FIRST DIVISION

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 Decision 1 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 reconsideration 12 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 1265 16 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.21 Exceptions (4), (5), (7), and
(11) 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
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 MODIFICATIONthat the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis.

No pronouncement as to costs.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson

(On Leave)
CONSUELO YNARES-SANTIAGO ROMEO J. CALLEJO, SR.
Associate Justice Asscociate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes
1
Penned by Associate Justice Portia Aliño-Hormachuelos and concurred in by
Associate Justices Angelina Sandoval-Gutierrez (now Associate Justice of this
Court) and Elvi John S. Asuncion.
2
Records, pp. 146, 190.
3
Id. at pp. 149 and 200; Exhibits "A-3-a" and "E-2-a Levi Strauss".
4
Id., Exhibits "A-3" and "E-2 Levi Strauss".
5
Id. at 1.
6
Id. at 63.
7
Id. at 93.
8
Id. at 540.
9
CA rollo, p. 18.
10
Id. at 101-102.
11
Id. at 98-100.
12
Id. at 105.
13
Id. at 135.
14
Rollo, p. 36.
15
Id. at 28 (Petition), 132 (Memorandum).
16
Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary,
and without prejudice to the provisions of Article 1165. This presumption does
not apply in case of earthquake, flood, storm, or other natural calamity.
17
Rollo, pp. 105 (Comment), 153 (Memorandum).
18
Spouses Hanopol v. Shoemart, Incorporated, 439 Phil. 266, 277 (2002); St.
Michael's Institute v. Santos, 422 Phil. 723, 737 (2001).
19
Go v. Court of Appeals, G.R. No. 158922, May 28, 2004, 430 SCRA 358,
364; Spouses Hanopol v. Shoemart, Incorporated, supra.
20
Custodio v. Corrado, G.R. No. 146082, July 30, 2004, 435 SCRA 500, 511;
Spouses Hanopol v. Shoemart, Incorporated, supra.
21
The Insular Life Assurance Company, Ltd. v. Court of Appeals, G.R. No.
126850, April 28, 2004, 428 SCRA 79, 86; Aguirre v. Court of Appeals, G.R. No.
122249, January 29, 2004, 421 SCRA 310, 319.
22
De Mesa v. Court of Appeals, 375 Phil. 432, 443 (1999).
23
Records, pp. 146, 190.
24
Id.
25
First Fil-Sin Lending Corporation v. Padillo, G.R. No. 160533, January 12,
2005, 448 SCRA 71, 76; Azarraga v. Rodriguez, 9 Phil. 637 (1908).
26
Records, at the back of pp. 151-173; Exhibits "C" to "C-22".
27
See Lawyers Cooperative Publishing Co. v. Tabora, 121 Phil. 737, 741 (1965).
28
Aetna Ins. Co. v. King, 265 So 2d 716, cited in 43 Am Jur 2d §943.
29
43 Am Jur 2d §943.
30
Id.
31
43 Am Jur 2d §962.
32
Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen were inevitable.
33
CA Decision, p. 11; CA rollo, p. 100.
34
Lawyers Cooperative Publishing v. Tabora, supra note 27, at 741.
35
Jurado, Comments and Jurisprudence on Obligations and Contracts (1993),
pp. 289-290. See also Republic of the Philippines v. Grijaldo, 122 Phil. 1060,
1066 (1965); De Leon v. Soriano, 87 Phil. 193, 196 (1950).
36
Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company,
91 Phil. 861, 865 (1952). See also Republic of the Philippines v. Grijaldo, supra;
De Leon v. Soriano, supra.
37
Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956).
38
Records, pp. 151-173.
39
Id. at 182.
40
Id. at 183.
41
Delsan Transport Lines, Inc. v. Court of Appeals, 420 Phil. 824, 834 (2001);
Philippine American General Insurance Company, Inc. v. Court of Appeals, 339
Phil. 455, 466 (1997).
42
Records, p. 201.
 EN BANC

G.R. No. 137172 April 4, 2001

UCPB GENERAL INSURANCE CO., INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

RESOLUTION

DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed
decision 1 of the Court of Appeals, which affirmed with modification the judgment of the
trial court (a) allowing Respondent to consign the sum of P225,753.95 as full payment
of the premiums for the renewal of the five insurance policies on Respondent's
properties; (b) declaring the replacement-renewal policies effective and binding from 22
May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent
P18,645,000.00 as indemnity for the burned properties covered by the renewal-
replacement policies. The modification consisted in the (1) deletion of the trial court's
declaration that three of the policies were in force from August 1991 to August 1992;
and (2) reduction of the award of the attorney's fees from 25% to 10% of the total
amount due the Respondent.

The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in
Pasay City and Manila] . . . .

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22
May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties
located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire.
On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable
Bank Manager's Checks in the total amount of P225,753.45 as renewal premium
payments for which Official Receipt Direct Premium No. 62926 (Exhibit "Q",
Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made its
formal demand for indemnification for the burned insured properties. On the
 same day, defendant returned the five (5) manager's checks stating in its letter
(Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on the
following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for
another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-
renewal earlier; and

c) The properties covered by the said policies were burned in a fire that
took place last June 13, 1992, or before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of
payment of the premiums on 13 July 1992 did not result in the renewal of the policies,
having been made beyond the effective date of renewal as provided under Policy
Condition No. 26, which states:

26. Renewal Clause. — Unless the company at least forty five days in advance
of the end of the policy period mails or delivers to the assured at the address
shown in the policy notice of its intention not to renew the policy or to condition its
renewal upon reduction of limits or elimination of coverages, the assured shall be
entitled to renew the policy upon payment of the premium due on the effective
date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number of
years, had been granted a 60 to 90-day credit term for the renewal of the policies. Such
a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was
issued on May 7, 1990 but premium was paid more than 90 days later on August
31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No.
34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was
issued by UCPB on May 4, 1990 but premium was collected by UCPB only on
July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and
"V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering
risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs.
"W" and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22,
1990 to May 22, 1991 was issued on May 3, 1990 but premium was paid only on
 July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy
No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was
issued on May 7, 1990 but premium was paid only on July 19, 1990 under O.R.
No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover
insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989
but premium therefor was collected only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering
risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils.
(Masagana's sister company) dated December 10, 1988 but premium therefor
was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-
1"). Fire Insurance Policy No. 29128 was issued on May 22, 1989 but premium
was paid only on July 25, 1989 under O.R. No. 40800 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance
Policy No. 29127 was issued on May 22, 1989 but premium was paid only on
July 17, 1989 under O.R. No. 40682 for insurance risk coverage from May 22,
1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-
29362 was issued on June 15, 1989 but premium was paid only on February 13,
1990 under O.R. No. 39233 for insurance coverage from May 22, 1989 to May
22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued
on November 22, 1988 but premium therefor was collected only on March 15,
1989 under O.R. NO. 38573 for insurance risks coverage from December 15,
1988 to December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances constitute

preponderant proof that no timely notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350)

from Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been
confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit "11".
Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not
earlier than said date, or within 45 days from the expiry dates of the policies as
provided under Policy Condition No. 26; (2) Defendant insurer unconditionally
accepted, and issued an official receipt for, the premium payment on July 1[3],
1992 which indicates defendant's willingness to assume the risk despite only a
67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated
July 17, 1992 (Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be "whether the fire
insurance policies issued by petitioner to the respondent covering the period from May
22, 1991 to May 22, 1992 . . . had been extended or renewed by an implied credit
arrangement though actual payment of premium was tendered on a later date and after
the occurrence of the (fire) risk insured against." We resolved this issue in the negative
in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of
Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals; 3 and Tibay v.
Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of
Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It
alleges in the motion that we had made in the decision our own findings of facts, which
are not in accord with those of the trial court and the Court of Appeals. The courts below
correctly found that no notice of non-renewal was made within 45 days before 22 May
1992, or before the expiration date of the fire insurance policies. Thus, the policies in
question were renewed by operation of law and were effective and valid on 30 June
1992 when the fire occurred, since the premiums were paid within the 60- to 90-day
credit term.

Respondent likewise disagrees with our ruling that parties may neither agree expressly
or impliedly on the extension of credit or time to pay the premium nor consider a policy
binding before actual payment. It urges the Court to take judicial notice of the fact that
despite the express provision of Section 77 of the Insurance Code, extension of credit
terms in premium payment has been the prevalent practice in the insurance industry.
Most insurance companies, including Petitioner, extend credit terms because Section
77 of the Insurance Code is not a prohibitive injunction but is merely designed for the
protection of the parties to an insurance contract. The Code itself, in Section 78,
authorizes the validity of a policy notwithstanding non-payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its
awareness of Section 77 Petitioner persuaded and induced Respondent to believe that
payment of premium on the 60- to 90-day credit term was perfectly alright; in fact it
accepted payments within 60 to 90 days after the due dates. By extending credit and
habitually accepting payments 60 to 90 days from the effective dates of the policies, it
has implicitly agreed to modify the tenor of the insurance policy and in effect waived the
provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.

Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues

that both the trial court and the Court of Appeals overlooked the fact that on 6 April 1992
Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent by
personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise
ignored the fact that Respondent was fully aware of the notice of non-renewal. A
reading of Section 66 of the Insurance Code readily shows that in order for an insured
to be entitled to a renewal of a non-life policy, payment of the premium due on the
effective date of renewal should first be made. Respondent's argument that Section 77
is not a prohibitive provision finds no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the
motion for reconsideration and the pleadings filed thereafter by the parties, we resolved
to grant the motion for reconsideration. The following facts, as found by the trial court
and the Court of Appeals, are indeed duly established:
 1. For years, Petitioner had been issuing fire policies to the Respondent, and
these policies were annually renewed.

2. Petitioner had been granting Respondent a 60- to 90-day credit term within
which to pay the premiums on the renewed policies.

3. There was no valid notice of non-renewal of the policies in question, as there

is no proof at all that the notice sent by ordinary mail was received by
Respondent, and the copy thereof allegedly sent to Zuellig was ever transmitted
to Respondent.

4. The premiums for the policies in question in the aggregate amount of

P225,753.95 were paid by Respondent within the 60- to 90-day credit term and
were duly accepted and received by Petitioner's cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's
advantage despite its practice of granting a 60- to 90-day credit term for the payment of
premiums.

Section 77 of the Insurance Code of 1978 provides:

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

thing insured is exposed to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has
been paid, except in the case of a life or an industrial life policy whenever the
grace period provision applies.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of
Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:

SECTION 72. An insurer is entitled to payment of premium as soon as the thing

insured is exposed to the peril insured against, unless there is clear agreement to
grant the insured credit extension of the premium due. No policy issued by an
insurance company is valid and binding unless and until the premium thereof has
been paid. (Italic supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72
expressly permitting an agreement to extend the period to pay the premium. But are
there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SECTION 78. Any acknowledgment in a policy or contract of insurance of the

receipt of premium is conclusive evidence of its payment, so far as to make the
policy binding, notwithstanding any stipulation therein that it shall not be binding
until premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court
of Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed
to the payment in installments of the premium and partial payment has been made at
the time of loss. We said therein, thus:

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

Not only that. In Tuscany, we also quoted with approval the following pronouncement of
the Court of Appeals in its Resolution denying the motion for reconsideration of its
decision:

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

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

By the approval of the aforequoted findings and conclusion of the Court of

Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the
insurer may grant credit extension for the payment of the premium. This simply means
that if the insurer has granted the insured a credit term for the payment of the premium
and loss occurs before the expiration of the term, recovery on the policy should be
allowed even though the premium is paid after the loss but within the credit term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance

contract to provide a credit term within which to pay the premiums. That agreement is
not against the law, morals, good customs, public order or public policy. The agreement
binds the parties. Article 1306 of the Civil Code provides:

ARTICLE 1306. The contracting parties may establish such stipulations clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.

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

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED

and SET ASIDE, and a new one is hereby entered DENYING the instant petition
for failure of Petitioner to sufficiently show that a reversible error was committed
by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in
toto.

No pronouncement as to cost.

SO ORDERED.

Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago,

De Leon, Jr. and Sandoval-Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.

Separate Opinions
VITUG, J .:

An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal

contract where the rights and obligations of the parties correlate and mutually
correspond. The insurer assumes the risk of loss which an insured might suffer in
consideration of premium payments under a risk-distributing device. Such assumption
of risk is a component of a general scheme to distribute actual losses among a group of
persons, bearing similar risks, who make ratable contributions to a fund from which the
losses incurred due to exposures to the peril insured against are assured and
compensated.

It is generally recognized that the business of insurance is one imbued with public
interest. 1 For the general good and mutual protection of all the parties, it is aptly
subjected to regulation and control by the State by virtue of an exercise of its police
power. 2 The State may regulate in various respects the relations between the insurer
and the insured, including the internal affairs of an insurance company, without being
violative of due process. 3

A requirement imposed by way of State regulation upon insurers is the maintenance of

an adequate legal reserve in favor of those claiming under their policies. 4 The law
generally mandates that insurance companies should retain an amount sufficient to
guarantee the security of its policyholders in the remote future, as well as the present,
and to cover any contingencies that may arise or may be fairly anticipated. The integrity
of this legal reserve is threatened and undermined if a credit arrangement on the
payment of premium were to be sanctioned. Calculations and estimations of liabilities
under the risk insured against are predicated on the basis of the payment of premiums,
the vital element that establishes the juridical relation between the insured and the
insurer. By legislative fiat, any agreement to the contrary notwithstanding, the payment
of premium is a condition precedent to, and essential for, the efficaciousness of the
insurance contract, except (a) in case of life or industrial life insurance where a grace
period applies, or (b) in case of a written acknowledgment by the insurer of the receipt
of premium, such as by a deposit receipt, the written acknowledgment being conclusive
evidence of the premium payment so far as to make the policy binding. 5

Section 77 of the Insurance Code provides:

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

thing insured is exposed to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has
been paid, except in the case of a life or an industrial life policy whenever the
grace period provision applies."

This provision amended Section 72 of the then Insurance Act by deleting the phrase,
"unless there is a clear agreement to grant the insured credit extension of the premium
due," and adding at the beginning of the second sentence the phrase, "[n]otwithstanding
any agreement to the contrary." Commenting on the new provision, Dean Hernando B.
Perez states:

"Under the former rule, whenever the insured was granted credit extension of the
premium due or given a period of time to pay the premium on the policy issued,
such policy was binding although premiums had not been paid (Section 72,
Insurance Act; 6 Couch 2d. 67). This rule was changed when the present
provision eliminated the portion concerning credit agreement, and added the
phrase 'notwithstanding any agreement to the contrary' which precludes the
parties from stipulating that the policy is valid even if premiums are not paid.
Hence, under the present law, the policy is not valid and binding unless and until
the premium is paid (Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA
63). If the insurer wants to favor the insured by making the policy binding
notwithstanding the non-payment of premium, a mere credit agreement would
not be sufficient. The remedy would be for the insurer to acknowledge in the
policy that premiums were paid although they were not, in which case the policy
becomes binding because such acknowledgment is a conclusive evidence of
payment of premium (Section 78). Thus, the Supreme Court took note that under
the present law, Section 77 of the Insurance Code of 1978 has deleted the
clause 'unless there is a clear agreement to grant the insured credit extension of
the premium due' (Velasco vs. Apostol, 173 SCRA 228)." 6

By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be

successfully invoked to create a primary liability, 8 nor can it give validity to what the law
so proscribes as a matter of public policy. 9 So essential is the premium payment to the
creation of the vinculum juris between the insured and the insurer that it would be
doubtful to have that payment validly excused even for a fortuitous event. 10

The law, however, neither requires for the establishment of the juridical tie, nor
measures the strength of such tie by, any specific amount of premium payment. A part
payment of the premium, if accepted by the insurer, can thus perfect the contract and
bring the parties into an obligatory relation. 11 Such a payment puts the contract into full
binding force, not merely pro tanto, thereby entitling and obligating the parties by their
agreement. Hence, in case of loss, full recovery less the unpaid portion of the premium
(by the operative act of legal compensation), can be had by the insured and,
correlatively, if no loss occurs the insurer can demand the payment of the unpaid
balance of the premium. 12

In the instant case, no juridical tie appears to have been established under any of the
situations hereinabove discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

Melo, J ., concurs.
PARDO, J ., dissenting:

The majority resolved to grant respondent's motion for reconsideration of the Court's
decision promulgated on June 15, 1999. By this somersault, petitioner must now pay
respondent's claim for insurance proceeds amounting to P18,645,000.00, exclusive of
interests, plus 25% of the amount due as attorney's fees, P25,000.00 as litigation
expenses, and costs of suit, covering its Pasay City property razed by fire. What an
undeserved largess! Indeed, an unjust enrichment at the expense of petitioner; even the
award of attorney's fees is bloated to 25% of the amount due.

We cannot give our concurrence. We beg to dissent. We find respondent's claim to be

fraudulent:

First: Respondent Masagana surreptitiously tried to pay the overdue premiums before
giving written notice to petitioner of the occurrence of the fire that razed the subject
property. This failure to give notice of the fire immediately upon its occurrence blatantly
showed the fraudulent character of its claim. The fire totally destroyed the property
on June 13, 1992; the written notice of loss was given only more than a month later,
on July 14, 1992, the day after respondent surreptitiously paid the overdue premiums.
Respondent very well knew that the policy was not renewed on time. Hence, the
surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible
disregard of the principle that insurance is a contract uberrima fides, the most abundant
good faith. 1 Respondent is required by law and by express terms of the policy to give
immediate written notice of loss. This must be complied with in the utmost good faith.

Another badge of fraud is that respondent deviated from its previous practice of
coursing its premium payments through its brokers. This time, respondent Masagana
went directly to petitioner and paid through its cashier with manager's checks. Naturally,
the cashier routinely accepted the premium payment because he had no written notice
of the occurrence of the fire. Such fact was concealed by the insured and not revealed
to petitioner at the time of payment.

Indeed, if as contended by respondent, there was a clear agreement regarding the grant
of a credit extension, respondent would have given immediate written notice of the fire
that razed the property. This clearly showed respondent's attempt to deceive petitioner
into believing that the subject property still existed and the risk insured against had not
happened.

Second: The claim for insurance benefits must fall as well because the failure to give
timely written notice of the fire was a material misrepresentation affecting the risk
insured against.

Section 1 of the policy provides:

 "All benefits under the policy shall be forfeited if the claim be in any respect
fraudulent, or if any false declaration be made or used in support thereof, or if
any false declaration be made or used in support thereof, or if any fraudulent
means or devices are used by the insured or any one acting on his behalf to
obtain any benefit under the policy." 2

In the factual milieu, the purported practice of giving 60 to 90-day credit extension for
payment of premiums was a disputed fact. But it is a given fact that the written notice of
loss was not immediately given. It was given only the day after the attempt to pay the
delayed premiums.

At any rate, the purported credit was a mere verbal understanding of the respondent
Masagana of an agreement between the insurance company (petitioner) and the
insurance brokers of respondent Masagana. The president of respondent
Masagana admitted that the insurance policy did not contain any proviso pertaining to
the grant of credit within which to pay the premiums. Respondent Masagana merely
deduced that a credit agreement existed based on previous years' practice that they
had of delayed payments accepted by the insurer as reflected on the face of the
receipts issued by UCPB evidencing the payment of premiums.

"Q: You also claim that you have 60 to 90 days credit arrangement with
UCPB; is that correct?,

A: Yes, ma'am.

Q: I'm showing to you the policy which had previously been marked in
evidence as Exhibit "A", "B", "C", "D", & "E"' for the plaintiff and likewise, marked
as exhibits "1", "2", "3", "4", & "5" for the defendant. Could you show us, Mr.
witness where in these policies does it show that you are actually given 60 to 90
days credit arrangement with UCPB?

A: Well, it's verbal with your company, and Ansons Insurance Brokerage. It
is not written.

Q: It is not written in the policy?

A: Yes.

Q: You merely have verbal agreement with Ansons Insurance Brokerage?

A: Yes; as shown in our mode of payment; in our vouchers and the receipts
issued by the insurance company." 3

It must be stressed that a verbal understanding of respondent Masagana cannot amend

an insurance policy. In insurance practice, amendments or even corrections to a policy
are done by written endorsements or tickets appended to the policy.
However, the date on the face of the receipts does not refer to the date of actual
remittance by respondent Masagana to UCPB of the premium payments, but merely to
the date of remittance to UCPB of the premium payments by the insurance brokers of
respondent Masagana.

"Q: You also identified several receipts; here; official receipts issued by UCPB
General Insurance Company, Inc., which has been previously marked as Exhibits
"F", "G", "H", "I", and "J" for the plaintiff; is that correct?

A: Yes.

Q: And, you would agree with me that the dates indicated in these particular
Official Receipts (O. R.), merely indicated the dates when UCPB General
Insurance Company issued these receipts? Do you admit that, Mr. Witness?

A: That was written in the receipts.

Q: But, you would also agree that this did not necessarily show the dates
when you actually forwarded the checks to your broker, Anson Insurance
Agency, for payment to UCPB General Insurance Co. Inc., isn't it?

A: The actual support of this would be the cash voucher of the company,
Masagana Telamart Inc., the date when they picked up the check from the
company.

Q: And are these cash voucher with you?

A: I don't know if it is in the folder or in our folder, now.

Q: So, you are not certain, whether or not you actually delivered the checks
covered by these Official Receipts to UCPB General Insurance, on the dates
indicated?

A: I would suppose it is few days earlier, when they picked up the payment
in our office." 4

Hence, what has been established was the grant of credit to the insurance brokers, not
to the assured. The insurance company recognized the payment to the insurance
brokers as payment to itself, though the actual remittance of the premium payments to
the principal might be made later. Once payment of premiums is made to the insurance
broker, the assured would be covered by a valid and binding insurance policy, provided
the loss occurred after payment to the broker has been made.

Assuming arguendo that the 60 to 90 day-credit-term has been agreed between the
parties, respondent could not still invoke estoppel to back up its claim. "Estoppel is
unavailing in this case," 5 thus spoke the Supreme Court through the pen of Justice
Hilario G. Davide, Jr., now Chief Justice. Mutatis mutandi, he may well be speaking of
this case. He added that "[E]stoppel can not give validity to an act that is prohibited by
law or against public policy." 6 The actual payment of premiums is a condition precedent
to the validity of an insurance contract other than life insurance policy. 7 Any agreement
to the contrary is void as against the law and public policy. Section 77 of the Insurance
Code provides:

"An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is
valid and binding unless and until the premium thereof has been paid, except in
the case of a life or an industrial life policy whenever the grace period provision
applies." [Emphasis supplied]

An incisive reading of the afore-cited provision would show that the emphasis was on
the conclusiveness of the acknowledgment in the policy of the receipt of premium,
notwithstanding the absence of actual payment of premium, because of estoppel. Under
the doctrine of estoppel, an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the person relying
thereon. "A party may not go back on his own acts and representations to the prejudice
of the other party who relied upon them." 8

This is the only case of estoppel which the law considers a valid exception to the
mandatory requirement of pre-payment of premium. The law recognized that the
contracting parties, in entering a contract of insurance, are free to enter into stipulations
and make personal undertakings so long as they are not contrary to law or public policy.
However, the law is clear in providing that the acknowledgment must be contained in
the policy or contract of insurance. Anything short of it would not fall under the exception
so provided in Section 78.

Hence, because of respondent's failure to pay the premiums prior to the occurrence of
the fire insured against, no valid and binding insurance policy was created to cover the
loss and destruction of the property. The fire took place on June 13, 1992, twenty-two
(22) days after the expiration of the policy of fire insurance. The tender of payment of
premiums was made only thirty (30) days after the occurrence of the fire, or on July 13,
1992. Respondent Masagana did not give immediate notice to petitioner of the fire as it
occurred as required in the insurance policy. Respondent Masagana tried to tender
payment of the premiums overdue surreptitiously before giving notice of the occurrence
of the fire. More importantly, the parties themselves expressly stipulated that the
insurance policy would not be binding on the insurer unless the premiums thereon had
been paid in full. Section 2 of the policy provides:

"2. This policy including any renewal and/or endorsement thereon is not in force
until the premium has been fully paid and duly receipted by the Company in the
manner provided therein.
 "Any supplementary agreement seeking to amend this condition prepared by
agent, broker or company official, shall be deemed invalid and of no effect.

"No payment in respect of any premium shall be deemed to be payment to the

Company unless a printed form of receipt for the same signed by an Official or
duly appointed Agent of the Company shall have been given to the Insured,
except when such printed receipt is not available at the time of payment and the
company or its representative accepts the premium in which case a temporary
receipt other than the printed form may be issued in lieu thereof. "Except only on
those specific cases where corresponding rules and regulations which now we
are or may hereafter be in force provide for the payment of the stipulated
premiums in periodic installments at fixed percentages, it is hereby declared,
agreed and warranted that this policy shall be deemed effective valid and binding
upon the Company when the premiums thereof have actually been paid in full
and duly acknowledged in a receipt signed by any authorized official or
representative/agent of the Company in such manner as provided
herein." 9 [emphasis supplied]

Thus, the insurance policy, including any renewal thereof or any endorsements
thereon shall not come in force until the premiums have been fully paid and duly
received by the insurance Company. No payment in respect of any premiums shall be
deemed to be payment to the Insurance Company unless a printed form of receipt for
the same signed by an Official or duly appointed Agent of the Company shall be given
to the insured.

The case of Tibay v. Court of Appeals 10 is in point. The issue raised therein was: "May a
fire insurance policy be valid, binding and enforceable upon mere partial payment of
premium?" In the said case, Fortune Life and General Insurance Co., Inc. issued Fire
Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo, on a
two-storey residential building located at 5855 Zobel Street, Makati City, together with
all the personal effects therein, The insurance was for P600,000.00, covering the period
from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total premium of
P2,983.50, Violeta Tibay only paid P600.00, thus leaving a substantial balance unpaid.
On March 8, 1987, the insured building was completely destroyed by fire. Two days
later, or on 10 March 1987, Violeta Tibay paid the balance of the premium. On the same
day, she filed with Fortune a claim for the proceeds of the fire insurance policy.

In denying the claim of insurance, the Court ruled that "by express agreement of the
parties, no vinculum juris or bond of law was to be established until full payment was
effected prior to the occurrence of the risk insured against. 11 As expressly stipulated in
the contract, full payment must be made before the risk occurs for the policy to be
considered effective and in force. "No vinculum juris whereby the insurer bound itself to
indemnify the assured according to law ever resulted from the fractional payment of
premium." 12
The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of
Appeals 13 to support the contention that the insurance policies subject of the instant
case were valid and effective. However, the factual situation in that case was different
from the case at bar.

In Tuscany, the Court held that the insurance policies were valid and binding because
there was partial payment of the premiums and a clear understanding between the
parties that they had intended the insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. On the basis of equity and
fairness, the Court ruled that there was a perfected contract of insurance upon the
partial payment of the premiums, notwithstanding the provisions of Section 77 to the
contrary. The Court would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse that
the premiums were not prepaid in full.

There is no dispute that like in any other contract, the parties to a contract of insurance
enjoy the freedom to stipulate on the terms and conditions that will govern their
agreement so long as they are not contrary to law, morals, good customs, public order
or public policy. However, the agreement containing such terms and conditions must be
clear and definite.

In the case at bar, there was no clear and definite agreement between petitioner and
respondent on the grant of a credit extension; neither was there partial payment of
premiums for petitioner to invoke the exceptional doctrine in Tuscany.

Hence, the circumstances in the above cited case are totally different from the case at
bar, and consequently, not applicable herein.

Insurance is an aleatory contract whereby one undertakes for a consideration to

indemnify another against loss, damage or liability arising from an unknown or
contingent event. 14 The consideration is the premium, which must be paid at the time
and in the manner specified in the policy, and if not so paid, the policy will lapse and be
forfeited by its own terms. 15

With regard to the contention that the absence of notice of non-renewal of the policy
resulted to the automatic renewal of the insurance policy, we find the contention
untenable. As above discussed, the law provides that only upon payment of the
insurance premium will the insurance policy bind the insurer to the peril insured against
and hold it liable under the policy in case of loss.

Even in the absence of notice of non-renewal, the assured would be bound by the law
that a non life insurance policy takes effect only on the date payment of the premium
was made.
Verily, it is elemental law that the payment of premium is a mandatory requisite to make
the policy of insurance effective. If the premium is not paid in the manner prescribed in
the policy as intended by the parties, the policy is void and ineffective. 16

Basically a contract of indemnity, an insurance contract is the law between the parties.
Its terms and conditions constitute the measure of the insurer's liability and compliance
therewith is a condition precedent to the insured's right to recovery from the insurer. 17

IN VIEW WHEREOF, I vote to DENY the respondent's motion for reconsideration, for
lack of merit.

Melo, Puno and Quisumbing, JJ ., concur.

Footnotes

1
Rollo, 38.
2
191 SCRA 1 [1990].
3
244 SCRA 744 [1995].
4
257 SCRA 126 [1996] (erroneously stated in the decision as 275 SCRA 126).
5
215 SCRA 463 [1992].

VITUG, J.:

1
Hartford Acci. & Indem. Co. vs. N.O. Leson Mfg. Co., 291 US 352, 78 L Ed, 840,
54 S Ct. 392.
2
United States vs. South-Eastern Underwriters Asso., 322 US 533, 88 L Ed 1440,
64 S Ct 1162, reh den 323 US 811, 89 L Ed 646, 65 S Ct, 26; Hinckley vs.
Bechtel Corp. (1st Dist.), 41 Cal App 3d 206, 116 Cal Rptr 33.
3
43 Am Jur 2d; Merchants Mut. Auto Liability Ins. Co. vs. Smart, 267 US 126, 69
L Ed 538, 45 S Ct 320; California State Auto Asso. Inter-Ins. Bureau vs. Maloney
341 US 105, 95 L Ed 788, 71 S Ct 601; State Farm Mut. Auto. Ins. Co. vs. Duel,
324 US 154, 89 L Ed 812 65 S Ct 573 reh den 324 US 887.
4
Tibay vs. Court of Appeals, 257 SCRA 126.
 5
Secs. 77-78, Insurance Code; Acme vs. Court of Appeals, 134 SCRA 155;
South Sea Surety and Insurance Company, Inc. vs. Court of Appeals, 244 SCRA
744.
6
Insurance Code and Insolvency Law by Hernando B. Perez, 1999 Rev. Ed.
7
Ames. vs. Auto Owners' Ins. Co.; 195 N.W. 686, 225 Mich. 44; 45 C.J.S. 674.
8
C.E. Carnes & Co. vs. Employers' Liability Assur. Corp., Limited of London,
England, C.C.A. La, 101 F2d 739; 45 CJS 674.
9
Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14.
10
See Constantino vs. Asia Life Insurance Co., 87 Phil. 248.

See Philippine Phoenix Surety and Insurance, Inc. vs. Woodworks, Inc., 20
11

SCRA 1271.
12
See Makati Tuscany Condominium vs. Court of Appeals, 215 SCRA 463.

PARDO, J., dissenting:

1
Velasco v. Apostol, 173 SCRA 228, 236 [1989].
2
Section 15, Policy Conditions, RTC Record, p. 25.
3
TSN, December 8, 1992, pp. 24-25.
4
TSN, December 8, 1992, pp. 14-17.
5
Development Bank of the Philippines v. Court of Appeals, 348 Phil. 15, 32
[1998].
6
Ibid.
7
American Home Assurance Co. v. Chua, 309 SCRA 250, 259 [1999].
8
Ayala Corporation v. Ray Burton Development Corp., 355 Phil. 475, 496 [1998].
9
Section 2, Policy Conditions, RTC Record, p. 16.
10
326 Phil. 931 [1996].
11
Tibay v. Court of Appeals, supra, Note 10, p. 136.
12
Ibid., p. 138.
13
215 SCRA 462 [1992].
14
Article 2010, Civil Code.
15
Tibay v. Court of Appeals, supra, Note 10, p. 133.
16
Tibay v. Court of Appeals, supra, Note 10, pp. 138-139.

17
Verendia v. Court of Appeals, 217 SCRA 417, 422-243 [1993].
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 81026 April 3, 1990

PAN MALAYAN INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN
DRIVER, respondents.

Regulus E. Cabote & Associates for petitioner.

Benito P. Fabie for private respondents.

CORTES, J.:

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a

decision of the Court of Appeals which upheld an order of the trial court dismissing for
no cause of action PANMALAY's complaint for damages against private respondents
Erlinda Fabie and her driver.

The principal issue presented for resolution before this Court is whether or not the
insurer PANMALAY may institute an action to recover the amount it had paid its
assured in settlement of an insurance claim against private respondents as the parties
allegedly responsible for the damage caused to the insured vehicle.

On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of
Makati against private respondents Erlinda Fabie and her driver. PANMALAY averred
the following: that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and
registered in the name of Canlubang Automotive Resources Corporation
[CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and
imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the insured car
was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed
the cost of repair of the insured car and, therefore, was subrogated to the rights of
CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and
that, despite repeated demands, defendants, failed and refused to pay the claim of
PANMALAY.

Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental
motion thereto. In compliance therewith, PANMALAY clarified, among others, that the
damage caused to the insured car was settled under the "own damage", coverage of
the insurance policy, and that the driver of the insured car was, at the time of the
accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also
submitted a copy of the insurance policy and the Release of Claim and Subrogation
Receipt executed by CANLUBANG in favor of PANMALAY.

On February 12, 1986, private respondents filed a Motion to Dismiss alleging that
PANMALAY had no cause of action against them. They argued that payment under the
"own damage" clause of the insurance policy precluded subrogation under Article 2207
of the Civil Code, since indemnification thereunder was made on the assumption that
there was no wrongdoer or no third party at fault.

After hearings conducted on the motion, opposition thereto, reply and rejoinder, the
RTC issued an order dated June 16, 1986 dismissing PANMALAY's complaint for no
cause of action. On August 19, 1986, the RTC denied PANMALAY's motion for
reconsideration.

On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on
November 27, 1987. Consequently, PANMALAY filed the present petition for review.

After private respondents filed its comment to the petition, and petitioner filed its reply,
the Court considered the issues joined and the case submitted for decision.

Deliberating on the various arguments adduced in the pleadings, the Court finds merit in
the petition.

PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it
had indemnified CANLUBANG for the damage to the insured car resulting from a traffic
accident allegedly caused by the negligence of the driver of private respondent, Erlinda
Fabie. PANMALAY contended, therefore, that its cause of action against private
respondents was anchored upon Article 2207 of the Civil Code, which reads:

If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person who has violated the contract.
...

PANMALAY is correct.

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If
the insured property is destroyed or damaged through the fault or negligence of a party
other than the assured, then the insurer, upon payment to the assured, will be
subrogated to the rights of the assured to recover from the wrongdoer to the extent that
the insurer has been obligated to pay. Payment by the insurer to the assured operates
as an equitable assignment to the former of all remedies which the latter may have
against the third party whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R.
No. L-18965, October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v.
Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323].

There are a few recognized exceptions to this rule. For instance, if the assured by his
own act releases the wrongdoer or third party liable for the loss or damage, from
liability, the insurer's right of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v.
Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company
of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly,
where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured's claim for loss, the settlement is
binding on both the assured and the insurer, and the latter cannot bring an action
against the carrier on his right of subrogation [McCarthy v. Barber Steamship Lines,
Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not
a risk covered by the policy, thereby effecting "voluntary payment", the former has no
right of subrogation against the third party liable for the loss [Sveriges Angfartygs
Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA
12].

None of the exceptions are availing in the present case.

The lower court and Court of Appeals, however, were of the opinion that PANMALAY
was not legally subrogated under Article 2207 of the Civil Code to the rights of
CANLUBANG, and therefore did not have any cause of action against private
respondents. On the one hand, the trial court held that payment by PANMALAY of
CANLUBANG's claim under the "own damage" clause of the insurance policy was an
admission by the insurer that the damage was caused by the assured and/or its
representatives. On the other hand, the Court of Appeals in applying the ejusdem
generis rule held that Section III-1 of the policy, which was the basis for settlement of
CANLUBANG's claim, did not cover damage arising from collision or overturning due to
the negligence of third parties as one of the insurable risks. Both tribunals concluded
that PANMALAY could not now invoke Article 2207 and claim reimbursement from
private respondents as alleged wrongdoers or parties responsible for the damage.

The above conclusion is without merit.

It must be emphasized that the lower court's ruling that the "own damage" coverage
under the policy implies damage to the insured car caused by the assured itself, instead
of third parties, proceeds from an incorrect comprehension of the phrase "own damage"
as used by the insurer. When PANMALAY utilized the phrase "own damage" — a
phrase which, incidentally, is not found in the insurance policy — to define the basis for
its settlement of CANLUBANG's claim under the policy, it simply meant that it had
assumed to reimburse the costs for repairing the damage to the insured
vehicle [See PANMALAY's Compliance with Supplementary Motion for Bill of
Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage"
coverage under Section III of the insurance policy is differentiated from Sections I and
IV-1 which refer to "Third Party Liability" coverage (liabilities arising from the death of, or
bodily injuries suffered by, third parties) and from Section IV-2 which refer to "Property
Damage" coverage (liabilities arising from damage caused by the insured vehicle to the
properties of third parties).

Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks
under Section III-1 of the policy does not include to the insured vehicle arising from
collision or overturning due to the negligent acts of the third party. Not only does it stem
from an erroneous interpretation of the provisions of the section, but it also violates a
fundamental rule on the interpretation of property insurance contracts.

It is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties
thereto have used. In the case of property insurance policies, the evident intention of
the contracting parties, i.e., the insurer and the assured, determine the import of the
various terms and provisions embodied in the policy. It is only when the terms of the
policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree
about the meaning of particular provisions, that the courts will intervene. In such an
event, the policy will be construed by the courts liberally in favor of the assured and
strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co.,
Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation
v. Court of Appeals, G.R. No. L-43706, November 14, 1986, 145 SCRA 533; Pacific
Banking Corporation v. Court of Appeals, G.R. No. L-41014, November 28, 1988, 168
SCRA 1. Also Articles 1370-1378 of the Civil Code].

Section III-1 of the insurance policy which refers to the conditions under which the
insurer PANMALAY is liable to indemnify the assured CANLUBANG against damage to
or loss of the insured vehicle, reads as follows:

SECTION III — LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the Insured
against loss of or damage to the Scheduled Vehicle and its accessories and
spare parts whilst thereon: —

(a) by accidental collision or overturning, or collision or overturning

consequent upon mechanical breakdown or consequent upon wear and
tear;

(b) by fire, external explosion, self ignition or lightning or burglary,

housebreaking or theft;

(c) by malicious act;

 (d) whilst in transit (including the processes of loading and unloading)
incidental to such transit by road, rail, inland, waterway, lift or elevator.

xxx xxx xxx

[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of

Particulars; Record, p. 34; Emphasis supplied].

PANMALAY contends that the coverage of insured risks under the above section,
specifically Section III-1(a), is comprehensive enough to include damage to the insured
vehicle arising from collision or overturning due to the fault or negligence of a third
party. CANLUBANG is apparently of the same understanding. Based on a police report
wherein the driver of the insured car reported that after the vehicle was sideswiped by a
pick-up, the driver thereof fled the scene [Record, p. 20], CANLUBANG filed its claim
with PANMALAY for indemnification of the damage caused to its car. It then accepted
payment from PANMALAY, and executed a Release of Claim and Subrogation Receipt
in favor of latter.

Considering that the very parties to the policy were not shown to be in disagreement
regarding the meaning and coverage of Section III-1, specifically sub-paragraph (a)
thereof, it was improper for the appellate court to indulge in contract construction, to
apply the ejusdem generis rule, and to ascribe meaning contrary to the clear intention
and understanding of these parties.

It cannot be said that the meaning given by PANMALAY and CANLUBANG to the
phrase "by accidental collision or overturning" found in the first paint of sub-paragraph
(a) is untenable. Although the terms "accident" or "accidental" as used in insurance
contracts have not acquired a technical meaning, the Court has on several occasions
defined these terms to mean that which takes place "without one's foresight or
expectation, an event that proceeds from an unknown cause, or is an unusual effect of
a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance &
Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants
Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989].
Certainly, it cannot be inferred from jurisprudence that these terms, without qualification,
exclude events resulting in damage or loss due to the fault, recklessness or negligence
of third parties. The concept "accident" is not necessarily synonymous with the concept
of "no fault". It may be utilized simply to distinguish intentional or malicious acts from
negligent or careless acts of man.

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or
loss of, the insured vehicle due to negligent or careless acts of third parties is not listed
under the general and specific exceptions to the coverage of insured risks which are
enumerated in detail in the insurance policy itself [See Annex "A-1" of PANMALAY's
Compliance with Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY
regarding the coverage of Section III-1(a) of the policy is undeniably more beneficial to
CANLUBANG than that insisted upon by respondents herein. By arguing that this
section covers losses or damages due not only to malicious, but also to negligent acts
of third parties, PANMALAY in effect advocates for a more comprehensive coverage of
insured risks. And this, in the final analysis, is more in keeping with the rationale behind
the various rules on the interpretation of insurance contracts favoring the assured or
beneficiary so as to effect the dominant purpose of indemnity or payment [SeeCalanoc
v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and
Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of
Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA 327].

Parenthetically, even assuming for the sake of argument that Section III-1(a) of the
insurance policy does not cover damage to the insured vehicle caused by negligent acts
of third parties, and that PANMALAY's settlement of CANLUBANG's claim for damages
allegedly arising from a collision due to private respondents' negligence would amount
to unwarranted or "voluntary payment", dismissal of PANMALAY's complaint against
private respondents for no cause of action would still be a grave error of law.

For even if under the above circumstances PANMALAY could not be deemed
subrogated to the rights of its assured under Article 2207 of the Civil Code, PANMALAY
would still have a cause of action against private respondents. In the pertinent case
of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled
that the insurer who may have no rights of subrogation due to "voluntary" payment may
nevertheless recover from the third party responsible for the damage to the insured
property under Article 1236 of the Civil Code.

In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as
subrogee merely prays that it be allowed to institute an action to recover from third
parties who allegedly caused damage to the insured vehicle, the amount which it had
paid its assured under the insurance policy. Having thus shown from the above
discussion that PANMALAY has a cause of action against third parties whose
negligence may have caused damage to CANLUBANG's car, the Court holds that there
is no legal obstacle to the filing by PANMALAY of a complaint for damages against
private respondents as the third parties allegedly responsible for the damage.
Respondent Court of Appeals therefore committed reversible error in sustaining the
lower court's order which dismissed PANMALAY's complaint against private
respondents for no cause of action. Hence, it is now for the trial court to determine if in
fact the damage caused to the insured vehicle was due to the "carelessness,
recklessness and imprudence" of the driver of private respondent Erlinda Fabie.

WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's

complaint for damages against private respondents is hereby REINSTATED. Let the
case be remanded to the lower court for trial on the merits.

SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

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

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:

This is a novel question in insurance law: Can a common-law wife named as beneficiary
in the life insurance policy of a legally married man claim the proceeds thereof in case
of death of the latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life

Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for
Accidental Death for the same amount Buenaventura C. Ebrado designated T. Ebrado
as the revocable beneficiary in his policy. He to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit
by a failing branch of a tree. As the policy was in force, The Insular Life Assurance Co.,
Ltd. liable to pay the coverage in the total amount of P11,745.73, representing the face
value of the policy in the amount of P5,882.00 plus the additional benefits for accidental
death also in the amount of P5,882.00 and the refund of P18.00 paid for the premium
due November, 1969, minus the unpaid premiums and interest thereon due for January
and February, 1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit of
marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured.
She asserts that she is the one entitled to the insurance proceeds, not the common-law
wife, Carponia T. Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First
Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after
which, a pre-trial order was entered reading as follows:ñé+.£ªwph!1

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

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

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura
Cristor Ebrado and directing the payment of the insurance proceeds to the estate of the
deceased insured. The trial court held:ñé+.£ªwph!1
 It is patent from the last paragraph of Art. 739 of the Civil Code that a
criminal conviction for adultery or concubinage is not essential in order to
establish the disqualification mentioned therein. Neither is it also
necessary that a finding of such guilt or commission of those acts be
made in a separate independent action brought for the purpose. The guilt
of the donee (beneficiary) may be proved by preponderance of evidence
in the same proceeding (the action brought to declare the nullity of the
donation).

It is, however, essential that such adultery or concubinage exists at the

time defendant Carponia T. Ebrado was made beneficiary in the policy in
question for the disqualification and incapacity to exist and that it is only
necessary that such fact be established by preponderance of evidence in
the trial. Since it is agreed in their stipulation above-quoted that the
deceased insured and defendant Carponia T. Ebrado were living together
as husband and wife without being legally married and that the marriage
of the insured with the other defendant Pascuala Vda. de Ebrado was
valid and still existing at the time the insurance in question was purchased
there is no question that defendant Carponia T. Ebrado is disqualified from
becoming the beneficiary of the policy in question and as such she is not
entitled to the proceeds of the insurance upon the death of the insured.

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

We affirm the judgment of the lower court.

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

The following donations shall be void:

 1. Those made between persons who were guilty of adultery or
concubinage at the time of donation;

Those made between persons found guilty of the same criminal offense, in
consideration thereof;

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

by reason of his office.

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

2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured
pays out of liberality, the beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in Article 739 of the new Civil Code
should equally operate in life insurance contracts. The mandate of Article 2012 cannot
be laid aside: any person who cannot receive a donation cannot be named as
beneficiary in the life insurance policy of the person who cannot make the
donation. 5 Under American law, a policy of life insurance is considered as a testament and in
construing it, the courts will, so far as possible treat it as a will and determine the effect of a clause
designating the beneficiary by rules under which wins are interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every
reason to hold that the bar in donations between legitimate spouses and those between
illegitimate ones should be enforced in life insurance policies since the same are based
on similar consideration As above pointed out, a beneficiary in a fife insurance policy is
no different from a donee. Both are recipients of pure beneficence. So long as manage
remains the threshold of family laws, reason and morality dictate that the impediments
imposed upon married couple should likewise be imposed upon extra-marital
relationship. If legitimate relationship is circumscribed by these legal disabilities, with
more reason should an illicit relationship be restricted by these disabilities. Thus,
in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: ñé+.£ªwph!1

If the policy of the law is, in the language of the opinion of the then Justice
J.B.L. Reyes of that court (Court of Appeals), 'to prohibit donations in favor
of the other consort and his descendants because of and undue and
improper pressure and influence upon the donor, a prejudice deeply
rooted in our ancient law;" por-que no se enganen desponjandose el uno
al otro por amor que han de consuno' (According to) the Partidas (Part IV,
Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore invicem
spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et
uxorem); then there is very reason to apply the same prohibitive policy to
 persons living together as husband and wife without the benefit of
nuptials. For it is not to be doubted that assent to such irregular
connection for thirty years bespeaks greater influence of one party over
the other, so that the danger that the law seeks to avoid is correspondingly
increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad
Sabinum, fr. 1), 'it would not be just that such donations should subsist,
lest the condition 6f those who incurred guilt should turn out to be better.'
So long as marriage remains the cornerstone of our family law, reason
and morality alike demand that the disabilities attached to marriage should
likewise attach to concubinage.

It is hardly necessary to add that even in the absence of the above

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

4. We do not think that a conviction for adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may effectuate. More specifically, with record to the
disability on "persons who were guilty of adultery or concubinage at the time of the
donation," Article 739 itself provides:ñé+.£ªwph!1

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

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

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

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

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñ;oz Palma, Fernandez and Guerrero, JJ.,

concur. 1äwphï1.ñët

Footnotes ñé+.£ªwph!1

1 Sec. 53 of PD 612 provides: "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."

2 See Vance, at 99.

3 Musigi v. West Coast Life Insurance Co., 61 Phil. 867(1935).

4 See Tolentino, Civil Code, Vol. II, 1972, ed., at 525-26.

5 See Padilla, Civil Code Anno., Vol. VI, 1974 ed., at 501.

6 44 Am Jur. 2d 639

7 38 SCRA 287-88 (1971).

8 PVTA v. Delos Angeles, 61 SCRA 489 (1974).

 FIRST DIVISION

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, Petitioner,

vs. HONORABLE COURT OF APPEALS, Respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, Petitioner, vs. HON. COURT OF

APPEALS and NGO HING, Respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna &
Manalo for petitioner Company. chanrobles virtual law library

Voltaire Garcia for petitioner Mondragon. chanrobles virtual law library

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the

Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878,
p. 58), because the petitioners in both cases seek similar relief,
through these petitions for certiorari by way of appeal, from the
amended decision of respondent Court of Appeals which affirmed in
toto the decision of the Court of First Instance of Cebu, ordering
"the defendants (herein petitioners Great Pacific Ligfe Assurance
Company and Mondragon) jointly and severally to pay plaintiff
(herein private respondent Ngo Hing) the amount of P50,000.00
with interest at 6% from the date of the filing of the complaint, and
the sum of P1,077.75, without interest. chanroblesvirtualawl ibrarychanrob les virtual law l ibrary

It appears that on March 14, 1957, private respondent Ngo Hing

filed an application with the Great Pacific Life Assurance Company
(hereinafter referred to as Pacific Life) for a twenty-year
endownment policy in the amount of P50,000.00 on the life of his
one-year old daughter Helen Go. Said respondent supplied the
essential data which petitioner Lapulapu D. Mondragon, Branch
Manager of the Pacific Life in Cebu City wrote on the corresponding
form in his own handwriting (Exhibit I-M). Mondragon finally type-
wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum
of P1,077.75 going over to the Company, but he reatined the
amount of P1,317.00 as his commission for being a duly authorized
agebt of Pacific Life. Upon the payment of the insurance premuim,
the binding deposit receipt (Exhibit E) was issued to private
respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at
the bottom of the back page of the application form his strong
recommendation for the approval of the insurance application. Then
on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter
stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years old,
but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile
Non-Medical Declaration be sent to the company. chanroblesvirtualawli brarychanrobles virtua l law lib rary

The non-acceptance of the insurance plan by Pacific Life was

allegedly not communicated by petitioner Mondragon to private
respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote
back Pacific Life again strongly recommending the approval of the
20-year endowment insurance plan to children, pointing out that
since 1954 the customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M). chanroblesvirtualawlibra rychanrobles virtual law libra ry

It was when things were in such state that on May 28, 1957 Helen
Go died of influenza with complication of bronchopneumonia.
Thereupon, private respondent sought the payment of the proceeds
of the insurance, but having failed in his effort, he filed the action
for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to
against both petitioners.chanroblesvirtualawl ibrarychanrob les virtual law l ibrary
The decisive issues in these cases are: (1) whether the binding
deposit receipt (Exhibit E) constituted a temporary contract of the
life insurance in question; and (2) whether private respondent Ngo
Hing concealed the state of health and physical condition of Helen
Go, which rendered void the aforesaid Exhibit E. chanroblesvirtualawlib rarychanrobles virtua l law libra ry

1. At the back of Exhibit E are condition precedents required before

a deposit is considered a BINDING RECEIPT. These conditions state
that:

A. If the Company or its agent, shan have received the premium

deposit ... and the insurance application, ON or PRIOR to the date of
medical examination ... said insurance shan be in force and in
effect from the date of such medical examination, for such period as
is covered by the deposit ..., PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard
rates under its rule for the amount of insurance and the kind of
policy requested in the application.chanroblesvirtualawlibrarychanrob les virtual law l ibrary

D. If the Company does not accept the application on standard rate

for the amount of insurance and/or the kind of policy requested in
the application but issue, or offers to issue a policy for a different
plan and/or amount ..., the insurance shall not be in force and in
effect until the applicant shall have accepted the policy as issued
or offered by the Company and shall have paid the full premium
thereof. If the applicant does not accept the policy, the deposit shall
be refunded.

E. If the applicant shall not have been insurable under Condition A

above, and the Company declines to approve the application the
insurance applied for shall not have been in force at any time and
the sum paid be returned to the applicant upon the surrender of this
receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the

binding deposit receipt is intended to be merely a provisional or
temporary insurance contract and only upon compliance of the
following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company
does not accept the application and offers to issue a policy for a
different plan, the insurance contract shall not be binding until the
applicant accepts the policy offered; otherwise, the deposit shall be
reftmded; and (3) that if the applicant is not ble according to the
standard rates, and the company disapproves the application, the
insurance applied for shall not be in force at any time, and the
premium paid shall be returned to the applicant. chanroblesvirtualawl ibrary chanrobles virtua l law l ibrary

Clearly implied from the aforesaid conditions is that the binding

deposit receipt in question is merely an acknowledgment, on behalf
of the company, that the latter's branch office had received from
the applicant the insurance premium and had accepted the
application subject for processing by the insurance company; and
that the latter will either approve or reject the same on the basis of
whether or not the applicant is "insurable on standard rates." Since
petitioner Pacific Life disapproved the insurance application of
respondent Ngo Hing, the binding deposit receipt in question had
never become in force at any time. chanroblesvirtualawl ibrarychanrobles virtua l law l ibrary

Upon this premise, the binding deposit receipt (Exhibit E) is,

manifestly, merely conditional and does not insure outright. As held
by this Court, where an agreement is made between the applicant
and the agent, no liability shall attach until the principal approves
the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in
approving or rejecting the application. Thus, in life insurance, a
"binding slip" or "binding receipt" does not insure by itself (De Lim
vs. Sun Life Assurance Company of Canada, 41 Phil. 264). chanroblesvirtualawli brarychanrobles virtua l law lib rary

It bears repeating that through the intra-company communication

of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the
insurance application in question on the ground that it is not
offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan
known as the Juvenile Triple Action, which private respondent failed
to accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing over the 20-
year endowment life insurance in the amount of P50,000.00 in favor
of the latter's one-year old daughter, and with the non-compliance
of the abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly perfected
between thenl Accordingly, the deposit paid by private respondent
shall have to be refunded by Pacific Life. chanroblesvirtualawl ibrary chanrobles virtua l law lib rary

As held in De Lim vs. Sun Life Assurance Company of

Canada, supra, "a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents ...
The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be
dione, nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in agreement."
library
chanrobles virtual law

We are not impressed with private respondent's contention that

failure of petitioner Mondragon to communicate to him the rejection
of the insurance application would not have any adverse effect on
the allegedly perfected temporary contract (Respondent's Brief, pp.
13-14). In this first place, there was no contract perfected between
the parties who had no meeting of their minds. Private respondet,
being an authorized insurance agent of Pacific Life at Cebu branch
office, is indubitably aware that said company does not offer the life
insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance
that Pacific Life will approve the recommendation of Mondragon for
the acceptance and approval of the application in question along
with his proposal that the insurance company starts to offer the 20-
year endowment insurance plan for children less than seven years.
Nonetheless, the record discloses that Pacific Life had rejected the
proposal and recommendation. Secondly, having an insurable
interest on the life of his one-year old daughter, aside from being an
insurance agent and an offense associate of petitioner Mondragon,
private respondent Ngo Hing must have known and followed the
progress on the processing of such application and could not
pretend ignorance of the Company's rejection of the 20-year
endowment life insurance application. chanroblesvirtualaw librarychan robles virtual la w library

At this juncture, We find it fit to quote with approval, the very apt
observation of then Appellate Associate Justice Ruperto G. Martin
who later came up to this Court, from his dissenting opinion to the
amended decision of the respondent court which completely
reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of

rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon
reiterating the desire for applicant's father to have the application
considered as one for a 20-year endowment plan was ever duly
communicated to Ngo; Hing, father of the minor applicant. I am not
quite conninced that this was so. Ngo Hing, as father of the
applicant herself, was precisely the "underwriter who wrote this
case" (Exhibit H-1). The unchallenged statement of appellant
Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically
admits that said Ngo Hing was "our associate" and that it was the
latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is inconceivable
that the progress in the processing of the application was not
brought home to his knowledge. He must have been duly apprised
of the rejection of the application for a 20-year endowment plan
otherwise Mondragon would not have asserted that it was Ngo Hing
himself who insisted on the application as originally filed, thereby
implictly declining the offer to consider the application under the
Juvenile Triple Action Plan. Besides, the associate of Mondragon that
he was, Ngo Hing should only be presumed to know what kind of
policies are available in the company for minors below 7 years old.
What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the
business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is
however, adopted by the company, it can hardly be said that it
could have been bound at all under the binding slip for a plan of
insurance that it could not have, by then issued at all. (Amended
Decision, Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is

of the firm belief that private respondent had deliberately concealed
the state of health and piysical condition of his daughter Helen Go.
Wher private regpondeit supplied the required essential data for the
insurance application form, he was fully aware that his one-year old
daughter is typically a mongoloid child. Such a congenital physical
defect could never be ensconced nor disguished. Nonetheless,
private respondent, in apparent bad faith, withheld the fact materal
to the risk to be assumed by the insurance compary. As an
insurance agent of Pacific Life, he ought to know, as he surely must
have known. his duty and responsibility to such a material fact. Had
he diamond said significant fact in the insurance application fom
Pacific Life would have verified the same and would have had no
choice but to disapprove the application outright. chanroblesvirtualawli brary chanrobles virtual law libra ry

The contract of insurance is one of perfect good faith uberrima fides

meaning good faith, absolute and perfect candor or openness and
honesty; the absence of any concealment or demotion, however
slight [Black's Law Dictionary, 2nd Edition], not for the alone but
equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to communicate
that which a partY knows aDd Ought to communicate (Section 25,
Act No. 2427). Whether intentional or unintentional the concealment
entitles the insurer to rescind the contract of insurance (Section 26,
Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930;
Satumino vs. Philippine American Life Insurance Company, 7 SCRA
316). Private respondent appears guilty thereof. chanroblesvirtualawlib rary chanrobles virtual la w library

We are thus constrained to hold that no insurance contract was

perfected between the parties with the noncompliance of the
conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private
respondent. chanroblesvirtualawlibrary chanrob les virtual law l ibrary

WHEREFORE, the decision appealed from is hereby set aside, and in

lieu thereof, one is hereby entered absolving petitioners Lapulapu D.
Mondragon and Great Pacific Life Assurance Company from their
civil liabilities as found by respondent Court and ordering the
aforesaid insurance company to reimburse the amount of
P1,077.75, without interest, to private respondent, Ngo Hing. Costs
against private respondent. chanroblesvirtualawlib rary chanrobles virtual law lib rary

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera,

JJ., concur.
chanroblesvirtualawlib rary chanrobles virtual law library
Fernandez, J., took no part.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.

Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.

Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late
Joaquin Ma. Herrer to recover from the defendant life insurance company the sum of
pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment for
the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in Manila
for a life annuity. Two days later he paid the sum of P6,000 to the manager of the
company's Manila office and was given a receipt reading as follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela
Renta Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y
aprobacion de la Oficina Central de la Compañia.

The application was immediately forwarded to the head office of the company at
Montreal, Canada. On November 26, 1917, the head office gave notice of acceptance
by cable to Manila. (Whether on the same day the cable was received notice was sent
by the Manila office of Herrer that the application had been accepted, is a disputed
point, which will be discussed later.) On December 4, 1917, the policy was issued at
Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office
of the company stating that Herrer desired to withdraw his application. The following day
the local office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by Mr.
Torres on the morning of December 21, 1917. Mr. Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received
notice of acceptance of his application. To resolve this question, we propose to go
directly to the evidence of record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at
the time of the trial testified that he prepared the letter introduced in evidence as Exhibit
3, of date November 26, 1917, and handed it to the local manager, Mr. E. E. White, for
signature. The witness admitted on cross-examination that after preparing the letter and
giving it to he manager, he new nothing of what became of it. The local manager, Mr.
White, testified to having received the cablegram accepting the application of Mr. Herrer
from the home office on November 26, 1917. He said that on the same day he signed a
letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after
being signed, were sent to the chief clerk and placed on the mailing desk for
transmission. The witness could not tell if the letter had every actually been placed in
the mails. Mr. Tuason, who was the chief clerk, on November 26, 1917, was not called
as a witness. For the defense, attorney Manuel Torres testified to having prepared the
will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application
for a life annuity, and that he said that the only document relating to the transaction in
his possession was the provisional receipt. Rafael Enriquez, the administrator of the
estate, testified that he had gone through the effects of the deceased and had found no
letter of notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26,
1917, notifying Mr. Herrer that his application had been accepted, was prepared and
signed in the local office of the insurance company, was placed in the ordinary channels
for transmission, but as far as we know, was never actually mailed and thus was never
received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law
which should be applied to the facts. In order to reach our legal goal, the obvious
signposts along the way must be noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were
found in the Code of Commerce and the Civil Code. In the Code of the Commerce,
there formerly existed Title VIII of Book III and Section III of Title III of Book III, which
dealt with insurance contracts. In the Civil Code there formerly existed and presumably
still exist, Chapters II and IV, entitled insurance contracts and life annuities,
respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in
force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of
Book III of the code of Commerce. The law of insurance is consequently now found in
the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the
methods to be followed in order that there may be a contract of insurance. On the other
hand, the Civil Code, in article 1802, not only describes a contact of life annuity
markedly similar to the one we are considering, but in two other articles, gives strong
clues as to the proper disposition of the case. For instance, article 16 of the Civil Code
provides that "In matters which are governed by special laws, any deficiency of the latter
shall be supplied by the provisions of this Code." On the supposition, therefore, which is
incontestable, that the special law on the subject of insurance is deficient in enunciating
the principles governing acceptance, the subject-matter of the Civil code, if there be
any, would be controlling. In the Civil Code is found article 1262 providing that "Consent
is shown by the concurrence of offer and acceptance with respect to the thing and the
consideration which are to constitute the contract. An acceptance made by letter shall
not bind the person making the offer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered into at the place where the
offer was made." This latter article is in opposition to the provisions of article 54 of the
Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a
conclusion, then the only duty remaining is for the court to apply the law as it is found.
The legislature in its wisdom having enacted a new law on insurance, and expressly
repealed the provisions in the Code of Commerce on the same subject, and having thus
left a void in the commercial law, it would seem logical to make use of the only pertinent
provision of law found in the Civil code, closely related to the chapter concerning life
annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the
offer only from the date it came to his knowledge, may not be the best expression of
modern commercial usage. Still it must be admitted that its enforcement avoids
uncertainty and tends to security. Not only this, but in order that the principle may not be
taken too lightly, let it be noticed that it is identical with the principles announced by a
considerable number of respectable courts in the United States. The courts who take
this view have expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only the
mailing of acceptance, it has been said, completes the contract of insurance, as
the locus poenitentiae is ended when the acceptance has passed beyond the control of
the party. (I Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph
of article 1262 of the Civil Code providing that an acceptance made by letter shall not
bind the person making the offer except from the time it came to his knowledge. The
pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to
be a medical examination of the applicant; (2) there had to be approval of the
application by the head office of the company; and (3) this approval had in some way to
be communicated by the company to the applicant. The further admitted facts are that
the head office in Montreal did accept the application, did cable the Manila office to that
effect, did actually issue the policy and did, through its agent in Manila, actually write the
letter of notification and place it in the usual channels for transmission to the addressee.
The fact as to the letter of notification thus fails to concur with the essential elements of
the general rule pertaining to the mailing and delivery of mail matter as announced by
the American courts, namely, when a letter or other mail matter is addressed and
mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the
ordinary course of the mails. But if any one of these elemental facts fails to appear, it is
fatal to the presumption. For instance, a letter will not be presumed to have been
received by the addressee unless it is shown that it was deposited in the post-office,
properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et
seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because
it has not been proved satisfactorily that the acceptance of the application ever came to
the knowledge of the applicant. lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the
sum of P6,000 with legal interest from November 20, 1918, until paid, without special
finding as to costs in either instance. So ordered.

Mapa, C.J., Araullo, Avanceña and Villamor, JJ., concur.

Johnson, J., dissents.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 95546 November 6, 1992

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,

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

BELLOSILLO, J.:

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

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

the thing is exposed to the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies.

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., issued in favor of
petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No.
AH-CPP-9210452 on the latter's building and premises, for a period beginning 1 March
1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was
paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November
1982, all of which were accepted by private respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-
CPP-9210596, which replaced and renewed the previous policy, for a term covering 1
March 1983 to 1 March 1984. The premium in the amount of P466,103.05 was again
paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9 September 1983,
and 21 November 1983. All payments were likewise accepted by private respondent.

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

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

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

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

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

3. Subject to no loss prior to premium payment. If there be any loss such

is not covered.

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

After some incidents, petitioner and private respondent moved for summary judgment.

On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon
the following findings:

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

As regards the unpaid premiums on Insurance Policy No. AH-CPP-

9210651, in view of the reservation in the receipts ordinarily issued by the
plaintiff on premium payments the only plausible conclusion is that plaintiff
has no right to demand their payment after the lapse of the term of said
policy on March 1, 1985. Therefore, the defendant was justified in refusing
to pay the same. 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of
Appeals rendered a decision 2modifying that of the trial court by ordering herein
petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained —

The obligation to pay premiums when due is ordinarily as indivisible

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

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

To our mind, the insurance contract became valid and binding upon
payment of the first premium, and the plaintiff could not have denied
liability on the ground that payment was not made in full, for the reason
that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the insurance
policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of
Sec. 77 of the Insurance Code, as amended, and by the conditions stipulated by the
insurer in its receipts, disclaiming liability for loss for occurring before payment of
premiums.

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

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

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

While the import of Section 77 is that prepayment of premiums is strictly

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

The reliance by petitioner on Arce vs. Capital Surety and Insurance

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

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

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

SO ORDERED.

Cruz, Padilla and Griño-Aquino, JJ., concur.

Medialdea, J., is on leave.

Footnotes

1 Rollo, p. 85.

2 Penned by Mme. Justice Minerva P. Gonzaga-Reyes, concurred by Mr.

Justice Ricardo J. Francisco and Mme. Justice Salome A. Montoya.

3 Decision, pp. 6-7; Rollo, pp. 36-37.

4 Rollo, pp. 41-42.

5 No. L-28501, September 30, 1982, 117 SCRA 63.