the policy of
insurance in force. If the premium is not paid in the manner
prescribed in the policy as intended by the parties the policy is
ineffective. Partial payment even when accepted as a partial
payment will not keep the policy alive even for such fractional
part of the year as the part payment bears to the whole
payment.[12]
Applying further the rules of statutory construction, the position
maintained by petitioners becomes even more untenable. The
case of South Sea Surety and Insurance Company, Inc. v. Court
of Appeals,[13] speaks only of two (2) statutory exceptions to the
requirement of payment of the entire premium as a prerequisite
to the validity of the insurance contract. These exceptions are:
(a) in case the insurance coverage relates to life or industrial life
(health) insurance when a grace period applies, and (b) when
the insurer makes a written acknowledgment of the receipt of
premium, this acknowledgment being declared by law to, be
then conclusive evidence of the premium payment.[14]
A maxim of recognized practicality is the rule that the expressed
exception or exemption excludes others. Exceptio firm at
regulim in casibus non exceptis. The express mention of
exceptions operates to exclude other exceptions; conversely,
those which are not within the enumerated exceptions are
deemed included in the general rule. Thus, under Sec. 77, as
well as Sec. 78, until the premium is paid, and the law has not
expressly excepted partial payments, there is no valid and
binding contract. Hence, in the absence of clear waiver of
prepayment in full by the insurer, the insured cannot collect on
the proceeds of the policy.
In the desire to safeguard the interest of the assured, itmust not
be ignored that the contract of insurance is primarily a risk-
distributing device, a mechanism by which all members of a
group exposed to a particular risk contribute premiums to an
insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party
therefore takes a risk: the insurer, that of being compelled upon
the happening of the contingency to pay the entire sum agreed
upon, and the insured, that of parting with the amount required
as premium, without receiving anything therefor in case the
contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a
legal reserve fund in favor of those claiming under their
policies.[15] It should be understood that the integrity of this fund
cannot be secured and maintained if by judicial fiat partial
offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an
express agreement to the contrary. For what could prevent the
insurance applicant from deliberately or wilfully holding back full
premium payment and wait for the risk insured against to
transpire and then conveniently pass on the balance of the
premium to be deducted from the proceeds of the
insurance? Worse, what if the insured makes an initial payment
of only 10%, or even 1%, of the required premium, and when the
risk occurs simply points to the proceeds from where to source
the balance? Can an insurance company then exist and survive
upon the payment of 1%, or even 10%, of the premium stipulated
in the policy on the basis that, after all, the insurer can deduct
 28

from the proceeds of the insurance should the risk insured

against occur?

Interpreting the contract of insurance stringently against the

insurer but liberally in favor of the insured despite clearly defined
obligations of the parties to the policy can be carried out to
extremes that there is the danger that we may, so to speak, kill
the goose that lays the golden egg. We are well aware of
insurance companies falling into the despicable habit of
collecting premiums promptly yet resorting to all kinds of
excuses to deny or delay payment of just insurance claims. But,
in this case, the law is manifestly on the side of the insurer. For
as long as the current Insurance Code remains unchanged and
partial payment of premiums is not mentioned at all as among
the exceptions provided in Secs. 77 and 78, no policy of
insurance can ever pretend to be efficacious or effective until
premium has been fully paid.

And so it must be. For it cannot be disputed that premium is

the elixir vitae of the insurance business because by law the
insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its
prompt payment and full satisfaction.[16] It must be emphasized
here that all actuarial calculations and various tabulations of
probabilities of losses under the risks insured against are based
on the sound hypothesis of prompt payment of premiums. Upon
this bedrock insurance firms are enabled to offer the assurance
of security to the public at favorable rates. But once payment of
premium is left to the whim and caprice of the insured, as when
the courts tolerate the payment of a mere P600.00 as partial
undertaking out of the stipulated total premium of P2,983.50 and
the balance to be paid even after the risk insured against has
occurred, as petitioners have done in this case, on the principle
that the strength of the vinculumjuris is not measured by any
specific amount of premium payment, we will surely wreak
havoc on the business and set to naught what has taken
actuarians centuries to devise to arrive at a fair and equitable
distribution of risks and benefits between the insurer and the
insured.

The terms of the insurance policy constitute the measure of the

insurers liability. In the absence of statutory prohibition to the
contrary, insurance companies have the same rights as
individuals to limit their liability and to impose whatever
conditions they deem best upon their obligations not
inconsistent with public policy.[17] The validity of these limitations
is by law passed upon by the Insurance Commissioner who is
empowered to approve all forms of policies, certificates or
contracts of insurance which insurers intend to issue or
deliver. That the policy contract in the case at bench was
approved and allowed issuance simply reaffirms the validity of
such policy, particularly the provision in question.

WHEREFORE, the petition is DENIED and the assailed

Decision of the Court of Appeals dated 24 March 1995 is
AFFIRMED.

SO ORDERED.