G.R. No.

L-15774

November 29, 1920

PILAR C. DE LIM, plaintiff-appellant,

vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Sanz and Luzuriaga for appellant.
Cohn and Fisher for appellee.
MALCOLM, J.:
This is an appeal by plaintiff from an order of the Court of First Instance of Zamboanga sustaining a demurrer to
plaintiff's complaint upon the ground that it fails to state a cause of action.
As the demurrer had the effect of admitting the material facts set forth in the complaint, the facts are those alleged by
the plaintiff. On July 6, 1917, Luis Lim y Garcia of Zamboanga made application to the Sun Life Assurance Company
of Canada for a policy of insurance on his life in the sum of P5,000. In his application Lim designated his wife, Pilar C.
de Lim, the plaintiff herein, as the beneficiary. The first premium of P433 was paid by Lim, and upon such payment
the company issued what was called a "provisional policy." Luis Lim y Garcia died on August 23, 1917, after the
issuance of the provisional policy but before approval of the application by the home office of the insurance company.
The instant action is brought by the beneficiary, Pilar C. de Lim, to recover from the Sun Life Assurance Company of
Canada the sum of P5,000, the amount named in the provisional policy.
The "provisional policy" upon which this action rests reads as follows:
Received (subject to the following stipulations and agreements) the sum of four hundred and thirty-three
pesos, being the amount of the first year's premium for a Life Assurance Policy on the life of Mr. Luis D. Lim
y Garcia of Zamboanga for P5,000, for which an application dated the 6th day of July, 1917, has been made
to the Sun Life Assurance Company of Canada.
The above-mentioned life is to be assured in accordance with the terms and conditions contained or inserted
by the Company in the policy which may be granted by it in this particular case for four months only from the
date of the application, provided that the Company shall confirm this agreement by issuing a policy on said
application when the same shall be submitted to the Head Office in Montreal. Should the Company not issue
such a policy, then this agreement shall be null and void ab initio, and the Company shall be held not to
have been on the risk at all, but in such case the amount herein acknowledged shall be returned.
[SEAL.]

(Sgd.) T. B. MACAULAY, President.

(Sgd.) A. F. Peters, Agent.

Our duty in this case is to ascertain the correct meaning of the document above quoted. A perusal of the same many
times by the writer and by other members of the court leaves a decided impression of vagueness in the mind.
Apparently it is to be a provisional policy "for four months only from the date of this application." We use the term
"apparently" advisedly, because immediately following the words fixing the four months period comes the word
"provided" which has the meaning of "if." Otherwise stated, the policy for four months is expressly made subjected to
the affirmative condition that "the company shall confirm this agreement by issuing a policy on said application when
the same shall be submitted to the head office in Montreal." To reenforce the same there follows the negative
condition
Should the company not issue such a policy, then this agreement shall be null and void ab initio, and the company
shall be held not to have been on the risk." Certainly, language could hardly be used which would more clearly
stipulate that the agreement should not go into effect until the home office of the company should confirm it by issuing

a policy. As we read and understand the so-called provisional policy it amounts to nothing but an acknowledgment on
behalf of the company, that it has received from the person named therein the sum of money agreed upon as the first
year's premium upon a policy to be issued upon the application, if the application is accepted by the company.
It is of course a primary rule that a contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it
is merely an offer or proposal to make a contract. The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties
have met in agreement. Our view is, that a contract of insurance was not here consummated by the parties.
lawph!l.net

Appellant relies on Joyce on Insurance. Beginning at page 253, of Volume I, Joyce states the general rule concerning
the agent's receipt pending approval or issuance of policy. The first rule which Joyce lays down is this: If the act of
acceptance of the risk by the agent and the giving by him of a receipt, is within the scope of the agent's authority, and
nothing remains but to issue a policy, then the receipt will bind the company. This rule does not apply, for while here
nothing remained but to issue the policy, this was made an express condition to the contract. The second rule laid
down by Joyce is this: Where an agreement is made between the applicant and the agent whether by signing an
application containing such condition, or otherwise, that no liability shall attach until the principal approves the risk
and a receipt is given buy the agent, such acceptance is merely conditional, and it subordinated to the act of the
company in approving or rejecting; so in life insurance a "binding slip" or "binding receipt" does not insure of itself.
This is the rule which we believe applies to the instant case. The third rule announced by Joyce is this: Where the
acceptance by the agent is within the scope of his authority a receipt containing a contract for insurance for a specific
time which is not absolute but conditional, upon acceptance or rejection by the principal, covers the specified period
unless the risk is declined within that period. The case cited by Joyce to substantiate the last principle is that a
Goodfellow vs. Times & Beacon Assurance Com. (17 U. C. Q. B., 411), not available.
The two cases most nearly in point come from the federal courts and the Supreme Court of Arkansas.
In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489} the facts were that the amount of the
first premium had been paid to an insurance agent and a receipt given therefor. The receipt, however, expressly
declared that if the application was accepted by the company, the insurance shall take effect from the date of the
application but that if the application was not accepted, the money shall be returned. The trite decision of the circuit
court of appeal was, "On the conceded facts of this case, there was no contract to life insurance perfected and the
judgment of the circuit court must be affirmed."
In the case of Cooksey vs. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the person applying for the life insurance
paid and amount equal to the first premium, but the application and the receipt for the money paid, stipulated that the
insurance was to become effective only when the application was approved and the policy issued. The court held that
the transaction did not amount to an agreement for preliminary or temporary insurance. It was said:
It is not an unfamiliar custom among life insurance companies in the operation of the business, upon receipt of an
application for insurance, to enter into a contract with the applicant in the shape of a so-called "binding receipt" for
temporary insurance pending the consideration of the application, to last until the policy be issued or the application
rejected, and such contracts are upheld and enforced when the applicant dies before the issuance of a policy or final
rejection of the application. It is held, too, that such contracts may rest in parol. Counsel for appellant insists that such
a preliminary contract for temporary insurance was entered into in this instance, but we do not think so. On the
contrary, the clause in the application and the receipt given by the solicitor, which are to be read together, stipulate
expressly that the insurance shall become effective only when the "application shall be approved and the policy duly
signed by the secretary at the head office of the company and issued." It constituted no agreement at all for
preliminary or temporary insurance; Mohrstadt vs. Mutual Life Ins. Co., 115 Fed., 81, 52 C. C. A., 675; Steinle vs.
New York Life Ins. Co., 81 Fed., 489, 26 C. C. A., 491." (See further Weinfeld vs. Mutual Reserve Fund Life Ass'n.
[1892], 53 Fed, 208' Mohrstadt vs. Mutual Life Insurance Co. [1902], 115 Fed., 81; Insurance co. vs. Young's
Administrator [1875], 90 U. S., 85; Chamberlain vs. Prudential Insurance Company of America [1901], 109 Wis., 4;

Shawnee Mut. Fire Ins. Co. vs. McClure [1913], 39 Okla., 509; Dorman vs. Connecticut Fire Ins. Co. [1914],
51 contra, Starr vs. Mutual Life Ins. Co. [1905], 41 Wash., 228.)
We are of the opinion that the trial court committed no error in sustaining the demurrer and dismissing the case. It is
to be noted, however, that counsel for appellee admits the liability of the company for the return of the first premium to
the estate of the deceased. It is not to be doubted but that the Sun Life Assurance Company of Canada will
immediately, on the promulgation of this decision, pay to the estate of the late Luis Lim y Garcia the of P433.
The order appealed from, in the nature of a final judgment is affirmed, without special finding as to costs in this
instance. So ordered.
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY, INC., respondents.
DE CASTRO, ** J.:
This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First
Instance of Manila in favor of petitioner and against private respondent which ordered the latter to pay the sum of
Pll,042.04 with interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete
payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby dismissing petitioner s complaint with
costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon this Court, Except as shall be
indicated in the discussion of the opinion of this Court the substantial correctness of still particular finding having been
disputed, thereby raising a question of law reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff secured temporary insurance from the defendant for its exportation of
1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan. Bay,
Quezon Province to Okinawa and Tokyo, Japan. The defendant issued on said date Cover Note
No. 1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the
WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved
by the Office of the Insurance Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2,
1963. The two marine policies bore the numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C,
respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of logs equivalent to 499,950
board feet. Policy No. 53 H0 1033 was for 853 pieces of logs equivalent to 695,548 board feet
(Exhibit C). The total cargo insured under the two marine policies accordingly consisted of 1,395
logs, or the equivalent of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine
policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost
during loading operations in the Diapitan Bay. The logs were to be loaded on the 'SS Woodlock'
which docked about 500 meters from the shoreline of the Diapitan Bay. The logs were taken from
the log pond of the plaintiff and from which they were towed in rafts to the vessel. At about 10:00
o'clock a. m. on March 29, 1963, while the logs were alongside the vessel, bad weather developed
resulting in 75 pieces of logs which were rafted together co break loose from each other. 45 pieces
of logs were salvaged, but 30 pieces were verified to have been lost or washed away as a result of
the accident.

In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'appropriately 32 pieces of log's
during loading of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft. Philippine
Lauan and Apitong Logs. We would like to inform you that we have received advance preliminary
report from our Office in Diapitan, Quezon that we have lost approximately 32 pieces of logs during
loading of the SS Woodlock.
We will send you an accurate report all the details including values as soon as same will be
reported to us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15,
1963, as shown by the stamp impression appearing on the left bottom corner of said letter. The
plaintiff subsequently submitted a 'Claim Statement demanding payment of the loss under Policies
Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G).
On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect
the loss and assess the damage. The adjustment company submitted its 'Report on August 23,
1963 (Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces of logs is not covered
by Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of
logs loaded on board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the
1,250,000 bd. ft. covered by Cover Note 1010 insured for $70,000.00.
On September 14, 1963, the adjustment company submitted a computation of the defendant's
probable liability on the loss sustained by the shipment, in the total amount of Pl1,042.04 (Exhibit
4).
On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground they
defendant's investigation revealed that the entire shipment of logs covered by the two marines
policies No. 53 110 1032 and 713 HO 1033 were received in good order at their point of
destination. It was further stated that the said loss may be considered as covered under Cover
Note No. 1010 because the said Note had become 'null and void by virtue of the issuance of
Marine Policy Nos. 53 HO 1032 and 1033'(Exhibit J-1). The denial of the claim by the defendant
was brought by the plaintiff to the attention of the Insurance Commissioner by means of a letter
dated March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance Commissioner
Francisco Y. Mandanas observed that 'it is only fair and equitable to indemnify the insured under
Cover Note No. 1010', and advised early settlement of the said marine loss and salvage claim
(Exhibit L).

On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their
attorneys, the claim of the plaintiff is being denied on the ground that the cover note is null and void
for lack of valuable consideration (Exhibit M). 4
Petitioner assigned as errors of the Court of Appeals, the following:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND
VOID FOR LACK OF VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED
THE PROVEN FACTS THAT PREMIUMS FOR THE COMPREHENSIVE INSURANCE
COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO SEPARATE
PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS
RELEASED FROM LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY IN
GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT
PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM
ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND, CONSEQUENTLY,
OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE INSURANCE
ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover
note is made subject to the terms and conditions of the marine policies, and the payment of premiums is one of the
terms of the policies. From this undisputed fact, We uphold petitioner's submission that the Cover Note was not
without consideration for which the respondent court held the Cover Note as null and void, and denied recovery
therefrom. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred,
does not militate against the validity of petitioner's contention, for no such premium could have been paid, since by
the nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that
would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are
intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan
Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by
private respondent after the issuance of the two regular marine insurance policies, thereby leaving no account unpaid
by petitioner due on the insurance coverage, which must be deemed to include the Cover Note. If the Note is to be
treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose and
function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a
mere application for insurance which is a mere offer. 6
It may be true that the marine insurance policies issued were for logs no longer including those which had been lost
during loading operations. This had to be so because the risk insured against is not for loss during operations
anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no
difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can
be determined independently as in fact it had been so ascertained at the instance of private respondent itself when it
sent its own adjuster to investigate and assess the loss, after the issuance of the marine insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its computation of respondent's liability on
the insurance coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for

no loss or damage had to be assessed on the coverage arising from the marine insurance policies. For obvious
reasons, it was not necessary to ask petitioner to pay premium on the Cover Note, for the loss insured against having
already occurred, the more practical procedure is simply to deduct the premium from the amount due the petitioner
on the Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose
what is due it as if there had been payment of premium, for non-payment by it was not chargeable against its fault.
Had all the logs been lost during the loading operations, but after the issuance of the Cover Note, liability on the note
would have already arisen even before payment of premium. This is how the cover note as a "binder" should legally
operate otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine
that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was
intended and policy is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires
this ground of delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on the
cover note, it took steps clearly indicative that this particular ground for objection to the claim was never in its mind.
The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place,
so that it could determine whether delay would be a valid ground upon which to object to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on April 15,
1963, was to set in motion from July 1963 what would be necessary to determine the cause and extent of the loss,
with a view to the payment thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess the
loss in July, 1963. The adjuster submitted his report on August 23, 1963 and its computation of respondent's liability
on September 14, 1963. From April 1963 to July, 1963, enough time was available for private respondent to
determine if petitioner was guilty of delay in communicating the loss to respondent company. In the proceedings that
took place later in the Office of the Insurance Commissioner, private respondent should then have raised this ground
of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find a real
and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and convinced
that as expressly provided by law, waiver can successfully be raised against private respondent. Thus Section 84 of
the Insurance Act provides:
Section 84.Delay in the presentation to an insurer of notice or proof of loss is waived if caused by
any act of his or if he omits to take objection promptly and specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments of error.
ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto
with the affirmance of this Court. No special pronouncement as to costs.
SO ORDERED.
G.R. No. L-5915

March 31, 1955

EAGLE STAR INSURANCE CO., LTD., KURR STEAMSHIP CO., INC., ROOSEVELT STEAMSHIP AGENCY, INC.,
and LEIF HOEGH & COMPANY, A/S., petitioners,
vs.
CHIA YU, respondent.
Ross, Selph, Carrascoso and Janda and Delfin L. Gonzales for petitioner.
Nabong and Sese for respondent.
REYES, A., J.:

On January 15, 1946, Atkin, Kroll & Co., loaded on the S. S. Roeph Silverlight owned and operated by Leigh Hoegh &
Co., A/S, of San Francisco California, 14 bales of assorted underwear valued at P8,085.23 consigned to Chia Yu in
the City of Manila. The shipment was insured against all risks by Eagle Star Ins. Co. of San Francisco, California,
under a policy issued to the shipper and by the latter assigned to the consignee. The vessel arrived in Manila on
February 10, 1946, and on March 4 started discharging its cargo into the custody of the Manila Terminal Co., Inc.,
which was then operating the arrastre service for the Bureau of Customs. But the 14 bales consigned to Chia Yu only
10 were delivered to him as the remaining 3 could not be found. Three of those delivered were also found damaged
to the extent of 50 per cent.
Chia Yu claimed indemnity for the missing and damaged bales. But the claim was declined, first, by the carrier and
afterward by the insurer, whereupon Chia Yu brought the present action against both, including their respective
agents in the Philippines. Commenced in the Court of First Instance of Manila on November 16, 1948, or more than
two years after delivery of the damaged bales and the date when the missing bales should have been delivered, the
action was resisted by the defendants principally on the ground of prescription. But the trial court found for plaintiff
and rendered judgment in his favor for the sum claimed plus legal interest and costs. The judgment was affirmed by
the Court of Appeals, and the case is now before us on appeal by certiorari.
Except for the controversy as to the amount for which the carrier could be held liable under the terms of the bill of
lading, the only question presented for determination is whether plaintiff's action has prescribed.
On the part of the carrier the defense of prescription is made to rest on the following stipulation of the bill of lading:
In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless
suit is brought within one year after the delivery of the goods or the date when the goods should have been
delivered.
The stipulation is but a repetition of a provision contained in section 3 (6) of the United States Carriage of Goods by
Sea, Act of 1936, which was adopted and made applicable to the Philippines by Commonwealth Act 65 and by
express agreement incorporated by reference in the bill of lading. Following our decision in Chua Kuy vs. Everett
Steamship Corporation,1 G. R. No L-5554 (May 27, 1953) and in E. R. Elser, Inc., et al., vs. Court of Appeals,. et
al.,2 G. R. No. L-6517 (November 29, 1954) giving force and effect to this kind of stipulation in bills of lading covering
shipments from the United States to the Philippines, we have to hold that plaintiff's failure to bring his action "within
one year after the delivery of the goods or the date when the goods should have been delivered" discharged the
carrier from all liability. This dispenses with the necessity of deciding how much could be recovered from the carrier
under the terms of the bill of lading.
The case for the insurer stands on a different footing, for its claim of prescription is founded upon the terms of the
policy and not upon the bill of lading. Under our law the time limit for bringing a civil action upon a written contract is
ten years after the right of action accrues. (Sec. 43, Act 190; Art. 1144, New Civil Code.) But counsel for the insurer
claim that this statutory in the policy:
No suit action on this Policy, for the recovery of any claim, shall be sustainable in any Court of law or equity
unless the insured shall have fully complied with all the terms and conditions of this Policy nor unless
commenced with twelve (12) months next after the happening of the loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire Insurance & Co., Ltd., et al., 46 Phil. 345, relied upon by the insurer,
this Court held that a clause in an insurance policy providing that an action upon the policy by the insured must be
brought within a certain time is, if reasonable, valid and will prevail over statutory limitations of the action. That
decision, however, was rendered before the passage of Act 4101, which amended the Insurance Act by inserting the
following section in chapter one thereof:

SEC. 61-A. Any condition, stipulation or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than one year from the time when the cause of action
accrues, is void.
As "matters respecting a remedy, such as the bringing of suit, admissibility of evidence, and statute of limitations,
depend upon the law of the place where the suit is brought" (Insular Government vs. Frank, 13 Phil. 236), any policy
clause repugnant to this amendment to the Insurance Act cannot be given effect in an action in our courts.
Examining the policy sued upon in the present case, we find that its prescriptive clause, if given effect in accordance
with the terms of the policy, would reduce the period allowed the insured for bringing his action to less than one year.
This is so because the said clause makes the prescriptive period begin from the happening of the loss and at the
same time provides that the no suit on the policy shall be sustainable in any court unless the insured shall have first
fully complied with all the terms and conditions of the policy, among them that which requires that, as so as the loss is
determined, written claim therefor be filed with the carrier and that the letter to the carrier and the latter's reply should
be attached to the claim papers to be sent to the insurer. It is obvious that compliance with this condition precedent
will necessarily consume time and thus shorten the period for bringing suit to less than one year if the period is to
begin, as stated in the policy, from "the happening of the loss." Being contrary to the law of the forum, such stipulation
cannot be given effect.
It may perhaps be suggested that the policy clause relied on by the insurer for defeating plaintiff's action should be
given the construction that would harmonize it with section 61-A of the Insurance Act by taking it to mean that the time
given the insured for bringing his suit is twelve months after the cause of action accrues. But the question then would
be: When did the cause of action accrue? On that question we agree with the court below that plaintiff's cause of
action did not accrue until his claim was finally rejected by the insurance company. This is because, before such final
rejection, there was no real necessity for bringing suit. As the policy provides that the insured should file his claim,
first, with the carrier and then with the insurer, he had a right to wait for his claim to be finally decided before going to
court. The law does not encourages unnecessary litigation.
At this junction it should be explained that while the decision of the Court of Appeals states that the claim against the
insurance company "was finally rejected o April 22, 1947, as correctly concluded by the court below," it is obvious
from the context and we find it to be a fact that the date meant was April 22, 1948, for this was the date when,
according to the finding of the trial court, the insurance company in London rejected the claim. The trial court's
decision says:
On September 21, 1946, after Roosevelt Steamship Agency Inc., and Manila Terminal Co., Inc., denied
plaintiff's claim, a formal insurance claim was filed with Kerr & Co., Ltd., local agents of Eagle Star Insurance
Co., Ltd., (Exh. L.)Kerr & Co., Ltd., referred the insurance claim to Eagle Star Insurance Co., Ltd. in London
but the latter, after insistent request of plaintiffs for action, rejected the claim on April 22, 1948, giving as its
reasons the lapse of the expiry day of the risks covered by the policy and returned the claim documents only
in August of 1948. (pp. 87-88, Record on Appeal.)
Furthermore, there is nothing in the record to show that the claim was rejected in the year 1947, either by the
insurance company in London or its settling agents in the Philippines, while on the other hand defendant's own
Exhibit L-1 is indisputable proof that it was on 22nd April 1948" that the settling agents informed the claimant "that
after due and careful consideration, our Principals confirm our declination of this claim." It not appearing that the
settling agents' decision on claims against their principals were not subject to reversal or modification by the latter,
while on the contrary the insurance policy expressly stipulates, under the heading "Important Notice," that the said
agents "have authority to certify only as to the nature, cause and extent of the damage," and it furthermore appearing
that a reiteration of plaintiffs claim was made to the principals and the latter gave it due course since only "after due
and careful consideration" did they confirm the action taken by the agents, we conclude that, for the purpose of the
present action, we should consider plaintiff's claim to have been finally rejected by the insurer on April 22, 1948.
Having been filed within twelve months form that date, the action cannot be deemed to have prescribed even on the

supposition that the period given the insured for bringing suit under the prescriptive clause of the policy is twelve
months after the accrual of the cause of action.
In concluding, we may state that contractual limitations contained in insurance policies are regarded with extreme
jealousy by courts and will be strictly construed against the insurer and should not be permitted to prevent a recovery
when their just and honest application would not produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is reversed with respect to the carrier and its agents but affirmed with
respect to the insurance company and its agents, with costs against the latter.
G.R. No. L-24566

July 29, 1968

AGRICULTURAL CREDIT & COOPERATIVE FINANCING ADMINISTRATION (ACCFA), plaintiff-appellant,

vs.
ALPHA INSURANCE & SURETY CO., INC., defendant-appellee,
RICARDO A. LADINES, ET AL., third party-defendants-appellees.
Deogracias E. Lerma and Esmeraldo U. Guloy for plaintiff-appellant.
L. L. Reyes for defendant-appellee.
Geronimo F. Abellera for third party defendants-appellees.
REYES, J.B.L., J.:
Appeal, on points of law, against a decision of the Court of First Instance of Manila, in its Case No. 43372, upholding
a motion to dismiss.
At issue is the question whether or not the provision of a fidelity bond that no action shall be had or maintained
thereon unless commenced within one year from the making of a claim for the loss upon which the action is based, is
valid or void, in view of Section 61-A of the Insurance Act invalidating stipulations limiting the time for commencing an
action thereon to less than one year from the time the cause of action accrues.
Material to this decision are the following facts:

1wph1.t

According to the allegations of the complaint, in order to guarantee the Asingan Farmers' Cooperative Marketing
Association, Inc. (FACOMA) against loss on account of "personal dishonesty, amounting to larceny or estafa of its
Secretary-Treasurer, Ricardo A. Ladines, the appellee, Alpha Insurance & Surety Company had issued, on 14
February 1958, its bond, No. P-FID-15-58, for the sum of Five Thousand Pesos (P5,000.00) with said Ricardo
Ladines as principal and the appellee as solidary surety. On the same date, the Asingan FACOMA assigned its rights
to the appellant, Agricultural Credit Cooperative and Financing Administration (ACCFA for short), with approval of the
principal and the surety.
During the effectivity of the bond, Ricardo Ladines converted and misappropriated, to his personal benefit, some
P11,513.22 of the FACOMA funds, of which P6,307.33 belonged to the ACCFA. Upon discovery of the loss, ACCFA
immediately notified in writing the survey company on 10 October 1958, and presented the proof of loss within the
period fixed in the bond; but despite repeated demands the surety company refused and failed to pay. Whereupon,
ACCFA filed suit against appellee on 30 May 1960.
Defendant Alpha Insurance & Surety Co., Inc., (now appellee) moved to dismiss the complaint for failure to state a
cause of action, giving as reason that (1) the same was filed more than one year after plaintiff made claim for loss,
contrary to the eighth condition of the bond, providing as follows: .
EIGHT LIMITATION OF ACTION

No action, suit or proceeding shall be had or maintained upon this Bond unless the same be commenced
within one year from the time of making claim for the loss upon which such action, suit or proceeding, is
based, in accordance with the fourth section hereof.
(2) the complaint failed to show that plaintiff had filed civil or criminal action against Ladines, as required by
conditions 4 and 11 of the bond; and (3) that Ladines was a necessary and indispensable party but had not been
joined as such.
At first, the Court of First Instance denied dismissal; but, upon reconsideration, the court reversed its original stand,
and dismissed the complaint on the ground that the action was filed beyond the contractual limitation period (Record
on Appeal, pages 56-59).
Hence, this appeal.
We find the appeal meritorious.
A fidelity bond is, in effect, in the nature of a contract of insurance against loss from misconduct, and is governed by
the same principles of interpretation: Mechanics Savings Bank & Trust Co. vs. Guarantee Company, 68 Fed. 459;
Pao Chan Wei vs. Nemorosa, 103 Phil. 57. Consequently, the condition of the bond in question, limiting the period for
bringing action thereon, is subject to the provisions of Section 61-A of the Insurance Act (No. 2427), as amended by
Act 4101 of the pre-Commonwealth Philippine Legislature, prescribing that

SEC. 61-A A condition, stipulation or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than one year from the time when the cause of action
accrues is void.
Since a "cause of action" requires, as essential elements, not only a legal right of the plaintiff and a correlative
obligation of the defendant but also "an act or omission of the defendant in violation of said legal right" (Maao Sugar
Central vs. Barrios, 79 Phil. 666), the cause of action does not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty (in this case, to pay the amount of the bond). The year for instituting action in court
must be reckoned, therefore, from the time of appellee's refusal to comply with its bond; it can not be counted from
the creditor's filing of the claim of loss, for that does not import that the surety company will refuse to pay. In so far,
therefore, as condition eight of the bond requires action to be filed within one year from the filing of the claim for loss,
such stipulation contradicts the public policy expressed in Section 61-A of the Philippine Insurance Act. Condition
eight of the bond, therefore, is null and void, and the appellant is not bound to comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil. 696, 701, this Court ruled: .

1wph1.t

It may perhaps be suggested that the policy clause relied on by the insurer for defeating plaintiff's action
should be given the construction that would harmonize it with section 61-A of the Insurance Act by taking it
to mean that the time given the insured for bringing his suit is twelve months after the cause of action
accrues. But the question then would be: When did the cause of action accrue? On that question we agree
with the court below that plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real necessity for bringing
suit. As the policy provides that the insured should file his claim, first, with the carrier and then with the
insurer, he had a right to wait for his claim to be finally decided before going to court. The law does not
encourage unnecessary litigation.
The discouraging of unnecessary litigation must be deemed a rule of public policy, considering the unrelieved
congestion in the courts.

As a consequence of the foregoing, condition eight of the Alpha bond is null and void, and action may be brought
within the statutory period of limitation for written contracts (New Civil Code, Article 1144). The case of Ang vs. Fulton
Fire Insurance Co., 2 S.C.R.A. 945 (31 July 1961), relied upon by the Court a quo, is no authority against the views
herein expressed, since the effect of Section 61-A of the Insurance Law on the terms of the Policy or contract was not
there considered.
The condition of previous conviction (paragraph b, clause 4, of the contract) having been deleted by express
agreement and the surety having assumed solidary liability, the other grounds of the motion to dismiss are equally
untenable. A creditor may proceed against any one of the solidary debtors, or some or all of them simultaneously
(Article 1216, New Civil Code).
WHEREFORE, the appealed order granting the motion to dismiss is reversed and set aside, and the records are
remanded to the Court of First Instance, with instructions to require defendant to answer and thereafter proceed in
conformity with the law and the Rules of Court. Costs against appellee. So ordered.
G.R. No. 92383 July 17, 1992
SUN INSURANCE OFFICE, LTD., petitioner,
vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.
CRUZ, J.:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two
months later, he was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on
the policy but her claim was rejected. The petitioner agreed that there was no suicide. It argued, however that there
was no accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10
o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not
drunk) and was playing with his handgun, from which he had previously removed the magazine. As she watched
television, he stood in front of her and pointed the gun at her. She pushed it aside and said it might he loaded. He
assured her it was not and then pointed it to his temple. The next moment there was an explosion and Lim slumped
to the floor. He was dead before he fell. 1
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The petitioner was
sentenced to pay her P200,000.00, representing the face value of the policy, with interest at the legal rate;
P10,000.00 as moral damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory damages;
and P5,000.00 as attorney's fees, plus the costs of the suit. This decision was affirmed on appeal, and the motion for
reconsideration was denied. 3 The petitioner then came to this Court to fault the Court of Appeals for approving the
payment of the claim and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an
insurance contract are to be construed and considered according to the ordinary understanding and common usage
and speech of people generally. In-substance, the courts are practically agreed that the words "accident" and
"accidental" mean that which happens by chance or fortuitously, without intention or design, and which is unexpected,
unusual, and unforeseen. The definition that has usually been adopted by the courts is that 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 case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human agency, an event
which, under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been
defined as an injury which happens by reason of some violence or casualty to the injured without his design, consent,
or voluntary co-operation. 5
In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an
accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that "there is no accident when a
deliberate act is performed unless some additional, unexpected, independent and unforeseen happening occurs
which produces or brings about their injury or death." There was such a happening. This was the firing of the gun,
which was the additional unexpected and independent and unforeseen occurrence that led to the insured person's
death.
The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the
private petitioner's claim is barred by such provision. It is there stated:
Exceptions
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting to commit suicide or willfully exposing himself to needless peril
except in an attempt to save human life.
To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured
willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they
both signify a disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such
life whereas the second act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who
walks a tightrope one thousand meters above the ground and without any safety device may not actually be intending
to commit suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully exposing himself to
needless peril" within the meaning of the exception in question.
The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to
needless peril and so came under the exception. The theory is that a gun is per se dangerous and should therefore
be handled cautiously in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the
gun and believed it was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted
that Lim did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is
that he thought it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed
harmless.
The contrary view is expressed by the petitioner thus:
Accident insurance policies were never intended to reward the insured for his tendency to show off
or for his miscalculations. They were intended to provide for contingencies. Hence, when I

miscalculate and jump from the Quezon Bridge into the Pasig River in the belief that I can
overcome the current, I have wilfully exposed myself to peril and must accept the consequences of
my act. If I drown I cannot go to the insurance company to ask them to compensate me for my
failure to swim as well as I thought I could. The insured in the case at bar deliberately put the gun
to his head and pulled the trigger. He wilfully exposed himself to peril.
The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That
might frighten the insurance people to death. We also agree that under the circumstances narrated, his beneficiary
would not be able to collect on the insurance policy for it is clear that when he braved the currents below,
he deliberately exposed himself to a known peril.
The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's
hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below were dangerous. By
contrast, Lim did not know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from
recovering from the insurance policy he obtained precisely against accident. There is nothing in the policy that
relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed
to his own accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly
made in the contract to relieve the insurer from liability, and none of these exceptions is applicable in the case at
bar. **
It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured.
There is no reason to deviate from this rule, especially in view of the circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this
case is, as the petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good
faith then it resisted the private respondent's claim on the ground that the death of the insured was covered by the
exception. The issue was indeed debatable and was clearly not raised only for the purpose of evading a legitimate
obligation. We hold therefore that the award of moral and exemplary damages and of attorney's fees is unjust and so
must be disapproved.
In order that a person may be made liable to the payment of moral damages, the law requires that
his act be wrongful. The adverse result of an action does not per se make the act wrongful and
subject the act or to the payment of moral damages. The law could not have meant to impose a
penalty on the right to litigate; such right is so precious that moral damages may not be charged on
those who may exercise it erroneously. For these the law taxes costs. 7
The fact that the results of the trial were adverse to Barreto did not alone make his act in
bringing the action wrongful because in most cases one party will lose; we would be
imposing an unjust condition or limitation on the right to litigate. We hold that the award of
moral damages in the case at bar is not justified by the facts had circumstances as well as
the law.
If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not
the fact of winning alone that entitles him to recover such damages of the exceptional
circumstances enumerated in Art. 2208. Otherwise, every time a defendant wins, automatically the
plaintiff must pay attorney's fees thereby putting a premium on the right to litigate which should not
be so. For those expenses, the law deems the award of costs as sufficient. 8
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable
to the private respondent in the sum of P200,000.00 representing the face value of the insurance contract, with

interest at the legal rate from the date of the filing of the complaint until the full amount is paid, but MODIFIED with
the deletion of all awards for damages, including attorney's fees, except the costs of the suit.
SO ORDERED.
G.R. No. L-27932 October 30, 1972
UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs, REPUBLIC BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
Armando L. Abad, Sr. for plaintiff-appellant.
Gamelo, Francisco and Aquino for defendant-appellee.
FERNANDO, J.:p
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co., Inc., defendant in the lower court
and now appellee, was able to avoid liability upon proof that there was a violation of a warranty. There was no denial
thereof from the insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the effort of the Republic
Bank, the main plaintiff and now the sole appellant, to recover on such policy as mortgagee, by virtue of the cover
note in the insurance policy providing that it is entitled to the payment of loss or damages as its interest may appear,
was in vain. The defect being legally incurable, its appeal is likewise futile. We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January 12, 1962, the Union Manufacturing
Co., Inc. obtained certain loans, overdrafts and other credit accommodations from the Republic Bank in the total sum
of P415,000.00 with interest at 9% per annum from said date and to secure the payment thereof, said Union
Manufacturing Co., Inc. executed a real and chattel mortgages on certain properties, which are more particularly
described and listed at the back of the mortgage contract ...; (2) That as additional condition of the mortgage contract,
the Union Manufacturing Co., Inc. undertook to secure insurance coverage over the mortgaged properties for the
same amount of P415,000.00 distributed as follows: (a) Buildings, P30,000.00; (b) Machineries, P300,000.00; and (c)
Merchandise Inventory, P85,000.00, giving a total of P415,000.00; (3) That as Union Manufacturing Co., Inc. failed to
secure insurance coverage on the mortgaged properties since January 12, 1962, despite the fact that Cua Tok, its
general manager, was reminded of said requirement, the Republic Bank procured from the defendant, Philippine
Guaranty Co., Inc. an insurance coverage on loss against fire for P500,000.00 over the properties of the Union
Manufacturing Co., Inc., as described in defendant's 'Cover Note' dated September 25, 1962, with the annotation that
loss or damage, if any, under said Cover Note is payable to Republic Bank as its interest may appear, subject
however to the printed conditions of said defendant's Fire Insurance Policy Form; (4) That on September 27, 1962,
Fire Insurance Policy No. 43170 ... was issued for the sum of P500,000.00 in favor of the assured, Union
Manufacturing Co., Inc., for which the corresponding premium in the sum of P8,328.12, which was reduced to
P6,688.12, was paid by the Republic Bank to the defendant, Philippine Guaranty Co., Inc. ...; (5) That upon the
expiration of said fire policy on September 25, 1963, the same was renewed by the Republic Bank upon payment of
the corresponding premium in the same amount of P6,663.52 on September 26, 1963; (6) That in the corresponding
voucher ..., it appears that although said renewal premium was paid by the Republic Bank, such payment was for the
account of Union Manufacturing Co., Inc. and that the cash voucher for the payment of the first premium was paid
also by the Republic Bank but for the account Union Manufacturing Co., Inc.; (7) That sometime on September 6,
1964, a fire occurred in the premises of the Union Manufacturing Co., Inc.; (8) That on October 6, 1964, the Union
Manufacturing Co., Inc. filed its fire claim with the defendant Philippine Guaranty Co., Inc., thru its adjuster, H. H.
Bayne Adjustment Co., which was denied by said defendant in its letter dated November 27, 1964 ..., on the following
grounds: 'a. Policy Condition No. 3 and/or the 'Other Insurance Clause' of the policy violated because you did not
give notice to us the other insurance which you had taken from New India for P80,000.00, Sincere Insurance for
P25,000.00 and Manila Insurance for P200,000.00 with the result that these insurances, of which we became aware

of only after the fire, were not endorsed on our policy; and (b) Policy Condition No. 11 was not complied with because
you have failed to give to our representatives the required documents and other proofs with respect to your claim and
matters touching on our liability, if any, and the amount of such liability'; (9) That as of September, 1962, when the
defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ... in the sum of P500,000.00 to cover the
properties of the Union Manufacturing Co., Inc., the same properties were already covered by Fire Policy No. 1533 of
the Sincere Insurance Company for P25,000.00 for the period from October 7, 1961 to October 7, 1962 ...; and by
insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic Insurance Agency for the total sum of P300,000.00
and for periods respectively, from January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963; and
(10) That when said defendant's Fire Insurance Policy No. 43170 was already in full force and effect, the Union
Manufacturing Co., Inc. without the consent of the defendant, Philippine Guaranty Co., Inc., obtained other insurance
policies totalling P305,000.00 over the same properties prior to the fire, to wit: (1) Fire Policy No. 250 of New India
Assurance Co., Ltd., for P80,000.00 for the period from May 27, 1964 to May 27, 1965 ...; (2) Fire Policy No. 3702 of
the Sincere Insurance Company for P25,000.00 for the period from October 7, 1963 to October 7, 1964 ...; and (3)
Fire Policy No. 6161 of Manila Insurance Co. for P200,000.00 for the period from May 15, 1964 to May 15,
1965 ... ." 1 There is in the cover note 2 and in the fire insurance policy 3 the following warranty: "[Co- Insurance
Declared]: Nil." 4
Why the appellant Republic Bank could not recover, as payee, in case of loss as its "interest may appear subject to
the terms and conditions, clauses and warranties" of the policy was expressed in the appealed decision thus:
"However, inasmuch as the Union Manufacturing Co., Inc. has violated the condition of the policy to the effect that it
did not reveal the existence of other insurance policies over the same properties, as required by the warranty
appearing on the face of the policy issued by the defendant and that on the other hand said Union Manufacturing Co.,
Inc. represented that there were no other insurance policies at the time of the issuance of said defendant's policy, and
it appearing furthermore that while the policy of the defendant was in full force and effect the Union Manufacturing
Co., Inc. secured other fire insurance policies without the written consent of the defendant endorsed on the policy, the
conclusion is inevitable that both the Republic Bank and Union Manufacturing Co., Inc. cannot recover from the same
policy of the defendant because the same is null and void." 5 The tone of confidence apparent in the above excerpts
from the lower court decision is understandable. The conclusion reached by the lower court finds support in
authoritative precedents. It is far from easy, therefore, for appellant Republic Bank to impute to such a decision a
failure to abide by the law. Hence, as noted at the outset, the appeal cannot prosper. An affirmance is indicated.
It is to Santa Ana v. Commercial Union Assurance Co., 6 a 1930 decision, that one turns to for the first explicit
formulation as to the controlling principle. As was made clear in the opinion of this Court, penned by Justice VillaReal: "Without deciding whether notice of other insurance upon the same property must be given in writing, or
whether a verbal notice is sufficient to render an insurance valid which requires such notice, whether oral or written,
we hold that in the absolute absence of such notice when it is one of the conditions specified in the fire insurance
policy, the policy is null and void." 7 The next year, in Ang Giok Chip v. Springfield Fire & Marine Ins. Co., 8 the
conformity of the insured to the terms of the policy, implied from the failure to express any disagreement with what is
provided for, was stressed in these words of the ponente, Justice Malcolm: "It is admitted that the policy before us
was accepted by the plaintiff. The receipt of this policy by the insured without objection binds both the acceptor and
the insured to the terms thereof. The insured may not thereafter be heard to say that he did not read the policy or
know its terms, since it is his duty to read his policy and it will be assumed that he did so." 9 As far back as 1915,
in Young v. Midland Textile Insurance Company, 10 it was categorically set forth that as a condition precedent to the
right of recovery, there must be compliance on the part of the insured with the terms of the policy. As stated in the
opinion of the Court through Justice Johnson: "If the insured has violated or failed to perform the conditions of the
contract, and such a violation or want of performance has not been waived by the insurer, then the insured cannot
recover. Courts are not permitted to make contracts for the parties. The function and duty of the courts consist simply
in enforcing and carrying out the contracts actually made. While it is true, as a general rule, that contracts of
insurance are construed most favorably to the insured, yet contracts of insurance, like other contracts, are to be
construed according to the sense and meaning of the terms which the parties themselves have used. If such terms
are clear and unambiguous they must be taken and understood in their plain, ordinary and popular sense." 11 More
specifically, there was a reiteration of this Santa Ana ruling in a decision by the then Justice, later Chief Justice,
Bengzon, in General Insurance & Surety Corp. v. Ng Hua. 12 Thus: "The annotation then, must be deemed to be a
warranty that the property was not insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec.

69, Insurance Act) Such misrepresentation is fatal in the light of our views in Santa Ana v. Commercial Union
Assurance Company, Ltd. ... . The materiality of non-disclosure of other insurance policies is not open to doubt." 13 As
a matter of fact, in a 1966 decision, Misamis Lumber Corp. v. Capital Ins. & Surety Co., Inc., 14 Justice J.B.L. Reyes,
for this Court, made manifest anew its adherence to such a principle in the face of an assertion that thereby a highly
unfavorable provision for the insured would be accorded recognition. This is the language used: "The insurance
contract may be rather onerous ('one sided', as the lower court put it), but that in itself does not justify the abrogation
of its express terms, terms which the insured accepted or adhered to and which is the law between the contracting
parties." 15
There is no escaping the conclusion then that the lower court could not have disposed of this case in a way other
than it did. Had it acted otherwise, it clearly would have disregarded pronouncements of this Court, the compelling
force of which cannot be denied. There is, to repeat, no justification for a reversal.
WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No costs.
G.R. No. 198588

July 11, 2012

UNITED MERCHANTS CORPORATION, Petitioner,

vs.
COUNTRY BANKERS INSURANCE CORPORATION, Respondent.
DECISION
CARPIO, J.:
The Case
This Petition for Review on Certiorari1 seeks to reverse the Court of Appeals Decision2 dated 16 June 2011 and its
Resolution3 dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals reversed the Decision4of the
Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim on the Insurance Policy is void.
The Facts
The facts, as culled from the records, are as follows:
Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling, and manufacturing
Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose Subdivision, Barrio Manresa, Quezon
City, where UMC assembled and stored its products.
On 6 September 1995, UMCs General Manager Alfredo Tan insured UMCs stocks in trade of Christmas lights
against fire with defendant Country Bankers Insurance Corporation (CBIC) for P15,000,000.00. The Fire Insurance
Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No. 12959A, valid until 6 September 1996, states:
AMOUNT OF INSURANCE:

FIFTEEN
MILLION PESOS
PHILIPPINE
CURRENCY
xxx

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the properties of the Assured or held
by them in trust, on commissions, or on joint account with others and/or for which they are responsible in the event of
loss and/or damage during the currency of this policy, whilst contained in the building of one lofty storey in height,
constructed of concrete and/or hollow blocks with portion of galvanized iron sheets, under galvanized iron rood,
occupied as Christmas lights storage.5

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to form part of the
Insurance Policy. Endorsement F/96-154 provides that UMCs stocks in trade were insured against additional perils,
to wit: "typhoon, flood, ext. cover, and full earthquake." The sum insured was also increased toP50,000,000.00
effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC issued Endorsement F/96-157 where the name of
the assured was changed from Alfredo Tan to UMC.
On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment Corporation (CRM)
to investigate and evaluate UMCs loss by reason of the fire. CBICs reinsurer, Central Surety, likewise requested the
National Bureau of Investigation (NBI) to conduct a parallel investigation. On 6 July 1996, UMC, through CRM,
submitted to CBIC its Sworn Statement of Formal Claim, with proofs of its loss.
On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from CBIC. On 25
February 1997, UMC received CBICs letter, dated 10 January 1997, rejecting UMCs claim due to breach of
Condition No. 15 of the Insurance Policy. Condition No. 15 states:
If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any benefit under this
Policy; or if the loss or damage be occasioned by the willful act, or with the connivance of the Insured, all the benefits
under this Policy shall be forfeited.6
On 19 February 1998, UMC filed a Complaint7 against CBIC with the RTC of Manila. UMC anchored its insurance
claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted, and the Certification dated 24
July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J. Garcia of the Bureau of Fire Protection. The
Certification dated 24 July 1996 provides that:
This is to certify that according to available records of this office, on or about 6:10 P.M. of July 3, 1996, a fire broke
out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an
estimated damage of Fifty-Five Million Pesos (P55,000,000.00) to the building and contents, while the reported
insurance coverage amounted to Fifty Million Pesos (P50,000,000.00) with Country Bankers Insurance Corporation.
The Bureau further certifies that no evidence was gathered to prove that the establishment was willfully, feloniously
and intentionally set on fire.
That the investigation of the fire incident is already closed being ACCIDENTAL in nature.8
In its Answer with Compulsory Counterclaim9 dated 4 March 1998, CBIC admitted the issuance of the Insurance
Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of action; (2) that UMCs
claim has already prescribed; and (3) that UMCs fire claim is tainted with fraud. CBIC alleged that UMCs claim was
fraudulent because UMCs Statement of Inventory showed that it had no stocks in trade as of 31 December 1995,
and that UMCs suspicious purchases for the year 1996 did not even amount to P25,000,000.00. UMCs GIS and
Financial Reports further revealed that it had insufficient capital, which meant UMC could not afford the
alleged P50,000,000.00 worth of stocks in trade.
In its Reply10 dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy. UMC claimed
that it did not make any false declaration because the invoices were genuine and the Statement of Inventory was for
internal revenue purposes only, not for its insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMCs disbursing officer.
Ebora testified that UMCs stocks in trade, at the time of the fire, consisted of: (1) raw materials for its Christmas
lights; (2) Christmas lights already assembled; and (3) Christmas lights purchased from local suppliers. These stocks
in trade were delivered from August 1995 to May 1996. She stated that Straight Cargo Commercial Forwarders
delivered the imported materials to the warehouse, evidenced by delivery receipts. However, for the year 1996, UMC
had no importations and only bought from its local suppliers. Ebora identified the suppliers as Fiber Technology
Corporation from which UMC bought stocks worth P1,800,000.00 on 20 May 1996; Fuze Industries Manufacturer
Philippines from which UMC bought stocks worth P19,500,000.00 from 20 January 1996 to 23 February 1996; and
Tomco Commercial Press from which UMC bought several Christmas boxes. Ebora testified that all these deliveries
were not yet paid. Ebora also presented UMCs Balance Sheet, Income Statement and Statement of Cash Flow. Per
her testimony, UMCs purchases amounted to P608,986.00 in 1994;P827,670.00 in 1995; and P20,000,000.00 in

1996. Ebora also claimed that UMC had sales only from its fruits business but no sales from its Christmas lights for
the year 1995.
The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers to assemble and
pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third witness, Metropolitan Bank and Trust
Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters of credit with MBTC for the year 1995 only.
The fourth witness presented was Ernesto Luna (Luna), the delivery checker of Straight Commercial Cargo
Forwarders. Luna affirmed the delivery of UMCs goods to its warehouse on 13 August 1995, 6 September 1995, 8
September 1995, 24 October 1995, 27 October 1995, 9 November 1995, and 19 December 1995. Lastly, CRMs
adjuster Dominador Victorio testified that he inspected UMCs warehouse and prepared preliminary reports in this
connection.
On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a Securities and
Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and NBI Investigator Arnold Lazaro
(Lazaro). Caguindagan testified that he inspected the burned warehouse on 5 July 1996, took pictures of it and
referred the claim to an independent adjuster. The SEC representatives testimony was dispensed with, since the
parties stipulated on the existence of certain documents, to wit: (1) UMCs GIS for 1994-1997; (2) UMCs Financial
Report as of 31 December 1996; (3) SEC Certificate that UMC did not file GIS or Financial Reports for certain years;
and (4) UMCs Statement of Inventory as of 31 December 1995 filed with the BIR.
Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMCs claim. On 19 November
1996, they concluded that arson was committed based from their interview with barangay officials and the pictures
showing that blackened surfaces were present at different parts of the warehouse. On cross-examination, Lazaro
admitted that they did not conduct a forensic investigation of the warehouse, nor did they file a case for arson.
For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of UCPB General
Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner. When asked to bring documents
related to the insurance of Perfect Investment Company, Inc., Batallones brought the papers of Perpetual Investment,
Inc.
The Ruling of the Regional Trial Court
On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering defendant to pay plaintiff:
a) the sum of P43,930,230.00 as indemnity with interest thereon at 6% per annum from November 2003
until fully paid;
b) the sum of P100,000.00 for exemplary damages;
c) the sum of P100,000.00 for attorneys fees; and
d) the costs of suit.
Defendants counterclaim is denied for lack of merit.
SO ORDERED.11
The RTC found no dispute as to UMCs fire insurance contract with CBIC. Thus, the RTC ruled for UMCs entitlement
to the insurance proceeds, as follows:
Fraud is never presumed but must be proved by clear and convincing evidence. (see Alonso v. Cebu Country Club,
417 SCRA 115 [2003]) Defendant failed to establish by clear and convincing evidence that the documents submitted
to the SEC and BIR were true. It is common business practice for corporations to have 2 sets of reports/statements
for tax purposes. The stipulated documents of plaintiff (Exhs. 2 8) may not have been accurate.

The conflicting findings of defendants adjuster, CRM Adjustment [with stress] and that made by Atty. Cabrera & Mr.
Lazaro for Central Surety shall be resolved in favor of the former. Definitely the formers finding is more credible as it
was made soon after the fire while that of the latter was done 4 months later. Certainly it would be a different situation
as the site was no longer the same after the clearing up operation which is normal after a fire incident. The Christmas
lights and parts could have been swept away. Hence the finding of the latter appears to be speculative to benefit the
reinsurer and which defendant wants to adopt to avoid liability.
The CRM Adjustment report found no arson and confirmed substantial stocks in the burned warehouse (Exhs. QQQ)
[underscoring supplied]. This is bolstered by the BFP certification that there was no proof of arson and the fire was
accidental (Exhs. PPP). The certification by a government agency like BFP is presumed to be a regular performance
of official duty. "Absent convincing evidence to the contrary, the presumption of regularity in the performance of official
functions has to be upheld." (People vs. Lapira, 255 SCRA 85) The report of UCPB General Insurances adjuster also
found no arson so that the burned warehouse owner PIC was indemnified.12
Hence, CBIC filed an appeal with the Court of Appeals (CA).
The Ruling of the Court of Appeals
On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and the Decision of the Regional
Trial Court, of the National Judicial Capital Region, Branch 3 of the City of Manila dated June 16, 2005 in Civil Case
No. 98-87370 is REVERSED and SET ASIDE. The plaintiff-appellees claim upon its insurance policy is deemed
avoided.
SO ORDERED.13
The CA ruled that UMCs claim under the Insurance Policy is void. The CA found that the fire was intentional in origin,
considering the array of evidence submitted by CBIC, particularly the pictures taken and the reports of Cabrera and
Lazaro, as opposed to UMCs failure to explain the details of the alleged fire accident. In addition, it found that UMCs
claim was overvalued through fraudulent transactions. The CA ruled:
We have meticulously gone over the entirety of the evidence submitted by the parties and have come up with a
conclusion that the claim of the plaintiff-appellee was indeed overvalued by transactions which were fraudulently
concocted so that the full coverage of the insurance policy will have to be fully awarded to the plaintiff-appellee.
First, We turn to the backdrop of the plaintiff-appellees case, thus, [o]n September 6, 1995 its stocks-in-trade were
insured for Fifteen Million Pesos and on May 7, 1996 the same was increased to 50 Million Pesos. Two months
thereafter, a fire gutted the plaintiff-appellees warehouse.
Second, We consider the reported purchases of the plaintiff-appellee as shown in its financial report dated December
31, 1996 vis--vis the testimony of Ms. Ebora thus:
1994 - P608,986.00
1995 - P827,670.00
1996 - P20,000,000.00 (more or less) which were purchased for a period of one month.
Third, We shall also direct our attention to the alleged true and complete purchases of the plaintiff-appellee as well as
the value of all stock-in-trade it had at the time that the fire occurred. Thus:

Exhibit
Exhs. "P"-"DD",

Source
Fuze Industries

Amount
(pesos)
19,550,400.00

Dates Covered
January 20, 1996

inclusive

Manufacturer Phils.

January 31, 1996

February 12,
1996
February 20,
1996
February 23,
1996

Exhs. "EE"-"HH",
inclusive

Tomco Commercial
Press

1,712,000.00

December 19,
1995
January 24, 1996
February 21,
1996
November 24,
1995

Exhs. "II"-"QQ",
inclusive

Precious Belen
Trading

2,720,400.00

January 13, 1996

January 19, 1996
January 26, 1996
February 3, 1996
February 13,
1996
February 20,
1996
February 27,
1996

Exhs. "RR""EEE", inclusive

Wisdom Manpower
Services

361,966.00

April 3, 1996
April 12, 1996
April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996

Exhs. "GGG""NNN", inclusive

Costs of Letters of
Credit for
imported raw
materials

15,159,144.71

May 29, 1995

June 15, 1995
July 5, 1995
September 4,
1995
October 2, 1995
October 27, 1995
January 8, 1996
March 19, 1996

Exhs. "GGG-11"
- "GGG-24",
"HHH-12", "HHH-22", "III-11",
"III-14",
"JJJ-13", "KKK-11", "LLL-5"

SCCFI statements of
account

384,794.38

June 15, 1995

June 28, 1995
August 1, 1995
September 4,
1995
September 8,
1995
September 11,
1995
October 30,
199[5]
November 10,
1995
December 21,
1995

TOTAL

44,315,024.31

Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly looking through the pieces of
evidence that it adduced during the trial. The latter alleged that fraud is present in the case at bar as shown by the
discrepancy of the alleged purchases from that of the reported purchases made by plaintiff-appellee. It had also
averred that fraud is present when upon verification of the address of Fuze Industries, its office is nowhere to be
found. Also, the defendant-appellant expressed grave doubts as to the purchases of the plaintiff-appellee sometime in
1996 when such purchases escalated to a high 19.5 Million Pesos without any contract to back it up.14
On 7 July 2011, UMC filed a Motion for Reconsideration,15 which the CA denied in its Resolution dated 8 September
2011. Hence, this petition.
The Issues
UMC seeks a reversal and raises the following issues for resolution:
I.
WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW, APPLICABLE
JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON AND FRAUD IN THE ABSENCE
OF "MATERIALLY CONVINCING EVIDENCE."
II.
WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW, APPLICABLE
JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER BREACHED ITS WARRANTY.16
The Ruling of the Court
At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court to review are
questions of fact. However, UMC argues that where the findings of the CA are in conflict with those of the trial court, a
review of the facts may be made. On this procedural issue, we find UMCs claim meritorious.
A petition for review under Rule 45 of the Rules of Court specifically provides that only questions of law may be
raised. The findings of fact of the CA are final and conclusive and this Court will not review them on appeal,17subject
to exceptions as when the findings of the appellate court conflict with the findings of the trial court.18Clearly, the
present case falls under the exception. Since UMC properly raised the conflicting findings of the lower courts, it is
proper for this Court to resolve such contradiction.
Having settled the procedural issue, we proceed to the primordial issue which boils down to whether UMC is entitled
to claim from CBIC the full coverage of its fire insurance policy.
UMC contends that because it had already established a prima facie case against CBIC which failed to prove its
defense, UMC is entitled to claim the full coverage under the Insurance Policy. On the other hand, CBIC contends
that because arson and fraud attended the claim, UMC is not entitled to recover under Condition No. 15 of the
Insurance Policy.
Burden of proof is the duty of any party to present evidence to establish his claim or defense by the amount of
evidence required by law,19 which is preponderance of evidence in civil cases.20 The party, whether plaintiff or
defendant, who asserts the affirmative of the issue has the burden of proof to obtain a favorable
judgment.21Particularly, in insurance cases, once an insured makes out a prima facie case in its favor, the burden of
evidence shifts to the insurer to controvert the insureds prima facie case.22 In the present case, UMC established
a prima facie case against CBIC. CBIC does not dispute that UMCs stocks in trade were insured against fire under
the Insurance Policy and that the warehouse, where UMCs stocks in trade were stored, was gutted by fire on 3 July
1996, within the duration of the fire insurance. However, since CBIC alleged an excepted risk, then the burden of
evidence shifted to CBIC to prove such exception.
1wphi1

An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the burden of
establishing that the loss comes within the purview of the exception or limitation.23 If loss is proved apparently within a

contract of insurance, the burden is upon the insurer to establish that the loss arose from a cause of loss which is
excepted or for which it is not liable, or from a cause which limits its liability.24 In the present case, CBIC failed to
discharge its primordial burden of establishing that the damage or loss was caused by arson, a limitation in the policy.
In prosecutions for arson, proof of the crime charged is complete where the evidence establishes: (1) the corpus
delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants as the one responsible for the
crime.25 Corpus delicti means the substance of the crime, the fact that a crime has actually been committed.26This is
satisfied by proof of the bare occurrence of the fire and of its having been intentionally caused.27
In the present case, CBICs evidence did not prove that the fire was intentionally caused by the insured. First, the
findings of CBICs witnesses, Cabrera and Lazaro, were based on an investigation conducted more than four months
after the fire. The testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene as told to them
by barangay officials, are hearsay because the barangay officials were not presented in court. Cabrera and Lazaro
even admitted that they did not conduct a forensic investigation of the warehouse nor did they file a case for
arson.28 Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM, states that the cause of the
fire was "faulty electrical wiring/accidental in nature." CBIC is bound by this evidence because in its Answer, it
admitted that it designated CRM to evaluate UMCs loss. Third, the Certification by the Bureau of Fire Protection
states that the fire was accidental in origin. This Certification enjoys the presumption of regularity, which CBIC failed
to rebut.
Contrary to UMCs allegation, CBICs failure to prove arson does not mean that it also failed to prove fraud. Qua
Chee Gan v. Law Union29 does not apply in the present case. In Qua Chee Gan,30 the Court dismissed the allegation
of fraud based on the dismissal of the arson case against the insured, because the evidence was identical in both
cases, thus:
While the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurers
evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the
same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot
be materially less convincing than that required in order to convict the insured of the crime of arson" (Bachrach vs.
British American Assurance Co., 17 Phil. 536). 31
In the present case, arson and fraud are two separate grounds based on two different sets of evidence, either of
which can void the insurance claim of UMC. The absence of one does not necessarily result in the absence of the
other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be forfeited, if the claim
be in any respect fraudulent, or if any false declaration be made or used in support thereof, to wit:
15. If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any benefit under this
Policy; or if the loss or damage be occasioned by the willful act, or with the connivance of the Insured, all the benefits
under this Policy shall be forfeited.
In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,32 the Court held that where a fire insurance policy provides that
"if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under this
Policy," and the evidence is conclusive that the proof of claim which the insured submitted was false and fraudulent
both as to the kind, quality and amount of the goods and their value destroyed by the fire, such a proof of claim is a
bar against the insured from recovering on the policy even for the amount of his actual loss.
In the present case, as proof of its loss of stocks in trade amounting to P50,000,000.00, UMC submitted its Sworn
Statement of Formal Claim together with the following documents: (1) letters of credit and invoices for raw materials,
Christmas lights and cartons purchased; (2) charges for assembling the Christmas lights; and (3) delivery receipts of
the raw materials. However, the charges for assembling the Christmas lights and delivery receipts could not support
its insurance claim. The Insurance Policy provides that CBIC agreed to insure UMCs stocks in trade. UMC defined
stock in trade as tangible personal property kept for sale or traffic.33 Applying UMCs definition, only the letters of
credit and invoices for raw materials, Christmas lights and cartons may be considered.

The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade purchased for 1996
amounts to P20,000,000.00 which were purchased in one month. Thus, UMC needs to prove purchases amounting
to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in the Statement of Inventory it
submitted to the BIR, which is considered an entry in official records,34 UMC stated that it had no stocks in trade as of
31 December 1995. In its defense, UMC alleged that it did not include as stocks in trade the raw materials to be
assembled as Christmas lights, which it had on 31 December 1995. However, as proof of its loss, UMC submitted
invoices for raw materials, knowing that the insurance covers only stocks in trade.
Equally important, the invoices (Exhibits "P"-"DD") from Fuze Industries Manufacturer Phils. were suspicious. The
purchases, based on the invoices and without any supporting contract, amounted to P19,550,400.00 worth of
Christmas lights from 20 January 1996 to 23 February 1996. The uncontroverted testimony of Cabrera revealed that
there was no Fuze Industries Manufacturer Phils. located at "55 Mahinhin St., Teachers Village, Quezon City," the
business address appearing in the invoices and the records of the Department of Trade & Industry. Cabrera testified
that:
A: Then we went personally to the address as I stated a while ago appearing in the record furnished by the United
Merchants Corporation to the adjuster, and the adjuster in turn now, gave us our basis in conducting investigation, so
we went to this place which according to the records, the address of this company but there was no office of this
company.
Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and discover the address indicated by the
United Merchants as the place of business of Fuze Industries Manufacturer, Phils. was a residential place, what then
did you do after determining that it was a residential place?
A: We went to the owner of the alleged company as appearing in the Department of Trade & Industry record, and as
appearing a certain Chinese name Mr. Huang, and the address as appearing there is somewhere in Binondo. We
went personally there together with the NBI Agent and I am with them when the subpoena was served to them, but a
male person approached us and according to him, there was no Fuze Industries Manufacturer, Phils., company in
that building sir.35
In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,36 the Court ruled that the submission of false invoices to the
adjusters establishes a clear case of fraud and misrepresentation which voids the insurers liability as per condition of
the policy. Their falsity is the best evidence of the fraudulent character of plaintiffs claim.37 InVerendia v. Court of
Appeals,38 where the insured presented a fraudulent lease contract to support his claim for insurance benefits, the
Court held that by its false declaration, the insured forfeited all benefits under the policy provision similar to Condition
No. 15 of the Insurance Policy in this case.
Furthermore, UMCs Income Statement indicated that the purchases or costs of sales are P827,670.00 for 1995
and P1,109,190.00 for 1996 or a total of P1,936,860.00.39 To corroborate this fact, Ebora testified that:
Q: Based on your 1995 purchases, how much were the purchases made in 1995?
A: The purchases made by United Merchants Corporation for the last year 1995 is P827,670.[00] sir
Q: And how about in 1994?
A: In 1994, its P608,986.00 sir.
Q: These purchases were made for the entire year of 1995 and 1994 respectively, am I correct?
A: Yes sir, for the year 1994 and 1995.40 (Emphasis supplied)
In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed during the 4 December
2002 hearing, it had P1,050,862.71 as total assets and P167,058.47 as total liabilities.41
Thus, either amount in UMCs Income Statement or Financial Reports is twenty-five times the claim UMC seeks to
enforce. The RTC itself recognized that UMC padded its claim when it only allowed P43,930,230.00 as insurance

claim. UMC supported its claim of P50,000,000.00 with the Certification from the Bureau of Fire Protection stating
that "x x x a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon
City incurring an estimated damage of Fifty- Five Million Pesos (P55,000,000.00) to the building and contents x x x."
However, this Certification only proved that the estimated damage of P55,000,000.00 is shared by both the building
and the stocks in trade.
It has long been settled that a false and material statement made with an intent to deceive or defraud voids an
insurance policy.42 In Yu Cua v. South British Insurance Co.,43 the claim was fourteen times bigger than the real loss;
in Go Lu v. Yorkshire Insurance Co,44 eight times; and in Tuason v. North China Insurance Co.,45 six times. In the
present case, the claim is twenty five times the actual claim proved.
The most liberal human judgment cannot attribute such difference to mere innocent error in estimating or counting but
to a deliberate intent to demand from insurance companies payment for indemnity of goods not existing at the time of
the fire.46 This constitutes the so-called "fraudulent claim" which, by express agreement between the insurers and the
insured, is a ground for the exemption of insurers from civil liability.47
In its Reply, UMC admitted the discrepancies when it stated that "discrepancies in its statements were not covered by
the warranty such that any discrepancy in the declaration in other instruments or documents as to matters that may
have some relation to the insurance coverage voids the policy."48
On UMCs allegation that it did not breach any warranty, it may be argued that the discrepancies do not, by
themselves, amount to a breach of warranty. However, the Insurance Code provides that "a policy may declare that a
violation of specified provisions thereof shall avoid it."49 Thus, in fire insurance policies, which contain provisions such
as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy between the actual loss and that claimed in the
proof of loss voids the insurance policy. Mere filing of such a claim will exonerate the insurer.50
Considering that all the circumstances point to the inevitable conclusion that UMC padded its claim and was guilty of
fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited whatever benefits it may be
entitled under the Insurance Policy, including its insurance claim.
While it is a cardinal principle of insurance law that a contract of insurance is to be construed liberally in favor of the
insured and strictly against the insurer company,51 contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves have used.52 If such terms are clear
and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. Courts are not
permitted to make contracts for the parties; the function and duty of the courts is simply to enforce and carry out the
contracts actually made.53
WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8 September 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 85777.
SO ORDERED.
G.R. No. 200784

August 7, 2013

MALAYAN INSURANCE COMPANY, INC., PETITIONER,

vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.
DECISION
MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the October 27, 2011
Decision1 of the Court of Appeals (CA), which affirmed with modification the September 17, 2009 Decision2 of the
Regional Trial Court, Branch 15, Manila (RTC), and its February 24, 2012 Resolution3 denying the motion for
reconsideration filed by petitioner Malayan Insurance Company., Inc. (Malayan).

The Facts
The undisputed factual antecedents were succinctly summarized by the CA as follows:
On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy No. F-00227-000073 to PAP
Co., Ltd. (PAP Co.) for the latters machineries and equipment located at Sanyo Precision Phils. Bldg., Phase III, Lot
4, Block 15, PEZA, Rosario, Cavite (Sanyo Building). The insurance, which was for Fifteen Million Pesos (?
15,000,000.00) and effective for a period of one (1) year, was procured by PAP Co. for Rizal Commercial Banking
Corporation (RCBC), the mortgagee of the insured machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co. renewed the policy
on an "as is" basis. Pursuant thereto, a renewal policy, Fire Insurance Policy No. F-00227-000079, was issued by
Malayan to PAP Co. for the period May 13, 1997 to May 13, 1998.
On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries and equipment were
totally lost by fire. Hence, PAP Co. filed a fire insurance claim with Malayan in the amount insured.
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the time of the loss, the
insured machineries and equipment were transferred by PAP Co. to a location different from that indicated in the
policy. Specifically, that the insured machineries were transferred in September 1996 from the Sanyo Building to the
Pace Pacific Bldg., Lot 14, Block 14, Phase III, PEZA, Rosario, Cavite (Pace Pacific). Contesting the denial, PAP Co.
argued that Malayan cannot avoid liability as it was informed of the transfer by RCBC, the party duty-bound to relay
such information. However, Malayan reiterated its denial of PAP Co.s claim. Distraught, PAP Co. filed the complaint
below against Malayan.4
Ruling of the RTC
On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay PAP Company Ltd (PAP) an
indemnity for the loss under the fire insurance policy as well as for attorneys fees. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff. Defendant is hereby
ordered:
a)
To pay plaintiff the sum of FIFTEEN MILLION PESOS (P15,000,000.00) as and for indemnity for the loss under the
fire insurance policy, plus interest thereon at the rate of 12% per annum from the time of loss on October 12, 1997
until fully paid;
b)
To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (PhP500,000.00) as and by way of attorneys fees;
[and,]
c)
To pay the costs of suit.
SO ORDERED.5

The RTC explained that Malayan is liable to indemnify PAP for the loss under the subject fire insurance policy
because, although there was a change in the condition of the thing insured as a result of the transfer of the subject
machineries to another location, said insurance company failed to show proof that such transfer resulted in the
increase of the risk insured against. In the absence of proof that the alteration of the thing insured increased the risk,
the contract of fire insurance is not affected per Article 169 of the Insurance Code.
The RTC further stated that PAPs notice to Rizal Commercial Banking Corporation (RCBC) sufficiently complied with
the notice requirement under the policy considering that it was RCBC which procured the insurance. PAP acted in
good faith in notifying RCBC about the transfer and the latter even conducted an inspection of the machinery in its
new location.
Not contented, Malayan appealed the RTC decision to the CA basically arguing that the trial court erred in ordering it
to indemnify PAP for the loss of the subject machineries since the latter, without notice and/or consent, transferred
the same to a location different from that indicated in the fire insurance policy.
Ruling of the CA
On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC decision but deleted the
attorneys fees. The decretal portion of the CA decision reads:
WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance Company must indemnify
PAP Co. Ltd the amount of Fifteen Million Pesos (PhP15,000,000.00) for the loss under the fire insurance policy, plus
interest thereon at the rate of 12% per annum from the time of loss on October 12, 1997 until fully paid. However, the
Five Hundred Thousand Pesos (PhP500,000.00) awarded to PAP Co., Ltd. as attorneys fees is DELETED. With
costs.
SO ORDERED.6
The CA wrote that Malayan failed to show proof that there was a prohibition on the transfer of the insured properties
during the efficacy of the insurance policy. Malayan also failed to show that its contractual consent was needed
before carrying out a transfer of the insured properties. Despite its bare claim that the original and the renewed
insurance policies contained provisions on transfer limitations of the insured properties, Malayan never cited the
specific provisions.
The CA further stated that even if there was such a provision on transfer restrictions of the insured properties, still
Malayan could not escape liability because the transfer was made during the subsistence of the original policy, not
the renewal policy. PAP transferred the insured properties from the Sanyo Factory to the Pace Pacific Building (Pace
Factory) sometime in September 1996. Therefore, Malayan was aware or should have been aware of such transfer
when it issued the renewal policy on May 14, 1997. The CA opined that since an insurance policy was a contract of
adhesion, any ambiguity must be resolved against the party that prepared the contract, which, in this case, was
Malayan.
Finally, the CA added that Malayan failed to show that the transfer of the insured properties increased the risk of the
loss. It, thus, could not use such transfer as an excuse for not paying the indemnity to PAP. Although the insurance
proceeds were payable to RCBC, PAP could still sue Malayan to enforce its rights on the policy because it remained
a party to the insurance contract.
Not in conformity with the CA decision, Malayan filed this petition for review anchored on the following
GROUNDS
I

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE WITH THE LAW
AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT AFFIRMED THE DECISION OF THE
TRIAL COURT AND THUS RULING IN THE QUESTIONED DECISION AND RESOLUTION THAT PETITIONER
MALAYAN IS LIABLE UNDER THE INSURANCE CONTRACT BECAUSE:
CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER MALAYAN WAS ABLE TO
PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF THE RENEWAL POLICY ISSUED TO RESPONDENT
PAP CO., THERE IS AN AFFIRMATIVE WARRANTY OR A REPRESENTATION MADE BY THE INSURED THAT
THE "LOCATION OF THE RISK" WAS AT THE SANYO BUILDING. IT IS LIKEWISE UNDISPUTED THAT WHEN
THE RENEWAL POLICY WAS ISSUED TO RESPONDENT PAP CO., THE INSURED PROPERTIES WERE NOT AT
THE SANYO BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE PACE FACTORY AND IT WAS
IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED AGAINST OCCURRED. THESE SET OF
UNDISPUTED FACTS, BY ITSELF ALREADY ENTITLES PETITIONER MALAYAN TO CONSIDER THE RENEWAL
POLICY AS AVOIDED OR RESCINDED BY LAW, BECAUSE OF CONCEALMENT, MISREPRESENTATION AND
BREACH OF AN AFFIRMATIVE WARRANTY UNDER SECTIONS 27, 45 AND 74 IN RELATION TO SECTION 31
OF THE INSURANCE CODE, RESPECTIVELY.
RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT CONCEALMENT,
MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE WARRANTY WHEN IT FAILED TO PROVE THAT IT
INFORMED PETITIONER MALAYAN THAT THE INSURED PROPERTIES HAD BEEN TRANSFERRED TO A
LOCATION DIFFERENT FROM WHAT WAS INDICATED IN THE INSURANCE POLICY.
IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE CONDITIONS AND LIMITATIONS
TO THE RENEWAL POLICY WHICH ARE THE REASONS WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE.
IN FACT, THE BEST PROOF THAT RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND
LIMITATIONS IS THE FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS FACTUAL ASSERTION THAT IT
SUPPOSEDLY NOTIFIED PETITIONER MALAYAN OF THE TRANSFER AS REQUIRED BY THE INSURANCE
POLICY.
MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS AN INCREASE IN RISK
BECAUSE OF THE UNILATERAL TRANSFER OF THE INSURED PROPERTIES. IN FACT, THIS PIECE OF
EVIDENCE WAS UNREBUTTED BY RESPONDENT PAP CO.
II
THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND ESTABLISHED DECISIONS
OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST AT THE RATE OF TWELVE PERCENT (12%)
INTEREST FROM THE TIME OF THE LOSS UNTIL FULLY PAID.
JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS NOT A LOAN OR
FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES A PLAINTIFF TO AN AWARD OF INTEREST AT
THE RATE OF TWELVE PERCENT (12%) PER ANNUM.
MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE SHOULD NOT HAVE BEEN
APPLIED BY THE COURT OF APPEALS BECAUSE THERE WAS NEVER ANY FINDING THAT PETITIONER
MALAYAN UNJUSTIFIABLY REFUSED OR WITHHELD THE PROCEEDS OF THE INSURANCE POLICY
BECAUSE IN THE FIRST PLACE, THERE WAS A LEGITIMATE DISPUTE OR DIFFERENCE IN OPINION ON
WHETHER RESPONDENT PAP CO. COMMITTED CONCEALMENT, MISREPRESENTATION AND BREACH OF
AN AFFIRMATIVE WARRANTY WHICH ENTITLES PETITIONER MALAYAN TO RESCIND THE INSURANCE
POLICY AND/OR TO CONSIDER THE CLAIM AS VOIDED.
III

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE WITH THE LAW
AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT AGREED WITH THE TRIAL COURT AND
HELD IN THE QUESTIONED DECISION THAT THE PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE
TO RESPONDENT PAP CO. DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE INSURANCE
POLICY.
IV
THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND JURISPRUDENCE WHEN
IT HELD IN THE QUESTIONED DECISION AND RESOLUTION THAT THE INTERPRETATION MOST FAVORABLE
TO THE INSURED SHALL BE ADOPTED.7
Malayan basically argues that it cannot be held liable under the insurance contract because PAP committed
concealment, misrepresentation and breach of an affirmative warranty under the renewal policy when it transferred
the location of the insured properties without informing it. Such transfer affected the correct estimation of the risk
which should have enabled Malayan to decide whether it was willing to assume such risk and, if so, at what rate of
premium. The transfer also affected Malayans ability to control the risk by guarding against the increase of the risk
brought about by the change in conditions, specifically the change in the location of the risk.
Malayan claims that PAP concealed a material fact in violation of Section 27 of the Insurance Code8 when it did not
inform Malayan of the actual and new location of the insured properties. In fact, before the issuance of the renewal
policy on May 14, 1997, PAP even informed it that there would be no changes in the renewal policy. Malayan also
argues that PAP is guilty of breach of warranty under the renewal policy in violation of Section 74 of the Insurance
Code9 when, contrary to its affirmation in the renewal policy that the insured properties were located at the Sanyo
Factory, these were already transferred to the Pace Factory. Malayan adds that PAP is guilty of misrepresentation
upon a material fact in violation of Section 45 of the Insurance Code10 when it informed Malayan that there would be
no changes in the original policy, and that the original policy would be renewed on an "as is" basis.
Malayan further argues that PAP failed to discharge the burden of proving that the transfer of the insured properties
under the insurance policy was with its knowledge and consent. Granting that PAP informed RCBC of the transfer or
change of location of the insured properties, the same is irrelevant and does not bind Malayan considering that RCBC
is a corporation vested with separate and distinct juridical personality. Malayan did not consent to be the principal of
RCBC. RCBC did not also act as Malayans representative.
With regard to the alleged increase of risk, Malayan insists that there is evidence of an increase in risk as a result of
the unilateral transfer of the insured properties. According to Malayan, the Sanyo Factory was occupied as a factory
of automotive/computer parts by the assured and factory of zinc & aluminum die cast and plastic gear for copy
machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A, while Pace Factory was occupied as
factory that repacked silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A.
PAPs position
On the other hand, PAP counters that there is no evidence of any misrepresentation, concealment or deception on its
part and that its claim is not fraudulent. It insists that it can still sue to protect its rights and interest on the policy
notwithstanding the fact that the proceeds of the same was payable to RCBC, and that it can collect interest at the
rate of 12% per annum on the proceeds of the policy because its claim for indemnity was unduly delayed without
legal justification.
The Courts Ruling
The Court agrees with the position of Malayan that it cannot be held liable for the loss of the insured properties under
the fire insurance policy.

As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained a ?15,000,000.00 fire
insurance policy from Malayan covering its machineries and equipment effective for one (1) year or until May 13,
1997; that the policy expressly stated that the insured properties were located at "Sanyo Precision Phils. Building,
Phase III, Lots 4 & 6, Block 15, EPZA, Rosario, Cavite"; that before its expiration, the policy was renewed 11 on an "as
is" basis for another year or until May 13, 1998; that the subject properties were later transferred to the Pace Factory
also in PEZA; and that on October 12, 1997, during the effectivity of the renewal policy, a fire broke out at the Pace
Factory which totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as regards the property affected unless
the insured, before the occurrence of any loss or damage, obtains the sanction of the company signified by
endorsement upon the policy, by or on behalf of the Company:
xxx

xxx

xxx

(c) If property insured be removed to any building or place other than in that which is herein stated to be insured.12
Evidently, by the clear and express condition in the renewal policy, the removal of the insured property to any building
or place required the consent of Malayan. Any transfer effected by the insured, without the insurers consent, would
free the latter from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal
The records are bereft of any convincing and concrete evidence that Malayan was notified of the transfer of the
insured properties from the Sanyo factory to the Pace factory. The Court has combed the records and found nothing
that would show that Malayan was duly notified of the transfer of the insured properties.
What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer to RCBC, the entity
which made the referral and the named beneficiary in the policy. Malayan and RCBC might have been sister
companies, but such fact did not make one an agent of the other. The fact that RCBC referred PAP to Malayan did
not clothe it with authority to represent and bind the said insurance company. After the referral, PAP dealt directly with
Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing,13 its counsel stipulated in open court
that it was Malayans authorized insurance agent, Rodolfo Talusan, who procured the original policy from Malayan,
not RCBC. This was the reason why Talusans testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005,14 PAPs hostile witness, Alexander Barrera,
Administrative Assistant of Malayan, testified that he was the one who procured Malayans renewal policy, not RCBC,
and that RCBC merely referred fire insurance clients to Malayan. He stressed, however, that no written referral
agreement exists between RCBC and Malayan. He also denied that PAP notified Malayan about the transfer before
the renewal policy was issued. He added that PAP, through Maricar Jardiniano (Jardiniano), informed him that the fire
insurance would be renewed on an "as is basis."15
Granting that any notice to RCBC was binding on Malayan, PAPs claim that it notified RCBC and Malayan was not
indubitably established. At best, PAP could only come up with the hearsay testimony of its principal witness, Branch
Manager Katsumi Yoneda (Mr. Yoneda), who testified as follows:
Q

What did you do as Branch Manager of Pap Co. Ltd.?

A
What I did I instructed my Secretary, because these equipment was bank loan and because of the insurance I told my secretary to
notify.
Q
To notify whom?
A
I told my Secretary to inform the bank.
Q
You are referring to RCBC?
A
Yes, sir.
xxxx
Q
After the RCBC was informed in the manner you stated, what did you do regarding the new location of these properties at Pace
Pacific Bldg. insofar as Malayan Insurance Company is concerned?
A
After that transfer, we informed the RCBC about the transfer of the equipment and also Malayan Insurance but we were not able to
contact Malayan Insurance so I instructed again my secretary to inform Malayan about the transfer.
Q
Who was the secretary you instructed to contact Malayan Insurance, the defendant in this case?
A
Dory Ramos.
Q
How many secretaries do you have at that time in your office?
A
Only one, sir.
Q
Do you know a certain Maricar Jardiniano?
A
Yes, sir.
Q
Why do you know her?
A
Because she is my secretary.
Q
So how many secretaries did you have at that time?
A
Two, sir.
Q
What happened with the instruction that you gave to your secretary Dory Ramos about the matter of informing the defendant
Malayan Insurance Co of the new location of the insured properties?
A
She informed me that the notification was already given to Malayan Insurance.
Q
Aside from what she told you how did you know that the information was properly relayed by the said secretary, Dory Ramos, to
Malayan Insurance?
A
I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
Q
Now after you were told by your secretary, Dory Ramos, that she was able to inform Malayan Insurance Company about the transfer
of the properties insured to the new location, do you know what happened insofar this information was given to the defendant
Malayan Insurance?
A
I heard that someone from Malayan Insurance came over to our company.
Q
Did you come to know who was that person who came to your place at Pace Pacific?
A
I do not know, sir.
Q
How did you know that this person from Malayan Insurance came to your place?
A
It is according to the report given to me.
Q
Who gave that report to you?
A
Dory Ramos.
Q
Was that report in writing or verbally done?

A
Verbal.16 [Emphases supplied]
The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal knowledge of the notice to either Malayan
or RCBC. PAP should have presented his secretaries, Dory Ramos and Maricar Jardiniano, at the witness stand. His testimony
alone was unreliable.
Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured properties were transferred to a different
location only after the renewal of the fire insurance policy.
COURT
Q
When did you transfer the machineries and equipments before the renewal or after the renewal of the insurance?
A
After the renewal.
COURT
Q
You understand my question?
A
Yes, Your Honor.17 [Emphasis supplied]

This enfeebles PAPs position that the subject properties were already transferred to the Pace factory before the
policy was renewed.
The transfer from the Sanyo Factory to the PACE Factory increased the risk.
The courts below held that even if Malayan was not notified thereof, the transfer of the insured properties to the Pace
Factory was insignificant as it did not increase the risk.
Malayan argues that the change of location of the subject properties from the Sanyo Factory to the Pace Factory
increased the hazard to which the insured properties were exposed. Malayan wrote:
With regards to the exposure of the risk under the old location, this was occupied as factory of automotive/computer
parts by the assured, and factory of zinc & aluminum die cast, plastic gear for copy machine by Sanyo Precision
Phils., Inc. with a rate of 0.449% under 6.1.2 A. But under Pace Pacific Mfg. Corporation this was occupied as factory
that repacks silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A. Hence, there was an increase in
the hazard as indicated by the increase in rate.18
The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a hazardous
environment and negatively affected the fire rating stated in the renewal policy. The increase in tariff rate from 0.449%
to 0.657% put the subject properties at a greater risk of loss. Such increase in risk would necessarily entail an
increase in the premium payment on the fire policy.
Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the importance of the issue,
PAP failed to refute Malayans argument on the increased risk.
Malayan is entitled to rescind the insurance contract
Considering that the original policy was renewed on an "as is basis," it follows that the renewal policy carried with it
the same stipulations and limitations. The terms and conditions in the renewal policy provided, among others, that the
location of the risk insured against is at the Sanyo factory in PEZA. The subject insured properties, however, were
totally burned at the Pace Factory. Although it was also located in PEZA, Pace Factory was not the location stipulated
in the renewal policy. There being an unconsented removal, the transfer was at PAPs own risk. Consequently, it must
suffer the consequences of the fire. Thus, the Court agrees with the report of Cunningham Toplis Philippines, Inc., an
international loss adjuster which investigated the fire incident at the Pace Factory, which opined that "[g]iven that the
location of risk covered under the policy is not the location affected, the policy will, therefore, not respond to this
loss/claim."19

It can also be said that with the transfer of the location of the subject properties, without notice and without Malayans
consent, after the renewal of the policy, PAP clearly committed concealment, misrepresentation and a breach of a
material warranty. Section 26 of the Insurance Code provides:
Section 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance."
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the insurance contract in case
of an alteration in the use or condition of the thing insured. Section 168 of the Insurance Code provides, as follows:
Section 68. An alteration in the use or condition of a thing insured from that to which it is limited by the policy made
without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance.
Accordingly, an insurer can exercise its right to rescind an insurance contract when the following conditions are
present, to wit:
1) the policy limits the use or condition of the thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insureds control; and
5) the alteration increases the risk of loss.20
In the case at bench, all these circumstances are present. It was clearly established that the renewal policy stipulated
that the insured properties were located at the Sanyo factory; that PAP removed the properties without the consent of
Malayan; and that the alteration of the location increased the risk of loss.
WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby REVERSED and SET ASIDE.
Petitioner Malayan Insurance Company, Inc. is hereby declared NOT liable for the loss of the insured machineries
and equipment suffered by PAP Co., Ltd.
SO ORDERED.