CHAPTER ONE

[P]laintiff is the owner of the Plaza Resort situated at

G.R. No. 156167 May 16, 2005
GULF RESORTS, INC., petitioner,
vs.
PHILIPPINE CHARTER INSURANCE
CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule
45 of the Revised Rules of Court by petitioner GULF
RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner
assails the appellate court decision 1 which dismissed its
two appeals and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner
and respondent on the scope of the insurance company’s
liability for earthquake damage to petitioner’s properties.
Petitioner avers that, pursuant to its earthquake shock
endorsement rider, Insurance Policy No. 31944 covers all
damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its
liability for loss to the two swimming pools of petitioner.
Agoo, La Union and had its properties in said resort
insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies
issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987;
and 1987-88 (Exhs. "C", "D", "E" and "F"; also Exhs. "1",
"2", "3" and "4" respectively), the risk of loss from
earthquake shock was extended only to plaintiff’s two
swimming pools, thus, "earthquake shock endt." (Item 5
only) (Exhs. "C-1"; "D-1," and "E" and two (2) swimming
pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in
those policies referred to the two (2) swimming pools only
(Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently
AHAC(AIU) issued in plaintiff’s favor Policy No. 206-
4182383-0 covering the period March 14, 1988 to March
14, 1989 (Exhs. "G" also "G-1") and in said policy the
earthquake endorsement clause as indicated in Exhibits
"C-1", "D-1", Exhibits "E" and "F-1" was deleted and the
entry under Endorsements/Warranties at the time of issue
read that plaintiff renewed its policy with AHAC (AIU) for
the period of March 14, 1989 to March 14, 1990 under
Policy No. 206-4568061-9 (Exh. "H") which carried the
entry under "Endorsement/Warranties at Time of Issue",
which read "Endorsement to Include Earthquake Shock
(Exh. "6-B-1") in the amount of P10,700.00 and
paid
P42
,658
.14

The facts as established by the court a quo, and affirmed

by the appellate court are as follows:
(Exhs. "6-A" and "6-B") as premium thereof, computed as 4568061-9 (Exh. "H") provided that the policy wording
and rates in said policy be copied in the policy to be
issued by defendant; that defendant issued Policy No.
31944 to plaintiff covering the period of March 14, 1990 to
March 14, 1991 for P10,700,600.00 for a total premium
of P45,159.92 (Exh. "I"); that in the computation of the
premium, defendant’s Policy No. 31944 (Exh. "I"), which
is the policy in question, contained on the right-hand
upper portion of page 7 thereof, the following:

follows: that the above break-down of premiums shows that plaintiff paid
only P393.00 as premium against earthquake shock (ES); that in all
the six insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the
premium against the peril of earthquake shock is the same, that
is P393.00 (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and "3-B-2"; "F-
02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs.
"C", "D", "E", "F", "G" and "H") and in Policy No. 31944 issued by
defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the

company of the sum included additional premium the
Company agrees, notwithstanding what is stated in the
printed conditions of this policy due to the contrary, that
this insurance covers loss or damage to shock to any of
the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. "1-D",
"2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that plaintiff agreed to insure with defendant the
properties covered by AHAC (AIU) Policy No. 206-
that in Exhibit "7-C" the word "included" above the
underlined portion was deleted; that on July 16, 1990 an
earthquake struck Central Luzon and Northern Luzon and
plaintiff’s properties covered by Policy No. 31944 issued
by defendant, including the two swimming pools in its
Agoo Playa Resort were damaged.2
After the earthquake, petitioner advised respondent that it
would be making a claim under its Insurance Policy No.
31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned
the investigation of the claim to an independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. 3 On July
30, 1990, respondent, through its adjuster, requested
petitioner to submit various documents in support of its
claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de
Leon,4 rendered a preliminary report5 finding extensive
damage caused by the earthquake to the clubhouse and
to the two swimming pools. Mr. de Leon stated that
"except for the swimming pools, all affected items have
no coverage for earthquake shocks." 6 On August 11,
1990, petitioner filed its formal demand 7 for settlement of
the damage to all its properties in the Agoo Playa Resort.
On August 23, 1990, respondent denied petitioner’s claim
on the ground that its insurance policy only afforded
earthquake shock coverage to the two swimming pools of
the resort.8 Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a
complaint10 with the regional trial court of Pasig praying
for the payment of the following:
1.) The sum of P5,427,779.00, representing losses
sustained by the insured properties, with interest thereon,
as computed under par. 29 of the policy (Annex "B") until
fully paid;
2.) The sum of P428,842.00 per month, representing
continuing losses sustained by plaintiff on account of
defendant’s refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary
damages;
4.) The sum of P500,000.00 by way of attorney’s fees and
expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative
Defenses with Compulsory Counterclaims.12
On February 21, 1994, the lower court after trial ruled in
favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only
a premium of P393.00 against the peril of earthquake
shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies
issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G").
From this fact the Court must consequently agree with the
position of defendant that the endorsement rider (Exhibit
"7-C") means that only the two swimming pools were
insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a
contract of adhesion hence, where the language used in
an insurance contract or application is such as to create
ambiguity the same should be resolved against the party
responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and
unambiguous hence there is no need for interpretation or
construction but only application of the provisions therein.
From the above observations the Court finds that only the
two (2) swimming pools had earthquake shock coverage
and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that
the damage to the swimming pools was appraised by
defendant’s adjuster at P386,000.00, defendant must, by
virtue of the contract of insurance, pay plaintiff said
amount.
Because it is the finding of the Court as stated in the
immediately preceding paragraph that defendant is liable
only for the damage caused to the two (2) swimming
pools and that defendant has made known to plaintiff its
willingness and readiness to settle said liability, there is
no basis for the grant of the other damages prayed for by
plaintiff. As to the counterclaims of defendant, the Court
does not agree that the action filed by plaintiff is baseless
and highly speculative since such action is a lawful
exercise of the plaintiff’s right to come to Court in the
honest belief that their Complaint is meritorious. The
prayer, therefore, of defendant for damages is likewise
denied.
WHEREFORE, premises considered, defendant is
ordered to pay plaintiffs the sum of THREE HUNDRED
EIGHTY SIX THOUSAND PESOS (P386,000.00)
representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the
Complaint until defendant’s obligation to plaintiff is fully
paid.
No pronouncement as to costs.13
Petitioner’s Motion for Reconsideration was denied. Thus,
petitioner filed an appeal with the Court of Appeals based
on the following assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT
PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR
THE DAMAGE TO ITS TWO SWIMMING POOLS
UNDER ITS FIRE POLICY NO. 31944, CONSIDERING
ITS PROVISIONS, THE CIRCUMSTANCES
SURROUNDING THE ISSUANCE OF SAID POLICY
AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16,
1990.
B. THE TRIAL COURT ERRED IN DETERMINING
PLAINTIFF-APPELLANT’S RIGHT TO RECOVER
UNDER DEFENDANT-APPELLEE’S POLICY (NO.
31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT
PLAINTIFF-APPELLANT IS ENTITLED TO THE
DAMAGES CLAIMED, WITH INTEREST COMPUTED AT
24% PER ANNUM ON CLAIMS ON PROCEEDS OF
POLICY.
On the other hand, respondent filed a partial appeal,
assailing the lower court’s failure to award it attorney’s
fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of
the trial court and ruled, thus:
However, after carefully perusing the documentary
evidence of both parties, We are not convinced that the
last two (2) insurance contracts (Exhs. "G" and "H"),
which the plaintiff-appellant had with AHAC (AIU) and
upon which the subject insurance contract with Philippine
Charter Insurance Corporation is said to have been
based and copied (Exh. "I"), covered an extended
earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not
granting the plaintiff-appellant’s prayer for the imposition
of interest – 24% on the insurance claim and 6% on loss
of income allegedly amounting to P4,280,000.00. Since
the defendant-appellant has expressed its willingness to
pay the damage caused on the two (2) swimming pools,
as the Court a quo and this Court correctly found it to be
liable only, it then cannot be said that it was in default and
therefore liable for interest.
Coming to the defendant-appellant’s prayer for an
attorney’s fees, long-standing is the rule that the award
thereof is subject to the sound discretion of the court.
Thus, if such discretion is well-exercised, it will not be
disturbed on appeal (Castro et al. v. CA, et al., G.R. No.
115838, July 18, 2002). Moreover, being the award
thereof an exception rather than a rule, it is necessary for
the court to make findings of facts and law that would
bring the case within the exception and justify the grant of
such award (Country Bankers Insurance Corp. v. Lianga
Bay and Community Multi-Purpose Coop., Inc., G.R. No.
136914, January 25, 2002). Therefore, holding that the
plaintiff-appellant’s action is not baseless and highly
speculative, We find that the Court a quo did not err in
granting the same.
WHEREFORE, in view of all the foregoing, both appeals
are hereby DISMISSED and judgment of the Trial Court
hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following
issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY
HELD THAT UNDER RESPONDENT’S INSURANCE
POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST
THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY
DENIED PETITIONER’S PRAYER FOR DAMAGES
WITH INTEREST THEREON AT THE RATE CLAIMED,
ATTORNEY’S FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy’s earthquake shock endorsement
clearly covers all of the properties insured and not only
the swimming pools. It used the words "any property
insured by this policy," and it should be interpreted as all
inclusive.
Second, the unqualified and unrestricted nature of the
earthquake shock endorsement is confirmed in the body
of the insurance policy itself, which states that it is
"[s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended
Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming
pools had already been deleted in the earthquake shock
endorsement.
Fourth, it is unbelievable for respondent to claim that it
only made an inadvertent omission when it deleted the
said qualification.
Fifth, that the earthquake shock endorsement rider
should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were
placed on the endorsements/warranties enumerated at
the time of issue.
Seventh, any ambiguity in the earthquake shock
endorsement should be resolved in favor of petitioner and
against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the
earthquake shock endorsement should be interpreted as
a caveat on the standard fire insurance policy, such as to
remove the two swimming pools from the coverage for
the risk of fire. It should not be used to limit the
respondent’s liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that
the additional premium was not paid under the extended
coverage. The premium for the earthquake shock
coverage was already included in the premium paid for
the policy.
Tenth, the parties’ contemporaneous and subsequent
acts show that they intended to extend earthquake shock
coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told
respondent that it wanted an exact replica of its latest
insurance policy from American Home Assurance
Company (AHAC-AIU), which covered all the resort’s
properties for earthquake shock damage and respondent
agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake
shock. Respondent’s insurance adjuster, Bayne Adjusters
and Surveyors, Inc., likewise requested petitioner to
submit the necessary documents for its building claims
and other repair costs. Thus, under the doctrine of
equitable estoppel, it cannot deny that the insurance
policy it issued to petitioner covered all of the properties
within the resort.
Eleventh, that it is proper for it to avail of a petition for
review by certiorari under Rule 45 of the Revised Rules of
Court as its remedy, and there is no need for calibration
of the evidence in order to establish the facts upon which
this petition is based.
On the other hand, respondent made the following
counter arguments:18
First, none of the previous policies issued by AHAC-AIU
from 1983 to 1990 explicitly extended coverage against
earthquake shock to petitioner’s insured properties other
than on the two swimming pools. Petitioner admitted that
from 1984 to 1988, only the two swimming pools were
insured against earthquake shock. From 1988 until 1990,
the provisions in its policy were practically identical to its
earlier policies, and there was no increase in the premium
paid. AHAC-AIU, in a letter19 by its representative Manuel
C. Quijano, categorically stated that its previous policy,
from which respondent’s policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioner’s payment of additional premium in
the amount of P393.00 shows that the policy only covered
earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for
earthquake shock coverage on the two swimming pools
from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the
limitation of the earthquake shock endorsement to the two
swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioner’s
properties. As per its agreement with petitioner,
respondent copied its policy from the AHAC-AIU policy
provided by petitioner. Although the first five policies
contained the said qualification in their rider’s title, in the
last two policies, this qualification in the title was deleted.
AHAC-AIU, through Mr. J. Baranda III, stated that such
deletion was a mere inadvertence. This inadvertence did
not make the policy incomplete, nor did it broaden the
scope of the endorsement whose descriptive title was
merely enumerated. Any ambiguity in the policy can be
easily resolved by looking at the other provisions,
specially the enumeration of the items insured, where
only the two swimming pools were noted as covered for
earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its
policies from 1984 through 1988, the phrase "Item 5
– P393,000.00 – on the two swimming pools only (against
the peril of earthquake shock only)" meant that only the
swimming pools were insured for earthquake damage.
The same phrase is used in toto in the policies from 1989
to 1990, the only difference being the designation of the
two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to
be effective, premiums must be paid for all the properties
covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the
swimming pools against earthquake shock. No other
premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier "ANY"
instead of "ALL" to describe the property covered was
done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its
requirement that all of its properties must be included in
the earthquake shock coverage. Petitioner’s own
evidence shows that it only required respondent to follow
the exact provisions of its previous policy from AHAC-
AIU. Respondent complied with this requirement.
Respondent’s only deviation from the agreement was
when it modified the provisions regarding the replacement
cost endorsement. With regard to the issue under
litigation, the riders of the old policy and the policy in
issue are identical.
Seventh, respondent did not do any act or give any
assurance to petitioner as would estop it from maintaining
that only the two swimming pools were covered for
earthquake shock. The adjuster’s letter notifying petitioner
to present certain documents for its building claims and
repair costs was given to petitioner before the adjuster
knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIU’s inadvertent
deletion of the phrase "Item 5 Only" after the descriptive
name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties’ clear
intention to limit earthquake shock coverage to the two
swimming pools.
Before petitioner accepted the policy, it had the
opportunity to read its conditions. It did not object to any
deficiency nor did it institute any action to reform the
policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages,
attorney’s fees and litigation expenses. Since respondent
was willing and able to pay for the damage caused on the
two swimming pools, it cannot be considered to be in
default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are
important in the resolution of the case at bar.
First, in the designation of location of risk, only the two
swimming pools were specified as included, viz:
ITEM 3 – 393,000.00 – On the two (2) swimming pools
only (against the peril of earthquake shock only) 20
Second, under the breakdown for premium payments, 21 it
was stated that:
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage
occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of
nature. 23
Fourth, the rider attached to the policy, titled "Extended
Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING
ESTABLISHED AGGREGATE SUMS INSURED IN
EXCESS OF FIVE MILLION PESOS, IN
CONSIDERATION OF A DISCOUNT OF 5% OR 7 ½ %
OF THE NET PREMIUM x x x POLICY HEREBY
UNDERTAKES TO CONTINUE THE INSURANCE
UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the
Company of the sum of P. . . . . . . . . . . . . . . . . additional
premium the Company agrees, notwithstanding what is
stated in the printed conditions of this Policy to the
contrary, that this insurance covers loss or damage
(including loss or damage by fire) to any of the property
insured by this Policy occasioned by or through or in
consequence of Earthquake.
Provided always that all the conditions of this Policy shall
apply (except in so far as they may be hereby expressly
varied) and that any reference therein to loss or damage
by fire should be deemed to apply also to loss or damage
occasioned by or through or in consequence of
Earthquake.24
Petitioner contends that pursuant to this rider, no
qualifications were placed on the scope of the earthquake
shock coverage. Thus, the policy extended earthquake
shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy
should be examined and interpreted in consonance with
each other.25 All its parts are reflective of the true intent of
the parties. The policy cannot be construed piecemeal.
Certain stipulations cannot be segregated and then made
to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot
focus on the earthquake shock endorsement to the
exclusion of the other provisions. All the provisions and
riders, taken and interpreted together, indubitably show
the intention of the parties to extend earthquake shock
coverage to the two swimming pools only.
A careful examination of the premium recapitulation will
show that it is the clear intent of the parties to extend
earthquake shock coverage only to the two swimming
pools. Section 2(1) of the Insurance Code defines a
contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown
or contingent event. Thus, an insurance contract exists
where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to
distribute actual losses among a large group of persons
bearing a similar risk; and
5. In consideration of the insurer's promise, the
insured pays a premium.26 (Emphasis ours)
An insurance premium is the consideration paid an
insurer for undertaking to indemnify the insured against a
specified peril.27 In fire, casualty, and marine insurance,
the premium payable becomes a debt as soon as the risk
attaches.28 In the subject policy, no premium payments
were made with regard to earthquake shock coverage,
except on the two swimming pools. There is no mention
of any premium payable for the other resort properties
with regard to earthquake shock. This is consistent with
the history of petitioner’s previous insurance policies from
AHAC-AIU. As borne out by petitioner’s witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that
insofar as your insurance policy during the period from
March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools
only?
A. Yes, sir. It is limited to the two swimming pools,
specifically shown in the warranty, there is a provision
here that it was only for item 5.
Q. More specifically Item 5 states the amount
of P393,000.00 corresponding to the two swimming pools
only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, November 25, 1991
pp. 23-296
Q. For the period from March 14, 1988 up to March 14,
1989, did you personally arrange for the procurement of
this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of
your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as
operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy
is concerned they are of course subject to your
instruction, is that not correct?
A. Yes, sir. The final action is still with us although they
can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from
March 14, 1988 to March 14, 1989, did you give written
instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties
of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction,
although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very
important because in April 1987 there was an earthquake
tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against
similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you
bother to check the provisions with respect to your
instructions that all properties must be covered again by
earthquake shock endorsement?
A. Are you referring to the insurance policy issued by
American Home Assurance Company marked Exhibit
"G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on
the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was
contented already that the previous limitation pertaining to
the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the
phrase "Subject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty &
Annual Payment Agreement on Long Term
Policies"29 to the insurance policy as proof of the intent of
the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the
descriptive titles of the riders, clauses, warranties or
endorsements to which the policy is subject, as required
under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the
deletion of the qualification limiting the coverage to the
two swimming pools. The earthquake shock endorsement
cannot stand alone. As explained by the testimony of
Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III30
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H
inclusive have been previously marked by counsel for
defendant as Exhibit[s] 1-6 inclusive. Did you have
occasion to review of (sic) these six (6) policies issued by
your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one
point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in
evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you is,
on the basis on (sic) the wordings indicated in Exhibits C
to H respectively what was the extent of the coverage
[against] the peril of earthquake shock as provided for in
each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2)
swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits
C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against
earthquake shock as provided for in each of the six (6)
policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration
"Earthquake Shock Endorsement, in the Clauses and
Warranties: Item 5 only (Earthquake Shock
Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement
on stand alone basis. For swimming pools we do cover
earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock…
COURT:
As far as earthquake shock endorsement you do not have
a specific coverage for other things other than swimming
pool? You are covering building? They are covered by a
general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we
are covering building or another we can issue earthquake
shock solely but that the moment I see this, the thing that
comes to my mind is either insuring a swimming pool,
foundations, they are normally affected by earthquake but
not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiff’s witness, Mr. Mantohac testified and he
alleged that only Exhibits C, D, E and F inclusive
[remained] its coverage against earthquake shock to two
(2) swimming pools only but that Exhibits G and H
respectively entend the coverage against earthquake
shock to all the properties indicated in the respective
schedules attached to said policies, what can you say
about that testimony of plaintiff’s witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot
stand alone without the other half of it. I assure you that
this one covers the two swimming pools with respect to
earthquake shock endorsement. Based on it, if we are
going to look at the premium there has been no change
with respect to the rates. Everytime (sic) there is a
renewal if the intention of the insurer was to include the
earthquake shock, I think there is a substantial increase
in the premium. We are not only going to consider the two
(2) swimming pools of the other as stated in the policy. As
I see, there is no increase in the amount of the premium. I
must say that the coverage was not broaden (sic) to
include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the
coverage. If you are going to do some computation based
on the rates you will arrive at the same premiums, your
Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming
pools for fire insurance?
WITNESS:
No, we don’t, sir.
Q. That is why the phrase "earthquake shock to the two
(2) swimming pools only" was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits,
Exhibits G and H which you have pointed to during your
direct-examination, the phrase "Item no. 5 only" meaning
to (sic) the two (2) swimming pools was deleted from the
policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any
significance to the deletion of the qualifying phrase for the
policies?
WITNESS:
My answer to that would be, the deletion of that particular
phrase is inadvertent. Being a company underwriter, we
do not cover. . it was inadvertent because of the previous
policies that we have issued with no specific attachments,
premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioner’s contention that
respondent’s contemporaneous and subsequent acts to
the issuance of the insurance policy falsely gave the
petitioner assurance that the coverage of the earthquake
shock endorsement included all its properties in the
resort. Respondent only insured the properties as
intended by the petitioner. Petitioner’s own witness
testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours
Mr. Witness, what exactly did you tell Atty. Omlas (sic) to
copy from Exhibit "H" for purposes of procuring the policy
from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get
will have the same provisions as this American Home
Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that
of the premium rates?
A. Yes, sir. He assured me that with regards to the
insurance premium rates that they will be charging will be
limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made
a comparison of the provisions and scope of coverage of
Exhibits "I" and "H" sometime in the third week of March,
1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or
difference between the policy wordings as well as scope
of coverage of Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference inasmuch (sic)
as I was assured already that the policy wordings and
rates were copied from the insurance policy I sent them
but it was only when this case erupted that we discovered
some discrepancies.
Q. With respect to the items declared for insurance
coverage did you notice any discrepancy at any time
between those indicated in Exhibit "I" and those indicated
in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any
difference because it was exactly the same P393,000.00
on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this
provision will have to be placed here because this
particular provision under the peril of earthquake shock
only is requested because this is an insurance policy and
therefore cannot be insured against fire, so this has to be
placed.
The verbal assurances allegedly given by respondent’s
representative Atty. Umlas were not proved. Atty. Umlas
categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of
respondent’s independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc.,
respondent never meant to lead petitioner to believe that
the endorsement for earthquake shock covered
properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your
discussion regarding the extent of coverage of the policy
issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the
inspection, I got a photocopy of the insurance coverage
policy and it was indicated under Item 3 specifically that
the coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic), and I relayed
to him what I had found out in the policy and he confirmed
to me indeed only Item 3 which were the two swimming
pools have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your
basis, if any, for stating that except for the swimming
pools all affected items have no coverage for earthquake
shock?
xxx
A. I based my statement on my findings, because upon
my examination of the policy I found out that under Item 3
it was specific on the wordings that on the two swimming
pools only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and secondly, when I
examined the summary of premium payment only Item 3
which refers to the swimming pools have a computation
for premium payment for earthquake shock and all the
other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract
and its riders. Petitioner cannot rely on the general rule
that insurance contracts are contracts of adhesion which
should be liberally construed in favor of the insured and
strictly against the insurer company which usually
prepares it.31 A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in
the contract, while the other party merely affixes his
signature or his "adhesion" thereto. Through the years,
the courts have held that in these type of contracts, the
parties do not bargain on equal footing, the weaker
party's participation being reduced to the alternative to
take it or leave it. Thus, these contracts are viewed as
traps for the weaker party whom the courts of justice must
protect.32 Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the
insured.33
The case law will show that this Court will only rule out
blind adherence to terms where facts and circumstances
will show that they are basically one-sided. 34 Thus, we
have called on lower courts to remain careful in
scrutinizing the factual circumstances behind each case
to determine the efficacy of the claims of contending
parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al.,35 the
parties, who were acute businessmen of experience,
were presumed to have assented to the assailed
documents with full knowledge.
We cannot apply the general rule on contracts of
adhesion to the case at bar. Petitioner cannot claim it did
not know the provisions of the policy. From the inception
of the policy, petitioner had required the respondent to
copy verbatimthe provisions and terms of its latest
insurance policy from AHAC-AIU. The testimony of Mr.
Leopoldo Mantohac, a direct participant in securing the
insurance policy of petitioner, is reflective of petitioner’s
knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy
you would want for those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of
this policy under Philippine Charter Insurance Corporation
as long as it will follow the same or exact provisions of the
previous insurance policy we had with American Home
Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the
provisions which you wanted in the American Home
Insurance policy are to be incorporated in the PCIC
policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter
Insurance Corporation I specifically told him that the
policy and wordings shall be copied from the AIU Policy
No. 206-4568061-9.
Respondent, in compliance with the condition set by the
petitioner, copied AIU Policy No. 206-4568061-9 in
drafting its Insurance Policy No. 31944. It is true that
there was variance in some terms, specifically in the
replacement cost endorsement, but the principal
provisions of the policy remained essentially similar to
AHAC-AIU’s policy. Consequently, we cannot apply the
"fine print" or "contract of adhesion" rule in this case as
the parties’ intent to limit the coverage of the policy to the
two swimming pools only is not ambiguous. 37
IN VIEW WHEREOF, the judgment of the Court of
Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
SO ORDERED. vs.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, PIONEER INSURANCE AND SURETY
JJ., concur. CORPORATION AND THE STEAMSHIP MUTUAL
UNDERWRITING ASSOCIATION (BERMUDA)
LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails

the Decision1 dated July 30, 2002 of the Court
of Appeals in CA-G.R. SP No. 60144, affirming
the Decision2 dated May 3, 2000 of the
Insurance Commission in I.C. Adm. Case No.
RD-277. Both decisions held that there was no
violation of the Insurance Code and the
respondents do not need license as insurer
and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold)

procured a protection and indemnity coverage
for its vessels from The Steamship Mutual
G.R. No. 154514. July 28, 2005 Underwriting Association (Bermuda) Limited
(Steamship Mutual) through Pioneer Insurance
WHITE GOLD MARINE SERVICES, and Surety Corporation (Pioneer).
INC., Petitioners, Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.3Pioneer
also issued receipts evidencing payments for
the coverage. When White Gold failed to fully
pay its accounts, Steamship Mutual refused to
renew the coverage.
Steamship Mutual thereafter filed a case
against White Gold for collection of sum of
money to recover the latter’s unpaid balance.
White Gold on the other hand, filed a
complaint before the Insurance Commission
claiming that Steamship Mutual violated
Sections 1864 and 1875 of the Insurance Code,
while Pioneer violated Sections 299, 63007 and
3018 in relation to Sections 302 and 303,
thereof.
The Insurance Commission dismissed the
complaint. It said that there was no need for
Steamship Mutual to secure a license because
it was not engaged in the insurance business.
It explained that Steamship Mutual was a
Protection and Indemnity Club (P & I Club).
Likewise, Pioneer need not obtain another
license as insurance agent and/or a broker for
Steamship Mutual because Steamship Mutual
was not engaged in the insurance business.
Moreover, Pioneer was already licensed,
hence, a separate license solely as
agent/broker of Steamship Mutual was already
superfluous.
The Court of Appeals affirmed the decision of
the Insurance Commissioner. In its decision,
the appellate court distinguished between P &
I Clubs vis-à-vis conventional insurance. The
appellate court also held that Pioneer merely
acted as a collection agent of Steamship
Mutual.
In this petition, petitioner assigns the
following errors allegedly committed by the
appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED
THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON
THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR
BROKER HENCE AS AN INSURER IT NEED NOT
SECURE A LICENSE TO ENGAGE IN
INSURANCE BUSINESS IN THE PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED
THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS
ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED,
THAT RESPONDENT PIONEER NEED NOT
SECURE A LICENSE WHEN CONDUCTING ITS
AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING
THE LICENSE OF RESPONDENT PIONEER AND
[IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.9
Simply, the basic issues before us are (1) Is
Steamship Mutual, a P & I Club, engaged in the
insurance business in the Philippines? (2)
Does Pioneer need a license as an insurance
agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a
P & I Club. Steamship Mutual admits it does
not have a license to do business in the
Philippines although Pioneer is its resident
agent. This relationship is reflected in the
certifications issued by the Insurance
Commission.
Petitioner insists that Steamship Mutual as a
P & I Club is engaged in the insurance
business. To buttress its assertion, it cites the
definition of a P & I Club in Hyopsung
Maritime Co., Ltd. v. Court of Appeals 10 as "an
association composed of shipowners in
general who band together for the specific
purpose of providing insurance cover on a
mutual basis against liabilities incidental to
shipowning that the members incur in favor of
third parties." It stresses that as a P & I Club,
Steamship Mutual’s primary purpose is to
solicit and provide protection and indemnity
coverage and for this purpose, it has engaged
the services of Pioneer to act as its agent.
Respondents contend that although Steamship
Mutual is a P & I Club, it is not engaged in the
insurance business in the Philippines. It is
merely an association of vessel owners who
have come together to provide mutual
protection against liabilities incidental to
shipowning.11 Respondents aver Hyopsung is
inapplicable in this case because the issue
in Hyopsung was the jurisdiction of the court
over Hyopsung.
Is Steamship Mutual engaged in the insurance
business?
Section 2(2) of the Insurance Code
enumerates what constitutes "doing an
insurance business" or "transacting an
insurance business". These are:
(a) making or proposing to make, as insurer,
any insurance contract;
(b) making, or proposing to make, as surety,
any contract of suretyship as a vocation and
not as merely incidental to any other
legitimate business or activity of the surety;
(c) doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;
(d) doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of this Code.
...
The same provision also provides, the fact
that no profit is derived from the making of
insurance contracts, agreements or
transactions, or that no separate or direct
consideration is received therefor, shall not
preclude the existence of an insurance
business.12
The test to determine if a contract is an
insurance contract or not, depends on the
nature of the promise, the act required to be
performed, and the exact nature of the
agreement in the light of the occurrence,
contingency, or circumstances under which
the performance becomes requisite. It is not
by what it is called.13
Basically, an insurance contract is a contract
of indemnity. In it, one undertakes for a
consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event.14
In particular, a marine insurance undertakes
to indemnify the assured against marine
losses, such as the losses incident to a marine
adventure.15 Section 9916 of the Insurance
Code enumerates the coverage of marine
insurance.
Relatedly, a mutual insurance company is a
cooperative enterprise where the members
are both the insurer and insured. In it, the
members all contribute, by a system of
premiums or assessments, to the creation of a
fund from which all losses and liabilities are
paid, and where the profits are divided among
themselves, in proportion to their
interest.17 Additionally, mutual insurance
associations, or clubs, provide three types of
coverage, namely, protection and indemnity,
war risks, and defense costs.18
A P & I Club is "a form of insurance against
third party liability, where the third party is
anyone other than the P & I Club and the
members."19 By definition then, Steamship
Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance
business.
The records reveal Steamship Mutual is doing
business in the country albeit without the
requisite certificate of authority mandated by
Section 18720 of the Insurance Code. It
maintains a resident agent in the Philippines
to solicit insurance and to collect payments in
its behalf. We note that Steamship Mutual
even renewed its P & I Club cover until it was
cancelled due to non-payment of the calls.
Thus, to continue doing business here,
Steamship Mutual or through its agent
Pioneer, must secure a license from the
Insurance Commission.
Since a contract of insurance involves public
interest, regulation by the State is necessary.
Thus, no insurer or insurance company is
allowed to engage in the insurance business
without a license or a certificate of authority
from the Insurance Commission.21
Does Pioneer, as agent/broker of Steamship
Mutual, need a special license?
Pioneer is the resident agent of Steamship
Mutual as evidenced by the certificate of
registration22 issued by the Insurance
Commission. It has been licensed to do or
transact insurance business by virtue of the
certificate of authority23 issued by the same
agency. However, a Certification from the
Commission states that Pioneer does not have
a separate license to be an agent/broker of
Steamship Mutual.24
Although Pioneer is already licensed as an
insurance company, it needs a separate
license to act as insurance agent for
Steamship Mutual. Section 299 of the
Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or
as an insurance broker in the solicitation or
procurement of applications for insurance, or
receive for services in obtaining insurance,
any commission or other compensation from
any insurance company doing business in the
Philippines or any agent thereof, without first
procuring a license so to act from the
Commissioner, which must be renewed
annually on the first day of January, or within
six months thereafter. . .
Finally, White Gold seeks revocation of
Pioneer’s certificate of authority and removal
of its directors and officers. Regrettably, we
are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY
GRANTED. The Decision dated July 30, 2002 of
the C ourt of Appeals affirming the Decision
dated May 3, 2000 of the Insurance
Commission is hereby REVERSED AND SET
ASIDE. The Steamship Mutual Underwriting
Association (Bermuda) Ltd., and Pioneer
Insurance and Surety Corporation are
ORDERED to obtain licenses and to secure
proper authorizations to do business as
insurer and insurance agent, respectively. The
petitioner’s prayer for the revocation of
Pioneer’s Certificate of Authority and removal
of its directors and officers, is DENIED. Costs
against respondents.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago,
Carpio, and Azcuna, JJ., concur.
G.R. No. 156956 October 9, 2006
REPUBLIC OF THE PHILIPPINES, by EDUARDO
T. MALINIS, in His Capacity as Insurance
Commissioner, petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.
DECISION

PANGANIBAN, CJ.:
The securities required by the Insurance Code
to be deposited with the Insurance
Commissioner are intended to answer for the
claims of all policy holders in the event that
the depositing insurance company becomes
insolvent or otherwise unable to satisfy their
claims. The security deposit must be ratably
distributed among all the insured who are
entitled to their respective shares; it cannot
be garnished or levied upon by a single
claimant, to the detriment of the others.
The Case
Before us is a Petition for Review1 under Rule
45 of the Rules of Court, seeking to reverse
the January 16, 2003 Order2 of the Regional
Court (RTC) of Quezon City (Branch 221) in
Civil Case No. Q-97-30412. The RTC found
Insurance Commissioner Eduardo T. Malinis
guilty of indirect contempt for refusing to
comply with the December 18, 2002
3
Resolution of the lower court. The January 16,
2003 Order states in full:
"On January 8, 2003, [respondent] filed a
Motion to Cite Commissioner Eduardo T.
Malinis of the Office of the Insurance
Commission in Contempt of Court because of
his failure and refusal to obey the lawful order
of this court embodied in a Resolution dated
December 18, 2002 directing him to allow the
withdrawal of the security deposit of Capital
Insurance and Surety Co. (CISCO) in the
amount of P11,835,375.50 to be paid to Sheriff
Manuel Paguyo in the satisfaction of the
Notice of Garnishment pursuant to a Decision
of this Court which has become final and
executory.
"During the hearing of the Motion set last
January 10, 2003, Commissioner Malinis or his
counsel or his duly authorized representative
failed to appear despite notice in utter
disregard of the order of this Court. However,
Commissioner Malinis filed on January 15,
2003 a written Comment reiterating the same
grounds already passed upon and rejected by
this Court. This Court finds no lawful
justification or excuse for Commissioner
Malinis' refusal to implement the lawful orders
of this Court.
"Wherefore, premises considered and after
due hearing, Commissioner Eduardo T. Malinis
is hereby declared guilty of Indirect Contempt
of Court pursuant to Section 3 [of] Rule 71 of
the 1997 Rules of Civil Procedure for willfully
disobeying and refusing to implement and
obey a lawful order of this Court."4
The Facts
On January 15, 2002, the RTC rendered a
Decision in Civil Case No. Q-97-30412, finding
the defendants (Vilfran Liner, Inc., Hilaria
Villegas and Maura Villegas) jointly and
severally liable to pay Del Monte Motors,
Inc., P11,835,375.50 representing the balance
of Vilfran Liner's service contracts with
respondent. The trial court further ordered the
execution of the Decision against the
counterbond posted by Vilfran Liner on June
10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).
On April 18, 2002, CISCO opposed the Motion
for Execution filed by respondent, claiming
that the latter had no record or document
regarding the alleged issuance of the
counterbond; thus, the bond was not valid and
enforceable.
On June 13, 2002, the RTC granted the Motion
for Execution and issued the corresponding
Writ. Armed with this Writ, Sheriff Manuel S.
Paguyo proceeded to levy on the properties of
CISCO. He also issued a Notice of
Garnishment on several depository banks of
the insurance company. Moreover, he served a
similar notice on the Insurance Commission,
so as to enforce the Writ on the security
deposit filed by CISCO with the Commission in
accordance with Section 203 of the Insurance
Code.
On December 18, 2002, after a hearing on all
the pending Motions, the RTC ruled that the
Notice of Garnishment served by Sheriff
Paguyo on the insurance commission was
valid. The trial court added that the letter and
spirit of the law made the security deposit
answerable for contractual obligations
incurred by CISCO under the insurance
contracts the latter had entered into. The RTC
resolved thus:
"Furthermore, the Commissioner of the Office
of the Insurance Commission is hereby
ordered to comply with its obligations under
the Insurance Code by upholding the integrity
and efficacy of bonds validly issued by duly
accredited Bonding and Insurance Companies;
and to safeguard the public interest by
insuring the faithful performance to enforce
contractual obligations under existing bonds.
Accordingly said office is ordered to withdraw
from the security deposit of Capital Insurance
& Surety Company, Inc. the amount
of P11,835.50 to be paid to Sheriff Manuel S.
Paguyo in satisfaction of the Notice of
Garnishment served on August 16, 2002."5
On January 8, 2003, respondent moved to cite
Insurance Commissioner Eduardo T. Malinis in
contempt of court for his refusal to obey the
December 18, 2002 Resolution of the trial
court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis
in contempt for his refusal to implement its
Order. It explained that the commissioner had
no legal justification for his refusal to allow
the withdrawal of CISCO's security deposit.
Hence, this Petition.6
Issues
Petitioner raises this sole issue for the Court's
consideration:
"Whether or not the security deposit held by
the Insurance Commissioner pursuant to
Section 203 of the Insurance Code may be
levied or garnished in favor of only one
insured."7
The Court's Ruling
The Petition is meritorious.
Preliminary Issue:
Propriety of Review
Before discussing the principal issue, the
Court will first dispose of the question of
mootness.
Prior to the filing of the instant Petition,
Insurance Commissioner Malinis sent the
treasurer of the Philippines a letter dated
March 26, 2003, stating that the former had no
objection to the release of the security
deposit to Del Monte Motors. Portions of the
fund were consequently released to
respondent in July, October, and December
2003. Thus, the issue arises: whether these
circumstances render the case moot.
Petitioner, however, contends that the partial
releases should not be construed as an
abandonment of its stand that security
deposits under Section 203 of the Insurance
Code are exempt from levy and garnishment.
The Republic claims that the releases were
made pursuant to the commissioner's power of
control over the fund, not to the lower court's
Order of garnishment. Petitioner further
invokes the jurisdiction of this Court to put to
rest the principal issue of whether security
deposits made with the Insurance Commission
may be levied and garnished.
The issue is not totally moot. To stress, only a
portion of respondent's claim was satisfied,
and the Insurance Commission has required
CISCO to replenish the latter's security
deposit. Respondent, therefore, may one day
decide to further garnish the security deposit,
once replenished. Moreover, after the
questioned Order of the lower court was
issued, similar claims on the security deposits
of various insurance companies have been
made before the Insurance Commission. To set
aside the resolution of the issue will only
postpone a task that is certain to crop up in
the future.
Besides, the business of insurance is imbued
with public interest. It is subject to regulation
by the State, with respect not only to the
relations between the insurer and the insured,
but also to the internal affairs of insurance
companies.8 As this case is undeniably
endowed with public interest and involves a
matter of public policy, this Court shall not
shirk from its duty to educate the bench and
the bar by formulating guiding and controlling
principles, precepts, doctrines and rules.9
Principal Issue:
Exemption of Security Deposit from Levy or
Garnishment
Section 203 of the Insurance Code provides as
follows:
"Sec. 203. Every domestic insurance company
shall, to the extent of an amount equal in
value to twenty-five per centum of the
minimum paid-up capital required under
section one hundred eighty-eight, invest its
funds only in securities, satisfactory to the
Commissioner, consisting of bonds or other
evidences of debt of the Government of the
Philippines or its political subdivisions or
instrumentalities, or of government-owned or
controlled corporations and entities, including
the Central Bank of the Philippines: Provided,
That such investments shall at all times be
maintained free from any lien or encumbrance;
and Provided, further, That such securities
shall be deposited with and held by the
Commissioner for the faithful performance by
the depositing insurer of all its obligations
under its insurance contracts. The provisions
of section one hundred ninety-two shall, so far
as practicable, apply to the securities
deposited under this section.
"Except as otherwise provided in this Code, no
judgment creditor or other claimant shall have
the right to levy upon any of the securities of
the insurer held on deposit pursuant to the
requirement of the Commissioner." (Emphasis
supplied)
Respondent notes that Section 203 does not
provide for an absolute prohibition on the levy
and garnishment of the security deposit. It
contends that the law requires the deposit,
precisely to ensure faithful performance of all
the obligations of the depositing insurer under
the latter's various insurance contracts.
Hence, respondent claims that the security
deposit should be answerable for the
counterbond issued by CISCO.
The Court is not convinced. As worded, the
law expressly and clearly states that the
security deposit shall be (1) answerable
for all the obligations of the depositing insurer
under its insurance contracts; (2) at all
times free from any liens or encumbrance; and
(3) exempt from levy by any claimant.
To be sure, CISCO, though presently under
conservatorship, has valid outstanding
policies. Its policy holders have a right under
the law to be equally protected by its security
deposit. To allow the garnishment of that
deposit would impair the fund by decreasing it
to less than the percentage of paid-up capital
that the law requires to be maintained.
Further, this move would create, in favor of
respondent, a preference of credit over the
other policy holders and beneficiaries.
Our Insurance Code is patterned after that of
California.10 Thus, the ruling of the state's
Supreme Court on a similar concept as that of
the security deposit is instructive. Engwicht v.
Pacific States Life Assurance Co.11 held that
the money required to be deposited by a
mutual assessment insurance company with
the state treasurer was "a trust fund to be
ratably distributed amongst all the claimants
entitled to share in it. Such a distribution
cannot be had except in an action in the
nature of a creditors' bill, upon the hearing of
which, and with all the parties interested in
the fund before it, the court may make
equitable distribution of the fund, and appoint
a receiver to carry that distribution into
effect."12
Basic is the statutory construction rule that
provisions of a statute should be construed in
accordance with the purpose for which it was
enacted.13 That is, the securities are held as a
contingency fund to answer for the claims
against the insurance company by all its
policy holders and their beneficiaries. This
step is taken in the event that the company
becomes insolvent or otherwise unable to
satisfy the claims against it. Thus, a single
claimant may not lay stake on the securities
to the exclusion of all others. The other parties
may have their own claims against the
insurance company under other insurance
contracts it has entered into.
Respondent's Inchoate Right
The right to lay claim on the fund is dependent
on the solvency of the insurer and is subject to
all other obligations of the company arising
from its insurance contracts. Thus,
respondent's interest is merely inchoate.
Being a mere expectancy, it has no attribute
of property. At this time, it is nonexistent and
may never exist.14 Hence, it would be
premature to make the security deposit
answerable for CISCO's present obligation to
Del Monte Motors.
Moreover, since insolvency proceedings
against CISCO have yet to be conducted, it
would be impossible to establish at this time
which claimants are entitled to the security
deposit and in what pro-rated amounts. Only
after all other claimants under subsisting
policies issued by CISCO have been heard can
respondent's share be determined.
Powers of the Commissioner
The Insurance Code has vested the Office of
the Insurance Commission with
both regulatory and adjudicatoryauthority over
insurance matters.15
The general regulatory authority of the
insurance commissioner is described in
Section 414 of the Code as follows:
"Sec. 414. The Insurance Commissioner shall
have the duty to see that all laws relating to
insurance, insurance companies and other
insurance matters, mutual benefit
associations, and trusts for charitable uses
are faithfully executed and to perform the
duties imposed upon him by this Code, and
shall, notwithstanding any existing laws to the
contrary, have sole and exclusive authority to
regulate the issuance and sale of variable
contracts as defined in section two hundred
thirty-two and to provide for the licensing of
persons selling such contracts, and to issue
such reasonable rules and regulations
governing the same.
"The Commissioner may issue such rulings,
instructions, circulars, orders and decisions
as he may deem necessary to secure the
enforcement of the provisions of this Code ,
subject to the approval of the Secretary of
Finance. Except as otherwise specified,
decisions made by the Commissioner shall be
appealable to the Secretary of Finance."
(Emphasis supplied)
Pursuant to these regulatory powers, the
commissioner is authorized to (1) issue (or to
refuse to issue) certificates of authority to
persons or entities desiring to engage in
insurance business in the Philippines;16 (2)
revoke or suspend these certificates of
authority upon finding grounds for the
revocation or suspension;17 (3) impose upon
insurance companies, their directors and/or
officers and/or agents appropriate penalties --
fines, suspension or removal from office -- for
failing to comply with the Code or with any of
the commissioner's orders, instructions,
regulations or rulings, or for otherwise
conducting business in an unsafe or unsound
manner.18
Included in the above regulatory
responsibilities is the duty to hold the security
deposits under Sections 191 19 and 203 of the
Code, for the benefit and security of all policy
holders. In relation to these provisions,
Section 192 of the Insurance Code states:
"Sec. 192. The Commissioner shall hold the
securities, deposited as aforesaid, for the
benefit and security of all the policyholders of
the company depositing the same, but shall as
long as the company is solvent, permit the
company to collect the interest or dividends
on the securities so deposited, and, from time
to time, with his assent, to withdraw any of
such securities, upon depositing with said
Commissioner other like securities, the
market value of which shall be equal to the
market value of such as may be withdrawn. In
the event of any company ceasing to do
business in the Philippines the securities
deposited as aforesaid shall be returned upon
the company's making application therefor
and proving to the satisfaction of the
Commissioner that it has no further liability
under any of its policies in the Philippines ."
(Emphasis supplied)
Undeniably, the insurance commissioner has
been given a wide latitude of discretion to
regulate the insurance industry so as to
protect the insuring public. The law
specifically confers custody over the
securities upon the commissioner, with whom
these investments are required to be
deposited. An implied trust20 is created by the
law for the benefit of all claimants under
subsisting insurance contracts issued by the
insurance company.21
As the officer vested with custody of the
security deposit, the insurance commissioner
is in the best position to determine if and
when it may be released without prejudicing
the rights of other policy holders. Before
allowing the withdrawal or the release of the
deposit, the commissioner must be satisfied
that the conditions contemplated by the law
are met and all policy holders protected.
Commissioner's Actions
Entitled to Great Respect
In this case, Commissioner Malinis refused to
release the security deposit of CISCO.
Believing that the funds were exempt from
execution as provided by law, he sought to
protect other policy holders. His interpretation
of the provisions of the law carries great
weight and consideration,22 as he is the head
of a specialized body tasked with the
regulation of insurance matters and primarily
charged with the implementation of the
Insurance Code.
The emergence of the multifarious needs of
modern society necessitates the
establishment of diverse administrative
agencies. In addressing these needs, the
administrative agencies charged with applying
and implementing particular statutes have
accumulated experience and specialized
capabilities. Thus, in a long line of cases, this
Court has recognized that their construction
of a statute is entitled to great respect and
should ordinarily be controlling, unless clearly
shown to be in sharp conflict with the
governing statute or the Constitution and
other laws.23

Clearly, then, the trial court erred in issuing

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

WHEREFORE, the Petition is GRANTED and the

assailed Order SET ASIDE. No costs.

SO ORDERED.

Ynares-Santiago, Austria-Martinez, Callejo, Sr.,

and Chico-Nazario, JJ., concur.
 decision1 in CA-G.R. SP No. 70479.
Petitioner Philippine Health Care
Providers, Inc. believes otherwise and
assails the CA decision in this petition for
review under Rule 45 of the Rules of Court.
G.R. No. 167330 June 12, 2008
Petitioner is a domestic corporation whose
PHILIPPINE HEALTH CARE PROVIDERS, primary purpose is "[t]o establish,
INC., petitioner, maintain, conduct and operate a prepaid
group practice health care delivery system
vs.
or a health maintenance organization to
COMMISSIONER OF INTERNAL take care of the sick and disabled persons
REVENUE, respondent. enrolled in the health care plan and to
provide for the administrative, legal, and
DECISION financial responsibilities of the
2
organization." Individuals enrolled in its
CORONA, J.: health care programs pay an annual
membership fee and are entitled to various
Is a health care agreement in the nature of preventive, diagnostic and curative
an insurance contract and therefore medical services provided by its duly
subject to the documentary stamp tax licensed physicians, specialists and other
(DST) imposed under Section 185 of professional technical staff participating
Republic Act 8424 (Tax Code of 1997)? in the group practice health delivery
system at a hospital or clinic owned,
This is an issue of first impression. The
operated or accredited by it.3
Court of Appeals (CA) answered it
affirmatively in its August 16, 2004
The pertinent part of petitioner's [petitioner] of the said maximum in In-
membership or health care Patient Benefits to any one member shall
4
agreement provides: preclude a subsequent payment of benefits
to such member in respect of an unrelated
VII BENEFITS sickness, injury or related causes
happening during the remainder of his
Subject to paragraphs VIII [on pre-existing membership term.
medical condition] and X [on claims for
reimbursement] of this Agreement, (a) Room and Board
Members shall have the following Benefits
under this Agreement: (b) Services of physician and/or surgeon or
specialist
In-Patient Services. In the event that a
Member contract[s] sickness or suffers (c) Use of operating room and recovery
injury which requires confinement in a room
participating Hospital[,] the services or
benefits stated below shall be provided to (d) Standard Nursing Services
the Member free of charge, but in no case
shall [petitioner] be liable to pay more than (e) Drugs and Medication for use in the
P75,000.00 in benefits with respect to hospital except those which are used to
anyone sickness, injury or related causes. dissolve blood clots in the vascular
If a member has exhausted such maximum systems (i.e., trombolytic agents)
benefits with respect to a particular
(f) Anesthesia and its administration
sickness, injury or related causes, all
accounts in excess of P75,000.00 shall be (g) Dressings, plaster casts and other
borne by the enrollee. It is[,] however, miscellaneous supplies
understood that the payment by
(h) Laboratory tests, x-rays and other
necessary diagnostic services
(i) Transfusion of blood and other blood
elements
Condition for in-Patient Care. The provision
of the services or benefits mentioned in
the immediately preceding paragraph shall
be subject to the following conditions:
(a) The Hospital Confinement must be
approved by [petitioner's] Physician,
Participating Physician or [petitioner's]
Medical Coordinator in that Hospital prior
to confinement.
(b) The confinement shall be in a
Participating Hospital and the
accommodation shall be in accordance
with the Member[']s benefit classification.
(c) Professional services shall be provided
only by the [petitioner's] Physicians or
Participating Physicians.
(d) If discharge from the Hospital has been
authorized by [petitioner's] attending
Physician or Participating Physician and
the Member shall fail or refuse to do so,
[petitioner] shall not be responsible for any
charges incurred after discharge has been
authorized.
Out-Patient Services. A Member is entitled
free of charge to the following services or
benefits which shall be rendered or
administered either in [petitioner's] Clinic
or in a Participating Hospital under the
direction or supervision of [petitioner's]
Physician, Participating Physician or
[petitioner's] Medical Coordinator.
(a) Gold Plan Standard Annual Physical
Examination on the anniversary date of
membership, to be done at [petitioner's]
designated hospital/clinic, to wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count * Hemoglobin * Hematocrit

(vi) Urinalysis * Differential * RBC/WBC

(vii) Fasting Blood Sugar (FBS) 3) Chest X-ray

(viii) SGPT 4) Urinalysis

(ix) Creatinine 5) Fecalysis

(x) Uric Acid (c) Preventive Health Care, which shall

(xi) Resting Electrocardiogram
(xii) Pap Smear (Optional for women 40
years and above)
include:
(i) Periodic Monitoring of Health Problems
(ii) Family planning counseling

(b) Platinum Family Plan/Gold Family Plan (iii) Consultation and advices on diet,
and Silver Annual Physical Examination. exercise and other healthy habits

The following tests are to be done as part (iv) Immunization but excluding drugs for
of the Member[']s Annual check-up vaccines used
program at [petitioner's] designated clinic,
to wit: (d) Out-Patient Care, which shall include:

1) Routine Physical Examination (i) Consultation, including specialist

evaluation
2) CBC (Complete Blood Count)
(ii) Treatment of injury or illness
(iii) Necessary x-ray and laboratory examinations and other medical services
examination related to the emergency treatment of the
patient.]5 Provided, however, that in no
(iv) Emergency medicines needed for the case shall the total amount payable by
immediate [petitioner] for said Emergency, inclusive
of hospital bill and professional fees,
relief of symptoms exceed P75,000.00.
(v) Minor surgery not requiring If the Member received care in a non-
confinement participating hospital, [petitioner] shall
reimburse [him]6 80% of the hospital bill or
Emergency Care. Subject to the conditions
the amount of P5,000.00[,] whichever is
and limitations in this Agreement and
lesser, and 50% of the professional fees of
those specified below, a Member is
non-participating physicians based on
entitled to receive emergency care [in
[petitioner's] schedule of fees provided
case of emergency. For this purpose, all
that the total amount[,] inclusive of
hospitals and all attending physician(s) in
hospital bills and professional fee shall not
the Emergency Room automatically
exceed P5,000.00.
become accredited. In participating
hospitals, the member shall be entitled to On January 27, 2000, respondent
the following services free of charge: (a) Commissioner of Internal Revenue sent
doctor's fees, (b) emergency room fees, (c) petitioner a formal demand letter and the
medicines used for immediate relief and corresponding assessment notices
during treatment, (d) oxygen, intravenous demanding the payment of deficiency
fluids and whole blood and human blood taxes, including surcharges and interest,
products, (e) dressings, casts and sutures for the taxable years 1996 and 1997 in the
and (f) x-rays, laboratory and diagnostic
total amount of P224,702,641.18. The plate, glass, steam boiler, burglar, elevator,
assessment represented the following: automatic sprinkler, or other branch of
insurance (except life, marine, inland, and
Value Added Tax (VAT) fire insurance), and all bonds,
undertakings, or recognizances,
1996 P 45,767,596.23
conditioned for the performance of the
duties of any office or position, for the
1997 54,738,434.03
doing or not doing of anything therein
specified, and on all obligations
P 100,506,030.26
guaranteeing the validity or legality of any
bond or other obligations issued by any
province, city, municipality, or other public
body or organization, and on all obligations
The deficiency DST assessment was guaranteeing the title to any real estate, or
imposed on petitioner's health care guaranteeing any mercantile credits,
agreement with the members of its health which may be made or renewed by any
care program pursuant to Section 185 of such person, company or corporation,
the 1997 Tax Code which provides: there shall be collected a documentary
stamp tax of fifty centavos (P0.50) on each
Section 185. Stamp tax on fidelity bonds
four pesos (P4.00), or fractional part
and other insurance policies. - On all
thereof, of the premium charged.
policies of insurance or bonds or
(emphasis supplied)
obligations of the nature of indemnity for
loss, damage, or liability made or renewed Petitioner protested the assessment in a
by any person, association or company or letter dated February 23, 2000. As
corporation transacting the business respondent did not act on the protest,
of accident, fidelity, employer's liability, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a
decision,7 the dispositive portion of which
read:
WHEREFORE, in view of the foregoing, the
instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED
to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25%
surcharge plus 20% interest from January
20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from
January 20, 1998 until fully paid for the
1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and
without force and effect. The 1996 and
1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST
from collecting the said DST deficiency
tax.
SO ORDERED.8
Respondent appealed the CTA decision to
the CA9 insofar as it cancelled the DST
assessment. He claimed that petitioner's
health care agreement was a contract of
insurance subject to DST under Section
185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its
decision.10 It held that petitioner's health
care agreement was in the nature of a non-
life insurance contract subject to DST:
WHEREFORE, the petition for review is
GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set
aside the 1996 and 1997 deficiency
documentary stamp tax assessment and
ordered petitioner to desist from collecting
the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts
of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for
1996 and 1997, respectively, plus 25%
surcharge for late payment and 20%
interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the
Tax Code, until the same shall have been
fully paid.
SO ORDERED.11
Petitioner moved for reconsideration but
the CA denied it. Hence, this petition.
Petitioner essentially argues that its
health care agreement is not a contract of
insurance but a contract for the provision
on a prepaid basis of medical services,
including medical check-up, that are not
based on loss or damage. Petitioner also
insists that it is not engaged in the
insurance business. It is a health
maintenance organization regulated by the
Department of Health, not an insurance
company under the jurisdiction of the
Insurance Commission. For these reasons,
petitioner asserts that the health care
agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by
persons of certain privileges conferred by
law for the creation, revision, or
termination of specific legal relationships
through the execution of specific
12
instruments. It is an excise upon the
privilege, opportunity, or facility offered at
exchanges for the transaction of the
business.13 In particular, the DST under
Section 185 of the 1997 Tax Code is
imposed on the privilege of making or
renewing any policy of insurance (except
life, marine, inland and fire insurance),
bond or obligation in the nature of
indemnity for loss, damage, or liability.
Under the law, a contract of insurance is
an agreement whereby one undertakes for
a consideration to indemnify another
against loss, damage or liability arising
from an unknown or contingent
14
event. The event insured against must be
designated in the contract and must either
be unknown or contingent.15
Petitioner's health care agreement is
primarily a contract of indemnity. And in
the recent case of Blue Cross Healthcare,
Inc. v. Olivares,16 this Court ruled that a
health care agreement is in the nature of a
non-life insurance policy.
Contrary to petitioner's claim, its health
care agreement is not a contract for the
provision of medical services. Petitioner
does not actually provide medical or
hospital services but merely arranges for
the same17 and pays for them up to the
stipulated maximum amount of coverage.
It is also incorrect to say that the health
care agreement is not based on loss or
damage because, under the said
agreement, petitioner assumes the liability
and indemnifies its member for hospital,
medical and related expenses (such as
professional fees of physicians). The term
"loss or damage" is broad enough to cover
the monetary expense or liability a
member will incur in case of illness or
injury.
Under the health care agreement, the
rendition of hospital, medical and
professional services to the member in
case of sickness, injury or emergency or
his availment of so-called "out-patient
services" (including physical examination,
x-ray and laboratory tests, medical
consultations, vaccine administration and
family planning counseling) is the
contingent event which gives rise to
liability on the part of the member. In case
of exposure of the member to liability, he
would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must
relieve its member from liability by paying
for expenses arising from the stipulated
contingencies belies its claim that its
services are prepaid. The expenses to be
incurred by each member cannot be
predicted beforehand, if they can be
predicted at all. Petitioner assumes the
risk of paying for the costs of the services
even if they are significantly and
substantially more than what the member
has "prepaid." Petitioner does not bear the
costs alone but distributes or spreads
them out among a large group of persons
bearing a similar risk, that is, among all
the other members of the health care extent agreed upon under the
19
program. This is insurance. contract. (emphasis supplied)

Petitioner's health care agreement is Similarly, the insurable interest of every

substantially similar to that involved member of petitioner's health care
in Philamcare Health Systems, Inc. v. program in obtaining the health care
CA.18 The health care agreement in that agreement is his own health. Under the
case entitled the subscriber to avail of the agreement, petitioner is bound to
hospitalization benefits, whether ordinary indemnify any member who incurs
or emergency, listed therein. It also hospital, medical or any other expense
provided for "out-patient benefits" such as arising from sickness, injury or other
annual physical examinations, preventive stipulated contingency to the extent
health care and other out-patient services. agreed upon under the contract.
This Court ruled in Philamcare Health
Systems, Inc.: Petitioner's contention that it is a health
maintenance organization and not an
[T]he insurable interest of [the subscriber] insurance company is irrelevant. Contracts
in obtaining the health care agreement between companies like petitioner and the
was his own health. The health care beneficiaries under their plans are treated
agreement was in the nature of non-life as insurance contracts.20
insurance, which is primarily a contract of
indemnity. Once the member incurs Moreover, DST is not a tax on the business
hospital, medical or any other expense transacted but an excise on the privilege,
arising from sickness, injury or other opportunity, or facility offered at
stipulated contingency, the health care exchanges for the transaction of the
provider must pay for the same to the business.21 It is an excise on the facilities
used in the transaction of the
business, separate and apart from the
business itself.22

WHEREFORE, the petition is

hereby DENIED. The August 16, 2004
decision of the Court of Appeals in CA-G.R.
SP No. 70479 is AFFIRMED.

Petitioner is ordered to pay the amounts

of P55,746,352.19 and P68,450,258.73 as
deficiency documentary stamp tax for
1996 and 1997, respectively, plus 25%
surcharge for late payment and 20%
interest per annum from January 27, 2000
until full payment thereof.

Costs against petitioner.

SO ORDERED.
 Section 15. The State shall protect and
promote the right to health of the people and
instill health consciousness among them.

ARTICLE XIII

Social Justice and Human Rights

Section 11. The State shall adopt an

integrated and comprehensive approach to
health development which shall endeavor to
make essential goods, health and other social
G.R. No. 167330 September 18, 2009 services available to all the people at
affordable cost. There shall be priority for the
PHILIPPINE HEALTH CARE PROVIDERS, needs of the underprivileged sick, elderly,
INC., Petitioner, disabled, women, and children. The State shall
endeavor to provide free medical care to
vs. paupers.1

COMMISSIONER OF INTERNAL For resolution are a motion for reconsideration

REVENUE, Respondent. and supplemental motion for reconsideration
dated July 10, 2008 and July 14, 2008,
RESOLUTION respectively, filed by petitioner Philippine
Health Care Providers, Inc.2
CORONA, J.:
We recall the facts of this case, as follows:
ARTICLE II
Petitioner is a domestic corporation whose
Declaration of Principles and State Policies primary purpose is "[t]o establish, maintain,
conduct and operate a prepaid group practice
health care delivery system or a health
maintenance organization to take care of the
sick and disabled persons enrolled in the
health care plan and to provide for the
administrative, legal, and financial
responsibilities of the organization."
Individuals enrolled in its health care
programs pay an annual membership fee and
are entitled to various preventive, diagnostic
and curative medical services provided by its
duly licensed physicians, specialists and other
professional technical staff participating in
the group practice health delivery system at a
hospital or clinic owned, operated or
accredited by it.
xxx xxx xxx
On January 27, 2000, respondent
Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the
corresponding assessment notices demanding
the payment of deficiency taxes, including
surcharges and interest, for the taxable years
1996 and 1997 in the total amount of
₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)]
assessment was imposed on petitioner’s
health care agreement with the members of
its health care program pursuant to Section
185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter
dated February 23, 2000. As respondent did
not act on the protest, petitioner filed a
petition for review in the Court of Tax Appeals
(CTA) seeking the cancellation of the
deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision,
the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the
instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to
PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until
fully paid for the 1996 VAT deficiency and
₱31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until
fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is
declared void and without force and effect.
The 1996 and 1997 deficiency DST
assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said
DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the
[Court of Appeals (CA)] insofar as it cancelled
the DST assessment. He claimed that
petitioner’s health care agreement was a
contract of insurance subject to DST under
Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its
decision. It held that petitioner’s health care
agreement was in the nature of a non-life
insurance contract subject to DST.
WHEREFORE, the petition for review is
GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside
the 1996 and 1997 deficiency documentary
stamp tax assessment and ordered petitioner
to desist from collecting the same is
REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of
₱55,746,352.19 and ₱68,450,258.73 as
deficiency Documentary Stamp Tax for 1996
and 1997, respectively, plus 25% surcharge for
late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections
248 and 249 of the Tax Code, until the same
shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the
CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court
denied the petition and affirmed the CA’s
decision. We held that petitioner’s health care
agreement during the pertinent period was in
the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares3 and Philamcare
Health Systems, Inc. v. CA.4We also ruled that
petitioner’s contention that it is a health
maintenance organization (HMO) and not an
insurance company is irrelevant because
contracts between companies like petitioner
and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST
is not a tax on the business transacted but an
excise on the privilege, opportunity or facility
offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed
the present motion for reconsideration and
supplemental motion for reconsideration,
asserting the following arguments:
(a) The DST under Section 185 of the National
Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity
bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR
v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services
are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care
agreements from items subject to DST is
clear, especially in the light of the
amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s
agreements are contracts of indemnity, they
are not those contemplated under Section
185.
(f) Assuming arguendo that petitioner’s
agreements are akin to health insurance,
health insurance is not covered by Section
185.
(g) The agreements do not fall under the
phrase "other branch of insurance" mentioned
in Section 185.
(h) The June 12, 2008 decision should only
apply prospectively.
(i) Petitioner availed of the tax amnesty
benefits under RA5 9480 for the taxable year
2005 and all prior years. Therefore, the
questioned assessments on the DST are now
rendered moot and academic.6
Oral arguments were held in Baguio City on
April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner
reveals for the first time that it availed of a tax
amnesty under RA 94807(also known as the
"Tax Amnesty Act of 2007") by fully paying the
amount of ₱5,127,149.08 representing 5% of its
net worth as of the year ending December 31,
2005.8
We find merit in petitioner’s motion for
reconsideration.
Petitioner was formally registered and
incorporated with the Securities and
9
Exchange Commission on June 30, 1987. It is
engaged in the dispensation of the following
medical services to individuals who enter into
health care agreements with it:
Preventive medical services such as periodic
monitoring of health problems, family planning
counseling, consultation and advices on diet,
exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine
physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like
and
Curative medical services which pertain to the
performing of other remedial and therapeutic
processes in the event of an injury or sickness
on the part of the enrolled member.10
Individuals enrolled in its health care program
pay an annual membership fee. Membership is
on a year-to-year basis. The medical services
are dispensed to enrolled members in a
hospital or clinic owned, operated or
accredited by petitioner, through physicians,
medical and dental practitioners under
contract with it. It negotiates with such health
care practitioners regarding payment
schemes, financing and other procedures for
the delivery of health services. Except in
cases of emergency, the professional services
are to be provided only by petitioner's
physicians, i.e. those directly employed by
it11 or whose services are contracted by
it.12 Petitioner also provides hospital services
such as room and board accommodation,
laboratory services, operating rooms, x-ray
facilities and general nursing care.13 If and
when a member avails of the benefits under
the agreement, petitioner pays the
participating physicians and other health care
providers for the services rendered, at pre-
agreed rates.14
To avail of petitioner’s health care programs,
the individual members are required to sign
and execute a standard health care agreement
embodying the terms and conditions for the
provision of the health care services. The
same agreement contains the various health
care services that can be engaged by the
enrolled member, i.e., preventive, diagnostic
and curative medical services. Except for the
curative aspect of the medical service offered,
the enrolled member may actually make use of
the health care services being offered by
petitioner at any time.
Health Maintenance Organizations Are Not
Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is
irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as
insurance contracts and the DST is not a tax
on the business but an excise on the privilege,
opportunity or facility used in the transaction
of the business.15
Petitioner, however, submits that it is of
critical importance to characterize the
business it is engaged in, that is, to determine
whether it is an HMO or an insurance
company, as this distinction is indispensable
in turn to the issue of whether or not it is
liable for DST on its health care agreements.16
A second hard look at the relevant law and
jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue
Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and
other insurance policies. – On all policies of
insurance or bonds or obligations of the
nature of indemnity for loss, damage, or
liability made or renewed by any person,
association or company or corporation
transacting the business of accident, fidelity,
employer’s liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine,
inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned
for the performance of the duties of any office
or position, for the doing or not doing of
anything therein specified, and on all
obligations guaranteeing the validity or
legality of any bond or other obligations issued
by any province, city, municipality, or other
public body or organization, and on all
obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile
credits, which may be made or renewed by any
such person, company or corporation, there
shall be collected a documentary stamp tax of
fifty centavos (₱0.50) on each four pesos
(₱4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction
that no word, clause, sentence, provision or
part of a statute shall be considered
surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction
which renders every word operative is
preferred over that which makes some words
idle and nugatory.17 This principle is expressed
in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation
which gives effect to the whole of the statute
– its every word.18
From the language of Section 185, it is evident
that two requisites must concur before the
DST can apply, namely: (1) the document must
be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should
be transacting the business of accident,
fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine,
inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA
7875 (or "The National Health Insurance Act of
1995"), an HMO is "an entity that provides,
offers or arranges for coverage of designated
health services needed by plan members for a
fixed prepaid premium."19 The payments do not
vary with the extent, frequency or type of
services provided.
The question is: was petitioner, as an HMO,
engaged in the business of insurance during
the pertinent taxable years? We rule that it
was not.
Section 2 (2) of PD20 1460 (otherwise known as
the Insurance Code) enumerates what
constitutes "doing an insurance business" or
"transacting an insurance business:"
a) making or proposing to make, as insurer,
any insurance contract;
b) making or proposing to make, as surety, any
contract of suretyship as a vocation and not
as merely incidental to any other legitimate
business or activity of the surety;
c) doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of this Code;
d) doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of this Code.
In the application of the provisions of this
Code, the fact that no profit is derived from
the making of insurance contracts,
agreements or transactions or that no
separate or direct consideration is received
therefore, shall not be deemed conclusive to
show that the making thereof does not
constitute the doing or transacting of an
insurance business.
Various courts in the United States, whose
jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are
not in the insurance business. One test that
they have applied is whether the assumption
of risk and indemnification of loss (which are
elements of an insurance business) are the
principal object and purpose of the
organization or whether they are merely
incidental to its business. If these are the
principal objectives, the business is that of
insurance. But if they are merely incidental
and service is the principal purpose, then the
business is not insurance.
Applying the "principal object and purpose
test,"22 there is significant American case law
supporting the argument that a corporation
(such as an HMO, whether or not organized for
profit), whose main object is to provide the
members of a group with health services, is
not engaged in the insurance business.
The rule was enunciated in Jordan v. Group
Health Association23 wherein the Court of
Appeals of the District of Columbia Circuit
held that Group Health Association should not
be considered as engaged in insurance
activities since it was created primarily for
the distribution of health care services rather
than the assumption of insurance risk.
xxx Although Group Health’s activities may be
considered in one aspect as creating security
against loss from illness or accident more
truly they constitute the quantity purchase of
well-rounded, continuous medical service by
its members. xxx The functions of such an
organization are not identical with those of
insurance or indemnity companies. The latter
are concerned primarily, if not exclusively,
with risk and the consequences of its descent,
not with service, or its extension in kind,
quantity or distribution; with the unusual
occurrence, not the daily routine of living.
Hazard is predominant. On the other hand, the
cooperative is concerned principally with
getting service rendered to its members and
doing so at lower prices made possible by
quantity purchasing and economies in
operation. Its primary purpose is to reduce the
cost rather than the risk of medical care; to
broaden the service to the individual in kind
and quantity; to enlarge the number receiving
it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil
and gas, rather than merely protecting against
the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster
at sea, fire and tornado. It is, in this instance,
to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily
discomforts as well as the more serious and
unusual illness. To summarize, the distinctive
features of the cooperative are the rendering
of service, its extension, the bringing of
physician and patient together, the preventive
features, the regularization of service as well
as payment, the substantial reduction in cost
by quantity purchasing in short, getting the
medical job done and paid for; not, except
incidentally to these features, the
indemnification for cost after the services is
rendered. Except the last, these are not
distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a
substantial difference between contracting in
this way for the rendering of service, even on
the contingency that it be needed, and
contracting merely to stand its cost when or
after it is rendered.
That an incidental element of risk distribution
or assumption may be present should not
outweigh all other factors. If attention is
focused only on that feature, the line between
insurance or indemnity and other types of
legal arrangement and economic function
becomes faint, if not extinct. This is especially
true when the contract is for the sale of goods
or services on contingency. But obviously it
was not the purpose of the insurance statutes
to regulate all arrangements for assumption or
distribution of risk. That view would cause
them to engulf practically all contracts,
particularly conditional sales and contingent
service agreements. The fallacy is in looking
only at the risk element, to the exclusion of all
others present or their subordination to it. The
question turns, not on whether risk is involved
or assumed, but on whether that or something
else to which it is related in the particular
plan is its principal object
24
purpose. (Emphasis supplied)
In California Physicians’ Service v.
25
Garrison, the California court felt that, after
scrutinizing the plan of operation as a whole
of the corporation, it was service rather than
indemnity which stood as its principal
purpose.
There is another and more compelling reason
for holding that the service is not engaged in
the insurance business. Absence or presence
of assumption of risk or peril is not the sole
test to be applied in determining its status.
The question, more broadly, is whether,
looking at the plan of operation as a whole,
‘service’ rather than ‘indemnity’ is its principal
object and purpose. Certainly the objects and
purposes of the corporation organized and
maintained by the California physicians have a
wide scope in the field of social
service. Probably there is no more impelling
need than that of adequate medical care on a
voluntary, low-cost basis for persons of small
income. The medical profession unitedly is
endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order
and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the
main difference between an HMO and an
insurance company is that HMOs undertake to
provide or arrange for the provision of medical
services through participating physicians
while insurance companies simply undertake
to indemnify the insured for medical expenses
incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New
Jersey27 is clear on this point:
The basic distinction between medical service
corporations and ordinary health and accident
insurers is that the former undertake to
provide prepaid medical services through
participating physicians, thus relieving
subscribers of any further financial burden,
while the latter only undertake to indemnify
an insured for medical expenses up to, but not
beyond, the schedule of rates contained in the
policy.
xxx xxx xxx
The primary purpose of a medical service
corporation, however, is an undertaking to
provide physicians who will render services to
subscribers on a prepaid basis. Hence, if there
are no physicians participating in the medical
service corporation’s plan, not only will the
subscribers be deprived of the protection
which they might reasonably have expected
would be provided, but the corporation will, in
effect, be doing business solely as a health
and accident indemnity insurer without having
qualified as such and rendering itself subject
to the more stringent financial requirements
of the General Insurance Laws….
A participating provider of health care
services is one who agrees in writing to
render health care services to or for persons
covered by a contract issued by health service
corporation in return for which the health
service corporation agrees to make payment
directly to the participating
28
provider. (Emphasis supplied)
Consequently, the mere presence of risk
would be insufficient to override the primary
purpose of the business to provide medical
services as needed, with payment made
directly to the provider of these services. 29 In
short, even if petitioner assumes the risk of
paying the cost of these services even if
significantly more than what the member has
prepaid, it nevertheless cannot be considered
as being engaged in the insurance business.
By the same token, any indemnification
resulting from the payment for services
rendered in case of emergency by non-
participating health providers would still be
incidental to petitioner’s purpose of providing
and arranging for health care services and
does not transform it into an insurer. To fulfill
its obligations to its members under the
agreements, petitioner is required to set up a
system and the facilities for the delivery of
such medical services. This indubitably shows
that indemnification is not its sole object.
In fact, a substantial portion of petitioner’s
services covers preventive and diagnostic
medical services intended to keep members
from developing medical conditions or
30
diseases. As an HMO, it is its obligation to
maintain the good health of its
members. Accordingly, its health care
programs are designed to prevent or to
minimize thepossibility of any assumption of
risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members
against any loss or damage arising from a
medical condition but, on the contrary, to
provide the health and medical services
needed to prevent such loss or damage.31
Overall, petitioner appears to provide
insurance-type benefits to its members (with
respect to its curative medical services), but
these are incidental to the principal activity of
providing them medical care. The "insurance-
like" aspect of petitioner’s business is
miniscule compared to its noninsurance
activities. Therefore, since it substantially
provides health care services rather than
insurance services, it cannot be considered as
being in the insurance business.
It is important to emphasize that, in adopting
the "principal purpose test" used in the above-
quoted U.S. cases, we are not saying that
petitioner’s operations are identical in every
respect to those of the HMOs or health
providers which were parties to those cases.
What we are stating is that, for the purpose of
determining what "doing an insurance
business" means, we have to scrutinize the
operations of the business as a whole and not
its mere components. This is of course only
prudent and appropriate, taking into account
the burdensome and strict laws, rules and
regulations applicable to insurers and other
entities engaged in the insurance business.
Moreover, we are also not unmindful that there
are other American authorities who have
found particular HMOs to be actually engaged
in insurance activities.32
Lastly, it is significant that petitioner, as an
HMO, is not part of the insurance industry.
This is evident from the fact that it is not
supervised by the Insurance Commission but
by the Department of Health.33 In fact, in a
letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not
engaged in the insurance business. This
determination of the commissioner must be
accorded great weight. It is well-settled that
the interpretation of an administrative agency
which is tasked to implement a statute is
accorded great respect and ordinarily controls
the interpretation of laws by the courts. The
reason behind this rule was explained
in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to
the emergence of the multifarious needs of a
modern or modernizing society and the
establishment of diverse administrative
agencies for addressing and satisfying those
needs; it also relates to the accumulation of
experience and growth of specialized
capabilities by the administrative agency
charged with implementing a particular
statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court
stressed that executive officials are presumed
to have familiarized themselves with all the
considerations pertinent to the meaning and
purpose of the law, and to have formed an
independent, conscientious and competent
expert opinion thereon. The courts give much
weight to the government agency officials
charged with the implementation of the law,
their competence, expertness, experience and
informed judgment, and the fact that they
frequently are the drafters of the law they
interpret.36
A Health Care Agreement Is Not An Insurance
Contract Contemplated Under Section 185 Of
The NIRC of 1997
Section 185 states that DST is imposed on "all
policies of insurance… or obligations of the
nature of indemnity for loss, damage, or
liability…." In our decision dated June 12,
2008, we ruled that petitioner’s health care
agreements are contracts of indemnity and
are therefore insurance contracts:
It is … incorrect to say that the health care
agreement is not based on loss or damage
because, under the said agreement, petitioner
assumes the liability and indemnifies its
member for hospital, medical and related
expenses (such as professional fees of
physicians). The term "loss or damage" is
broad enough to cover the monetary expense
or liability a member will incur in case of
illness or injury.
Under the health care agreement, the
rendition of hospital, medical and professional
services to the member in case of sickness,
injury or emergency or his availment of so-
called "out-patient services" (including
physical examination, x-ray and laboratory
tests, medical consultations, vaccine
administration and family planning counseling)
is the contingent event which gives rise to
liability on the part of the member. In case of
exposure of the member to liability, he would
be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must
relieve its member from liability by paying for
expenses arising from the stipulated
contingencies belies its claim that its
services are prepaid. The expenses to be
incurred by each member cannot be predicted
beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the
costs of the services even if they are
significantly and substantially more than what
the member has "prepaid." Petitioner does not
bear the costs alone but distributes or
spreads them out among a large group of
persons bearing a similar risk, that is, among
all the other members of the health care
program. This is insurance.37
We reconsider. We shall quote once again the
pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and
other insurance policies. – On all policies of
insurance or bonds or obligations of the
nature of indemnity for loss, damage, or
liability made or renewed by any person,
association or company or corporation
transacting the business of accident, fidelity,
employer’s liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine,
inland, and fire insurance), xxxx (Emphasis
supplied)
In construing this provision, we should be
guided by the principle that tax statutes are
strictly construed against the taxing
38
authority. This is because taxation is a
destructive power which interferes with the
personal and property rights of the people and
takes from them a portion of their property for
the support of the government.39 Hence, tax
laws may not be extended by implication
beyond the clear import of their language, nor
their operation enlarged so as to embrace
matters not specifically provided.40
We are aware that, in Blue
Cross and Philamcare, the Court pronounced
that a health care agreement is in the nature
of non-life insurance, which is primarily a
contract of indemnity. However, those cases
did not involve the interpretation of a tax
provision. Instead, they dealt with the liability
of a health service provider to a member
under the terms of their health care
agreement. Such contracts, as contracts of
adhesion, are liberally interpreted in favor of
the member and strictly against the HMO. For
this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a
contract of insurance as an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by
the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a
large group of persons bearing a similar risk
and
5. In consideration of the insurer’s promise,
the insured pays a premium.41
Do the agreements between petitioner and its
members possess all these elements? They do
not.
First. In our jurisdiction, a commentator of our
insurance laws has pointed out that, even if a
contract contains all the elements of an
insurance contract, if its primary purpose is
the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a
contract containing all the four elements
mentioned above would be an insurance
contract. The primary purpose of the parties
in making the contract may negate the
existence of an insurance contract. For
example, a law firm which enters into
contracts with clients whereby in
consideration of periodical payments, it
promises to represent such clients in all suits
for or against them, is not engaged in the
insurance business. Its contracts are simply
for the purpose of rendering personal
services. On the other hand, a contract by
which a corporation, in consideration of a
stipulated amount, agrees at its own expense
to defend a physician against all suits for
damages for malpractice is one of insurance,
and the corporation will be deemed as
engaged in the business of insurance. Unlike
the lawyer’s retainer contract, the essential
purpose of such a contract is not to render
personal services, but to indemnify against
loss and damage resulting from the defense of
actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a
contract of insurance are present in
petitioner’s agreements. To begin with, there
is no loss, damage or liability on the part of
the member that should be indemnified by
petitioner as an HMO. Under the agreement,
the member pays petitioner a predetermined
consideration in exchange for the hospital,
medical and professional services rendered by
the petitioner’s physician or affiliated
physician to him. In case of availment by a
member of the benefits under the agreement,
petitioner does not reimburse or indemnify the
member as the latter does not pay any third
party. Instead, it is the petitioner who pays the
participating physicians and other health care
providers for the services rendered at pre-
agreed rates. The member does not make any
such payment.
In other words, there is nothing in petitioner's
agreements that gives rise to a monetary
liability on the part of the member to any third
party-provider of medical services which
might in turn necessitate indemnification from
petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or
claim has already been incurred. There is no
indemnity precisely because the member
merely avails of medical services to be paid or
already paid in advance at a pre-agreed price
under the agreements.
Third. According to the agreement, a member
can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray,
routine annual physical examination and
consultations, vaccine administration as well
as family planning counseling, even in the
absence of any peril, loss or damage on his or
her part.
Fourth. In case of emergency, petitioner is
obliged to reimburse the member who
receives care from a non-participating
physician or hospital. However, this is only a
very minor part of the list of services
available. The assumption of the expense by
petitioner is not confined to the happening of
a contingency but includes incidents even in
the absence of illness or injury.
In Michigan Podiatric Medical Association v.
National Foot Care Program, Inc.,43 although
the health care contracts called for the
defendant to partially reimburse a subscriber
for treatment received from a non-designated
doctor, this did not make defendant an insurer.
Citing Jordan, the Court determined that "the
primary activity of the defendant (was) the
provision of podiatric services to subscribers
in consideration of prepayment for such
services."44 Since indemnity of the insured
was not the focal point of the agreement but
the extension of medical services to the
member at an affordable cost, it did not
partake of the nature of a contract of
insurance.
Fifth. Although risk is a primary element of an
insurance contract, it is not necessarily true
that risk alone is sufficient to establish it.
Almost anyone who undertakes a contractual
obligation always bears a certain degree of
financial risk. Consequently, there is a need to
distinguish prepaid service contracts (like
those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a
business risk when it offers to provide health
services: the risk that it might fail to earn a
reasonable return on its investment. But it is
not the risk of the type peculiar only to
insurance companies. Insurance risk, also
known as actuarial risk, is the risk that the
cost of insurance claims might be higher than
the premiums paid. The amount of premium is
calculated on the basis of assumptions made
relative to the insured.45
However, assuming that petitioner’s
commitment to provide medical services to its
members can be construed as an acceptance
of the risk that it will shell out more than the
prepaid fees, it still will not qualify as an
insurance contract because petitioner’s
objective is to provide medical services at
reduced cost, not to distribute risk like an
insurer.
In sum, an examination of petitioner’s
agreements with its members leads us to
conclude that it is not an insurance contract
within the context of our Insurance Code.
There Was No Legislative Intent To Impose
DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion
against the imposition of DST on petitioner’s
health care agreements under Section 185 of
the NIRC of 1997 is the provision’s legislative
history. The text of Section 185 came into U.S.
law as early as 1904 when HMOs and health
care agreements were not even in existence in
this jurisdiction. It was imposed under Section
116, Article XI of Act No. 1189 (otherwise
known as the "Internal Revenue Law of
1904")46enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the
rate of tax, Section 185 of the NIRC of 1997 is
a verbatim reproduction of the pertinent
portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected,
and paid for and in respect to the several
bonds, debentures, or certificates of stock and
indebtedness, and other documents,
instruments, matters, and things mentioned
and described in this section, or for or in
respect to the vellum, parchment, or paper
upon which such instrument, matters, or
things or any of them shall be written or
printed by any person or persons who shall
make, sign, or issue the same, on and after
January first, nineteen hundred and five, the
several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or
bond or obligation of the nature of indemnity
for loss, damage, or liability made or renewed
by any person, association, company, or
corporation transacting the business of
accident, fidelity, employer’s liability, plate
glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of
insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the
Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to
internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No.
1189 was completely reproduced as Section
30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items
subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article
III of Act No. 2339 was again reproduced as
Section 1604 (l), Article IV of Act No. 2657
(Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code
of 1917.
Section 1449 (1) eventually became Sec. 222
of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue
laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision
remained substantially the same.
Thereafter, on June 3, 1977, the same
provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as
Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10,
1984 respectively, the DST rate was again
increased.1avvphi1
Effective January 1, 1986, pursuant to Section
45 of PD 1994, Section 234 of the NIRC of 1977
was renumbered as Section 198. And under
Section 23 of EO47 273 dated July 25, 1987, it
was again renumbered and became Section
185.
On December 23, 1993, under RA 7660,
Section 185 was amended but, again, only
with respect to the rate of tax.
Notwithstanding the comprehensive
amendment of the NIRC of 1977 by RA 8424
(or the NIRC of 1997), the subject legal
provision was retained as the present Section
185. In 2004, amendments to the DST
provisions were introduced by RA 9243 48 but
Section 185 was untouched.
On the other hand, the concept of an HMO was
introduced in the Philippines with the
formation of Bancom Health Care Corporation
in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health
Care Services, Inc. (or Intercare). However,
there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer,
having set foot in the Philippines as early as
1965 and having been formally incorporated in
1991. Afterwards, HMOs proliferated quickly
and currently, there are 36 registered HMOs
with a total enrollment of more than 2
million.49
We can clearly see from these two histories
(of the DST on the one hand and HMOs on the
other) that when the law imposing the DST
was first passed, HMOs were yet unknown in
the Philippines. However, when the various
amendments to the DST law were enacted,
they were already in existence in the
Philippines and the term had in fact already
been defined by RA 7875. If it had been the
intent of the legislature to impose DST on
health care agreements, it could have done so
in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact
that the NIRC contained no specific provision
on the DST liability of health care agreements
of HMOs at a time they were already known as
such, belies any legislative intent to impose it
on them. As a matter of fact, petitioner was
assessed its DST liability only on January 27,
2000, after more than a decade in the
business as an HMO.50
Considering that Section 185 did not change
since 1904 (except for the rate of tax), it
would be safe to say that health care
agreements were never, at any time,
recognized as insurance contracts or deemed
engaged in the business of insurance within
the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an
incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no
limits, so that security against its abuse is to
be found only in the responsibility of the
legislature which imposes the tax on the
constituency who is to pay it. 51 So potent
indeed is the power that it was once opined
that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to
date which amounts to ₱376 million53 is way
beyond its net worth of ₱259
54
million. Respondent never disputed these
assertions. Given the realities on the ground,
imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the
government to throttle private business. On
the contrary, the government ought to
encourage private enterprise.55 Petitioner, just
like any concern organized for a lawful
economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas,
et al. v. CTA, et al.:57
The power of taxation is sometimes called
also the power to destroy. Therefore it should
be exercised with caution to minimize injury to
the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the
tax collector kill the "hen that lays the golden
egg."58
Legitimate enterprises enjoy the
constitutional protection not to be taxed out
of existence. Incurring losses because of a tax
imposition may be an acceptable
consequence but killing the business of an
entity is another matter and should not be
allowed. It is counter-productive and
ultimately subversive of the nation’s thrust
towards a better economy which will
ultimately benefit the majority of our people.59
Petitioner’s Tax Liability Was Extinguished
Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the
arguments, the DST assessment for taxable
years 1996 and 1997 became moot and
academic60 when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid
₱5,127,149.08 representing 5% of its net worth
as of the year ended December 31, 2005 and
complied with all requirements of the tax
amnesty. Under Section 6(a) of RA 9480, it is
entitled to immunity from payment of taxes as
well as additions thereto, and the appurtenant
civil, criminal or administrative penalties
under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior
years.61
Far from disagreeing with petitioner,
respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment
of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including
the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding
years.
In view of petitioner’s availment of the
benefits of [RA 9840], and without conceding
the merits of this case as discussed
above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of
petitioner. This admission, however, is not
meant to preclude a revocation of the amnesty
granted in case it is found to have been
granted under circumstances amounting to
tax fraud under Section 10 of said amnesty
law.62 (Emphasis supplied)
Furthermore, we held in a recent case that
DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no
other conclusion to draw than that petitioner’s
liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment
of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In
Another Case?
Petitioner raises another interesting issue in
its motion for reconsideration: whether this
Court is bound by the ruling of the CA64 in CIR
v. Philippine National Bank65 that a health care
agreement of Philamcare Health Systems is
not an insurance contract for purposes of the
DST.
In support of its argument, petitioner cites the
August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine
National Bank (G.R. No. 148680).66 Petitioner
argues that the dismissal of G.R. No. 148680
by minute resolution was a judgment on the
merits; hence, the Court should apply the CA
ruling there that a health care agreement is
not an insurance contract.
It is true that, although contained in a minute
resolution, our dismissal of the petition was a
disposition of the merits of the case. When we
dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result,
our ruling in that case has already become
final.67 When a minute resolution denies or
dismisses a petition for failure to comply with
formal and substantive requirements, the
challenged decision, together with its findings
of fact and legal conclusions, are deemed
sustained.68 But what is its effect on other
cases?
With respect to the same subject matter and
the same issues concerning the same parties,
it constitutes res judicata.69 However, if other
parties or another subject matter (even with
the same parties and issues) is involved, the
minute resolution is not binding precedent.
Thus, in CIR v. Baier-Nickel,70 the Court noted
that a previous case, CIR v. Baier-
71
Nickel involving the same parties and the
same issues, was previously disposed of by
the Court thru a minute resolution dated
February 17, 2003 sustaining the ruling of the
CA. Nonetheless, the Court ruled that the
previous case "ha(d) no bearing" on the latter
case because the two cases involved different
subject matters as they were concerned with
the taxable income of different taxable
years.72
Besides, there are substantial, not simply
formal, distinctions between a minute
resolution and a decision. The constitutional
requirement under the first paragraph of
Section 14, Article VIII of the Constitution that
the facts and the law on which the judgment is
based must be expressed clearly and
distinctly applies only to decisions, not to
minute resolutions. A minute resolution is
signed only by the clerk of court by authority
of the justices, unlike a decision. It does not
require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article
VIII speaks of a decision.73Indeed, as a rule,
this Court lays down doctrines or principles of
law which constitute binding precedent in a
decision duly signed by the members of the
Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party
in G.R. No. 148680 and since petitioner’s
liability for DST on its health care agreement
was not the subject matter of G.R. No. 148680,
petitioner cannot successfully invoke the
minute resolution in that case (which is not
even binding precedent) in its favor.
Nonetheless, in view of the reasons already
discussed, this does not detract in any way
from the fact that petitioner’s health care
agreements are not subject to DST.
A Final Note
Taking into account that health care
agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never
any legislative intent to impose the same on
HMOs like petitioner, the same should not be
arbitrarily and unjustly included in its
coverage.
It is a matter of common knowledge that there
is a great social need for adequate medical
services at a cost which the average wage
earner can afford. HMOs arrange, organize and
manage health care treatment in the
furtherance of the goal of providing a more
efficient and inexpensive health care system
made possible by quantity purchasing of
services and economies of scale. They offer
advantages over the pay-for-service system
(wherein individuals are charged a fee each
time they receive medical services), including ASIDE. Respondent is ordered to desist from
the ability to control costs. They protect their collecting the said tax.
members from exposure to the high cost of
hospitalization and other medical expenses No costs.
brought about by a fluctuating economy.
Accordingly, they play an important role in
society as partners of the State in achieving
its constitutional mandate of providing its
citizens with affordable health services.

The rate of DST under Section 185 is

equivalent to 12.5% of the premium
74
charged. Its imposition will elevate the cost
of health care services. This will in turn
necessitate an increase in the membership
fees, resulting in either placing health
services beyond the reach of the ordinary
wage earner or driving the industry to the
ground. At the end of the day, neither side
wins, considering the indispensability of the
services offered by HMOs.

WHEREFORE, the motion for reconsideration

is GRANTED. The August 16, 2004 decision of
the Court of Appeals in CA-G.R. SP
No. 70479 is REVERSED and SET ASIDE. The
1996 and 1997 deficiency DST assessment
against petitioner is
hereby CANCELLED and SET
G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS,

INC., petitioner,

vs.

COURT OF APPEALS and JULITA

TRINOS, respondents.

YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of

respondent Julita Trinos, applied for a health
care coverage with petitioner Philamcare
Health Systems, Inc. In the standard
application form, he answered no to the
following question:

Have you or any of your family members ever

consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver
disease, asthma or peptic ulcer? (If Yes, give
details).1

The application was approved for a period of

one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care
Agreement No. P010194. Under the agreement,
respondent’s husband was entitled to avail of
hospitalization benefits, whether ordinary or
emergency, listed therein. He was also
entitled to avail of "out-patient benefits" such
as annual physical examinations, preventive
health care and other out-patient services.
Upon the termination of the agreement, the
same was extended for another year from
March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of
P75,000.00 per disability.2
During the period of his coverage, Ernani
suffered a heart attack and was confined at
the Manila Medical Center (MMC) for one
month beginning March 9, 1990. While her
husband was in the hospital, respondent tried
to claim the benefits under the health care
agreement. However, petitioner denied her
claim saying that the Health Care Agreement
was void. According to petitioner, there was a
concealment regarding Ernani’s medical
history. Doctors at the MMC allegedly
discovered at the time of Ernani’s confinement
that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the
application form. Thus, respondent paid the
hospitalization expenses herself, amounting to
about P76,000.00.
After her husband was discharged from the
MMC, he was attended by a physical therapist
at home. Later, he was admitted at the
Chinese General Hospital. Due to financial
difficulties, however, respondent brought her
husband home again. In the morning of April
13, 1990, Ernani had fever and was feeling
very weak. Respondent was constrained to
bring him back to the Chinese General
Hospital where he died on the same day.
On July 24, 1990, respondent instituted with
the Regional Trial Court of Manila, Branch 44,
an action for damages against petitioner and
its president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90-53795. She
asked for reimbursement of her expenses plus
moral damages and attorney’s fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the
Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:
1. Defendants to pay and reimburse the
medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus
interest, until the amount is fully paid to
plaintiff who paid the same;
2. Defendants to pay the reduced amount of
moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount
of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorney’s fees
P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the
decision of the trial court but deleted all
awards for damages and absolved petitioner
Reverente.4 Petitioner’s motion
5 Section 2 (1) of the Insurance Code defines a
reconsideration was denied. Hence, petitioner
brought the instant petition for review, raising
the primary argument that a health care
agreement is not an insurance contract; hence
the "incontestability clause" under the
Insurance Code6 does not apply.1âwphi1.nêt
Petitioner argues that the agreement grants
"living benefits," such as medical check-ups
and hospitalization which a member may
immediately enjoy so long as he is alive upon
effectivity of the agreement until its expiration
one-year thereafter. Petitioner also points out
that only medical and hospitalization benefits
are given under the agreement without any
indemnification, unlike in an insurance
contract where the insured is indemnified for
his loss. Moreover, since Health Care
Agreements are only for a period of one year,
as compared to insurance contracts which
last longer,7 petitioner argues that the
of incontestability clause does not apply, as the
same requires an effectivity period of at least
two years. Petitioner further argues that it is
not an insurance company, which is governed
by the Insurance Commission, but a Health
Maintenance Organization under the authority
of the Department of Health.
for
contract of insurance as an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by
the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a
large group of persons bearing a similar risk;
and
5. In consideration of the insurer’s promise,
the insured pays a premium.8
Section 3 of the Insurance Code states that
any contingent or unknown event, whether
past or future, which may damnify a person
having an insurable interest against him, may
be insured against. Every person has an
insurable interest in the life and health of
himself. Section 10 provides:
Every person has an insurable interest in the
life and health:
(1) of himself, of his spouse and of his
children;
(2) of any person on whom he depends wholly
or in part for education or support, or in whom
he has a pecuniary interest;
(3) of any person under a legal obligation to
him for the payment of money, respecting
property or service, of which death or illness
might delay or prevent the performance; and
(4) of any person upon whose life any estate or
interest vested in him depends.
In the case at bar, the insurable interest of
respondent’s husband in obtaining the health
care agreement was his own health. The
health care agreement was in the nature of
non-life insurance, which is primarily a
contract of indemnity.9 Once the member
incurs hospital, medical or any other expense
arising from sickness, injury or other
stipulated contingent, the health care provider
must pay for the same to the extent agreed
upon under the contract.
Petitioner argues that respondent’s husband
concealed a material fact in his application. It
appears that in the application for health
coverage, petitioners required respondent’s
husband to sign an express authorization for
any person, organization or entity that has any
record or knowledge of his health to furnish
any and all information relative to any
hospitalization, consultation, treatment or any
other medical advice or
10
examination. Specifically, the Health Care
Agreement signed by respondent’s husband
states:
We hereby declare and agree that all
statement and answers contained herein and
in any addendum annexed to this application
are full, complete and true and bind all parties
in interest under the Agreement herein applied
for, that there shall be no contract of health
care coverage unless and until an Agreement
is issued on this application and the full
Membership Fee according to the mode of
payment applied for is actually paid during the
lifetime and good health of proposed
Members; that no information acquired by any
Representative of PhilamCare shall be binding
upon PhilamCare unless set out in writing in
the application; that any physician is, by these
presents, expressly authorized to disclose or
give testimony at anytime relative to any
information acquired by him in his
professional capacity upon any question
affecting the eligibility for health care
coverage of the Proposed Members and that
the acceptance of any Agreement issued on
this application shall be a ratification of any
correction in or addition to this application as
stated in the space for Home Office
Endorsement.11 (Underscoring ours)
In addition to the above condition, petitioner
additionally required the applicant for
authorization to inquire about the applicant’s
medical history, thus:
I hereby authorize any person, organization, or
entity that has any record or knowledge of my
health and/or that of __________ to give to the
PhilamCare Health Systems, Inc. any and all
information relative to any hospitalization,
consultation, treatment or any other medical
advice or examination. This authorization is in
connection with the application for health
care coverage only. A photographic copy of
this authorization shall be as valid as the
original.12 (Underscoring ours)
Petitioner cannot rely on the stipulation
regarding "Invalidation of agreement" which
reads:
Failure to disclose or misrepresentation of any
material information by the member in the
application or medical examination, whether
intentional or unintentional, shall
automatically invalidate the Agreement from
the very beginning and liability of Philamcare
shall be limited to return of all Membership
Fees paid. An undisclosed or misrepresented
information is deemed material if its
revelation would have resulted in the
declination of the applicant by Philamcare or
the assessment of a higher Membership Fee
for the benefit or benefits applied for.13
The answer assailed by petitioner was in
response to the question relating to the
medical history of the applicant. This largely
depends on opinion rather than fact,
especially coming from respondent’s husband
who was not a medical doctor. Where matters
of opinion or judgment are called for, answers
made in good faith and without intent to
deceive will not avoid a policy even though
they are untrue.14 Thus,
(A)lthough false, a representation of the
expectation, intention, belief, opinion, or
judgment of the insured will not avoid the
policy if there is no actual fraud in inducing
the acceptance of the risk, or its acceptance
at a lower rate of premium, and this is likewise
the rule although the statement is material to
the risk, if the statement is obviously of the
foregoing character, since in such case the
insurer is not justified in relying upon such
statement, but is obligated to make further
inquiry. There is a clear distinction between
such a case and one in which the insured is
fraudulently and intentionally states to be
true, as a matter of expectation or belief, that
which he then knows, to be actually untrue, or
the impossibility of which is shown by the
facts within his knowledge, since in such case
the intent to deceive the insurer is obvious
and amounts to actual fraud.15(Underscoring
ours)
The fraudulent intent on the part of the
insured must be established to warrant
rescission of the insurance
16
contract. Concealment as a defense for the
health care provider or insurer to avoid
liability is an affirmative defense and the duty
to establish such defense by satisfactory and
convincing evidence rests upon the provider
or insurer. In any case, with or without the
authority to investigate, petitioner is liable for
claims made under the contract. Having
assumed a responsibility under the
agreement, petitioner is bound to answer the
same to the extent agreed upon. In the end,
the liability of the health care provider
attaches once the member is hospitalized for
the disease or injury covered by the
agreement or whenever he avails of the
covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a
concealment entitles the injured party to
rescind a contract of insurance." The right to
rescind should be exercised previous to the
commencement of an action on the
17
contract. In this case, no rescission was
made. Besides, the cancellation of health care
agreements as in insurance policies require
the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence
after effective date of the policy of one or
more of the grounds mentioned;
3. Must be in writing, mailed or delivered to
the insured at the address shown in the policy;
4. Must state the grounds relied upon provided
in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which
cancellation is based.18
None of the above pre-conditions was fulfilled
in this case. When the terms of insurance
contract contain limitations on liability, courts
should construe them in such a way as to
preclude the insurer from non-compliance with
his obligation.19 Being a contract of adhesion,
the terms of an insurance contract are to be
construed strictly against the party which
prepared the contract – the insurer.20 By
reason of the exclusive control of the
insurance company over the terms and
phraseology of the insurance contract,
ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured,
especially to avoid forfeiture.21 This is equally
applicable to Health Care Agreements. The
phraseology used in medical or hospital
service contracts, such as the one at bar,
must be liberally construed in favor of the
subscriber, and if doubtful or reasonably
susceptible of two interpretations the
construction conferring coverage is to be
adopted, and exclusionary clauses of doubtful
import should be strictly construed against
the provider.22
Anent the incontestability of the membership
of respondent’s husband, we quote with
approval the following findings of the trial
court:
(U)nder the title Claim procedures of WHEREFORE, in view of the foregoing, the
expenses, the defendant Philamcare Health petition is DENIED. The assailed decision of
Systems Inc. had twelve months from the date the Court of Appeals dated December 14, 1995
of issuance of the Agreement within which to is AFFIRMED.
contest the membership of the patient if he
had previous ailment of asthma, and six SO ORDERED.
months from the issuance of the agreement if
the patient was sick of diabetes or Davide, Jr., C.J., Puno, and Kapunan,
hypertension. The periods having expired, the JJ., concur.
defense of concealment or misrepresentation
no longer lie.23

Finally, petitioner alleges that respondent was

not the legal wife of the deceased member
considering that at the time of their marriage,
the deceased was previously married to
another woman who was still alive. The health
care agreement is in the nature of a contract
of indemnity. Hence, payment should be made
to the party who incurred the expenses. It is
not controverted that respondent paid all the
hospital and medical expenses. She is
therefore entitled to reimbursement. The
records adequately prove the expenses
incurred by respondent for the deceased’s
hospitalization, medication and the
professional fees of the attending
24
physicians.
 THE HON. COURT OF APPEALS and AMERICAN
HOME ASSURANCE
CORPORATION, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari

of the Decision1 of the Court of Appeals in CA-
G.R. CV No. 39836 promulgated on June 17,
1996, reversing the decision of the Regional
Trial Court of Makati City, Branch 137, ordering
petitioner to pay private respondent the sum
of Five Million Ninety-Six Thousand Six
Hundred Thirty-Five Pesos and Fifty-Seven
Centavos (P5,096,635.57) and costs and the
Resolution2 dated January 21, 1997 which
denied the subsequent motion for
reconsideration.

The facts show that Caltex Philippines (Caltex

for brevity) entered into a contract of
affreightment with the petitioner, Delsan
Transport Lines, Inc., for a period of one year
whereby the said common carrier agreed to
G.R. No. 127897 November 15, 2001 transport Caltex’s industrial fuel oil from the
Batangas-Bataan Refinery to different parts of
DELSAN TRANSPORT LINES, INC., petitioner, the country. Under the contract, petitioner
took on board its vessel, MT Maysun 2,277.314
vs. kiloliters of industrial fuel oil of Caltex to be
delivered to the Caltex Oil Terminal in
Zamboanga City. The shipment was insured
with the private respondent, American Home
Assurance Corporation.
On August 14, 1986, MT Maysum set sail from
Batangas for Zamboanga City. Unfortunately,
the vessel sank in the early morning of August
16, 1986 near Panay Gulf in the Visayas taking
with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex
the sum of Five Million Ninety-Six Thousand
Six Hundred Thirty-Five Pesos and Fifty-Seven
Centavos (P5,096,635.67) representing the
insured value of the lost cargo. Exercising its
right of subrogation under Article 2207 of the
New Civil Code, the private respondent
demanded of the petitioner the same amount
it paid to Caltex.1âwphi1.nêt
Due to its failure to collect from the petitioner
despite prior demand, private respondent filed
a complaint with the Regional Trial Court of
Makati City, Branch 137, for collection of a
sum of money. After the trial and upon
analyzing the evidence adduced, the trial
court rendered a decision on November 29,
1990 dismissing the complaint against herein
petitioner without pronouncement as to cost.
The trial court found that the vessel, MT
Maysum, was seaworthy to undertake the
voyage as determined by the Philippine Coast
Guard per Survey Certificate Report No. M5-
016-MH upon inspection during its annual dry-
docking and that the incident was caused by
unexpected inclement weather condition
or force majeure, thus exempting the common
carrier (herein petitioner) from liability for the
loss of its cargo.3
The decision of the trial court, however, was
reversed, on appeal, by the Court of Appeals.
The appellate court gave credence to the
weather report issued by the Philippine
Atmospheric, Geophysical and Astronomical
Services Administration (PAGASA for brevity)
which showed that from 2:00 o’clock to 8:oo
o’clock in the morning on August 16, 1986, the
wind speed remained at 10 to 20 knots per
hour while the waves measured from .7 to two
(2) meters in height only in the vicinity of the
Panay Gulf where the subject vessel sank, in
contrast to herein petitioner’s allegation that
the waves were twenty (20) feet high. In the
absence of any explanation as to what may
have caused the sinking of the vessel coupled
with the finding that the same was improperly
manned, the appellate court ruled that the
petitioner is liable on its obligation as
common carrier4 to herein private respondent
insurance company as subrogee of Caltex. The
subsequent motion for reconsideration of
herein petitioner was denied by the appellate
court.
Petitioner raised the following assignments of
error in support of the instant petition,5 to wit:
I insurance. It theorized that when private
THE COURT OF APPEALS ERRED IN
REVERSING THE DECISION OF THE REGIONAL
TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS
NOT JUSTIFIED IN REBUTTING THE LEGAL
PRESUMPTION THAT THE VESSEL MT
"MAYSUN" WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT
APPLYING THE DOCTRINE OF THE SUPREME
COURT IN THE CASE OF HOME INSURANCE
CORPORATION V. COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes
the provision of Section 113 of the Insurance
Code of the Philippines, which states that in
every marine insurance upon a ship or freight,
or freightage, or upon any thin which is the
subject of marine insurance there is an
implied warranty by the shipper that the ship
is seaworthy. Consequently, the insurer will
not be liable to the assured for any loss under
the policy in case the vessel would later on be
found as not seaworthy at the inception of the
respondent paid Caltex the value of its lost
cargo, the act of the private respondent is
equivalent to a tacit recognition that the ill-
fated vessel was seaworthy; otherwise,
private respondent was not legally liable to
Caltex due to the latter’s breach of implied
warranty under the marine insurance policy
that the vessel was seaworthy.
The petitioner also alleges that the Court of
Appeals erred in ruling that MT Maysun was
not seaworthy on the ground that the marine
officer who served as the chief mate of the
vessel, Francisco Berina, was allegedly not
qualified. Under Section 116 of the Insurance
Code of the Philippines, the implied warranty
of seaworthiness of the vessel, which the
private respondent admitted as having been
fulfilled by its payment of the insurance
proceeds to Caltex of its lost cargo, extends to
the vessel’s complement. Besides, petitioner
avers that although Berina had merely a
2nd officer’s license, he was qualified to act as
the vessel’s chief officer under Chapter
IV(403), Category III(a)(3)(ii)(aa) of the
Philippine Merchant Marine Rules and
Regulations. In fact, all the crew and officers
of MT Maysun were exonerated in the
administrative investigation conducted by the
Board of Marine Inquiry after the subject
accident.6
In any event, petitioner further avers that
private respondent failed, for unknown reason,
to present in evidence during the trial of the
instant case the subject marine cargo
insurance policy it entered into with Caltex. By
virtue of the doctrine laid down in the case
of Home Insurance Corporation vs. CA,7 the
failure of the private respondent to present
the insurance policy in evidence is allegedly
fatal to its claim inasmuch as there is no way
to determine the rights of the parties thereto.
Hence, the legal issues posed before the Court
are:
I
Whether or not the payment made by the
private respondent to Caltex for the insured
value of the lost cargo amounted to an
admission that the vessel was seaworthy, thus
precluding any action for recovery against the
petitioner.
II
Whether or not the non-presentation of the
marine insurance policy bars the complaint for
recovery of sum of money for lack of cause of
action.
We rule in the negative on both issues.
The payment made by the private respondent
for the insured value of the lost cargo
operates as waiver of its (private respondent)
right to enforce the term of the implied
warranty against Caltex under the marine
insurance policy. However, the same cannot be
validly interpreted as an automatic admission
of the vessel’s seaworthiness by the private
respondent as to foreclose recourse against
the petitioner for any liability under its
contractual obligation as a common carrier.
The fact of payment grants the private
respondent subrogatory right which enables it
to exercise legal remedies that would
otherwise be available to Caltex as owner of
the lost cargo against the petitioner common
carrier.8 Article 2207 of the New civil Code
provides that:
Art. 2207. If the 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.
The right of subrogation has its roots in
equity. It is designed to promote and to
accomplish justice and is the mode which
equity adopts to compel the ultimate payment
of a debt by one who in justice and good
conscience ought to pay.9 It is not dependent
upon, nor does it grow out of, any privity of
contract or upon written assignment of claim.
It accrues simply upon payment by the
insurance company of the insurance
10
claim. Consequently, the payment made by
the private respondent (insurer) to Caltex
(assured) operates as an equitable
assignment to the former of all the remedies
which the latter may have against the
petitioner.
From the nature of their business and for
reasons of public policy, common carriers are
bound to observe extraordinary diligence in
the vigilance over the goods and for the safety
of passengers transported by them, according
to all the circumstance of each case.11 In the
event of loss, destruction or deterioration of
the insured goods, common carriers shall be
responsible unless the same is brought about,
among others, by flood, storm, earthquake,
lightning or other natural disaster or
calamity.12 In all other cases, if the goods are
lost, destroyed or deteriorated, common
carriers are presumed to have been at fault or
to have acted negligently, unless they prove
that they observed extraordinary diligence.13
In order to escape liability for the loss of its
cargo of industrial fuel oil belonging to Caltex,
petitioner attributes the sinking of MT Maysun
to fortuitous even or force majeure. From the
testimonies of Jaime Jarabe and Francisco
Berina, captain and chief mate, respectively of
the ill-fated vessel, it appears that a sudden
and unexpected change of weather condition
occurred in the early morning of August 16,
1986; that at around 3:15 o’clock in the
morning a squall ("unos") carrying strong
winds with an approximate velocity of 30
knots per hour and big waves averaging
eighteen (18) to twenty (20) feet high,
repeatedly buffeted MT Maysun causing it to
tilt, take in water and eventually sink with its
cargo.14 This tale of strong winds and big
waves by the said officers of the petitioner
however, was effectively rebutted and belied
by the weather report15 from the Philippine
Atmospheric, Geophysical and Astronomical
Services Administration (PAGASA), the
independent government agency charged with
monitoring weather and sea conditions,
showing that from 2:00 o’clock to 8:00 o’clock
in the morning on August 16, 1986, the wind
speed remained at ten (10) to twenty (20)
knots per hour while the height of the waves
ranged from .7 to two (2) meters in the vicinity
of Cuyo East Pass and Panay Gulf where the
subject vessel sank. Thus, as the appellate
court correctly ruled, petitioner’s vessel, MT
Maysun, sank with its entire cargo for the
reason that it was not seaworthy. There was
no squall or bad weather or extremely poor
sea condition in the vicinity when the said
vessel sank.
The appellate court also correctly opined that
the petitioner’s witnesses, Jaime Jarabe and
Francisco Berina, ship captain and chief mate,
respectively, of the said vessel, could not be
expected to testify against the interest of
their employer, the herein petitioner common
carrier.
Neither may petitioner escape liability by
presenting in evidence certificates16 that tend
to show that at the time of dry-docking and
inspection by the Philippine Coast Guard, the
vessel MT Maysun, was fit for voyage. These
pieces of evidence do not necessarily take
into account the actual condition of the vessel
at the time of the commencement of the
voyage. As correctly observed by the Court of
appeals:
At the time of dry-docking and inspection, the
ship may have appeared fit. The certificates
issued, however, do not negate the
presumption of unseaworthiness triggered by
an unexplained sinking. Of certificates issued
in this regard, authorities are likewise clear as
to their probative value, (thus):
Seaworthiness relates to a vessel’s actual
condition. Neither the granting of
classification or the issuance of certificates
established seaworthiness. (2-A Benedict on
Admiralty, 7-3, Sec. 62).
And also:
Authorities are clear that diligence in securing
certificates of seaworthiness does not satisfy
the vessel owner’s obligation. Also securing
the approval of the shipper of the cargo, or his
surveyor, of the condition of the vessel or her
stowage does not establish due diligence if
the vessel was in fact unseaworthy, for the
cargo owner has no obligation in relation to
seaworthiness. (Ibid.)17
Additionally, the exoneration of MT Maysun’s
officers and crew by the Board of Marine
Inquiry merely concerns their respective
administrative liabilities. It does not in any
way operate to absolve the petitioner common
carrier from its civil liabilities. It does not in
any way operate to absolve the petitioner
common carrier from its civil liability arising
from its failure to observe extraordinary
diligence in the vigilance over the goods it
was transporting and for the negligent acts or
omissions of its employees, the determination
of which properly belongs to the courts.18 In
the case at bar, petitioner is liable for the
insured value of the lost cargo of industrial
fuel oil belonging to Caltex for its failure to
rebut the presumption of fault or negligence
as common carrier19 occasioned by the
unexplained sinking of its vessel, MT Maysun,
while in transit.
Anent the second issue, it is our view and so
hold that the presentation in evidence of the
marine insurance policy is not indispensable
in this case before the insurer may recover
from the common carrier the insured value of
the lost cargo in the exercise of its
subrogatory right. The subrogation receipt, by
itself, is sufficient to establish not only the
relationship of herein private respondent as
insurer and Caltex, as the assured shipper of
the lost cargo of industrial fuel oil, but also
the amount paid to settle the insurance claim.
The right of subrogation accrues simply upon
payment by the insurance company of the
insurance claim.20
The presentation of the insurance policy was
necessary in the case of Home Insurance
Corporation v. CA21 (a case cited by petitioner)
because the shipment therein (hydraulic
engines) passed through several stages with
different parties involved in each stage. First,
from the shipper to the port of departure;
second, from the port of departure to the M/S
Oriental Statesman; third, from the M/S
Oriental Statesman to the M/S Pacific
Conveyor; fourth, from the M/S Pacific
Conveyor to the port or arrival; fifth, from the
port of arrival to the arrastre operator; sixth,
from the arrastre operator to the hauler,
Mabuhay Brokerage Co., Inc. (private
respondent therein); and lastly, from the
hauler to the consignee. We emphasized in
that case that in the absence of proof of
stipulations to the contrary, the hauler can be
liable only for any damage that occurred from
the time it received the cargo until it finally
delivered it to the consignee. Ordinarily, it
cannot be held responsible for the handling of
the cargo before it actually received it. The
insurance contract, which was not presented
in evidence in that case would have indicated
the scope of the insurer’s liability, if any, since
no evidence was adduced indicating at what
stage in the handling process the damage to
the cargo was sustained.
Hence, our ruling on the presentation of the
insurance policy in the said case of Home
Insurance Corporation is not applicable to the
case at bar. In contrast, there is no doubt that
the cargo of industrial fuel oil belonging to
Caltex, in the case at bar, was lost while on
board petitioner’s vessel, MT Maysun, which
sank while in transit in the vicinity of Panay
Gulf and Cuyo East Pass in the early morning
of August 16, 1986.
WHEREFORE, the instant petition is DENIED.
The Decision dated June 17, 1996 of the Court
of Appeals in CA-G.R. CV No. 39836
is AFFIRMED. Costs against the petitioner.
SO ORDERED.1âwphi1.nêt
Bellosillo, Mendoza, Quisumbing, and Buena,
JJ., concur.

G.R. No. 159213 July 3, 2013
VECTOR SHIPPING CORPORATION and
FRANCISCO SORIANO, Petitioners,
vs.
AMERICAN HOME ASSURANCE COMPANY
and SULPICIO LINES, INC., Respondents.
DECISION
BERSAMIN, J.:
Subrogation under Article 2207 of the Civil Code
gives rise to a cause of action created by law. For
purposes of the law on the prescription of actions,
the period of limitation is ten years.
The Case
Vector Shipping Corporation (Vector) and
Francisco Soriano appeal the decision
1
promulgated on July 22, 2003, whereby the Court
of Appeals (CA) held them jointly and severally
liable to pay ₱7 ,455,421.08 to American Home
Assurance Company (respondent) as and by way
of actual damages on the basis of respondent
being the subrogee of its insured Caltex
Philippines, Inc. (Caltex).
Antecedents
Vector was the operator of the motor tanker M/T
Vector, while Soriano was the registered owner of
the M/T Vector. Respondent is a domestic
insurance corporation.2
On September 30, 1987, Caltex entered into a
contract of Affreightment3 with Vector for the
transport of Caltex’s petroleum cargo through the
M/T Vector. Caltex insured the petroleum cargo
with respondent for ₱7,455,421.08 under Marine
Open Policy No. 34-5093-6.4 In the evening of
December 20, 1987, the M/T Vector and the M/V
Doña Paz, the latter a vessel owned and operated
by Sulpicio Lines, Inc., collided in the open sea
near Dumali Point in Tablas Strait, located
between the Provinces of Marinduque and
Oriental Mindoro. The collision led to the sinking
of both vessels. The entire petroleum cargo of
Caltex on board the M/T Vector perished. 5 On July
12, 1988, respondent indemnified Caltex for the
loss of the petroleum cargo in the full amount of
₱7,455,421.08.6
On March 5, 1992, respondent filed a complaint
against Vector, Soriano, and Sulpicio Lines, Inc. to
recover the full amount of ₱7,455,421.08 it paid to
Caltex (Civil Case No. 92-620).7 The case was
raffled to Branch 145 of the Regional Trial Court
(RTC) in Makati City.
On December 10, 1997, the RTC issued a
resolution dismissing Civil Case No. 92-620 on the
following grounds:
This action is upon a quasi-delict and as such
must be commenced within four 4 years from the
day they may be brought. [Art. 1145 in relation to
Art. 1150, Civil Code] "From the day [the action]
may be brought" means from the day the quasi-
delict occurred. [Capuno v. Pepsi Cola, 13 SCRA
663]
The tort complained of in this case occurred on 20
December 1987. The action arising therefrom
would under the law prescribe, unless interrupted,
on 20 December 1991.
When the case was filed against defendants
Vector Shipping and Francisco Soriano on 5
March 1992, the action not having been
interrupted, had already prescribed.
Under the same situation, the cross-claim of
Sulpicio Lines against Vector Shipping and
Francisco Soriano filed on 25 June 1992 had
likewise prescribed.
The letter of demand upon defendant Sulpicio
Lines allegedly on 6 November 1991 did not
interrupt the tolling of the prescriptive period since
there is no evidence that it was actually received
by the addressee. Under such circumstances, the
action against Sulpicio Lines had likewise
prescribed.
Even assuming that such written extra-judicial
demand was received and the prescriptive period
interrupted in accordance with Art. 1155, Civil
Code, it was only for the 10-day period within
which Sulpicio Lines was required to settle its
obligation. After that period lapsed, the
prescriptive period started again. A new 4-year
period to file action was not created by the extra-
judicial demand; it merely suspended and
extended the period for 10 days, which in this
case meant that the action should be commenced
by 30 December 1991, rather than 20 December
1991.
Thus, when the complaint against Sulpicio Lines
was filed on 5 March 1992, the action had
prescribed.
PREMISES CONSIDERED, the complaint of
American Home Assurance Company and the
cross-claim of Sulpicio Lines against Vector
Shipping Corporation and Francisco Soriano are
DISMISSED.
Without costs.
SO ORDERED.8
Respondent appealed to the CA, which
promulgated its assailed decision on July 22, 2003
reversing the RTC.9Although thereby absolving
Sulpicio Lines, Inc. of any liability to respondent,
the CA held Vector and Soriano jointly and
severally liable to respondent for the
reimbursement of the amount of ₱7,455,421.08
paid to Caltex, explaining:
xxxx
The resolution of this case is primarily anchored
on the determination of what kind of relationship
existed between Caltex and M/V Dona Paz and
between Caltex and M/T Vector for purposes of
applying the laws on prescription. The Civil Code
expressly provides for the number of years before
the extinctive prescription sets in depending on
the relationship that governs the parties.
xxxx
After a careful perusal of the factual milieu and the
evidence adduced by the parties, We are
constrained to rule that the relationship that
existed between Caltex and M/V Dona Paz is that
of a quasi-delict while that between Caltex and
M/T Vector is culpa contractual based on a
Contract of Affreightment or a charter party.
xxxx
On the other hand, the claim of appellant against
M/T Vector is anchored on a breach of contract of
affreightment. The appellant averred that M/T
Vector committed such act for having
misrepresented to the appellant that said vessel is
seaworthy when in fact it is not. The contract was
executed between Caltex and M/T Vector on
September 30, 1987 for the latter to transport
thousands of barrels of different petroleum
products. Under Article 1144 of the New Civil
Code, actions based on written contract must be
brought within 10 years from the time the right of
action accrued. A passenger of a ship, or his heirs,
can bring an action based on culpa contractual
within a period of 10 years because the ticket
issued for the transportation is by itself a complete
written contract (Peralta de Guerrero vs. Madrigal
Shipping Co., L 12951, November 17, 1959).
Viewed with reference to the statute of limitations,
an action against a carrier, whether of goods or of
passengers, for injury resulting from a breach of
contract for safe carriage is one on contract, and
not in tort, and is therefore, in the absence of a
specific statute relating to such actions governed
by the statute fixing the period within which
actions for breach of contract must be brought (53
C.J.S. 1002 citing Southern Pac. R. Co. of Mexico
vs. Gonzales 61 P. 2d 377, 48 Ariz. 260, 106
A.L.R. 1012).
Considering that We have already concluded that
the prescriptive periods for filing action against
M/V Doña Paz based on quasi delict and M/T
Vector based on breach of contract have not yet
expired, are We in a position to decide the appeal
on its merit.
We say yes.
xxxx
Article 2207 of the Civil Code on subrogation is
explicit that if the plaintiff’s property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company should be subrogated
to the rights of the insured against the wrongdoer
or the person who has violated the contract.
Undoubtedly, the herein appellant has the rights of
a subrogee to recover from M/T Vector what it has
paid by way of indemnity to Caltex.
WHEREFORE, foregoing premises considered,
the decision dated December 10, 1997 of the RTC
of Makati City, Branch 145 is hereby REVERSED.
Accordingly, the defendant-appellees Vector
Shipping Corporation and Francisco Soriano are
held jointly and severally liable to the plaintiff-
appellant American Home Assurance Company
for the payment of ₱7,455,421.08 as and by way
of actual damages.
10
SO ORDERED.
Respondent sought the partial reconsideration of
the decision of the CA, contending that Sulpicio
Lines, Inc. should also be held jointly liable with
Vector and Soriano for the actual damages
awarded.11 On their part, however, Vector and
Soriano immediately appealed to the Court on
September 12, 2003.12 Thus, on October 1, 2003,
the CA held in abeyance its action on
respondent’s partial motion for reconsideration
pursuant to its internal rules until the Court has
resolved this appeal.13
Issues
The main issue is whether this action of
respondent was already barred by prescription for
bringing it only on March 5, 1992. A related issue
concerns the proper determination of the nature of
the cause of action as arising either from a quasi-
delict or a breach of contract.
The Court will not pass upon whether or not
Sulpicio Lines, Inc. should also be held jointly
liable with Vector and Soriano for the actual
damages claimed.
Ruling
The petition lacks merit.
Vector and Soriano posit that the RTC correctly
dismissed respondent’s complaint on the ground
of prescription. They insist that this action was
premised on a quasi-delict or upon an injury to the
rights of the plaintiff, which, pursuant to Article
1146 of the Civil Code, must be instituted within
four years from the time the cause of action
accrued; that because respondent’s cause of
action accrued on December 20, 1987, the date of
the collision, respondent had only four years, or
until December 20, 1991, within which to bring its
action, but its complaint was filed only on March 5,
1992, thereby rendering its action already barred
for being commenced beyond the four-year
prescriptive period;14 and that there was no
showing that respondent had made extrajudicial
written demands upon them for the
reimbursement of the insurance proceeds as to
interrupt the running of the prescriptive period. 15
We concur with the CA’s ruling that respondent’s
action did not yet prescribe. The legal provision
governing this case was not Article 1146 of the
Civil Code,16 but Article 1144 of the Civil Code,
which states:
Article 1144. The following actions must be
brought within ten years from the time the cause
of action accrues:
(1)Upon a written contract;
(2)Upon an obligation created by law;
(3)Upon a judgment.
We need to clarify, however, that we cannot adopt
the CA’s characterization of the cause of action as
based on the contract of affreightment between
Caltex and Vector, with the breach of contract
being the failure of Vector to make the M/T Vector
seaworthy, as to make this action come under
Article 1144 (1), supra. Instead, we find and hold
that that the present action was not upon a written
contract, but upon an obligation created by law.
Hence, it came under Article 1144 (2) of the Civil
Code. This is because the subrogation of
respondent to the rights of Caltex as the insured
was by virtue of the express provision of law
embodied in Article 2207 of the Civil Code, to wit:
Article 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. (Emphasis
supplied)
The juridical situation arising under Article 2207 of
the Civil Code is well explained in Pan Malayan
Insurance Corporation v. Court of Appeals, 17 as
follows:
Article 2207 of the Civil Code is founded on the
well-settled principle of subrogation.1âwphi1 If the
insured property is destroyed or damaged through
the fault or negligence of a party other than the
assured, then the insurer, upon payment to the
assured, will be subrogated to the rights of the
assured to recover from the wrongdoer to the
extent that the insurer has been obligated to pay.
Payment by the insurer to the assured operates
as an equitable assignment to the former of all
remedies which the latter may have against the
third party whose negligence or wrongful act
caused the loss.1âwphi1 The right of subrogation
is not dependent upon, nor does it grow out of,
any privity of contract or upon written assignment
of claim. It accrues simply upon payment of the
insurance claim by the insurer [Compania
Maritima v. Insurance Company of North America,
G.R. No. L-18965, October 30, 1964, 12 SCRA
213; Fireman’s Fund Insurance Company v.
Jamilla & Company, Inc., G.R. No. L-27427, April
7, 1976, 70 SCRA 323].18
Verily, the contract of affreightment that Caltex and
Vector entered into did not give rise to the legal
obligation of Vector and Soriano to pay the
demand for reimbursement by respondent
because it concerned only the agreement for the
transport of Caltex’s petroleum cargo. As the
Court has aptly put it in Pan Malayan Insurance
Corporation v. Court of Appeals, supra,
respondent’s right of subrogation pursuant to
Article 2207, supra, was "not dependent upon, nor
did it grow out of, any privity of contract or upon
written assignment of claim but accrued simply
upon payment of the insurance claim by the
insurer."
Considering that the cause of action accrued as of
the time respondent actually indemnified Caltex in
the amount of ₱7,455,421.08 on July 12,
1988,19 the action was not yet barred by the time
of the filing of its complaint on March 5,
1992,20 which was well within the 10-year period
prescribed by Article 1144 of the Civil Code.
The insistence by Vector and Soriano that the
running of the prescriptive period was not
interrupted because of the failure of respondent to
serve any extrajudicial demand was rendered
inconsequential by our foregoing finding that
respondent’s cause of action was not based on a
quasi-delict that prescribed in four years from the
date of the collision on December 20, 1987, as the
RTC misappreciated, but on an obligation created
by law, for which the law fixed a longer
prescriptive period of ten years from the accrual of
the action.
Still, Vector and Soriano assert that respondent
had no right of subrogation to begin with, because
the complaint did not allege that respondent had
actually paid Caltex for the loss of the cargo. They
further assert that the subrogation receipt
submitted by respondent was inadmissible for not
being properly identified by Ricardo C. Ongpauco,
respondent’s witness, who, although supposed to
identify the subrogation receipt based on his
affidavit, was not called to testify in court; and that
respondent presented only one witness in the
person of Teresita Espiritu, who identified Marine
Open Policy No. 34-5093-6 issued by respondent
to Caltex.21
We disagree with petitioners’ assertions. It is
undeniable that respondent preponderantly
established its right of subrogation. Its Exhibit C
was Marine Open Policy No. 34-5093-6 that it had
issued to Caltex to insure the petroleum cargo
against marine peril.22 Its Exhibit D was the formal
written claim of Caltex for the payment of the
insurance coverage of ₱7,455,421.08 coursed
through respondent’s adjuster.23 Its Exhibits E to H
were marine documents relating to the perished
cargo on board the M/V Vector that were
processed for the purpose of verifying the
insurance claim of Caltex.24 Its Exhibit I was the
subrogation receipt dated July 12, 1988 showing
that respondent paid Caltex ₱7,455,421.00 as the
full settlement of Caltex’s claim under Marine
Open Policy No. 34-5093-6.25 All these exhibits
were unquestionably duly presented, marked, and
admitted during the trial.26 Specifically, Exhibit C
was admitted as an authentic copy of Marine
Open Policy No. 34-5093-6, while Exhibits D, E, F,
G, H and I, inclusive, were admitted as parts of
the testimony of respondent’s witness Efren
Villanueva, the manager for the adjustment
service of the Manila Adjusters and Surveyors
Company.27
Consistent with the pertinent law and
jurisprudence, therefore, Exhibit I was already
enough by itself to prove the payment of
₱7,455,421.00 as the full settlement of Caltex’s
claim.28 The payment made to Caltex as the
insured being thereby duly documented,
respondent became subrogated as a matter of
course pursuant to Article 2207 of the Civil Code.
In legal contemplation, subrogation is the
"substitution of another person in the place of the
creditor, to whose rights he succeeds in relation to
the debt;" and is "independent of any mere
contractual relations between the parties to be
affected by it, and is broad enough to cover every
instance in which one party is required to pay a
debt for which another is primarily answerable,
and which in equity and conscience ought to be
discharged by the latter."29
Lastly, Vector and Soriano argue that Caltex
waived and abandoned its claim by not setting up
a cross-claim against them in Civil Case No.
18735, the suit that Sulpicio Lines, Inc. had
brought to claim damages for the loss of the M/V
Doña Paz from them, Oriental Assurance
Company (as insurer of the M/T Vector), and
Caltex; that such failure to set up its cross- claim
on the part of Caltex, the real party in interest who
had suffered the loss, left respondent without any
better right than Caltex, its insured, to recover
anything from them, and forever barred Caltex
from asserting any claim against them for the loss
of the cargo; and that respondent was similarly
barred from asserting its present claim due to its
being merely the successor-in-interest of Caltex.
the two actions, the failure to set up the cross-
claim against them in Civil Case No. 18735 is no
reason to bar this action.
WHEREFORE, the Court DENIES the petition for
review on certiorari; AFFIRMS the decision
promulgated on July 22, 2003; and ORDERS
petitioners to pay the costs of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:

The argument of Vector and Soriano would have

substance and merit had Civil Case No. 18735
and this case involved the same parties and
litigated the same rights and obligations. But the
two actions were separate from and independent
of each other. Civil Case No. 18735 was instituted
by Sulpicio Lines, Inc. to recover damages for the
loss of its M/V Doña Paz. In contrast, this action
was brought by respondent to recover from Vector
and Soriano whatever it had paid to Caltex under
its marine insurance policy on the basis of its right
of subrogation. With the clear variance between
 Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 185964 June 16, 2014

ASIAN TERMINALS, INC., Petitioner,

vs.

FIRST LEPANTO-TAISHO INSURANCE

CORPORATION, Respondent.

DECISION

REYES, J.:

This is a Petition for Review on

1
Certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the
Decision2 dated October 10, 2008 of the Court
of Appeals (CA) in CA-G.R. SP No. 99021 which
adjudged petitioner Asian Terminals, Inc. (ATI)
liable to pay the money claims of respondent
First Lepanto-Taisho Insurance Corporation
(FIRST LEPANTO).
The Undisputed Facts
3
On July 6, 1996, 3,000 bags of sodium
tripolyphosphate contained in 100 plain jumbo
bags complete and in good condition were
loaded and received on board M/V "Da Feng"
owned by China Ocean Shipping Co. (COSCO)
in favor of consignee, Grand Asian Sales, Inc.
(GASI). Based on a Certificate of
4
Insurance dated August 24, 1995, it appears
that the shipment was insured against all
risks by GASI with FIRST LEPANTO for
₱7,959,550.50 under Marine Open Policy No.
0123.
The shipment arrived in Manila on July 18,
1996 and was discharged into the possession
and custody of ATI, a domestic corporation
engaged in arrastre business. The shipment
remained for quite some time at ATI’s storage
area until it was withdrawn by broker, Proven
Customs Brokerage Corporation (PROVEN), on
August 8 and 9, 1996 for delivery to the
consignee. Upon receipt of the
shipment,5 GASI subjected the same to
inspection and found that the delivered goods
incurred shortages of 8,600 kilograms and
spillage of 3,315 kg for a total of11,915 kg of
loss/damage valued at ₱166,772.41.
GASI sought recompense from COSCO, thru its
Philippine agent Smith Bell Shipping Lines,
Inc. (SMITH BELL),6ATI7 and PROVEN8 but was
denied. Hence, it pursued indemnification from
the shipment’s insurer.9
After the requisite investigation and
adjustment, FIRST LEPANTO paid GASI the
amount of ₱165,772.40 as insurance
10
indemnity.
Thereafter, GASI executed a Release of
Claim11 discharging FIRST LEPANTO from any
and all liabilities pertaining to the
lost/damaged shipment and subrogating it to
all the rights of recovery and claims the
former may have against any person or
corporation in relation to the lost/damaged
shipment.
As such subrogee, FIRST LEPANTO demanded
from COSCO, its shipping agency in the
Philippines, SMITH BELL, PROVEN and ATI,
reimbursement of the amount it paid to GASI.
When FIRST LEPANTO’s demands were not
heeded, it filed on May 29, 1997 a
Complaint12 for sum of money before the
Metropolitan Trial Court (MeTC) of Manila,
Branch 3. FIRST LEPANTO sought that it be
reimbursed the amount of 166,772.41, twenty-
five percent (25%) thereof as attorney’s fees,
and costs of suit.
ATI denied liability for the lost/damaged
shipment and claimed that it exercised due
diligence and care in handling the same.13 ATI
averred that upon arrival of the shipment,
SMITH BELL requested for its inspection14 and
it was discovered that one jumbo bag thereof
sustained loss/damage while in the custody of
COSCO as evidenced by Turn Over Survey of
Bad Order Cargo No. 47890 dated August 6,
199615 jointly executed by the respective
representatives of ATI and COSCO. During the
withdrawal of the shipment by PROVEN from
ATI’s warehouse, the entire shipment was re-
examined and it was found to be exactly in the
same condition as when it was turned over to
ATI such that one jumbo bag was damaged. To
bolster this claim, ATI submitted Request for
Bad Order Survey No. 40622 dated August 9,
199616 jointly executed by the respective
representatives of ATI and PROVEN. ATI also
submitted various Cargo Gate
17
Passes showing that PROVEN was able to
completely withdraw all the shipment from
ATI’s warehouse in good order condition
except for that one damaged jumbo bag.
In the alternative, ATI asserted that even if it
is found liable for the lost/damaged portion of
the shipment, its contract for cargo handling
services limits its liability to not more than
₱5,000.00 per package. ATI interposed a
counterclaim of ₱20,000.00 against FIRST
LEPANTO as and for attorney’s fees. It also
filed a cross-claim against its co-defendants
COSCO and SMITH BELL in the event that it is
made liable to FIRST LEPANTO.18
PROVEN denied any liability for the
lost/damaged shipment and averred that the
complaint alleged no specific acts or
omissions that makes it liable for damages.
PROVEN claimed that the damages in the
shipment were sustained before they were
withdrawn from ATI’s custody under which the
shipment was left in an open area exposed to
the elements, thieves and vandals. PROVEN
contended that it exercised due diligence and
prudence in handling the shipment. PROVEN
also filed a counterclaim for attorney’s fees
and damages.19
Despite receipt of summons on December 4,
1996,20 COSCO and SMITH BELL failed to file
an answer to the complaint. FIRST LEPANTO
thus moved that they be declared in
default21 but the motion was denied by the
MeTC on the ground that under Rule 9, Section
3 of the Rules of Civil Procedure, "when a
pleading asserting a claim states a common
cause of action against several defending
parties, some of whom answer and the other
fail to do so, the Court shall try the case
against all upon the answers thus filed, and
render judgment upon the evidence
presented." 22
establishing that it is indeed the Philippine
agent of COSCO. There is also no evidence
attributing any fault to SMITH BELL.
Consequently, the complaint was dismissed in
this wise:
WHEREFORE, in light of the foregoing,
judgment is hereby rendered DISMISSING the
instant case for failure of [FIRST LEPANTO] to
sufficiently establish its cause o faction
against [ATI, COSCO, SMITH BELL, and
PROVEN].
The counterclaims of [ATI and PROVEN] are
likewise dismissed for lack of legal basis.
No pronouncement as to cost.

Ruling of the MeTC SO ORDERED.24

In a Judgment23 dated May 30, 2006, the MeTC Ruling of the Regional Trial Court
absolved ATI and PROVEN from any liability
On appeal, the Regional Trial Court (RTC)
and instead found COSCO to be the party at
reversed the MeTC’s findings. In its
fault and hence liable for the loss/damage 25
Decision dated January 26, 2007, the RTC of
sustained by the subject shipment. However,
Manila, Branch 21, in Civil Case No. 06-116237,
the MeTC ruled it has no jurisdiction over
rejected the contentions of ATI upon its
COSCO because it is a foreign corporation.
observation that the same is belied by its very
Also, it cannot enforce judgment upon SMITH
own documentary evidence. The RTC
BELL because no evidence was presented
remarked that, if, as alleged by ATI, one jumbo
bag was already in bad order condition upon
its receipt of the shipment from COSCO on
July 18, 1996, then how come that the Request
for Bad Order Survey and the Turn Over Survey
of Bad Order Cargo were prepared only weeks
thereafter or on August 9, 1996 and August 6,
1996, respectively. ATI was adjudged unable to
prove that it exercised due diligence while in
custody of the shipment and hence, negligent
and should be held liable for the damages
caused to GASI which, in turn, is subrogated
by FIRST LEPANTO.
The RTC rejected ATI’s contention that its
liability is limited only to ₱5,000.00 per
package because its Management Contract
with the Philippine Ports Authority (PPA)
purportedly containing the same was not
presented as evidence. More importantly,
FIRST LEPANTO or GASI cannot be deemed
bound thereby because they were not parties
thereto. Lastly, the RTC did not give merit to
ATI’s defense that any claim against it has
already prescribed because GASI failed to file
any claim within the 15-day period stated in
the gate pass issued by ATI to GASI’s broker,
PROVEN. Accordingly, the RTC disposed thus:
WHEREFORE, in light of the foregoing, the
judgment on appeal is hereby REVERSED.
[ATI] is hereby ordered to reimburse [FIRST
LEPANTO] the amount of [P]165,772.40 with
legal interest until fully paid, to pay [FIRST
LEPANTO] 10% of the amount due the latter as
and for attorney’s fees plus the costs of suit.
The complaint against [COSCO/SMITH BELL
and PROVEN] are DISMISSED for lack of
evidence against them. The counterclaim and
cross[-]claim of [ATI] are likewise DISMISSED
for lack of merit.
SO ORDERED.26
Ruling of the CA
ATI sought recourse with the CA challenging
the RTC’s finding that FIRST LEPANTO was
validly subrogated to the rights of GASI with
respect to the lost/damaged shipment. ATI
argued that there was no valid subrogation
because FIRSTLEPANTO failed to present a
valid, existing and enforceable Marine Open
Policy or insurance contract. ATI reasoned
that the Certificate of Insurance or Marine
Cover Note submitted by FIRST LEPANTO as
evidence is not the same as an actual
insurance contract.
In its Decision27 dated October 10, 2008, the
CA dismissed the appeal and held that the
Release of Claim and the Certificate of
Insurance presented by FIRST LEPANTO
sufficiently established its relationship with
the consignee and that upon proof of payment
of the latter’s claim for damages, FIRST
LEPANTO was subrogated to its rights against
those liable for the lost/damaged shipment.
The CA also affirmed the ruling of the RTC
that the subject shipment was damaged while
in the custody of ATI. Thus, the CA disposed as
follows:
WHEREFORE, premises considered, the
assailed Decision is hereby AFFIRMED and the
instant petition is DENIED for lack of merit.
SO ORDERED.28
ATI moved for reconsideration but the motion
was denied in the CA Resolution29 dated
January 12, 2009. Hence, this petition arguing
that:
(a) The presentation of the insurance policy is
indispensable in proving the right of FIRST
LEPANTO to be subrogated to the right of the
consignee pursuant to the ruling in Wallem
Philippines Shipping, Inc. v. Prudential
Guarantee and Assurance Inc.;30
(b) ATI cannot be barred from invoking the
defense of prescription as provided for in the
gate passes in consonance with the ruling in
International Container Terminal Services, Inc.
v. Prudential Guarantee and Assurance Co,
Inc.31
Ruling of the Court
The Court denies the petition.
ATI failed to prove that it exercised
due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.
It must be emphasized that factual questions
pertaining to ATI’s liability for the loss/damage
sustained by GASI has already been settled in
the uniform factual findings of the RTC and
the CA that: ATI failed to prove by
preponderance of evidence that it exercised
due diligence in handling the shipment.
Such findings are binding and conclusive upon
this Court since a review thereof is proscribed
by the nature of the present petition. Only
questions of law are allowed in petitions for
review on certiorari under Rule 45 of the Rules
of Court. It is not the Court’s duty to review,
examine, and evaluate or weigh all over again
the probative value of the evidence presented,
especially where the findings of the RTC are
affirmed by the CA, as in this case.32
There are only specific instances when the
Court deviates from the rule and conducts a
review of the courts a quo’s factual findings,
such as when: (1) the inference made is
manifestly mistaken, absurd or impossible; (2)
there is grave abuse of discretion;(3) the
findings are grounded entirely on
speculations, surmises or conjectures; (4) the
judgment of the CA is based on
misapprehension of facts; (5) the CA, in
making its findings, went beyond the issues of
the case and the same is contrary to the
admissions of both appellant and appellee; (6)
the findings of fact are conclusions without
citation of specific evidence on which they are
based; (7) the CA manifestly overlooked
certain relevant facts not disputed by the
parties and which, if properly considered,
would justify a different conclusion; and (8)
the findings of fact of the CA are premised on
the absence of evidence and are contradicted
by the evidence on record.33
None of these instances, however, are present
in this case. Moreover, it is unmistakable that
ATI has already conceded to the factual
findings of RTC and CA adjudging it liable for
the shipment’s loss/damage considering the
absence of arguments pertaining to such issue
in the petition at bar.
These notwithstanding, the Court scrutinized
the records of the case and found that indeed,
ATI is liable as the arrastre operator for the
lost/damaged portion of the shipment.
The relationship between the consignee and
the arrastre operator is akin to that existing
between the consignee and/or the owner of
the shipped goods and the common carrier, or
that between a depositor and a
warehouseman. Hence, in the performance of
its obligations, an arrastre operator should
observe the same degree of diligence as that
required of a common carrier and a
warehouseman. Being the custodian of the
goods discharged from a vessel, an arrastre
operator’s duty is to take good care of the
goods and to turn them over to the party
entitled to their possession.34
In a claim for loss filed by the consignee (or
the insurer), the burden of proof to show
compliance with the obligation to deliver the
goods to the appropriate party devolves upon
the arrastre operator. Since the safekeeping of
the goods is its responsibility, it must prove
that the losses were not due to its negligence
or to that of its employees. To avoid liability,
the arrastre operator must prove that it
exercised diligence and due care in handling
the shipment.35
ATI failed to discharge its burden of proof.
Instead, it insisted on shifting the blame to
COSCO on the basis of the Request for Bad
Order Survey dated August 9, 1996 purportedly
showing that when ATI received the shipment,
one jumbo bag thereof was already in
damaged condition.
The RTC and CA were both correct in
concluding that ATI’s contention was
improbable and illogical. As judiciously
discerned by the courts a quo, the date of the
document was too distant from the date when
the shipment was actually received by ATI
from COSCO on July 18, 1996. In fact, what the
document established is that when the
loss/damage was discovered, the shipment
has been in ATI’s custody for at least two
weeks. This circumstance, coupled with the
undisputed declaration of PROVEN’s
witnesses that while the shipment was in
ATI’s custody, it was left in an open area
exposed to the elements, thieves and
vandals,36 all generate the conclusion that ATI
failed to exercise due care and diligence while
the subject shipment was under its custody,
control and possession as arrastre operator.
To prove the exercise of diligence in handling
the subject cargoes, an arrastre operator must
do more than merely show the possibility that
some other party could be responsible for the
loss or the damage.37 It must prove that it
used all reasonable means to handle and store
the shipment with due care and diligence
including safeguarding it from weather
elements, thieves or vandals.
Non-presentation of the insurance
contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.
It is conspicuous from the records that ATI put
in issue the submission of the insurance
contract for the first time before the CA.
Despite opportunity to study FIRST LEPANTO’s
complaint before the MeTC, ATI failed to allege
in its answer the necessity of the insurance
contract. Neither was the same considered
during pre-trial as one of the decisive matters
in the case. Further, ATI never challenged the
relevancy or materiality of the Certificate of
Insurance presented by FIRST LEPANTO as
evidence during trial as proof of its right to be
subrogated in the consignee’s stead. Since it
was not agreed during the pre-trial
proceedings that FIRST LEPANTO will have to
prove its subrogation rights by presenting a
copy of the insurance contract, ATI is barred
from pleading the absence of such contract in
its appeal. It is imperative for the parties to
disclose during pre-trial all issues they intend
to raise during the trial because, they are
bound by the delimitation of such issues. The
determination of issues during the pre-trial
conference bars the consideration of other
questions, whether during trial or on appeal.38
A faithful adherence to the rule by litigants is
ensured by the equally settled principle that a
party cannot change his theory on appeal as
such act violates the basic rudiments of fair
play and due process. As stressed in Jose v.
Alfuerto:39
[A] party cannot change his theory ofthe case
or his cause of action on appeal. Points of law,
theories, issues and arguments not brought to
the attention of the lower court will not be
considered by the reviewing court. The
defenses not pleaded in the answer cannot, on
appeal, change fundamentally the nature of
the issue in the case. To do so would be unfair
to the adverse party, who had no opportunity
to present evidence in connection with the
new theory; this would offend the basic rules
of due process and fair play.40 (Citation
omitted)
While the Court may adopt a liberal stance
and relax the rule, no reasonable explanation,
however, was introduced to justify ATI’s failure
to timely question the basis of FIRST
LEPANTO’s rights as a subrogee.
The fact that the CA took cognizance of and
resolved the said issue did not cure or ratify
ATI’s faux pas. "[A] judgment that goes beyond
the issues and purports to adjudicate
something on which the court did not hear the
parties, is not only irregular but also
extrajudicial and invalid."41 Thus, for resolving
an issue not framed during the pre-trial and on
which the parties were not heard during the
trial, that portion of the CA’s judgment
discussing the necessity of presenting an
insurance contract was erroneous.
At any rate, the non-presentation of the
insurance contract is not fatal to FIRST
LEPANTO’s right to collect reimbursement as
the subrogee of GASI.
"Subrogation is the substitution of one person
in the place of another with reference to a
lawful claim or right, so that he who is
substituted succeeds to the rights of the other
in relation to a debt or claim, including its
remedies or securities."42 The right of
subrogation springs from Article 2207 of the
Civil Code which states:
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 wrong-doer 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.
As a general rule, the marine insurance policy
needs to be presented in evidence before the
insurer may recover the insured value of the
lost/damaged cargo in the exercise of its
subrogatory right. In Malayan Insurance Co.,
Inc. v.Regis Brokerage Corp.,43 the Court
stated that the presentation of the contract
constitutive of the insurance relationship
between the consignee and insurer is critical
because it is the legal basis of the latter’s
right to subrogation.44
In Home Insurance Corporation v. CA,45 the
Court also held that the insurance contract
was necessary to prove that it covered the
hauling portion of the shipment and was not
limited to the transport of the cargo while at
sea. The shipment in that case passed through
six stages with different parties involved in
each stage until it reached the consignee. The
insurance contract, which was not presented
in evidence, was necessary to determine the
scope of the insurer’s liability, if any, since no
evidence was adduced indicating at what
stage in the handling process the damage to
the cargo was sustained.46
An analogous disposition was arrived at in the
Wallem47 case cited by ATI wherein the Court
held that the insurance contract must be
presented in evidence in order to determine
the extent of its coverage. It was further ruled
therein that the liability of the carrier from
whom reimbursement was demanded was not
established with certainty because the
alleged shortage incurred by the cargoes was
not definitively determined.48
Nevertheless, the rule is not inflexible. In
certain instances, the Court has admitted
exceptions by declaring that a marine
insurance policy is dispensable evidence in
reimbursement claims instituted by the
insurer.
In Delsan Transport Lines, Inc. v. CA, 49 the
Court ruled that the right of subrogation
accrues simply upon payment by the
insurance company of the insurance claim.
Hence, presentation in evidence of the marine
insurance policy is not indispensable before
the insurer may recover from the common
carrier the insured value of the lost cargo in
the exercise of its subrogatory right. The
subrogation receipt, by itself, was held
sufficient to establish not only the relationship
between the insurer and consignee, but also
the amount paid to settle the insurance claim.
The presentation of the insurance contract
was deemed not fatal to the insurer’s cause of
action because the loss of the cargo
undoubtedly occurred while on board the
petitioner’s vessel.50
The same rationale was the basis of the
judgment in International Container Terminal
Services, Inc. v. FGU Insurance
51
Corporation, wherein the arrastre operator
was found liable for the lost shipment despite
the failure of the insurance company to offer
in evidence the insurance contract or policy.
As in Delsan, it was certain that the loss of
the cargo occurred while in the petitioner’s
custody.52
Based on the attendant facts of the instant
case, the application of the exception is
warranted.1âwphi1 As discussed above, it is
already settled that the loss/damage to the
GASI’s shipment occurred while they were in
ATI’s custody, possession and control as
arrastre operator. Verily, the Certificate of
Insurance53 and the Release of
54
Claim presented as evidence sufficiently
established FIRST LEPANTO’s right to collect
reimbursement as the subrogee of the
consignee, GASI.
With ATI’s liability having been positively
established, to strictly require the
presentation of the insurance contract will run
counter to the principle of equity upon which
the doctrine of subrogation is premised.
Subrogation 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.55
The payment by the insurer to the insured
operates as an equitable assignment to the
insurer of all the remedies which the insured
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.56
ATI cannot invoke prescription
ATI argued that the consignee, thru its insurer,
FIRST LEPANTO is barred from seeking
payment for the lost/damaged shipment
because the claim letter of GASI to ATI was
served only on September 27, 1996 or more
than one month from the date the shipment
was delivered to the consignee’s warehouse
on August 9, 1996. The claim of GASI was thus
filed beyond the 15-day period stated in ATI’s
Management Contract with PPA which in turn
was reproduced in the gate passes issued to
the consignee’s broker, PROVEN, as follows:
Issuance of this Gate Pass Constitutes
delivery to and receipt by consignee of the
goods as described above in good order and
condition unless an accompanying x x x
certificates duly issued and noted on the face
of this Gate Pass appeals. [sic]
This Gate pass is subject to all terms and
conditions defined in the Management
Contract between the Philippine Port[s]
Authority and Asian Terminals, Inc. and
amendment thereto and alterations thereof
particularly but not limited to the [A]rticle VI
thereof, limiting the contractor’s liability to
[P]5,000.00 per package unless the
importation is otherwise specified or
manifested or communicated in writing
together with the invoice value and supported
by a certified packing list to the contractor by
the interested party or parties before the
discharge of the goods and corresponding
arrastre charges have been paid providing
exception or restrictions from liability
releasing the contractor from liability among
others unless a formal claim with the required
annexes shall have been filed with the
contractor within fifteen (15) days from date
of issuance by the contractors or certificate of
loss, damages, injury, or Certificate of non-
delivery.57
The contention is bereft of merit. As clarified
in Insurance Company of North America v.
Asian Terminals, Inc.,58substantial compliance
with the 15-day time limitation is allowed
provided that the consignee has made a
provisional claim thru a request for bad order
survey or examination report, viz:
Although the formal claim was filed beyond
the 15-day period from the issuance of the
examination report on the request for bad
order survey, the purpose of the time
limitations for the filing of claims had already
been fully satisfied by the request of the
consignee’s broker for a bad order survey and
by the examination report of the arrastre
operator on the result thereof, as the arrastre
operator had become aware of and had
verified the facts giving rise to its liability.
Hence, the arrastre operator suffered no
prejudice by the lack of strict compliance with
the 15-day limitation to file the formal
complaint.59 (Citations omitted)
In the present case, ATI was notified of the
loss/damage to the subject shipment as early
as August 9, 1996 thru a Request for Bad
Order Survey60 jointly prepared by the
consignee’s broker, PROVEN, and the
representatives of ATI. For having submitted a
provisional claim, GASI is thus deemed to
have substantially complied with the notice
requirement to the arrastre operator
notwithstanding that a formal claim was sent
to the latter only on September 27, 1996. ATI
was not deprived the best opportunity to
probe immediately the veracity of such claims.
Verily then, GASI, thru its subrogee FIRST
LEPANTO, is not barred by filing the herein
action in court.
ATI cannot rely on the ruling in
61
Prudentiat because the consignee therein
made no provisional claim thru request for bad
order survey and instead filed a claim for the
first time after four months from receipt of the
shipment.
Attorney's fees and interests
All told, ATI is liable to pay FIRST LEPANTO
the amount of the Pl 65, 772.40 representing
the insurance indemnity paid by the latter to
GASI. Pursuant to Nacar v. Gallery
62
Frames, the said amount shall earn a legal
interest at the rate of six percent (6%) per
annum from the date of finality of this
judgment until its full satisfaction.
As correctly imposed by the RTC and the CA,
ten percent (10%) of the judgment award is
reasonable as and for attorney's fees
considering the length of time that has passed
in prosecuting the claim.63
WHEREFORE, premises considered, the
petition is hereby DENIED. The Decision dated
October 10, 2008 of the Court of Appeals in
CA-G.R. SP No. 99021 is hereby AFFIRMED
insofar as it adjudged liable and ordered Asian
Terminals, Inc., to pay First Lepanto-Taisho
Insurance Corp., the amount of ₱165,772.40,
ten percent (10%) thereof as and for attorney's
fees, plus costs of suit. The said amount shall
earn legal interest at the rate of six percent
( 6%) per annum from the date of finality of
this judgment until its full satisfaction.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
G.R. No. L-52732 August 29, 1988

F.F. CRUZ and CO., INC., petitioner,

vs.

THE COURT OF APPEALS, GREGORIO

MABLE as substituted by his wife LUZ
ALMONTE MABLE and children
DOMING, LEONIDAS, LIGAYA, ELENA,
GREGORIO, JR., SALOME, ANTONIO, petitioner's shop. Petitioner's employees,
and BERNARDO all surnamed who slept in the shop premises, tried to put
MABLE, respondents. out the fire, but their efforts proved futile.
The fire spread to private respondents'
Luis S. Topacio for petitioner. house. Both the shop and the house were
razed to the ground. The cause of the
Mauricio M. Monta for respondents. conflagration was never discovered. The
National Bureau of Investigation found
specimens from the burned structures
CORTES, J.: negative for the presence of inflammable
This petition to review the decision of the Court of Appeals puts in substances.
issue the application of the common law doctrine of res ipsa
loquitur.
Subsequently, private respondents
The essential facts of the case are not collected P35,000.00 on the insurance on
disputed. their house and the contents thereof.

The furniture manufacturing shop of On January 23, 1975, private respondents

petitioner in Caloocan City was situated filed an action for damages against
adjacent to the residence of private petitioner, praying for a judgment in their
respondents. Sometime in August 1971, favor awarding P150,000.00 as actual
private respondent Gregorio Mable first damages, P50,000.00 as moral damages,
approached Eric Cruz, petitioner's plant P25,000.00 as exemplary damages,
manager, to request that a firewall be P20,000.00 as attorney's fees and costs.
constructed between the shop and private The Court of First Instance held for private
respondents' residence. The request was respondents:
repeated several times but they fell on
WHEREFORE, the Court hereby renders
deaf ears. In the early morning of
judgment, in favor of plaintiffs, and against
September 6, 1974, fire broke out in
the defendant:
1. Ordering the defendant to pay to the
plaintiffs the amount of P80,000.00 for
damages suffered by said plaintiffs for the
loss of their house, with interest of 6% from
the date of the filing of the Complaint on
January 23, 1975, until fully paid;
2. Ordering the defendant to pay to the
plaintiffs the sum of P50,000.00 for the loss
of plaintiffs' furnitures, religious images,
silverwares, chinawares, jewelries, books,
kitchen utensils, clothing and other
valuables, with interest of 6% from date of
the filing of the Complaint on January 23,
1975, until fully paid;
3. Ordering the defendant to pay to the
plaintiffs the sum of P5,000.00 as moral
damages, P2,000.00 as exemplary
damages, and P5,000.00 as and by way of
attorney's fees;
4. With costs against the defendant;
5. Counterclaim is ordered dismissed, for
lack of merit. [CA Decision, pp. 1-2; Rollo,
pp. 29-30.]
On appeal, the Court of Appeals, in a
decision promulgated on November 19,
1979, affirmed the decision of the trial
court but reduced the award of damages:
WHEREFORE, the decision declaring the
defendants liable is affirmed. The damages
to be awarded to plaintiff should be
reduced to P70,000.00 for the house and
P50,000.00 for the furniture and other
fixtures with legal interest from the date of
the filing of the complaint until full
payment thereof. [CA Decision, p. 7; Rollo,
p. 35.]
A motion for reconsideration was filed on
December 3, 1979 but was denied in a
resolution dated February 18, 1980. Hence,
petitioner filed the instant petition for
review on February 22, 1980. After the
comment and reply were filed, the Court
resolved to deny the petition for lack of
merit on June 11, 1980.
However, petitioner filed a motion for
reconsideration, which was granted, and
the petition was given due course on
September 12, 1980. After the parties filed
their memoranda, the case was submitted
for decision on January 21, 1981.
Petitioner contends that the Court
Appeals erred:
1. In not deducting the sum of P35,000.00,
which private respondents recovered on
the insurance on their house, from the
award of damages.
2. In awarding excessive and/or unproved
damages.
3. In applying the doctrine of res ipsa
loquitur to the facts of the instant case.
The pivotal issue in this case is the
applicability of the common law doctrine
of res ipsa loquitur, the issue of damages
being merely consequential. In view
thereof, the errors assigned by petitioner
shall be discussed in the reverse order.
1. The doctrine of res ipsa loquitur, whose
application to the instant case petitioner
objects to, may be stated as follows:
Where the thing which caused the injury
complained of is shown to be under the
management of the defendant or his
of servants and the accident is such as in the
ordinary course of things does not happen
if those who have its management or
control use proper care, it affords
reasonable evidence, in the absence of
explanation by the defendant, that the
accident arose from want of care. [Africa v.
Caltex (Phil.), Inc., G.R. No. L-12986, March
31, 1966, 16 SCRA 448.]
Thus, in Africa, supra, where fire broke out
in a Caltex service station while gasoline
from a tank truck was being unloaded into
an underground storage tank through a
hose and the fire spread to and burned
neighboring houses, this Court, applying
the doctrine of res ipsa loquitur, adjudged
Caltex liable for the loss.
The facts of the case likewise call for the
application of the doctrine, considering
that in the normal course of operations of a
furniture manufacturing shop, combustible
material such as wood chips, sawdust,
paint, varnish and fuel and lubricants for
machinery may be found thereon.
It must also be noted that negligence or
want of care on the part of petitioner or its
employees was not merely presumed. The
Court of Appeals found that petitioner
failed to construct a firewall between its
shop and the residence of private
respondents as required by a city
ordinance; that the fire could have been
caused by a heated motor or a lit cigarette;
that gasoline and alcohol were used and
stored in the shop; and that workers
sometimes smoked inside the shop [CA
Decision, p. 5; Rollo, p. 33.]
Even without applying the doctrine of res
ipsa loquitur, petitioner's failure to
construct a firewall in accordance with city
ordinances would suffice to support a
finding of negligence.
Even then the fire possibly would not have
spread to the neighboring houses were it
not for another negligent omission on the
part of defendants, namely, their failure to
provide a concrete wall high enough to
prevent the flames from leaping over it. As
it was the concrete wall was only 2-1/2
meters high, and beyond that height it
consisted merely of galvanized iron sheets,
which would predictably crumble and melt
when subjected to intense
heat. Defendant's negligence, therefore,
was not only with respect to the cause of
the fire but also with respect to the spread
thereof to the neighboring houses.[Africa v.
Caltex (Phil.), Inc., supra; Emphasis
supplied.]
In the instant case, with more reason
should petitioner be found guilty of
negligence since it had failed to construct a
firewall between its property and private
respondents' residence which sufficiently
complies with the pertinent city
ordinances. The failure to comply with an
ordinance providing for safety regulations
had been ruled by the Court as an act of
negligence [Teague v. Fernandez, G.R. No.
L-29745, June 4, 1973, 51 SCRA 181.]
The Court of Appeals, therefore, had more
than adequate basis to find petitioner liable
for the loss sustained by private
respondents.
2. Since the amount of the loss sustained
by private respondents constitutes a
finding of fact, such finding by the Court of
Appeals should not be disturbed by this
Court [M.D. Transit & Taxi Co., Inc. v. Court
of Appeals, G.R. No. L-23882, February 17,
1968, 22 SCRA 559], more so when there is
no showing of arbitrariness.
In the instant case, both the CFI and the
Court of Appeals were in agreement as to
the value of private respondents' furniture
and fixtures and personal effects lost in the
fire (i.e. P50,000.00). With regard to the
house, the Court of Appeals reduced the
award to P70,000.00 from P80,000.00.
Such cannot be categorized as arbitrary
considering that the evidence shows that
the house was built in 1951 for P40,000.00
and, according to private respondents, its
reconstruction would cost P246,000.00.
Considering the appreciation in value of
real estate and the diminution of the real
value of the peso, the valuation of the
house at P70,000.00 at the time it was
razed cannot be said to be excessive.
3. While this Court finds that petitioner is
liable for damages to private respondents
as found by the Court of Appeals, the fact
that private respondents have been
indemnified by their insurer in the amount
of P35,000.00 for the damage caused to
their house and its contents has not
escaped the attention of the Court. Hence,
the Court holds that in accordance with
Article 2207 of the Civil Code the amount
of P35,000.00 should be deducted from the
amount awarded as damages. Said article
provides:
Art. 2207. If the plaintiffs property has
been insured, and he has received
indemnity from the insurance company for
the injury or loss arising out of the wrong
or breach of contract complained of, the
insurance company is subrogated to the
rights of the insured against the wrongdoer
or the person who violated the contract. If
the amount paid by the insurance
company does not fully cover the injury or
loss, the aggrieved party shall be entitled
to recover the deficiency from the person
causing the loss or injury. (Emphasis
supplied.]
The law is clear and needs no
interpretation. Having been indemnified by
their insurer, private respondents are only
entitled to recover the deficiency from
petitioner.
On the other hand, the insurer, if it is so
minded, may seek reimbursement of the
amount it indemnified private respondents
from petitioner. This is the essence of its
right to be subrogated to the rights of the
insured, as expressly provided in Article
2207. Upon payment of the loss incurred
by the insured, the insurer is entitled to be
subrogated pro tanto to any right of action
which the insured may have against the
third person whose negligence or wrongful
act caused the loss [Fireman's Fund
Insurance Co. v. Jamila & Co., Inc., G.R. No.
L-27427, April 7, 1976, 70 SCRA 323.]
Under Article 2207, the real party in
interest with regard to the indemnity
received by the insured is the insurer [Phil.
Air Lines, Inc. v. Heald Lumber Co., 101
Phil. 1031, (1957).] Whether or not the
insurer should exercise the rights of the
insured to which it had been subrogated
lies solely within the former's sound
discretion. Since the insurer is not a party
to the case, its identity is not of record and
no claim is made on its behalf, the private
respondent's insurer has to claim his right
to reimbursement of the P35,000.00 paid
to the insured.
WHEREFORE, in view of the foregoing, the
decision of the Court of Appeals is hereby
AFFIRMED with the following modifications
as to the damages awarded for the loss of
private respondents' house, considering
their receipt of P35,000.00 from their
insurer: (1) the damages awarded for the
loss of the house is reduced to P35,000.00;
and (2) the right of the insurer to
subrogation and thus seek reimbursement
from petitioner for the P35,000.00 it had
paid private respondents is recognized.
SO ORDERED.
G.R. No. 166245 April 9, 2008

ETERNAL GARDENS MEMORIAL PARK

CORPORATION, petitioner,

vs.

THE PHILIPPINE AMERICAN LIFE INSURANCE

COMPANY, respondent.

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on

Certiorari under Rule 45 which seeks to
reverse and set aside the November 26, 2004
Decision1 of the Court of Appeals (CA) in CA-
G.R. CV No. 57810 is the query: May the
inaction of the insurer on the insurance
application be considered as approval of the
application?

The Facts
On December 10, 1980, respondent Philippine
American Life Insurance Company (Philamlife)
entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 2 with
petitioner Eternal Gardens Memorial Park
Corporation (Eternal). Under the policy, the
clients of Eternal who purchased burial lots
from it on installment basis would be insured
by Philamlife. The amount of insurance
coverage depended upon the existing balance
of the purchased burial lots. The policy was to
be effective for a period of one year,
renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at
least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid
balance of his loan with the Assured, and is
accepted for Life Insurance coverage by the
Company on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for
amounts of insurance up to P50,000.00.
However, a declaration of good health shall be
required for all Lot Purchasers as part of the
application. The Company reserves the right
to require further evidence of insurability
satisfactory to the Company in respect of the
following:
1. Any amount of insurance in excess of
P50,000.00.
2. Any lot purchaser who is more than 55
years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot
Purchaser at any time shall be the amount of
the unpaid balance of his loan (including
arrears up to but not exceeding 2 months) as
reported by the Assured to the Company or the
sum of P100,000.00, whichever is smaller.
Such benefit shall be paid to the Assured if the
Lot Purchaser dies while insured under the
Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser
shall be effective on the date he contracts a
loan with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the Company.3
Eternal was required under the policy to
submit to Philamlife a list of all new lot
purchasers, together with a copy of the
application of each purchaser, and the
amounts of the respective unpaid balances of
all insured lot purchasers. In relation to the
instant petition, Eternal complied by
submitting a letter dated December 29,
1982,4 containing a list of insurable balances
of its lot buyers for October 1982. One of those
included in the list as "new business" was a
certain John Chuang. His balance of payments
was PhP 100,000. On August 2, 1984, Chuang
died.
5
Eternal sent a letter dated August 20, 1984 to
Philamlife, which served as an insurance
claim for Chuang’s death. Attached to the
claim were the following documents: (1)
Chuang’s Certificate of Death; (2)
Identification Certificate stating that Chuang
is a naturalized Filipino Citizen; (3) Certificate
of Claimant; (4) Certificate of Attending
Physician; and (5) Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on
November 12, 1984,6 requiring Eternal to
submit the following documents relative to its
insurance claim for Chuang’s death: (1)
Certificate of Claimant (with form attached);
(2) Assured’s Certificate (with form attached);
(3) Application for Insurance accomplished
and signed by the insured, Chuang, while still
living; and (4) Statement of Account showing
the unpaid balance of Chuang before his
death.
Eternal transmitted the required documents
through a letter dated November 14,
7
1984, which was received by Philamlife on
November 15, 1984.
After more than a year, Philamlife had not
furnished Eternal with any reply to the latter’s
insurance claim. This prompted Eternal to
demand from Philamlife the payment of the
claim for PhP 100,000 on April 25, 1986.8
In response to Eternal’s demand, Philamlife
denied Eternal’s insurance claim in a letter
dated May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he
entered into Contract #9558 and 9529 with
Eternal Gardens Memorial Park in October
1982 for the total maximum insurable amount
of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to
his death on August 2, 1984.
In accordance with our Creditor’s Group Life
Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good
health shall be required for all Lot Purchasers
as party of the application." We cite further
the provision on Effective Date of Coverage
under the policy which states that "there shall
be no insurance if the application is not
approved by the Company." Since no
application had been submitted by the
Insured/Assured, prior to his death, for our
approval but was submitted instead on
November 15, 1984, after his death, Mr. John
Uy Chuang was not covered under the Policy.
We wish to point out that Eternal Gardens
being the Assured was a party to the Contract
and was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums,
these do not connote our approval per se of
the insurance coverage but are held by us in
trust for the payor until the prerequisites for
insurance coverage shall have been met. We
will however, return all the premiums which
have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the
Makati City Regional Trial Court (RTC) for a
sum of money against Philamlife, docketed as
Civil Case No. 14736. The trial court decided
in favor of Eternal, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE,
ordering the Defendant PHILAMLIFE, to pay
the sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang,
plus legal rate of interest, until fully paid; and,
to pay the sum of P10,000.00 as attorney’s
fees.
SO ORDERED.
The RTC found that Eternal submitted
Chuang’s application for insurance which he
accomplished before his death, as testified to
by Eternal’s witness and evidenced by the
letter dated December 29, 1982, stating,
among others: "Encl: Phil-Am Life Insurance
Application Forms & Cert."10 It further ruled
that due to Philamlife’s inaction from the
submission of the requirements of the group
insurance on December 29, 1982 to Chuang’s
death on August 2, 1984, as well as
Philamlife’s acceptance of the premiums
during the same period, Philamlife was
deemed to have approved Chuang’s
application. The RTC said that since the
contract is a group life insurance, once proof
of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled,
thus:
WHEREFORE, the decision of the Regional
Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the
complaint is DISMISSED. No costs.
SO ORDERED. 11
The CA based its Decision on the factual
finding that Chuang’s application was not
enclosed in Eternal’s letter dated December
29, 1982. It further ruled that the non-
accomplishment of the submitted application
form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no
application form, Chuang was not covered by
Philamlife’s insurance.
Hence, we have this petition with the following
grounds:
The Honorable Court of Appeals has decided a
question of substance, not therefore
determined by this Honorable Court, or has
decided it in a way not in accord with law or
with the applicable jurisprudence, in holding
that:
I. The application for insurance was not duly
submitted to respondent PhilamLife before the
death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of
the Regional Trial Court dated May 29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of
facts and will not re-examine factual issues
raised before the CA and first level courts,
considering their findings of facts are
conclusive and binding on this Court. However,
such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when
in making its findings the [CA] went beyond
the issues of the case, or its findings are
contrary to the admissions of both the
appellant and the appellee; (7) when the
findings [of the CA] are contrary to the trial
court; (8) when the findings are conclusions
without citation of specific evidence on which
they are based; (9) when the facts set forth in
the petition as well as in the petitioner’s main
and reply briefs are not disputed by the
respondent; (10) when the findings of fact are
premised on the supposed absence of
evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts
not disputed by the parties, which, if properly
considered, would justify a different
12
conclusion. (Emphasis supplied.)
In the instant case, the factual findings of the
RTC were reversed by the CA; thus, this Court
may review them.
Eternal claims that the evidence that it
presented before the trial court supports its
contention that it submitted a copy of the
insurance application of Chuang before his
death. In Eternal’s letter dated December 29,
1982, a list of insurable interests of buyers for
October 1982 was attached, including Chuang
in the list of new businesses. Eternal added it
was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance
Application Forms & Cert." were enclosed in
the letter that was apparently received by
Philamlife on January 15, 1983. Finally, Eternal
alleged that it provided a copy of the
insurance application which was signed by
Chuang himself and executed before his
death.
On the other hand, Philamlife claims that the
evidence presented by Eternal is insufficient,
arguing that Eternal must present evidence
showing that Philamlife received a copy of
Chuang’s insurance application.
The evidence on record supports Eternal’s
position.
The fact of the matter is, the letter dated
December 29, 1982, which Philamlife stamped
as received, states that the insurance forms
for the attached list of burial lot buyers were
attached to the letter. Such stamp of receipt
has the effect of acknowledging receipt of the
letter together with the attachments. Such
receipt is an admission by Philamlife against
its own interest.13 The burden of evidence has
shifted to Philamlife, which must prove that
the letter did not contain Chuang’s insurance
application. However, Philamlife failed to do
so; thus, Philamlife is deemed to have
received Chuang’s insurance application.
To reiterate, it was Philamlife’s bounden duty
to make sure that before a transmittal letter is
stamped as received, the contents of the
letter are correct and accounted for.
Philamlife’s allegation that Eternal’s
witnesses ran out of credibility and reliability
due to inconsistencies is groundless. The trial
court is in the best position to determine the
reliability and credibility of the witnesses,
because it has the opportunity to observe
firsthand the witnesses’ demeanor, conduct,
and attitude. Findings of the trial court on
such matters are binding and conclusive on
the appellate court, unless some facts or
circumstances of weight and substance have
been overlooked, misapprehended, or
14
misinterpreted, that, if considered, might
affect the result of the case.15
An examination of the testimonies of the
witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and
value.
Philamlife primarily claims that Eternal did not
even know where the original insurance
application of Chuang was, as shown by the
testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form
which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the
new client to fill up two copies of this form
and the original of this is submitted to
Philamlife together with the monthly
remittances and the second copy is remained
or retained with the marketing department of
Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not
responsive as counsel is merely asking for the
location and does not [ask] for the number of
copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where
the original but when I submitted with that
payment together with the new clients all the
originals I see to it before I sign the
transmittal letter the originals are attached
therein.16
In other words, the witness admitted not
knowing where the original insurance
application was, but believed that the
application was transmitted to Philamlife as
an attachment to a transmittal letter.
As to the seeming inconsistencies between
the testimony of Manuel Cortez on whether
one or two insurance application forms were
accomplished and the testimony of Mendoza
on who actually filled out the application form,
these are minor inconsistencies that do not
affect the credibility of the witnesses. Thus,
we ruled in People v. Paredes that minor
inconsistencies are too trivial to affect the
credibility of witnesses, and these may even
serve to strengthen their credibility as these
negate any suspicion that the testimonies
have been rehearsed.17
We reiterated the above ruling in Merencillo v.
People:
Minor discrepancies or inconsistencies do not
impair the essential integrity of the
prosecution’s evidence as a whole or reflect
on the witnesses’ honesty. The test is whether
the testimonies agree on essential facts and
whether the respective versions corroborate
and substantially coincide with each other so
as to make a consistent and coherent whole.18
In the present case, the number of copies of
the insurance application that Chuang
executed is not at issue, neither is whether
the insurance application presented by
Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of
Eternal’s witnesses.
However, the question arises as to whether
Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the
affirmative.
As earlier stated, Philamlife and Eternal
entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated
December 10, 1980. In the policy, it is provided
that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser
shall be effective on the date he contracts a
loan with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the Company.
An examination of the above provision would
show ambiguity between its two sentences.
The first sentence appears to state that the
insurance coverage of the clients of Eternal
already became effective upon contracting a
loan with Eternal while the second sentence
appears to require Philamlife to approve the
insurance contract before the same can
become effective.
It must be remembered that an insurance
contract is a contract of adhesion which must
be construed liberally in favor of the insured
and strictly against the insurer in order to
safeguard the latter’s interest. Thus,
in Malayan Insurance Corporation v. Court of
Appeals, this Court held that:
Indemnity and liability insurance policies are
construed in accordance with the general rule
of resolving any ambiguity therein in favor of
the insured, where the contract or policy is
prepared by the insurer. A contract of
insurance, being a contract of adhesion, par
excellence, any ambiguity therein should be
resolved against the insurer; in other words, it
should be construed liberally in favor of the
insured and strictly against the insurer.
Limitations of liability should be regarded with
extreme jealousy and must be construed in
such a way as to preclude the insurer from
noncompliance with its
19
obligations. (Emphasis supplied.)
In the more recent case of Philamcare Health
Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain
limitations on liability, courts should construe
them in such a way as to preclude the insurer
from non-compliance with his obligation.
Being a contract of adhesion, the terms of an
insurance contract are to be construed
strictly against the party which prepared the
contract, the insurer. By reason of the
exclusive control of the insurance company
over the terms and phraseology of the
insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in
favor of the insured, especially to avoid
forfeiture.20
Clearly, the vague contractual provision, in
Creditor Group Life Policy No. P-1920 dated
December 10, 1980, must be construed in
favor of the insured and in favor of the
effectivity of the insurance contract.
On the other hand, the seemingly conflicting
provisions must be harmonized to mean that
upon a party’s purchase of a memorial lot on
installment from Eternal, an insurance
contract covering the lot purchaser is created
and the same is effective, valid, and binding
until terminated by Philamlife by disapproving
the insurance application. The second
sentence of Creditor Group Life Policy No. P-
1920 on the Effective Date of Benefit is in the
nature of a resolutory condition which would
lead to the cessation of the insurance
contract. Moreover, the mere inaction of the
insurer on the insurance application must not
work to prejudice the insured; it cannot be
interpreted as a termination of the insurance
contract. The termination of the insurance
contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and
the insured as contracting parties on equal
footing is inaccurate at best. Insurance
contracts are wholly prepared by the insurer
with vast amounts of experience in the
industry purposefully used to its advantage.
More often than not, insurance contracts are
contracts of adhesion containing technical
terms and conditions of the industry,
confusing if at all understandable to Eternal until Philamlife’s receipt of the May 29,
laypersons, that are imposed on those who 1996 RTC Decision on June 17, 1996;
wish to avail of insurance. As such, insurance
contracts are imbued with public interest that (3) To pay Eternal legal interest at the rate of
must be considered whenever the rights and twelve percent (12%) per annum of PhP
obligations of the insurer and the insured are 100,000 from June 17, 1996 until full payment
to be delineated. Hence, in order to protect of this award; and
the interest of insurance applicants, insurance
companies must be obligated to act with (4) To pay Eternal attorney’s fees in the
haste upon insurance applications, to either amount of PhP 10,000.
deny or approve the same, or otherwise be
bound to honor the application as a valid, No costs.
binding, and effective insurance contract.21
SO ORDERED.
WHEREFORE, we GRANT the petition. The
Carpio-Morales, Acting Chairperson, Tinga,
November 26, 2004 CA Decision in CA-G.R. CV
Brion, Chico-Nazario*, JJ., concur.
No. 57810 is REVERSED and SET ASIDE. The
May 29, 1996 Decision of the Makati City RTC,
Branch 138 is MODIFIED. Philamlife is
hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000

representing the proceeds of the Life
Insurance Policy of Chuang;

(2) To pay Eternal legal interest at the rate of

six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by

G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE
CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the
Rules of Court, assails the Decision 1 dated
May 17, 1993, of the Court of Appeals and its
Resolution 2 dated January 4, 1994 in CA-G.R.
CV No. 18341. The appellate court affirmed in
toto the judgment of the Misamis Oriental
Regional Trial Court, Branch 18, in an
insurance claim filed by private respondent
against Great Pacific Life Assurance Co. The
dispositive portion of the trial court's decision
reads:
WHEREFORE, judgment is rendered adjudging
the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under
its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay
to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr.
Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for
damages, attorney's fees and litigation
expenses in the complaint and counterclaim,
with costs against the defendant and
dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary,
for lack of cause of action. 3
The facts, as found by the Court of Appeals,
are as follows:
A contract of group life insurance was
executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife)
and Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure
the lives of eligible housing loan mortgagors of
DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a
physician and a housing debtor of DBP applied
for membership in the group life insurance
plan. In an application form, Dr. Leuterio
answered questions concerning his health
condition as follows:
7. Have you ever had, or consulted, a physician
for a heart condition, high blood pressure,
cancer, diabetes, lung; kidney or stomach
disorder or any other physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge,
in good health?
4 called to testify. Dr. Mejia's findings, based
Answer: [x] Yes [ ] NO.
On November 15, 1983, Grepalife issued
Certificate No. B-18558, as insurance
coverage of Dr. Leuterio, to the extent of his
DBP mortgage indebtedness amounting to
eighty-six thousand, two hundred (P86,200.00)
pesos.1âwphi1.nêt
On August 6, 1984, Dr. Leuterio died due to
"massive cerebral hemorrhage."
Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging
that Dr. Leuterio was not physically healthy
when he applied for an insurance coverage on
November 15, 1983. Grepalife insisted that Dr.
Leuterio did not disclose he had been
suffering from hypertension, which caused his
death. Allegedly, such non-disclosure
constituted concealment that justified the
denial of the claim.
On October 20, 1986, the widow of the late Dr.
Leuterio, respondent Medarda V. Leuterio, filed
a complaint with the Regional Trial Court of
Misamis Oriental, Branch 18, against Grepalife
for "Specific Performance with
5
Damages." During the trial, Dr. Hernando
Mejia, who issued the death certificate, was
partly from the information given by the
respondent widow, stated that Dr. Leuterio
complained of headaches presumably due to
high blood pressure. The inference was not
conclusive because Dr. Leuterio was not
autopsied, hence, other causes were not ruled
out.
On February 22, 1988, the trial court rendered
a decision in favor of respondent widow and
against Grepalife. On May 17, 1993, the Court
of Appeals sustained the trial court's decision.
Hence, the present petition. Petitioners
interposed the following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES
(DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFF'S HUSBAND WILFREDO
LEUTERIO ONE OF ITS LOAN BORROWERS,
INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife]
FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT
DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR
NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF
ANY EVIDENCE TO SHOW HOW MUCH WAS
THE ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE
CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING
THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM
ARISING FROM THE DEATH OF WILFREDO
LEUTERIO. 6
Synthesized below are the assigned errors for
our resolution:
1. Whether the Court of Appeals erred in
holding petitioner liable to DBP as beneficiary
in a group life insurance contract from a
complaint filed by the widow of the
decedent/mortgagor?
2. Whether the Court of Appeals erred in not
finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the
insurance contract?
3. Whether the Court of Appeals erred in
holding Grepalife liable in the amount of eighty
six thousand, two hundred (P86,200.00) pesos
without proof of the actual outstanding
mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was
instituted by the widow of Dr. Leuterio, not the
real party in interest, hence the trial court
acquired no jurisdiction over the case. It
argues that when the Court of Appeals
affirmed the trial court's judgment, Grepalife
was held liable to pay the proceeds of
insurance contract in favor of DBP, the
indispensable party who was not joined in the
suit.
To resolve the issue, we must consider the
insurable interest in mortgaged properties and
the parties to this type of contract. The
rationale of a group insurance policy of
mortgagors, otherwise known as the
"mortgage redemption insurance," is a device
for the protection of both the mortgagee and
the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that
in the event of the unexpected demise of the
mortgagor during the subsistence of the
mortgage contract, the proceeds from such
insurance will be applied to the payment of
the mortgage debt, thereby relieving the heirs
of the mortgagor from paying the
obligation. 7 In a similar vein, ample protection
is given to the mortgagor under such a
concept so that in the event of death; the
mortgage obligation will be extinguished by
the application of the insurance proceeds to
the mortgage indebtedness. 8 Consequently,
where the mortgagor pays the insurance
premium under the group insurance policy,
making the loss payable to the mortgagee, the
insurance is on the mortgagor's interest, and
the mortgagor continues to be a party to the
contract. In this type of policy insurance, the
mortgagee is simply an appointee of the
insurance fund, such loss-payable clause does
not make the mortgagee a party to the
contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor
of property effects insurance in his own name
providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to
a mortgagee, the insurance is deemed to be
upon the interest of the mortgagor, who does
not cease to be a party to the original
contract, and any act of his, prior to the loss,
which would otherwise avoid the insurance,
will have the same effect, although the
property is in the hands of the mortgagee, but
any act which, under the contract of
insurance, is to be performed by the
mortgagor, may be performed by the
mortgagee therein named, with the same
effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to
the mortgagee all his rights or interests in the
insurance, the policy stating that: "In the
event of the debtor's death before his
indebtedness with the Creditor [DBP] shall
have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to
the creditor and the balance of sum assured, if
there is any, shall then be paid to the
beneficiary/ies designated by the
10
debtor." When DBP submitted the insurance
claim against petitioner, the latter denied
payment thereof, interposing the defense of
concealment committed by the insured.
Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of
foreclosure on the residential lot of private
respondent. 11 In Gonzales La O vs. Yek Tong
Lin Fire & Marine Ins. Co. 12 we held:
Insured, being the person with whom the
contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to
some exceptions, insured may thus sue,
although the policy is taken wholly or in part
for the benefit of another person named or
unnamed, and although it is expressly made
payable to another as his interest may appear
or otherwise. * * * Although a policy issued to
a mortgagor is taken out for the benefit of the
mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name,
especially where the mortgagee's interest is
less than the full amount recoverable under
the policy, * * *.
And in volume 33, page 82, of the same work,
we read the following:
Insured may be regarded as the real party in
interest, although he has assigned the policy
for the purpose of collection, or has assigned
as collateral security any judgment he may
obtain. 13
And since a policy of insurance upon life or
health may pass by transfer, will or succession
to any person, whether he has an insurable
interest or not, and such person may recover it
whatever the insured might have
14
recovered, the widow of the decedent Dr.
Leuterio may file the suit against the insurer,
Grepalife.
The second assigned error refers to an alleged
concealment that the petitioner interposed as
its defense to annul the insurance contract.
Petitioner contends that Dr. Leuterio failed to
disclose that he had hypertension, which
might have caused his death. Concealment
exists where the assured had knowledge of a
fact material to the risk, and honesty, good
faith, and fair dealing requires that he should
communicate it to the assured, but he
designedly and intentionally withholds the
same. 15
Petitioner merely relied on the testimony of
the attending physician, Dr. Hernando Mejia,
as supported by the information given by the
widow of the decedent. Grepalife asserts that
Dr. Mejia's technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented
hospital record, and that the widow's
declaration that her husband had "possible
hypertension several years ago" should not be
considered as hearsay, but as part of res
gestae.
On the contrary the medical findings were not
conclusive because Dr. Mejia did not conduct
an autopsy on the body of the decedent. As
the attending physician, Dr. Mejia stated that
he had no knowledge of Dr. Leuterio's any
previous hospital confinement. 16 Dr. Leuterio's
death certificate stated that hypertension was
only "the possible cause of death." The private
respondent's statement, as to the medical
history of her husband, was due to her
unreliable recollection of events. Hence, the
statement of the physician was properly
considered by the trial court as hearsay.
The question of whether there was
concealment was aptly answered by the
appellate court, thus:
The insured, Dr. Leuterio, had answered in his
insurance application that he was in good
health and that he had not consulted a doctor
or any of the enumerated ailments, including
hypertension; when he died the attending
physician had certified in the death certificate
that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this
report, the appellant insurance company
refused to pay the insurance claim. Appellant
alleged that the insured had concealed the
fact that he had hypertension.
Contrary to appellant's allegations, there was
no sufficient proof that the insured had
suffered from hypertension. Aside from the
statement of the insured's widow who was not
even sure if the medicines taken by Dr.
Leuterio were for hypertension, the appellant
had not proven nor produced any witness who
could attest to Dr. Leuterio's medical
history . . .
xxx xxx xxx
Appellant insurance company had failed to
establish that there was concealment made
by the insured, hence, it cannot refuse
payment of the claim. 17
The fraudulent intent on the part of the
insured must be established to entitle the
insurer to rescind the
18
contract. Misrepresentation as a defense of
the insurer to avoid liability is an affirmative
defense and the duty to establish such
defense by satisfactory and convincing
evidence rests upon the insurer. 19 In the case
at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the
insurance.1âwphi1.nêt
And that brings us to the last point in the
review of the case at bar. Petitioner claims
that there was no evidence as to the amount
of Dr. Leuterio's outstanding indebtedness to
DBP at the time of the mortgagor's death.
Hence, for private respondent's failure to
establish the same, the action for specific
performance should be dismissed. Petitioner's
claim is without merit. A life insurance policy
is a valued policy. 20 Unless the interest of a
person insured is susceptible of exact
pecuniary measurement, the measure of
indemnity under a policy of insurance upon life
or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due
proof of the Debtor's death during the terms of
this insurance, a death benefit in the amount
of P86,200.00 shall be paid.
In the event of the debtor's death before his
indebtedness with the creditor shall have
been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to
the Creditor and the balance of the Sum
Assured, if there is any shall then be paid to
the beneficiary/ies designated by the
22
debtor." (Emphasis omitted)
However, we noted that the Court of Appeals'
decision was promulgated on May 17, 1993. In
private respondent's memorandum, she states
that DBP foreclosed in 1995 their residential
lot, in satisfaction of mortgagor's outstanding
loan. Considering this supervening event, the
insurance proceeds shall inure to the benefit
of the heirs of the deceased person or his
beneficiaries. Equity dictates that DBP should
not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio
protest). Hence, it cannot collect the
insurance proceeds, after it already
foreclosed on the mortgage. The proceeds
now rightly belong to Dr. Leuterio's heirs
represented by his widow, herein private
respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED.
The Decision and Resolution of the Court of
Appeals in CA-G.R. CV 18341 is AFFIRMED with
MODIFICATION that the petitioner is ORDERED
to pay the insurance proceeds amounting to
Eighty-six thousand, two hundred (P86,200.00)
pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of
proof of prior settlement of mortgagor's
indebtedness to Development Bank of the
Philippines. Costs against
petitioner.1âwphi1.nêt
SO ORDERED.
Mendoza, Buena and De Leon, Jr., JJ., concur.
CHAPTER TWO
Bellosillo, J, on official leave.
G.R. No. 166245 April 9, 2008
ETERNAL GARDENS MEMORIAL PARK
CORPORATION, petitioner,
vs.
THE PHILIPPINE AMERICAN LIFE
INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari
under Rule 45 which seeks to reverse and set
aside the November 26, 2004 Decision1 of the
Court of Appeals (CA) in CA-G.R. CV No. 57810
is the query: May the inaction of the insurer on
the insurance application be considered as
approval of the application?
The Facts
On December 10, 1980, respondent Philippine
American Life Insurance Company (Philamlife)
entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 2 with
petitioner Eternal Gardens Memorial Park
Corporation (Eternal). Under the policy, the
clients of Eternal who purchased burial lots
from it on installment basis would be insured
by Philamlife. The amount of insurance
coverage depended upon the existing balance
of the purchased burial lots. The policy was to
be effective for a period of one year,
renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at
least 18 but not more than 65 years of age, is
indebted to the Assured for the unpaid
balance of his loan with the Assured, and is
accepted for Life Insurance coverage by the
Company on its effective date is eligible for
insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for
amounts of insurance up to P50,000.00.
However, a declaration of good health shall be
required for all Lot Purchasers as part of the
application. The Company reserves the right to
require further evidence of insurability
satisfactory to the Company in respect of the
following:
1. Any amount of insurance in excess of
P50,000.00.
2. Any lot purchaser who is more than 55
years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot
Purchaser at any time shall be the amount of
the unpaid balance of his loan (including
arrears up to but not exceeding 2 months) as
reported by the Assured to the Company or
the sum of P100,000.00, whichever is smaller.
Such benefit shall be paid to the Assured if the
Lot Purchaser dies while insured under the
Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser
shall be effective on the date he contracts a
loan with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the Company. 3
Eternal was required under the policy to
submit to Philamlife a list of all new lot
purchasers, together with a copy of the
application of each purchaser, and the
amounts of the respective unpaid balances of
all insured lot purchasers. In relation to the
instant petition, Eternal complied by
submitting a letter dated December 29,
1982,4 containing a list of insurable balances
of its lot buyers for October 1982. One of
those included in the list as "new business"
was a certain John Chuang. His balance of
payments was PhP 100,000. On August 2,
1984, Chuang died.
Eternal sent a letter dated August 20, 1984 5 to
Philamlife, which served as an insurance claim
for Chuang’s death. Attached to the claim
were the following documents: (1) Chuang’s
Certificate of Death; (2) Identification
Certificate stating that Chuang is a naturalized
Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5)
Assured’s Certificate.
In reply, Philamlife wrote Eternal a letter on
November 12, 1984,6 requiring Eternal to
submit the following documents relative to its
insurance claim for Chuang’s death: (1)
Certificate of Claimant (with form attached);
(2) Assured’s Certificate (with form attached);
(3) Application for Insurance accomplished and
signed by the insured, Chuang, while still
living; and (4) Statement of Account showing
the unpaid balance of Chuang before his
death.
Eternal transmitted the required documents
through a letter dated November 14,
1984,7 which was received by Philamlife on
November 15, 1984.
After more than a year, Philamlife had not
furnished Eternal with any reply to the latter’s
insurance claim. This prompted Eternal to
demand from Philamlife the payment of the
claim for PhP 100,000 on April 25, 1986.8
In response to Eternal’s demand, Philamlife
denied Eternal’s insurance claim in a letter
dated May 20, 1986,9 a portion of which reads:
The deceased was 59 years old when he
entered into Contract #9558 and 9529 with
Eternal Gardens Memorial Park in October
1982 for the total maximum insurable amount
of P100,000.00 each. No application for Group
Insurance was submitted in our office prior to
his death on August 2, 1984.
In accordance with our Creditor’s Group Life
Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good
health shall be required for all Lot Purchasers
as party of the application." We cite further
the provision on Effective Date of Coverage
under the policy which states that "there shall
be no insurance if the application is not
approved by the Company." Since no
application had been submitted by the
Insured/Assured, prior to his death, for our
approval but was submitted instead on
November 15, 1984, after his death, Mr. John
Uy Chuang was not covered under the Policy.
We wish to point out that Eternal Gardens
being the Assured was a party to the Contract
and was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums,
these do not connote our approval per se of
the insurance coverage but are held by us in
trust for the payor until the prerequisites for
insurance coverage shall have been met. We
will however, return all the premiums which
have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the
Makati City Regional Trial Court (RTC) for a
sum of money against Philamlife, docketed as
Civil Case No. 14736. The trial court decided in
favor of Eternal, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment
is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE,
ordering the Defendant PHILAMLIFE, to pay the
sum of P100,000.00, representing the
proceeds of the Policy of John Uy Chuang, plus
legal rate of interest, until fully paid; and, to
pay the sum of P10,000.00 as attorney’s fees.
SO ORDERED.
The RTC found that Eternal submitted
Chuang’s application for insurance which he
accomplished before his death, as testified to
by Eternal’s witness and evidenced by the
letter dated December 29, 1982, stating,
among others: "Encl: Phil-Am Life Insurance
Application Forms & Cert."10 It further ruled
that due to Philamlife’s inaction from the
submission of the requirements of the group
insurance on December 29, 1982 to Chuang’s
death on August 2, 1984, as well as
Philamlife’s acceptance of the premiums
during the same period, Philamlife was
deemed to have approved Chuang’s
application. The RTC said that since the
contract is a group life insurance, once proof
of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled,
thus:
WHEREFORE, the decision of the Regional
Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the
complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual
finding that Chuang’s application was not
enclosed in Eternal’s letter dated December
29, 1982. It further ruled that the non-
accomplishment of the submitted application
form violated Section 26 of the Insurance
Code. Thus, the CA concluded, there being no
application form, Chuang was not covered by
Philamlife’s insurance.
Hence, we have this petition with the following
grounds:
The Honorable Court of Appeals has decided a
question of substance, not therefore
determined by this Honorable Court, or has
decided it in a way not in accord with law or
with the applicable jurisprudence, in holding
that:
I. The application for insurance was not duly
submitted to respondent PhilamLife before the
death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of
the Regional Trial Court dated May 29, 1996.
The Court’s Ruling
As a general rule, this Court is not a trier of
facts and will not re-examine factual issues
raised before the CA and first level courts,
considering their findings of facts are
conclusive and binding on this Court. However,
such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when
in making its findings the [CA] went beyond
the issues of the case, or its findings are
contrary to the admissions of both the
appellant and the appellee; (7) when the
findings [of the CA] are contrary to the
trial court; (8) when the findings are
conclusions without citation of specific
evidence on which they are based; (9) when
the facts set forth in the petition as well as in
the petitioner’s main and reply briefs are not
disputed by the respondent; (10) when the
findings of fact are premised on the supposed
absence of evidence and contradicted by the
evidence on record; and (11) when the Court
of Appeals manifestly overlooked certain
relevant facts not disputed by the parties,
which, if properly considered, would justify a
different conclusion.12(Emphasis supplied.)
In the instant case, the factual findings of the
RTC were reversed by the CA; thus, this Court
may review them.
Eternal claims that the evidence that it
presented before the trial court supports its
contention that it submitted a copy of the
insurance application of Chuang before his
death. In Eternal’s letter dated December 29,
1982, a list of insurable interests of buyers for
October 1982 was attached, including Chuang
in the list of new businesses. Eternal added it
was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance
Application Forms & Cert." were enclosed in
the letter that was apparently received by
Philamlife on January 15, 1983. Finally, Eternal
alleged that it provided a copy of the
insurance application which was signed by
Chuang himself and executed before his
death.
On the other hand, Philamlife claims that the
evidence presented by Eternal is insufficient,
arguing that Eternal must present evidence
showing that Philamlife received a copy of
Chuang’s insurance application.
The evidence on record supports Eternal’s
position.
The fact of the matter is, the letter dated
December 29, 1982, which Philamlife stamped
as received, states that the insurance forms
for the attached list of burial lot buyers were
attached to the letter. Such stamp of receipt
has the effect of acknowledging receipt of the
letter together with the attachments. Such
receipt is an admission by Philamlife against
its own interest.13 The burden of evidence has
shifted to Philamlife, which must prove that
the letter did not contain Chuang’s insurance
application. However, Philamlife failed to do
so; thus, Philamlife is deemed to have
received Chuang’s insurance application.
To reiterate, it was Philamlife’s bounden duty
to make sure that before a transmittal letter is
stamped as received, the contents of the letter
are correct and accounted for.
Philamlife’s allegation that Eternal’s witnesses
ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is
in the best position to determine the reliability
and credibility of the witnesses, because it has
the opportunity to observe firsthand the
witnesses’ demeanor, conduct, and attitude.
Findings of the trial court on such matters are
binding and conclusive on the appellate court,
unless some facts or circumstances of weight
and substance have been overlooked,
misapprehended, or misinterpreted,14 that, if
considered, might affect the result of the
case.15
An examination of the testimonies of the
witnesses mentioned by Philamlife, however,
reveals no overlooked facts of substance and
value.
Philamlife primarily claims that Eternal did not
even know where the original insurance
application of Chuang was, as shown by the
testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form
which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the
new client to fill up two copies of this form and
the original of this is submitted to Philamlife
together with the monthly remittances and the
second copy is remained or retained with the
marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not
responsive as counsel is merely asking for the
location and does not [ask] for the number of
copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where
the original but when I submitted with that
payment together with the new clients all the
originals I see to it before I sign the transmittal
letter the originals are attached therein.16
In other words, the witness admitted not
knowing where the original insurance
application was, but believed that the
application was transmitted to Philamlife as an
attachment to a transmittal letter.
As to the seeming inconsistencies between the
testimony of Manuel Cortez on whether one or
two insurance application forms were
accomplished and the testimony of Mendoza
on who actually filled out the application form,
these are minor inconsistencies that do not
affect the credibility of the witnesses. Thus, we
ruled in People v. Paredes that minor
inconsistencies are too trivial to affect the
credibility of witnesses, and these may even
serve to strengthen their credibility as these
negate any suspicion that the testimonies
have been rehearsed.17
We reiterated the above ruling in Merencillo v.
People:
Minor discrepancies or inconsistencies do not
impair the essential integrity of the
prosecution’s evidence as a whole or reflect on
the witnesses’ honesty. The test is whether the
testimonies agree on essential facts and
whether the respective versions corroborate
and substantially coincide with each other so
as to make a consistent and coherent whole.18
In the present case, the number of copies of
the insurance application that Chuang
executed is not at issue, neither is whether the
insurance application presented by Eternal has
been falsified. Thus, the inconsistencies
pointed out by Philamlife are minor and do not
affect the credibility of Eternal’s witnesses.
However, the question arises as to whether
Philamlife assumed the risk of loss without
approving the application.
This question must be answered in the
affirmative.
As earlier stated, Philamlife and Eternal
entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated
December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser
shall be effective on the date he contracts a
loan with the Assured. However, there shall be
no insurance if the application of the Lot
Purchaser is not approved by the Company.
An examination of the above provision would
show ambiguity between its two sentences.
The first sentence appears to state that the
insurance coverage of the clients of Eternal
already became effective upon contracting a
loan with Eternal while the second sentence
appears to require Philamlife to approve the
insurance contract before the same can
become effective.
It must be remembered that an insurance
contract is a contract of adhesion which must
be construed liberally in favor of the insured
and strictly against the insurer in order to
safeguard the latter’s interest. Thus,
in Malayan Insurance Corporation v. Court of
Appeals, this Court held that:
Indemnity and liability insurance policies are
construed in accordance with the general rule
of resolving any ambiguity therein in favor of
the insured, where the contract or policy is
prepared by the insurer. A contract of
insurance, being a contract of adhesion,
par excellence, any ambiguity therein
should be resolved against the insurer; in
other words, it should be construed liberally in
favor of the insured and strictly against the
insurer. Limitations of liability should be
regarded with extreme jealousy and must be
construed in such a way as to preclude the
insurer from noncompliance with its
obligations. (Emphasis supplied.)
19
In the more recent case of Philamcare Health
Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain
limitations on liability, courts should construe
them in such a way as to preclude the insurer
from non-compliance with his obligation. Being
a contract of adhesion, the terms of an
insurance contract are to be construed strictly
against the party which prepared the contract,
the insurer. By reason of the exclusive control
of the insurance company over the terms and
phraseology of the insurance contract,
ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured,
especially to avoid forfeiture.20
Clearly, the vague contractual provision, in
Creditor Group Life Policy No. P-1920 dated
December 10, 1980, must be construed in
favor of the insured and in favor of the
effectivity of the insurance contract.
On the other hand, the seemingly conflicting
provisions must be harmonized to mean that
upon a party’s purchase of a memorial lot on
installment from Eternal, an insurance
contract covering the lot purchaser is created
and the same is effective, valid, and binding
until terminated by Philamlife by disapproving
the insurance application. The second
sentence of Creditor Group Life Policy No. P-
1920 on the Effective Date of Benefit is in the
nature of a resolutory condition which would
lead to the cessation of the insurance
contract. Moreover, the mere inaction of the
insurer on the insurance application must not
work to prejudice the insured; it cannot be
interpreted as a termination of the insurance
contract. The termination of the insurance
contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and
the insured as contracting parties on equal
footing is inaccurate at best. Insurance
contracts are wholly prepared by the insurer
with vast amounts of experience in the
industry purposefully used to its advantage.
More often than not, insurance contracts are
contracts of adhesion containing technical
terms and conditions of the industry,
confusing if at all understandable to
laypersons, that are imposed on those who
wish to avail of insurance. As such, insurance
contracts are imbued with public interest that
must be considered whenever the rights and
obligations of the insurer and the insured are
to be delineated. Hence, in order to protect
the interest of insurance applicants, insurance
companies must be obligated to act with haste
upon insurance applications, to either deny or
approve the same, or otherwise be bound to
honor the application as a valid, binding, and
effective insurance contract.21
WHEREFORE, we GRANT the petition. The
November 26, 2004 CA Decision in CA-G.R. CV
No. 57810 is REVERSED and SET ASIDE. The
May 29, 1996 Decision of the Makati City RTC,
Branch 138 is MODIFIED. Philamlife is
hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000
representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of
six percent (6%) per annum of PhP 100,000
from the time of extra-judicial demand by
Eternal until Philamlife’s receipt of the May 29,
1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of
twelve percent (12%) per annum of PhP
100,000 from June 17, 1996 until full payment
of this award; and
(4) To pay Eternal attorney’s fees in the
amount of PhP 10,000.
No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga,
Brion, Chico-Nazario*, JJ., concur.
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE
CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules
of Court, assails the Decision 1 dated May 17,
1993, of the Court of Appeals and its
Resolution 2 dated January 4, 1994 in CA-G.R. CV
No. 18341. The appellate court affirmed in toto the
judgment of the Misamis Oriental Regional Trial
Court, Branch 18, in an insurance claim filed by
private respondent against Great Pacific Life
Assurance Co. The dispositive portion of the trial
court's decision reads:
WHEREFORE, judgment is rendered adjudging the
defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy
No. G-1907, in relation to Certification B-18558
liable and ordered to pay to the DEVELOPMENT
BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of
EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages,
attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the
defendant and dismissing the complaint in respect
to the plaintiffs, other than the widow-beneficiary,
for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as
follows:
A contract of group life insurance was executed
between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and
Development Bank of the Philippines (hereinafter
DBP). Grepalife agreed to insure the lives of
eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a
physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an
application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for
a heart condition, high blood pressure, cancer,
diabetes, lung; kidney or stomach disorder or any
other physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in
good health?
Answer: [x] Yes [ ] NO. 4
On November 15, 1983, Grepalife issued
Certificate No. B-18558, as insurance coverage of
Dr. Leuterio, to the extent of his DBP mortgage
indebtedness amounting to eighty-six thousand,
two hundred (P86,200.00) pesos.1âwphi1.nêt
On August 6, 1984, Dr. Leuterio died due to
"massive cerebral hemorrhage." Consequently,
DBP submitted a death claim to Grepalife.
Grepalife denied the claim alleging that Dr.
Leuterio was not physically healthy when he
applied for an insurance coverage on November
15, 1983. Grepalife insisted that Dr. Leuterio did
not disclose he had been suffering from
hypertension, which caused his death. Allegedly,
such non-disclosure constituted concealment that
justified the denial of the claim.
On October 20, 1986, the widow of the late Dr.
Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis
Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5During the trial, Dr.
Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia's findings, based
partly from the information given by the
respondent widow, stated that Dr. Leuterio
complained of headaches presumably due to high
blood pressure. The inference was not conclusive
because Dr. Leuterio was not autopsied, hence,
other causes were not ruled out.
On February 22, 1988, the trial court rendered a
decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals
sustained the trial court's decision. Hence, the
present petition. Petitioners interposed the
following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
WHICH IS NOT A PARTY TO THE CASE FOR
PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-
APPELLANT [Petitioner Grepalife] FOR LACK OF
CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING
THE CASE FOR WANT OF JURISDICTION OVER THE
SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL
AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH
ITS GROUP INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT
THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP
IN THE GROUP LIFE INSURANCE PLAN BETWEEN
DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO. 6
Synthesized below are the assigned errors for our
resolution:
1. Whether the Court of Appeals erred in holding
petitioner liable to DBP as beneficiary in a group
life insurance contract from a complaint filed by
the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not
finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding
Grepalife liable in the amount of eighty six
thousand, two hundred (P86,200.00) pesos
without proof of the actual outstanding mortgage
payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted
by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no
jurisdiction over the case. It argues that when the
Court of Appeals affirmed the trial court's
judgment, Grepalife was held liable to pay the
proceeds of insurance contract in favor of DBP, the
indispensable party who was not joined in the suit.
To resolve the issue, we must consider the
insurable interest in mortgaged properties and the
parties to this type of contract. The rationale of a
group insurance policy of mortgagors, otherwise
known as the "mortgage redemption insurance," is
a device for the protection of both the mortgagee
and the mortgagor. On the part of the mortgagee,
it has to enter into such form of contract so that in
the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be
applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from
paying the obligation. 7 In a similar vein, ample
protection is given to the mortgagor under such a
concept so that in the event of death; the
mortgage obligation will be extinguished by the
application of the insurance proceeds to the
mortgage indebtedness. 8 Consequently, where
the mortgagor pays the insurance premium under
the group insurance policy, making the loss
payable to the mortgagee, the insurance is on the
mortgagor's interest, and the mortgagor continues
to be a party to the contract. In this type of policy
insurance, the mortgagee is simply an appointee
of the insurance fund, such loss-payable clause
does not make the mortgagee a party to the
contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of
property effects insurance in his own name
providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon
the interest of the mortgagor, who does not cease
to be a party to the original contract, and any act
of his, prior to the loss, which would otherwise
avoid the insurance, will have the same effect,
although the property is in the hands of the
mortgagee, but any act which, under the contract
of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein
named, with the same effect as if it had been
performed by the mortgagor.
The insured private respondent did not cede to the
mortgagee all his rights or interests in the
insurance, the policy stating that: "In the event of
the debtor's death before his indebtedness with
the Creditor [DBP] shall have been fully paid, an
amount to pay the outstanding indebtedness shall
first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the
beneficiary/ies designated by the debtor." 10 When
DBP submitted the insurance claim against
petitioner, the latter denied payment thereof,
interposing the defense of concealment
committed by the insured. Thereafter, DBP
collected the debt from the mortgagor and took
the necessary action of foreclosure on the
residential lot of private respondent. 11 In Gonzales
La O vs. Yek Tong Lin Fire & Marine Ins. Co. 12 we
held:
Insured, being the person with whom the contract
was made, is primarily the proper person to bring
suit thereon. * * * Subject to some exceptions,
insured may thus sue, although the policy is taken
wholly or in part for the benefit of another person
named or unnamed, and although it is expressly
made payable to another as his interest may
appear or otherwise. * * * Although a policy issued
to a mortgagor is taken out for the benefit of the
mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name,
especially where the mortgagee's interest is less
than the full amount recoverable under the
policy, * * *.
And in volume 33, page 82, of the same work, we
read the following:
Insured may be regarded as the real party in
interest, although he has assigned the policy for
the purpose of collection, or has assigned as
collateral security any judgment he may obtain. 13
And since a policy of insurance upon life or health
may pass by transfer, will or succession to any
person, whether he has an insurable interest or
not, and such person may recover it whatever the
insured might have recovered, 14the widow of the
decedent Dr. Leuterio may file the suit against the
insurer, Grepalife.
The second assigned error refers to an alleged
concealment that the petitioner interposed as its
defense to annul the insurance contract. Petitioner
contends that Dr. Leuterio failed to disclose that
he had hypertension, which might have caused his
death. Concealment exists where the assured had
knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that
he should communicate it to the assured, but he
designedly and intentionally withholds the
same. 15
Petitioner merely relied on the testimony of the
attending physician, Dr. Hernando Mejia, as
supported by the information given by the widow
of the decedent. Grepalife asserts that Dr. Mejia's
technical diagnosis of the cause of death of Dr.
Leuterio was a duly documented hospital record,
and that the widow's declaration that her husband
had "possible hypertension several years ago"
should not be considered as hearsay, but as part
of res gestae.
On the contrary the medical findings were not
conclusive because Dr. Mejia did not conduct an
autopsy on the body of the decedent. As the
attending physician, Dr. Mejia stated that he had
no knowledge of Dr. Leuterio's any previous
hospital confinement. 16 Dr. Leuterio's death
certificate stated that hypertension was only "the
possible cause of death." The private respondent's
statement, as to the medical history of her
husband, was due to her unreliable recollection of
events. Hence, the statement of the physician was
properly considered by the trial court as hearsay.
The question of whether there was concealment
was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his
insurance application that he was in good health
and that he had not consulted a doctor or any of
the enumerated ailments, including hypertension;
when he died the attending physician had certified
in the death certificate that the former died of
cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant
insurance company refused to pay the insurance
claim. Appellant alleged that the insured had
concealed the fact that he had hypertension.
Contrary to appellant's allegations, there was no
sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the
insured's widow who was not even sure if the
medicines taken by Dr. Leuterio were for
hypertension, the appellant had not proven nor
produced any witness who could attest to Dr.
Leuterio's medical history . . .
xxx xxx xxx
Appellant insurance company had failed to
establish that there was concealment made by the
insured, hence, it cannot refuse payment of the
claim. 17
The fraudulent intent on the part of the insured
must be established to entitle the insurer to
rescind the contract.18Misrepresentation as a
defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence
rests upon the insurer. 19 In the case at bar, the
petitioner failed to clearly and satisfactorily
establish its defense, and is therefore liable to pay
the proceeds of the insurance.1âwphi1.nêt
And that brings us to the last point in the review of
the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's
outstanding indebtedness to DBP at the time of
the mortgagor's death. Hence, for private
respondent's failure to establish the same, the
action for specific performance should be
dismissed. Petitioner's claim is without merit. A life
insurance policy is a valued policy. 20 Unless the
interest of a person insured is susceptible of exact
pecuniary measurement, the measure of
indemnity under a policy of insurance upon life or
health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due proof of
the Debtor's death during the terms of this
insurance, a death benefit in the amount of
P86,200.00 shall be paid.
In the event of the debtor's death before his
indebtedness with the creditor shall have been
fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the Creditor and
the balance of the Sum Assured, if there is any
shall then be paid to the beneficiary/ies
designated by the debtor." 22(Emphasis omitted)
However, we noted that the Court of Appeals'
decision was promulgated on May 17, 1993. In
private respondent's memorandum, she states
that DBP foreclosed in 1995 their residential lot, in
satisfaction of mortgagor's outstanding loan.
Considering this supervening event, the insurance
proceeds shall inure to the benefit of the heirs of
the deceased person or his beneficiaries. Equity
dictates that DBP should not unjustly enrich itself
at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the
insurance proceeds, after it already foreclosed on
the mortgage. The proceeds now rightly belong to
Dr. Leuterio's heirs represented by his widow,
herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The
Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION
that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the
heirs of the insured, Dr. Wilfredo Leuterio
(deceased), upon presentation of proof of prior
settlement of mortgagor's indebtedness to
Development Bank of the Philippines. Costs
against petitioner.1âwphi1.nêt
SO ORDERED.
Mendoza, Buena and De Leon, Jr., JJ., concur.
Bellosillo, J, on official leave.
FILIPINAS COMPAÑIA DE
SEGUROS, Petitioner, v. CHRISTERN,
HUENEFELD & CO., INC., Respondent.
Ramirez & Ortigas for Petitioner.
Ewald Huenefeld for Respondent.
SYLLABUS
1. CORPORATIONS; NATIONALITY OF PRIVATE
CORPORATION; CONTROL TEST. — The nationality
of a private corporation is determined by the
character or citizenship of its controlling
stockholders.
2. ID.; ID.; ID.; INTERNATIONAL LAW; EFFECT OF
WAR. — Where majority of the stockholders of a
corporation were German subjects, the
corporation became an enemy corporation upon
the outbreak of the war between the United States
and Germany.
3. INSURANCE; TERMINATION OF POLICY OF
PUBLIC ENEMY. — As the Philippine Insurance Law
(Act No. 2427, as amended), in its section 8,
provides that "anyone except a public enemy may
be insured," an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy.
4. ID.; ID.; RETURN OF PREMIUMS UPON
TERMINATION OF POLICY BY REASON OF WAR. —
Where an insurance policy ceases to be effective
by reason of war, which has made the insured an
enemy, the premiums paid for the period covered
by the policy from the date war is declared, should
be returned.
DECISION
PARAS, C.J. :
On October 1, 1941, the respondent corporation,
Christern, Huenefeld & Co., Inc., after payment of
corresponding premium, obtained from the
petitioner, Filipinas Cia. de Seguros, fire policy No.
29333 in the sum of P100,000, covering
merchandise contained in a building located at No.
711 Roman Street, Binondo, Manila. On February
27, 1942, or during the Japanese military
occupation, the building and insured merchandise
were burned. In due time the respondent
submitted to the petitioner its claim under the
policy. The salvaged goods were sold at public
auction and, after deducting their value, the total
loss suffered by the respondent was fixed at
P92,650. The petitioner refused to pay the claim
on the ground that the policy in favor of the
respondent had ceased to be in force on the date
the United States declared war against Germany,
the respondent corporation (though organized
under and by virtue of the laws of the Philippines)
being controlled by German subjects and the
petitioner being a company under American
jurisdiction when said policy was issued on
October 1, 1941. The petitioner, however, in
pursuance of the order of the Director of the
Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the
respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in
the Court of First Instance of Manila for the
purpose of recovering from the respondent the
sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise
were burned after the policy issued in 1941 in
favor of the respondent corporation had ceased to
be effective because of the outbreak of the war
between the United States and Germany on
December 10, 1941, and that the payment made
by the petitioner to the respondent corporation
during the Japanese military occupation was under
pressure. After trial, the Court of First Instance of
Manila dismissed the action without
pronouncement as to costs. Upon appeal to the
Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs.
The case is now before us on appeal
by certiorari from the decision of the Court of
Appeals.
The Court of Appeals overruled the contention of
the petitioner that the respondent corporation
became an enemy when the United States
declared war against Germany, relying on English
and American cases which held that a corporation
is a citizen of the country or state by and under
the laws of which it was created or organized. It
rejected the theory that the nationality of a private
corporation is determined by the character or
citizenship of its controlling stockholders.
There is no question that majority of the
stockholders of the respondent corporation were
German subjects. This being so, we have to rule
that said respondent became an enemy
corporation upon the outbreak of the war between
the United States and Germany. The English and
American cases relied upon by the Court of
Appeals have lost their force in view of the latest
decision of the Supreme Court of the United States
in Clark v. Uebersee Finanz Korporation, decided
on December 8, 1947, 92 Law. Ed. Advance
Opinions, No. 4, pp. 148-153, in which the control
test has been adopted. In "Enemy Corporations"
by Martin Domke, a paper presented to the
Second International Conference of the Legal
Profession held at The Hague (Netherlands) in
August, 1948, the following enlightening passages
appear:jgc:chanrobles.com.ph
"Since World War I, the determination of enemy
nationality of corporations has been discussed in
many countries, belligerent and neutral. A
corporation was subject to enemy legislation when
it was controlled by enemies, namely managed
under the influence of individuals or corporations
themselves considered as enemies. It was the
English courts which first in the Daimler case
applied this new concept of "piercing the
corporate veil’, which was adopted by the Peace
Treaties of 1919 and the Mixed Arbitral Tribunals
established after the First World War.
"The United States of America did not adopt the
control test during the First World War. Courts
refused to recognize the concept whereby
American-registered corporations could be
considered as enemies and thus subject to
domestic legislation and administrative measures
regarding enemy property.
"World War II revived the problem again. It was
known that German and other enemy interests
were cloaked by domestic corporation structure. It
was not only by legal ownership of shares that a
material influence could be exercised on the
management of the corporation but also by long-
term loans and other factual situations. For that
reason, legislation on enemy property enacted in
various countries during World War II adopted by
statutory provisions the control test and
determined, to various degrees, the incidents of
control. Court decisions were rendered on the
basis of such newly enacted statutory provisions in
determining enemy character of domestic
corporation.
"The United States did not, in the amendments of
the Trading with the Enemy Act during the last
war, include as did other legislations, the
application of the control test and again, as in
World War I, courts refused to apply this concept
whereby the enemy character of an American or
neutral-registered corporation is determined by
the enemy nationality of the controlling
stockholders.
"Measures of blocking foreign funds, the so called
freezing regulations, and other administrative
practice in the treatment of foreign-owned
property in the United States allowed to a large
degree the determination of enemy interests in
domestic corporations and thus the application of
the control test. Court decisions sanctioned such
administrative practice enacted under the First
War Powers Act of 1941, and more recently, on
December 8, 1947, the Supreme Court of the
United States definitely approved of the control
theory. In Clark v. Uebersee Finanz Korporation, A.
G., dealing with a Swiss corporation allegedly
controlled by German interests, the Court said:
’The property of all foreign interest was placed
within the reach of the vesting power (of the Alien
Property Custodian) not to appropriate friendly or
neutral assets but to reach enemy interests which
masqueraded under those innocent fronts. . . . The
power of seizure and vesting was extended to all
property of any foreign country or national so that
no innocent appearing device could become a
Trojan horse.’"
It becomes unnecessary, therefore, to dwell at
length on the authorities cited in support of the
appealed decision. However, we may add that, in
Haw Pia v. China Banking Corporation, * 45 Off.
Gaz., (Supp. 9) 229, we already held that the
China Banking Corporation came within the
meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries
not only because it was incorporated under the
laws of an enemy country but because it was
controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as
amended), in section 8, provides that "anyone
except a public enemy may be insured." It stands
to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy.
"Effect of war, generally. — All intercourse
between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by
the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the
enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of
voluntary submission to it; or of receiving its
protection; also, all acts concerning the
transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the
enemy, and upon the life or lives of aliens
engaged in service with the enemy; this for the
reason that the subjects of one country cannot be
permitted to lend their assistance to protect by
insurance the commerce or property of
belligerent, alien subjects, or to do anything
detrimental to their country’s interest. The
purpose of war is to cripple the power and exhaust
the resources of the enemy, and it is inconsistent
that one country should destroy its enemy’s
property and repay in insurances the value of
what has been so destroyed, or that it should in
such manner increase the resources of the enemy,
or render it aid, and the commencement of war
determines, for like reasons, all trading intercourse
with the enemy, which prior thereto may have
been lawful. All individuals, therefore, who
compose the belligerent powers, exist, as to each
other, in a state of utter exclusion, and are public
enemies." (6 Couch, Cyc. of Ins. Law, pp. 5352-
5353.)

"In the case of an ordinary fire policy, which grants
insurance only from year to year, or for some
other specified term it is plain that when the
parties become alien enemies, the contractual tie
is broken and the contractual rights of the parties,
so far as not vested, lost." (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy
corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by
the petitioner (a Philippine corporation) had
ceased to be valid and enforceable, and since the
insured goods were burned after December 10,
1941, and during the war, the respondent was not
entitled to any indemnity under said policy from
the petitioner. However, elementary rules of
justice (in the absence of specific provision in the
Insurance Law) require that the premium paid by
the respondent for the period covered by its policy
from December 11, 1941, should be returned by
the petitioner.
The Court of Appeals, in deciding the case, stated
that the main issue hinges on the question of
whether the policy in question became null and
void upon the declaration of war between the
United States and Germany on December 10,
1941, and its judgment in favor of the respondent
corporation was predicated on its conclusion that
the policy did not cease to be in force. The Court
of Appeals necessarily assumed that, even if the
payment by the petitioner to the respondent was
involuntary, its action is not tenable in view of the
ruling on the validity of the policy. As a matter of
fact, the Court of Appeals held that "any
intimidation resorted to by the appellee was not
unjust but the exercise of its lawful right to claim
for and receive the payment of the insurance
policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was
entitled to payment from the appellant, was well
founded." Factually, there can be no doubt that
the Director of the Bureau of Financing, in ordering
the petitioner to pay the claim of the respondent,
merely obeyed the instructions of the Japanese
Military Administration, as may be seen from the
following: "In view of the findings and conclusion
of this office contained in its decision on
Administrative Case dated February 9, 1943 copy
of which was sent to your office and the
concurrence therein of the Financial Department of
the Japanese Military Administration, and following
the instructions of said authority, you are hereby
ordered to pay the claim of Messrs. Christern,
Huenefeld & Co., Inc. The payment of said claim,
however, should be made by means of crossed
check." (Italics supplied.) .
It results that the petitioner is entitled to recover
what was paid to the respondent under the
circumstances of this case. However, the
petitioner will be entitled to recover only the
equivalent, in actual Philippine currency, of
P92,650 paid on April 19, 1943, in accordance with ASIA LIFE INSURANCE COMPANY, defendant-
the rate fixed in the Ballantyne scale. appellee.

Wherefore, the appealed decision is hereby Mariano Lozada for appellant Constantino.
reversed and the respondent corporation is
ordered to pay to the petitioner the sum of
Cachero and Madarang for appellant Peralta.
P77,208.39, Philippine currency, less the amount
of the premium, in Philippine currency, that should
be returned by the petitioner for the unexpired Dewitt, Perkins and Ponce Enrile for appellee.
term of the policy in question, beginning
December 11, 1941. Without costs. So ordered. Ramirez and Ortigas and Padilla, Carlos and
Fernando as amici curiae.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo
and Bautista Angelo, JJ., concur. BENGZON, J.:

G.R. No. L-1669 August 31, 1950 These two cases, appealed from the Court of First
Instance of Manila, call for decision of the question
PAZ LOPEZ DE CONSTANTINO, plaintiff- whether the beneficiary in a life insurance policy
appellant, may recover the amount thereof although the
insured died after repeatedly failing to pay the
vs. stipulated premiums, such failure having been
caused by the last war in the Pacific.
ASIA LIFE INSURANCE COMPANY, defendant-
appellee. The facts are these:

x---------------------------------------------------------x First case. In consideration of the sum of P176.04

as annual premium duly paid to it, the Asia Life
G.R. No. L-1670 August 31, 1950
Insurance Company (a foreign corporation
incorporated under the laws of Delaware, U.S.A.),
AGUSTINA PERALTA, plaintiff-appellant,
issued on September 27, 1941, its Policy No.
vs. 93912 for P3,000, whereby it insured the life of
Arcadio Constantino for a term of twenty years.
The first premium covered the period up to
September 26, 1942. The plaintiff Paz Lopez de
Constantino was regularly appointed beneficiary.
The policy contained these stipulations, among
others:
This POLICY OF INSURANCE is issued in
consideration of the written and printed
application here for a copy of which is attached
hereto and is hereby made a part hereof made a
part hereof, and of the payment in advance during
the lifetime and good health of the Insured of the
annual premium of One Hundred fifty-eight and
4/100 pesos Philippine currency1 and of the
payment of a like amount upon each twenty-
seventh day of September hereafter during the
term of Twenty years or until the prior death of the
Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any
unpunctuality in making any such payment shall
cause this policy to lapse unless and except as
kept in force by the Grace Period condition or
under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were
paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an
American corporation , had to close its branch
office in Manila by reason of the Japanese
occupation, i.e. from January 2, 1942, until the
year 1945.
Second case. On August 1, 1938, the defendant
Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating
with Accident Indemnity), covering the lives of the
spouses Tomas Ruiz and Agustina Peralta, for the
sum of P3,000. The annual premium stipulated in
the policy was regularly paid from August 1, 1938,
up to and including September 30, 1941. Effective
August 1, 1941, the mode of payment of
premiums was changed from annual to quarterly,
so that quarterly premiums were paid, the last
having been delivered on November 18, 1941,
said payment covering the period up to January
31, 1942. No further payments were handed to the
insurer. Upon the Japanese occupation, the insured
and the insurer became separated by the lines of
war, and it was impossible and illegal for them to
deal with each other. Because the insured had
borrowed on the policy an mount of P234.00 in
January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force
only up to September 7, 1942. Tomas Ruiz died on
February 16, 1945. The plaintiff Agustina Peralta is
his beneficiary. Her demand for payment met with
defendant's refusal, grounded on non-payment of
the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in
consideration of the written and printed
application herefor, a copy of which is attached
hereto and is hereby made apart hereof, and of
the payment in advance during the life time and
good health of the Insured of the annual premium
of Two hundred and 43/100 pesos Philippine
currency and of the payment of a like amount
upon each first day of August hereafter during the
term of Twenty years or until the prior death of
either of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any
unpunctuality in making any such payment shall
cause this policy to lapse unless and except as
kept in force by the Grace Period condition or
under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are
entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They
allege that non-payment of the premiums was
caused by the closing of defendant's offices in
Manila during the Japanese occupation and the
impossible circumstances created by war.
Defendant on the other hand asserts that the
policies had lapsed for non-payment of premiums,
in accordance with the contract of the parties and
the law applicable to the situation.
The lower court absolved the defendant. Hence
this appeal.
The controversial point has never been decided in
this jurisdiction. Fortunately, this court has had the
benefit of extensive and exhaustive memoranda
including those of amici curiae. The matter has
received careful consideration, inasmuch as it
affects the interest of thousands of policy-holders
and the obligations of many insurance companies
operating in this country.
Since the year 1917, the Philippine law on
Insurance was found in Act No. 2427, as amended,
and the Civil Code.2Act No. 2427 was largely
copied from the Civil Code of California. 3 And this
court has heretofore announced its intention to
supplement the statutory laws with general
principles prevailing on the subject in the United
State.4
In Young vs. Midland Textile Insurance Co. (30 Phil.,
617), we said that "contracts of insurance are
contracts of indemnity upon the terms and
conditions specified in the policy. The parties have
a right to impose such reasonable conditions at
the time of the making of the contract as they
may deem wise and necessary. The rate of
premium is measured by the character of the risk
assumed. The insurance company, for a
comparatively small consideration, undertakes to
guarantee the insured against loss or damage,
upon the terms and conditions agreed upon, and
upon no other, and when called upon to pay, in
case of loss, the insurer, therefore, may justly
insists upon a fulfillment of these terms. If the
insured cannot bring himself within the conditions
of the policy, he is not entitled for the loss. The
terms of the policy constitute the measure of the
insurer's liability, and in order to recover the
insured must show himself within those terms; and
if it appears that the contract has been terminated
by a violation, on the part of the insured, of its
conditions, then there can be no right of recovery.
The compliance of the insured with the terms of
the contract is a condition precedent to the right
of recovery."
Recall of the above pronouncements is appropriate
because the policies in question stipulate that "all
premium payments are due in advance and any
unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would
seem that pursuant to the express terms of the
policy, non-payment of premium produces its
avoidance.
The conditions of contracts of Insurance, when
plainly expressed in a policy, are binding upon the
parties and should be enforced by the courts, if
the evidence brings the case clearly within their
meaning and intent. It tends to bring the law itself
into disrepute when, by astute and subtle
distinctions, a plain case is attempted to be taken
without the operation of a clear, reasonable and
material obligation of the contract.
Mack vs.Rochester German Ins. Co., 106 N.Y., 560,
564. (Young vs. Midland Textile Ins. Co., 30 Phil.,
617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this
court held that a life policy was avoided because
the premium had not been paid within the time
fixed, since by its express terms, non-payment of
any premium when due or within the thirty-day
period of grace, ipso facto caused the policy to
lapse. This goes to show that although we take the
view that insurance policies should be
conserved and should not lightly be thrown out,
5
still we do not hesitate to enforce the agreement
of the parties.
Forfeitures of insurance policies are not favored,
but courts cannot for that reason alone refuse to
enforce an insurance contract according to its
meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that
inasmuch as the non-payment of premium was the
consequence of war, it should be excused and
should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on
Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the
American cases may be divided into three groups,
according as they support the so-called
Connecticut Rule, the New York Rule, or the United
States Rule.
The first holds the view that "there are two
elements in the consideration for which the annual
premium is paid — First, the mere protection for
the year, and second, the privilege of renewing
the contract for each succeeding year by paying
the premium for that year at the time agreed
upon. According to this view of the contract, the
payment of premiums is a condition precedent,
the non-performance would be illegal necessarily
defeats the right to renew the contract."
The second rule, apparently followed by the
greater number of decisions, hold that "war
between states in which the parties reside merely
suspends the contracts of the life insurance, and
that, upon tender of all premiums due by the
insured or his representatives after the war has
terminated, the contract revives and becomes
fully operative."
The United States rule declares that the contract is
not merely suspended, but is abrogated by reason
of non-payments is peculiarly of the essence of
the contract. It additionally holds that it would be
unjust to allow the insurer to retain the reserve
value of the policy, which is the excess of the
premiums paid over the actual risk carried during
the years when the policy had been in force. This
rule was announced in the well-known
Statham case which, in the opinion of Professor
6
Vance, is the correct rule.7
The appellants and some amici curiae contend
that the New York rule should be applied here. The
appellee and other amici curiae contend that the
United States doctrine is the orthodox view.
We have read and re-read the principal cases
upholding the different theories. Besides the
respect and high regard we have always
entertained for decisions of the Supreme Court of
the United States, we cannot resist the conviction
that the reasons expounded in its decision of the
Statham case are logically and judicially sound.
Like the instant case, the policy involved in the
Statham decision specifies that non-payment on
time shall cause the policy to cease and
determine. Reasoning out that punctual payments
were essential, the court said:
. . . it must be conceded that promptness of
payment is essential in the business of life
insurance. All the calculations of the insurance
company are based on the hypothesis of prompt
payments. They not only calculate on the receipt
of the premiums when due, but on compounding
interest upon them. It is on this basis that they are
enabled to offer assurance at the favorable rates
they do. Forfeiture for non-payment is an
necessary means of protecting themselves from
embarrassment. Unless it were enforceable, the
business would be thrown into confusion. It is like
the forfeiture of shares in mining enterprises, and
all other hazardous undertakings. There must be
power to cut-off unprofitable members, or the
success of the whole scheme is endangered. The
insured parties are associates in a great scheme.
This associated relation exists whether the
company be a mutual one or not. Each is
interested in the engagements of all; for out of the
co-existence of many risks arises the law of
average, which underlies the whole business. An
essential feature of this scheme is the
mathematical calculations referred to, on which
the premiums and amounts assured are based.
And these calculations, again, are based on the
assumption of average mortality, and of prompt
payments and compound interest thereon.
Delinquency cannot be tolerated nor redeemed,
except at the option of the company. This has
always been the understanding and the practice in
this department of business. Some companies, it
is true, accord a grace of thirty days, or other fixed
period, within which the premium in arrear may be
paid, on certain conditions of continued good
health, etc. But this is a matter of stipulation, or of
discretion, on the part of the particular company.
When no stipulation exists, it is the general
understanding that time is material, and that the
forfeiture is absolute if the premium be not paid.
The extraordinary and even desperate efforts
sometimes made, when an insured person is in
extremes to meet a premium coming due,
demonstrates the common view of this matter.
The case, therefore, is one in which time is
material and of the essence and of the essence of
the contract. Non-payment at the day involves
absolute forfeiture if such be the terms of the
contract, as is the case here. Courts cannot with
safety vary the stipulation of the parties by
introducing equities for the relief of the insured
against their own negligence.
In another part of the decision, the United States
Supreme Court considers and rejects what is, in
effect, the New York theory in the following words
and phrases:
The truth is, that the doctrine of the revival of
contracts suspended during the war is one based
on considerations of equity and justice, and
cannot be invoked to revive a contract which it
would be unjust or inequitable to revive.
In the case of Life insurance, besides the
materiality of time in the performance of the
contract, another strong reason exists why the
policy should not be revived. The parties do not
stand on equal ground in reference to such a
revival. It would operate most unjustly against the
company. The business of insurance is founded on
the law of average; that of life insurance
eminently so. The average rate of mortality is the
basis on which it rests. By spreading their risks
over a large number of cases, the companies
calculate on this average with reasonable
certainty and safety. Anything that interferes with
it deranges the security of the business. If every
policy lapsed by reason of the war should be
revived, and all the back premiums should be
paid, the companies would have the benefit of this
average amount of risk. But the good risks are
never heard from; only the bar are sought to be
revived, where the person insured is either dead
or dying. Those in health can get the new policies
cheaper than to pay arrearages on the old. To
enforce a revival of the bad cases, whilst the
company necessarily lose the cases which are
desirable, would be manifestly unjust. An insured
person, as before stated, does not stand isolated
and alone. His case is connected with and co-
related to the cases of all others insured by the
same company. The nature of the business, as a
whole, must be looked at to understand the
general equities of the parties.
The above consideration certainly lend themselves
to the approval of fair-minded men. Moreover, if,
as alleged, the consequences of war should not
prejudice the insured, neither should they bear
down on the insurer.
Urging adoption of the New York theory, counsel
for plaintiff point out that the obligation of the
insured to pay premiums was excused during the
war owing to impossibility of performance, and
that consequently no unfavorable consequences
should follow from such failure.
The appellee answers, quite plausibly, that the
periodic payment of premiums, at least those after
the first, is not an obligation of the insured, so
much so that it is not a debt enforceable by action
of the insurer.
Under an Oklahoma decision, the annual premium
due is not a debt. It is not an obligation upon
which the insurer can maintain an action against
insured; nor is its settlement governed by the
strict rule controlling payments of debts. So, the
court in a Kentucky case declares, in the opinion,
that it is not a debt. . . . The fact that it is payable
annually or semi-annually, or at any other
stipulated time, does not of itself constitute a
promise to pay, either express or implied. In case
of non-payment the policy is forfeited, except so
far as the forfeiture may be saved by agreement,
by waiver, estoppel, or by statute. The payment of
the premium is entirely optional, while a debt may
be enforced at law, and the fact that the premium
is agreed to be paid is without force, in the
absence of an unqualified and absolute agreement
to pay a specified sum at some certain time. In the
ordinary policy there is no promise to pay, but it is
optional with the insured whether he will continue
the policy or forfeit it. (3 Couch, Cyc. on Insurance,
Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui
generis. While the insured by an observance of the
conditions may hold the insurer to his contract,
the latter has not the power or right to compel the
insured to maintain the contract relation with it
longer than he chooses. Whether the insured will
continue it or not is optional with him. There being
no obligation to pay for the premium, they did not
constitute a debt. (Noble vs. Southern States M.D.
Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis
ours.)
It should be noted that the parties contracted not
only for peacetime conditions but also for times of
war, because the policies contained provisions
applicable expressly to wartime days. The logical
inference, therefore, is that the parties
contemplated uninterrupted operation of the
contract even if armed conflict should ensue.
For the plaintiffs, it is again argued that in view of
the enormous growth of insurance business since
the Statham decision, it could now be relaxed and
even disregarded. It is stated "that the relaxation
of rules relating to insurance is in direct proportion
to the growth of the business. If there were only
100 men, for example, insured by a Company or a
mutual Association, the death of one will distribute
the insurance proceeds among the remaining 99
policy-holders. Because the loss which each
survivor will bear will be relatively great, death
from certain agreed or specified causes may be
deemed not a compensable loss. But if the policy-
holders of the Company or Association should be
1,000,000 individuals, it is clear that the death of
one of them will not seriously prejudice each one
of the 999,999 surviving insured. The loss to be
borne by each individual will be relatively small."
The answer to this is that as there are (in the
example) one million policy-holders, the "losses"
to be considered will not be the death of one but
the death of ten thousand, since the proportion of
1 to 100 should be maintained. And certainly such
losses for 10,000 deaths will not be "relatively
small."
After perusing the Insurance Act, we are firmly
persuaded that the non-payment of premiums is
such a vital defense of insurance companies that
since the very beginning, said Act no. 2427
expressly preserved it, by providing that after the
policy shall have been in force for two years, it
shall become incontestable (i.e. the insurer shall
have no defense) except for fraud, non-payment
of premiums, and military or naval service in time
of war (sec. 184 [b], Insurance Act). And when
Congress recently amended this section (Rep. Act
No. 171), the defense of fraud was eliminated,
while the defense of nonpayment of premiums
was preserved. Thus the fundamental character of
the undertaking to pay premiums and the high
importance of the defense of non-payment
thereof, was specifically recognized.
In keeping with such legislative policy, we feel no
hesitation to adopt the United States Rule, which
is in effect a variation of the Connecticut rule for
the sake of equity. In this connection, it appears
that the first policy had no reserve value, and that
the equitable values of the second had been
practically returned to the insured in the form of
loan and advance for premium.
For all the foregoing, the lower court's decision
absolving the defendant from all liability on the
policies in question, is hereby affirmed, without
costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor,
Tuason, and Reyes, JJ., concur.
G.R. No. 183526 August 25, 2009
VIOLETA R. LALICAN, Petitioner,
vs.
THE INSULAR LIFE ASSURANCE COMPANY
LIMITED, AS REPRESENTED BY THE
PRESIDENT VICENTE R. AVILON, Respondent.
DECISION
CHICO-NAZARIO, J.:
Challenged in this Petition for Review on
Certiorari1 under Rule 45 of the Rules of Court are
the Decision2 dated 30 August 2007 and the
Orders dated 10 April 20083 and 3 July 20084 of
the Regional Trial Court (RTC) of Gapan City,
Branch 34, in Civil Case No. 2177. In its assailed
Decision, the RTC dismissed the claim for death
benefits filed by petitioner Violeta R. Lalican
(Violeta) against respondent Insular Life Assurance
Company Limited (Insular Life); while in its
questioned Orders dated 10 April 2008 and 3 July
2008, respectively, the RTC declared the finality of
the aforesaid Decision and denied petitioner’s
Notice of Appeal.
The factual and procedural antecedents of the
case, as culled from the records, are as follows:
Violeta is the widow of the deceased Eulogio C.
Lalican (Eulogio).
During his lifetime, Eulogio applied for an
insurance policy with Insular Life. On 24 April
1997, Insular Life, through Josephine Malaluan
(Malaluan), its agent in Gapan City, issued in favor
of Eulogio Policy No. 9011992, 5 which contained a
20-Year Endowment Variable Income Package Flexi
Plan worth ₱500,000.00,6 with two riders valued at
₱500,000.00 each.7 Thus, the value of the policy
amounted to ₱1,500,000.00. Violeta was named
as the primary beneficiary.
Under the terms of Policy No. 9011992, Eulogio
was to pay the premiums on a quarterly basis in
the amount of ₱8,062.00, payable every 24 April,
24 July, 24 October and 24 January of each year,
until the end of the 20-year period of the policy.
According to the Policy Contract, there was a
grace period of 31 days for the payment of each
premium subsequent to the first. If any premium
was not paid on or before the due date, the policy
would be in default, and if the premium remained
unpaid until the end of the grace period, the policy
would automatically lapse and become void.8
Eulogio paid the premiums due on 24 July 1997
and 24 October 1997. However, he failed to pay
the premium due on 24 January 1998, even after
the lapse of the grace period of 31 days. Policy No.
9011992, therefore, lapsed and became void.
Eulogio submitted to the Cabanatuan District
Office of Insular Life, through Malaluan, on 26 May
1998, an Application for Reinstatement9 of Policy
No. 9011992, together with the amount of
₱8,062.00 to pay for the premium due on 24
January 1998. In a letter10 dated 17 July 1998,
Insular Life notified Eulogio that his Application for
Reinstatement could not be fully processed
because, although he already deposited ₱8,062.00
as payment for the 24 January 1998 premium, he
left unpaid the overdue interest thereon
amounting to ₱322.48. Thus, Insular Life
instructed Eulogio to pay the amount of interest
and to file another application for reinstatement.
Eulogio was likewise advised by Malaluan to pay
the premiums that subsequently became due on
24 April 1998 and 24 July 1998, plus interest.
On 17 September 1998, Eulogio went to
Malaluan’s house and submitted a second
Application for Reinstatement11of Policy No.
9011992, including the amount of ₱17,500.00,
representing payments for the overdue interest on
the premium for 24 January 1998, and the
premiums which became due on 24 April 1998 and
24 July 1998. As Malaluan was away on a business
errand, her husband received Eulogio’s second
Application for Reinstatement and issued a receipt
for the amount Eulogio deposited.
A while later, on the same day, 17 September
1998, Eulogio died of cardio-respiratory arrest
secondary to electrocution.
Without knowing of Eulogio’s death, Malaluan
forwarded to the Insular Life Regional Office in the
City of San Fernando, on 18 September 1998,
Eulogio’s second Application for Reinstatement of
Policy No. 9011992 and ₱17,500.00 deposit.
However, Insular Life no longer acted upon
Eulogio’s second Application for Reinstatement, as
the former was informed on 21 September 1998
that Eulogio had already passed away.
On 28 September 1998, Violeta filed with Insular
Life a claim for payment of the full proceeds of
Policy No. 9011992.
In a letter12 dated 14 January 1999, Insular Life
informed Violeta that her claim could not be
granted since, at the time of Eulogio’s death,
Policy No. 9011992 had already lapsed, and
Eulogio failed to reinstate the same. According to
the Application for Reinstatement, the policy
would only be considered reinstated upon
approval of the application by Insular Life during
the applicant’s "lifetime and good health," and
whatever amount the applicant paid in connection
thereto was considered to be a deposit only until
approval of said application. Enclosed with the 14
January 1999 letter of Insular Life to Violeta was
DBP Check No. 0000309734, for the amount of
₱25,417.00, drawn in Violeta’s favor, representing
the full refund of the payments made by Eulogio
on Policy No. 9011992.
On 12 February 1998, Violeta requested a
reconsideration of the disallowance of her claim. In
a letter13 dated 10 March 1999, Insular Life stated
that it could not find any reason to reconsider its
decision rejecting Violeta’s claim. Insular Life
again tendered to Violeta the above-mentioned
check in the amount of ₱25,417.00.
Violeta returned the letter dated 10 March 1999
and the check enclosed therein to the Cabanatuan
District Office of Insular Life. Violeta’s counsel
subsequently sent a letter14 dated 8 July 1999 to
Insular Life, demanding payment of the full
proceeds of Policy No. 9011992. On 11 August
1999, Insular Life responded to the said demand
letter by agreeing to conduct a re-evaluation of
Violeta’s claim.
Without waiting for the result of the re-evaluation
by Insular Life, Violeta filed with the RTC, on 11
October 1999, a Complaint for Death Claim
Benefit,15 which was docketed as Civil Case No.
2177. Violeta alleged that Insular Life engaged in
unfair claim settlement practice and deliberately
failed to act with reasonable promptness on her
insurance claim. Violeta prayed that Insular Life be
ordered to pay her death claim benefits on Policy
No. 9011992, in the amount of ₱1,500,000.00,
plus interests, attorney’s fees, and cost of suit.
Insular Life filed with the RTC an Answer with
Counterclaim,16 asserting that Violeta’s Complaint
had no legal or factual bases. Insular Life
maintained that Policy No. 9011992, on which
Violeta sought to recover, was rendered void by
the non-payment of the 24 January 1998 premium
and non-compliance with the requirements for the
reinstatement of the same. By way of
counterclaim, Insular Life prayed that Violeta be
ordered to pay attorney’s fees and expenses of
litigation incurred by the former.
Violeta, in her Reply and Answer to Counterclaim,
asserted that the requirements for the
reinstatement of Policy No. 9011992 had been
complied with and the defenses put up by Insular
Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a
Decision in favor of Insular Life.
The RTC found that Policy No. 9011992 had indeed
lapsed and Eulogio needed to have the same
reinstated:
[The] arguments [of Insular Life] are not without
basis. When the premiums for April 24 and July 24,
1998 were not paid by [Eulogio] even after the
lapse of the 31-day grace period, his insurance
policy necessarily lapsed. This is clear from the
terms and conditions of the contract between
[Insular Life] and [Eulogio] which are written in
[the] Policy provisions of Policy No. 9011992 x x
x.17
The RTC, taking into account the clear provisions
of the Policy Contract between Eulogio and Insular
Life and the Application for Reinstatement Eulogio
subsequently signed and submitted to Insular Life,
held that Eulogio was not able to fully comply with
the requirements for the reinstatement of Policy
No. 9011992:
The well-settled rule is that a contract has the
force of law between the parties. In the instant
case, the terms of the insurance contract between
[Eulogio] and [Insular Life] were spelled out in the
policy provisions of Insurance Policy No. 9011992.
There is likewise no dispute that said insurance
contract is by nature a contract of adhesion[,]
which is defined as "one in which one of the
contracting parties imposes a ready-made form of
contract which the other party may accept or
reject but cannot modify." (Polotan, Sr. vs. CA, 296
SCRA 247).
xxxx
The New Lexicon Webster’s Dictionary defines
ambiguity as the "quality of having more than one
meaning" and "an idea, statement or expression
capable of being understood in more than one
sense." In Nacu vs. Court of Appeals, 231 SCRA
237 (1994), the Supreme Court stated that[:]
"Any ambiguity in a contract, whose terms are
susceptible of different interpretations as a result
thereby, must be read and construed against the
party who drafted it on the assumption that it
could have been avoided by the exercise of a little
care."
In the instant case, the dispute arises from the
afore-quoted provisions written on the face of the
second application for reinstatement. Examining
the said provisions, the court finds the same
clearly written in terms that are simple enough to
admit of only one interpretation. They are clearly
not ambiguous, equivocal or uncertain that would
need further construction. The same are written
on the very face of the application just above the
space where [Eulogio] signed his name. It is
inconceivable that he signed it without reading
and understanding its import.1avvphi1
Similarly, the provisions of the policy provisions
(sic) earlier mentioned are written in simple and
clear layman’s language, rendering it free from
any ambiguity that would require a legal
interpretation or construction. Thus, the court
believes that [Eulogio] was well aware that when
he filed the said application for reinstatement, his
lapsed policy was not automatically reinstated and
that its approval was subject to certain conditions.
Nowhere in the policy or in the application for
reinstatement was it ever mentioned that the
payment of premiums would have the effect of an
automatic and immediate renewal of the lapsed
policy. Instead, what was clearly stated in the
application for reinstatement is that pending
approval thereof, the premiums paid would be
treated as a "deposit only and shall not bind the
company until this application is finally approved
during my/our" lifetime and good health[.]"
Again, the court finds nothing in the aforesaid
provisions that would even suggest an ambiguity
either in the words used or in the manner they
were written. [Violeta] did not present any proof
that [Eulogio] was not conversant with the English
language. Hence, his having personally signed the
application for reinstatement[,] which consisted
only of one page, could only mean that he has
read its contents and that he understood them. x x
x payment of overdue premiums and interest was
Therefore, consistent with the above Supreme
Court ruling and finding no ambiguity both in the
policy provisions of Policy No. 9011992 and in the
application for reinstatement subject of this case,
the court finds no merit in [Violeta’s] contention
that the policy provision stating that [the lapsed
policy of Eulogio] should be reinstated during his
lifetime is ambiguous and should be construed in
his favor. It is true that [Eulogio] submitted his
application for reinstatement, together with his
premium and interest payments, to [Insular Life]
through its agent Josephine Malaluan in the
morning of September 17, 1998. Unfortunately, he
died in the afternoon of that same day. It was only
on the following day, September 18, 1998 that Ms.
Malaluan brought the said document to [the
regional office of Insular Life] in San Fernando,
Pampanga for approval. As correctly pointed out
by [Insular Life] there was no more application to
approve because the applicant was already dead
and no insurance company would issue an
insurance policy to a dead person. 18 (Emphases
ours.)
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta]
for the loss of her husband, it cannot express the
same by interpreting the insurance agreement in
her favor where there is no need for such
interpretation. It is conceded that [Eulogio’s]
received by [Insular Life] through its agent Ms.
Malaluan. It is also true that [the] application for
reinstatement was filed by [Eulogio] a day before
his death. However, there is nothing that would
justify a conclusion that such receipt amounted to
an automatic reinstatement of the policy that has
already lapsed. The evidence suggests clearly that
no such automatic renewal was contemplated in
the contract between [Eulogio] and [Insular Life].
Neither was it shown that Ms. Malaluan was the
officer authorized to approve the application for
reinstatement and that her receipt of the
documents submitted by [Eulogio] amounted to its
approval.19 (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises
considered and finding that [Violeta] has failed to
establish by preponderance of evidence her cause
of action against the defendant, let this case be,
as it is hereby DISMISSED.20
On 14 September 2007, Violeta filed a Motion for
Reconsideration21 of the afore-mentioned RTC
Decision. Insular Life opposed22 the said motion,
averring that the arguments raised therein were
merely a rehash of the issues already considered
and addressed by the RTC. In an Order 23 dated 8
November 2007, the RTC denied Violeta’s Motion
for Reconsideration, finding no cogent and
compelling reason to disturb its earlier findings.
Per the Registry Return Receipt on record, the 8
November 2007 Order of the RTC was received by
Violeta on 3 December 2007.
In the interim, on 22 November 2007, Violeta filed
with the RTC a Reply24 to the Motion for
Reconsideration, wherein she reiterated the prayer
in her Motion for Reconsideration for the setting
aside of the Decision dated 30 August 2007.
Despite already receiving on 3 December 2007, a
copy of the RTC Order dated 8 November 2007,
which denied her Motion for Reconsideration,
Violeta still filed with the RTC, on 26 February
2008, a Reply Extended Discussion elaborating on
the arguments she had previously made in her
Motion for Reconsideration and Reply.
On 10 April 2008, the RTC issued an
Order,25 declaring that the Decision dated 30
August 2007 in Civil Case No. 2177 had already
attained finality in view of Violeta’s failure to file
the appropriate notice of appeal within the
reglementary period. Thus, any further discussions
on the issues raised by Violeta in her Reply and
Reply Extended Discussion would be moot and
academic.
Violeta filed with the RTC, on 20 May 2008, a
Notice of Appeal with Motion,26 praying that the
Order dated 10 April 2008 be set aside and that
she be allowed to file an appeal with the Court of
Appeals.
In an Order27 dated 3 July 2008, the RTC denied
Violeta’s Notice of Appeal with Motion given that
the Decision dated 30 August 2007 had long since
attained finality.
Violeta directly elevated her case to this Court via
the instant Petition for Review on Certiorari,
raising the following issues for consideration:
1. Whether or not the Decision of the court a quo
dated August 30, 2007, can still be reviewed
despite having allegedly attained finality and
despite the fact that the mode of appeal that has
been availed of by Violeta is erroneous?
2. Whether or not the Regional Trial Court in its
original jurisdiction has decided the case on a
question of law not in accord with law and
applicable decisions of the Supreme Court?
Violeta insists that her former counsel committed
an honest mistake in filing a Reply, instead of a
Notice of Appeal of the RTC Decision dated 30
August 2007; and in the computation of the
reglementary period for appealing the said
judgment. Violeta claims that her former counsel
suffered from poor health, which rapidly
deteriorated from the first week of July 2008 until
the latter’s death just shortly after the filing of the
instant Petition on 8 August 2008. In light of these
circumstances, Violeta entreats this Court to admit
and give due course to her appeal even if the
same was filed out of time.
Violeta further posits that the Court should
address the question of law arising in this case
involving the interpretation of the second
sentence of Section 19 of the Insurance Code,
which provides:
Section. 19. x x x [I]nterest in the life or health of
a person insured must exist when the insurance
takes effect, but need not exist thereafter or when
the loss occurs.
On the basis thereof, Violeta argues that Eulogio
still had insurable interest in his own life when he
reinstated Policy No. 9011992 just before he
passed away on 17 September 1998. The RTC
should have construed the provisions of the Policy
Contract and Application for Reinstatement in
favor of the insured Eulogio and against the
insurer Insular Life, and considered the special
circumstances of the case, to rule that Eulogio had
complied with the requisites for the reinstatement
of Policy No. 9011992 prior to his death, and that
Violeta is entitled to claim the proceeds of said
policy as the primary beneficiary thereof.
The Petition lacks merit.
At the outset, the Court notes that the elevation of
the case to us via the instant Petition for Review
on Certiorari is not justified. Rule 41, Section 1 of
the Rules of Court,28 provides that no appeal may
be taken from an order disallowing or dismissing
an appeal. In such a case, the aggrieved party
may file a Petition for Certiorari under Rule 65 of
the Rules of Court.29
Furthermore, the RTC Decision dated 30 August
2007, assailed in this Petition, had long become
final and executory. Violeta filed a Motion for
Reconsideration thereof, but the RTC denied the
same in an Order dated 8 November 2007. The
records of the case reveal that Violeta received a
copy of the 8 November 2007 Order on 3
December 2007. Thus, Violeta had 15 days30 from
said date of receipt, or until 18 December 2007, to
file a Notice of Appeal. Violeta filed a Notice of
Appeal only on 20 May 2008, more than five
months after receipt of the RTC Order dated 8
November 2007 denying her Motion for
Reconsideration.
Violeta’s claim that her former counsel’s failure to
file the proper remedy within the reglementary
period was an honest mistake, attributable to the
latter’s deteriorating health, is unpersuasive.
Violeta merely made a general averment of her
former counsel’s poor health, lacking relevant
details and supporting evidence. By Violeta’s own
admission, her former counsel’s health rapidly
deteriorated only by the first week of July 2008.
The events pertinent to Violeta’s Notice of Appeal
took place months before July 2008, i.e., a copy of
the RTC Order dated 8 November 2007, denying
Violeta’s Motion for Reconsideration of the
Decision dated 30 August 2007, was received on 3
December 2007; and Violeta’s Notice of Appeal
was filed on 20 May 2008. There is utter lack of
proof to show that Violeta’s former counsel was
already suffering from ill health during these
times; or that the illness of Violeta’s former
counsel would have affected his judgment and
competence as a lawyer.
Moreover, the failure of her former counsel to file
a Notice of Appeal within the reglementary period
binds Violeta, which failure the latter cannot now
disown on the basis of her bare allegation and self-
serving pronouncement that the former was ill. A
client is bound by his counsel’s mistakes and
negligence.31
The Court, therefore, finds no reversible error on
the part of the RTC in denying Violeta’s Notice of
Appeal for being filed beyond the reglementary
period. Without an appeal having been timely
filed, the RTC Decision dated 30 August 2007 in
Civil Case No. 2177 already became final and
executory.
A judgment becomes "final and executory" by
operation of law. Finality becomes a fact when the
reglementary period to appeal lapses and no
appeal is perfected within such period. As a
consequence, no court (not even this Court) can
exercise appellate jurisdiction to review a case or
modify a decision that has become final. 32 When a
final judgment is executory, it becomes immutable
and unalterable. It may no longer be modified in
any respect either by the court, which rendered it
or even by this Court. The doctrine is founded on
considerations of public policy and sound practice
that, at the risk of occasional errors, judgments
must become final at some definite point in time.33
The only recognized exceptions to the doctrine of
immutability and unalterability are the correction
of clerical errors, the so-called nunc pro
tunc entries, which cause no prejudice to any
party, and void judgments.34 The instant case does
not fall under any of these exceptions.
Even if the Court ignores the procedural lapses
committed herein, and proceeds to resolve the
substantive issues raised, the Petition must still
fail.
Violeta makes it appear that her present Petition
involves a question of law, particularly, whether
Eulogio had an existing insurable interest in his
own life until the day of his death.
An insurable interest is one of the most basic and
essential requirements in an insurance contract. In
general, an insurable interest is that interest which
a person is deemed to have in the subject matter
insured, where he has a relation or connection
with or concern in it, such that the person will
derive pecuniary benefit or advantage from the
preservation of the subject matter insured and will
suffer pecuniary loss or damage from its
destruction, termination, or injury by the
happening of the event insured against. 35 The
existence of an insurable interest gives a person
the legal right to insure the subject matter of the
policy of insurance.36 Section 10 of the Insurance
Code indeed provides that every person has an
insurable interest in his own life. 37 Section 19 of
the same code also states that an interest in the
life or health of a person insured must exist when
the insurance takes effect, but need not exist
thereafter or when the loss occurs.38
Upon more extensive study of the Petition, it
becomes evident that the matter of insurable
interest is entirely irrelevant in the case at bar. It is
actually beyond question that while Eulogio was
still alive, he had an insurable interest in his own
life, which he did insure under Policy No. 9011992.
The real point of contention herein is whether
Eulogio was able to reinstate the lapsed insurance
policy on his life before his death on 17 September
1998.
The Court rules in the negative.
Before proceeding, the Court must correct the
erroneous declaration of the RTC in its 30 August
2007 Decision that Policy No. 9011992 lapsed
because of Eulogio’s non-payment of the
premiums which became due on 24 April 1998 and
24 July 1998. Policy No. 9011992 had lapsed and
become void earlier, on 24 February 1998, upon
the expiration of the 31-day grace period for
payment of the premium, which fell due on 24
January 1998, without any payment having been
made.
That Policy No. 9011992 had already lapsed is a
fact beyond dispute. Eulogio’s filing of his first
Application for Reinstatement with Insular Life,
through Malaluan, on 26 May 1998, constitutes an
admission that Policy No. 9011992 had lapsed by
then. Insular Life did not act on Eulogio’s first
Application for Reinstatement, since the amount
Eulogio simultaneously deposited was sufficient to
cover only the ₱8,062.00 overdue premium for 24
January 1998, but not the ₱322.48 overdue
interests thereon. On 17 September 1998, Eulogio
submitted a second Application for Reinstatement
to Insular Life, again through Malaluan, depositing
at the same time ₱17,500.00, to cover payment
for the overdue interest on the premium for 24
January 1998, and the premiums that had also
become due on 24 April 1998 and 24 July 1998. On
the very same day, Eulogio passed away.
To reinstate a policy means to restore the same to
premium-paying status after it has been permitted
to lapse.39Both the Policy Contract and the
Application for Reinstatement provide for specific
conditions for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular
Life identified the following conditions for
reinstatement should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within
three years after it lapsed if the following
conditions are met: (1) the policy has not been
surrendered for its cash value or the period of
extension as a term insurance has not expired; (2)
evidence of insurability satisfactory to [Insular
Life] is furnished; (3) overdue premiums are paid
with compound interest at a rate not exceeding
that which would have been applicable to said
premium and indebtedness in the policy years
prior to reinstatement; and (4) indebtedness which
existed at the time of lapsation is paid or
renewed.40
Additional conditions for reinstatement of a lapsed
policy were stated in the Application for
Reinstatement which Eulogio signed and
submitted, to wit:
I/We agree that said Policy shall not be considered
reinstated until this application is approved by the
Company during my/our lifetime and good health
and until all other Company requirements for the
reinstatement of said Policy are fully satisfied.
I/We further agree that any payment made or to
be made in connection with this application shall
be considered as deposit only and shall not bind
the Company until this application is finally
approved by the Company during my/our lifetime
and good health. If this application is disapproved,
I/We also agree to accept the refund of all
payments made in connection herewith, without
interest, and to surrender the receipts for such
payment.41 (Emphases ours.)
In the instant case, Eulogio’s death rendered
impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True,
Eulogio, before his death, managed to file his
Application for Reinstatement and deposit the
amount for payment of his overdue premiums and
interests thereon with Malaluan; but Policy No.
9011992 could only be considered reinstated after
the Application for Reinstatement had been
processed and approved by Insular Life during
Eulogio’s lifetime and good health.
Relevant herein is the following pronouncement of
the Court in Andres v. The Crown Life Insurance
Company,42citing McGuire v. The Manufacturer's
Life Insurance Co.43:
"The stipulation in a life insurance policy giving
the insured the privilege to reinstate it upon
written application does not give the insured
absolute right to such reinstatement by the mere
filing of an application. The insurer has the right to
deny the reinstatement if it is not satisfied as to
the insurability of the insured and if the latter does
not pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured the insurance Company cannot be
compelled to entertain an application for
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be
determined and satisfied." (Emphases ours.)
It does not matter that when he died, Eulogio’s
Application for Reinstatement and deposits for the
overdue premiums and interests were already with
Malaluan. Insular Life, through the Policy Contract,
expressly limits the power or authority of its
insurance agents, thus:
Our agents have no authority to make or modify
this contract, to extend the time limit for payment
of premiums, to waive any lapsation, forfeiture or
any of our rights or requirements, such powers
being limited to our president, vice-president or
persons authorized by the Board of Trustees and
only in writing.44 (Emphasis ours.)
Malaluan did not have the authority to approve
Eulogio’s Application for Reinstatement. Malaluan
still had to turn over to Insular Life Eulogio’s
Application for Reinstatement and accompanying
deposits, for processing and approval by the latter.
The Court agrees with the RTC that the conditions
for reinstatement under the Policy Contract and
Application for Reinstatement were written in clear
and simple language, which could not admit of
any meaning or interpretation other than those
that they so obviously embody. A construction in
favor of the insured is not called for, as there is no
ambiguity in the said provisions in the first place.
The words thereof are clear, unequivocal, and
simple enough so as to preclude any mistake in
the appreciation of the same.
Violeta did not adduce any evidence that Eulogio
might have failed to fully understand the import
and meaning of the provisions of his Policy
Contract and/or Application for Reinstatement,
both of which he voluntarily signed. While it is a
cardinal principle of insurance law that a policy or
contract of insurance is to be construed liberally in
favor of the insured and strictly as against the
insurer company, yet, contracts of insurance, like
other contracts, are to be construed according to
the sense and meaning of the terms, which the
parties themselves have used. If such terms are
clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular
sense.45
Eulogio’s death, just hours after filing his
Application for Reinstatement and depositing his
payment for overdue premiums and interests with
Malaluan, does not constitute a special
circumstance that can persuade this Court to
already consider Policy No. 9011992 reinstated.
Said circumstance cannot override the clear and
express provisions of the Policy Contract and
Application for Reinstatement, and operate to
remove the prerogative of Insular Life thereunder
to approve or disapprove the Application for
Reinstatement. Even though the Court
commiserates with Violeta, as the tragic and
fateful turn of events leaves her practically empty-
handed, the Court cannot arbitrarily burden
Insular Life with the payment of proceeds on a
lapsed insurance policy. Justice and fairness must
equally apply to all parties to a case. Courts are
not permitted to make contracts for the parties.
The function and duty of the courts consist simply
in enforcing and carrying out the contracts
actually made.46
Policy No. 9011992 remained lapsed and void, not
having been reinstated in accordance with the
Policy Contract and Application for Reinstatement
before Eulogio’s death. Violeta, therefore, cannot
claim any death benefits from Insular Life on the
basis of Policy No. 9011992; but she is entitled to
receive the full refund of the payments made by
Eulogio thereon.
WHEREFORE, premises considered, the Court
DENIES the instant Petition for Review on
Certiorari under Rule 45 of the Rules of Court. The
Court AFFIRMS the Orders dated 10 April 2008 and
3 July 2008 of the RTC of Gapan City, Branch 34, in
Civil Case No. 2177, denying petitioner Violeta R.
Lalican’s Notice of Appeal, on the ground that the
Decision dated 30 August 2007 subject thereof,
was already final and executory. No costs.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
Acting Chairperson
G.R. No. 23703 September 28, 1925
HILARIO GERCIO, plaintiff-appellee,
vs.
SUN LIFE ASSURANCE OF CANADA, ET
AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus
Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla
for appellee.
MALCOLM, J.:
The question of first impression in the law of life
insurance to be here decided is whether the
insured — the husband — has the power to
change the beneficiary — the former wife — and
to name instead his actual wife, where the insured
and the beneficiary have been divorced and where
the policy of insurance does not expressly reserve
to the insured the right to change the beneficiary.
Although the authorities have been exhausted, no
legal situation exactly like the one before us has
been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun
Life Assurance Co. of Canada, the insurer, and
Andrea Zialcita, the beneficiary, are the
defendants. The complaint is in the nature of
mandamus. Its purpose is to compel the defendant
Sun Life Assurance Co. of Canada to change the
beneficiary in the policy issued by the defendant
company on the life of the plaintiff Hilario Gercio,
with one Andrea Zialcita as beneficiary.
A default judgment was taken in the lower court
against the defendant Andrea Zialcita. The other
defendant, the Sun Life Assurance Co. of Canada,
first demurred to the complaint and when the
demurrer was overruled, filed an answer in the
nature of a general denial. The case was then
submitted for decision on an agreed statement of
facts. The judgment of the trial court was in favor
of the plaintiff without costs, and ordered the
defendant company to eliminate from the
insurance policy the name of Andrea Zialcita as
beneficiary and to substitute therefor such name
as the plaintiff might furnish to the defendant for
that purpose.
The Sun Life Assurance Co. of Canada has
appealed and has assigned three errors alleged to
have been committed by the lower court. The
appellee has countered with a motion which asks
the court to dismiss the appeal of the defendant
Sun Life Assurance Co. of Canada, with costs.
As the motion presented by the appellee and the
first two errors assigned by the appellant are
preliminary in nature, we will pass upon the first.
Appellee argues that the "substantial defendant"
was Andrea Zialcita, and that since she was
adjudged in default, the Sun Life Assurance Co. of
Canada has no interest in the appeal. It will be
noticed, however, that the complaint prays for
affirmative relief against the insurance company. It
will be noticed further that it is stipulated that the
insurance company has persistently refused to
change the beneficiary as desired by the plaintiff.
As the rights of Andrea Zialcita in the policy are
rights which are enforceable by her only against
the insurance company, the defendant insurance
company will only be fully protected if the
question at issue is conclusively determined.
Accordingly, we have decided not to accede to the
motion of the appellee and not to order the
dismissal of the appeal of the appellant.
This brings us to the main issue. Before, however,
discussing its legal aspects, it is advisable to have
before us the essential facts. As they are
stipulated, this part of the decision can easily be
accomplished.
On January 29, 1910, the Sun Life Assurance Co. of
Canada issued insurance policy No. 161481 on the
life of Hilario Gercio. The policy was what is known
as a twenty-year endowment policy. By its terms,
the insurance company agreed to insure the life of
Hilario Gercio for the sum of P/2,000, to be paid
him on February 1, 1930, or if the insured should
die before said date, then to his wife, Mrs. Andrea
Zialcita, should she survive him; otherwise to the
executors, administrators, or assigns of the
insured. The policy also contained a schedule of
reserves, amounts in cash, paid-up policies, and
renewed insurance, guaranteed. The policy did not
include any provision reserving to the insured the
right to change the beneficiary.
On the date the policy was issued, Andrea Zialcita
was the lawful wife of Hilario Gercio. Towards the
end of the year 1919, she was convicted of the
crime of adultery. On September 4, 1920, a decree
of divorce was issued in civil case no. 17955,
which had the effect of completely dissolving the
bonds of matrimony contracted by Hilario Gercio
and Andrea Zialcita.
On March 4, 1922, Hilario Gercio formally notified
the Sun Life Assurance Co. of Canada that he had
revoked his donation in favor of Andrea Zialcita,
and that he had designated in her stead his
present wife, Adela Garcia de Gercio, as the
beneficiary of the policy. Gercio requested the
insurance company to eliminate Andrea Zialcita as
beneficiary. This, the insurance company has
refused and still refuses to do.
With all of these introductory matters disposed of
and with the legal question to the forefront, it
becomes our first duty to determine what law
should be applied to the facts. In this connection,
it should be remembered that the insurance policy
was taken out in 1910, that the Insurance Act. No.
2427, became effective in 1914, and that the
effort to change the beneficiary was made in
1922. Should the provisions of the Code of
Commerce and the Civil Code in force in 1910, or
the provisions of the Insurance Act now in force, or
the general principles of law, guide the court in its
decision?
On the supposition, first, that the Code of
Commerce is applicable, yet there can be found in
it no provision either permitting or prohibiting the
insured to change the beneficiary.
On the supposition, next, that the Civil Code
regulates insurance contracts, it would be most
difficult, if indeed it is practicable, to test a life
insurance policy by its provisions. Should the
insurance contract, whereby the husband names
the wife as the beneficiary, be denominated a
donation inter vivos, a donation causa mortis, a
contract in favor of a third person, or an aleatory
contract? The subject is further complicated by the
fact that if an insurance contract should be
considered a donation, a husband may then never
insure his life in favor of his wife and vice versa,
inasmuch as article 1334 prohibits all donations
between spouses during marriage. It would seem,
therefore, that this court was right when in the
case of Del Val vs. Del Val ([1915]), 29 Phil., 534),
it declined to consider the proceeds of the
insurance policy as a donation or gift, saying "the
contract of life insurance is a special contract and
the destination of the proceeds thereof is
determined by special laws which deal exclusively
with that subject. The Civil Code has no provisions
which relate directly and specifically to life-
insurance contracts or to the destination of life-
insurance proceeds. . . ." Some satisfaction is
gathered from the perplexities of the Louisiana
Supreme Court, a civil law jurisdiction, where the
jurists have disagreed as to the classification of
the insurance contract, but have agreed in their
conclusions as will hereafter see. (Re Succession
of Leone Desforges [1914], 52 L.R.A. [N.S.], 689;
Lambert vs Penn Mutual Life Insurance Company
of Philadelphia and L'Hote & Co. [1898], 50 La.
Ann., 1027.)
On the further supposition that the Insurance Act
applies, it will be found that in this Law, there is
likewise no provision either permitting or
prohibiting the insured to change the beneficiary.
We must perforce conclude that whether the case
be considered as of 1910, or 1914, or 1922, and
whether the case be considered in the light of the
Code of Commerce, the Civil Code, or the
Insurance Act, the deficiencies in the law will have
to be supplemented by the general principles
prevailing on the subject. To that end, we have
gathered the rules which follow from the best
considered American authorities. In adopting
these rules, we do so with the purpose of having
the Philippine Law of Insurance conform as nearly
as possible to the modern Law of Insurance as
found in the United States proper.
The wife has an insurable interest in the life of her
husband. The beneficiary has an absolute vested
interest in the policy from the date of its issuance
and delivery. So when a policy of life insurance is
taken out by the husband in which the wife is
named as beneficiary, she has a subsisting
interest in the policy. And this applies to a policy to
which there are attached the incidents of a loan
value, cash surrender value, an automatic
extension by premiums paid, and to an
endowment policy, as well as to an ordinary life
insurance policy. If the husband wishes to retain to
himself the control and ownership of the policy he
may so provide in the policy. But if the policy
contains no provision authorizing a change of
beneficiary without the beneficiary's consent, the
insured cannot make such change. Accordingly, it
is held that a life insurance policy of a husband
made payable to the wife as beneficiary, is the
separate property of the beneficiary and beyond
the control of the husband.
As to the effect produced by the divorce, the
Philippine Divorce Law, Act No. 2710, merely
provides in section 9 that the decree of divorce
shall dissolve the community property as soon as
such decree becomes final. Unlike the statutes of
a few jurisdictions, there is no provision in the
Philippine Law permitting the beneficiary in a
policy for the benefit of the wife of the husband to
be changed after a divorce. It must follow,
therefore, in the absence of a statute to the
contrary, that if a policy is taken out upon a
husband's life the wife is named as beneficiary
therein, a subsequent divorce does not destroy
her rights under the policy.
These are some of the pertinent principles of the
Law of Insurance. To reinforce them, we would,
even at the expense of clogging the decision with
unnecessary citation of authority, bring to notice
certain decisions which seem to us to have
controlling influence.
To begin with, it is said that our Insurance Act is
mostly taken from the statute of California. It
should prove of interest, therefore, to know the
stand taken by the Supreme Court of that State. A
California decision oft cited in the Cyclopedias
is Yore vs. Booth ([1895]), 110 Cal., 238; 52 Am.
St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but
slight dissent in the courts of this country, that a
person who procures a policy upon his own life,
payable to a designated beneficiary, although he
pays the premiums himself, and keeps the policy
in his exclusive possession, has no power to
change the beneficiary, unless the policy itself, or
the charter of the insurance company, so provides.
In policy, although he has parted with nothing, and
is simply the object of another's bounty, has
acquired a vested and irrevocable interest in the
policy, which he may keep alive for his own benefit
by paying the premiums or assessments if the
person who effected the insurance fails or refuses
to do so.
As carrying great weight, there should also be
taken into account two decisions coming from the
Supreme Court of the United States. The first of
these decisions, in point of time, is Connecticut
Mutual Life Insurance Company vs
Schaefer ([1877]), 94 U.S., 457). There, Mr. Justice
Bradley, delivering the opinion of the court, in part
said:
This was an action on a policy of the court, in part
said: July 25, 1868, on the joint lives of George F.
and Francisca Schaefer, then husband and wife,
payable to the survivor on the death of either. In
January, 1870, they were divorced, and alimony
was decreed and paid to the wife, and there was
never any issue of the marriage. They both
subsequently married again, after which, in
February, 1871, George F. Schaefer died. This
action was brought by Francisca, the survivor.
xxx xxx xxx
The other point, relating to the alleged cessation
of insurable interest by reason of the divorce of
the parties, is entitled to more serious
consideration, although we have very little
difficulty in disposing of it.
It will be proper, in the first place, to ascertain
what is an insurable interest. It is generally agreed
that mere wager policies, that is, policies in which
the insured party has no interest in its loss or
destruction, are void, as against public policy. . . .
But precisely what interest is necessary, in order
to take a policy out of the category of mere wager,
has been the subject of much discussion. In
marine and fire insurance the difficulty is not so
great, because there insurance is considered as
strictly an indemnity. But in life insurance the loss
can seldom be measured by pecuniary values.
Still, an interest of some sort in the insured life
must exist. A man cannot take out insurance on
the life of a total stranger, nor on that of one who
is not so connected with him as to make the
continuance of the life a matter of some real
interest to him.
It is well settled that a man has an insurable
interest in his own life and in that of his wife and
children; a woman in the life of her husband; and
the creditor in the life of his debtor. Indeed it may
be said generally that any reasonable expectation
of pecuniary benefit or advantage from the
continued life of another creates an insurable
interest in such life. And there is no doubt that a
man may effect an insurance on his own life for
the benefit of a relative or fried; or two or more
persons, on their joint lives, for the benefit of the
survivor or survivors. The old tontines were based
substantially on this principle, and their validity
has never been called in question.
xxx xxx xxx
The policy in question might, in our opinion, be
sustained as a joint insurance, without reference
to any other interest, or to the question whether
the cessation of interest avoids a policy good at its
inception. We do not hesitate to say, however,
that a policy taken out in good faith and valid at
its inception, is not avoided by the cessation of the
insurable interest, unless such be the necessary
effect of the provisions of the policy itself. . . .
. . . .In our judgment of life policy, originally valid,
does not cease to be so by the cessation of the
assured party's interest in the life insured.
Another controlling decision of the United States
Supreme Court is that of the Central National Bank
of Washington City vs. Hume ([1888], 128 U.S.,
134). Therein, Mr. Chief Justice Fuller, as the organ
of the court, announced the following doctrines:
We think it cannot be doubted that in the instance
of contracts of insurance with a wife or children, or
both, upon their insurable interest in the life of the
husband or father, the latter, while they are living,
can exercise no power of disposition over the
same without their consent, nor has he any
interest therein of which he can avail himself; nor
upon his death have his personal representatives
or his creditors any interest in the proceeds of
such contracts, which belong to the beneficiaries
to whom they are payable.
It is indeed the general rule that a policy, and the
money to become due under it, belong, the
moment it is issued, to the person or persons
named in it as the beneficiary or beneficiaries, and
that there is no power in the person procuring the
insurance, by any act of his, by deed or by will, to
transfer to any other person the interest of the
person named.
A jurisdiction which found itself in somewhat the
same situation as the Philippines, because of
having to reconcile the civil law with the more
modern principles of insurance, is Louisiana. In a
case coming before the Federal Courts, In re
Dreuil & Co. ([1915]), 221 Fed., 796), the facts
were that an endowment insurance policy
provided for payment of the amount thereof at the
expiration of twenty years to the insured, or his
executors, administrators, or assigns, with the
proviso that, if the insured die within such period,
payment was to be made to his wife if she survive
him. It was held that the wife has a vested interest
in the policy, of which she cannot be deprived
without her consent. Foster, District Judge,
announced:
In so far as the law of Louisiana is concerned, it
may also be considered settled that where a policy
is of the semitontine variety, as in this case, the
beneficiary has a vested right in the policy, of
which she cannot be deprived without her
consent. (Lambert vs Penn Mutual Life Ins. Co., 50
La. Ann., 1027; 24 South., 16.) (See in same
connection a leading decision of the Louisiana
Supreme Court, Re Succession of Leonce
Desforges, [1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the
insured to destroy the vested interest of the
beneficiary in the policy. That point is well covered
in the case of Entwistle vs. Travelers Insurance
Company ([1902], 202 Pa. St., 141). To quote:
. . . The interest of the wife was wholly contingent
upon her surviving her husband, and she could
convey no greater interest in the policy than she
herself had. The interest of the children of the
insured, which was created for them by the
contract when the policy was issued; vested in
them at the same time that the interest of the wife
became vested in her. Both interests were
contingent. If the wife die before the insured, she
will take nothing under the policy. If the insured
should die before the wife, then the children take
nothing under the policy. We see no reason to
discriminate between the wife and the children.
They are all payees, under the policy, and
together constitute the assured.
The contingency which will determine whether the
wife, or the children as a class will take the
proceeds, has not as yet happened; all the
beneficiaries are living, and nothing has occurred
by which the rights of the parties are in any way
changed. The provision that the policy may be
converted into cash at the option of the holder
does not change the relative rights of the parties.
We agree entirely with the suggestion that
"holder" or "holders", as used in this connection,
means those who in law are the owners of the
policy, and are entitled to the rights and benefits
which may accrue under it; in other words, all the
beneficiaries; in the present case, not only the
wife, by the children of the insured. If for any
reason, prudence required the conversion of the
policy into cash, a guardian would have no special
difficulty in reasonable protecting the interest of
his wards. But however that may be, it is manifest
that the option can only be exercised by those
having the full legal interest in the policy, or by
their assignee. Neither the husband, nor the wife,
nor both together had power to destroy the vested
interest of the children in the policy.
The case most nearly on all fours with the one at
bar is that of Wallace vs Mutual Benefit Life
Insurance Co. ([1906], 97 Minn., 27; 3 L.R.A. [N.S.],
478). The opinion there delivered also invokes
added interest when it is noted that it was written
by Mr. Justice Elliott, the author of a text on
insurance, later a member of this court. In the
Minnesota case cited, one Wallace effected a
"twenty-year endowment" policy of insurance on
his life, payable in the event of his death within
twenty years to Emma G. Wallace, his wife, but, if
he lived, to himself at the end of twenty years. If
Wallace died before the death of his wife, within
the twenty years, the policy was payable to the
personal representatives of the insured. During
the pendency of divorce proceedings, the parties
signed a contract by which Wallace agreed that, if
a divorce was granted to Mrs. Wallace, the court
might award her certain specified property as
alimony, and Mrs. Wallace agreed to relinquish all
claim to any property arising out of the relation of
husband and wife. The divorce was granted. An
action was brought by Wallace to compel Mrs.
Wallace to relinquish her interest in the insurance
policy. Mr. Justice Elliott said:
As soon as the policy was issued Mrs. Wallace
acquired a vested interest therein, of which she
could not be deprived without her consent, except
under the terms of the contract with the insurance
company. No right to change the beneficiary was
reserved. Her interest in the policy was her
individual property, subject to be divested only by
her death, the lapse of time, or by the failure of
the insured to pay the premiums. She could keep
the policy alive by paying the premiums, if the
insured did not do so. It was contingent upon
these events, but it was free from the control of
her husband. He had no interest in her property in
this policy, contingent or otherwise. Her interest
was free from any claim on the part of the insured
or his creditors. He could deprive her of her
interest absolutely in but one way, by living more
than twenty years. We are unable to see how the
plaintiff's interest in the policy was primary or
superior to that of the husband. Both interests
were contingent, but they were entirely separate
and distinct, the one from the other. The wife's
interest was not affected by the decree of court
which dissolved the marriage contract between
the parties. It remains her separate property, after
the divorce as before. . .
. . . . The fact that she was his wife at the time the
policy was issued may have been, and
undoubtedly was, the reason why she was named
as beneficiary in the event of his death. But her
property interest in the policy after it was issued
did not in any reasonable sense arise out of the
marriage relation.
Somewhat the same question came before the
Supreme Court of Kansas in the leading case
of Filley vs. Illinois Life Insurance
Company ([1914]), 91 Kansas, 220; L.R.A. [1915
D], 130). It was held, following consideration
extending to two motions for rehearing, as follows:
The benefit accruing from a policy of life insurance
upon the life of a married man, payable upon his
death to his wife, naming her, is payable to the
surviving beneficiary named, although she may
have years thereafter secured a divorce from her
husband, and he was thereafter again married to
one who sustained the relation of wife to him at
the time of his death.
The rights of a beneficiary in an ordinary life
insurance policy become vested upon the issuance
of the policy, and can thereafter, during the life of
the beneficiary, be defeated only as provided by
the terms of the policy.
If space permitted, the following corroborative
authority could also be taken into account: Joyce,
The Law of Insurance, second edition, vol. 2, pp.
1649 et seq.; 37 Corpus Juris, pp. 394 et seq.; 14
R.C.L., pp. 1376 et seq.; Green vs. Green ([1912],
147 Ky., 608; 39 L.R.A. [N.S.], 370); Washington
Life Insurance Co. vs. Berwald ([1903], 97 Tex.,
111); Begley vs. Miller ([1907]), 137 Ill., App.,
278); Blum vs. New York L. Ins. Co. ([1906], 197
Mo., 513; 8 L.R.A. [N.S.], 923; Union Central Life
Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49
L.R.A., 737); Griffith vs. New York Life Ins. Co.
([1894], 101 Cal., 627; 40 Am. St. Rep.,
96); Preston vs. Conn. Mut. L. Ins. Co. of
Hartford([1902]); 95 Md., 101); Snyder vs.
Supreme Ruler of Fraternal Mystic Circle ([1909],
122 Tenn. 248; 45 L.R.A. [N.S.], 209); Lloyd vs.
Royal Union Mut. L. Ins. Co. ([1917], 245 Fed.,
162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878],
46 Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix
Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep.,
129); Supreme Council American Legion of Honor
vs. Smith and Smith ([1889], 45 N.J. Eq.,
466); Overhiser vs. Overhiser ([1900], 63 Ohio St.,
77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon
vs. New York Life Insurance Co. ([1918], 183 Iowa,
658); with which compare Foster vs. Gile ([1880],
50 Wis., 603) and Hatch vs. Hatch ([1904], 35 Tex.
Civ. App., 373).
On the admitted facts and the authorities
supporting the nearly universally accepted
principles of insurance, we are irresistibly led to
the conclusion that the question at issue must be
answered in the negative.
The judgment appealed from will be reversed and
the complaint ordered dismissed as to the
appellant, without special pronouncement as to
the costs in either instance. So ordered.
Street, Villamor, Ostrand, Johns, and Villa-Real,
JJ., concur.
Avanceña, C.J., concurs in the result.
Romualdez, J., took no part.
Separate Opinions
JOHNSON, J., concurring in the result.
I agree with the majority of the court, that the
judgment of the lower court should be revoked,
but for a different reason. In my judgment, the
question presented by the plaintiff is purely an
academic one. The purpose of the petition is to
have declared the rights of certain persons in an
insurance policy which is not yet due and payable.
It may never become due and payable. The
premiums may not be paid, thereby rendering the
contract of insurance of non effect, and many
other things may occur, before the policy becomes
due, which would render it non effective. The
plaintiff and the other parties who are claiming an
interest in said policy should wait until there is
something due them under the same. For the
courts to declare now who are the persons entitled
to receive the amounts due, if they ever become G.R. No. L-54216 July 19, 1989
due and payable, is impossible, for the reason that
nothing may ever become payable under the THE PHILIPPINE AMERICAN INSURANCE
contract of insurance, and for many reasons such COMPANY, petitioner,
persons may never have a right to receive
anything when the policy does become due and vs.
payable. In my judgment, the action is premature
and should have been dismissed. HONORABLE GREGORIO G. PINEDA in his
capacity as Judge of the Court of First
Instance of Rizal, and RODOLFO C.
DIMAYUGA, respondents.

PARAS, J.:

Challenged before Us in this petition for review

on certiorari are the Orders of the respondent
Judge dated March 19, 1980 and June 10, 1980
granting the prayer in the petition in Sp. Proc. No.
9210 and denying petitioner's Motion for
Reconsideration, respectively.

The undisputed facts are as follows:

On January 15, 1968, private respondent procured

an ordinary life insurance policy from the
petitioner company and designated his wife and
children as irrevocable beneficiaries of said policy.
Under date February 22, 1980 private respondent
filed a petition which was docketed as Civil Case
No. 9210 of the then Court of First Instance of
Rizal to amend the designation of the beneficiaries
in his life policy from irrevocable to revocable.
Petitioner, on March 10, 1980 filed an Urgent
Motion to Reset Hearing. Also on the same date,
petitioner filed its Comment and/or Opposition to
Petition.
When the petition was called for hearing on March
19, 1980, the respondent Judge Gregorio G.
Pineda, presiding Judge of the then Court of First
Instance of Rizal, Pasig Branch XXI, denied
petitioner's Urgent Motion, thus allowing the
private respondent to adduce evidence, the
consequence of which was the issuance of the
questioned Order granting the petition.
Petitioner promptly filed a Motion for
Reconsideration but the same was denied in an
Order June 10, 1980. Hence, this petition raising
the following issues for resolution:
I Beneficiary Designation Indorsement in the policy
WHETHER OR NOT THE DESIGNATION OF THE
IRREVOCABLE BENEFICIARIES COULD BE
CHANGED OR AMENDED WITHOUT THE CONSENT
OF ALL THE IRREVOCABLE BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE
BENEFICIARIES HEREIN, ONE OF WHOM IS
ALREADY DECEASED WHILE THE OTHERS ARE ALL
MINORS, COULD VALIDLY GIVE CONSENT TO THE
CHANGE OR AMENDMENT IN THE DESIGNATION OF
THE IRREVOCABLE BENEFICIARIES.
We are of the opinion that his Honor, the
respondent Judge, was in error in issuing the
questioned Orders.
Needless to say, the applicable law in the instant
case is the Insurance Act, otherwise known as Act
No. 2427 as amended, the policy having been
procured in 1968. Under the said law, the
beneficiary designated in a life insurance contract
cannot be changed without the consent of the
beneficiary because he has a vested interest in
the policy (Gercio v. Sun Life Ins. Co. of Canada, 48
Phil. 53; Go v. Redfern and the International
Assurance Co., Ltd., 72 Phil. 71).
In this regard, it is worth noting that the
which forms part of Policy Number 0794461 in the
name of Rodolfo Cailles Dimayuga states that the
designation of the beneficiaries is irrevocable
(Annex "A" of Petition in Sp. Proc. No. 9210, Annex
"C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that,
notwithstanding the provisions of this policy to the
contrary, inasmuch as the designation of the
primary/contingent beneficiary/beneficiaries in this
Policy has been made without reserving the right
to change said beneficiary/ beneficiaries, such
designation may not be surrendered to the
Company, released or assigned; and no right or
privilege under the Policy may be exercised, or
agreement made with the Company to any change
in or amendment to the Policy, without the
consent of the said beneficiary/beneficiaries.
(Petitioner's Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the
private respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted
provision of the contract, not to mention the law
then applicable, it is only with the consent of all
the beneficiaries that any change or amendment
in the policy concerning the irrevocable
beneficiaries may be legally and validly effected.
Both the law and the policy do not provide for any
other exception, thus, abrogating the contention
of the private respondent that said designation
can be amended if the Court finds a just,
reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6)
children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot
be considered an effective ratification to the
change of the beneficiaries from irrevocable to
revocable. Indubitable is the fact that all the six
(6) children named as beneficiaries were minors at
the time,** for which reason, they could not validly
give their consent. Neither could they act through
their father insured since their interests are quite
divergent from one another. In point is an excerpt
from the Notes and Cases on Insurance Law by
Campos and Campos, 1960, reading-
The insured ... can do nothing to divest the
beneficiary of his rights without his consent. He
cannot assign his policy, nor even take its cash
surrender value without the consent of the
beneficiary. Neither can the insured's creditors
seize the policy or any right thereunder. The
insured may not even add another beneficiary
because by doing so, he diminishes the amount
which the beneficiary may recover and this he
cannot do without the beneficiary's consent.
Therefore, the parent-insured cannot exercise
rights and/or privileges pertaining to the insurance
contract, for otherwise, the vested rights of the
irrevocable beneficiaries would be rendered
inconsequential.
Of equal importance is the well-settled rule that
the contract between the parties is the law binding
on both of them and for so many times, this court
has consistently issued pronouncements
upholding the validity and effectivity of contracts.
Where there is nothing in the contract which is
contrary to law, good morals, good customs,
public policy or public order the validity of the
contract must be sustained. Likewise, contracts
which are the private laws of the contracting
parties should be fulfilled according to the literal
sense of their stipulations, if their terms are clear
and leave no room for doubt as to the intention of
the contracting parties, for contracts are
obligatory, no matter in what form they may be,
whenever the essential requisites for their validity
are present (Phoenix Assurance Co., Ltd. vs.
United States Lines, 22 SCRA 675, Phil. American
General Insurance Co., Inc. vs. Mutuc, 61 SCRA
22.)
In the recent case of Francisco Herrera vs.
Petrophil Corporation, 146 SCRA 385, this Court
ruled that:
... it is settled that the parties may establish such
stipulations, clauses, terms, and conditions as
they may want to include; and as long as such
agreements are not contrary to law, good morals,
good customs, public policy or public order, they
shall have the force of law between them.
Undeniably, the contract in the case at bar,
contains the indispensable elements for its validity
and does not in any way violate the law, morals,
customs, orders, etc. leaving no reason for Us to
deny sanction thereto.
Finally, the fact that the contract of insurance does
not contain a contingency when the change in the
designation of beneficiaries could be validly
effected means that it was never within the
contemplation of the parties. The lower court, in
gratuitously providing for such contingency, made
a new contract for them, a proceeding which we
cannot tolerate. Ergo, We cannot help but
conclude that the lower court acted in excess of its
authority when it issued the Order dated March
19, 1980 amending the designation of the
beneficiaries from "irrevocable" to "revocable"
over the disapprobation of the petitioner insurance
company.
WHEREFORE, premises considered, the questioned
Orders of the respondent Judge are hereby
nullified and set aside.
SO ORDERED.
Melencio-Herrera (Chairperson), Sarmiento and
Regalado, JJ., concur.
Padilla, J., took no part.
G.R. No. 181132 June 5, 2009

HEIRS OF LORETO C. MARAMAG, represented

by surviving spouse VICENTA PANGILINAN
MARAMAG,Petitioners,

vs.

EVA VERNA DE GUZMAN MARAMAG, ODESSA

DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE
MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE
ASSURANCE CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition1 for review on certiorari under
Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the
Court of Appeals (CA), in CA-G.R. CV No. 85948,
dismissing petitioners’ appeal for lack of
jurisdiction.
The case stems from a petition3 filed against
respondents with the Regional Trial Court, Branch
29, for revocation and/or reduction of insurance
proceeds for being void and/or inofficious, with
prayer for a temporary restraining order (TRO) and
a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the
legitimate wife and children of Loreto Maramag
(Loreto), while respondents were Loreto’s
illegitimate family; (2) Eva de Guzman Maramag
(Eva) was a concubine of Loreto and a suspect in
the killing of the latter, thus, she is disqualified to
receive any proceeds from his insurance policies
from Insular Life Assurance Company, Ltd.
(Insular)4 and Great Pacific Life Assurance
Corporation (Grepalife);5 (3) the illegitimate
children of Loreto—Odessa, Karl Brian, and Trisha
Angelie—were entitled only to one-half of the
legitime of the legitimate children, thus, the
proceeds released to Odessa and those to be
released to Karl Brian and Trisha Angelie were
inofficious and should be reduced; and (4)
petitioners could not be deprived of their
legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of
preliminary injunction, petitioners alleged, among
others, that part of the insurance proceeds had
already been released in favor of Odessa, while
the rest of the proceeds are to be released in favor
of Karl Brian and Trisha Angelie, both minors, upon
the appointment of their legal guardian.
Petitioners also prayed for the total amount of
₱320,000.00 as actual litigation expenses and
attorney’s fees.
In answer,6 Insular admitted that Loreto
misrepresented Eva as his legitimate wife and
Odessa, Karl Brian, and Trisha Angelie as his
legitimate children, and that they filed their claims
for the insurance proceeds of the insurance
policies; that when it ascertained that Eva was not
the legal wife of Loreto, it disqualified her as a
beneficiary and divided the proceeds among
Odessa, Karl Brian, and Trisha Angelie, as the
remaining designated beneficiaries; and that it
released Odessa’s share as she was of age, but
withheld the release of the shares of minors Karl
Brian and Trisha Angelie pending submission of
letters of guardianship. Insular alleged that the
complaint or petition failed to state a cause of
action insofar as it sought to declare as void the
designation of Eva as beneficiary, because Loreto
revoked her designation as such in Policy No.
A001544070 and it disqualified her in Policy No.
A001693029; and insofar as it sought to declare
as inofficious the shares of Odessa, Karl Brian, and
Trisha Angelie, considering that no settlement of
Loreto’s estate had been filed nor had the
respective shares of the heirs been determined.
Insular further claimed that it was bound to honor
the insurance policies designating the children of
Loreto with Eva as beneficiaries pursuant to
Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim,
Grepalife alleged that Eva was not designated as
an insurance policy beneficiary; that the claims
filed by Odessa, Karl Brian, and Trisha Angelie
were denied because Loreto was ineligible for
insurance due to a misrepresentation in his
application form that he was born on December
10, 1936 and, thus, not more than 65 years old
when he signed it in September 2001; that the
case was premature, there being no claim filed by
the legitimate family of Loreto; and that the law on
succession does not apply where the designation
of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian,
and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the
illegitimate family of Loreto failed to file their
answer. Hence, the trial court, upon motion of
petitioners, declared them in default in its Order
dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular
and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial
court ordered petitioners to comment within 15
days.
In their comment, petitioners alleged that the
issue raised by Insular and Grepalife was purely
legal – whether the complaint itself was proper or
not – and that the designation of a beneficiary is
an act of liberality or a donation and, therefore,
subject to the provisions of Articles 7528 and
7729 of the Civil Code.
In reply, both Insular and Grepalife countered that
the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the
estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was
legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a
Resolution, the dispositive portion of which reads –
WHEREFORE, the motion to dismiss incorporated
in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants
Odessa, Karl Brian and Trisha Maramag. The action
shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus –
Art. 2011 of the Civil Code provides that the
contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code.
The principal law on insurance is the Insurance
Code, as amended. Only in case of deficiency in
the Insurance Code that the Civil Code may be
resorted to. (Enriquez v. Sun Life Assurance Co.,
41 Phil. 269.)
The Insurance Code, as amended, contains a
provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec.
53 thereof that the insurance proceeds shall be
applied exclusively to the proper interest of the
person in whose name or for whose benefit it is
made, unless otherwise specified in the policy.
Since the defendants are the ones named as the
primary beneficiary (sic) in the insurances (sic)
taken by the deceased Loreto C. Maramag and
there is no showing that herein plaintiffs were also
included as beneficiary (sic) therein the insurance
proceeds shall exclusively be paid to them. This is
because the beneficiary has a vested right to the
indemnity, unless the insured reserves the right to
change the beneficiary. (Grecio v. Sunlife
Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on
donations or the rules on testamentary succession
in order to defeat the right of herein defendants to
collect the insurance indemnity. The beneficiary in
a contract of insurance is not the donee spoken in
the law of donation. The rules on testamentary
succession cannot apply here, for the insurance
indemnity does not partake of a donation. As such,
the insurance indemnity cannot be considered as
an advance of the inheritance which can be
subject to collation (Del Val v. Del Val, 29 Phil.
534). In the case of Southern Luzon Employees’
Association v. Juanita Golpeo, et al., the Honorable
Supreme Court made the following
pronouncements[:]
"With the finding of the trial court that the
proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and
separate property, we agree that the proceeds of
an insurance policy belong exclusively to the
beneficiary and not to the estate of the person
whose life was insured, and that such proceeds
are the separate and individual property of the
beneficiary and not of the heirs of the person
whose life was insured, is the doctrine in America.
We believe that the same doctrine obtains in these
Islands by virtue of Section 428 of the Code of
Commerce x x x."
In [the] light of the above pronouncements, it is
very clear that the plaintiffs has (sic) no sufficient
cause of action against defendants Odessa, Karl
Brian and Trisha Angelie Maramag for the
reduction and/or declaration of inofficiousness of
donation as primary beneficiary (sic) in the
insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of
any cause of action. One of the named beneficiary
(sic) in the insurances (sic) taken by the late
Loreto C. Maramag is his concubine Eva Verna De
Guzman. Any person who is forbidden from
receiving any donation under Article 739 cannot
be named beneficiary of a life insurance policy of
the person who cannot make any donation to him,
according to said article (Art. 2012, Civil Code). If
a concubine is made the beneficiary, it is believed
that the insurance contract will still remain valid,
but the indemnity must go to the legal heirs and
not to the concubine, for evidently, what is
prohibited under Art. 2012 is the naming of the
improper beneficiary. In such case, the action for
the declaration of nullity may be brought by the
spouse of the donor or donee, and the guilt of the
donor and donee may be proved by
preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the
Philippines, page 897). Since the designation of
defendant Eva Verna de Guzman as one of the
primary beneficiary (sic) in the insurances (sic)
taken by the late Loreto C. Maramag is void under
Art. 739 of the Civil Code, the insurance indemnity
that should be paid to her must go to the legal
heirs of the deceased which this court may
properly take cognizance as the action for the
declaration for the nullity of a void donation falls
within the general jurisdiction of this Court.11
Insular12 and Grepalife13 filed their respective
motions for reconsideration, arguing, in the main,
that the petition failed to state a cause of action.
Insular further averred that the proceeds were
divided among the three children as the remaining
named beneficiaries. Grepalife, for its part, also
alleged that the premiums paid had already been
refunded.
Petitioners, in their comment, reiterated their
earlier arguments and posited that whether the
complaint may be dismissed for failure to state a
cause of action must be determined solely on the
basis of the allegations in the complaint, such that
the defenses of Insular and Grepalife would be
better threshed out during trial.1avvphi1
On June 16, 2005, the trial court issued a
Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing
disquisitions, the Motions for Reconsideration filed
by defendants Grepalife and Insular Life are
hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004
which ordered the prosecution of the case against
defendant Eva Verna De Guzman, Grepalife and
Insular Life is hereby SET ASIDE, and the case
against them is hereby ordered DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of
Insular and Grepalife, the trial court considered
the allegations of Insular that Loreto revoked the
designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy
such that the entire proceeds would be paid to the
illegitimate children of Loreto with Eva pursuant to
Section 53 of the Insurance Code. It ruled that it is
only in cases where there are no beneficiaries
designated, or when the only designated
beneficiary is disqualified, that the proceeds
should be paid to the estate of the insured. As to
the claim that the proceeds to be paid to Loreto’s
illegitimate children should be reduced based on
the rules on legitime, the trial court held that the
distribution of the insurance proceeds is governed
primarily by the Insurance Code, and the
provisions of the Civil Code are irrelevant and
inapplicable. With respect to the Grepalife policy,
the trial court noted that Eva was never
designated as a beneficiary, but only Odessa, Karl
Brian, and Trisha Angelie; thus, it upheld the
dismissal of the case as to the illegitimate
children. It further held that the matter of Loreto’s
misrepresentation was premature; the appropriate
action may be filed only upon denial of the claim
of the named beneficiaries for the insurance
proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution
to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial
court dismissing the complaint for failure to state
a cause of action involved a pure question of law.
The appellate court also noted that petitioners did
not file within the reglementary period a motion
for reconsideration of the trial court’s Resolution,
dated September 21, 2004, dismissing the
complaint as against Odessa, Karl Brian, and
Trisha Angelie; thus, the said Resolution had
already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss
for failure to state a cause of action, may the
Court consider matters which were not alleged in
the Complaint, particularly the defenses put up by
the defendants in their Answer?
b. In granting a motion for reconsideration of a
motion to dismiss for failure to state a cause of
action, did not the Regional Trial Court engage in
the examination and determination of what were
the facts and their probative value, or the truth
thereof, when it premised the dismissal on
allegations of the defendants in their answer –
which had not been proven?
c. x x x (A)re the members of the legitimate family
entitled to the proceeds of the insurance for the
concubine?15
In essence, petitioners posit that their petition
before the trial court should not have been
dismissed for failure to state a cause of action
because the finding that Eva was either
disqualified as a beneficiary by the insurance
companies or that her designation was revoked by
Loreto, hypothetically admitted as true, was raised
only in the answers and motions for
reconsideration of both Insular and Grepalife. They
argue that for a motion to dismiss to prosper on
that ground, only the allegations in the complaint
should be considered. They further contend that,
even assuming Insular disqualified Eva as a
beneficiary, her share should not have been
distributed to her children with Loreto but, instead,
awarded to them, being the legitimate heirs of the
insured deceased, in accordance with law and
jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on
the trial court’s finding that the petition failed to
state a cause of action, as provided in Rule 16,
Section 1(g), of the Rules of Court, which reads –
SECTION 1. Grounds. – Within the time for but
before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss
may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no
cause of action.
A cause of action is the act or omission by which a
party violates a right of another.16 A complaint
states a cause of action when it contains the three
(3) elements of a cause of action—(1) the legal
right of the plaintiff; (2) the correlative obligation
of the defendant; and (3) the act or omission of
the defendant in violation of the legal right. If any
of these elements is absent, the complaint
becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action.17
When a motion to dismiss is premised on this
ground, the ruling thereon should be based only
on the facts alleged in the complaint. The court
must resolve the issue on the strength of such
allegations, assuming them to be true. The test of
sufficiency of a cause of action rests on whether,
hypothetically admitting the facts alleged in the
complaint to be true, the court can render a valid
judgment upon the same, in accordance with the
prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized
exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial
notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are
inadmissible in evidence;
4. by the record or document in the pleading, the
allegations appear unfounded; or
5. there is evidence which has been presented to
the court by stipulation of the parties or in the
course of the hearings related to the case.18
In this case, it is clear from the petition filed
before the trial court that, although petitioners are
the legitimate heirs of Loreto, they were not
named as beneficiaries in the insurance policies
issued by Insular and Grepalife. The basis of
petitioners’ claim is that Eva, being a concubine of
Loreto and a suspect in his murder, is disqualified
from being designated as beneficiary of the
insurance policies, and that Eva’s children with
Loreto, being illegitimate children, are entitled to a
lesser share of the proceeds of the policies. They
also argued that pursuant to Section 12 of the
Insurance Code,19 Eva’s share in the proceeds
should be forfeited in their favor, the former
having brought about the death of Loreto. Thus,
they prayed that the share of Eva and portions of
the shares of Loreto’s illegitimate children should
be awarded to them, being the legitimate heirs of
Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that
petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code
which expressly provides that insurance contracts
shall be governed by special laws, i.e., the
Insurance Code. Section 53 of the Insurance Code
states—
SECTION 53. The insurance proceeds shall be
applied exclusively to the proper interest of the
person in whose name or for whose benefit it is
made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only
persons entitled to claim the insurance proceeds
are either the insured, if still alive; or the
beneficiary, if the insured is already deceased,
upon the maturation of the policy.20 The exception
to this rule is a situation where the insurance
contract was intended to benefit third persons who
are not parties to the same in the form of
favorable stipulations or indemnity. In such a case,
third parties may directly sue and claim from the
insurer.21
Petitioners are third parties to the insurance
contracts with Insular and Grepalife and, thus, are
not entitled to the proceeds thereof. Accordingly,
respondents Insular and Grepalife have no legal
obligation to turn over the insurance proceeds to
petitioners. The revocation of Eva as a beneficiary
in one policy and her disqualification as such in
another are of no moment considering that the
designation of the illegitimate children as
beneficiaries in Loreto’s insurance policies remains
valid. Because no legal proscription exists in
naming as beneficiaries the children of illicit Associate Justice
relationships by the insured,22 the shares of Eva in
the insurance proceeds, whether forfeited by the
court in view of the prohibition on donations under
Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate
children, the designated beneficiaries, to the
exclusion of petitioners. It is only in cases where
the insured has not designated any
beneficiary,23 or when the designated beneficiary
is disqualified by law to receive the
proceeds,24 that the insurance policy proceeds
shall redound to the benefit of the estate of the
insured.

In this regard, the assailed June 16, 2005

Resolution of the trial court should be upheld. In
the same light, the Decision of the CA dated
January 8, 2008 should be sustained. Indeed, the
appellate court had no jurisdiction to take
cognizance of the appeal; the issue of failure to
state a cause of action is a question of law and not
of fact, there being no findings of fact in the first
place.25

WHEREFORE, the petition is DENIED for lack of

merit. Costs against petitioners.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

 INSURANCE COMPANY OF NORTH
AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on

certiorari of the Decision1 dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No.
61848 which set aside the Decision dated August
31, 1998 of the Regional Trial Court, Branch 138,
Makati (RTC) in Civil Case No. 92-322 and upheld
the causes of action for damages of Insurance
Company of North America (respondent) against
Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the

maker of Wrangler Blue Jeans. Levi Strauss (Phils.)
Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co..
IMC and LSPI separately obtained from respondent
fire insurance policies with book debt
endorsements. The insurance policies provide for
G.R. No. 147839 June 8, 2006 coverage on "book debts in connection with ready-
made clothing materials which have been sold or
GAISANO CAGAYAN, INC. Petitioner, delivered to various customers and dealers of the
Insured anywhere in the Philippines."2 The policies
vs. defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45
days after the time of the loss covered under this
Policy."3 The policies also provide for the following
conditions:
1. Warranted that the Company shall not be liable
for any unpaid account in respect of the
merchandise sold and delivered by the Insured
which are outstanding at the date of loss for a
period in excess of six (6) months from the date of
the covering invoice or actual delivery of the
merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the
Company within twelve (12) days after the close of
every calendar month all amount shown in their
books of accounts as unpaid and thus become
receivable item from their customers and dealers.
x x x4
xxxx
Petitioner is a customer and dealer of the products
of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire.
Included in the items lost or destroyed in the fire
were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint
for damages against petitioner. It alleges that IMC
and LSPI filed with respondent their claims under
their respective fire insurance policies with book
debt endorsements; that as of February 25, 1991,
the unpaid accounts of petitioner on the sale and
delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims
of IMC and LSPI and, by virtue thereof, respondent
was subrogated to their rights against petitioner;
that respondent made several demands for
payment upon petitioner but these went
unheeded.5
In its Answer with Counter Claim dated July 4,
1995, petitioner contends that it could not be held
liable because the property covered by the
insurance policies were destroyed due to fortuities
event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was
no breach of contract committed by it since the
loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to
it that they insured their properties; that it never
consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to
arrive at an amicable settlement. 7 Thus, trial on
the merits ensued.
On August 31, 1998, the RTC rendered its decision
dismissing respondent's complaint.8 It held that
the fire was purely accidental; that the cause of
the fire was not attributable to the negligence of
the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that
since the sales invoices state that "it is further
agreed that merely for purpose of securing the
payment of purchase price, the above-described
merchandise remains the property of the vendor
until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and
must bear the loss.
Dissatisfied, petitioner appealed to the CA. 9 On
October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The
dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the
appealed decision is REVERSED and SET ASIDE
and a new one is entered ordering defendant-
appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the
amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully
paid;
2. the amount of P535,613.00 representing the
amount paid by the plaintiff-appellant to the
insured Levi Strauss Phil., Inc., plus legal interest
from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of
sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the
goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code,
to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of
the thing at the time the loss under the principle
of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods
but the payment of its unpaid account and as such
the obligation to pay is not extinguished, even if
the fire is considered a fortuitous event; that by
subrogation, the insurer has the right to go against
petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the
vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it
was denied by the CA in its Resolution dated April
11, 2001.13
Hence, the present petition for review on certiorari
anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT
THE INSURANCE IN THE INSTANT CASE WAS ONE
OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT
ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS AUTOMATIC SUBROGATION UNDER
ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the
insurance in the present case cannot be deemed
to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit
that was insured since respondent paid on the
occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner
of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as
the accounts were not yet due since no prior
demands were made by IMC and LSPI against
petitioner for payment of the debt and such
demands came from respondent only after it had
already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that
despite delivery of the goods, petitioner-buyer IMC
and LSPI assumed the risk of loss when they
secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits
that there is no subrogation in favor of respondent
as no valid insurance could be maintained thereon
by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that
petitioner was not privy to the insurance contract
or the payment between respondent and its
insured nor was its consent or approval ever
secured; that this lack of privity forecloses any
real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping
the insured goods safe from fire.
For its part, respondent counters that while
ownership over the ready- made clothing
materials was transferred upon delivery to
petitioner, IMC and LSPI have insurable interest
over said goods as creditors who stand to suffer
direct pecuniary loss from its destruction by fire;
that petitioner is liable for loss of the ready-made
clothing materials since it failed to overcome the
presumption of liability under Article 126516 of the
Civil Code; that the fire was caused through
petitioner's negligence in failing to provide
stringent measures of caution, care and
maintenance on its property because electric
wires do not usually short circuit unless there are
defects in their installation or when there is lack of
proper maintenance and supervision of the
property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's
valid claim and should be liable to respondent for
contracted lawyer's fees, litigation expenses and
cost of suit.17
As a general rule, in petitions for review, the
jurisdiction of this Court in cases brought before it
from the CA is limited to reviewing questions of
law which involves no examination of the
probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is
not a trier of facts; it is not its function to analyze
or weigh evidence all over again.19 Accordingly,
findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized
several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the
findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its
findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when
the findings are contrary to the trial court; (8)
when the findings are conclusions without citation
of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as
in the petitioner's main and reply briefs are not
disputed by the respondent; (10) when the
findings of fact are premised on the supposed
absence of evidence and contradicted by the
evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly
considered, would justify a different
conclusion. Exceptions (4), (5), (7), and (11)
21
apply to the present petition.
At issue is the proper interpretation of the
questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy
on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance
applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract
are plain and readily understood, there is no room
for construction.22 In this case, the questioned
insurance policies provide coverage for "book
debts in connection with ready-made clothing
materials which have been sold or delivered to
various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book
debts as the "unpaid account still appearing in the
Book of Account of the Insured 45 days after the
time of the loss covered under this
Policy." Nowhere is it provided in the questioned
24
insurance policies that the subject of the
insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are
clear and explicit that they do not justify an
attempt to read into it any alleged intention of the
parties, the terms are to be understood literally
just as they appear on the face of the
contract.25 Thus, what were insured against were
the accounts of IMC and LSPI with petitioner which
remained unpaid 45 days after the loss through
fire, and not the loss or destruction of the goods
delivered.
Petitioner argues that IMC bears the risk of loss
because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t
is further agreed that merely for purpose of
securing the payment of the purchase price the
above described merchandise remains the
property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1),
Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods
remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual
delivery has been made or not, except that:
(1) Where delivery of the goods has been made to
the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in
the goods has been retained by the seller merely
to secure performance by the buyer of his
obligations under the contract, the goods are at
the buyer's risk from the time of such delivery;
(Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to
insure that the buyer will pay its debt, the risk of
loss is borne by the buyer. 27 Accordingly, petitioner
bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over
the goods. They have an insurable interest until
full payment of the value of the delivered goods.
Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of
who bears the risk of loss, in property insurance,
one's interest is not determined by concept of
title, but whether insured has substantial
economic interest in the property.28
Section 13 of our Insurance Code defines insurable
interest as "every interest in property, whether
real or personal, or any relation thereto, or liability
in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may
consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an
expectancy, coupled with an existing interest in
that out of which the expectancy arises.
Therefore, an insurable interest in property does
not necessarily imply a property interest in, or a
lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an
interest, it is sufficient that the insured is so
situated with reference to the property that he
would be liable to loss should it be injured or
destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in
property who derives a benefit from its existence
or would suffer loss from its destruction.30Indeed, a
vendor or seller retains an insurable interest in the
property sold so long as he has any interest
therein, in other words, so long as he would suffer
by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC
and LSPI pertain to the unpaid accounts appearing
in their Books of Account 45 days after the time of
the loss covered by the policies.
The next question is: Is petitioner liable for the
unpaid accounts?
Petitioner's argument that it is not liable because
the fire is a fortuitous event under Article 117432 of
the Civil Code is misplaced. As held earlier,
petitioner bears the loss under Article 1504 (1) of
the Civil Code.
Moreover, it must be stressed that the insurance
in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that
remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA,
where the obligation consists in the payment of
money, the failure of the debtor to make the
payment even by reason of a fortuitous event
shall not relieve him of his liability. 33 The rationale
for this is that the rule that an obligor should be
held exempt from liability when the loss occurs
thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable
even in case of fortuitous event. It does not apply
when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an
obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not
extinguish the obligation." If the obligation is
generic in the sense that the object thereof is
designated merely by its class or genus without
any particular designation or physical segregation
from all others of the same class, the loss or
destruction of anything of the same kind even
without the debtor's fault and before he has
incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based
on the principle that the genus of a thing can
never perish. Genus nunquan perit. 36 An obligation
to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property
of the debtor.37
Thus, whether fire is a fortuitous event or
petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has
been established that petitioner has outstanding
accounts with IMC and LSPI.
With respect to IMC, the respondent has
adequately established its claim. Exhibits "C" to
"C-22"38 show that petitioner has an outstanding
account with IMC in the amount of P2,119,205.00.
Exhibit "E"39 is the check voucher evidencing
payment to IMC. Exhibit "F"40 is the subrogation
receipt executed by IMC in favor of respondent
upon receipt of the insurance proceeds. All these
documents have been properly identified,
presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent
as insurer and IMC as the insured, but also the
amount paid to settle the insurance claim. The
right of subrogation accrues simply upon payment
by the insurance company of the insurance
claim.41 Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil
Code which provides:
Art. 2207. If the plaintiff's property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient
evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano,
Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss
of Levi's products in the amount of P535,613.00 in
the fire that razed petitioner's building on
February 25, 1991.
Moreover, there is no proof of full settlement of
the insurance claim of LSPI; no subrogation receipt
was offered in evidence. Thus, there is no
evidence that respondent has been subrogated to
any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is
fatal to petitioner's case for recovery of the
amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The
assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of
Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the
order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
G.R. No. 181132 June 5, 2009
HEIRS OF LORETO C. MARAMAG, represented
by surviving spouse VICENTA PANGILINAN
MARAMAG,Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA
DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE
MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE
ASSURANCE CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition1 for review on certiorari under
Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the
Court of Appeals (CA), in CA-G.R. CV No. 85948,
dismissing petitioners’ appeal for lack of
jurisdiction.
The case stems from a petition3 filed against
respondents with the Regional Trial Court, Branch
29, for revocation and/or reduction of insurance
proceeds for being void and/or inofficious, with
prayer for a temporary restraining order (TRO) and
a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the
legitimate wife and children of Loreto Maramag
(Loreto), while respondents were Loreto’s
illegitimate family; (2) Eva de Guzman Maramag
(Eva) was a concubine of Loreto and a suspect in
the killing of the latter, thus, she is disqualified to
receive any proceeds from his insurance policies
from Insular Life Assurance Company, Ltd.
(Insular)4 and Great Pacific Life Assurance
Corporation (Grepalife);5 (3) the illegitimate
children of Loreto—Odessa, Karl Brian, and Trisha
Angelie—were entitled only to one-half of the
legitime of the legitimate children, thus, the
proceeds released to Odessa and those to be
released to Karl Brian and Trisha Angelie were
inofficious and should be reduced; and (4)
petitioners could not be deprived of their
legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of
preliminary injunction, petitioners alleged, among
others, that part of the insurance proceeds had
already been released in favor of Odessa, while
the rest of the proceeds are to be released in favor
of Karl Brian and Trisha Angelie, both minors, upon
the appointment of their legal guardian.
Petitioners also prayed for the total amount of
₱320,000.00 as actual litigation expenses and
attorney’s fees.
In answer,6 Insular admitted that Loreto
misrepresented Eva as his legitimate wife and
Odessa, Karl Brian, and Trisha Angelie as his
legitimate children, and that they filed their claims
for the insurance proceeds of the insurance
policies; that when it ascertained that Eva was not
the legal wife of Loreto, it disqualified her as a
beneficiary and divided the proceeds among
Odessa, Karl Brian, and Trisha Angelie, as the
remaining designated beneficiaries; and that it
released Odessa’s share as she was of age, but
withheld the release of the shares of minors Karl
Brian and Trisha Angelie pending submission of
letters of guardianship. Insular alleged that the
complaint or petition failed to state a cause of
action insofar as it sought to declare as void the
designation of Eva as beneficiary, because Loreto
revoked her designation as such in Policy No.
A001544070 and it disqualified her in Policy No.
A001693029; and insofar as it sought to declare
as inofficious the shares of Odessa, Karl Brian, and
Trisha Angelie, considering that no settlement of
Loreto’s estate had been filed nor had the
respective shares of the heirs been determined.
Insular further claimed that it was bound to honor
the insurance policies designating the children of
Loreto with Eva as beneficiaries pursuant to
Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim,
Grepalife alleged that Eva was not designated as
an insurance policy beneficiary; that the claims
filed by Odessa, Karl Brian, and Trisha Angelie
were denied because Loreto was ineligible for
insurance due to a misrepresentation in his
application form that he was born on December
10, 1936 and, thus, not more than 65 years old
when he signed it in September 2001; that the
case was premature, there being no claim filed by
the legitimate family of Loreto; and that the law on
succession does not apply where the designation
of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian,
and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the
illegitimate family of Loreto failed to file their
answer. Hence, the trial court, upon motion of
petitioners, declared them in default in its Order
dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular
and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial
court ordered petitioners to comment within 15
days.
In their comment, petitioners alleged that the
issue raised by Insular and Grepalife was purely
legal – whether the complaint itself was proper or
not – and that the designation of a beneficiary is
an act of liberality or a donation and, therefore,
subject to the provisions of Articles 7528 and
7729 of the Civil Code.
In reply, both Insular and Grepalife countered that
the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the
estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was
legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a
Resolution, the dispositive portion of which reads –
WHEREFORE, the motion to dismiss incorporated
in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants
Odessa, Karl Brian and Trisha Maramag. The action
shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus –
Art. 2011 of the Civil Code provides that the
contract of insurance is governed by the (sic)
special laws. Matters not expressly provided for in
such special laws shall be regulated by this Code.
The principal law on insurance is the Insurance
Code, as amended. Only in case of deficiency in
the Insurance Code that the Civil Code may be
resorted to. (Enriquez v. Sun Life Assurance Co.,
41 Phil. 269.)
The Insurance Code, as amended, contains a
provision regarding to whom the insurance
proceeds shall be paid. It is very clear under Sec.
53 thereof that the insurance proceeds shall be
applied exclusively to the proper interest of the
person in whose name or for whose benefit it is
made, unless otherwise specified in the policy.
Since the defendants are the ones named as the
primary beneficiary (sic) in the insurances (sic)
taken by the deceased Loreto C. Maramag and
there is no showing that herein plaintiffs were also
included as beneficiary (sic) therein the insurance
proceeds shall exclusively be paid to them. This is
because the beneficiary has a vested right to the
indemnity, unless the insured reserves the right to
change the beneficiary. (Grecio v. Sunlife
Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on
donations or the rules on testamentary succession
in order to defeat the right of herein defendants to
collect the insurance indemnity. The beneficiary in
a contract of insurance is not the donee spoken in
the law of donation. The rules on testamentary
succession cannot apply here, for the insurance
indemnity does not partake of a donation. As such,
the insurance indemnity cannot be considered as
an advance of the inheritance which can be
subject to collation (Del Val v. Del Val, 29 Phil.
534). In the case of Southern Luzon Employees’
Association v. Juanita Golpeo, et al., the Honorable
Supreme Court made the following
pronouncements[:]
"With the finding of the trial court that the
proceeds to the Life Insurance Policy belongs
exclusively to the defendant as his individual and
separate property, we agree that the proceeds of
an insurance policy belong exclusively to the
beneficiary and not to the estate of the person
whose life was insured, and that such proceeds
are the separate and individual property of the
beneficiary and not of the heirs of the person
whose life was insured, is the doctrine in America.
We believe that the same doctrine obtains in these
Islands by virtue of Section 428 of the Code of
Commerce x x x."
In [the] light of the above pronouncements, it is
very clear that the plaintiffs has (sic) no sufficient
cause of action against defendants Odessa, Karl
Brian and Trisha Angelie Maramag for the
reduction and/or declaration of inofficiousness of
donation as primary beneficiary (sic) in the
insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of
any cause of action. One of the named beneficiary
(sic) in the insurances (sic) taken by the late
Loreto C. Maramag is his concubine Eva Verna De
Guzman. Any person who is forbidden from
receiving any donation under Article 739 cannot
be named beneficiary of a life insurance policy of
the person who cannot make any donation to him,
according to said article (Art. 2012, Civil Code). If
a concubine is made the beneficiary, it is believed
that the insurance contract will still remain valid,
but the indemnity must go to the legal heirs and
not to the concubine, for evidently, what is
prohibited under Art. 2012 is the naming of the
improper beneficiary. In such case, the action for
the declaration of nullity may be brought by the
spouse of the donor or donee, and the guilt of the
donor and donee may be proved by
preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the
Philippines, page 897). Since the designation of
defendant Eva Verna de Guzman as one of the
primary beneficiary (sic) in the insurances (sic)
taken by the late Loreto C. Maramag is void under
Art. 739 of the Civil Code, the insurance indemnity
that should be paid to her must go to the legal
heirs of the deceased which this court may
properly take cognizance as the action for the
declaration for the nullity of a void donation falls
within the general jurisdiction of this Court.11
Insular12 and Grepalife13 filed their respective
motions for reconsideration, arguing, in the main,
that the petition failed to state a cause of action.
Insular further averred that the proceeds were
divided among the three children as the remaining
named beneficiaries. Grepalife, for its part, also
alleged that the premiums paid had already been
refunded.
Petitioners, in their comment, reiterated their
earlier arguments and posited that whether the
complaint may be dismissed for failure to state a
cause of action must be determined solely on the
basis of the allegations in the complaint, such that
the defenses of Insular and Grepalife would be
better threshed out during trial.1avvphi1
On June 16, 2005, the trial court issued a
Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing
disquisitions, the Motions for Reconsideration filed
by defendants Grepalife and Insular Life are
hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004
which ordered the prosecution of the case against
defendant Eva Verna De Guzman, Grepalife and
Insular Life is hereby SET ASIDE, and the case
against them is hereby ordered DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of
Insular and Grepalife, the trial court considered
the allegations of Insular that Loreto revoked the
designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy
such that the entire proceeds would be paid to the
illegitimate children of Loreto with Eva pursuant to
Section 53 of the Insurance Code. It ruled that it is
only in cases where there are no beneficiaries
designated, or when the only designated
beneficiary is disqualified, that the proceeds
should be paid to the estate of the insured. As to
the claim that the proceeds to be paid to Loreto’s
illegitimate children should be reduced based on
the rules on legitime, the trial court held that the
distribution of the insurance proceeds is governed
primarily by the Insurance Code, and the
provisions of the Civil Code are irrelevant and
inapplicable. With respect to the Grepalife policy,
the trial court noted that Eva was never
designated as a beneficiary, but only Odessa, Karl
Brian, and Trisha Angelie; thus, it upheld the
dismissal of the case as to the illegitimate
children. It further held that the matter of Loreto’s
misrepresentation was premature; the appropriate
action may be filed only upon denial of the claim
of the named beneficiaries for the insurance
proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution
to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial
court dismissing the complaint for failure to state
a cause of action involved a pure question of law.
The appellate court also noted that petitioners did
not file within the reglementary period a motion
for reconsideration of the trial court’s Resolution,
dated September 21, 2004, dismissing the
complaint as against Odessa, Karl Brian, and
Trisha Angelie; thus, the said Resolution had
already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss
for failure to state a cause of action, may the
Court consider matters which were not alleged in
the Complaint, particularly the defenses put up by
the defendants in their Answer?
b. In granting a motion for reconsideration of a
motion to dismiss for failure to state a cause of
action, did not the Regional Trial Court engage in
the examination and determination of what were
the facts and their probative value, or the truth
thereof, when it premised the dismissal on
allegations of the defendants in their answer –
which had not been proven?
c. x x x (A)re the members of the legitimate family
entitled to the proceeds of the insurance for the
concubine?15
In essence, petitioners posit that their petition
before the trial court should not have been
dismissed for failure to state a cause of action
because the finding that Eva was either
disqualified as a beneficiary by the insurance
companies or that her designation was revoked by
Loreto, hypothetically admitted as true, was raised
only in the answers and motions for
reconsideration of both Insular and Grepalife. They
argue that for a motion to dismiss to prosper on
that ground, only the allegations in the complaint
should be considered. They further contend that,
even assuming Insular disqualified Eva as a
beneficiary, her share should not have been
distributed to her children with Loreto but, instead,
awarded to them, being the legitimate heirs of the
insured deceased, in accordance with law and
jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on
the trial court’s finding that the petition failed to
state a cause of action, as provided in Rule 16,
Section 1(g), of the Rules of Court, which reads –
SECTION 1. Grounds. – Within the time for but
before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss
may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no
cause of action.
A cause of action is the act or omission by which a
party violates a right of another.16 A complaint
states a cause of action when it contains the three
(3) elements of a cause of action—(1) the legal
right of the plaintiff; (2) the correlative obligation
of the defendant; and (3) the act or omission of
the defendant in violation of the legal right. If any
of these elements is absent, the complaint
becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action.17
When a motion to dismiss is premised on this
ground, the ruling thereon should be based only
on the facts alleged in the complaint. The court
must resolve the issue on the strength of such
allegations, assuming them to be true. The test of
sufficiency of a cause of action rests on whether,
hypothetically admitting the facts alleged in the
complaint to be true, the court can render a valid
judgment upon the same, in accordance with the
prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized
exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial
notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are
inadmissible in evidence;
4. by the record or document in the pleading, the
allegations appear unfounded; or
5. there is evidence which has been presented to
the court by stipulation of the parties or in the
course of the hearings related to the case.18
In this case, it is clear from the petition filed
before the trial court that, although petitioners are
the legitimate heirs of Loreto, they were not
named as beneficiaries in the insurance policies
issued by Insular and Grepalife. The basis of
petitioners’ claim is that Eva, being a concubine of
Loreto and a suspect in his murder, is disqualified
from being designated as beneficiary of the
insurance policies, and that Eva’s children with
Loreto, being illegitimate children, are entitled to a
lesser share of the proceeds of the policies. They
also argued that pursuant to Section 12 of the
Insurance Code,19 Eva’s share in the proceeds
should be forfeited in their favor, the former
having brought about the death of Loreto. Thus,
they prayed that the share of Eva and portions of
the shares of Loreto’s illegitimate children should
be awarded to them, being the legitimate heirs of
Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that
petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code
which expressly provides that insurance contracts
shall be governed by special laws, i.e., the
Insurance Code. Section 53 of the Insurance Code
states—
SECTION 53. The insurance proceeds shall be
applied exclusively to the proper interest of the
person in whose name or for whose benefit it is
made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only
persons entitled to claim the insurance proceeds
are either the insured, if still alive; or the
beneficiary, if the insured is already deceased,
upon the maturation of the policy.20 The exception
to this rule is a situation where the insurance
contract was intended to benefit third persons who
are not parties to the same in the form of
favorable stipulations or indemnity. In such a case,
third parties may directly sue and claim from the
insurer.21
Petitioners are third parties to the insurance
contracts with Insular and Grepalife and, thus, are
not entitled to the proceeds thereof. Accordingly,
respondents Insular and Grepalife have no legal
obligation to turn over the insurance proceeds to
petitioners. The revocation of Eva as a beneficiary
in one policy and her disqualification as such in
another are of no moment considering that the
designation of the illegitimate children as
beneficiaries in Loreto’s insurance policies remains
valid. Because no legal proscription exists in
naming as beneficiaries the children of illicit
relationships by the insured,22 the shares of Eva in
the insurance proceeds, whether forfeited by the
court in view of the prohibition on donations under
Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate
children, the designated beneficiaries, to the
exclusion of petitioners. It is only in cases where
the insured has not designated any
beneficiary,23 or when the designated beneficiary
is disqualified by law to receive the
proceeds,24 that the insurance policy proceeds
shall redound to the benefit of the estate of the
insured.
In this regard, the assailed June 16, 2005
Resolution of the trial court should be upheld. In
the same light, the Decision of the CA dated
January 8, 2008 should be sustained. Indeed, the
appellate court had no jurisdiction to take
cognizance of the appeal; the issue of failure to
state a cause of action is a question of law and not
of fact, there being no findings of fact in the first
place.25
WHEREFORE, the petition is DENIED for lack of
merit. Costs against petitioners.
SO ORDERED.

ANTONIO EDUARDO B. NACHURA
Associate Justice
G.R. No. 147839 June 8, 2006
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH
AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on
certiorari of the Decision1 dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No.
61848 which set aside the Decision dated August
31, 1998 of the Regional Trial Court, Branch 138,
Makati (RTC) in Civil Case No. 92-322 and upheld
the causes of action for damages of Insurance
Company of North America (respondent) against
Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the
maker of Wrangler Blue Jeans. Levi Strauss (Phils.)
Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co..
IMC and LSPI separately obtained from respondent
fire insurance policies with book debt
endorsements. The insurance policies provide for
coverage on "book debts in connection with ready-
made clothing materials which have been sold or
delivered to various customers and dealers of the
Insured anywhere in the Philippines."2 The policies
defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45
days after the time of the loss covered under this
Policy."3 The policies also provide for the following
conditions:
1. Warranted that the Company shall not be liable
for any unpaid account in respect of the
merchandise sold and delivered by the Insured
which are outstanding at the date of loss for a
period in excess of six (6) months from the date of
the covering invoice or actual delivery of the
merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the
Company within twelve (12) days after the close of
every calendar month all amount shown in their
books of accounts as unpaid and thus become
receivable item from their customers and dealers.
x x x4
 xxxx
Petitioner is a customer and dealer of the products
of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire.
Included in the items lost or destroyed in the fire
were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint
for damages against petitioner. It alleges that IMC
and LSPI filed with respondent their claims under
their respective fire insurance policies with book
debt endorsements; that as of February 25, 1991,
the unpaid accounts of petitioner on the sale and
delivery of ready-made clothing materials with IMC
was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims
of IMC and LSPI and, by virtue thereof, respondent
was subrogated to their rights against petitioner;
that respondent made several demands for
payment upon petitioner but these went
unheeded.5
In its Answer with Counter Claim dated July 4,
1995, petitioner contends that it could not be held
liable because the property covered by the
insurance policies were destroyed due to fortuities
event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was
no breach of contract committed by it since the
loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to
it that they insured their properties; that it never
consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to
arrive at an amicable settlement. 7 Thus, trial on
the merits ensued.
On August 31, 1998, the RTC rendered its decision
dismissing respondent's complaint.8 It held that
the fire was purely accidental; that the cause of
the fire was not attributable to the negligence of
the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that
since the sales invoices state that "it is further
agreed that merely for purpose of securing the
payment of purchase price, the above-described
merchandise remains the property of the vendor
until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and
must bear the loss.
Dissatisfied, petitioner appealed to the CA. 9 On
October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The
dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the
appealed decision is REVERSED and SET ASIDE
and a new one is entered ordering defendant-
appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the
amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully
paid;
2. the amount of P535,613.00 representing the
amount paid by the plaintiff-appellant to the
insured Levi Strauss Phil., Inc., plus legal interest
from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of
sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the
goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code,
to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of
the thing at the time the loss under the principle
of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods
but the payment of its unpaid account and as such
the obligation to pay is not extinguished, even if
the fire is considered a fortuitous event; that by
subrogation, the insurer has the right to go against
petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the
vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it
was denied by the CA in its Resolution dated April
11, 2001.13
Hence, the present petition for review on certiorari
anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT
THE INSURANCE IN THE INSTANT CASE WAS ONE
OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT
ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS AUTOMATIC SUBROGATION UNDER
ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the
insurance in the present case cannot be deemed
to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit
that was insured since respondent paid on the
occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner
of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as
the accounts were not yet due since no prior
demands were made by IMC and LSPI against
petitioner for payment of the debt and such
demands came from respondent only after it had
already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that
despite delivery of the goods, petitioner-buyer IMC
and LSPI assumed the risk of loss when they
secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits
that there is no subrogation in favor of respondent
as no valid insurance could be maintained thereon
by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that
petitioner was not privy to the insurance contract
or the payment between respondent and its
insured nor was its consent or approval ever
secured; that this lack of privity forecloses any
real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping
the insured goods safe from fire.
For its part, respondent counters that while
ownership over the ready- made clothing
materials was transferred upon delivery to
petitioner, IMC and LSPI have insurable interest
over said goods as creditors who stand to suffer
direct pecuniary loss from its destruction by fire;
that petitioner is liable for loss of the ready-made
clothing materials since it failed to overcome the
presumption of liability under Article 126516 of the
Civil Code; that the fire was caused through
petitioner's negligence in failing to provide
stringent measures of caution, care and
maintenance on its property because electric
wires do not usually short circuit unless there are
defects in their installation or when there is lack of
proper maintenance and supervision of the
property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's
valid claim and should be liable to respondent for
contracted lawyer's fees, litigation expenses and
cost of suit.17
As a general rule, in petitions for review, the
jurisdiction of this Court in cases brought before it
from the CA is limited to reviewing questions of
law which involves no examination of the
probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is
not a trier of facts; it is not its function to analyze
or weigh evidence all over again.19 Accordingly,
findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized
several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the
findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its
findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when
the findings are contrary to the trial court; (8)
when the findings are conclusions without citation
of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as
in the petitioner's main and reply briefs are not
disputed by the respondent; (10) when the
findings of fact are premised on the supposed
absence of evidence and contradicted by the
evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly
considered, would justify a different
conclusion. Exceptions (4), (5), (7), and (11)
21
apply to the present petition.
At issue is the proper interpretation of the
questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy
on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance
applies to loss of the ready-made clothing
materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract
are plain and readily understood, there is no room
for construction.22 In this case, the questioned
insurance policies provide coverage for "book
debts in connection with ready-made clothing
materials which have been sold or delivered to
various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book
debts as the "unpaid account still appearing in the
Book of Account of the Insured 45 days after the
time of the loss covered under this
Policy."24 Nowhere is it provided in the questioned
insurance policies that the subject of the
insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are
clear and explicit that they do not justify an
attempt to read into it any alleged intention of the
parties, the terms are to be understood literally
just as they appear on the face of the
contract.25 Thus, what were insured against were
the accounts of IMC and LSPI with petitioner which
remained unpaid 45 days after the loss through
fire, and not the loss or destruction of the goods
delivered.
Petitioner argues that IMC bears the risk of loss
because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t
is further agreed that merely for purpose of
securing the payment of the purchase price the
above described merchandise remains the
property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1),
Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods
remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual
delivery has been made or not, except that:
(1) Where delivery of the goods has been made to
the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in
the goods has been retained by the seller merely
to secure performance by the buyer of his
obligations under the contract, the goods are at
the buyer's risk from the time of such delivery;
(Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to
insure that the buyer will pay its debt, the risk of
loss is borne by the buyer. 27 Accordingly, petitioner
bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over
the goods. They have an insurable interest until
full payment of the value of the delivered goods.
Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of
who bears the risk of loss, in property insurance,
one's interest is not determined by concept of
title, but whether insured has substantial
economic interest in the property.28
Section 13 of our Insurance Code defines insurable
interest as "every interest in property, whether
real or personal, or any relation thereto, or liability
in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may
consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an
expectancy, coupled with an existing interest in
that out of which the expectancy arises.
Therefore, an insurable interest in property does
not necessarily imply a property interest in, or a
lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an
interest, it is sufficient that the insured is so
situated with reference to the property that he
would be liable to loss should it be injured or
destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in
property who derives a benefit from its existence
or would suffer loss from its destruction.30Indeed, a
vendor or seller retains an insurable interest in the
property sold so long as he has any interest
therein, in other words, so long as he would suffer
by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC
and LSPI pertain to the unpaid accounts appearing
in their Books of Account 45 days after the time of
the loss covered by the policies.
The next question is: Is petitioner liable for the
unpaid accounts?
Petitioner's argument that it is not liable because
the fire is a fortuitous event under Article 117432 of
the Civil Code is misplaced. As held earlier,
petitioner bears the loss under Article 1504 (1) of
the Civil Code.
Moreover, it must be stressed that the insurance
in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that
remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA,
where the obligation consists in the payment of
money, the failure of the debtor to make the
payment even by reason of a fortuitous event
shall not relieve him of his liability. 33 The rationale
for this is that the rule that an obligor should be
held exempt from liability when the loss occurs
thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable
even in case of fortuitous event. It does not apply
when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an
obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not
extinguish the obligation." If the obligation is
generic in the sense that the object thereof is
designated merely by its class or genus without
any particular designation or physical segregation
from all others of the same class, the loss or
destruction of anything of the same kind even
without the debtor's fault and before he has
incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based
on the principle that the genus of a thing can
never perish. Genus nunquan perit. 36 An obligation
to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property
of the debtor.37
Thus, whether fire is a fortuitous event or
petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has
been established that petitioner has outstanding
accounts with IMC and LSPI.
With respect to IMC, the respondent has
adequately established its claim. Exhibits "C" to
"C-22"38 show that petitioner has an outstanding
account with IMC in the amount of P2,119,205.00.
Exhibit "E"39 is the check voucher evidencing
payment to IMC. Exhibit "F"40 is the subrogation
receipt executed by IMC in favor of respondent
upon receipt of the insurance proceeds. All these
documents have been properly identified,
presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent
as insurer and IMC as the insured, but also the
amount paid to settle the insurance claim. The
right of subrogation accrues simply upon payment
by the insurance company of the insurance
claim.41 Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil
Code which provides:
Art. 2207. If the plaintiff's property has been
insured, and he has received indemnity from the
insurance company for the injury or loss arising
out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to
the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
any right which LSPI may have against petitioner.
Failure to substantiate the claim of subrogation is
fatal to petitioner's case for recovery of the
amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The
assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of
Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the
order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient

evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano,
Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss
of Levi's products in the amount of P535,613.00 in G.R. No. 85141 November 28, 1989
the fire that razed petitioner's building on
February 25, 1991. FILIPINO MERCHANTS INSURANCE CO.,
INC., petitioner,
Moreover, there is no proof of full settlement of
the insurance claim of LSPI; no subrogation receipt vs.
was offered in evidence. Thus, there is no
evidence that respondent has been subrogated to
COURT OF APPEALS and CHOA TIEK
SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.
REGALADO, J.:
This is a review of the decision of the Court of
Appeals, promulgated on July 19,1988, the
dispositive part of which reads:
WHEREFORE, the judgment appealed from is
affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff
the sum of P51,568.62 with interest at legal rate
from the date of filing of the complaint, and is
modified with respect to the third party complaint
in that (1) third party defendant E. Razon, Inc. is
ordered to reimburse third party plaintiff the sum
of P25,471.80 with legal interest from the date of
payment until the date of reimbursement, and (2)
the third-party complaint against third party
defendant Compagnie Maritime Des Chargeurs
Reunis is dismissed. 1
The facts as found by the trial court and adopted
by the Court of Appeals are as follows:
This is an action brought by the consignee of the
shipment of fishmeal loaded on board the vessel
SS Bougainville and unloaded at the Port of Manila
on or about December 11, 1976 and seeks to
recover from the defendant insurance company
the amount of P51,568.62 representing damages
to said shipment which has been insured by the
defendant insurance company under Policy No. M-
2678. The defendant brought a third party
complaint against third party defendants
Compagnie Maritime Des Chargeurs Reunis and/or
E. Razon, Inc. seeking judgment against the third
(sic) defendants in case Judgment is rendered
against the third party plaintiff. It appears from
the evidence presented that in December 1976,
plaintiff insured said shipment with defendant
insurance company under said cargo Policy No. M-
2678 for the sum of P267,653.59 for the goods
described as 600 metric tons of fishmeal in new
gunny bags of 90 kilos each from Bangkok,
Thailand to Manila against all risks under
warehouse to warehouse terms. Actually, what
was imported was 59.940 metric tons not 600 tons
at $395.42 a ton CNF Manila. The fishmeal in 666
new gunny bags were unloaded from the ship on
December 11, 1976 at Manila unto the arrastre
contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge
105 bags were in bad order condition as jointly
surveyed by the ship's agent and the arrastre
contractor. The condition of the bad order was
reflected in the turn over survey report of Bad
Order cargoes Nos. 120320 to 120322, as Exhibit
C-4 consisting of three (3) pages which are also
Exhibits 4, 5 and 6- Razon. The cargo was also
surveyed by the arrastre contractor before
delivery of the cargo to the consignee and the
condition of the cargo on such delivery was
reflected in E. Razon's Bad Order Certificate No.
14859, 14863 and 14869 covering a total of 227
bags in bad order condition. Defendant's surveyor
has conducted a final and detailed survey of the
cargo in the warehouse for which he prepared a
survey report Exhibit F with the findings on the
extent of shortage or loss on the bad order bags
totalling 227 bags amounting to 12,148 kilos,
Exhibit F-1. Based on said computation the
plaintiff made a formal claim against the
defendant Filipino Merchants Insurance Company
for P51,568.62 (Exhibit C) the computation of
which claim is contained therein. A formal claim
statement was also presented by the plaintiff
against the vessel dated December 21, 1976,
Exhibit B, but the defendant Filipino Merchants
Insurance Company refused to pay the claim.
Consequently, the plaintiff brought an action
against said defendant as adverted to above and
defendant presented a third party complaint
against the vessel and the arrastre contractor. 2
The court below, after trial on the merits, rendered
judgment in favor of private respondent, the
decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is
hereby rendered in favor of the plaintiff and
against the defendant Filipino Merchant's (sic)
Insurance Co., ordering the defendants to pay the
plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate
from the date of the filing of the complaint;
On the third party complaint, the third party
defendant Compagnie Maritime Des Chargeurs
Reunis and third party defendant E. Razon, Inc. are
ordered to pay to the third party plaintiff jointly
and severally reimbursement of the amounts paid
by the third party plaintiff with legal interest from
the date of such payment until the date of such
reimbursement.
Without pronouncement as to costs.3
On appeal, the respondent court affirmed the
decision of the lower court insofar as the award on
the complaint is concerned and modified the same
with regard to the adjudication of the third-party
complaint. A motion for reconsideration of the
aforesaid decision was denied, hence this petition
with the following assignment of errors:
1. The Court of Appeals erred in its interpretation
and application of the "all risks" clause of the
marine insurance policy when it held the petitioner
liable to the private respondent for the partial loss
of the cargo, notwithstanding the clear absence of
proof of some fortuitous event, casualty, or
accidental cause to which the loss is attributable,
thereby contradicting the very precedents cited by
it in its decision as well as a prior decision of the
same Division of the said court (then composed of
Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that
the private respondent had no insurable interest in
the subject cargo, hence, the marine insurance
policy taken out by private respondent is null and
void;
3. The Court of Appeals erred in not holding that
the private respondent was guilty of fraud in not
disclosing the fact, it being bound out of utmost
good faith to do so, that it had no insurable
interest in the subject cargo, which bars its
recovery on the policy. 4
On the first assignment of error, petitioner
contends that an "all risks" marine policy has a
technical meaning in insurance in that before a
claim can be compensable it is essential that there
must be "some fortuity, " "casualty" or "accidental
cause" to which the alleged loss is attributable
and the failure of herein private respondent, upon
whom lay the burden, to adduce evidence showing
that the alleged loss to the cargo in question was
due to a fortuitous event precludes his right to
recover from the insurance policy. We find said
contention untenable.
The "all risks clause" of the Institute Cargo Clauses
read as follows:
5. This insurance is against all risks of loss or
damage to the subject-matter insured but shall in
no case be deemed to extend to cover loss,
damage, or expense proximately caused by delay
or inherent vice or nature of the subject-matter
insured. Claims recoverable hereunder shall be
payable irrespective of percentage. 5
An "all risks policy" should be read literally as
meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The
terms "accident" and "accidental", as used in
insurance contracts, have not acquired any
technical meaning. They are construed by the
courts in their ordinary and common acceptance.
Thus, the terms have been taken to mean that
which happens by chance or fortuitously, without
intention and design, and which is unexpected,
unusual and unforeseen. An accident is an event
that takes place without one's foresight or
expectation; an event that proceeds from an
unknown cause, or is an unusual effect of a known
cause and, therefore, not expected. 6
The very nature of the term "all risks" must be
given a broad and comprehensive meaning as
covering any loss other than a willful and
fraudulent act of the insured. 7 This is pursuant to
the very purpose of an "all risks" insurance to give
protection to the insured in those cases where
difficulties of logical explanation or some mystery
surround the loss or damage to property. 8 An "all
asks" policy has been evolved to grant greater
protection than that afforded by the "perils
clause," in order to assure that no loss can happen
through the incidence of a cause neither insured
against nor creating liability in the ship; it is
written against all losses, that is, attributable to
external causes. 9
The term "all risks" cannot be given a strained
technical meaning, the language of the clause
under the Institute Cargo Clauses being
unequivocal and clear, to the effect that it extends
to all damages/losses suffered by the insured
cargo except (a) loss or damage or expense
proximately caused by delay, and (b) loss or
damage or expense proximately caused by the
inherent vice or nature of the subject matter
insured.
Generally, the burden of proof is upon the insured
to show that a loss arose from a covered peril, but
under an "all risks" policy the burden is not on the
insured to prove the precise cause of loss or
damage for which it seeks compensation. The
insured under an "all risks insurance policy" has
the initial burden of proving that the cargo was in
good condition when the policy attached and that
the cargo was damaged when unloaded from the
vessel; thereafter, the burden then shifts to the
insurer to show the exception to the
coverage. As we held in Paris-Manila Perfumery
10
Co. vs. Phoenix Assurance Co., Ltd. 11 the basic
rule is that the insurance company has the burden
of proving that the loss is caused by the risk
excepted and for want of such proof, the company
is liable.
Coverage under an "all risks" provision of a marine
insurance policy creates a special type of
insurance which extends coverage to risks not
usually contemplated and avoids putting upon the
insured the burden of establishing that the loss
was due to the peril falling within the policy's
coverage; the insurer can avoid coverage upon
demonstrating that a specific provision expressly
excludes the loss from coverage. 12 A marine
insurance policy providing that the insurance was
to be "against all risks" must be construed as
creating a special insurance and extending to
other risks than are usually contemplated, and
covers all losses except such as arise from the
fraud of the insured. 13 The burden of the insured,
therefore, is to prove merely that the goods he
transported have been lost, destroyed or
deteriorated. Thereafter, the burden is shifted to
the insurer to prove that the loss was due to
excepted perils. To impose on the insured the
burden of proving the precise cause of the loss or
damage would be inconsistent with the broad
protective purpose of "all risks" insurance.
In the present case, there being no showing that
the loss was caused by any of the excepted perils,
the insurer is liable under the policy. As aptly
stated by the respondent Court of Appeals, upon
due consideration of the authorities and
jurisprudence it discussed —
... it is believed that in the absence of any showing
that the losses/damages were caused by an
excepted peril, i.e. delay or the inherent vice or
nature of the subject matter insured, and there is
no such showing, the lower court did not err in
holding that the loss was covered by the policy.
There is no evidence presented to show that the
condition of the gunny bags in which the fishmeal
was packed was such that they could not hold
their contents in the course of the necessary
transit, much less any evidence that the bags of
cargo had burst as the result of the weakness of
the bags themselves. Had there been such a
showing that spillage would have been a certainty,
there may have been good reason to plead that
there was no risk covered by the policy (See Berk
vs. Style [1956] cited in Marine Insurance
Claims, Ibid, p. 125). Under an 'all risks' policy, it
was sufficient to show that there was damage
occasioned by some accidental cause of any kind,
and there is no necessity to point to any particular
cause. 14
Contracts of insurance are contracts of indemnity
upon the terms and conditions specified in the
policy. The agreement has the force of law
between the parties. The terms of the policy
constitute the measure of the insurer's liability. If
such terms are clear and unambiguous, they must
be taken and understood in their plain, ordinary
and popular sense.15
Anent the issue of insurable interest, we uphold
the ruling of the respondent court that private
respondent, as consignee of the goods in transit
under an invoice containing the terms under "C &
F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable
interest in property as every interest in property,
whether real or personal, or any relation thereto,
or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured. In principle, anyone has an insurable
interest in property who derives a benefit from its
existence or would suffer loss from its destruction
whether he has or has not any title in, or lien upon
or possession of the property y. 16 Insurable
interest in property may consist in (a) an existing
interest; (b) an inchoate interest founded on an
existing interest; or (c) an expectancy, coupled
with an existing interest in that out of which the
expectancy arises. 17
Herein private respondent, as vendee/consignee of
the goods in transit has such existing interest
therein as may be the subject of a valid contract
of insurance. His interest over the goods is based
on the perfected contract of sale. 18The perfected
contract of sale between him and the shipper of
the goods operates to vest in him an equitable
title even before delivery or before be performed
the conditions of the sale. 19 The contract of
shipment, whether under F.O.B., C.I.F., or C. & F. as
in this case, is immaterial in the determination of
whether the vendee has an insurable interest or
not in the goods in transit. The perfected contract
of sale even without delivery vests in the vendee
an equitable title, an existing interest over the
goods sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides
that where, in pursuance of a contract of sale, the
seller is authorized or required to send the goods
to the buyer, delivery of the goods to a carrier,
whether named by the buyer or not, for, the
purpose of transmission to the buyer is deemed to
be a delivery of the goods to the buyer, the
exceptions to said rule not obtaining in the present
case. The Court has heretofore ruled that the
delivery of the goods on board the carrying
vessels partake of the nature of actual delivery
since, from that time, the foreign buyers assumed
the risks of loss of the goods and paid the
insurance premium covering them. 20
C & F contracts are shipment contracts. The term
means that the price fixed includes in a lump sum
the cost of the goods and freight to the named
destination. 21 It simply means that the seller must
pay the costs and freight necessary to bring the
goods to the named destination but the risk of loss
or damage to the goods is transferred from the
seller to the buyer when the goods pass the ship's
rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest
was not among the defenses averred in petitioners
answer. It was neither an issue agreed upon by the
parties at the pre-trial conference nor was it raised
during the trial in the court below. It is a settled
rule that an issue which has not been raised in the
court a quo cannot be raised for the first time on
appeal as it would be offensive to the basic rules
of fair play, justice and due process. 23 This is but a
permuted restatement of the long settled rule that
when a party deliberately adopts a certain theory,
and the case is tried and decided upon that theory
in the court below, he will not be permitted to
change his theory on appeal because, to permit
him to do so, would be unfair to the adverse
party. 24
If despite the fundamental doctrines just stated,
we nevertheless decided to indite a disquisition on
the issue of insurable interest raised by petitioner,
it was to put at rest all doubts on the matter under
the facts in this case and also to dispose of
petitioner's third assignment of error which
consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and
the assailed decision of the respondent Court of
Appeals is AFFIRMED in toto.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera (Chairperson), J., is on leave.

G.R. No. 168115 June 8, 2007
VICENTE ONG LIM SING, JR., petitioner,
vs.
FEB LEASING & FINANCE
CORPORATION, respondent.
DECISION
NACHURA, J.:
This is a petition for review on certiorari assailing
the Decision1 dated March 15, 2005 and the
Resolution2 dated May 23, 2005 of the Court of
Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:
On March 9, 1995, FEB Leasing and Finance
Corporation (FEB) entered into a lease 3 of
equipment and motor vehicles with JVL Food
Products (JVL). On the same date, Vicente Ong Lim
Sing, Jr. (Lim) executed an Individual Guaranty
Agreement4 with FEB to guarantee the prompt and
faithful performance of the terms and conditions
of the aforesaid lease agreement. Corresponding
Lease Schedules with Delivery and Acceptance
Certificates5 over the equipment and motor
vehicles formed part of the agreement. Under the
contract, JVL was obliged to pay FEB an aggregate
gross monthly rental of One Hundred Seventy
Thousand Four Hundred Ninety-Four Pesos
(₱170,494.00).
JVL defaulted in the payment of the monthly
rentals. As of July 31, 2000, the amount in arrears,
including penalty charges and insurance
premiums, amounted to Three Million Four
Hundred Fourteen Thousand Four Hundred Sixty-
Eight and 75/100 Pesos (₱3,414,468.75). On
August 23, 2000, FEB sent a letter to JVL
demanding payment of the said amount. However,
JVL failed to pay.6
On December 6, 2000, FEB filed a Complaint 7 with
the Regional Trial Court of Manila, docketed as
Civil Case No. 00-99451, for sum of money,
damages, and replevin against JVL, Lim, and John
Doe.
In the Amended Answer,8 JVL and Lim admitted
the existence of the lease agreement but asserted
that it is in reality a sale of equipment on
installment basis, with FEB acting as the financier.
JVL and Lim claimed that this intention was
apparent from the fact that they were made to
believe that when full payment was effected, a
Deed of Sale will be executed by FEB as vendor in
favor of JVL and Lim as vendees. 9 FEB purportedly
assured them that documenting the transaction as
a lease agreement is just an industry practice and
that the proper documentation would be effected
as soon as full payment for every item was made.
They also contended that the lease agreement is a
contract of adhesion and should, therefore, be
construed against the party who prepared it, i.e.,
FEB.
In upholding JVL and Lim’s stance, the trial court
stressed the contradictory terms it found in the
lease agreement. The pertinent portions of the
Decision dated November 22, 2002 read:
A profound scrutiny of the provisions of the
contract which is a contract of adhesion at once
exposed the use of several contradictory terms. To
name a few, in Section 9 of the said contract –
disclaiming warranty, it is stated that the lessor is
not the manufacturer nor the latter’s agent and
therefore does not guarantee any feature or
aspect of the object of the contract as to its
merchantability. Merchantability is a term applied
in a contract of sale of goods where conditions and
warranties are made to apply. Article 1547 of the
Civil Code provides that unless a contrary
intention appears an implied warranty on the part
of the seller that he has the right to sell and to
pass ownership of the object is furnished by law
together with an implied warranty that the thing
shall be free from hidden faults or defects or any
charge or encumbrance not known to the buyer.
In an adhesion contract which is drafted and
printed in advance and parties are not given a real
arms’ length opportunity to transact, the Courts
treat this kind of contract strictly against their
architects for the reason that the party entering
into this kind of contract has no choice but to
accept the terms and conditions found therein
even if he is not in accord therewith and for that
matter may not have understood all the terms and
stipulations prescribed thereat. Contracts of this
character are prepared unilaterally by the stronger
party with the best legal talents at its disposal. It
is upon that thought that the Courts are called
upon to analyze closely said contracts so that the
weaker party could be fully protected.
Another instance is when the alleged lessee was
required to insure the thing against loss, damage
or destruction.
In property insurance against loss or other
accidental causes, the assured must have an
insurable interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable
interest in property is whether the assured has a
right, title or interest therein that he will be
benefited by its preservation and continued
existence or suffer a direct pecuniary loss from its
destruction or injury by the peril insured against. If
the defendants were to be regarded as only a
lessee, logically the lessor who asserts ownership
will be the one directly benefited or injured and
therefore the lessee is not supposed to be the
assured as he has no insurable interest.
There is also an observation from the records that
the actual value of each object of the contract
would be the result after computing the monthly
rentals by multiplying the said rentals by the
number of months specified when the rentals
ought to be paid.
Still another observation is the existence in the
records of a Deed of Absolute Sale by and
between the same parties, plaintiff and
defendants which was an exhibit of the defendant
where the plaintiff sold to the same defendants
one unit 1995 Mitsubishi L-200 STRADA DC PICK
UP and in said Deed, The Court noticed that the
same terms as in the alleged lease were used in
respect to warranty, as well as liability in case of
loss and other conditions. This action of the
plaintiff unequivocally exhibited their real
intention to execute the corresponding Deed after
the defendants have paid in full and as heretofore
discussed and for the sake of emphasis the
obscurity in the written contract cannot favor the
party who caused the obscurity.
Based on substantive Rules on Interpretation, if
the terms are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulations shall control. If the
words appear to be contrary to the evident
intention of the parties, their contemporaneous
and subsequent acts shall be principally
considered. If the doubts are cast upon the
principal object of the contract in such a way that
it cannot be known what may have been the
intention or will of the parties, the contract shall
be null and void.10
Thus, the court concluded with the following
disposition:
In this case, which is held by this Court as a sale
on installment there is no chattel mortgage on the
thing sold, but it appears amongst the Complaint’s
prayer, that the plaintiff elected to exact
fulfillment of the obligation.
For the vehicles returned, the plaintiff can only
recover the unpaid balance of the price because of
the previous payments made by the defendants
for the reasonable use of the units, specially so, as
it appears, these returned vehicles were sold at
auction and that the plaintiff can apply the
proceeds to the balance. However, with respect to
the unreturned units and machineries still in the
possession of the defendants, it is this Court’s
view and so hold that the defendants are liable
therefore and accordingly are ordered jointly and
severally to pay the price thereof to the plaintiff
together with attorney’s fee and the costs of suit
in the sum of Php25,000.00.
SO ORDERED.11
On December 27, 2002, FEB filed its Notice of
Appeal.12 Accordingly, on January 17, 2003, the
court issued an Order13 elevating the entire
records of the case to the CA. FEB averred that the
trial court erred:
A. When it ruled that the agreement between the
Parties-Litigants is one of sale of personal
properties on installment and not of lease;
B. When it ruled that the applicable law on the
case is Article 1484 (of the Civil Code) and not R.A.
No. 8556;
C. When it ruled that the Plaintiff-Appellant can no
longer recover the unpaid balance of the price
because of the previous payments made by the
defendants for the reasonable use of the units;
D. When it failed to make a ruling or judgment on
the Joint and Solidary Liability of Vicente Ong Lim,
Jr. to the Plaintiff-Appellant.14
On March 15, 2005, the CA issued its
Decision15 declaring the transaction between the
parties as a financial lease agreement under
Republic Act (R.A.) No. 8556.16 The fallo of the
assailed Decision reads:
WHEREFORE, the instant appeal
is GRANTED and the assailed Decision dated 22
November 2002 rendered by the Regional Trial
Court of Manila, Branch 49 in Civil Case No. 00-
99451 is REVERSED and SET ASIDE, and a new
judgment is hereby ENTERED ordering appellees
JVL Food Products and Vicente Ong Lim, Jr. to
solidarily pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four
Hundred Fourteen Thousand Four Hundred
Sixty Eight Pesos and 75/100
(Php3,414,468.75), with interest at the rate of
twelve percent (12%) per annum starting from the
date of judicial demand on 06 December 2000,
until full payment thereof. Costs against appellees.
SO ORDERED.17
Lim filed the instant Petition for Review on
Certiorari under Rule 45
contending that:
I
The Honorable Court of Appeals erred when it
failed to consider that the undated complaint was
filed by Saturnino J. Galang, Jr., without any
authority from respondent’s Board of Directors
and/or Secretary’s Certificate.
II
The Honorable Court of Appeals erred when it
failed to strictly apply Section 7, Rule 18 of the
1997 Rules of Civil Procedure and now Item 1, A(8)
of A.M. No. 03-1-09 SC (June 8, 2004).
III
The Honorable Court of Appeals erred in not
dismissing the appeal for failure of the respondent
to file on time its appellant’s brief and to
separately rule on the petitioner’s motion to
dismiss.
IV
The Honorable Court of Appeals erred in finding
that the contract between the parties is one of a
financial lease and not of a contract of sale.
V We affirm the ruling of the appellate court.
The Honorable Court of Appeals ERRED IN ruling
that the payments paid by the petitioner to the
respondent are "rentals" and not installments paid
for the purchase price of the subject motor
vehicles, heavy machines and equipment.
VI
The Honorable Court of Appeals erred in ruling
that the previous contract of sale involving the
pick-up vehicle is of no consequence.
VII
The Honorable Court of Appeals failed to take into
consideration that the contract of lease, a contract
of adhesion, concealed the true intention of the
parties, which is a contract of sale.
VIII
The Honorable Court of Appeals erred in ruling
that the petitioner is a lessee with insurable
interest over the subject personal properties.
IX
The Honorable Court of Appeals erred in
construing the intentions of the Court a quo in its
usage of the term merchantability.18
First, Lim can no longer question Galang’s
authority as FEB’s authorized representative in
filing the suit against Lim. Galang was the
representative of FEB in the proceedings before
the trial court up to the appellate court. Petitioner
never placed in issue the validity of Galang’s
representation before the trial and appellate
courts. Issues raised for the first time on appeal
are barred by estoppel. Arguments not raised in
the original proceedings cannot be considered on
review; otherwise, it would violate basic principles
of fair play.19
Second, there is no legal basis for Lim to question
the authority of the CA to go beyond the matters
agreed upon during the pre-trial conference, or in
not dismissing the appeal for failure of FEB to file
its brief on time, or in not ruling separately on the
petitioner’s motion to dismiss.
Courts have the prerogative to relax procedural
rules of even the most mandatory character,
mindful of the duty to reconcile both the need to
speedily put an end to litigation and the parties’
right to due process. In numerous cases, this Court
has allowed liberal construction of the rules when
to do so would serve the demands of substantial
justice and equity.20 In Aguam v. Court of Appeals ,
the Court explained:
The court has the discretion to dismiss or not to
dismiss an appellant's appeal. It is a power
conferred on the court, not a duty. The "discretion
must be a sound one, to be exercised in
accordance with the tenets of justice and fair play,
having in mind the circumstances obtaining in
each case." Technicalities, however, must be
avoided. The law abhors technicalities that impede
the cause of justice. The court's primary duty is to
render or dispense justice. "A litigation is not a
game of technicalities." "Lawsuits unlike duels are
not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to
justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and
not on technicality. Every party litigant must be
afforded the amplest opportunity for the proper
and just determination of his cause, free from the
unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is
frowned upon where the policy of the court is to
encourage hearings of appeals on their merits and
the rules of procedure ought not to be applied in a
very rigid, technical sense; rules of procedure are
used only to help secure, not override substantial
justice. It is a far better and more prudent course
of action for the court to excuse a technical lapse
and afford the parties a review of the case on
appeal to attain the ends of justice rather than
dispose of the case on technicality and cause a
grave injustice to the parties, giving a false
impression of speedy disposal of cases while
actually resulting in more delay, if not a
miscarriage of justice.21
Third, while we affirm that the subject lease
agreement is a contract of adhesion, such a
contract is not void per se. It is as binding as any
ordinary contract. A party who enters into an
adhesion contract is free to reject the stipulations
entirely.22 If the terms thereof are accepted
without objection, then the contract serves as the
law between the parties.
In Section 23 of the lease contract, it was
expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY
CLAUSE
23.1. The LESSOR and the LESSEE agree this
instrument constitute the entire agreement
between them, and that no representations have
been made other than as set forth herein. This
Agreement shall not be amended or altered in any
manner, unless such amendment be made in
writing and signed by the parties hereto.
Petitioner’s claim that the real intention of the
parties was a contract of sale of personal property
on installment basis is more likely a mere
afterthought in order to defeat the rights of the
respondent.
The Lease Contract with corresponding Lease
Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease
within the purview of R.A. No. 8556. Section 3(d)
thereof defines "financial leasing" as:
[A] mode of extending credit through a non-
cancelable lease contract under which the lessor
purchases or acquires, at the instance of the
lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and
other movable or immovable property in
consideration of the periodic payment by the
lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase
price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory
period of not less than two (2) years during which
the lessee has the right to hold and use the leased
property with the right to expense the lease
rentals paid to the lessor and bears the cost of
repairs, maintenance, insurance and preservation
thereof, but with no obligation or option on his
part to purchase the leased property from the
owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor
vehicles to JVL in consideration of a monthly
periodic payment of ₱170,494.00. The periodic
payment by petitioner is sufficient to amortize at
least 70% of the purchase price or acquisition cost
of the said movables in accordance with the Lease
Schedules with Delivery and Acceptance
Certificates. "The basic purpose of a financial
leasing transaction is to enable the prospective
buyer of equipment, who is unable to pay for such
equipment in cash in one lump sum, to lease such
equipment in the meantime for his use, at a fixed
rental sufficient to amortize at least 70% of the
acquisition cost (including the expenses and a
margin of profit for the financial lessor) with the
expectation that at the end of the lease period the
buyer/financial lessee will be able to pay any
remaining balance of the purchase price."23
The allegation of petitioner that the rent for the
use of each movable constitutes the value of the
vehicle or equipment leased is of no moment. The
law on financial lease does not prohibit such a
circumstance and this alone does not make the
transaction between the parties a sale of personal
property on installment. In fact, the value of the
lease, usually constituting the value or amount of
the property involved, is a benefit allowed by law
to the lessor for the use of the property by the
lessee for the duration of the lease. It is
recognized that the value of these movables
depreciates through wear and tear upon use by
the lessee. In Beltran v. PAIC Finance
Corporation,24 we stated that:
Generally speaking, a financing company is not a
buyer or seller of goods; it is not a trading
company. Neither is it an ordinary leasing
company; it does not make its profit by buying
equipment and repeatedly leasing out such
equipment to different users thereof. But a
financial lease must be preceded by a purchase
and sale contract covering the equipment which
becomes the subject matter of the financial lease.
The financial lessor takes the role of the buyer of
the equipment leased. And so the formal or
documentary tie between the seller and the real
buyer of the equipment, i.e., the financial lessee,
is apparently severed. In economic reality,
however, that relationship remains. The sale of the
equipment by the supplier thereof to the financial
lessor and the latter's legal ownership thereof are
intended to secure the repayment over time of the
purchase price of the equipment, plus financing
charges, through the payment of lease rentals;
that legal title is the upfront security held by the
financial lessor, a security probably superior in
some instances to a chattel mortgagee's lien.25
Fourth, the validity of Lease No. 27:95:20 between
FEB and JVL should be upheld. JVL entered into the
lease contract with full knowledge of its terms and
conditions. The contract was in force for more than
four years. Since its inception on March 9, 1995,
JVL and Lim never questioned its provisions. They
only attacked the validity of the contract after
they were judicially made to answer for their
default in the payment of the agreed rentals.
It is settled that the parties are free to agree to
such stipulations, clauses, terms, and conditions
as they may want to include in a contract. As long
as such agreements are not contrary to law,
morals, good customs, public policy, or public
order, they shall have the force of law between
the parties.26 Contracting parties may stipulate on
terms and conditions as they may see fit and
these have the force of law between them.27
The stipulation in Section 1428 of the lease
contract, that the equipment shall be insured at
the cost and expense of the lessee against loss,
damage, or destruction from fire, theft, accident,
or other insurable risk for the full term of the
lease, is a binding and valid stipulation. Petitioner,
as a lessee, has an insurable interest in the
equipment and motor vehicles leased. Section 17
of the Insurance Code provides that the measure
of an insurable interest in property is the extent to
which the insured might be damnified by loss or
injury thereof. It cannot be denied that JVL will be
directly damnified in case of loss, damage, or
destruction of any of the properties leased.
Likewise, the stipulation in Section 9.1 of the lease
contract that the lessor does not warrant the
merchantability of the equipment is a valid
stipulation. Section 9.1 of the lease contract is
stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES
THAT THE LESSOR IS NOT THE MANUFACTURER OR
SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF
THE MANUFACTURER OR SUPPLIER THEREOF. THE
LESSEE HEREBY ACKNOWLEDGES THAT IT HAS
SELECTED THE EQUIPMENT AND THE SUPPLIER
THEREOF AND THAT THERE ARE NO WARRANTIES,
CONDITIONS, TERMS, REPRESENTATION OR
INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY
OR OTHERWISE, MADE BY OR ON BEHALF OF THE
LESSOR AS TO ANY FEATURE OR ASPECT OF THE
EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS
FITNESS, SUITABILITY, CAPACITY, CONDITION OR
MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT WILL MEET THE REQUIREMENTS OF
ANY LAW, RULE, SPECIFICATIONS OR CONTRACT
WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.29
In the financial lease agreement, FEB did not
assume responsibility as to the quality,
merchantability, or capacity of the equipment.
This stipulation provides that, in case of defect of
any kind that will be found by the lessee in any of
the equipment, recourse should be made to the
manufacturer. "The financial lessor, being a
financing company, i.e., an extender of credit
rather than an ordinary equipment rental
company, does not extend a warranty of the
fitness of the equipment for any particular use.
Thus, the financial lessee was precisely in a
position to enforce such warranty directly against
the supplier of the equipment and not against the
financial lessor. We find nothing contra legem or
contrary to public policy in such a contractual
arrangement."30
Fifth, petitioner further proffers the view that the
real intention of the parties was to enter into a
contract of sale on installment in the same
manner that a previous transaction between the
parties over a 1995 Mitsubishi L-200 Strada DC-
Pick-Up was initially covered by an agreement
denominated as a lease and eventually became
the subject of a Deed of Absolute Sale.
We join the CA in rejecting this view because to
allow the transaction involving the pick-up to be
read into the terms of the lease agreement would
expand the coverage of the agreement, in
violation of Article 1372 of the New Civil
Code. 31 The lease contract subject of the
complaint speaks only of a lease. Any agreement
between the parties after the lease contract has
ended is a different transaction altogether and
should not be included as part of the lease.
Furthermore, it is a cardinal rule in the
interpretation of contracts that if the terms of a
contract are clear and leave no doubt as to the
intention of the contracting parties, the literal
meaning of its stipulations shall control. No
amount of extrinsic aid is necessary in order to
determine the parties' intent.32
WHEREFORE, in the light of all the foregoing, the
petition is DENIED. The Decision of the CA in CA-
G.R. CV No. 77498 dated March 15, 2005 and
Resolution dated May 23, 2005 are AFFIRMED.
Costs against petitioner.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and
UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45
of the Rules of Court seeks to set aside a decision
of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha,
as lessees, entered into a lease contract with
private respondent CKS Development Corporation
(hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease
contract states:
18. . . . The LESSEE shall not insure against fire the
chattels, merchandise, textiles, goods and effects
placed at any stall or store or space in the leased
premises without first obtaining the written
consent and approval of the LESSOR. If the LESSEE
obtain(s) the insurance thereof without the
consent of the LESSOR then the policy is deemed
assigned and transferred to the LESSOR for its
own benefit; . . .1
3. Notwithstanding the above stipulation in the
lease contract, the Cha spouses insured against
loss by fire the merchandise inside the leased
premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc.
(hereinafter United) without the written consent of
private respondent CKS.
4. On the day that the lease contract was to
expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier
procured by the Cha spouses (without its consent),
it wrote the insurer (United) a demand letter
asking that the proceeds of the insurance contract
(between the Cha spouses and United) be paid
directly to CKS, based on its lease contract with
the Cha spouses.
6. United refused to pay CKS. Hence, the latter
filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch
6, Manila, rendered a decision * ordering therein
defendant United to pay CKS the amount of
P335,063.11 and defendant Cha spouses to pay
P50,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA
GR CV No. 39328 rendered a decision ** dated 11
January 1996, affirming the trial court decision,
deleting however the awards for exemplary
damages and attorney's fees. A motion for
reconsideration by United was denied on 29 March
1996.
In the present petition, the following errors are
assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THAT THE STIPULATION IN
THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT
IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THE CONTRACT OF LEASE
ENTERED INTO AS A CONTRACT OF ADHESION
AND THEREFORE THE QUESTIONABLE PROVISION
THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED
OUT IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE POLICY
TO APPELLEE WHICH IS NOT PRIVY TO THE SAID
POLICY IN CONTRAVENTION OF THE INSURANCE
LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE POLICY
ON THE BASIS OF A STIPULATION WHICH IS VOID
FOR BEING WITHOUT CONSIDERATION AND FOR
BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION.2
The core issue to be resolved in this case is
whether or not the aforequoted paragraph 18 of
the lease contract entered into between CKS and
the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the
leased premises is deemed assigned or
transferred to the lessor (CKS) if said policy is
obtained without the prior written consent of the
latter.
It is, of course, basic in the law on contracts that
the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public
order or public policy.3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on
property shall be enforceable except for the
benefit of some person having an insurable
interest in the property insured.
A non-life insurance policy such as the fire
insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of
indemnity. Insurable interest in the property
insured must exist at the time the insurance takes
effect and at the time the loss occurs. 4 The basis
of such requirement of insurable interest in
property insured is based on sound public policy:
to prevent a person from taking out an insurance
policy on property upon which he has no insurable
interest and collecting the proceeds of said policy
in case of loss of the property. In such a case, the
contract of insurance is a mere wager which is
void under Section 25 of the Insurance Code,
which provides:
Sec. 25. Every stipulation in a policy of Insurance
for the payment of loss, whether the person
insured has or has not any interest in the property
insured, or that the policy shall be received as
proof of such interest, and every policy executed
by way of gaming or wagering, is void.
In the present case, it cannot be denied that CKS
has no insurable interest in the goods and
merchandise inside the leased premises under the
provisions of Section 17 of the Insurance Code
which provide:
Sec. 17. The measure of an insurable interest in
property is the extent to which the insured might
be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the
Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by
the petitioner-spouses over their merchandise.
This insurable interest over said merchandise
remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under
the provision of the lease contract previously
quoted is void for being contrary to law and/or
public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo
Cha and Stella Uy-Cha (herein co-petitioners). The
insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person
(CKS) who has no insurable interest in the
property insured.
The liability of the Cha spouses to CKS for violating
their lease contract in that the Cha spouses
obtained a fire insurance policy over their own
merchandise, without the consent of CKS, is a
separate and distinct issue which we do not
resolve in this case.
WHEREFORE, the decision of the Court of Appeals
in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds
of the fire insurance policy to petitioners Nilo Cha
and Stella Uy-Cha.
SO ORDERED.
Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ.,
concur.
G.R. No. L-14300 January 19, 1920
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO.,
(LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc.
Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas,
Compañia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the
Court of First Instance of the city of Manila by the
plaintiff, the San Miguel Brewery, for the purpose
of recovering upon two policies of insurance
underwritten respectively by Law Union and Rock
Insurance Company (Ltd.), and the
"Filipinas" Compania de Seguros, for the sum of
P7,500 each, insuring certain property which has
been destroyed by fire. The plaintiff, the San
Miguel Brewery, is named as the party assured in
the two policies referred to, but it is alleged in the
complaint that said company was in reality
interested in the property which was the subject of
insurance in the character of a mortgage creditor
only, and that the owner of said property upon the
date the policies were issued was one D. P. Dunn
who was later succeeded as owner by one Henry
Harding. Accordingly said Harding was made a
defendant, as a person interested in the subject of
the litigation.
The prayer of the complaint is that judgment be
entered in favor of the plaintiff against the two
companies named for the sum of P15,000, with
interest and costs, and further that upon
satisfaction of the balance of P4,505.30 due to the
plaintiff upon the mortgage debt, and upon the
cancellation of the mortgage, the plaintiff be
absolved from liability to the defendants or any of
them. The peculiar form of the latter part of the
prayer is evidently due to the design of the
plaintiff to lay a foundation for Harding to recover
the difference between the plaintiff's credit and
the amount for which the property was insured.
Accordingly, as was to be expected, Harding
answered, admitting the material allegations of
the complaint and claiming for himself the right to
recover the difference between the plaintiff's
mortgage credit and the face value of the policies.
The two insurance companies also answered,
admitting in effect their liability to the San Miguel
Brewery to the extent of its mortgage credit, but
denying liability to Harding on the ground that
under the contracts of insurance the liability of the
insurance companies was limited to the insurable
interest of the plaintiff therein. Soon after the
action was begun the insurance companies
effected a settlement with the San Miguel Brewery
by paying the full amount of the credit claimed by
it, with the result that the litigation as between the
original plaintiff and the two insurance companies
came to an end, leaving the action to be
prosecuted to final judgement by the defendant
Harding with respect to the balance claimed to be
due to him upon the policies.
Upon hearing the evidence the trial judge came to
the conclusion that Harding had no right of action
whatever against the companies and absolved
them from liability without special finding as to
costs. From this decision the said Henry Harding
has appealed.
The two insurance companies who are named as
defendants do not dispute their liability to the San
Miguel Brewery, to the extent already stated, and
the only question here under discussion is that of
the liability of the insurance companies to
Harding. It is therefore necessary to take account
of such facts only as bear upon this aspect of the
case.
In this connection it appears that on January 12,
1916, D. P. Dunn, then the owner of the property
to which the insurance relates, mortgaged the
same to the San Miguel Brewery to secure a debt
of P10,000. In the contract of mortgage Dunn
agreed to keep the property insured at his
expense to the full amount of its value in
companies to be selected by the Brewery
Company and authorized the latter in case of loss
to receive the proceeds of the insurance and to
retain such part as might be necessary to cover
the mortgage debt. At the same time, in order
more conveniently to accomplish the end in view,
Dunn authorized and requested the Brewery
Company to effect said insurance itself.
Accordingly on the same date Antonio Brias,
general manager of the Brewery, made a verbal
application to the Law Union and Rock Insurance
Company for insurance to the extent of P15,000
upon said property. In reply to a question of the
company's agent as to whether the Brewery was
the owner of the property, he stated that the
company was interested only as a mortgagee. No
information was asked as to who was the owner of
the property, and no information upon this point
was given.
It seems that the insurance company to whom this
application was directed did not want to carry
more than one-half the risk. It therefore issued its
own policy for P7,500 and procured a policy in a
like amount to be issued by the
"Filipinas" Compania de Seguros. Both policies
were issued in the name of the San Miguel
Brewery as the assured, and contained no
reference to any other interest in the property.
Both policies contain the usual clause requiring
assignments to be approved and noted on the
policy. The premiums were paid by the Brewery
and charged to Dunn. A year later the policies
were renewed, without change, the renewal
premiums being paid by the Brewery, supposedly
for the account of the owner. In the month of
March of the year 1917 Dunn sold the insured
property to the defendant Henry Harding, but not
assignment of the insurance, or of the insurance
policies, was at any time made to him.
We agree with the trial court that no cause of
action in Henry Harding against the insurance
companies is show. He is not a party to the
contracts of insurance and cannot directly
maintain an action thereon. (Uy Tam and Uy
Yet vs.Leonard, 30 Phil. Rep., 471.) His claim is
merely of an equitable and subsidiary nature and
must be made effective, if at all, through the San
Miguel Brewery in whose name the contracts are
written. Now the Brewery, as mortgagee of the
insured property, undoubtedly had an insurable
interest therein; but it could not, in any event,
recover upon these policies an amount in excess
of its mortgage credit. In this connection it will be
remembered that Antonio Brias, upon making
application for the insurance, informed the
company with which the insurance was placed
that the Brewery was interested only as a
mortgagee. It would, therefore, be impossible for
the Brewery mortgage on the insured property.
This conclusion is not only deducible from the
principles governing the operation and effect of
insurance contracts in general but the point is
clearly covered by the express provisions of
sections 16 and 50 of the Insurance Act (Act No.
2427). In the first of the sections cited, it is
declared that "the measure of an insurable
interest in property is the extent to which the
insured might be damnified by loss or injury
thereof" (sec. 16); while in the other it is stated
that "the insurance shall be applied exclusively to
the proper interest of the person in whose name it
is made unless otherwise specified in the policy"
(sec. 50).
These provisions would have been fatal to any
attempt at recovery even by D. P. Dunn, if the
ownership of the property had continued in him up
to the time of the loss; and as regards Harding, an
additional insuperable obstacle is found in the fact
that the ownership of the property had been
charged, prior to the loss, without any
corresponding change having been effected in the
policy of insurance. In section 19 of the Insurance
Act we find it stated that "a change of interest in
any part of a thing insured unaccompanied by a
corresponding change of interest in the insurance,
suspends the insurance to an equivalent extent,
until the interest in the thing and the interest in
the insurance are vested in the same person."
Again in section 55 it is declared that "the mere
transfer of a thing insured does not transfer the
policy, but suspends it until the same person
becomes the owner of both the policy and the
thing insured."
Undoubtedly these policies of insurance might
have been so framed as to have been "payable to
the Sane Miguel Brewery, mortgagee, as its
interest may appear, remainder to whomsoever,
during the continuance of the risk, may become
the owner of the interest insured." (Sec 54, Act No.
2427.) Such a clause would have proved an
intention to insure the entire interest in the
property, not merely the insurable interest of the
San Miguel Brewery, and would have shown
exactly to whom the money, in case of loss, should
be paid. But the policies are not so written.
It is easy to collect from the facts stated in the
decision of the trial judge, no less than from the
testimony of Brias, the manager of the San Miguel
Brewery, that, as the insurance was written up,
the obligation of the insurance companies was
different from that contemplated by Dunn, at
whose request the insurance was written, and
Brias. In the contract of mortgage Dunn had
agreed, at his own expense, to insure the
mortgaged property for its full value and to
indorse the policies in such manner as to authorize
the Brewery Company to receive the proceeds in
case of loss and to retain such part thereof as
might be necessary to satisfy the remainder then
due upon the mortgage debt. Instead, however, of
effecting the insurance himself Dunn authorized
and requested the Brewery Company to procure
insurance on the property in the amount of
P15,000 at Dunn's expense. The Brewery
Company undertook to carry this mandate into
effect, and it of course became its duty to procure
insurance of the character contemplated, that is,
to have the policies so written as to protect not
only the insurable interest of the Brewery, but also
the owner. Brias seems to have supposed that the
policies as written had this effect, but in this he
was mistaken. It was certainly a hardship on the
owner to be required to pay the premiums upon
P15,000 of insurance when he was receiving no
benefit whatever except in protection to the
extent of his indebtedness to the Brewery. The
blame for the situation thus created rests,
however, with the Brewery rather than with the
insurance companies, and there is nothing in the
record to indicate that the insurance companies
were requested to write insurance upon the
insurable interest of the owner or intended to
make themselves liable to that extent.
If during the negotiations which resulted in the
writing of this insurance, it had been agreed
between the contracting parties that the insurance
should be so written as to protect not only the
interest of the mortgagee but also the residuary
interest of the owner, and the policies had been,
by inadvertence, ignorance, or mistake written in
the form in which they were issued, a court would
have the power to reform the contracts and give
effect to them in the sense in which the parties
intended to be bound. But in order to justify this, it
must be made clearly to appear that the minds of
the contracting parties did actually meet in
agreement and that they labored under some
mutual error or mistake in respect to the
expression of their purpose. Thus, in Bailey vs.
American Central Insurance Co. (13 Fed., 250), it
appeared that a mortgage desiring to insure his
own insurable interest only, correctly stated his
interest, and asked that the same be insured. The
insurance company agreed to accept the risk, but
the policy was issued in the name of the owner,
because of the mistaken belief of the company's
agent that the law required it to be so drawn. It
was held that a court of equity had the power, at
the suit of the mortgage, to reform the instrument
and give judgment in his favor for the loss
thereunder, although it had been exactly as it was.
Said the court: "If the applicant correctly states his
interest and distinctly asks for an insurance
thereon, and the agent of the insurer agrees to
comply with his request, and assumes to decide
upon the form of the policy to be written for that
purpose, and by mistake of law adopts the wrong
form, a court of equity will reform the instrument
so as to make it insurance upon the interest
named." (See also Fink vs. Queens Insurance Co.,
24 Fed., 318; Esch vs. Home Insurance Co., 78
Iowa, 334; 16 Am. St. Rep., 443; Woodbury
Savings etc., Co., vs. Charter Oak Insurance Co.,
31 Conn., 517; Balen vs. Hanover Fire Insurance
Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by
mistake described as owner, the court may grant
reformation and permit a recovery by the
mortgage in his character as such.
(Dalton vs. Milwaukee etc. Insurance Co., 126
Iowa, 377; Spare vs. Home Mutual Insurance Co.,
17 Fed., 568.) In Thompson vs. Phoenix Insurance
Co. (136 U.S., 287; 34 L. 3d., 408), it appeared
that one Kearney made application to an
insurance company for insurance on certain
property in his hands as receiver and it was
understood between him and the company's agent
that, in case of loss, the proceeds of the policy
should accrue to him and his successors as
receiver and to others whom it might concern.
However, the policy, as issued, was so worded as
to be payable only to him as receiver. In an action
brought on the policy by a successor of Kearney, it
was alleged that the making of the contract in this
form was due to inadvertence, accident, and
mistake upon the part of both Kearney and the
company.
Said the court:
If by inadvertence, accident, or mistake the terms
of the contract were not fully set forth in the
policy, the plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by
mistake, material stipulations have been omitted,
whereby the true intent and meaning of the
parties are not fully or accurately expressed.
There was a definite concluded agreement as to
insurance, which, in point of time, preceded the
preparation and delivery of the policy, and this is
demonstrated by legal and exact evidence, which
removes all doubt as to the sense and undertaking
of the parties. In the agreement there has been a
mutual mistake, caused chiefly by that contracting
party who now seeks to limit the insurance to an
interest in the property less than that agreed to be
insured. The written agreement did not effect that
which the parties intended. That a court of equity
can afford relief in such a case, is, we think, well
settled by the authorities. (Smell vs. Atlantic, etc.,
Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the
proof must be of the most satisfactory character,
and it must clearly appear that the contract failed
to express the real agreement between the
parties. (Philippine Sugar Estates Development
Company vs. Government of the Philippine Islands,
62 L. ed., 1177, reversing Government of
Philippine Island vs. Philippine Sugar Estates
Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is entirely
insufficient to authorize the application of the
doctrine state in the foregoing cases, for it is by
means clear from the testimony of Brias — and
none other was offered — that the parties
intended for the policy to cover the risk of the
owner in addition to that of the mortgagee. It Candelaria Davac as the person entitled to receive
results that the defendant Harding is not entitled the death benefits payable for the death of
to relief in any aspect of the case. Petronilo Davac.

The judgment is therefore affirmed, with costs The facts of the case as found by the Social
against the appellant. So ordered. Security Commission, briefly are: The late
Petronilo Davac, a former employee of Lianga Bay
Arellano, C.J., Johnson, Araullo, Malcolm and Logging Co., Inc. became a member of the Social
Avanceña, JJ., concur. Security System (SSS for short) on September 1,
1957. As such member, he was assigned SS I.D.
No. 08-007137. In SSS form E-1 (Member's Record)
which he accomplished and filed with the SSS on
G.R. No. L-21642 July 30, 1966 November 21, 1957, he designated respondent
Candelaria Davac as his beneficiary and indicated
SOCIAL SECURITY SYSTEM, petitioner-appellee, his relationship to her as that of "wife". He died on
April 5, 1959 and, thereupon, each of the
vs. respondents (Candelaria Davac and Lourdes
Tuplano) filed their claims for death benefit with
CANDELARIA D. DAVAC, ET AL., respondents; the SSS. It appears from their respective claims
and the documents submitted in support thereof,
LOURDES Tuplano, respondent-appellant. that the deceased contracted two marriages, the
first, with claimant Lourdes Tuplano on August 29,
J. Ma. Francisco and N. G. Bravo for respondent- 1946, who bore him a child, Romeo Davac, and
appellant. the second, with Candelaria Davac on January 18,
1949, with whom he had a minor daughter
Office of the Solicitor General Arturo A. Alafriz, Elizabeth Davac. Due to their conflicting claims,
Solicitor Camilo D. Quiason and E. T. Duran for the processing thereof was held in abeyance,
petitioner-appellee. whereupon the SSS filed this petition praying that
respondents be required to interpose and litigate
BARRERA, J.: between themselves their conflicting claims over
the death benefits in question.1äwphï1.ñët
This is an appeal from the resolution of the Social
Security Commission declaring respondent
On February 25, 1963, the Social Security
Commission issued the resolution referred to
above, Not satisfied with the said resolution,
respondent Lourdes Tuplano brought to us the
present appeal.
The only question to be determined herein is
whether or not the Social Security Commission
acted correctly in declaring respondent Candelaria
Davac as the person entitled to receive the death
benefits in question.
Section 13, Republic Act No. 1161, as amended by
Republic Act No. 1792, in force at the time
Petronilo Davac's death on April 5, 1959, provides:
1. SEC. 13. Upon the covered employee's death or
total and permanent disability under such
conditions as the Commission may define, before
becoming eligible for retirement and if either such
death or disability is not compensable under the
Workmen's Compensation Act, he or, in case of his
death, his beneficiaries, as recorded by his
employer shall be entitled to the following benefit:
... . (emphasis supplied.)
Under this provision, the beneficiary "as recorded"
by the employee's employer is the one entitled to
the death benefits. In the case of Tecson vs. Social
Security System, (L-15798, December 28, 1961),
this Court, construing said Section 13, said:
It may be true that the purpose of the coverage
under the Social Security System is protection of
the employee as well as of his family, but this
purpose or intention of the law cannot be enforced
to the extent of contradicting the very provisions
of said law as contained in Section 13, thereof, ... .
When the provision of a law are clear and explicit,
the courts can do nothing but apply its clear and
explicit provisions (Velasco vs. Lopez, 1 Phil, 270;
Caminetti vs. U.S., 242 U.S. 470, 61 L. ed. 442).
But appellant contends that the designation herein
made in the person of the second and, therefore,
bigamous wife is null and void, because (1) it
contravenes the provisions of the Civil Code, and
(2) it deprives the lawful wife of her share in the
conjugal property as well as of her own and her
child's legitime in the inheritance.
As to the first point, appellant argues that a
beneficiary under the Social Security System
partakes of the nature of a beneficiary in life
insurance policy and, therefore, the same
qualifications and disqualifications should be
applied.
Article 2012 of the New Civil Code provides:
ART. 2012. Any person who is forbidden from
receiving any donation under Article 739 cannot
be named beneficiary of a life insurance policy by
the person who cannot make any donation to him
according to said article.
And Article 739 of the same Code prescribes:
ART. 739. The following donations shall be void:
(1) Those made between persons who were guilty
of adultery or concubinage at the time of the
donation;
xxx xxx xxx
Without deciding whether the naming of a
beneficiary of the benefits accruing from
membership in the Social Security System is a
donation, or that it creates a situation analogous
to the relation of an insured and the beneficiary
under a life insurance policy, it is enough, for the
purpose of the instant case, to state that the
disqualification mentioned in Article 739 is not
applicable to herein appellee Candelaria Davac
because she was not guilty of concubinage, there
being no proof that she had knowledge of the
previous marriage of her husband Petronilo.1
Regarding the second point raised by appellant,
the benefits accruing from membership in the
Social Security System do not form part of the
properties of the conjugal partnership of the
covered member. They are disbursed from a public
special fund created by Congress in pursuance to
the declared policy of the Republic "to develop,
establish gradually and perfect a social security
system which ... shall provide protection against
the hazards of disability, sickness, old age and
death."2
The sources of this special fund are the covered
employee's contribution (equal to 2-½ per cent of
the employee's monthly compensation);3 the
employer's contribution (equivalent to 3-½ per
cent of the monthly compensation of the covered
employee);4 and the Government contribution
which consists in yearly appropriation of public
funds to assure the maintenance of an adequate
working balance of the funds of the
System.5 Additionally, Section 21 of the Social
Security Act, as amended by Republic Act 1792,
provides:
SEC. 21. Government Guarantee. — The benefits
prescribed in this Act shall not be diminished and
to guarantee said benefits the Government of the
Republic of the Philippines accepts general
responsibility for the solvency of the System.
From the foregoing provisions, it appears that the
benefit receivable under the Act is in the nature of
a special privilege or an arrangement secured by
the law, pursuant to the policy of the State to
provide social security to the workingmen. The
amounts that may thus be received cannot be
considered as property earned by the member
during his lifetime. His contribution to the fund, it
may be noted, constitutes only an insignificant
portion thereof. Then, the benefits are specifically
declared not transferable,6 and exempted from tax
legal processes, and lien.7Furthermore, in the
settlement of claims thereunder the procedure to
be observed is governed not by the general
provisions of law, but by rules and regulations
promulgated by the Commission. Thus, if the
money is payable to the estate of a deceased
member, it is the Commission, not the probate or
regular court that determines the person or
persons to whom it is payable.8 that the benefits
under the Social Security Act are not intended by
the lawmaking body to form part of the estate of
the covered members may be gathered from the
subsequent amendment made to Section 15
thereof, as follows:
In short, if there is a named beneficiary and the
designation is not invalid (as it is not so in this
case), it is not the heirs of the employee who are
entitled to receive the benefits (unless they are
the designated beneficiaries themselves). It is only
when there is no designated beneficiaries or when
the designation is void, that the laws of succession
are applicable. And we have already held that the
Social Security Act is not a law of succession.9
Wherefore, in view of the foregoing considerations,
the resolution of the Social Security Commission
appealed from is hereby affirmed, with costs
against the appellant.

SEC. 15. Non-transferability of benefit. — The So ordered.

system shall pay the benefits provided for in this
Act to such persons as may be entitled thereto in Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
accordance with the provisions of this Act. Such Bengzon, J.P., Zaldivar and Sanchez, concur.
benefits are not transferable, and no power of
attorney or other document executed by those
entitled thereto in favor of any agent, attorney, or
any other individual for the collection thereof in
their behalf shall be recognized except when they
are physically and legally unable to collect
personally such benefits: Provided, however, That
in the case of death benefits, if no beneficiary has
been designated or the designation there of is
void, said benefits shall be paid to the legal heirs
in accordance with the laws of succession. (Rep.
Act 2658, amending Rep. Act 1161.)
G.R. No. L-28093 January 30, 1971
BASILIA BERDIN VDA. DE CONSUEGRA;
JULIANA, PACITA, MARIA LOURDES, JOSE, JR.,
RODRIGO, LINEDA and LUIS, all surnamed
CONSUEGRA, petitioners-appellants,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM,
COMMISSIONER OF PUBLIC HIGHWAYS,
HIGHWAY DISTRICT ENGINEER OF SURIGAO
DEL NORTE, COMMISSIONER OF CIVIL
SERVICE, and ROSARIO DIAZ, respondents-
appellees.
Bernardino O. Almeda for petitioners-appellants.
Binag and Arevalo, Jr. for respondent-appellee
Government Service Insurance System.
Office of the Solicitor General for other
respondents-appellees.
ZALDIVAR, J.:
Appeal on purely questions of law from the
decision of the Court of First Instance of Surigao
del Norte, dated March 7, 1967, in its Special
Proceeding No. 1720.
The pertinent facts, culled from the stipulation of
facts submitted by the parties, are the following:
The late Jose Consuegra, at the time of his death,
was employed as a shop foreman of the office of
the District Engineer in the province of Surigao del
Norte. In his lifetime, Consuegra contracted two
marriages, the first with herein respondent Rosario
Diaz, solemnized in the parish church of San
Nicolas de Tolentino, Surigao, Surigao, on July 15,
1937, out of which marriage were born two
children, namely, Jose Consuegra, Jr. and Pedro
Consuegra, but both predeceased their father; and
the second, which was contracted in good faith
while the first marriage was subsisting, with herein
petitioner Basilia Berdin, on May 1, 1957 in the
same parish and municipality, out of which
marriage were born seven children, namely,
Juliana, Pacita, Maria Lourdes, Jose, Rodrigo,
Lenida and Luz, all surnamed Consuegra.
Being a member of the Government Service
Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the
proceeds of his life insurance under policy No.
601801 were paid by the GSIS to petitioner Basilia
Berdin and her children who were the beneficiaries
named in the policy. Having been in the service of
the government for 22.5028 years, Consuegra was
entitled to retirement insurance benefits in the
sum of P6,304.47 pursuant to Section 12(c) of
Commonwealth Act 186 as amended by Republic
Acts 1616 and 3836. Consuegra did not designate
any beneficiary who would receive the retirement
insurance benefits due to him. Respondent Rosario
Diaz, the widow by the first marriage, filed a claim
with the GSIS asking that the retirement insurance
benefits be paid to her as the only legal heir of
Consuegra, considering that the deceased did not
designate any beneficiary with respect to his
retirement insurance benefits. Petitioner Basilia
Berdin and her children, likewise, filed a similar
claim with the GSIS, asserting that being the
beneficiaries named in the life insurance policy of
Consuegra, they are the only ones entitled to
receive the retirement insurance benefits due the
deceased Consuegra. Resolving the conflicting
claims, the GSIS ruled that the legal heirs of the
late Jose Consuegra were Rosario Diaz, his widow
by his first marriage who is entitled to one-half, or
8/16, of the retirement insurance benefits, on the
one hand; and Basilia Berdin, his widow by the
second marriage and their seven children, on the
other hand, who are entitled to the remaining one-
half, or 8/16, each of them to receive an equal
share of 1/16.
Dissatisfied with the foregoing ruling and
apportionment made by the GSIS, Basilia Berdin
and her children1 filed on October 10, 1966 a
petition for mandamus with preliminary injunction
in the Court of First Instance of Surigao, naming as
respondents the GSIS, the Commissioner of Public
Highways, the Highway District Engineer of
Surigao del Norte, the Commissioner of Civil
Service, and Rosario Diaz, praying that they
(petitioners therein) be declared the legal heirs
and exclusive beneficiaries of the retirement
insurance of the late Jose Consuegra, and that a
writ of preliminary injunction be issued restraining
the implementation of the adjudication made by
the GSIS. On October 26, 1966, the trial court
issued an order requiring therein respondents to
file their respective answers, but refrained from
issuing the writ of preliminary injunction prayed
for. On February 11, 1967, the parties submitted a
stipulation of facts, prayed that the same be
admitted and approved and that judgment be
rendered on the basis of the stipulation of facts.
On March 7, 1967, the court below rendered
judgment, the pertinent portions of which are
quoted hereunder:
This Court, in conformity with the foregoing
stipulation of facts, likewise is in full accord with
the parties with respect to the authority cited by
them in support of said stipulation and which is
herein-below cited for purposes of this judgment,
to wit:
"When two women innocently and in good faith
are legally united in holy matrimony to the same
man, they and their children, born of said wedlock,
will be regarded as legitimate children and each
family be entitled to one half of the estate. Lao &
Lao vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong
Masa, Inc., (CA) 39 OG 79; Pisalbon vs. Bejec, 74
Phil. 88.
WHEREFORE, in view of the above premises, this
Court is of the opinion that the foregoing
stipulation of facts is in order and in accordance
with law and the same is hereby approved.
Judgment, therefore, is hereby rendered declaring
the petitioner Basilia Berdin Vda. de Consuegra
and her co-petitioners Juliana, Pacita, Maria
Lourdes, Jose, Jr., Rodrigo, Lenida and Luis, all
surnamed Consuegra, beneficiary and entitled to
one-half (1/2) of the retirement benefit in the
amount of Six Thousand Three Hundred Four Pesos
and Fourty-Seven Centavos (P6,304.47) due to the
deceased Jose Consuegra from the Government
Service Insurance System or the amount of
P3,152.235 to be divided equally among them in
the proportional amount of 1/16 each. Likewise,
the respondent Rosario Diaz Vda. de Consuegra is
hereby declared beneficiary and entitled to the
other half of the retirement benefit of the late Jose
Consuegra or the amount of P3,152.235. The case
with respect to the Highway District Engineer of
Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners-
appellants, Basilia Berdin and her children.
It is the contention of appellants that the lower
court erred in not holding that the designated
beneficiaries in the life insurance of the late Jose
Consuegra are also the exclusive beneficiaries in
the retirement insurance of said deceased. In
other words, it is the submission of appellants that
because the deceased Jose Consuegra failed to
designate the beneficiaries in his retirement
insurance, the appellants who were the
beneficiaries named in the life insurance should
automatically be considered the beneficiaries to
receive the retirement insurance benefits, to the
exclusion of respondent Rosario Diaz. From the
arguments adduced by appellants in their brief We
gather that it is their stand that the system of life
insurance and the system of retirement insurance,
that are provided for in Commonwealth Act 186 as
amended, are simply complementary to each
other, or that one is a part or an extension of the
other, such that whoever is named the beneficiary
in the life insurance is also the beneficiary in the
retirement insurance when no such beneficiary is
named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the
Government Service Insurance System is
Commonwealth Act 186 which was enacted by the
National Assembly on November 14, 1936. As
originally approved, Commonwealth Act 186
provided for the compulsory membership in the
Government Service Insurance System of all
regularly and permanently appointed officials and
employees of the government, considering as
automatically insured on life all such officials and
employees, and issuing to them the corresponding
membership policy under the terms and conditions
as provided in the Act.2
Originally, Commonwealth Act 186 provided for
life insurance only. Commonwealth Act 186 was
amended by Republic Act 660 which was enacted
by the Congress of the Philippines on June 16,
1951, and, among others, the amendatory Act
provided that aside from the system of life
insurance under the Government Service
Insurance System there was also established the
system of retirement insurance. Thus, We will note
in Republic Act 660 that there is a chapter on life
insurance and another chapter on retirement
insurance. 3 Under the chapter on life insurance
are sections 8, 9 and 10 of Commonwealth Act
186, as amended; and under the chapter on
retirement insurance are sections 11, 12, 13 and
13-A. On May 31, 1957, Republic Act 1616 was
enacted by Congress, amending section 12 of
Commonwealth Act 186 as amended by Republic
Act 660, by adding thereto two new subsections,
designated as subsections (b) and (c). This
subsection (c) of section 12 of Commonwealth Act
186, as amended by Republic Acts 660, 1616 and
3096, was again amended by Republic Act 3836
which was enacted on June 22,
1963.lâwphî1.ñèt The pertinent provisions of
subsection (c) of Section 12 of Commonwealth Act
186, as thus amended and reamended, read as
follows:
(c) Retirement is likewise allowed to a member,
regardless of age, who has rendered at least
twenty years of service. The benefit shall, in
addition to the return of his personal contributions
plus interest and the payment of the
corresponding employer's premiums described in
subsection (a) of Section 5 hereof, without
interest, be only a gratuity equivalent to one
month's salary for every year of service, based on
the highest rate received, but not to exceed
twenty-four months; Provided, That the retiring
officer or employee has been in the service of the
said employer or office for at least four years,
immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office
concerned which is hereby authorized to provide
the necessary appropriation to pay the same from
any unexpended items of appropriations.
Elective or appointive officials and employees paid
gratuity under this subsection shall be entitled to
the commutation of the unused vacation and sick
leave, based on the highest rate received, which
they may have to their credit at the time of
retirement.
Jose Consuegra died on September 26, 1965, and
so at the time of his death he had acquired rights
under the above-quoted provisions of subsection
(c) of Section 12 of Com. Act 186, as finally
amended by Rep. Act 3836 on June 22, 1963.
When Consuegra died on September 26, 1965, he
had to his credit 22.5028 years of service in the
government, and pursuant to the above-quoted
provisions of subsection (c) of Section 12 of Com.
Act 186, as amended, on the basis of the highest
rate of salary received by him which was P282.83
per month, he was entitled to receive retirement
insurance benefits in the amount of P6,304.47.
This is the retirement benefits that are the subject
of dispute between the appellants, on the one
hand, and the appellee Rosario Diaz, on the other,
in the present case. The question posed is: to
whom should this retirement insurance benefits of
Jose Consuegra be paid, because he did not, or
failed to, designate the beneficiary of his
retirement insurance?
If Consuegra had 22.5028 years of service in the
government when he died on September 26,
1965, it follows that he started in the government
service sometime during the early part of 1943, or
before 1943. In 1943 Com. Act 186 was not yet
amended, and the only benefits then provided for
in said Com. Act 186 were those that proceed from
a life insurance. Upon entering the government
service Consuegra became a compulsory member
of the GSIS, being automatically insured on his life,
pursuant to the provisions of Com. Act 186 which
was in force at the time. During 1943 the
operation of the Government Service Insurance
System was suspended because of the war, and
the operation was resumed sometime in 1946.
When Consuegra designated his beneficiaries in
his life insurance he could not have intended
those beneficiaries of his life insurance as also the
beneficiaries of his retirement insurance because
the provisions on retirement insurance under the
GSIS came about only when Com. Act 186 was
amended by Rep. Act 660 on June 16, 1951.
Hence, it cannot be said that because herein
appellants were designated beneficiaries in
Consuegra's life insurance they automatically
became the beneficiaries also of his retirement
insurance. Rep. Act 660 added to Com. Act 186
provisions regarding retirement insurance, which
are Sections 11, 12, and 13 of Com. Act 186, as
amended. Subsection (b) of Section 11 of Com. Act
186, as amended by Rep. Act 660, provides as
follows:
(b) Survivors benefit. — Upon death before he
becomes eligible for retirement, his beneficiaries
as recorded in the application for retirement
annuity filed with the System shall be paid his own
premiums with interest of three per centum per
annum, compounded monthly. If on his death he is
eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him
previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of
Section 11 of Commonwealth Act 186, as
amended by Rep. Act 660, clearly indicate that
there is need for the employee to file an
application for retirement insurance benefits when
he becomes a member of the GSIS, and he should
state in his application the beneficiary of his
retirement insurance. Hence, the beneficiary
named in the life insurance does not automatically
become the beneficiary in the retirement
insurance unless the same beneficiary in the life
insurance is so designated in the application for
retirement insurance.
Section 24 of Commonwealth Act 186, as
amended by Rep. Act 660, provides for a life
insurance fund and for a retirement insurance
fund. There was no such provision in Com. Act 186
before it was amended by Rep. Act 660. Thus,
subsections (a) and (b) of Section 24 of
Commonwealth Act 186, as amended by Rep. Act
660, partly read as follows:
(a) Life insurance fund. — This shall consist of all
premiums for life insurance benefit and/or
earnings and savings therefrom. It shall meet
death claims as they may arise or such equities as
any member may be entitled to, under the
conditions of his policy, and shall maintain the
required reserves to the end of guaranteeing the
fulfillment of the life insurance contracts issued by
the System ...
(b) Retirement insurance fund. — This shall consist
of all contributions for retirement insurance
benefit and of earnings and savings therefrom. It
shall meet annuity payments and establish the
required reserves to the end of guaranteeing the
fulfillment of the contracts issued by the
System. ...
Thus, We see that the GSIS offers two separate
and distinct systems of benefits to its members —
one is the life insurance and the other is the
retirement insurance. These two distinct systems
of benefits are paid out from two distinct and
separate funds that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the
same are paid to whoever is named the
beneficiary in the life insurance policy. As in the
case of a life insurance provided for in the
Insurance Act (Act 2427, as amended), the
beneficiary in a life insurance under the GSIS may
not necessarily be a heir of the insured. The
insured in a life insurance may designate any
person as beneficiary unless disqualified to be so
under the provisions of the Civil Code.4 And in the
absence of any beneficiary named in the life
insurance policy, the proceeds of the insurance
will go to the estate of the insured.
Retirement insurance is primarily intended for the
benefit of the employee — to provide for his old
age, or incapacity, after rendering service in the
government for a required number of years. If the
employee reaches the age of retirement, he gets
the retirement benefits even to the exclusion of
the beneficiary or beneficiaries named in his
application for retirement insurance. The
beneficiary of the retirement insurance can only
claim the proceeds of the retirement insurance if
the employee dies before retirement. If the
employee failed or overlooked to state the
beneficiary of his retirement insurance, the
retirement benefits will accrue to his estate and
will be given to his legal heirs in accordance with
law, as in the case of a life insurance if no
beneficiary is named in the insurance policy.
It is Our view, therefore, that the respondent GSIS
had correctly acted when it ruled that the
proceeds of the retirement insurance of the late
Jose Consuegra should be divided equally between
his first living wife Rosario Diaz, on the one hand,
and his second wife Basilia Berdin and his children
by her, on the other; and the lower court did not
commit error when it confirmed the action of the
GSIS, it being accepted as a fact that the second
marriage of Jose Consuegra to Basilia Berdin was
contracted in good faith. The lower court has
correctly applied the ruling of this Court in the
case of Lao, et al. vs. Dee Tim, et al., 45 Phil. 739
as cited in the stipulation of facts and in the
decision appealed from.5 In the recent case
of Gomez vs. Lipana, L-23214, June 30, 1970, 6 this
Court, in construing the rights of two women who
were married to the same man — a situation more
or less similar to the case of appellant Basilia
Berdin and appellee Rosario Diaz — held "that
since the defendant's first marriage has not been
dissolved or declared void the conjugal
partnership established by that marriage has not
ceased. Nor has the first wife lost or relinquished
her status as putative heir of her husband under
the new Civil Code, entitled to share in his estate
upon his death should she survive him.
Consequently, whether as conjugal partner in a
still subsisting marriage or as such putative heir
she has an interest in the husband's share in the
property here in dispute.... " And with respect to
the right of the second wife, this Court observed
that although the second marriage can be
presumed to be void ab initio as it was celebrated
while the first marriage was still subsisting, still
there is need for judicial declaration of such nullity.
And inasmuch as the conjugal partnership formed
by the second marriage was dissolved before
judicial declaration of its nullity, "[t]he only lust
and equitable solution in this case would be to
recognize the right of the second wife to her share
of one-half in the property acquired by her and her
husband and consider the other half as pertaining
to the conjugal partnership of the first marriage."
WHEREFORE, the decision appealed from is
affirmed, with costs against petitioners-appellants.
It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Castro, Fernando, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.
G.R. No. 20341 September 1, 1923
DOMINGO GARCIA and THE PHILIPPINE
NATIONAL BANK, plaintiffs-appellees,
vs.
THE HONGKONG FIRE & MARINE INSURANCE
CO., LTD., defendant-appellant.
William and Ferrier for appellant.
Roman Lacson for the appellee Bank.
Vicente de Vera for the other appellee.
STATEMENT
After formal pleas, the plaintiff's allege that on the
19th of March, 1918, in the City of Manila, the
plaintiff, Domingo Garcia, then a merchant and
owner of a bazaar known as "Las Novedades" in
the district of Legaspi, municipality and Province
of Albay, entered into a contract with the
defendant whereby it insured his merchandise in
the sum of P15,000 at a premium of P300 per
annum; that in consideration of such premium, the
defendant issued its fire insurance policy No. 1951
in favor of the plaintiff, not on the merchandise in
the building, but on the building which contained
the merchandise; that for such reason the policy
does not contain the true agreement and intent of
the parties; that the plaintiff was not the owner of,
and did not have any interest in, the building; and
that the policy was so issued through error,
carelessness and negligence of the defendant.
That on august 30, 1919, Garcia executed a
mortgage to the plaintiff Bank on the merchandise
insured by the defendant, and that with the
consent of the defendant, the plaintiff endorsed
the policy to the Bank; that on February 6, 1920,
and while the policy was in force and effect, a fire
took place which destroyed the merchandise in
the building of the value of P20,000, together with
the building itself; that demand was made upon
the defendant for the payment of P15,000, as
provided for in the policy, and that payment was
refused. Wherefore, plaintiffs pray judgment for
that amount, with legal interest from the date of
filing of the complaint, and costs.
For answer, the defendant admits the formal
allegations of the complaint, and denies generally
and specifically all other allegations.
As a result of the trial, the lower court rendered
judgment for the plaintiff, as prayed for in the
complaint, from which the defendant appeals and
contends that the lower court erred in denying its
motion to make the complaint more definite and
certain; in permitting Garcia over its objection to
testify to the contents of certain documents; in
refusing to strike them from the record; in finding
that the defendant, through its agent, knew that it
was the merchandise which was insured and not
the building; in failing to find the plaintiffs, and
Garcia in particular, guilty of negligence; in finding
that the defendant committed error in making out
the policy to cover the building rather than the
merchandise; in rendering the judgment; and in
denying defendant's motion for a new trial.
JOHNS, J.:
It appears that the policy was in the English
language, of which the plaintiff Garcia is ignorant.
When he received it he noticed that the amount
P15,000 was correct, and never personally made a
further investigation. He was the exclusive owner
of the merchandise in the building which, at the
time of the fire, was of the probable value of
P20,000. He did not own or claim any interest in
the building. Desiring to have his merchandise
insured for P15,000, he wrote a letter to "El Pilar,"
requesting that firm to have it insured, as a result
of which, the policy in questions was issued and
delivered to him, and it was issued on the building
with Garcia did not own, and did not cover the
merchandise which he did own. Desiring to obtain
a loan from the Philippine National Bank, Garcia
later delivered and assigned the policy to the
plaintiff Bank as collateral security for a loan.
Upon receipt of the policy, and as one of the
conditions for the making of the loan, the Bank,
through its manager, addressed the following
letter to the agents of the defendant on August 6,
1919:
We beg to advise that the merchandise insured by
you against fire in favor of Mr. Domingo Garcia of
Legaspi, Albay, P. I., for P15,000 for which you
issued policy No. 1951, has been mortgaged to
this bank together with the policy to secure a
credit and loans not to exceed P6,000 in all.
We would appreciate very much if you have our
claims against the property and policy covering it,
on account of the mortgage, entered in your
records and advise us accordingly.
Hoping to hear from you soon, we are,
Very truly yours,
This was answered by the agents August 14, 1919,
as follows:
We beg to acknowledge receipt of your esteemed
favor of the 6th inst., informing us that the
Hongkong Fire Insurance Company, Ltd.'s Policy in
the name of Mr. Domingo Garcia, for the sum of
P15,000 has been mortgaged to your goodselves.
In order that this transaction made by officially
recorded, it will be necessary to make an
endorsement upon the original policy, and we
shall be glad, therefore, if you will return this
document to us as soon as convenient.
We are, Dear Sirs,
Yours faithfully.
August 18, 1919, the Bank wrote the following
letter to the agents:
Complying with your request of the 13th ultimo,
we beg to inclose herewith policy No. 1951 in
favor of Mr. Domingo Garcia, Legaspi, Albay, for
P15,000, which has been mortgaged to this Bank
to secure a credit and loan of not exceed P6,000 in
all, for your proper indorsement.
Trusting to have your prompt action in this matter,
we are,
Very respectfully yours.
September 1, 1919, the agents wrote the Bank as
follows:
We beg to acknowledge receipt of your favour of
the 18th ultimo, enclosing Hongkong Fire
Insurance Fire Insurance Co., Ltd.'s Policy No.
1951, in the name of Mr. Domingo Garcia, and in
accordance with your request have endorsed
same in your favour, and beg to return the
document herewith. Please be good enough to
acknowledge safe receipt in due course and
oblige.
Yours faithfully.
It clearly appears that where the word
"merchandise" was written in the letter of August
6th above quoted, some other word had been
previously written and erased, and the word
"merchandise" was the written, as it now appears.
It is contended that when the letter was written,
the Bank, which then had the possession of the
policy, knew that it covered the building and did
not insure the merchandise. That, having such
knowledge, it was the duty of the Bank to notify
the defendant, and having failed to do so, it
cannot now contend that the policy was issued
through a mistake. The fact remains that the
defendant, through its agents, received this letter,
and that it recites:
We beg to advise that the merchandise insured by
you against fire in favor of Mr. Domingo Garcia,
etc.
That was a personal notice to the defendant of the
fact that the policy was on the merchandise. It is
pointed out that the Bank and not the defendant
then had the policy, and, for such reason, the
Bank did not have notice of the error. Although the
policy was in possession of the Bank, the
defendant had among its own records all of the
data and information upon which the policy was
issued, and, as a matter of fact, its agents knew or
should have known the kind of property insured.
It is possible that when the Bank wrote the letter,
it knew of the error in the issuance of the policy.
But that is a matter of inference or conjecture
only. Outside of the appearance of the letter itself,
there is no evidence that the Bank had any
acknowledge of the error.
Garcia had his dealings with the officials of the
branch Bank at Legaspi where he was doing
business as a merchant, of which the officials of
that Bank had knowledge. Under such facts, the
presumption of knowledge, if any, on the part of
the Bank would be that the policy was on the
merchandise. Be that as it may, when the
defendant received the letter from the Bank, it
knew from its own records that the policy was
issued on the building, and, as a matter of fair
dealing, it should have notified the Bank that the
policy was on the building. It will be noted that the
letters in question were all written several months
before the fire.
In the final analysis, Garcia wanted insurance upon
a stock of goods, which he owned, and he received
and paid for a policy on a building, which he did
not own, and while the policy was in force and
effect, both the building, which he did not own,
and the stock of merchandise, which he did own,
were completely destroyed by fire. Garcia was a
well known merchant, and his merchandise was in
the building described in the policy.
For some unknown reason, the party who applied
for the insurance at the instance and request of
Garcia was not called as a witness, and, as stated,
that answer of the defendant is confined to
general denial, and it did not offer any evidence.
In a well-written opinion, the trial court analyzed
the evidence and made findings of fact upon
which it rendered judgment for the plaintiff. It is
claimed that the letters and the copy of the
telegram introduced in evidence were hearsay and
not competent. If for no other purpose, they were
competent to show that Garcia wanted insurance
on his merchandise and the reason why he wanted
it.
The defense is purely technical, and is founded
upon the contention that plaintiff cannot recover,
because the policy covers loss on a building, and
does not cover loss of merchandise.
It is very apparent that a mistake was made in the
issuance of the policy.
In its opinion the trial court says:
Under these circumstances it seems clear and
manifest that the insured, as well as the manager
of the National Bank at Legaspi, who was
interested in the policy, because the same secured
a loan of P6,000 made to Domingo Garcia, and the
corporation of Wise & Co., Ltd., which represented
the insurance company, have been in the belief
that it was not the building but the merchandise
that was insured, for the reason that none of them
paid attention to the context of the policy.
The opinion of the trial court further points out
that, under the pleadings and proof, there is
ground for the contention that the plaintiff would arising from the loss of a shipment of apitong logs
be entitled to recover on the policy for the loss of from Palawan to Manila.
the building.
The facts relevant to the present review disclose
All things considered, the judgment of the lower that sometime in January 1986, private
court is affirmed, with costs. So ordered. respondent Panama Sawmill Co., Inc. (Panama)
bought, in Palawan, 1,208 pieces of apitong logs,
Araullo, C.J., Johnson, Malcolm, Avanceña, Villamor with a total volume of 2,000 cubic meters. It hired
and Romualdez, JJ., concur. Transpacific Towage, Inc., to transport the logs by
sea to Manila and insured it against loss for P1-M
Street, J., dissents. with petitioner Oriental Assurance Corporation
(Oriental Assurance). There is a claim by Panama,
however, that the insurance coverage should have
G.R. No. 94052 August 9, 1991 been for P3-M were it not for the fraudulent act of
one Benito Sy Yee Long to whom it had entrusted
ORIENTAL ASSURANCE the amount of P6,000.00 for the payment of the
CORPORATION, petitioner, premium for a P3-M policy.

vs. Oriental Assurance issued Marine Insurance Policy

No. OACM 86/002, which stipulated, among others:
COURT OF APPEALS AND PANAMA SAW MILL
CO., INC., respondents. Name of Insured:

Alejandro P. Ruiz, Jr. for petitioner. Panama Sawmill, Inc.

Federico R. Reyes for private respondent. Karuhatan, Valenzuela

Metro Manila
MELENCIO-HERRERA, J:
Vessel:
An action to recover on a marine insurance policy,
issued by petitioner in favor of private respondent, MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter
apitong Logs
Barge Transpac 1,000-1,000 cubic meter apitong
Logs
Voyage or Period of Insurance:
From Palawan-ETD January 16, 1986
To: Manila
Subject matter Insured:
2,000 cubic meters apitong Logs
Agreed Value
Amount Insured Hereunder:
Pesos: One Million Only (P1,000,000.00)
Philippine Currency
Premium — P2,500.00 rate — 0.250%
Doc. stamps 187.60 Invoice No. 157862
l % P/tax 25.00
TOTAL P2,712.50
CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS
and WARRANTIES
Warranted that this Insurance is against TOTAL
LOSS ONLY. Subject to the following clauses:
— Civil Code Article 1250 Waiver clause
— Typhoon warranty clause
— Omnibus clause.
The logs were loaded on two (2) barges: (1) on
barge PCT-7000,610 pieces of logs with a volume
of 1,000 cubicmeters; and (2) on Barge TPAC-
1000, 598 pieces of logs, also with a volume of
1,000 cubic meters.
On 28 January 1986, the two barges were towed
by one tug-boat, the MT 'Seminole' But, as fate
would have it, during the voyage, rough seas and
strong winds caused damage to Barge TPAC-1000
resulting in the loss of 497 pieces of logs out of
the 598 pieces loaded thereon.
Panama demanded payment for the loss but
Oriental Assurance refuse on the ground that its
contracted liability was for "TOTAL LOSS ONLY."
The rejection was upon the recommendation of
the Tan Gatue Adjustment Company.
Unable to convince Oriental Assurance to pay its
claim, Panama filed a Complaint for Damages
against Ever Insurance Agency (allegedly, also
liable), Benito Sy Lee Yong and Oriental Assurance,
before the Regional Trial Court, Kalookan, Branch
123, docketed as Civil Case No. C-12601.
After trial on the merit, the RTC1 rendered its
Decision, with the following dispositive portion:
WHEREFORE, upon all the foregoing premises,
judgment is hereby rendered:
1. Ordering the defendant Oriental Assurance
Corporation to pay plaintiff Panama Saw Mill Inc.
the amount of P415,000.00 as insurance
indemnity with interest at the rate of 12% per
annum computed from the date of the filing of the
complaint;
2. Ordering Panama Saw Mill to pay defendant
Ever Insurance Agency or Antonio Sy Lee Yong,
owner thereof, (Ever being a single proprietorship)
for the amount of P20,000.00 as attorney's fee
and another amount of P20,000.00 as moral
damages.
3. Dismissing the complaint against defendant
Benito Sy Lee Yong.
SO ORDERED.
On appeal by both parties, respondent Appellate
Court2 affirmed the lower Court judgment in all
respects except for the rate of interest, which was
reduce from twelve (12%) to six (6%) per annum.
Both Courts shared the view that the insurance
contract should be liberally construed in order to
avoid a denial of substantial justice; and that the
logs loaded in the two barges should be treated
separately such that the loss sustained by the
shipment in one of them may be considered as
"constructive total loss" and correspondingly
compensable.
In this Petition for Review on Certiorari, Oriental
Assurance challenges the aforesaid dispositions. In
its Comment, Panama, in turn, maintains that the
constructive total loss should be based on a policy
value of P3-M and not P1-M, and prays that the
award to Ever Insurance Agency or Antonio Sy Lee
Yong of damages and attorney's fees be set aside.
The question for determination is whether or not
Oriental Assurance can be held liable under its
marine insurance policy based on the theory of a
divisible contract of insurance and, consequently,
a constructive total loss.
Our considered opinion is that no liability attaches.
The terms of the contract constitute the measure
of the insurer liability and compliance therewith is
a condition precedent to the insured's right to
recovery from the insurer (Perla Compania de
Seguros, Inc. v. Court of Appeals, G.R. No. 78860,
May 28, 1990, 185 SCRA 741). Whether a contract
is entire or severable is a question of intention to
be determined by the language employed by the
parties. The policy in question shows that the
subject matter insured was the entire shipment of
2,000 cubic meters of apitong logs. The fact that
the logs were loaded on two different barges did
not make the contract several and divisible as to
the items insured. The logs on the two barges
were not separately valued or separately insured.
Only one premium was paid for the entire
shipment, making for only one cause or
consideration. The insurance contract must,
therefore, be considered indivisible.
More importantly, the insurer's liability was for
"total loss only." A total loss may be either actual
or constructive (Sec. 129, Insurance Code). An
actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or
by being broken up;
(c) Any damage to the thing which renders it
valueless to the owner for the purpose for which
he held it; or
(d) Any other event which effectively deprives the
owner of the possession, at the port of destination,
of the thing insured. (Section 130, Insurance
Code).
A constructive total loss is one which gives to a
person insured a right to abandon, under Section
139 of the Insurance Code. This provision reads:
SECTION 139. A person insured by a contract of
marine insurance may abandon the thing insured,
or any particular portion thereof separately valued
by the policy, or otherwise separately insured, and
recover for a total loss thereof, when the cause of
the loss is a peril injured against,
(a) If more than three-fourths thereof in value is
actually lost, or would have to be expended to
recover it from the peril;
(b) If it is injured to such an extent as to reduce its
value more than three-fourths;
xxx xxx xxx
(Emphasis supplied)
Respondent Appellate Court treated the loss as a
constructive total loss, and for the purpose of
computing the more than three-fourths value of
the logs actually lost, considered the cargo in one
barge as separate from the logs in the other. Thus,
it concluded that the loss of 497 pieces of logs
from barge TPAC-1000, mathematically speaking,
is more than three-fourths (¾) of the 598 pieces of
logs loaded in that barge and may, therefore, be
considered as constructive total loss.
The basis thus used is, in our opinion, reversible under its marine insurance policy No. OAC-M-
error.1âwphi1 The requirements for the application 86/002. No costs.
of Section 139 of the Insurance Code, quoted
above, have not been met. The logs involved, SO ORDERED.
although placed in two barges, were not
separately valued by the policy, nor separately Paras, Padilla, Sarmiento and Regalado, JJ., concur.
insured. Resultantly, the logs lost in barge TPAC-
1000 in relation to the total number of logs loaded
on the same barge can not be made the basis for
determining constructive total loss. The logs
having been insured as one inseparable unit, the
correct basis for determining the existence of
constructive total loss is the totality of the
shipment of logs. Of the entirety of 1,208, pieces
of logs, only 497 pieces thereof were lost or
41.45% of the entire shipment. Since the cost of G.R. No. L-9370 March 31, 1915
those 497 pieces does not exceed 75% of the
value of all 1,208 pieces of logs, the shipment can K. S. YOUNG, plaintiff-appellee,
not be said to have sustained a constructive total
loss under Section 139(a) of the Insurance Code. vs.

In the absence of either actual or constructive THE MIDLAND TEXTILE INSURANCE

total loss, there can be no recovery by the insured COMPANY, defendant-appellant.
Panama against the insurer, Oriental Assurance.
Bruce, Lawrence, Ross and Block for appellant.
By reason of the conclusions arrived at, Panama's
asseverations in its Comment need no longer be Thos D. Aitken for appellee.
passed upon, besides the fact that no review, in
proper form, has been sought by it. JOHNSON, J.:

WHEREFORE, the judgment under review is hereby The purpose of the present action is to recover the
SET ASIDE and petitioner, Oriental Assurance sum of P3,000 upon an insurance policy. The lower
Corporation, is hereby ABSOLVED from liability court rendered a judgment in favor of the plaintiff
and against the defendant for the sum of
P2,708.78, and costs. From that judgment the
defendant appealed to this court.
The undisputed facts upon which said action is
based are as follows:
1. The plaintiff conducted a candy and fruit store
on the Escolta, in the city of Manila, and occupied
a building at 321 Calle Claveria, as a residence
and bodega (storehouse).
2. On the 29th of May, 1912, the defendant, in
consideration of the payment of a premium of P60,
entered into a contract of insurance with the
plaintiff (policy No. 509105) by the terms of which
the defendant company, upon certain conditions,
promised to pay to the plaintiff the sum of P3,000,
in case said residence and bodegaand contends
should be destroyed by fire.
3. On the conditions of said contract of insurance
is found in "warranty B" and is as follows:
"Waranty B. — It is hereby declared and agreed
that during the pendency of this policy no
hazardous goods stored or kept for sale, and no
hazardous trade or process be carried on, in the
building to which this insurance applies, or in any
building connected therewith."
4. On the 4th or 5th of February, 1913, the plaintiff
placed in said residence and bodega three boxes,
18 by 18 by 20 inches measurement, which
belonged to him and which were filed with
fireworks.
5. On the 18th day of March, q913, said residence
and bodega and the contents thereof were
partially destroyed by fire.
6. Said fireworks had been given to the plaintiff by
the former owner of the Luneta Candy Store; that
the plaintiff intended to use the same in the
celebration of the Chinese new year; that the
authorities of the city of Manila had prohibited the
use of fireworks on said occasion, and that the
plaintiff then placed the same in said bodega,
where they remained from the 4th or 5th of
February, 1913, until after the fire of the 18th of
March, 1913.
7. Both of the parties agree that said fireworks
come within the phrase "hazardous goods,"
mentioned in said "warranty B" of the policy.
8. That said fireworks were found in a part of the
building not destroyed by the fire; that they in no
way contributed to the fire, or to the loss
occasioned thereby.
The only question presented by the parties is
whether or not the placing of said fireworks in the
building insured, under the conditions above
enumerated, they being "hazardous goods," is a
violation of the terms of the contract of insurance
and especially of "warranty B." "Warranty B"
provides that "no hazardous goods be stored" in
the building insured. It is admitted by both parties
that the fireworks are "hazardous goods." The
defendant alleged that they were "stored." The
plaintiff contends that under all the facts and
circumstances of the case, they were not "stored"
in said building, and that the placing of them in
the building was not a violation of the terms of the
contract. Both the plaintiff and defendant agree
that if they were "hazardous goods," and if they
were "stored," then the act of the plaintiff was a
violation of the terms of the contract of insurance
and the defendant was justified in repudiating its
liability thereunder.
This leads us to a consideration of the meaning of
the accord "stored" as used in said "warranty B."
While the word "stored" has been variously
defined by authors, as well as by courts, we have
found no case exactly analogous to the present.
The plaintiff says that he placed said fireworks in
the bodega after he had been notified that he
could not use them on the Chinese new year, in
order that he might later send them to a friend in
the provinces. Whether a particular article is
"stored" or not must, in some degree, depend
upon the intention of the parties. The
interpretation of the word "stored" is quite
difficult, in view of the many decisions upon the
various conditions presented. Nearly all of the
cases cited by the lower court are cases where the
article was being put to some reasonable and
actual use, which might easily have been
permitted by the terms of the policy, and within
the intention of the parties, and excepted from the
operation of the warranty, like the present. Said
decision are upon cases like:
1. Where merchants have had or kept the
"hazardous" articles in small quantities, and for
actual daily use, for safe, such as gasoline,
gunpowder, etc.;
2. Where such articles have been brought on the
premises for actual use thereon, and in small
quantities, such as oil, paints, etc; and
3. Where such articles or goods were used for
lighting purpose, and in small quantities.
The author of the Century Dictionary defines the
world "store" to be a deposit in a store or
warehouse for preservation or safe keeping; o
place in a warehouse or other place of deposit for
safe keeping. See also the definitions given by the
Standard Dictionary, to the same effect.
Said definitions, of course, do not include a
deposit in a store, in small quantities, for daily
use. "Daily use" precludes the idea of a deposit for
preservation or safe keeping, as well as a deposit
for future consumption, or safe keeping.
In the present case no claim is made that the
"hazardous goods" were placed in the bodega for
present or daily use. It is admitted that they were
placed in the bodega "for future use," or for future
consumption, or for safe keeping. The plaintiff
makes no claim that he deposited them there with
any other idea than "for future use" — for future
consumption. It seems clear to us that the
"hazardous goods" in question were "stored" in
the bodega, as that word is generally defined.
That being true, suppose the defendant had made
an examination of the premises, even in the
absence of a fire, and had found he "hazardous
goods" there, under the conditions above
described, would it not have been justified, then
and there, in declaring the policy null and of no
effect by reason of a violation of its terms on he
par of the plaintiff? If it might, then may it no
repudiate is liability, even after the fire? If the
"warranty" is a term of the contract, will not its
violation cause a breach and justify
noncompliance or a repudiation?
Contracts of insurance are contracts of indemnity
upon the terms and conditions specified in the
policy. The parties have a right to impose such
reasonable conditions at the time of the making of
the contract as they may deem wise and
necessary. The rate of premium is measured by
the character of the risk assumed. The insurance
company, for a comparatively small consideration,
undertakes to guarantee the insured against loss
or damage, upon the terms and conditions agreed
upon, and upon no other, and when called upon to
pay, in case of loss, the insurer, therefore, may
justly insist upon a fulfillment of these terms. If the
insured cannot bring himself within the conditions
of the policy, he is not entitled to recover for the
loss. The terms of the policy constitute the
measure of the insurer's liability, and in order to
recover the insured must show himself within
those terms; and if it appears that the contract
has been terminated by a violation, on the part of
the insured, of its conditions, then there can be no
right of recovery. The compliance of the insured
with the terms of the contract is a condition
precedent to the right of recovery. If the insured
has violated or failed to perform the conditions of
the contract, and such a violation or want of
performance has not been waived by the insurer,
then the insured cannot recover. Courts are not
permitted to make contracts for the parties. The
function and duty of the courts consist simply in
enforcing and carrying out he contracts actually
made. While it is true, as a general rule, that
contracts of insurance are construed most
favorably to the insured, yet contracts of
insurance, like other contracts, are to be
construed according to the sense and meaning of
the terms which the parties themselves have
used. If such terms are clear and unambiguous
they must be taken and understood in their plain,
ordinary and popular sense. (Imperial Fire Ins.
Co. vs. County of Coos, 151 U. S., 542;
Kyte vs. Commercial Union Assurance Co., 149
Mass., 116, 122.) The conditions of contracts of
insurance, when plainly expressed in a policy, are
binding upon the parties and should be enforced
by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to
bring the law itself into disrepute when, by astute
and subtle distinctions, a plain case is attempted
to be taken without the operation of a clear,
reasonable, and material obligation of the
contract. (Mack vs. Rochester German Ins. Co.,
106 N. Y., 560, 564.)
The appellant argues, however, that in view of the
fact that the "storing" of the fireworks on the
premises of the insured did not contribute in any
way to the damage occasioned by the fire, he
should be permitted to recover — that the
"storing" of the "hazardous goods" in no way
caused injury to the defendant company. That
argument, however, is beside the question, if the
"storing" was a violation of the terms of the
contract. The violation of the terms of the
contract, by virtue of the provisions of the policy
itself, terminated, at the election of either party,
he contractual relations. (Kyte vs. Commercial
Union Assurance Co., 149 Mass., 116, 122.) The
plaintiff paid a premium based upon the risk at the
time the policy was issued. Certainly it cannot be
denied that the placing of the firecrackers in the
building insured increased the risk. The plaintiff
had not paid a premium based upon the increased
risk, neither had the defendant issued a policy
upon the theory of a different risk. The plaintiff
was enjoying, if his contention may be allowed
may be allowed, the benefits of an insurance
policy upon one risk, whereas, as a matter of fact,
it was issued upon an entirely different risk. The
defendant had neither been paid nor had issues a
policy to cover the increased risk. An increase of
risk which is substantial and which is continued for
a considerable period of time, is a direct and
certain injury to the insurer, and changes the basis
upon which the contract of insurance rests.
(Kyte vs. Commercial Union Assurance Co. (supra);
Frost's Detroit Lumber Works vs.Millers' Mutual Ins.
Co., 37 Minn., 300, 302; Moore vs. Phoenix Ins.
Co., 62 N. H., 240; Ferree vs. Oxford Fire & Life Ins.
Co., 67 Pa. State, 373.)
Therefore and for the foregoing reasons, the
judgment of the lower court is hereby revoked and
the defendant is hereby relieved from any
responsibility under said complaint, and, without
any finding as to costs, it is so ordered.
Arellano, C.J., Torres, Carson, Trent and Araullo,
JJ., concur.
G.R. No. L-55397 February 29, 1988
TAI TONG CHUACHE & CO., petitioner,
vs.
THE INSURANCE COMMISSION and
TRAVELLERS MULTI-INDEMNITY
CORPORATION, respondents.
GANCAYCO, J.:
This petition for review on certiorari seeks the
reversal of the decision of the Insurance
Commission in IC Case #367 1 dismissing the
complaint 2 for recovery of the alleged unpaid
balance of the proceeds of the Fire Insurance
Policies issued by herein respondent insurance
company in favor of petitioner-intervenor.
covering the building for P50,000.00 with
respondent Zenith Insurance Corporation. On July
16, 1975, another Fire Insurance Policy No. 8459
(Exhibit "B") was procured from respondent
Philippine British Assurance Company, covering
the same building for P50,000.00 and the contents
thereof for P70,000.00.

The facts of the case as found by respondent On July 31, 1975, the building and the contents
Insurance Commission are as follows: were totally razed by fire.

Complainants acquired from a certain Rolando Adjustment Standard Corporation submitted a

Gonzales a parcel of land and a building located at report as follow
San Rafael Village, Davao City. Complainants
assumed the mortgage of the building in favor of xxx xxx xxx
S.S.S., which building was insured with respondent
S.S.S. Accredited Group of Insurers for P25,000.00. ... Thus the apportioned share of each company is
as follows:
On April 19, 1975, Azucena Palomo obtained a
loan from Tai Tong Chuache Inc. in the amount of Policy No..
P100,000.00. To secure the payment of the loan, a Company Risk
mortgage was executed over the land and the
building in favor of Tai Tong Chuache & Co.
(Exhibit "1" and "1-A"). On April 25, 1975, Arsenio
Chua, representative of Thai Tong Chuache &
Co. insured the latter's interest with Travellers
Multi-Indemnity Corporation for P100,000.00
(P70,000.00 for the building and P30,000.00 for
the contents thereof) (Exhibit "A-a," contents
thereof) (Exhibit "A-a").

On June 11, 1975, Pedro Palomo secured a Fire

Insurance Policy No. F- 02500 (Exhibit "A"),
We are showing hereunder another
apportionment of the loss which includes the
Travellers Multi-Indemnity policy for Based on the computation of the loss,
reference purposes. including the Travellers Multi- Indemnity,
respondents, Zenith Insurance, Phil. British
Policy No.
Assurance and S.S.S. Accredited Group of Insurers,
Company Risk paid their corresponding shares of the loss.
Complainants were paid the following: P41,546.79
by Philippine British Assurance Co., P11,877.14 by
MIRO/ Zenith Zenith Insurance Corporation, and P5,936.57 by
S.S.S. Group of Accredited Insurers (Par. 6.
Amended Complaint). Demand was made from
F-02500 Insurance respondent Travellers Multi-Indemnity for its share
in the loss but the same was refused. Hence,
complainants demanded from the other three (3)
Corp. Building respondents the balance of each share in the loss
based on the computation of the Adjustment
Standards Report excluding Travellers Multi-
F-84590 Phil. Indemnity in the amount of P30,894.31
(P5,732.79-Zenith Insurance: P22,294.62, Phil.
British: and P2,866.90, SSS Accredited) but the
same was refused, hence, this action.
British
In their answers, Philippine British Assurance and
Zenith Insurance Corporation admitted the
material allegations in the complaint, but denied
liability on the ground that the claim of the
complainants had already been waived,
extinguished or paid. Both companies set up
counterclaim in the total amount of P 91,546.79.
Instead of filing an answer, SSS Accredited Group
of Insurers informed the Commission in its letter of
July 22, 1977 that the herein claim of
complainants for the balance had been paid in the
amount of P 5,938.57 in full, based on the
Adjustment Standards Corporation Report of
September 22, 1975.
Travellers Insurance, on its part, admitted the
issuance of the Policy No. 599 DV and alleged as
its special and affirmative defenses the following,
to wit: that Fire Policy No. 599 DV, covering the
furniture and building of complainants was
secured by a certain Arsenio Chua, mortgage
creditor, for the purpose of protecting his
mortgage credit against the complainants; that
the said policy was issued in the name of Azucena
Palomo, only to indicate that she owns the insured
premises; that the policy contains an endorsement
in favor of Arsenio Chua as his mortgage interest
may appear to indicate that insured was Arsenio
Chua and the complainants; that the premium due
on said fire policy was paid by Arsenio Chua; that
respondent Travellers is not liable to pay
complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a
complaint in intervention claiming the proceeds of
the fire Insurance Policy No. F-559 DV, issued by
respondent Travellers Multi-Indemnity.
Travellers Insurance, in answer to the complaint in
intervention, alleged that the Intervenor is not
entitled to indemnity under its Fire Insurance
Policy for lack of insurable interest before the loss
of the insured premises and that the
complainants, spouses Pedro and Azucena
Palomo, had already paid in full their mortgage
indebtedness to the intervenor. 3
As adverted to above respondent Insurance
Commission dismissed spouses Palomos'
complaint on the ground that the insurance policy
subject of the complaint was taken out by Tai Tong
Chuache & Company, petitioner herein, for its own
interest only as mortgagee of the insured property
and thus complainant as mortgagors of the
insured property have no right of action against
herein respondent. It likewise dismissed
petitioner's complaint in intervention in the
following words:
We move on the issue of liability of respondent
Travellers Multi-Indemnity to the Intervenor-
mortgagee. The complainant testified that she was
still indebted to Intervenor in the amount of
P100,000.00. Such allegation has not however,
been sufficiently proven by documentary
evidence. The certification (Exhibit 'E-e') issued by
the Court of First Instance of Davao, Branch 11,
indicate that the complainant was Antonio Lopez
Chua and not Tai Tong Chuache & Company. 4
From the above decision, only intervenor Tai Tong
Chuache filed a motion for reconsideration but it
was likewise denied hence, the present petition.
It is the contention of the petitioner that
respondent Insurance Commission decided an
issue not raised in the pleadings of the parties in
that it ruled that a certain Arsenio Lopez Chua is
the one entitled to the insurance proceeds and not
Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above
erroneous interpretation of the decision appealed
from considering the manner it was written. 5 As
correctly pointed out by respondent insurance
commission in their comment, the decision did not
pronounce that it was Arsenio Lopez Chua who has
insurable interest over the insured property.
Perusal of the decision reveals however that it
readily absolved respondent insurance company
from liability on the basis of the commissioner's
conclusion that at the time of the occurrence of
the peril insured against petitioner as mortgagee
had no more insurable interest over the insured
property. It was based on the inference that the
credit secured by the mortgaged property was
already paid by the Palomos before the said
property was gutted down by fire. The foregoing
conclusion was arrived at on the basis of the
certification issued by the then Court of First
Instance of Davao, Branch II that in a certain civil
action against the Palomos, Antonio Lopez Chua
stands as the complainant and not petitioner Tai
Tong Chuache & Company.
We find the petition to be impressed with merit. It
is a well known postulate that the case of a party
is constituted by his own affirmative allegations.
Under Section 1, Rule 1316 each party must prove
his own affirmative allegations by the amount of
evidence required by law which in civil cases as in
the present case is preponderance of evidence.
The party, whether plaintiff or defendant, who
asserts the affirmative of the issue has the burden
of presenting at the trial such amount of evidence
as required by law to obtain favorable
judgment.7 Thus, petitioner who is claiming a right
over the insurance must prove its case. Likewise,
respondent insurance company to avoid liability
under the policy by setting up an affirmative
defense of lack of insurable interest on the part of
the petitioner must prove its own affirmative
allegations.
It will be recalled that respondent insurance
company did not assail the validity of the
insurance policy taken out by petitioner over the
mortgaged property. Neither did it deny that the
said property was totally razed by fire within the
period covered by the insurance. Respondent, as
mentioned earlier advanced an affirmative
defense of lack of insurable interest on the part of
the petitioner that before the occurrence of the
peril insured against the Palomos had already paid
their credit due the petitioner. Respondent having
admitted the material allegations in the complaint,
has the burden of proof to show that petitioner has
no insurable interest over the insured property at
the time the contingency took place. Upon that
point, there is a failure of proof. Respondent, it will
be noted, exerted no effort to present any
evidence to substantiate its claim, while petitioner
did. For said respondent's failure, the decision
must be adverse to it.
However, as adverted to earlier, respondent
Insurance Commission absolved respondent
insurance company from liability on the basis of
the certification issued by the then Court of First
Instance of Davao, Branch II, that in a certain civil
action against the Palomos, Arsenio Lopez Chua
stands as the complainant and not Tai Tong
Chuache. From said evidence respondent
commission inferred that the credit extended by
herein petitioner to the Palomos secured by the
insured property must have been paid. Such is a
glaring error which this Court cannot sanction.
Respondent Commission's findings are based upon
a mere inference.
The record of the case shows that the petitioner to
support its claim for the insurance proceeds
offered as evidence the contract of mortgage
(Exh. 1) which has not been cancelled nor
released. It has been held in a long line of cases
that when the creditor is in possession of the
document of credit, he need not prove non-
payment for it is presumed. 8 The validity of the
insurance policy taken b petitioner was not
assailed by private respondent. Moreover,
petitioner's claim that the loan extended to the
Palomos has not yet been paid was corroborated
by Azucena Palomo who testified that they are still
indebted to herein petitioner. 9
Public respondent argues however, that if the civil
case really stemmed from the loan granted to
Azucena Palomo by petitioner the same should
have been brought by Tai Tong Chuache or by its
representative in its own behalf. From the above
premise respondent concluded that the obligation
secured by the insured property must have been
paid.
The premise is correct but the conclusion is wrong.
Citing Rule 3, Sec. 2 10 respondent pointed out that
the action must be brought in the name of the real
party in interest. We agree. However, it should be
borne in mind that petitioner being a partnership
may sue and be sued in its name or by its duly
authorized representative. The fact that Arsenio
Lopez Chua is the representative of petitioner is
not questioned. Petitioner's declaration that
Arsenio Lopez Chua acts as the managing partner
of the partnership was corroborated by respondent
insurance company. 11 Thus Chua as the managing
partner of the partnership may execute all acts of
administration 12 including the right to sue debtors
of the partnership in case of their failure to pay
their obligations when it became due and
demandable. Or at the very least, Chua being a
partner of petitioner Tai Tong Chuache & Company
is an agent of the partnership. Being an agent, it is
understood that he acted for and in behalf of the
firm.13 Public respondent's allegation that the civil
case flied by Arsenio Chua was in his capacity as
personal creditor of spouses Palomo has no basis.

The respondent insurance company having issued

a policy in favor of herein petitioner which policy
was of legal force and effect at the time of the fire,
it is bound by its terms and conditions. Upon its
failure to prove the allegation of lack of insurable
interest on the part of the petitioner, respondent
insurance company is and must be held liable.

IN VIEW OF THE FOREGOING, the decision

appealed from is hereby SET ASIDE and ANOTHER
judgment is rendered order private respondent
Travellers Multi-Indemnity Corporation to pay
petitioner the face value of Insurance Policy No.
599-DV in the amount of P100,000.00. Costs
against said private respondent.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Griño-Aquino,

JJ., concur