1
FIRST DIVISION  trade, goods in process and/or inventories only
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,  and the particulars of such insurance or insurances
vs. COURT OF APPEALS and COUNTRY
BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court
is the decision1 of the Court of Appeals in CA-G.R.
SP No. 31916, entitled "Country Bankers Insurance
Corporation versus Armando Geagonia," reversing
the decision of the Insurance Commission in I.C.
Case No. 3340 which awarded the claim of
petitioner Armando Geagonia against private
respondent Country Bankers Insurance
Corporation.
The petitioner is the owner of Norman's Mart
located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he
obtained from the private respondent fire
insurance policy No. F-146222 for P100,000.00. The
period of the policy was from 22 December 1989 to
22 December 1990 and covered the following:
"Stock-in-trade consisting principally of dry goods
such as RTW's for men and women wear and other
usual to assured's business."
The petitioner declared in the policy under the
subheading entitled CO-INSURANCE that Mercantile
Insurance Co., Inc. was the co-insurer for
P50,000.00. From 1989 to 1990, the petitioner had
in his inventory stocks amounting to P392,130.50,
itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. 86,432.50
Merchandise
Cebu Tesing 250,000.00 (on credit)
Textiles
—————
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of
any insurance or insurances already affected, or
which may subsequently be effected, covering any
of the property or properties consisting of stocks in
however, he had no knowledge of the provision in
hereby insured, and unless such notice be given
be stated therein or endorsed in this policy
pursuant to Section 50 of the Insurance Code, by or
on behalf of the Company before the occurrence of
any loss or damage, all benefits under this policy
shall be deemed forfeited, provided however, that
this condition shall not apply when the total
insurance or insurances in force at the time of the
loss or damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out
at around 7:30 p.m. at the public market of San
Francisco, Agusan del Sur. The petitioner's insured
stock-in-trade were completely destroyed
prompting him to file with the private respondent a
claim under the policy. On 28 December 1990, the
private respondent denied the claim because it
found that at the time of the loss the petitioner's
stocks-in-trade were likewise covered by fire
insurance policies No. GA-28146 and No. GA-
28144, for P100,000.00 each, issued by the Cebu
Branch of the Philippines First Insurance Co., Inc.
(hereinafter PFIC). 3 These policies indicate that the
insured was "Messrs. Discount Mart (Mr. Armando
Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to
Messrs. Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of this
policy. CO-INSURANCE DECLARED: P100,000. —
Phils. First CEB/F 24758. 4
The basis of the private respondent's denial was
the petitioner's alleged violation of Condition 3 of
the policy.
The petitioner then filed a complaint 5 against the
private respondent with the Insurance Commission
(Case No. 3340) for the recovery of P100,000.00
under fire insurance policy No. F-14622 and for
attorney's fees and costs of litigation. He attached
as Annex "AM"6 thereof his letter of 18 January
1991 which asked for the reconsideration of the
denial. He admitted in the said letter that at the
time he obtained the private respondent's fire
insurance policy he knew that the two policies
issued by the PFIC were already in existence;
the private respondent's policy requiring him to
inform it of the prior policies; this requirement was
not mentioned to him by the private respondent's
agent; and had it been mentioned, he would not
have withheld such information. He further
asserted that the total of the amounts claimed
under the three policies was below the actual value
of his stocks at the time of loss, which was
P1,000,000.00.
In its answer,7 the private respondent specifically
denied the allegations in the complaint and set up
as its principal defense the violation of Condition 3
of the policy.
In its decision of 21 June 1993,8 the Insurance
Commission found that the petitioner did not
violate Condition 3 as he had no knowledge of the
existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without
informing him or securing his consent; and that
Cebu Tesing Textile, as his creditor, had insurable
interest on the stocks. These findings were based
on the petitioner's testimony that he came to know
of the PFIC policies only when he filed his claim
with the private respondent and that Cebu Tesing
Textile obtained them and paid for their premiums
without informing him thereof. The Insurance
Commission then decreed:
WHEREFORE, judgment is hereby rendered
ordering the respondent company to pay
complainant the sum of P100,000.00 with legal
interest from the time the complaint was filed until
fully satisfied plus the amount of P10,000.00 as
attorney's fees. With costs. The compulsory
counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the
decision 9 having been denied by the Insurance
Commission in its resolution of 20 August
1993, 10 the private respondent appealed to the
Court of Appeals by way of a petition for review.
The petition was docketed as CA-G.R. SP No.
31916.

In its decision of 29 December 1993, 11 the Court of
Appeals reversed the decision of the Insurance
Commission because it found that the petitioner
knew of the existence of the two other policies
issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA
28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner
herein]. The policy states that "DISCOUNT MART
(MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the
mortgagee of the goods.
In addition, the premiums on both policies were
paid for by private respondent, not by the Tesing
Textiles which is alleged to have taken out the
other insurance without the knowledge of private
respondent. This is shown by Premium Invoices
nos. 46632 and 46630. (Annexes M and N). In both
invoices, Tesing Textiles is indicated to be only the
mortgagee of the goods insured but the party to
which they were issued were the "DISCOUNT MART
(MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent
[petitioner herein] who took out the policies on the
same property subject of the insurance with
petitioner. Hence, in failing to disclose the
existence of these insurances private respondent
violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of
knowledge of the provisions insurances is belied by
his letter to petitioner [of 18 January 1991. The
body of the letter reads as follows;]xxx xxx xxx
Please be informed that I have no knowledge of the
provision requiring me to inform your office about
my  C — . . . WHEN IT DISMISSED THE CLAIM OF THE
prior insurance under FGA-28146 and F-CEB-
24758. Your representative did not mention about
said requirement at the time he was convincing me
to insure with you. If he only die or even inquired if
I had other existing policies covering my
establishment, I would have told him so. You will
note that at the time he talked to me until I
decided to insure with your company the two
policies aforementioned were already in effect.
2
Therefore I would have no reason to withhold such
information and I would have desisted to part with
my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested
in protecting my investments. The actual value of
my stocks damaged by the fire was estimated by
the Police Department to be P1,000,000.00 (Please
see xerox copy of Police Report Annex "A"). My
Income Statement as of December 31, 1989 or five
months before the fire, shows my merchandise
inventory was already some P595,455.75. . . .
These will support my claim that the amount
claimed under the three policies are much below
the value of my stocks lost. xxx xxx xxx
The letter contradicts private respondent's
pretension that he did not know that there were
other insurances taken on the stock-in-trade and
seriously puts in question his credibility.”
His motion to reconsider the adverse decision
having been denied, the petitioner filed the instant
petition. He contends therein that the Court of
Appeals acted with grave abuse of discretion
amounting to lack or excess of jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS OF
FACTS OF THE INSURANCE COMMISSION, A QUASI-
JUDICIAL BODY CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND WHOSE
DECISION IS ACCORDED RESPECT AND EVEN
FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE
MATTERS WHICH WERE NOT PRESENTED AS
EVIDENCE DURING THE HEARING OR TRIAL; AND
PETITIONER HEREIN AGAINST THE PRIVATE
RESPONDENT.
The chief issues that crop up from the first and
third grounds are (a) whether the petitioner had
prior knowledge of the two insurance policies
issued by the PFIC when he obtained the fire
insurance policy from the private respondent,
thereby, for not disclosing such fact, violating
Condition 3 of the policy, and (b) if he had, whether
he is precluded from recovering therefrom.
The second ground, which is based on the Court of
Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without
merit. The petitioner claims that the said letter was
not offered in evidence and thus should not have
been considered in deciding the case. However, as
correctly pointed out by the Court of Appeals, a
copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M"
thereof and made integral part of the
complaint. 12 It has attained the status of a judicial
admission and since its due execution and
authenticity was not denied by the other party, the
petitioner is bound by it even if it were not
introduced as an independent evidence. 13
As to the first issue, the Insurance Commission
found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals
disagreed and found otherwise in view of the
explicit admission by the petitioner in his letter to
the private respondent of 18 January 1991, which
was quoted in the challenged decision of the Court
of Appeals. These divergent findings of fact
constitute an exception to the general rule that in
petitions for review under Rule 45, only questions
of law are involved and findings of fact by the
Court of Appeals are conclusive and binding upon
this Court. 14
We agree with the Court of Appeals that the
petitioner knew of the prior policies issued by the
PFIC. His letter of 18 January 1991 to the private
respondent conclusively proves this knowledge. His
testimony to the contrary before the Insurance
Commissioner and which the latter relied upon
cannot prevail over a written admission made ante
litem motam. It was, indeed, incredible that he did
not know about the prior policies since these
policies were not new or original. Policy No. GA-
28144 was a renewal of Policy No. F-24758, while
Policy No. GA-28146 had been renewed twice, the
previous policy being F-24792.
Condition 3 of the private respondent's Policy No.
F-14622 is a condition which is not proscribed by
law. Its incorporation in the policy is allowed by

Section 75 of the Insurance Code 15 which provides
that "[a] policy may declare that a violation of
specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid the policy." Such a condition is a
provision which invariably appears in fire insurance
policies and is intended to prevent an increase in
the moral hazard. It is commonly known as the
additional or "other insurance" clause and has
been upheld as valid and as a warranty that no
other insurance exists. Its violation would thus
avoid the  contract himself. Hence, any act of the mortgagor
policy. 16 However, in order to constitute a
violation, the other insurance must be upon same
subject matter, the same interest therein, and the
same risk.17
As to a mortgaged property, the mortgagor and the
mortgagee have each an independent insurable
interest therein and both interests may be one
policy, or each may take out a separate policy
covering his interest, either at the same or at
separate times. 18 The mortgagor's insurable
interest covers the full value of the mortgaged
property, even though the mortgage debt is
equivalent to the full value of the property.19 The
mortgagee's insurable interest is to the extent of
the debt, since the property is relied upon as
security thereof, and in insuring he is not insuring
the property but his interest or lien thereon. His
insurable interest is prima facie the value
mortgaged and extends only to the amount of the
debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering
different insurable interests may be obtained by
the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for
the benefit of the mortgagee, which is the usual
practice. The mortgagee may be made the
beneficial payee in several ways. He may become
the assignee of the policy with the consent of the
insurer; or the mere pledgee without such consent;
or the original policy may contain a mortgage
clause; or a rider making the policy payable to the
mortgagee "as his interest may appear" may be
attached; or a "standard mortgage clause,"
containing a collateral independent contract
between the mortgagee and insurer, may be
attached; or the policy, though by its terms
3
payable absolutely to the mortgagor, may have
been procured by a mortgagor under a contract
duty to insure for the mortgagee's benefit, in which
case the mortgagee acquires an equitable lien
upon the proceeds. 21
In the policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as
such by the insurer but not made a party to the
which defeats his right will also defeat the right of
the mortgagee. 22 This kind of policy covers only
such interest as the mortgagee has at the issuing
of the policy.23
On the other hand, a mortgagee may also procure
a policy as a contracting party in accordance with
the terms of an agreement by which the mortgagor
is to pay the premiums upon such insurance. 24 It
has been noted, however, that although the
mortgagee is himself the insured, as where he
applies for a policy, fully informs the authorized
agent of his interest, pays the premiums, and
obtains on the assurance that it insures him, the
policy is in fact in the form used to insure a
mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name
the petitioner as the assured and contain a
mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING
TEXTILES, Cebu City as their interest may appear
subject to the terms of this policy.”
This is clearly a simple loss payable clause, not a
standard mortgage clause.
It must, however, be underscored that unlike the
"other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or
in Pioneer Insurance & Surety
Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of
any insurance or insurances already effected, or
which may subsequently be effected covering any
of the property hereby insured, and unless such
notice be given and the particulars of such
insurance or insurances be stated in or endorsed
on this Policy by or on behalf of the Company
before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial
Union Assurance 
Co. 28 which provided "that any outstanding
insurance upon the whole or a portion of the
objects thereby assured must be declared by the
insured in writing and he must cause the company
to add or insert it in the policy, without which such
policy shall be null and void, and the insured will
not be entitled to indemnity in case of
loss," Condition 3 in the private respondent's policy
No. F-14622 does not absolutely declare void any
violation thereof. It expressly provides that the
condition "shall not apply when the total insurance
or insurances in force at the time of the loss or
damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or
insurance contract is to be interpreted liberally in
favor of the insured and strictly against the
company, the reason being, undoubtedly, to afford
the greatest protection which the insured was
endeavoring to secure when he applied for
insurance. It is also a cardinal principle of law that
forfeitures are not favored and that any
construction which would result in the forfeiture of
the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to
construe the policy in a manner which would
permit recovery, as, for example, by finding a
waiver for such forfeiture. 29 Stated differently,
provisions, conditions or exceptions in policies
which tend to work a forfeiture of insurance
policies should be construed most strictly against
those for whose benefits they are inserted, and
most favorably toward those against whom they
are intended to operate. 30 The reason for this is
that, except for riders which may later be inserted,
the insured sees the contract already in its final
form and has had no voice in the selection or
arrangement of the words employed therein. On
the other hand, the language of the contract was
carefully chosen and deliberated upon by experts
and legal advisers who had acted exclusively in the

interest of the insurers and the technical language
employed therein is rarely understood by ordinary
laymen. 31
With these principles in mind, we are of the opinion
that Condition 3 of the subject policy is not totally
free from ambiguity and must, perforce, be
meticulously analyzed. Such analysis leads us to
conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy
shall only be to the extent exceeding P200,000.00
of the total policies obtained.
The first conclusion is supported by the portion of
the condition referring to other insurance "covering
any of the property or properties consisting of
stocks in trade, goods in process and/or inventories
only hereby insured," and the portion regarding the
insured's declaration on the subheading CO-
INSURANCE that the co-insurer is Mercantile
Insurance Co., Inc. in the sum of P50,000.00. A
double insurance exists where the same person is
insured by several insurers separately in respect of
the same subject and interest. As earlier stated,
the insurable interests of a mortgagor and a
mortgagee on the mortgaged property are distinct
and separate. Since the two policies of the PFIC do
not cover the same interest as that covered by the
policy of the private respondent, no double
insurance exists. The non-disclosure then of the
former policies was not fatal to the petitioner's
right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself
that such condition shall not apply if the total
insurance in force at the time of loss does not
exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a
loss not exceeding P200,000.00. What it had in
mind was to discourage over-insurance. Indeed,
the rationale behind the incorporation of "other
insurance" clause in fire policies is to prevent over-
insurance and thus avert the perpetration of fraud.
When a property owner obtains insurance policies
from two or more insurers in a total amount that
exceeds the property's value, the insured may
have an inducement to destroy the property for the
purpose of collecting the insurance. The public as
well as the insurer is interested in preventing a
4
situation in which a fire would be profitable to the
insured.32
WHEREFORE, the instant petition is hereby
GRANTED. The decision of the Court of Appeals in
CA-G.R. SP No. 31916 is SET ASIDE and the
decision of the Insurance Commission in Case No.
3340 is REINSTATED.
Costs against private respondent Country Bankers
Insurance Corporation.
SO ORDERED.
SECOND DIVISION
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE
CORP., petitioner,
vs. COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules
of Court, assails the Decision 1 dated May 17, 1993,
of the Court of Appeals and its Resolution 2 dated
January 4, 1994 in CA-G.R. CV No. 18341. The
appellate court affirmed in toto the judgment of
the Misamis Oriental Regional Trial Court, Branch
18, in an insurance claim filed by private
respondent against Great Pacific Life Assurance Co.
The dispositive portion of the trial court's decision
reads:
WHEREFORE, judgment is rendered adjudging the
defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy
No. G-1907, in relation to Certification B-18558
liable and ordered to pay to the DEVELOPMENT
BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of
EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages,
attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the
defendant and dismissing the complaint in respect
to the plaintiffs, other than the widow-beneficiary,
for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as
follows:
A contract of group life insurance was executed
between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and
Development Bank of the Philippines (hereinafter
DBP). Grepalife agreed to insure the lives of eligible
housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a
physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an
application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for
a heart condition, high blood pressure, cancer,
diabetes, lung; kidney or stomach disorder or any
other physical impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in
good health?
Answer: [x] Yes [ ] NO. 4
On November 15, 1983, Grepalife issued Certificate
No. B-18558, as insurance coverage of Dr.
Leuterio, to the extent of his DBP mortgage
indebtedness amounting to eighty-six thousand,
two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to
"massive cerebral hemorrhage." Consequently,
DBP submitted a death claim to Grepalife.
Grepalife denied the claim alleging that Dr.
Leuterio was not physically healthy when he
applied for an insurance coverage on November
15, 1983. Grepalife insisted that Dr. Leuterio did
not disclose he had been suffering from
hypertension, which caused his death. Allegedly,
such non-disclosure constituted concealment that
justified the denial of the claim.
On October 20, 1986, the widow of the late Dr.
Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis
Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5During the trial, Dr.
Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia's findings, based
partly from the information given by the
respondent widow, stated that Dr. Leuterio

complained of headaches presumably due to high
blood pressure. The inference was not conclusive
because Dr. Leuterio was not autopsied, hence,
other causes were not ruled out.
On February 22, 1988, the trial court rendered a
decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals
sustained the trial court's decision. Hence, the
present petition. Petitioners interposed the
following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
WHICH IS NOT A PARTY TO THE CASE FOR
PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-
APPELLANT [Petitioner Grepalife] FOR LACK OF
CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING
THE CASE FOR WANT OF JURISDICTION OVER THE
SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL
AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH
ITS GROUP INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT
THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN
THE GROUP LIFE INSURANCE PLAN BETWEEN
DEFENDANT-APPELLANT OF THE INSURANCE CLAIM
ARISING FROM THE DEATH OF WILFREDO
LEUTERIO. 6
Synthesized below are the assigned errors for our
resolution:
5
1. Whether the Court of Appeals erred in holding
petitioner liable to DBP as beneficiary in a group
life insurance contract from a complaint filed by
the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not
finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding
Grepalife liable in the amount of eighty six
thousand, two hundred (P86,200.00) pesos without
proof of the actual outstanding mortgage payable
by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted
by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no
jurisdiction over the case. It argues that when the
Court of Appeals affirmed the trial court's
judgment, Grepalife was held liable to pay the
proceeds of insurance contract in favor of DBP, the
indispensable party who was not joined in the suit.
To resolve the issue, we must consider the
insurable interest in mortgaged properties and the
parties to this type of contract. The rationale of a
group insurance policy of mortgagors, otherwise
known as the "mortgage redemption insurance," is
a device for the protection of both the mortgagee
and the mortgagor. On the part of the mortgagee,
it has to enter into such form of contract so that in
the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be
applied to the payment of the mortgage debt,
thereby relieving the heirs of the mortgagor from
paying the obligation. 7 In a similar vein, ample
protection is given to the mortgagor under such a
concept so that in the event of death; the
mortgage obligation will be extinguished by the
application of the insurance proceeds to the
mortgage indebtedness. 8 Consequently, where the
mortgagor pays the insurance premium under the
group insurance policy, making the loss payable to
the mortgagee, the insurance is on the mortgagor's
interest, and the mortgagor continues to be a party
to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance
fund, such loss-payable clause does not make the
mortgagee a party to the contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of
property effects insurance in his own name
providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon
the interest of the mortgagor, who does not cease
to be a party to the original contract, and any act
of his, prior to the loss, which would otherwise
avoid the insurance, will have the same effect,
although the property is in the hands of the
mortgagee, but any act which, under the contract
of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein
named, with the same effect as if it had been
performed by the mortgagor.”
The insured private respondent did not cede to the
mortgagee all his rights or interests in the
insurance, the policy stating that: "In the event of
the debtor's death before his indebtedness with
the Creditor [DBP] shall have been fully paid, an
amount to pay the outstanding indebtedness shall
first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the
beneficiary/ies designated by the debtor." 10 When
DBP submitted the insurance claim against
petitioner, the latter denied payment thereof,
interposing the defense of concealment committed
by the insured. Thereafter, DBP collected the debt
from the mortgagor and took the necessary action
of foreclosure on the residential lot of private
respondent. 11 In Gonzales La O vs. Yek Tong Lin
Fire & Marine Ins. Co. 12 we held:
Insured, being the person with whom the contract
was made, is primarily the proper person to bring
suit thereon. * * * Subject to some exceptions,
insured may thus sue, although the policy is taken
wholly or in part for the benefit of another person
named or unnamed, and although it is expressly
made payable to another as his interest may
appear or otherwise. * * * Although a policy issued
to a mortgagor is taken out for the benefit of the
mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name,

especially where the mortgagee's interest is less
than the full amount recoverable under the
policy, * * *.
And in volume 33, page 82, of the same work, we
read the following:
Insured may be regarded as the real party in
interest, although he has assigned the policy for
the purpose of collection, or has assigned as
collateral security any judgment he may obtain. 13”
And since a policy of insurance upon life or health
may pass by transfer, will or succession to any
person, whether he has an insurable interest or
not, and such person may recover it whatever the
insured might have recovered, 14the widow of the
decedent Dr. Leuterio may file the suit against the
insurer, Grepalife.
The second assigned error refers to an alleged
concealment that the petitioner interposed as its
defense to annul the insurance contract. Petitioner
contends that Dr. Leuterio failed to disclose that he
had hypertension, which might have caused his
death. Concealment exists where the assured had
knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that
he should communicate it to the assured, but he
designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the
attending physician, Dr. Hernando Mejia, as
supported by the information given by the widow
of the decedent. Grepalife asserts that Dr. Mejia's
technical diagnosis of the cause of death of Dr.
Leuterio was a duly documented hospital record,
and that the widow's declaration that her husband
had "possible hypertension several years ago"
should not be considered as hearsay, but as part
of res gestae.
On the contrary the medical findings were not
conclusive because Dr. Mejia did not conduct an
autopsy on the body of the decedent. As the
attending physician, Dr. Mejia stated that he had
no knowledge of Dr. Leuterio's any previous
hospital confinement. 16 Dr. Leuterio's death
certificate stated that hypertension was only "the
6
possible cause of death." The private respondent's
statement, as to the medical history of her
husband, was due to her unreliable recollection of
events. Hence, the statement of the physician was
properly considered by the trial court as hearsay.
The question of whether there was concealment
was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his
insurance application that he was in good health
and that he had not consulted a doctor or any of
the enumerated ailments, including hypertension;
when he died the attending physician had certified
in the death certificate that the former died of
cerebral hemorrhage, probably secondary to
hypertension. From this report, the appellant
insurance company refused to pay the insurance
claim. Appellant alleged that the insured had
concealed the fact that he had hypertension.
Contrary to appellant's allegations, there was no
sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the
insured's widow who was not even sure if the
medicines taken by Dr. Leuterio were for
hypertension, the appellant had not proven nor
produced any witness who could attest to Dr.
Leuterio's medical history . . . xxx xxx xxx
Appellant insurance company had failed to
establish that there was concealment made by the
insured, hence, it cannot refuse payment of the
claim. 17”
The fraudulent intent on the part of the insured
must be established to entitle the insurer to
rescind the contract.18Misrepresentation as a
defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence
rests upon the insurer. 19 In the case at bar, the
petitioner failed to clearly and satisfactorily
establish its defense, and is therefore liable to pay
the proceeds of the insurance.
And that brings us to the last point in the review of
the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's
outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's
failure to establish the same, the action for specific
performance should be dismissed. Petitioner's
claim is without merit. A life insurance policy is a
valued policy. 20 Unless the interest of a person
insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a
policy of insurance upon life or health is the sum
fixed in the policy. 21 The mortgagor paid the
premium according to the coverage of his
insurance, which states that:
The policy states that upon receipt of due proof of
the Debtor's death during the terms of this
insurance, a death benefit in the amount of
P86,200.00 shall be paid.
In the event of the debtor's death before his
indebtedness with the creditor shall have been
fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the Creditor and
the balance of the Sum Assured, if there is any
shall then be paid to the beneficiary/ies designated
by the debtor." 22(Emphasis omitted)
However, we noted that the Court of Appeals'
decision was promulgated on May 17, 1993. In
private respondent's memorandum, she states that
DBP foreclosed in 1995 their residential lot, in
satisfaction of mortgagor's outstanding loan.
Considering this supervening event, the insurance
proceeds shall inure to the benefit of the heirs of
the deceased person or his beneficiaries. Equity
dictates that DBP should not unjustly enrich itself
at the expense of another (Nemo cum alterius
detrimenio protest). Hence, it cannot collect the
insurance proceeds, after it already foreclosed on
the mortgage. The proceeds now rightly belong to
Dr. Leuterio's heirs represented by his widow,
herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The
Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION
that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the
heirs of the insured, Dr. Wilfredo Leuterio
(deceased), upon presentation of proof of prior

settlement of mortgagor's indebtedness to
Development Bank of the Philippines. Costs against
petitioner.
SO ORDERED.
SECOND DIVISION
 G.R. No. 128833 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION,
UY CHUN BING AND ELI D. LAO, petitioners,  As security for its credit facilities with RCBC, GOYU
vs. COURT OF APPEALS and GOYU & SONS,
INC., respondents.
G.R. No. 128834 April 20, 1998
RIZAL COMMERCIAL BANKING
CORPORATION, petitioners,  mortgage contracts, GOYU committed itself to
vs. COURT OF APPEALS, ALFREDO C.
SEBASTIAN, GOYU & SONS, INC., GO SONG
HIAP, SPOUSES GO TENG KOK and BETTY
CHIU SUK YING alias BETTY GO, respondents.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., petitioners,  GOYU obtained in its name a total of ten insurance
vs. GOYU & SONS, INC. respondent.
MELO, J.:
The issue relevant to the herein three consolidated
petitions revolve around the fire loss claims of
respondent Goyu & Sons, Inc. (GOYU) with
petitioner Malayan Insurance Company, Inc. (MICO)
in connection with the mortgage contracts entered
into by and between Rizal Commercial Banking
Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its
claims in the total amount of P74,040,518.58, plus
37% interest per annum commending July 27,
1992. RCBC was ordered to pay actual and
compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily
liable to pay GOYU P1,500,000.00 as exemplary
damages and P1,500,000.00 for attorney's fees.
GOYU's obligation to RCBC was fixed at
P68,785,069.04 as of April 1992, without any
interest, surcharges, and penalties. RCBC and
MICO appealed separately but, in view of the
common facts and issues involved, their individual
petitions were consolidated.
The undisputed facts may be summarized as
follows:
GOYU applied for credit facilities and
accommodations with RCBC at its Binondo Branch.
After due evaluation, RCBC Binondo Branch,
through its key officers, petitioners Uy Chun Bing
and Eli D. Lao, recommended GOYU's application
for approval by RCBC's executive committee. A
7
credit facility in the amount of P30 million was
initially granted. Upon GOYU's application and Uy's
and Lao's recommendation, RCBC's executive
committee increased GOYU's credit facility to P50
million, then to P90 million, and finally to P117
million.
executed two real estate mortgages and two
chattel mortgages in favor of RCBC, which were
registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four
insure the mortgaged property with an insurance
company approved by RCBC, and subsequently, to
endorse and deliver the insurance polices to RCBC.
policies from MICO. In February 1992, Alchester
Insurance Agency, Inc., the insurance agent where
GOYU obtained the Malayan insurance policies,
issued nine endorsements in favor of RCBC
seemingly upon instructions of GOYU (Exhibits "1-
Malayan" to "9-Malayan").
On April 27, 1992, one of GOYU's factory buildings
in Valenzuela was gutted by fire. Consequently,
GOYU submitted its claim for indemnity on account
of the loss insured against. MICO denied the claim
on the ground that the insurance policies were
either attached pursuant to writs of
attachments/garnishments issued by various
courts or that the insurance proceeds were also
claimed by other creditors of GOYU alleging better
rights to the proceeds than the insured. GOYU filed
a complaint for specific performance and damages
which was docketed at the Regional Trial Court of
the National Capital Judicial Region (Manila, Branch
3) as Civil Case No. 93-65442, now subject of the
present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO
its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the
same reasons that MICO denied GOYU's claims.
In an interlocutory order dated October 12, 1993
(Record, pp. 311-312), the Regional Trial Court of
Manila (Branch 3), confirmed that GOYU's other
creditors, namely, Urban Bank, Alfredo Sebastian,
and Philippine Trust Company obtained their
respective writs of attachments from various
courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of
the ten insurance policies be deposited with the
said court minus the aforementioned
P14,938,080.23. Accordingly, on January 7, 1994,
MICO deposited the amount of P50,505,594.60 with
Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment
was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75
(Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered
judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor
of the plaintiff and against the defendant, Malayan
Insurance Company, Inc. and Rizal Commercial
Banking Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total
amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by was of interest
for the duration of the delay since July 27, 1992
(ninety days after defendant insurer's receipt of
the required proof of loss and notice of loss) at the
rate of twice the ceiling prescribed by the Monetary
Board, on the following amounts:
1) P50,000,000.00 — from July 27, 1992 up to the
time said amount was deposited with this Court on
January 7, 1994;
2) P24,040,518.58 — from July 27, 1992 up to the
time when the writs of attachments were received
by defendant Malayan;
2. For defendant Rizal Commercial Banking
Corporation:
a. To pay the plaintiff actual and compensatory
damages in the amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the
following amounts:

1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorney's fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC,
ordering the plaintiff to pay its loan obligations with
defendant RCBC in the amount of P68,785,069.04,
as of April 27, 1992, with interest thereon at the
rate stipulated in the respective promissory notes
(without surcharges and penalties) per
computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial
Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of
P50,000,000.00 deposited with the Court by
defendant Malayan, together with all the interest
earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their
respective appeals. GOYU was unsatisfied with the
amount awarded in its favor. MICO and RCBC
disputed the trial court's findings of liability on
their part. The Court of Appeals party granted
GOYU's appeal, but sustained the findings of the
trial court with respect to MICO and RCBC's
liabilities, thusly:
WHEREFORE, the decision of the lower court dated
June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total
amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus
deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu
receives the said amount at the rate of thirty-seven
(37%) percent per annum which is twice the ceiling
prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING
CORPORATION;
a) To pay the plaintiff actual and compensatory
damages in the amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO.,
INC., RIZAL COMMERCIAL BANKING CORPORATION,
UY CHUN BING AND ELI D. LAO:
8
a) To pay the plaintiff jointly and severally the
following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.
4. And on RCBC's Counterclaim, ordering the
plaintiff Goyu & Sons, Inc. to pay its loan obligation
with RCBC in the amount of P68,785,069.04 as of
April 27, 1992 without any interest, surcharges and
penalties.
The Clerk of the Court of the Regional Trial Court of
Manila is hereby ordered to immediately release to
Goyu & Sons, Inc. the amount of P50,505,594.60
(per O.R. No. 3649285) deposited with it by
Malayan Insurance Co., Inc., together with all the
interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No.
128833 and 128866, respectively, seeking review
and consequent reversal of the above dispositions
of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from
the decision in C.A. G.R. No. CV-48376, which case,
by virtue of the Court of Appeals' resolution dated
August 7, 1996, was consolidated with C.A. G.R.
No. CV-46162 (subject of herein G.R. No. 128833).
At issue in said petition is RCBC's right to intervene
in the action between Alfredo C. Sebastian (the
creditor) and GOYU (the debtor), where the subject
insurance policies were attached in favor of
Sebastian.
After a careful reviews of the material facts as
found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the
submission of RCBC and MICO.
The several causes of action pursued below by
GOYU gave rise to several related issues which are
now submitted in the petitions before us. This
Court, however, discerns one primary and central
issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance
policies taken by GOYU, the mortgagor, in case of
the occurrence of loss.
As earlier mentioned, accordant with the credit
facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of
RCBC. It was expressly stipulated in these
mortgage contracts that GOYU shall insure the
mortgaged property with any of the insurance
companies acceptable to RCBC. GOYU indeed
insured the mortgaged property with MICO, an
insurance company acceptable to RCBC. Bases on
their stipulations in the mortgage contracts, GOYU
was supposed to endorse these insurance policies
in favor of, and deliver them, to RCBC. Alchester
Insurance Agency, Inc., MICO's underwriter from
whom GOYU obtained the subject insurance
policies, prepared the nine endorsements (see Exh.
"1-Malayan" to "9-Malayan"; also Exh. "51-RCBC"
to "59-RCBC"), copies of which were delivered to
GOYU, RCBC, and MICO. However, because these
endorsements do not bear the signature of any
officer of GOYU, the trial court, as well as the Court
of Appeals, concluded that the endorsements are
defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee
have separated and distinct insurable interests in
the same mortgaged property, such that each one
of them may insure the same property for his own
sole benefit. There is no question that GOYU could
insure the mortgaged property for its own
exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance
policies naming itself as the sole payee, the
intentions of the parties as shown by their
contemporaneous acts, must be given due
consideration in order to better serve the interest
of justice and equity.
It is to be noted that nine endorsement documents
were prepared by Alchester in favor of RCBC. The
Court is in a quandary how Alchester could arrive
at the idea of endorsing any specific insurance
policy in favor of any particular beneficiary or
payee other than the insured had not such named
payee or beneficiary been specifically disclosed by
the insured itself. It is also significant that GOYU
voluntarily and purposely took the insurance
policies from MICO, a sister company of RCBC, and
not just from any other insurance company.
Alchester would not have found out that the

subject pieces of property were mortgaged to
RCBC had not such information been voluntarily
disclosed by GOYU itself. Had it not been for GOYU,
Alchester would not have known of GOYU's
intention of obtaining insurance coverage in
compliance with its undertaking in the mortgage
contracts with RCBC, and verily, Alchester would
not have endorsed the policies to RCBC had it not
been so directed by GOYU.
On equitable principles, particularly on the ground
of estoppel, the Court is constrained to rule in favor
of mortgagor RCBC. The basis and purpose of the
doctrine was explained in Philippine National Bank
vs. Court of Appeals (94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds
of public, policy, fair dealing, good faith and justice,
and its purpose is to forbid one to speak against his
own act, representations, or commitments to the
injury of one to whom they were directed and who
reasonably relied thereon. The doctrine of estoppel
springs from equitable principles and the equities
in the case. It is designed to aid the law in the
administration of justice where without its aid
injustice might result. It has been applied by this
Court wherever and whenever special
circumstances of a case so demand. (p. 368.)
Evelyn Lozada of Alchester testified that upon
instructions of Mr. Go, through a certain Mr. Yam,
she prepared in quadruplicate on February 11,
1992 the nine endorsement documents for GOYU's
nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement
documents were sent to GOYU, and the others
were sent to RCBC and MICO, while the fourth
copies were detained for Alchester's file (tsn,
February 23, pp. 7-8). GOYU has not denied having
received from Alchester the originals of these
documents.
RCBC, in good faith, relied upon the endorsement
documents sent to it as this was only pursuant to
the stipulation in the mortgage contracts. We find
such reliance to be justified under the
circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or
persons who prepared such endorsements. Over
and above this, GOYU continued, in the meantime,
9
to enjoy the benefits of the credit facilities
extended to it by RCBC. After the occurrence of the
loss insure against, it was too late for GOYU to
disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare
and issue said endorsements. If there had not been
actually an implied ratification of said
endorsements by virtue of GOYU's inaction in this
case, GOYU is at the very least estopped from
assailing their operative effects. To permit GOYU to
capitalize on its non-confirmation of these
endorsements while it continued to enjoy the
benefits of the credit facilities of RCBC which
believed in good faith that there was due
endorsement pursuant to their mortgage contracts,
is to countenance grave contravention of public
policy, fair dealing, good faith, and justice. Such an
unjust situation, the Court cannot sanction. Under
the peculiar circumstances obtaining in this case,
the Court is bound to recognize RCBC's right to the
proceeds of the insurance polices if not for the
actual endorsement of the policies, at least on the
basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the
Insurance Code which provides that the proceeds
of insurance shall exclusively apply to the interest
of the person in whose name or for whose benefit it
is made. The peculiarity of the circumstances
obtaining in the instant case presents a
justification to take exception to the strict
application of said provision, it having been
sufficiently established that it was the intention of
the parties to designate RCBC as the party for
whose benefit the insurance policies were taken
out. Consider thus the following:
1. It is undisputed that the insured pieces of
property were the subject of mortgage contracts
entered into between RCBC and GOYU in
consideration of and for securing GOYU's credit
facilities from RCBC. The mortgage contracts
contained common provisions whereby GOYU, as
mortgagor, undertook to have the mortgaged
property properly covered against any loss by an
insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to
cover the mortgaged property from MICO, no less
than a sister company of RCBC and definitely an
acceptable insurance company to RCBC.
3. Endorsement documents were prepared by
MICO's underwriter, Alchester Insurance Agency,
Inc., and copies thereof were sent to GOYU, MICO,
and RCBC. GOYU did not assail, until of late, the
validity of said endorsements.
4. GOYU continued until the occurrence of the fire,
to enjoy the benefits of the credit facilities
extended by RCBC which was conditioned upon the
endorsement of the insurance policies to be taken
by GOYU to cover the mortgaged properties.
This Court can not over stress the fact that upon
receiving its copies of the endorsement documents
prepared by Alchester, GOYU, despite the absence
of its written conformity thereto, obviously
considered said endorsement to be sufficient
compliance with its obligation under the mortgage
contracts since RCBC accordingly continued to
extend the benefits of its credits facilities and
GOYU continued to benefit therefrom. Just as plain
too is the intention of the parties to constitute
RCBC as the beneficiary of the various insurance
policies obtained by GOYU. The intention of the
parties will have to be given full force and effect
particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which
under the factual circumstances of the case, is
truly the person or entity for whose benefit the
polices were clearly intended.
Moreover, the law's evident intention to protect the
interests of the mortgage upon the mortgaged
property is expressed in Article 2127 of the Civil
Code which states:
Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate remains in

the possession of the mortgagor, or it passes into
the hands of a third person.
Significantly, the Court notes that out of the 10
insurance policies subject of this case, only 8 of
them appear to have been subject of the
endorsements prepared and delivered by Alchester
for and upon instructions of GOYU as shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92
b. Policy Number ACIA/F-174-07660 Exhibit "1-
Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-
Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-
Malayan"
Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43
e. Policy Number ACIA/F-114-07663 Exhibit "4-
Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76
f. Policy Number ACIA/F-114-07623 Exhibit "7-
Malayan"
Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00
g. Policy Number ACIA/F-174-07223 Exhibit "6-
Malayan"
10
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00
i. Policy Number F-114-07402 Exhibit "8-Malayan"
Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20
j. Policy Number F-114-07525 Exhibit "9-Malayan"
Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for MICO.)
Policy Number F-114-07795 [(a) above] has not
been endorsed. This fact was admitted by MICO's
witness, Atty. Farolan (tsn, February 16, 1994, p.
25). Likewise, the record shows no endorsement
for Policy Number CI/F-128-03341 [(h) above]. Also,
one of the endorsement documents, Exhibit "5-
Malayan", refers to a certain insurance policy
number ACIA-F-07066, which is not among the
insurance policies involved in the complaint.
The proceeds of the 8 insurance policies endorsed
to RCBC aggregate to P89,974,488.36. Being
excessively payable to RCBC by reason of the
endorsement by Alchester to RCBC, which we
already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can
not be attached by GOYU's other creditors up to
the extent of the GOYU's outstanding obligation in
RCBC's favor. Section 53 of the Insurance Code
ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to
the proper interest of the person for whose benefit
it was made. In this case, to the extent of GOYU's
obligation with RCBC, the interest of GOYU in the
subject policies had been transferred to RCBC
effective as of the time of the endorsement. These
policies may no longer be attached by the other
creditors of GOYU, like Alfredo Sebastian in the
present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and
academic in view of the results reached herein.
Only the two other policies amounting to
P19,646,224.92 may be validly attached,
garnished, and levied upon by GOYU's other
creditors. To the extent of GOYU's outstanding
obligation with RCBC, all the rest of the other
insurance policies above-listed which were
endorsed to RCBC, are, therefore, to be released
from attachment, garnishment, and levy by the
other creditors of GOYU.
This brings us to the next issue to be resolved,
which is, the extent of GOYU's outstanding
obligation with RCBC which the proceeds of the 8
insurance policies will discharge and liquidate, or
put differently, the actual amount of GOYU's
liability to RCBC.
The Court of Appeals simply echoed the declaration
of the trial court finding that GOYU's total
obligation to RCBC was only P68,785,060.04 as of
April 27, 1992, thus sanctioning the trial court's
exclusion of Promissory Note No. 421-92 (renewal
of Promissory Note No. 908-91) and Promissory
Note No. 420-92 (renewal of Promissory Note No.
952-91) on the ground that their execution is
highly questionable for not only are these dated
after the fire, but also because the signatures of
either GOYU or any its representative are
conspicuously absent. Accordingly, the Court of
Appeals speculated thusly:
. . . Hence, this Court is inclined to conclude that
said promissory notes were pre-signed by plaintiff
in bank terms, as averred by plaintiff, in
contemplation of the speedy grant of future loans,
for the same practice of procedure has always
been adopted in its previous dealings with the
bank. (Rollo, pp. 181-182.)
The fact that the promissory notes bear dates
posterior to the fire does not necessarily mean that
the documents are spurious, for it is presumed that
the ordinary course of business had been followed
(Metropolitan Bank and Trust Company vs. Quilts
and All, Inc., 22 SCRA 486 [1993]). The obligor and
not the holder of the negotiable instrument has the
burden of proof of showing that he no longer owes

the obligee any amount (Travel-On, Inc. vs. Court
of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of
private transactions, receipt of the loan amounting
to P121,966,058.67 (Exhibits 1-29, RCBC) was
admitted by GOYU as indicated in the testimony of
Go Song Hiap when he answered the queries of the
trial court.
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to
29-RCBC, you received all the amounts stated
therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated
in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me
but the amount I asked which is correct, Your
Honor.
COURT
Q Your mean to say the amounts indicated in
Exhibits 1 to 29-RCBC is correct?
A Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of
having received all the proceeds of the 29
promissory notes as hereinabove quotes, GOYU
also offered and admitted to RCBC that is
obligation be fixed at P116,301,992.60 as shown in
its letter date March 9, 1993, which pertinently
reads:
We wish to inform you, therefore that we are ready
and willing to pay the current past due account of
this company in the amount of P116,301,992.60 as
of 21 January 1993, specified in pars. 15, p. 10, and
18, p. 13 of your affidavits of Third Party Claims in
the Urban case at Makati, Metro Manila and in the
Zamboanga case at Zamboanga city, respectively,
less the total of P8,851,519.71 paid from the
Seaboard and Equitable insurance companies and
other legitimate deductions. We accept and
11
confirm this amount of P116,301,992.60 as stated
as true and correct. (Exhibit BB.)
The Court of Appeals erred in placing much
significance on the fact that the excluded
promissory notes are dated after the fire. It failed
to consider that said notes had for their origin
transactions consummated prior to the fire. Thus,
careful attention must be paid to the fact that
Promissory Notes No. 420-92 and 421-92 are
mere renewals of Promissory Notes No. 908-91 and
952-91, loans already availed of by GOYU.
The two courts below erred in failing to see that
the promissory notes which they ruled should be
excluded for bearing dates which are after that of
the fire, are mere renewals of previous ones. The
proceeds of the loan represented by these
promissory notes were admittedly received by
GOYU. There is ample factual and legal basis for
giving GOYU's judicial admission of liability in the
amount of P116,301,992.60 full force and effect.
It should, however, be quickly added that whatever
amount RCBC may have recovered from the other
insurers of the mortgage property will,
nonetheless, have to be applied as payment
against GOYU's obligation. But, contrary to the
lower courts' findings, payments effected by GOYU
prior to January 21, 1993 should no longer be
deducted. Such payments had obviously been duly
considered by GOYU, in its aforequoted letter date
March 9, 1993, wherein it admitted that its past
due account totaled P116,301,992.60 as of January
21, 1993.
The net obligation of GOYU, after deductions, is
thus reduced to P107,246,887.90 as of January 21,
1993, to wit:
Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
Broken down as follows:
Principal 1 Interest
Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81
2) Proceeds from
Equitable Insurance
Company 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
___________
9,055,104.70 3
================
NET AMOUNT as of January 21, 1993
P107,246,887.90
The need for the payment of interest due the
principal amount of the obligation, which is the
cost of money to RCBC, the primary end and the
ultimate reason for RCBC's existence and being,
was duly recognized by the trial court when it ruled
favorably on RCBC's counterclaim, ordering GOYU
"to pay its loan obligation with RCBC in the amount
of P68,785,069.04, as of April 27, 1992, with
interest thereon at the rate stipulated in the
respective promissory notes (without surcharges
and penalties) per computation, pp. 14-A, 14-B 14-
C" (Record, p. 479). Inexplicably, the Court of
Appeals, without even laying down the factual or
legal justification for its ruling, modified the trial
court's ruling and ordered GOYU "to pay the
principal amount of P68,785,069.04 without any
interest, surcharges and penalties" (Rollo, p. 200).
It is to be noted in this regard that even the trial
court hedgingly and with much uncertainty deleted
the payment of additional interest, penalties, and
charges, in this manner:
Regarding defendant RCBC's commitment not to
charge additional interest, penalties and
surcharges, the same does not require that it be
embodied in a document or some form of writing to
be binding and enforceable. The principle is well
known that generally a verbal agreement or
contract is no less binding and effective than a
written one. And the existence of such a verbal
agreement has been amply established by the
evidence in this case. In any event, regardless of
the existence of such verbal agreement, it would

still be unjust and inequitable for defendant RCBC
to charge the plaintiff with surcharges and
penalties considering the latter's pitiful situation.
(Emphasis supplied). (Record, p. 476)
The essence or rationale for the payment of
interest or cost of money is separate and distinct
from that of surcharges and penalties. What may
justify a court in not allowing the creditor to charge
surcharges and penalties despite express
stipulation therefor in a valid agreement, may not
equally justify non-payment of interest. The
charging of interest for loans forms a very essential
and fundamental element of the banking business,
which may truly be considered to be at the very
core of its existence or being. It is inconceivable for
a bank to grant loans for which it will not charge
any interest at all. We fail to find justification for
the Court of Appeal's outright deletion of the
payment of interest as agreed upon in the
respective promissory notes. This constitutes gross
error.
For the computation of the interest due to be paid
to RCBC, the following rules of thumb laid down by
this Court in Eastern Shipping Lines, Inc. vs. Court
of Appeals (234 SCRA 78 [1994]), shall apply, to
wit:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the actual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from
12
default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or
until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date of the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the computation
of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum
of money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of
interest owing on each specific promissory note as
summarized and tabulated by the trial court in its
decision (pp. 470 and 471, Record) such agreed
interest rates must be followed. This is very clear
from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and
penalties, we partly agree that GOYU's pitiful
situation must be taken into account. We do not
agree, however, that payment of any amount as
surcharges and penalties should altogether be
deleted. Even assuming that RCBC, through its
responsible officers, herein petitioners Eli Lao and
Uy Chun Bing, may have relayed its assurance for
assistance to GOYU immediately after the
occurrence of the fire, we cannot accept the lower
courts' finding that RCBC had thereby ipso
facto effectively waived collection of any additional
interests, surcharges, and penalties from GOYU.
Assurances of assistance are one thing, but waiver
of additional interests, surcharges, and penalties is
another.
Surcharges and penalties agreed to be paid by the
debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter
3, Title XVIII of the Civil Code. Article 2227 thereof
provides:
Art. 2227. Liquidated damages, whether intended
as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what
is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should
be stressed that the Court will not make any
sweeping ruling that surcharges and penalties
imposed by banks for non-payment of the loans
extended by them are generally iniquitous and
unconscionable. What may be iniquitous and
unconscionable in one case, may be totally just
and equitable in another. This provision of law will
have to be applied to the established facts of any
given case. Given the circumstance under which
GOYU found itself after the occurrence of the fire,
the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty
charges of 36%, to be definitely iniquitous and
unconscionable. The Court tempers these rates to
2% and 3%, respectively. Furthermore, in the light
of GOYU's offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See:
Exhibit "BB"), which RCBC refused, we find it more
in keeping with justice and equity for RCBC not to
charge additional interest, surcharges, and
penalties from that time onward.
Given the factual milieu hereover, we rule that it
was error to hold MICO liable in damages for
denying or withholding the proceeds of the
insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well
as the endorsements of the insurance policies,
RCBC has the right to claim the insurance
proceeds, in substitution of the property lost in the
fire. Having assigned its rights, GOYU lost its
standing as the beneficiary of the said insurance
policies.
Secondly, for an insurance company to be held
liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be
wanton, oppressive, or malevolent (Zenith
Insurance Corporation vs. CA. 185 SCRA 403
[1990]). It is generally agreed, however, that an
insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly,
the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless
the evidence and circumstances show that such
refusal was willful and without reasonable cause as
the facts appear to a reasonable and prudent man
(Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d]
53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga.
331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs.
Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR
189). The case at bar does not show that MICO
wantonly and in bad faith delayed the release of
the proceeds. The problem in the determination of
who is the actual beneficiary of the insurance
policies, aggravated by the claim of various
creditors who wanted to partake of the insurance
proceeds, not to mention the importance of the
endorsement to RCBC, to our mind, and as now
borne out by the outcome herein, justified MICO in
withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the
Court of Appeals said that RCBC cannot avail itself
of two simultaneous remedies in enforcing the
claim of an unpaid creditor, one for specific
performance and the other for foreclosure. In doing
so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause
of action (Rollo, pp. 195-199). The Court of Appeals
was too accommodating in giving due
consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the
same Court of Appeals in CA G.R. CV No. 46247,
the case having been elevated by RCBC.
13
In finding that the foreclosure suit cannot prosper,
the Fifteenth Division of the Court of Appeals pre-
empted the resolution of said foreclosure case
which is not before it. This is plain reversible error
if not grave abuse of discretion.
As held in Peña vs. Court of Appeals (245 SCRA 691
[1995]):
It should have been enough, nonetheless, for the
appellate court to merely set aside the questioned
ordered of the trial court for having been issued by
the latter with grave abuse of discretion. In likewise
enjoining permanently herein petitioner "from
entering in and interfering with the use or
occupation and enjoyment of petitioner's (now
private respondent) residential house and
compound," the appellate court in effect,
precipitately resolved with finality the case for
injunction that was yet to be heard on the merits
by the lower court. Elevated to the appellate court,
it might be stressed, were mere incidents of the
principal case still pending with the trial court.
In Municipality of Biñan, Laguna vs. Court of
Appeals, 219 SCRA 69, we ruled that the Court of
Appeals would have "no jurisdiction in
a certiorariproceeding involving an incident in a
case to rule on the merits of the main case itself
which was not on appeal before it. (pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case
No. 1073, before the Zamboanga Regional Trial
Court, since it has been determined that RCBC has
the right to the insurance proceeds, the subject
matter of intervention is rendered moot and
academic. Respondent Sebastian must, however,
yield to the preferential right of RCBC over the
MICO insurance policies. It is basic and
fundamental that the first mortgagee has superior
rights over junior mortgagees or attaching
creditors (Alpha Insurance & Surety Co. vs. Reyes,
106 SCRA 274 [1981]; Sun Life Assurance Co. of
Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED
and the decision and resolution of December 16,
1996 and April 3, 1997 in CA-G.R. CV No. 46162
are hereby REVERSED and SET ASIDE, and a new
one entered:
1. Dismissing the Complaint of private respondent
GOYU in Civil Case No. 93-65442 before Branch 3
of the Manila Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to
deliver to Rizal Commercial Banking Corporation
the proceeds of the insurance policies in the
amount of P51,862,390.94 (per report of adjuster
Toplis & Harding (Far East), Inc., Exhibits "2" and
"2-1"), less the amount of P50,505,594.60 (per O.R.
No. 3649285);
3. Ordering the Clerk of Court to release the
amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan
obligation with Rizal Commercial Banking
Corporation in the principal amount of
P107,246,887.90, with interest at the respective
rates stipulated in each promissory note from
January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January
21, 1993 to March 9, 1993, minus payments made
by Malayan Insurance Company, Inc. and the
proceeds of the amount deposited with the trial
court and its earned interest. The total amount due
RCBC at the time of the finality of this judgment
shall earn interest at the legal rate of 12% in lieu of
all other stipulated interests and charges until fully
paid.
The petition of Rizal Commercial Banking
Corporation against the respondent Court in CA-GR
CV 48376 is DISMISSED for being moot and
academic in view of the results herein arrived at.
Respondent Sebastian's right as attaching creditor
must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.
SO ORDERED.
SECOND DIVISION
G.R. No. 85141 November 28, 1989
FILIPINO MERCHANTS INSURANCE CO.,
INC., petitioner, 
vs. COURT OF APPEALS and CHOA TIEK
SENG, respondents.
REGALADO, J.:

This is a review of the decision of the Court of
Appeals, promulgated on July 19,1988, the
dispositive part of which reads:
WHEREFORE, the judgment appealed from is
affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff
the sum of P51,568.62 with interest at legal rate
from the date of filing of the complaint, and is
modified with respect to the third party complaint
in that (1) third party defendant E. Razon, Inc. is
ordered to reimburse third party plaintiff the sum
of P25,471.80 with legal interest from the date of
payment until the date of reimbursement, and (2)
the third-party complaint against third party
defendant Compagnie Maritime Des Chargeurs
Reunis is dismissed. 1
The facts as found by the trial court and adopted
by the Court of Appeals are as follows:
This is an action brought by the consignee of the
shipment of fishmeal loaded on board the vessel
SS Bougainville and unloaded at the Port of Manila
on or about December 11, 1976 and seeks to
recover from the defendant insurance company the
amount of P51,568.62 representing damages to
said shipment which has been insured by the
defendant insurance company under Policy No. M-
2678. The defendant brought a third party
complaint against third party defendants
Compagnie Maritime Des Chargeurs Reunis and/or
E. Razon, Inc. seeking judgment against the third
(sic) defendants in case Judgment is rendered
against the third party plaintiff. It appears from the
evidence presented that in December 1976,
plaintiff insured said shipment with defendant
insurance company under said cargo Policy No. M-
2678 for the sum of P267,653.59 for the goods
described as 600 metric tons of fishmeal in new
gunny bags of 90 kilos each from Bangkok,
Thailand to Manila against all risks under
warehouse to warehouse terms. Actually, what was
imported was 59.940 metric tons not 600 tons at
$395.42 a ton CNF Manila. The fishmeal in 666 new
gunny bags were unloaded from the ship on
December 11, 1976 at Manila unto the arrastre
contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge
14
105 bags were in bad order condition as jointly
surveyed by the ship's agent and the arrastre
contractor. The condition of the bad order was
reflected in the turn over survey report of Bad
Order cargoes Nos. 120320 to 120322, as Exhibit
C-4 consisting of three (3) pages which are also
Exhibits 4, 5 and 6- Razon. The cargo was also
surveyed by the arrastre contractor before delivery
of the cargo to the consignee and the condition of
the cargo on such delivery was reflected in E.
Razon's Bad Order Certificate No. 14859, 14863
and 14869 covering a total of 227 bags in bad
order condition. Defendant's surveyor has
conducted a final and detailed survey of the cargo
in the warehouse for which he prepared a survey
report Exhibit F with the findings on the extent of
shortage or loss on the bad order bags totalling
227 bags amounting to 12,148 kilos, Exhibit F-1.
Based on said computation the plaintiff made a
formal claim against the defendant Filipino
Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is
contained therein. A formal claim statement was
also presented by the plaintiff against the vessel
dated December 21, 1976, Exhibit B, but the
defendant Filipino Merchants Insurance Company
refused to pay the claim. Consequently, the
plaintiff brought an action against said defendant
as adverted to above and defendant presented a
third party complaint against the vessel and the
arrastre contractor. 2”
The court below, after trial on the merits, rendered
judgment in favor of private respondent, the
decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is
hereby rendered in favor of the plaintiff and
against the defendant Filipino Merchant's (sic)
Insurance Co., ordering the defendants to pay the
plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate
from the date of the filing of the complaint;
On the third party complaint, the third party
defendant Compagnie Maritime Des Chargeurs
Reunis and third party defendant E. Razon, Inc. are
ordered to pay to the third party plaintiff jointly
and severally reimbursement of the amounts paid
by the third party plaintiff with legal interest from
the date of such payment until the date of such
reimbursement.
Without pronouncement as to costs.3
On appeal, the respondent court affirmed the
decision of the lower court insofar as the award on
the complaint is concerned and modified the same
with regard to the adjudication of the third-party
complaint. A motion for reconsideration of the
aforesaid decision was denied, hence this petition
with the following assignment of errors:
1. The Court of Appeals erred in its interpretation
and application of the "all risks" clause of the
marine insurance policy when it held the petitioner
liable to the private respondent for the partial loss
of the cargo, notwithstanding the clear absence of
proof of some fortuitous event, casualty, or
accidental cause to which the loss is attributable,
thereby contradicting the very precedents cited by
it in its decision as well as a prior decision of the
same Division of the said court (then composed of
Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that
the private respondent had no insurable interest in
the subject cargo, hence, the marine insurance
policy taken out by private respondent is null and
void;
3. The Court of Appeals erred in not holding that
the private respondent was guilty of fraud in not
disclosing the fact, it being bound out of utmost
good faith to do so, that it had no insurable interest
in the subject cargo, which bars its recovery on the
policy. 4
On the first assignment of error, petitioner
contends that an "all risks" marine policy has a
technical meaning in insurance in that before a
claim can be compensable it is essential that there
must be "some fortuity, " "casualty" or "accidental
cause" to which the alleged loss is attributable and
the failure of herein private respondent, upon
whom lay the burden, to adduce evidence showing

that the alleged loss to the cargo in question was
due to a fortuitous event precludes his right to
recover from the insurance policy. We find said
contention untenable.
The "all risks clause" of the Institute Cargo Clauses
read as follows:
5. This insurance is against all risks of loss or
damage to the subject-matter insured but shall in
no case be deemed to extend to cover loss,
damage, or expense proximately caused by delay
or inherent vice or nature of the subject-matter
insured. Claims recoverable hereunder shall be
payable irrespective of percentage. 5
An "all risks policy" should be read literally as
meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The
terms "accident" and "accidental", as used in
insurance contracts, have not acquired any
technical meaning. They are construed by the
courts in their ordinary and common acceptance.
Thus, the terms have been taken to mean that
which happens by chance or fortuitously, without
intention and design, and which is unexpected,
unusual and unforeseen. An accident is an event
that takes place without one's foresight or
expectation; an event that proceeds from an
unknown cause, or is an unusual effect of a known
cause and, therefore, not expected. 6
The very nature of the term "all risks" must be
given a broad and comprehensive meaning as
covering any loss other than a willful and
fraudulent act of the insured. 7 This is pursuant to
the very purpose of an "all risks" insurance to give
protection to the insured in those cases where
difficulties of logical explanation or some mystery
surround the loss or damage to property. 8 An "all
asks" policy has been evolved to grant greater
protection than that afforded by the "perils clause,"
in order to assure that no loss can happen through
the incidence of a cause neither insured against
nor creating liability in the ship; it is written against
all losses, that is, attributable to external causes. 9
The term "all risks" cannot be given a strained
technical meaning, the language of the clause
15
under the Institute Cargo Clauses being
unequivocal and clear, to the effect that it extends
to all damages/losses suffered by the insured cargo
except (a) loss or damage or expense proximately
caused by delay, and (b) loss or damage or
expense proximately caused by the inherent vice
or nature of the subject matter insured.
Generally, the burden of proof is upon the insured
to show that a loss arose from a covered peril, but
under an "all risks" policy the burden is not on the
insured to prove the precise cause of loss or
damage for which it seeks compensation. The
insured under an "all risks insurance policy" has
the initial burden of proving that the cargo was in
good condition when the policy attached and that
the cargo was damaged when unloaded from the
vessel; thereafter, the burden then shifts to the
insurer to show the exception to the
coverage. 10 As we held in Paris-Manila Perfumery
Co. vs. Phoenix Assurance Co., Ltd.  11 the basic rule
is that the insurance company has the burden of
proving that the loss is caused by the risk excepted
and for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine
insurance policy creates a special type of insurance
which extends coverage to risks not usually
contemplated and avoids putting upon the insured
the burden of establishing that the loss was due to
the peril falling within the policy's coverage; the
insurer can avoid coverage upon demonstrating
that a specific provision expressly excludes the
loss from coverage. 12 A marine insurance policy
providing that the insurance was to be "against all
risks" must be construed as creating a special
insurance and extending to other risks than are
usually contemplated, and covers all losses except
such as arise from the fraud of the insured. 13 The
burden of the insured, therefore, is to prove merely
that the goods he transported have been lost,
destroyed or deteriorated. Thereafter, the burden
is shifted to the insurer to prove that the loss was
due to excepted perils. To impose on the insured
the burden of proving the precise cause of the loss
or damage would be inconsistent with the broad
protective purpose of "all risks" insurance.
In the present case, there being no showing that
the loss was caused by any of the excepted perils,
the insurer is liable under the policy. As aptly
stated by the respondent Court of Appeals, upon
due consideration of the authorities and
jurisprudence it discussed —
... it is believed that in the absence of any showing
that the losses/damages were caused by an
excepted peril, i.e. delay or the inherent vice or
nature of the subject matter insured, and there is
no such showing, the lower court did not err in
holding that the loss was covered by the policy.
There is no evidence presented to show that the
condition of the gunny bags in which the fishmeal
was packed was such that they could not hold their
contents in the course of the necessary transit,
much less any evidence that the bags of cargo had
burst as the result of the weakness of the bags
themselves. Had there been such a showing that
spillage would have been a certainty, there may
have been good reason to plead that there was no
risk covered by the policy (See Berk vs. Style
[1956] cited in Marine Insurance Claims, Ibid, p.
125). Under an 'all risks' policy, it was sufficient to
show that there was damage occasioned by some
accidental cause of any kind, and there is no
necessity to point to any particular cause. 14”
Contracts of insurance are contracts of indemnity
upon the terms and conditions specified in the
policy. The agreement has the force of law
between the parties. The terms of the policy
constitute the measure of the insurer's liability. If
such terms are clear and unambiguous, they must
be taken and understood in their plain, ordinary
and popular sense.15
Anent the issue of insurable interest, we uphold the
ruling of the respondent court that private
respondent, as consignee of the goods in transit
under an invoice containing the terms under "C & F
Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable
interest in property as every interest in property,
whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a

contemplated peril might directly damnify the
insured. In principle, anyone has an insurable
interest in property who derives a benefit from its
existence or would suffer loss from its destruction
whether he has or has not any title in, or lien upon
or possession of the property y. 16 Insurable
interest in property may consist in (a) an existing
interest; (b) an inchoate interest founded on an
existing interest; or (c) an expectancy, coupled
with an existing interest in that out of which the
expectancy arises. 17
Herein private respondent, as vendee/consignee of
the goods in transit has such existing interest
therein as may be the subject of a valid contract of
insurance. His interest over the goods is based on
the perfected contract of sale. 18The perfected
contract of sale between him and the shipper of
the goods operates to vest in him an equitable title
even before delivery or before be performed the
conditions of the sale. 19 The contract of shipment,
whether under F.O.B., C.I.F., or C. & F. as in this
case, is immaterial in the determination of whether
the vendee has an insurable interest or not in the
goods in transit. The perfected contract of sale
even without delivery vests in the vendee an
equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that
where, in pursuance of a contract of sale, the seller
is authorized or required to send the goods to the
buyer, delivery of the goods to a carrier, whether
named by the buyer or not, for, the purpose of
transmission to the buyer is deemed to be a
delivery of the goods to the buyer, the exceptions
to said rule not obtaining in the present case. The
Court has heretofore ruled that the delivery of the
goods on board the carrying vessels partake of the
nature of actual delivery since, from that time, the
foreign buyers assumed the risks of loss of the
goods and paid the insurance premium covering
them. 20
C & F contracts are shipment contracts. The term
means that the price fixed includes in a lump sum
the cost of the goods and freight to the named
destination. 21 It simply means that the seller must
16
pay the costs and freight necessary to bring the
goods to the named destination but the risk of loss
or damage to the goods is transferred from the
seller to the buyer when the goods pass the ship's
rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest
was not among the defenses averred in petitioners
answer. It was neither an issue agreed upon by the
parties at the pre-trial conference nor was it raised
during the trial in the court below. It is a settled
rule that an issue which has not been raised in the
court a quo cannot be raised for the first time on
appeal as it would be offensive to the basic rules of
fair play, justice and due process. 23 This is but a
permuted restatement of the long settled rule that
when a party deliberately adopts a certain theory,
and the case is tried and decided upon that theory
in the court below, he will not be permitted to
change his theory on appeal because, to permit
him to do so, would be unfair to the adverse
party. 24
If despite the fundamental doctrines just stated, we
nevertheless decided to indite a disquisition on the
issue of insurable interest raised by petitioner, it
was to put at rest all doubts on the matter under
the facts in this case and also to dispose of
petitioner's third assignment of error which
consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and
the assailed decision of the respondent Court of
Appeals is AFFIRMED in toto.
SO ORDERED.
FIRST DIVISION
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and
UNITED INSURANCE CO., INC., petitioners, 
vs. COURT OF APPEALS and CKS
DEVELOPMENT CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45
of the Rules of Court seeks to set aside a decision
of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha,
as lessees, entered into a lease contract with
private respondent CKS Development Corporation
(hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease
contract states:
18. . . . The LESSEE shall not insure against fire the
chattels, merchandise, textiles, goods and effects
placed at any stall or store or space in the leased
premises without first obtaining the written
consent and approval of the LESSOR. If the LESSEE
obtain(s) the insurance thereof without the consent
of the LESSOR then the policy is deemed assigned
and transferred to the LESSOR for its own benefit; .
. .1
3. Notwithstanding the above stipulation in the
lease contract, the Cha spouses insured against
loss by fire the merchandise inside the leased
premises for Five Hundred Thousand (P500,000.00)
with the United Insurance Co., Inc. (hereinafter
United) without the written consent of private
respondent CKS.
4. On the day that the lease contract was to expire,
fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier
procured by the Cha spouses (without its consent),
it wrote the insurer (United) a demand letter asking
that the proceeds of the insurance contract
(between the Cha spouses and United) be paid
directly to CKS, based on its lease contract with the
Cha spouses.
6. United refused to pay CKS. Hence, the latter
filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch
6, Manila, rendered a decision * ordering therein
defendant United to pay CKS the amount of
P335,063.11 and defendant Cha spouses to pay
P50,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs of suit.

8. On appeal, respondent Court of Appeals in CA
GR CV No. 39328 rendered a decision ** dated 11
January 1996, affirming the trial court decision,
deleting however the awards for exemplary
damages and attorney's fees. A motion for
reconsideration by United was denied on 29 March
1996.
In the present petition, the following errors are
assigned by petitioners to the Court of Appeals:
I provision of the lease contract previously quoted is
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THAT THE STIPULATION IN
THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT IS
NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THE CONTRACT OF LEASE
ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION
THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT
IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE POLICY
TO APPELLEE WHICH IS NOT PRIVY TO THE SAID
POLICY IN CONTRAVENTION OF THE INSURANCE
LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE POLICY
ON THE BASIS OF A STIPULATION WHICH IS VOID
FOR BEING WITHOUT CONSIDERATION AND FOR
BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION.2
The core issue to be resolved in this case is
whether or not the aforequoted paragraph 18 of
the lease contract entered into between CKS and
17
the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the
leased premises is deemed assigned or transferred
to the lessor (CKS) if said policy is obtained without
the prior written consent of the latter.
It is, of course, basic in the law on contracts that
the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public order
or public policy.3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on
property shall be enforceable except for the benefit
of some person having an insurable interest in the
property insured.
A non-life insurance policy such as the fire
insurance policy taken by petitioner-spouses over
their merchandise is primarily a contract of
indemnity. Insurable interest in the property
insured must exist at the time the insurance takes
effect and at the time the loss occurs.4 The basis of
such requirement of insurable interest in property
insured is based on sound public policy: to prevent
a person from taking out an insurance policy on
property upon which he has no insurable interest
and collecting the proceeds of said policy in case of
loss of the property. In such a case, the contract of
insurance is a mere wager which is void under
Section 25 of the Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance
for the payment of loss, whether the person
insured has or has not any interest in the property
insured, or that the policy shall be received as
proof of such interest, and every policy executed
by way of gaming or wagering, is void.
In the present case, it cannot be denied that CKS
has no insurable interest in the goods and
merchandise inside the leased premises under the
provisions of Section 17 of the Insurance Code
which provide:
Sec. 17. The measure of an insurable interest in
property is the extent to which the insured might
be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the
Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This
insurable interest over said merchandise remains
with the insured, the Cha spouses. The automatic
assignment of the policy to CKS under the
void for being contrary to law and/or public policy.
The proceeds of the fire insurance policy thus
rightfully belong to the spouses Nilo Cha and Stella
Uy-Cha (herein co-petitioners). The insurer (United)
cannot be compelled to pay the proceeds of the
fire insurance policy to a person (CKS) who has no
insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating
their lease contract in that the Cha spouses
obtained a fire insurance policy over their own
merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve
in this case.
WHEREFORE, the decision of the Court of Appeals
in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds
of the fire insurance policy to petitioners Nilo Cha
and Stella Uy-Cha.
SO ORDERED.
RE-READ: GEAGONIA V. CA (under Parties to a
Contract)
INSULAR LIFE V. EBRADO (under Applicability of the
Civil Code)
SECOND DIVISION
G.R. No. 175666               July 29, 2013
MANILA BANKERS LIFE INSURANCE
CORPORATION, Petitioner. 
vs. CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance
Code is to compel insurers to solicit business from
or provide insurance coverage only to legitimate
and bona fide clients, by requiring them to
thoroughly investigate those they insure within two
years from effectivity of the policy and while the

insured is still alive. If they do not, they will be
obligated to honor claims on the policies they
issue, regardless of fraud, concealment or
misrepresentation. The law assumes that they will
do just that and not sit on their laurels,
indiscriminately soliciting and accepting insurance
business from any Tom, Dick and Harry.
Assailed in this Petition for Review on
Certiorari1 are the September 28, 2005 Decision2 of
the Court of Appeals' (CA) in CA-G.R. CV No. 62286
and its November 9, 2006 Resolution 3 denying the
petitioner’s Motion for Reconsideration. 4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a
life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating
respondent Cresencia P. Aban (Aban), her
niece,5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the
policy), with a face value of ₱100,000.00, in
Sotero’s favor on August 30, 1993, after the
requisite medical examination and payment of the
insurance premium.6
On April 10, 1996,7 when the insurance policy had
been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for
the insurance proceeds on July 9, 1996. Petitioner
conducted an investigation into the claim,8 and
came out with the following findings:
1. Sotero did not personally apply for insurance
coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to
pay the insurance premiums on Insurance Policy
No. 747411;
4. Sotero did not sign the July 3, 1993 application
for insurance;9 and
5. Respondent was the one who filed the insurance
application, and x x x designated herself as the
beneficiary.10
For the above reasons, petitioner denied
respondent’s claim on April 16, 1997 and refunded
the premiums paid on the policy.11
18
On April 24, 1997, petitioner filed a civil case for
rescission and/or annulment of the policy, which
was docketed as Civil Case No. 97-867 and
assigned to Branch 134 of the Makati Regional Trial
Court. The main thesis of the Complaint was that
the policy was obtained by fraud, concealment
and/or misrepresentation under the Insurance
Code,12 which thus renders it voidable under Article
139013 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming
that petitioner’s cause of action was barred by
prescription pursuant to Section 48 of the
Insurance Code, which provides as follows:
Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this
chapter, such right must be exercised previous to
the commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force
during the lifetime of the insured for a period of
two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindible by reason of
the fraudulent concealment or misrepresentation
of the insured or his agent.
During the proceedings on the Motion to Dismiss,
petitioner’s investigator testified in court, stating
among others that the insurance underwriter who
solicited the insurance is a cousin of respondent’s
husband, Dindo Aban,15 and that it was the
respondent who paid the annual premiums on the
policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an
Order17 granting respondent’s Motion to Dismiss,
thus:
WHEREFORE, defendant CRESENCIA P. ABAN’s
Motion to Dismiss is hereby granted. Civil Case No.
97-867 is hereby dismissed.
SO ORDERED.18
In dismissing the case, the trial court found that
Sotero, and not respondent, was the one who
procured the insurance; thus, Sotero could legally
take out insurance on her own life and validly
designate – as she did – respondent as the
beneficiary. It held further that under Section 48,
petitioner had only two years from the effectivity of
the policy to question the same; since the policy
had been in force for more than two years,
petitioner is now barred from contesting the same
or seeking a rescission or annulment thereof.
Petitioner moved for reconsideration, but in
another Order19 dated October 20, 1998, the trial
court stood its ground.
Petitioner interposed an appeal with the CA,
docketed as CA-G.R. CV No. 62286. Petitioner
questioned the dismissal of Civil Case No. 97-867,
arguing that the trial court erred in applying
Section 48 and declaring that prescription has set
in. It contended that since it was respondent – and
not Sotero – who obtained the insurance, the policy
issued was rendered void ab initio for want of
insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed
Decision, which contained the following decretal
portion:
WHEREFORE, in the light of all the foregoing, the
instant appeal is DISMISSED for lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying
Section 48 to petitioner’s case, the CA held that
petitioner may no longer prove that the subject
policy was void ab initio or rescindible by reason of
fraudulent concealment or misrepresentation after
the lapse of more than two years from its issuance.
It ratiocinated that petitioner was equipped with
ample means to determine, within the first two
years of the policy, whether fraud, concealment or
misrepresentation was present when the insurance
coverage was obtained. If it failed to do so within
the statutory two-year period, then the insured
must be protected and allowed to claim upon the
policy.
Petitioner moved for reconsideration,21 but the CA
denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN
SUSTAINING THE ORDER OF THE TRIAL COURT

DISMISSING THE COMPLAINT ON THE GROUND OF
PRESCRIPTION IN CONTRAVENTION (OF)
PERTINENT LAWS AND APPLICABLE
JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN
SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE
CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN
DENYING PETITIONER’S MOTION FOR
RECONSIDERATION.23
Petitioner’s Arguments
In praying that the CA Decision be reversed and
that the case be remanded to the trial court for the
conduct of further proceedings, petitioner argues in
its Petition and Reply24 that Section 48 cannot
apply to a case where the beneficiary under the
insurance contract posed as the insured and
obtained the policy under fraudulent
circumstances. It adds that respondent, who was
merely Sotero’s niece, had no insurable interest in
the life of her aunt.
Relying on the results of the investigation that it
conducted after the claim for the insurance
proceeds was filed, petitioner insists that
respondent’s claim was spurious, as it appeared
that Sotero did not actually apply for insurance
coverage, was unlettered, sickly, and had no visible
source of income to pay for the insurance
premiums; and that respondent was an impostor,
posing as Sotero and fraudulently obtaining
insurance in the latter’s name without her
knowledge and consent.
Petitioner adds that Insurance Policy No. 747411
was void ab initio and could not have given rise to
rights and obligations; as such, the action for the
declaration of its nullity or inexistence does not
prescribe.25
Respondent’s Arguments
Respondent, on the other hand, essentially argues
in her Comment26 that the CA is correct in applying
Section 48. She adds that petitioner’s new
allegation in its Petition that the policy is void ab
initio merits no attention, having failed to raise the
19
same below, as it had claimed originally that the
policy was merely voidable.
On the issue of insurable interest, respondent
echoes the CA’s pronouncement that since it was
Sotero who obtained the insurance, insurable
interest was present. Under Section 10 of the
Insurance Code, Sotero had insurable interest in
her own life, and could validly designate anyone as
her beneficiary. Respondent submits that the CA’s
findings of fact leading to such conclusion should
be respected.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and
appellate courts’ finding that it was Sotero who
obtained the insurance for herself, designating
respondent as her beneficiary. Both courts are in
accord in this respect, and the Court is loath to
disturb this. While petitioner insists that its
independent investigation on the claim reveals that
it was respondent, posing as Sotero, who obtained
the insurance, this claim is no longer feasible in the
wake of the courts’ finding that it was Sotero who
obtained the insurance for herself. This finding of
fact binds the Court.
With the above crucial finding of fact – that it was
Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not
totally disproved. Allegations of fraud, which are
predicated on respondent’s alleged posing as
Sotero and forgery of her signature in the
insurance application, are at once belied by the
trial and appellate courts’ finding that Sotero
herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must
be established to entitle the insurer to rescind the
contract."27 In the absence of proof of such
fraudulent intent, no right to rescind arises.
Moreover, the results and conclusions arrived at
during the investigation conducted unilaterally by
petitioner after the claim was filed may simply be
dismissed as self-serving and may not form the
basis of a cause of action given the existence and
application of Section 48, as will be discussed at
length below.
Section 48 serves a noble purpose, as it regulates
the actions of both the insurer and the insured.
Under the provision, an insurer is given two years –
from the effectivity of a life insurance contract and
while the insured is alive – to discover or prove that
the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After
the two-year period lapses, or when the insured
dies within the period, the insurer must make good
on the policy, even though the policy was obtained
by fraud, concealment, or misrepresentation. This
is not to say that insurance fraud must be
rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be
penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of
bona fide takers of insurance and the public in
general.
Section 48 regulates both the actions of the
insurers and prospective takers of life insurance. It
gives insurers enough time to inquire whether the
policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at
insurance fraud would be timely uncovered – thus
deterring them from venturing into such nefarious
enterprise. At the same time, legitimate policy
holders are absolutely protected from unwarranted
denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of
fraud, concealment, or misrepresentation by
insurers, claims which may no longer be set up
after the two-year period expires as ordained
under the law.
Thus, the self-regulating feature of Section 48 lies
in the fact that both the insurer and the insured are
given the assurance that any dishonest scheme to
obtain life insurance would be exposed, and
attempts at unduly denying a claim would be
struck down. Life insurance policies that pass the
statutory two-year period are essentially treated as
legitimate and beyond question, and the
individuals who wield them are made secure by the
thought that they will be paid promptly upon claim.
In this manner, Section 48 contributes to the
stability of the insurance industry.
Section 48 prevents a situation where the insurer
knowingly continues to accept annual premium

payments on life insurance, only to later on deny a
claim on the policy on specious claims of
fraudulent concealment and misrepresentation,
such as what obtains in the instant case. Thus,
instead of conducting at the first instance an
investigation into the circumstances surrounding
the issuance of Insurance Policy No. 747411 which
would have timely exposed the supposed flaws and
irregularities attending it as it now professes,
petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums
on the policy. For nearly three years, petitioner
collected the premiums and devoted the same to
its own profit. It cannot now deny the claim when it
is called to account. Section 48 must be applied to
it with full force and effect.
The Court therefore agrees fully with the appellate
court’s pronouncement that –
the "incontestability clause" is a provision in law
that after a policy of life insurance made payable
on the death of the insured shall have been in
force during the lifetime of the insured for a period
of two (2) years from the date of its issue or of its
last reinstatement, the insurer cannot prove that
the policy is void ab initio or is rescindible by
reason of fraudulent concealment or
misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the
insured or his beneficiary by limiting the rescinding
of the contract of insurance on the ground of
fraudulent concealment or misrepresentation to a
period of only two (2) years from the issuance of
the policy or its last reinstatement.
The insurer is deemed to have the necessary
facilities to discover such fraudulent concealment
or misrepresentation within a period of two (2)
years. It is not fair for the insurer to collect the
premiums as long as the insured is still alive, only
to raise the issue of fraudulent concealment or
misrepresentation when the insured dies in order
to defeat the right of the beneficiary to recover
under the policy.
At least two (2) years from the issuance of the
policy or its last reinstatement, the beneficiary is
20
given the stability to recover under the policy when
the insured dies. The provision also makes clear
when the two-year period should commence in
case the policy should lapse and is reinstated, that
is, from the date of the last reinstatement.
After two years, the defenses of concealment or
misrepresentation, no matter how patent or well-
founded, will no longer lie.
Congress felt this was a sufficient answer to the
various tactics employed by insurance companies
to avoid liability.
The so-called "incontestability clause" precludes
the insurer from raising the defenses of false
representations or concealment of material facts
insofar as health and previous diseases are
concerned if the insurance has been in force for at
least two years during the insured’s lifetime. The
phrase "during the lifetime" found in Section 48
simply means that the policy is no longer
considered in force after the insured has died. The
key phrase in the second paragraph of Section 48
is "for a period of two years."
As borne by the records, the policy was issued on
August 30, 1993, the insured died on April 10,
1996, and the claim was denied on April 16, 1997.
The insurance policy was thus in force for a period
of 3 years, 7 months, and 24 days. Considering
that the insured died after the two-year period, the
plaintiff-appellant is, therefore, barred from proving
that the policy is void ab initio by reason of the
insured’s fraudulent concealment or
misrepresentation or want of insurable interest on
the part of the beneficiary, herein defendant-
appellee.
Well-settled is the rule that it is the plaintiff-
appellant’s burden to show that the factual findings
of the trial court are not based on substantial
evidence or that its conclusions are contrary to
applicable law and jurisprudence. The plaintiff-
appellant failed to discharge that burden.28
Petitioner claims that its insurance agent, who
solicited the Sotero account, happens to be the
cousin of respondent’s husband, and thus
insinuates that both connived to commit insurance
fraud. If this were truly the case, then petitioner
would have discovered the scheme earlier if it had
in earnest conducted an investigation into the
circumstances surrounding the Sotero policy. But
because it did not and it investigated the Sotero
account only after a claim was filed thereon more
than two years later, naturally it was unable to
detect the scheme. For its negligence and inaction,
the Court cannot sympathize with its plight.
Instead, its case precisely provides the strong
argument for requiring insurers to diligently
conduct investigations on each policy they issue
within the two-year period mandated under Section
48, and not after claims for insurance proceeds are
filed with them.
Besides, if insurers cannot vouch for the integrity
and honesty of their insurance agents/salesmen
and the insurance policies they issue, then they
should cease doing business. If they could not
properly screen their agents or salesmen before
taking them in to market their products, or if they
do not thoroughly investigate the insurance
contracts they enter into with their clients, then
they have only themselves to blame. Otherwise
said, insurers cannot be allowed to collect
premiums on insurance policies, use these
amounts collected and invest the same through the
years, generating profits and returns therefrom for
their own benefit, and thereafter conveniently deny
insurance claims by questioning the authority or
integrity of their own agents or the insurance
policies they issued to their premium-paying
clients. This is exactly one of the schemes which
Section 48 aims to prevent.
Insurers may not be allowed to delay the payment
of claims by filing frivolous cases in court, hoping
that the inevitable may be put off for years – or
even decades – by the pendency of these
unnecessary court cases. In the meantime, they
benefit from collecting the interest and/or returns
on both the premiums previously paid by the
insured and the insurance proceeds which should
otherwise go to their beneficiaries. The business of
insurance is a highly regulated commercial activity
in the country,29 and is imbued with public
interest.30 "An insurance contract is a contract of
adhesion which must be construed liberally in favor
 21

of the insured and strictly against the insurer in

order to safeguard the former’s interest."31

WHEREFORE, the Petition is DENIED. The assailed

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

SO ORDERED.