1

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-33637

December 31, 1931

ANG GIOK CHIP, doing business under the name and style of
Hua
Bee
Kong
Si, plaintiff-appellee,
vs.
SPRINGFIELD
FIRE
&
MARINE
INSURANCE
COMPANY, defendant-appellant.
C.A.
Sobral
for
appellant.
Paredes
and
Buencamino
for
appellee.
Gibbs and McDonough and Ramon Ozaeta as amici curiae.

MALCOLM, J.:
An important question in the law of insurance, not heretofore
considered in this jurisdiction and, according to our information, not
directly resolved in California from which State the Philippine
Insurance Act was taken, must be decided on this appeal for the
future guidance of trial courts and of insurance companies doing
business in the Philippine Islands. This question, flatly stated, is
whether a warranty referred to in the policy as forming part of the
contract of insurance and in the form of a rider to the insurance
policy, is null and void because not complying with the Philippine
Insurance Act. The court has had the benefit of instructive briefs
and memoranda from the parties and has also been assisted by a
well prepared brief submitted on behalf of amici curiae.
The admitted facts are these: Ang Giok Chip doing business under
the name and style of Hua Bee Kong Si was formerly the owner of a
warehouse situated at No. 643 Calle Reina Regente, City of Manila.
The contents of the warehouse were insured with the three
insurance companies for the total sum of P60,000. One insurance
policy, in the amount of P10,000, was taken out with the Springfield
Fire & Marine Insurance Company. The warehouse was destroyed by
fire on January 11, 1928, while the policy issued by the latter
company was in force.

Predicated on this policy the plaintiff instituted action in the Court

of First Instance of Manila against the defendant to recover a
proportional part of the loss coming to P8,170.59. Four special
defenses were interposed on behalf of the insurance company, one
being planted on a violation of warranty F fixing the amount of
hazardous goods which might be stored in the insured building. The
trial judge in his decision found against the insurance company on
all points, and gave judgment in favor of the plaintiff for the sum of
P8,188.74. From this judgment the insurance company has
appealed, and it is to the first and fourth errors assigned that we
would address particular attention.
Considering the result at which we arrive, it is unnecessary for us to
discuss three of the four special defenses which were made by the
insurance company. We think, however, that it would be a
reasonable deduction to conclude that more than 3 per cent of the
total value of the merchandise contained in the warehouse
constituted hazardous goods, and that this per cent reached as
high as 39. We place reliance on the consular invoices and on the
testimony of the adjuster, Herridge. Having thus swept to one side
all intervening obstacle, the legal question recurs, as stated in the
beginning of this decision, of whether or not warranty F was null
and void.
To place this question in its proper light, we turn to the policy issued
by the Springfield Fire & Marine Insurance Company in favor of the
plaintiff. The description of the risk in this policy is as
follows:lawphil.net
Ten thousand pesos Philippine Currency. On
general non-hazardous
merchandise,
chiefly
consisting of chucherias, also produce, Cacao, Flour,
all the property of the Insured, or held by them in
trust, on commission or on joint account with others,
or for which he is responsible, while contained during
the currency of this policy in the godown, situate No.
643 Calle Reina Regent. . . .
This policy is subject to the hereon attached
"Ordinary Short Period Rate Scale"Warranties A & F,
Co-insurances Clause "and Three Fourths Loss
Clause," which are forming part of same. Co-

2
insurance declared:
"P20,000. Sun Insurance Office Ltd. (K & S)."
(Emphasis inserted.) Securely pasted on the left hand
margin of the face of the policy are five warranties
and special clauses. One of them is warranty F,
specially referred to on the face of the policy, reading
in part as follows:
WARRANTY F
It is hereby declared and agreed that during the
currency of this policy no hazardous goods be stored
in the Building to which this insurance applies or in
any building communicating therewith, provided,
always, however, that the Insured be permitted to
stored a small quantity of the hazardous goods
specified below, but not exceeding in all 3 per cent of
the total value of the whole of the goods or
merchandise contained in said warehouse, viz; . . . .
The applicable law is found in the Instance Act, Act
No. 2427, as amended, section 65 reading:
"Every express warranty, made at or before the execution of a
policy, must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy, as
making a part of it." As the Philippine law was taken verbatim from
the law of California, in accordance with well settled canons of
statutory construction, the court should follow in fundamental
points, at least, the construction placed by California courts on a
California law. Unfortunately the researches of counsel reveal no
authority coming from the courts of California which is exactly on
all fours with the case before us. However, there are certain
consideration lying at the basis of California law and certain
indications in the California decisions which point the way for the
decision in this case
Section 65 of the Philippine Insurance Act corresponds to section
2605 of the Civil Cod of California. The comments of the Code
Examiners of California disclose that the language of section 2605
was quite different from that under the Code as adopted in 1872.
That language was found too harsh as to insurance companies. The

Code Examiners' notes state: "The amendment restores the law as

it existed previous to the Code: See Parsons on Maritime Law, 106,
and Phillips on Insurance, sec. 756." The passage referred to in
Philips on Insurance, was worded by the author as follows:
"Any express warranty or condition is always a part of the policy,
but, like any other part of an express contract, may be written in
the margin, or contained in proposals or documents expressly
referred to in the policy, and so made a part of it." The annotator of
the Civil Code of California, after setting forth these facts, adds:
. . . The section as it now reads is in harmony with the rule that a
warranty may be contained in another instrument than the policy
when expressly referred to in the policy as forming a part
thereof: . . . .
What we have above stated has been paraphrased from the
decision of the California Court of Appeals in the case of Isaac
Upham Co. vs. United States Fidelity & Guaranty Co. ( [1922], 211
Pac., 809), and thus discloses the attitude of the California courts.
Likewise in the Federal courts, in the case of Conner vs. Manchester
Assur. Co. ([1904], 130 Fed., 743), section 2605 of the Civil Code of
California came under observation, and it was said that it "is in
effect an affirmance of the generally accepted doctrine applicable
to such contracts."
We, therefore, think it wrong to hold that the California law
represents a radical departure from the basic principles governing
the law of insurance. We are more inclined to believe that the
codification of the law of California had exactly the opposite
purpose, and that in the language of the Federal court it was but an
affirmance of the generally accepted doctrine applicable to such
contracts. This being true, we turn to two of such well recognized
doctrines. In the first place, it is well settled that a rider attached to
a policy is a part of the contract, to the same extent and with like
effect as it actually embodied therein. (I Couch, Cyclopedia of
Insurance Law, sec. 159.) In the second place, it is equally well
settled that an express warranty must appear upon the face of the
policy, or be clearly incorporated therein and made a part thereof
by explicit reference, or by words clearly evidencing such intention.
(4 Couch, Cyclopedia of Insurance Law, sec. 862.)

3
Section 65 of the Insurance Act and its counterpart, section 265 of
the Civil Code of California, will bear analysis as tested by reason
and authority. The law says that every express warranty must be
"contained in the policy itself." The word "contained," according to
the dictionaries, means "included," inclosed," "embraced,"
"comprehended," etc. When, therefore, the courts speak of a rider
attached to the policy, and thus "embodied" therein, or of a
warranty "incorporated" in the policy, it is believed that the phrase
"contained in the policy itself" must necessarily include such rider
and warranty. As to the alternative relating to "another instrument,"
"instrument" as here used could not mean a mere slip of paper like
a rider, but something akin to the policy itself, which in section 48
of the Insurance Act is defined as "The written instrument, in which
a contract of insurance is set forth." In California, every paper
writing is not necessarily an "instrument" within the statutory
meaning of the term. The word "instrument has a well defined
definition in California, and as used in the Codes invariably means
some written paper or instrument signed and delivered by one
person to another, transferring the title to, or giving a lien, on
property, or giving a right to debt or duty. (Hoag vs. Howard [1880],
55 Cal., 564; People vs. Fraser[1913], 137 Pac., 276.) In other
words, the rider, warranty F, is contained in the policy itself,
because by the contract of insurance agreed to by the parties it is
made to form a part of the same, but is not another instrument
signed by the insured and referred to in the policy as forming a part
of it.
Again, referring to the jurisprudence of California, another rule of
insurance adopted in that State is in point. 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.
In California Jurisprudence, vol. 14, p. 427, from which these
statements are taken with citations to California decisions, it is
added that it has been held that where the holder of a policy
discovers a mistake made by himself and the local agent in
attaching the wrong rider to his application, elects to retain the
policy issued to him, and neither requests the issuance of a
different one nor offers to pay the premium requisite to insure

against the risk which he believe the rider to cover, he thereby

accepts the policy.
We are given to understand, and there is no indication to the
contrary, that we have here a standard insurance policy. We are
further given to understand, and there is no indication to the
contrary, that the issuance of the policy in this case with its
attached rider conforms to well established practice in the
Philippines and elsewhere. We are further given to understand, and
there is no indication to the contrary, that there are no less than
sixty-nine insurance companies doing business in the Philippine
Islands with outstanding policies more or less similar to the one
involved in this case, and that to nullify such policies would place
an unnecessary hindrance in the transaction of insurance business
in the Philippines. These are matters of public policy. We cannot
believe that it was ever the legislative intention to insert in the
Philippine Law on Insurance an oddity, an incongruity, entirely out
of harmony with the law as found in other jurisdiction, and
destructive of good business practice.
We have studied this case carefully and having done so have
reached the definite conclusion that warranty F, a rider attached to
the face of the insurance policy, and referred to in contract of
insurance, is valid and sufficient under section 65 of the Insurance
Act. Accordingly, sustaining the first and fourth errors assigned, and
it being unnecessary to discuss the remaining errors, the result will
be to reverse the judgment appealed from and to order the
dismissal of the complaint, without special pronouncement as to
costs in either instance.
Street, Villamor, Ostrand, and Romualdez, JJ., concur.
Ang Giok Chip v Springfield G.R. No. L-33637 December 31,
1931
J. Malcolm

Facts:
Ang insured his warehouse for the total value of Php 60,000. One of
these, amounting to 10,000, was with SpringfieldInsurance
Company. His warehouse burned down, then he attempted to

4
recover
8,000
from Springfield for
the indemnity.The
insurance company interposed its defense on a rider in the policy
in the form of Warranty F, fixing the amount ofhazardous good that
can be stored in a building to be covered by the insurance. They
claimed
that
Ang
violated
the
3
percent
limit
by
placing hazardous goods to as high as 39 percent of all the goods
stored in the building. His suit to recover was granted by the trial
court. Hence, this appeal.

Issue: Whether a warranty referred to in the policy as forming part

of the contract of insurance and in the form of a rider tothe
insurance policy, is null and void because not complying with the
Philippine Insurance Act.

Held: No. The warranty is valid. Petition dismissed.

Ratio:
The Insurance Act, Section 65, taken from California law, states:
"Every express warranty, made at or before the execution of a
policy, must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy, as
making a part of it."
Warranty F, indemnifying for a value of Php 20,000 and pasted on
the left margin of the policy stated:
It is hereby declared and agreed that during the currency of this
policy no hazardous goods be stored in the Building to which this
insurance applies or in any building communicating therewith,
provided, always, however, that the Insured be permitted to stored
a small quantity of the hazardous goods specified below, but not
exceeding in all 3 per cent of the total value of the whole of the
goods or merchandise contained in said warehouse, viz; . . . .
Also, the court stated a book that said, "any express warranty or
condition is always a part of the policy, but, like any other part of
an express contract, may be written in the margin, or contained in

proposals or documents expressly referred to in the policy, and so

made a part of it."
It is well settled that a rider attached to a policy is a part of the
contract, to the same extent and with like effect as it actually
embodied therein. In the second place, it is equally well settled that
an express warranty must appear upon the face of the policy, or be
clearly incorporated therein and made a part thereof by explicit
reference, or by words clearly evidencing such intention.
The court concluded that Warranty F is contained in the policy
itself, because by the contract of insurance agreed to by the parties
it was made to be a part. It wasnt aseparate instrument agreed to
by the parties.
The receipt of the policy by the insured without objection binds him.
It was his duty to read the policy and know its terms. He also never
chose to accept a different policy by considering the earlier one as
a mistake. Hence, the rider is valid

5
G.R. No. L-9370
K.
vs.
THE MIDLAND
appellant.

March 31, 1915

S.
TEXTILE

Bruce,
Lawrence,
Ross
Thos D. Aitken for appellee.

YOUNG, plaintiff-appellee,
INSURANCE
and

COMPANY, defendant-

Block

for

appellant.

JOHNSON, J.:
The purpose of the present action is to recover the sum of P3,000
upon an insurance policy. The lower court rendered a judgment in
favor of the plaintiff and against the defendant for the sum of
P2,708.78, and costs. From that judgment the defendant appealed
to this court.
The undisputed facts upon which said action is based are as
follows:
1. The plaintiff conducted a candy and fruit store on the Escolta, in
the city of Manila, and occupied a building at 321 Calle Claveria, as
a residence and bodega (storehouse).
2. On the 29th of May, 1912, the defendant, in consideration of the
payment of a premium of P60, entered into a contract of insurance
with the plaintiff (policy No. 509105) by the terms of which the
defendant company, upon certain conditions, promised to pay to
the plaintiff the sum of P3,000, in case said residence
and bodega and contends should be destroyed by fire.
3. On the conditions of said contract of insurance is found in
"warranty B" and is as follows: "Waranty B. It is hereby declared
and agreed that during the pendency of this policy no hazardous
goods stored or kept for sale, and no hazardous trade or process be
carried on, in the building to which this insurance applies, or in any
building connected therewith."
4. On the 4th or 5th of February, 1913, the plaintiff placed in said
residence and bodega three boxes, 18 by 18 by 20 inches
measurement, which belonged to him and which were filed with
fireworks.

5. On the 18th day of March, q913, said residence and bodega and
the contents thereof were partially destroyed by fire.
6. Said fireworks had been given to the plaintiff by the former
owner of the Luneta Candy Store; that the plaintiff intended to use
the same in the celebration of the Chinese new year; that the
authorities of the city of Manila had prohibited the use of fireworks
on said occasion, and that the plaintiff then placed the same in
said bodega, where they remained from the 4th or 5th of February,
1913, until after the fire of the 18th of March, 1913.
7. Both of the parties agree that said fireworks come within the
phrase "hazardous goods," mentioned in said "warranty B" of the
policy.
8. That said fireworks were found in a part of the building not
destroyed by the fire; that they in no way contributed to the fire, or
to the loss occasioned thereby.
The only question presented by the parties is whether or not the
placing of said fireworks in the building insured, under the
conditions above enumerated, they being "hazardous goods," is a
violation of the terms of the contract of insurance and especially of
"warranty B." "Warranty B" provides that "no hazardous goods
be stored" in the building insured. It is admitted by both parties
that the fireworks are "hazardous goods." The defendant alleged
that they were "stored." The plaintiff contends that under all the
facts and circumstances of the case, they were not "stored" in said
building, and that the placing of them in the building was not a
violation of the terms of the contract. Both the plaintiff and
defendant agree that if they were "hazardous goods," and if they
were "stored," then the act of the plaintiff was a violation of the
terms of the contract of insurance and the defendant was justified
in repudiating its liability thereunder.
This leads us to a consideration of the meaning of the accord
"stored" as used in said "warranty B." While the word "stored" has
been variously defined by authors, as well as by courts, we have
found no case exactly analogous to the present. The plaintiff says
that he placed said fireworks in the bodega after he had been
notified that he could not use them on the Chinese new year, in
order that he might later send them to a friend in the provinces.
Whether a particular article is "stored" or not must, in some degree,

6
depend upon the intention of the parties. The interpretation of the
word "stored" is quite difficult, in view of the many decisions upon
the various conditions presented. Nearly all of the cases cited by
the lower court are cases where the article was being put to some
reasonable and actual use, which might easily have been permitted
by the terms of the policy, and within the intention of the parties,
and excepted from the operation of the warranty, like the present.
Said decision are upon cases like:
1. Where merchants have had or kept the "hazardous" articles in
small quantities, and for actual daily use, for safe, such as gasoline,
gunpowder, etc.;
2. Where such articles have been brought on the premises for
actual use thereon, and in small quantities, such as oil, paints, etc;
and
3. Where such articles or goods were used for lighting purpose, and
in small quantities.
The author of the Century Dictionary defines the world "store" to be
a deposit in a store or warehouse for preservation or safe keeping;
o place in a warehouse or other place of deposit for safe keeping.
See also the definitions given by the Standard Dictionary, to the
same effect.
Said definitions, of course, do not include a deposit in a store, in
small quantities, for daily use. "Daily use" precludes the idea of a
deposit for preservation or safe keeping, as well as a deposit for
future consumption, or safe keeping.
In the present case no claim is made that the "hazardous goods"
were placed in the bodega for present or daily use. It is admitted
that they were placed in the bodega "for future use," or for future
consumption, or for safe keeping. The plaintiff makes no claim that
he deposited them there with any other idea than "for future use"
for future consumption. It seems clear to us that the "hazardous
goods" in question were "stored" in the bodega, as that word is
generally defined. That being true, suppose the defendant had
made an examination of the premises, even in the absence of a
fire, and had found he "hazardous goods" there, under the
conditions above described, would it not have been justified, then
and there, in declaring the policy null and of no effect by reason of

a violation of its terms on he par of the plaintiff? If it might, then

may it no repudiate is liability, even after the fire? If the "warranty"
is a term of the contract, will not its violation cause a breach and
justify noncompliance or a repudiation?
Contracts of insurance are contracts of indemnity upon the terms
and conditions specified in the policy. The parties have a right to
impose such reasonable conditions at the time of the making of the
contract as they may deem wise and necessary. The rate of
premium is measured by the character of the risk assumed. The
insurance company, for a comparatively small consideration,
undertakes to guarantee the insured against loss or damage, upon
the terms and conditions agreed upon, and upon no other, and
when called upon to pay, in case of loss, the insurer, therefore, may
justly insist upon a fulfillment of these terms. If the insured cannot
bring himself within the conditions of the policy, he is not entitled
to recover for the loss. The terms of the policy constitute the
measure of the insurer's liability, and in order to recover the
insured must show himself within those terms; and if it appears
that the contract has been terminated by a violation, on the part of
the insured, of its conditions, then there can be no right of
recovery. The compliance of the insured with the terms of the
contract is a condition precedent to the right of recovery. If the
insured has violated or failed to perform the conditions of the
contract, and such a violation or want of performance has not been
waived by the insurer, then the insured cannot recover. Courts are
not permitted to make contracts for the parties. The function and
duty of the courts consist simply in enforcing and carrying out he
contracts actually made. While it is true, as a general rule, that
contracts of insurance are construed most favorably to the insured,
yet contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous
they must be taken and understood in their plain, ordinary and
popular sense. (Imperial Fire Ins. Co. vs. County of Coos, 151 U. S.,
542; Kyte vs. Commercial Union Assurance Co., 149 Mass., 116,
122.) The conditions of contracts of insurance, when plainly
expressed in a policy, are binding upon the parties and should be
enforced by the courts, if the evidence brings the case clearly
within their meaning and intent. It tends to bring the law itself into
disrepute when, by astute and subtle distinctions, a plain case is

7
attempted to be taken without the operation of a clear, reasonable,
and material obligation of the contract. (Mack vs. Rochester
German Ins. Co., 106 N. Y., 560, 564.)
The appellant argues, however, that in view of the fact that the
"storing" of the fireworks on the premises of the insured did not
contribute in any way to the damage occasioned by the fire, he
should be permitted to recover that the "storing" of the
"hazardous goods" in no way caused injury to the defendant
company. That argument, however, is beside the question, if the
"storing" was a violation of the terms of the contract. The violation
of the terms of the contract, by virtue of the provisions of the policy
itself, terminated, at the election of either party, he contractual
relations. (Kyte vs. Commercial Union Assurance Co., 149 Mass.,
116, 122.) The plaintiff paid a premium based upon the risk at the
time the policy was issued. Certainly it cannot be denied that the
placing of the firecrackers in the building insured increased the risk.
The plaintiff had not paid a premium based upon the increased risk,
neither had the defendant issued a policy upon the theory of a
different risk. The plaintiff was enjoying, if his contention may be
allowed may be allowed, the benefits of an insurance policy upon
one risk, whereas, as a matter of fact, it was issued upon an
entirely different risk. The defendant had neither been paid nor had
issues a policy to cover the increased risk. An increase of risk which
is substantial and which is continued for a considerable period of
time, is a direct and certain injury to the insurer, and changes the
basis
upon
which
the
contract
of
insurance
rests.
(Kyte vs. Commercial Union Assurance Co. (supra); Frost's Detroit
Lumber Worksvs. Millers' Mutual Ins. Co., 37 Minn., 300, 302;
Moore vs. Phoenix Ins. Co., 62 N. H., 240; Ferree vs. Oxford Fire &
Life Ins. Co., 67 Pa. State, 373.)
Therefore and for the foregoing reasons, the judgment of the lower
court is hereby revoked and the defendant is hereby relieved from
any responsibility under said complaint, and, without any finding as
to costs, it is so ordered.
Arellano, C.J., Torres, Carson, Trent and Araullo, JJ., concur.

8
G.R. No. L-4611

December 17, 1955

QUA
CHEE
GAN, plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented
by its agent, WARNER, BARNES AND CO., LTD., defendantappellant.
Delgado,
Flores
&
Macapagal
for
appellant.
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and
Perkins, Ponce Enrile & Contreras for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940,
in the Court of First Instance of said province, seeking to recover
the proceeds of certain fire insurance policies totalling P370,000,
issued by the Law Union & Rock Insurance Co., Ltd., upon certain
bodegas and merchandise of the insured that were burned on June
21, 1940. The records of the original case were destroyed during
the liberation of the region, and were reconstituted in 1946. After a
trial that lasted several years, the Court of First Instance rendered a
decision in favor of the plaintiff, the dispositive part whereof reads
as follows:

The complaint in intervention of the Philippine National Bank is

dismissed without costs. (Record on Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed
directly to this Court.
The record shows that before the last war, plaintiff-appellee owned
four warehouses or bodegas (designated as Bodegas Nos. 1 to 4) in
the municipality of Tabaco, Albay, used for the storage of stocks of
copra and of hemp, baled and loose, in which the appellee dealth
extensively. They had been, with their contents, insured with the
defendant Company since 1937, and the lose made payable to the
Philippine National Bank as mortgage of the hemp and crops, to the
extent of its interest. On June, 1940, the insurance stood as follows:
Policy No.
2637164
"LL")

Property Insured
(Exhibit

Bodega No. 2 (Building)

2637165
"JJ")

(Exhibit

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;
(d) Under the fourth cause of action, the sum of P15,000; and
(e) Under the fifth cause of action, the sum of P40,000;
all of which shall bear interest at the rate of 8% per annum in
accordance with Section 91 (b) of the Insurance Act from
September 26, 1940, until each is paid, with costs against the
defendant.

Bodega No. 3 (Building)

Bodega No. 4 (Building)

Wherefore, judgment is rendered for the plaintiff and against the

defendant condemning the latter to pay the former
(a) Under the first cause of action, the sum of P146,394.48;

Bodega No. 1 (Building)

Hemp Press moved by steam engine

2637345
"X")

(Exhibit Merchandise contents (copra and empty sa

Bodega No. 1)

2637346
"Y")

(Exhibit

2637067
"GG")

(Exhibit

Total

Merchandise contents (hemp) of Bodega No. 3

Merchandise contents (loose hemp) of Bodega

Fire of undetermined origin that broke out in the early morning of

July 21, 1940, and lasted almost one week, gutted and completely
destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored
theren. Plaintiff-appellee informed the insurer by telegram on the
same date; and on the next day, the fire adjusters engaged by
appellant insurance company arrived and proceeded to examine
and photograph the premises, pored over the books of the insured
and conducted an extensive investigation. The plaintiff having
submitted the corresponding fire claims, totalling P398,562.81 (but
reduced to the full amount of the insurance, P370,000), the
Insurance Company resisted payment, claiming violation of
warranties and conditions, filing of fraudulent claims, and that the
fire had been deliberately caused by the insured or by other
persons in connivance with him.
With counsel for the insurance company acting as private
prosecutor, Que Chee Gan, with his brother, Qua Chee Pao, and
some employees of his, were indicted and tried in 1940 for the
crime of arson, it being claimed that they had set fire to the
destroyed warehouses to collect the insurance. They were,
however, acquitted by the trial court in a final decision dated July 9,
1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance
money proceeded to its trial and termination in the Court below,
with the result noted at the start of this opinion. The Philippine
National Bank's complaint in intervention was dismissed because
the appellee had managed to pay his indebtedness to the Bank
during the pendecy of the suit, and despite the fire losses.
In its first assignment of error, the insurance company alleges that
the trial Court should have held that the policies were avoided for
breach of warranty, specifically the one appearing on a rider pasted
(with other similar riders) on the face of the policies (Exhibits X, Y, JJ
and LL). These riders were attached for the first time in 1939, and
the pertinent portions read as follows:
Memo. of Warranty. The undernoted Appliances for the extinction
of fire being kept on the premises insured hereby, and it being
declared and understood that there is an ample and constant water
supply with sufficient pressure available at all seasons for the

same, it is hereby warranted that the said appliances shall be

maintained in efficient working order during the currency of this
policy, by reason whereof a discount of 2 1/2 per cent is allowed on
the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each
150 feet of external wall measurement of building, protected, with
not less than 100 feet of hose piping and nozzles for every two
hydrants kept under cover in convenient places, the hydrants being
supplied with water pressure by a pumping engine, or from some
other source, capable of discharging at the rate of not less than 200
gallons of water per minute into the upper story of the highest
building protected, and a trained brigade of not less than 20 men to
work the same.'
It is argued that since the bodegas insured had an external wall
perimeter of 500 meters or 1,640 feet, the appellee should have
eleven (11) fire hydrants in the compound, and that he actually had
only two (2), with a further pair nearby, belonging to the
municipality of Tabaco.
We are in agreement with the trial Court that the appellant is
barred by waiver (or rather estoppel) to claim violation of the socalled fire hydrants warranty, for the reason that knowing fully all
that the number of hydrants demanded therein never existed from
the very beginning, the appellant neverthless issued the policies in
question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon
the insured to allow appellant to claims now as void ab initio the
policies that it had issued to the plaintiff without warning of their
fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were
issued, that in the premises insured there were only two fire
hydrants installed by Qua Chee Gan and two others nearby, owned
by the municipality of TAbaco, contrary to the requirements of the
warranty in question. Such fact appears from positive testimony for
the insured that appellant's agents inspected the premises; and the
simple denials of appellant's representative (Jamiczon) can not
overcome that proof. That such inspection was made is moreover
rendered probable by its being a prerequisite for the fixing of the

10
discount on the premium to which the insured was entitled, since
the discount depended on the number of hydrants, and the fire
fighting equipment available (See "Scale of Allowances" to which
the policies were expressly made subject). The law, supported by a
long line of cases, is expressed by American Jurisprudence (Vol. 29,
pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance
of a policy of insurance, has knowledge of existing facts which, if
insisted on, would invalidate the contract from its very inception,
such knowledge constitutes a waiver of conditions in the contract
inconsistent with the facts, and the insurer is stopped thereafter
from asserting the breach of such conditions. The law is charitable
enough to assume, in the absence of any showing to the contrary,
that an insurance company intends to executed a valid contract in
return for the premium received; and when the policy contains a
condition which renders it voidable at its inception, and this result
is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than
to have deceived the insured into thinking he is insured when in
fact he is not, and to have taken his money without consideration.
(29 Am. Jur., Insurance, section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To
allow a company to accept one's money for a policy of insurance
which it then knows to be void and of no effect, though it knows as
it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely
related to positive fraud, as to the abhorent to fairminded men. It
would be to allow the company to treat the policy as valid long
enough to get the preium on it, and leave it at liberty to repudiate it
the next moment. This cannot be deemed to be the real intention of
the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it,
for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl.
540, 543-544).
The inequitableness of the conduct observed by the insurance
company in this case is heightened by the fact that after the

insured had incurred the expense of installing the two hydrants, the
company collected the premiums and issued him a policy so
worded that it gave the insured a discount much smaller than that
he was normaly entitledto. According to the "Scale of Allowances,"
a policy subject to a warranty of the existence of one fire hydrant
for every 150 feet of external wall entitled the insured to a discount
of 7 1/2 per cent of the premium; while the existence of "hydrants,
in compund" (regardless of number) reduced the allowance on the
premium to a mere 2 1/2 per cent. This schedule was logical, since
a greater number of hydrants and fire fighting appliances reduced
the risk of loss. But the appellant company, in the particular case
now before us, so worded the policies that while exacting the
greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2 per cent, thereby giving
the insurance company a double benefit. No reason is shown why
appellant's premises, that had been insured with appellant for
several years past, suddenly should be regarded in 1939 as so
hazardous as to be accorded a treatment beyond the limits of
appellant's own scale of allowances. Such abnormal treatment of
the insured strongly points at an abuse of the insurance company's
selection of the words and terms of the contract, over which it had
absolute control.
These considerations lead us to regard the parol evidence rule,
invoked by the appellant as not applicable to the present case. It is
not a question here whether or not the parties may vary a written
contract by oral evidence; but whether testimony is receivable so
that a party may be, by reason of inequitable conduct shown,
estopped from enforcing forfeitures in its favor, in order to forestall
fraud or imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture
Other than Nonpayment. It is a well settled rule of law that an
insurer which with knowledge of facts entitling it to treat a policy as
no longer in force, receives and accepts a preium on the policy,
estopped to take advantage of the forfeiture. It cannot treat the
policy as void for the purpose of defense to an action to recover for
a loss thereafter occurring and at the same time treat it as valid for
the purpose of earning and collecting further premiums." (29 Am.
Jur., 653, p. 657.)

11
It would be unconscionable to permit a company to issue a policy
under circumstances which it knew rendered the policy void and
then to accept and retain premiums under such a void policy.
Neither law nor good morals would justify such conduct and the
doctrine of equitable estoppel is peculiarly applicable to the
situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

possess. There is no merit in appellant's claim that subordinate

membership of the business manager (Co Cuan) in the fire brigade,
while its direction was entrusted to a minor employee unders the
testimony improbable. A business manager is not necessarily adept
at fire fighting, the qualities required being different for both
activities.

Moreover, taking into account the well known rule that ambiguities
or obscurities must be strictly interpreted aganst the prty that
caused them, 1the "memo of warranty" invoked by appellant bars
the latter from questioning the existence of the appliances called
for in the insured premises, since its initial expression, "the
undernoted appliances for the extinction of fire being kept on the
premises insured hereby, . . . it is hereby warranted . . .", admists of
interpretation as an admission of the existence of such appliances
which appellant cannot now contradict, should the parol evidence
rule apply.

Under the second assignment of error, appellant insurance

company avers, that the insured violated the "Hemp Warranty"
provisions of Policy No. 2637165 (Exhibit JJ), against the storage of
gasoline, since appellee admitted that there were 36 cans (latas) of
gasoline in the building designed as "Bodega No. 2" that was a
separate structure not affected by the fire. It is well to note that
gasoline is not specifically mentioned among the prohibited articles
listed in the so-called "hemp warranty." The cause relied upon by
the insurer speaks of "oils (animal and/or vegetable and/or mineral
and/or their liquid products having a flash point below 300o
Fahrenheit", and is decidedly ambiguous and uncertain; for in
ordinary parlance, "Oils" mean "lubricants" and not gasoline or
kerosene. And how many insured, it may well be wondered, are in a
position to understand or determine "flash point below 003o
Fahrenheit. Here, again, by reason of the exclusive control of the
insurance company over the terms and phraseology of the
contract, the ambiguity must be held strictly against the insurer
and liberraly in favor of the insured, specially to avoid a forfeiture
(44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

The alleged violation of the warranty of 100 feet of fire hose for
every two hydrants, must be equally rejected, since the appellant's
argument thereon is based on the assumption that the insured was
bound to maintain no less than eleven hydrants (one per 150 feet
of wall), which requirement appellant is estopped from enforcing.
The supposed breach of the wter pressure condition is made to rest
on the testimony of witness Serra, that the water supply could fill a
5-gallon can in 3 seconds; appellant thereupon inferring that the
maximum quantity obtainable from the hydrants was 100 gallons a
minute, when the warranty called for 200 gallons a minute. The
transcript shows, however, that Serra repeatedly refused and
professed inability to estimate the rate of discharge of the water,
and only gave the "5-gallon per 3-second" rate because the
insistence of appellant's counsel forced the witness to hazard a
guess. Obviously, the testimony is worthless and insufficient to
establish the violation claimed, specially since the burden of its
proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is
preponderant that the same was organized, and drilled, from time
to give, altho not maintained as a permanently separate unit, which
the warranty did not require. Anyway, it would be unreasonable to
expect the insured to maintain for his compound alone a fire
fighting force that many municipalities in the Islands do not even

Insurance is, in its nature, complex and difficult for the layman to
understand. Policies are prepared by experts who know and can
anticipate the hearing and possible complications of every
contingency. So long as insurance companies insist upon the use of
ambiguous, intricate and technical provisions, which conceal rather
than frankly disclose, their own intentions, the courts must, in
fairness to those who purchase insurance, construe every
ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co.,
91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases
and exceptions, to defeat the very purpose for which the policy was
procured (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).

12
We see no reason why the prohibition of keeping gasoline in the
premises could not be expressed clearly and unmistakably, in the
language and terms that the general public can readily understand,
without resort to obscure esoteric expression (now derisively
termed "gobbledygook"). We reiterate the rule stated in Bachrach
vs. British American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character,
it ought to have been plainly expressed in the policy.
This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentrations of
capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
"agreements" that the weaker party may not change one whit, his
participation in the "agreement" being reduced to the alternative to
take it or leave it" labelled since Raymond Baloilles" contracts by
adherence" (con tracts d'adhesion), in contrast to these entered
into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are
prime examples) obviously call for greater strictness and vigilance
on the part of courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their becoming
traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme
Court of Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro
envolvia alguna oscuridad, habra de ser tenido en cuenta que al
seguro es, practicamente un contrato de los llamados de adhesion
y por consiguiente en caso de duda sobre la significacion de las
clausulas generales de una poliza redactada por las compafijas
sin la intervencion alguna de sus clientes se ha de adoptar de
acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas
favorable al asegurado, ya que la obscuridad es imputable a la
empresa aseguradora, que debia haberse explicado mas
claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal
fidei) not for the insured alone, but equally so for the insurer; in
fact, it is mere so for the latter, since its dominant bargaining
position carries with it stricter responsibility.

Another point that is in favor of the insured is that the gasoline kept
in Bodega No. 2 was only incidental to his business, being no more
than a customary 2 day's supply for the five or six motor vehicles
used for transporting of the stored merchandise (t. s. n., pp. 14471448). "It is well settled that the keeping of inflammable oils on the
premises though prohibited by the policy does not void it if such
keeping is incidental to the business." Bachrach vs. British
American Ass. Co., 17 Phil. 555, 560); and "according to the weight
of authority, even though there are printed prohibitions against
keeping certain articles on the insured premises the policy will not
be avoided by a violation of these prohibitions, if the prohibited
articles are necessary or in customary use in carrying on the trade
or business conducted on the premises." (45 C. J. S., p. 311; also 4
Couch on Insurance, section 966b). It should also be noted that the
"Hemp Warranty" forbade storage only "in the building to which this
insurance applies and/or in any building communicating therewith",
and it is undisputed that no gasoline was stored in the burned
bodegas, and that "Bodega No. 2" which was not burned and where
the gasoline was found, stood isolated from the other insured
bodegas.
The charge that the insured failed or refused to submit to the
examiners of the insurer the books, vouchers, etc. demanded by
them was found unsubstantiated by the trial Court, and no reason
has been shown to alter this finding. The insured gave the
insurance examiner all the date he asked for (Exhibits AA, BB, CCC
and Z), and the examiner even kept and photographed some of the
examined books in his possession. What does appear to have been
rejected by the insured was the demand that he should submit
"a list of all books, vouchers, receiptsand other records" (Age 4,
Exhibit 9-c); but the refusal of the insured in this instance was well
justified, since the demand for a list of all the vouchers (which were
not in use by the insured) and receipts was positively unreasonable,
considering that such listing was superfluous because the insurer
was not denied access to the records, that the volume of Qua Chee
Gan's business ran into millions, and that the demand was made
just after the fire when everything was in turmoil. That the
representatives of the insurance company were able to secure all
the date they needed is proved by the fact that the adjuster
Alexander Stewart was able to prepare his own balance sheet
(Exhibit L of the criminal case) that did not differ from that

13
submitted by the insured (Exhibit J) except for the valuation of the
merchandise, as expressly found by the Court in the criminal case
for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved,
was strikingly illustrated in the decision of the arson case (Exhibit
WW) acquiting Qua Choc Gan, appellee in the present proceedings.
The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua
Choc Gan en Tabaco asi como su existencia de copra y abaca en las
bodega al tiempo del incendio durante el periodo comprendido
desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que
Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio
en Tabaco. Segun Steward al llegar a este conclusion el ha tenidoen
cuenta el balance de comprobacion Exhibit 'J' que le ha entregado
el mismo acusado Que Choc Gan en relacion con sus libros y lo ha
encontrado correcto a excepcion de los precios de abaca y copra
que alli aparecen que no estan de acuerdo con los precios en el
mercado. Esta comprobacion aparece en el balance mercado
exhibit J que fue preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured
and the adjuster Stewart for the insurer, the Court referred the
controversy to a government auditor, Apolonio Ramos; but the
latter reached a different result from the other two. Not only that,
but Ramos reported two different valuations that could be reached
according to the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos
usos buenos para promovar el comercio y la finanza, pero en el
caso presente ha resultado un tanto cumplicada y acomodaticia,
como lo prueba el resultado del examen hecho por los contadores
Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo
examinado las mismas partidas y los mismos libros dichos
contadores hayan de llegara dos conclusiones que difieron
sustancialmente entre si. En otras palabras, no solamente la
comprobacion hecha por Stewart difiere de la comprobacion hecha
por Ramos sino que, segun este ultimo, su comprobacion ha dado
lugar a dos resultados diferentes dependiendo del metodo que se
emplea.

Clearly then, the charge of fraudulent overvaluation cannot be

seriously entertained. The insurer attempted to bolster its case with
alleged photographs of certain pages of the insurance book
(destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and
26-B) and allegedly showing abnormal purchases of hemp and
copra from June 11 to June 20, 1940. The Court below remained
unconvinced of the authenticity of those photographs, and rejected
them, because they were not mentioned not introduced in the
criminal case; and considering the evident importance of said
exhibits in establishing the motive of the insured in committing the
arson charged, and the absence of adequate explanation for their
omission in the criminal case, we cannot say that their rejection in
the civil case constituted reversible error.
The next two defenses pleaded by the insurer, that the insured
connived at the loss and that the fraudulently inflated the quantity
of the insured stock in the burnt bodegas, are closely related to
each other. Both defenses are predicted on the assumption that the
insured was in financial difficulties and set the fire to defraud the
insurance company, presumably in order to pay off the Philippine
National Bank, to which most of the insured hemp and copra was
pledged. Both defenses are fatally undermined by the established
fact that, notwithstanding the insurer's refusal to pay the value of
the policies the extensive resources of the insured (Exhibit WW)
enabled him to pay off the National Bank in a short time; and if he
was able to do so, no motive appears for attempt to defraud the
insurer. While the acquittal of the insured in the arson case is
not res judicata on the present civil action, the insurer's evidence,
to judge from the decision in the criminal case, is practically
identical in both cases and must lead to the same result, since the
proof to establish the defense of connivance at the fire in order to
defraud the insurer "cannot be materially less convincing than that
required in order to convict the insured of the crime of
arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have
contained the quantities of copra and hemp stated in the fire
claims, the insurer's case rests almost exclusively on the estimates,
inferences and conclusionsAs to the defense that the burned
bodegas could not possibly have contained the quantities of copra
and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusions of its

14
adjuster investigator, Alexander D. Stewart, who examined the
premises during and after the fire. His testimony, however, was
based on inferences from the photographs and traces found after
the fire, and must yield to the contradictory testimony of engineer
Andres Bolinas, and specially of the then Chief of the Loan
Department of the National Bank's Legaspi branch, Porfirio Barrios,
and of Bank Appraiser Loreto Samson, who actually saw the
contents of the bodegas shortly before the fire, while inspecting
them for the mortgagee Bank. The lower Court was satisfied of the
veracity and accuracy of these witnesses, and the appellant insurer
has failed to substantiate its charges aganst their character. In fact,
the insurer's repeated accusations that these witnesses were later
"suspended for fraudulent transactions" without giving any details,
is a plain attempt to create prejudice against them, without the
least support in fact.
Stewart himself, in testifying that it is impossible to determine from
the remains the quantity of hemp burned (t. s. n., pp. 1468, 1470),
rebutted appellant's attacks on the refusal of the Court below to
accept its inferences from the remains shown in the photographs of
the burned premises. It appears, likewise, that the adjuster's
calculations of the maximum contents of the destroyed warehouses
rested on the assumption that all the copra and hemp were in
sacks, and on the result of his experiments to determine the space
occupied by definite amounts of sacked copra. The error in the
estimates thus arrived at proceeds from the fact that a large
amount of the insured's stock were in loose form, occupying less
space than when kept in sacks; and from Stewart's obvious failure
to give due allowance for the compression of the material at the
bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of
the overlying stock, as shown by engineer Bolinas. It is probable
that the errors were due to inexperience (Stewart himself admitted
that this was the first copra fire he had investigated); but it is clear
that such errors render valueles Stewart's computations. These
were in fact twice passed upon and twice rejected by different
judges (in the criminal and civil cases) and their concordant opinion
is practically conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly
disregarded by the Court below, since the opinions stated therein
were based on ex parte investigations made at the back of the
insured; and the appellant did not present at the trial the original

testimony and documents from which the conclusions in the report

were drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by
the insured contained false and fraudulent statements that avoided
the insurance policy. But the trial Court found that the
discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and claim
forms, caused by his imperfect knowledge of English, and that the
misstatements were innocently made and without intent to
defraud. Our review of the lengthy record fails to disclose reasons
for rejecting these conclusions of the Court below. For example, the
occurrence of previous fires in the premises insured in 1939, altho
omitted in the claims, Exhibits EE and FF, were nevertheless
revealed by the insured in his claims Exhibits Q (filed
simultaneously with them), KK and WW. Considering that all these
claims were submitted to the smae agent, and that this same agent
had paid the loss caused by the 1939 fire, we find no error in the
trial Court's acceptance of the insured's explanation that the
omission in Exhibits EE and FF was due to inadvertance, for the
insured could hardly expect under such circumstances, that the
1939 would pass unnoticed by the insurance agents. Similarly, the
20 per cent overclaim on 70 per cent of the hemo stock, was
explained by the insured as caused by his belief that he was
entitled to include in the claim his expected profit on the 70 per
cent of the hemp, because the same was already contracted for
and sold to other parties before the fire occurred. Compared with
other cases of over-valuation recorded in our judicial annals, the 20
per cent excess in the case of the insured is not by itself sufficient
to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins.
Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent)
bigger than the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43
Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China
Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun
Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the
goods insured were inventoried at O13,113. Certainly, the insured's
overclaim of 20 per cent in the case at bar, duly explained by him
to the Court a quo, appears puny by comparison, and can not be
regarded as "more than misstatement, more than inadvertence of
mistake, more than a mere error in opinion, more than a slight
exaggeration" (Tan It vs. Sun Insurance Office, ante) that would

15
entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on apart (70 per cent)
of the hemp stock; had the insured acted with fraudulent intent,
nothing prevented him from increasing the value of all of his copra,
hemp and buildings in the same proportion. This also applies to the
alleged fraudulent claim for burned empty sacks, that was likewise
explained to our satisfaction and that of the trial Court. The rule is
that to avoid a policy, the false swearing must be wilful and with
intent to defraud (29 Am. Jur., pp. 849-851) which was not the
cause. Of course, the lack of fraudulent intent would not authorize
the collection of the expected profit under the terms of the polices,
and the trial Court correctly deducte the same from its award.
We find no reversible error in the judgment appealed from,
wherefore the smae is hereby affirmed. Costs against the appellant.
So ordered.
Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and
Concepcion, JJ., concur.
Qua v Law Union. G.R. No. L-4611 December 17, 1955
J. Reyes

Facts:
Qua owned 4 warehouses used for the storage of copra and hemp.
They were insured with the Law Union.
Fire broke out and completely destroyed 3 bodegas. The plaintiff
submitted claims totalling P398,562.81. The Insurance Company
resisted payment on the grounds that the fire had been deliberately
caused by the insured or by other persons in connivance with him.
Que Chee Gan and his brother were tried for arson, but were
acquitted by the trial court. As regards the insurance claim, the
trial court ruled in favor of Qua and entitled him to recover more
than Php 300,000 for indemnities from the insurance company.
Hence, the company appealed to the SC.
In its first assignment of error, the insurance company alleged that
the trial Court should have held that the policies were avoided for
breach of warranty. The contract noted that fire hydrants were

required in a particular measurement of space (every 150 feet).

Hence, they argued that since the bodegas insured had an external
wall perimeter of 500 meters, the appellee should have 11 fire
hydrants in the compound, and that he actually had only 2, with a
further pair.

Issues:
1. WON the insurance company can void the policies it had issued
2. WON the insured violated the "Hemp Warranty" provisions of the
policy against the storage of gasoline
3. WON the insured planned the destruction of the bodega

Held: No. No. No.

Ratio:
1. The insurer, who at the time of issuance, has knowledge of
existing facts which would invalidate the contract from the
beginning, such constitutes a waiver of conditions in the contract
inconsistent
with
the
facts,
and
the
insurer
is
stoppedthereafter from asserting the breach of such conditions.
Also, an insurance company intends to executed a valid contract in
return for the premium received; and when the policy contains a
condition which renders it voidable at its inception, and this result
is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than
to have deceived the insured into thinking he is insured when in
fact he is not.
The appellant is barred estoppel to claim violation of the so-called
fire hydrants warranty, because it knew the number of hydrants
demanded therein never existed from the very beginning and
issued the policies.
To allow a company to accept one's money for a policy of insurance
which it then knows to be void and of no effect, though it knows as

16
it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely
related to positive fraud, as to the abhorrent to fair-minded men.
The appellant company so worded the policies that while exacting
the greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2%, thereby giving the
insurance company a double benefit. Such abnormal treatment of
the insured strongly points at an abuse of the insurance company's
selection of the words and terms of the contract, over which it had
absolute control.
Receipt of Premiums or Assessments after Cause for Forfeiture
Other than Nonpayment. It is a well settled rule of law that an
insurer which with knowledge of facts entitling it to treat a policy as
no longer in force, receives and accepts a premium on the policy,
estopped to take advantage of the forfeiture. It cannot treat the
policy as void for the purpose of defense to an action to recover for
a loss thereafter occurring and at the same time treat it as valid for
the purpose of earning and collecting further premiums.
Moreover, taking into account the well known rule that ambiguities
or obscurities must be strictly interpreted against the party that
caused them, the "memo of warranty" invoked by appellant bars
the latter from questioning the existence of the appliances called
for in the insured premises
2. The ambiguity must be held strictly against the insurer and
liberally in favor of the insured, specially to avoid a forfeiture. So
long as insurance companies insist upon the use of ambiguous,
intricate and technical provisions, which conceal rather than frankly
disclose, their own intentions, the courts must, in fairness to those
who purchase insurance, construe everyambiguity in favor of the
insured.
Appellee admitted that there were 36 cans of gasoline in the
building designed. It However, gasoline is not specifically
mentioned among the prohibited articles listed in the so-called
"hemp warranty." The cause relied upon by the insurer speaks of
"oils", and is uncertain because, "Oils" usually mean "lubricants"
and not gasoline or kerosene.

If the company intended to rely upon a condition of that character,

it ought to have been plainly expressed in the policy.
The contract of insurance is one of perfect good faith not for the
insured alone, but equally so for the insurer; in fact, it is mere so for
the latter, since its dominant bargaining position carries with it
stricter responsibility.
Also, the gasoline kept in Bodega No. 2 was only incidental to his
business, being no more than a customary 2 day's supply for the
five or six motor vehicles used for transporting of the stored
merchandise. "It is well settled that the keeping of inflammable oils
on the premises though prohibited by the policy does not void it if
such keeping is incidental to the business."
3. It was unlikely that Qua burned the warehouse to defraud the
company because he had the resources to pay off theNational
Bank in a short time. Also, no motive appears for attempt to
defraud the insurer. While the acquittal of the insured in
the arson case is not res judicata on the present civil action, the
insurer's evidence, to judge from the decision in the criminal case,
is practically identical in both cases and must lead to the same
result, since the proof to establish the defense of connivance at the
fire in order to defraud the insurer "cannot be materially less
convincing than that required in order to convict the insured of the
crime of arson."
As to the defense that the burned bodegas could not possibly have
contained the quantities of copra and hemp stated in the fire
claims, the insurer relied on its adjuster investigator who examined
the premises during and after the fire. His testimony, however, was
based on inferences from the photographs and traces found after
the fire, and must yield to the contradictory testimony of those who
actually saw the contents of the bodegas shortly before the fire,
while inspecting them for the mortgagee Bank.

17
G.R. No. L-14373

January 30, 1960

GENERAL
INSURANCE
CORPORATION, petitioner,
vs.
NG HUA, respondent.

AND

SURETY

Jose P. Bengzon, Guido Advincula and Potenciano Villegas, Jr.,

petitioner.
Crispin D. Baizas for respondent.
BENGZON, J.:
Suit to recover on a fire insurance policy. The insurer presented
several defenses in the Manila court of first instance. After trial, it
was required to pay.
On appeal to the Courts of Appeal, the judgment was affirmed.
This is now a revision on certiorari, upon the insurer's insistence on
two of its main defenses: prescription and breach of warranty.
The principal of facts on which adjudication may rest are these:
On April 15, 1952, the defendant General Insurance and Surety
Corporation issued its insurance Policy No. 471, insuring against
fire, for one year, the stock in trade of the Central Pomade Factory
owned by Ng Hua, the court insured. The next day, the Pomade
factory building burned, resulting in destruction by fire of the
insured properties. Ng Hua claimed indemnity from the insurer. The
policy covered damages up to P10,000.00; but after some
negotiations and upon suggestion of the Manila Adjustment
Company, he reduced the claim of P5,000.00. Nevertheless, the
defendant insurer refused to pay for various reasons, namely (a)
action was not filed in time; (b) violation of warranty; (c) submission
of fraudulent claim; and (f) failure to pay the premium.
The aforesaid Policy No. 471 contains this stipulation on the back
thereof;.
3. The insured shall give notice to the company of any insurance or
insurances already affected, or which may subsequently be
effected, covering any of the property hereby insured, and unless
such notice be given and the particulars of such insurance or

insurances be stated in or endorsed on this Policy by or on behalf of

the Company before the occurrence of any loss or damage, all
benefits under the policy shall be forfeited. (Emphasis ours.)
The face of the policy bore the annotation: "Co-Insurance Declared
NIL"
It is undenied that Ng Hua had obtained fire insurance on the same
goods, for the same period of time, in the amount of P20,000.00
from General Indemnity Co. However, the Court of Appeals referring
to the annotation and overruling the defense, held that there was
no violation of the above clause, inasmuch as "co-insurance exists
when a condition of the policy requires the insured to bear ratable
proportion of the loss when the value of the insured property
exceeds the face value of the policy," hence there is no coinsurance here.
Discussion Undoubtedly, co-insurance exists under the condition
described by the appellate court. But that isone kind of coinsurance. It is not the only situation where co-insurance exists.
Other insurers of the same property against the same hazard are
sometimes referred as co-insurers and the ensuing combination as
co-insurance.1 And considering the terms of the policy which
required the insured to declare other insurances, the statement in
question must be deemed to be a statement (warranty) binding on
both insurer and insured, that there were no other insurance on the
property. Remember it runs "Co-Insurance declared"; emphasis on
the last word. If "Co-Insurance" means that the Court of Appeals
says, the annotation served no purpose. It would even be contrary
to the policy itself, which in its clause No. 17 made the insured
a co-insurer for the excess of the value of the property over the
amount of the policy.
The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof
entitles the insurer to rescind. (Sec. 69. Insurance Act) Such
misrepresentation is fatal in the light of our views in Santa Ana vs.
Commercial Union Assurance Company, Ltd., 55 Phil., 329. The
materiality of non-disclosure of other insurance policies is not open
to doubt.
Furthermore, even if the annotations were overlooked, the
defendant insurer would still be free from liability because there is

18
no question that the policy issued by General Indemnity had
not been stated in nor endorsed onPolicy No. 471 of defendant. And
as stipulated in the above-quoted provisions of such policy "all
benefit under this policy shall be forfeited."2
To avoid the dissastrous effect of the misrepresentation or
concealment of the other insurance policy, Ng Hua alleges "actual
knowledge" on the part of General insurance of the fact that he had
taken out additional insurance with General Indemnity. He does not
say when such knowledge was acquired or imparted. If General
Insurance know before issuing its policy or before the fire, such
knowledge might overcome the insurer's defense.3However, the
Court of Appeals found no evidence of such knowledge. We have
read the pages of the stenographic notes cited by Ng Hua and we
all gather is evidence of the existence of the Insurance General
Indemnity Company. As to knowledge of General Insurance before
issuance of its policy or the fire, there was none.
Indeed, this concealment and violation was expressly set up as a
special defense in the answer. Yet plaintiff did not, in avoidance,
reply nor assert such knowledge. And it is doubtful whether the
evidence on the point would be admissible under the pleadings.
(See Rule 11, sec. 1.)
All the above considerations lead to the conclusion that the
defendant insurer successfully established its defense of warranty
breach or concealment of the other insurance and/or violation of
the provision of the policy above-mentioned.
Having reached the conclusion, we deem it unnecessary to discuss
the other defenses.
Wherefore, the judgment under review will be revoked, and the
defendant insurer (herein petitioner) acquitted from all the liability
under the policy. Costs against respondent. So ordered.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador,
Concepcion Reyes, J.B.L., Endencia, and Barrera, JJ., concur.

19
G.R. No. L-1669

August 31, 1950

PAZ
LOPEZ
DE
CONSTANTINO, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

Insured of the annual premium of One Hundred fifty-eight and

4/100 pesos Philippine currency 1 and of the payment of a like
amount
upon
each
twenty-seventh
day
of
September
hereafter during the term of Twenty years or until the prior death of
the Insured. (Emphasis supplied.)

x---------------------------------------------------------x

xxx

G.R. No. L-1670

All premium payments are due in advance and any unpunctuality in

making any such payment shall cause this policy to lapse unless
and except as kept in force by the Grace Period condition or under
Option 4 below. (Grace of 31 days.)

August 31, 1950

AGUSTINA
PERALTA, plaintiff-appellant,
vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

xxx

xxx

Mariano
Lozada
for
appellant
Constantino.
Cachero
and
Madarang
for
appellant
Peralta.
Dewitt,
Perkins
and
Ponce
Enrile
for
appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici
curiae.

After that first payment, no further premiums were paid. The

insured died on September 22, 1944.

BENGZON, J.:

Second case. On August 1, 1938, the defendant Asia Life Insurance

Company issued its Policy No. 78145 (Joint Life 20-Year Endowment
Participating with Accident Indemnity), covering the lives of the
spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000.
The annual premium stipulated in the policy was regularly paid
from August 1, 1938, up to and including September 30, 1941.
Effective August 1, 1941, the mode of payment of premiums was
changed from annual to quarterly, so that quarterly premiums were
paid, the last having been delivered on November 18, 1941, said
payment covering the period up to January 31, 1942. No further
payments were handed to the insurer. Upon the Japanese
occupation, the insured and the insurer became separated by the
lines of war, and it was impossible and illegal for them to deal with
each other. Because the insured had borrowed on the policy an
mount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to
September 7, 1942. Tomas Ruiz died on February 16, 1945. The
plaintiff Agustina Peralta is his beneficiary. Her demand for payment
met with defendant's refusal, grounded on non-payment of the
premiums.

These two cases, appealed from the Court of First Instance of

Manila, call for decision of the question whether the beneficiary in a
life insurance policy may recover the amount thereof although the
insured died after repeatedly failing to pay the stipulated
premiums, such failure having been caused by the last war in the
Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual
premium duly paid to it, the Asia Life Insurance Company (a foreign
corporation incorporated under the laws of Delaware, U.S.A.),
issued on September 27, 1941, its Policy No. 93912 for P3,000,
whereby it insured the life of Arcadio Constantino for a term of
twenty years. The first premium covered the period up to
September 26, 1942. The plaintiff Paz Lopez de Constantino was
regularly appointed beneficiary. The policy contained these
stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written
and printed application here for a copy of which is attached hereto
and is hereby made a part hereof made a part hereof, and of the
payment in advance during the lifetime and good health of the

It is admitted that the defendant, being an American corporation ,

had to close its branch office in Manila by reason of the Japanese
occupation, i.e. from January 2, 1942, until the year 1945.

The policy provides in part:

20
This POLICY OF INSURANCE is issued in consideration of the written
and printed application herefor, a copy of which is attached hereto
and is hereby made apart hereof, and of the payment in advance
during the life time and good health of the Insured of the annual
premium of Two hundred and 43/100 pesos Philippine currency and
of the payment of a like amount upon each first day of August
hereafter during the term of Twenty years or until the prior death of
either of the Insured. (Emphasis supplied.)
xxx

xxx

xxx

All premium payments are due in advance and any unpunctuality in

making any such payment shall cause this policy to lapse unless
and except as kept in force by the Grace Period condition or under
Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive
the proceeds of the policies minus all sums due for premiums in
arrears. They allege that non-payment of the premiums was caused
by the closing of defendant's offices in Manila during the Japanese
occupation and the impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed
for non-payment of premiums, in accordance with the contract of
the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction.
Fortunately, this court has had the benefit of extensive and
exhaustive memoranda including those of amici curiae. The matter
has received careful consideration, inasmuch as it affects the
interest of thousands of policy-holders and the obligations of many
insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in
Act No. 2427, as amended, and the Civil Code. 2 Act No. 2427 was
largely copied from the Civil Code of California. 3 And this court has
heretofore announced its intention to supplement the statutory
laws with general principles prevailing on the subject in the United
State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said
that "contracts of insurance are contracts of indemnity upon the

terms and conditions specified in the policy. The parties have a

right to impose such reasonable conditions at the time of the
making of the contract as they may deem wise and necessary. The
rate of premium is measured by the character of the risk assumed.
The insurance company, for a comparatively small consideration,
undertakes to guarantee the insured against loss or damage, upon
the terms and conditions agreed upon, and upon no other, and
when called upon to pay, in case of loss, the insurer, therefore, may
justly insists upon a fulfillment of these terms. If the insured cannot
bring himself within the conditions of the policy, he is not entitled
for the loss. The terms of the policy constitute the measure of the
insurer's liability, and in order to recover the insured must show
himself within those terms; and if it appears that the contract has
been terminated by a violation, on the part of the insured, of its
conditions, then there can be no right of recovery. The compliance
of the insured with the terms of the contract is a condition
precedent to the right of recovery."
Recall of the above pronouncements is appropriate because the
policies in question stipulate that "all premium payments are due in
advance and any unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would seem that pursuant
to the express terms of the policy, non-payment of premium
produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in
a policy, are binding upon the parties and should be enforced by
the courts, if the evidence brings the case clearly within their
meaning and intent. It tends to bring the law itself into disrepute
when, by astute and subtle distinctions, a plain case is attempted
to be taken without the operation of a clear, reasonable and
material obligation of the contract. Mack vs. Rochester German Ins.
Co., 106 N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil.,
617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a
life policy was avoided because the premium had not been paid
within the time fixed, since by its express terms, non-payment of
any premium when due or within the thirty-day period of
grace, ipso facto caused the policy to lapse. This goes to show that
although we take the view that insurance policies should be

21
conserved5 and should not lightly be thrown out, still we do not
hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot
for that reason alone refuse to enforce an insurance contract
according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the nonpayment of premium was the consequence of war, it should be
excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says
that in determining the effect of non-payment of premiums
occasioned by war, the American cases may be divided into three
groups, according as they support the so-called Connecticut Rule,
the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the
consideration for which the annual premium is paid First, the
mere protection for the year, and second, the privilege of renewing
the contract for each succeeding year by paying the premium for
that year at the time agreed upon. According to this view of the
contract, the payment of premiums is a condition precedent, the
non-performance would be illegal necessarily defeats the right to
renew the contract."
The second rule, apparently followed by the greater number of
decisions, hold that "war between states in which the parties reside
merely suspends the contracts of the life insurance, and that, upon
tender of all premiums due by the insured or his representatives
after the war has terminated, the contract revives and becomes
fully operative."
The United States rule declares that the contract is not merely
suspended, but is abrogated by reason of non-payments is
peculiarly of the essence of the contract. It additionally holds that it
would be unjust to allow the insurer to retain the reserve value of
the policy, which is the excess of the premiums paid over the actual
risk carried during the years when the policy had been in force. This
rule was announced in the well-known Statham 6case which, in the
opinion of Professor Vance, is the correct rule.7

The appellants and some amici curiae contend that the New York
rule should be applied here. The appellee and other amici
curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the
different theories. Besides the respect and high regard we have
always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded
in its decision of the Statham case are logically and judicially
sound. Like the instant case, the policy involved in the Statham
decision specifies that non-payment on time shall cause the policy
to cease and determine. Reasoning out that punctual payments
were essential, the court said:
. . . it must be conceded that promptness of payment is essential in
the business of life insurance. All the calculations of the insurance
company are based on the hypothesis of prompt payments. They
not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are
enabled to offer assurance at the favorable rates they do. Forfeiture
for non-payment is an necessary means of protecting themselves
from embarrassment. Unless it were enforceable, the business
would be thrown into confusion. It is like the forfeiture of shares in
mining enterprises, and all other hazardous undertakings. There
must be power to cut-off unprofitable members, or the success of
the whole scheme is endangered. The insured parties are
associates in a great scheme. This associated relation exists
whether the company be a mutual one or not. Each is interested in
the engagements of all; for out of the co-existence of many risks
arises the law of average, which underlies the whole business. An
essential feature of this scheme is the mathematical calculations
referred to, on which the premiums and amounts assured are
based. And these calculations, again, are based on the assumption
of average mortality, and of prompt payments and compound
interest thereon. Delinquency cannot be tolerated nor redeemed,
except at the option of the company. This has always been the
understanding and the practice in this department of business.
Some companies, it is true, accord a grace of thirty days, or other
fixed period, within which the premium in arrear may be paid, on
certain conditions of continued good health, etc. But this is a
matter of stipulation, or of discretion, on the part of the particular
company. When no stipulation exists, it is the general

22
understanding that time is material, and that the forfeiture is
absolute if the premium be not paid. The extraordinary and even
desperate efforts sometimes made, when an insured person is in
extremes to meet a premium coming due, demonstrates the
common view of this matter.
The case, therefore, is one in which time is material and of
essence and of the essence of the contract. Non-payment at
day involves absolute forfeiture if such be the terms of
contract, as is the case here. Courts cannot with safety vary
stipulation of the parties by introducing equities for the relief of
insured against their own negligence.

the
the
the
the
the

In another part of the decision, the United States Supreme Court

considers and rejects what is, in effect, the New York theory in the
following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended
during the war is one based on considerations of equity and justice,
and cannot be invoked to revive a contract which it would be unjust
or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the
performance of the contract, another strong reason exists why the
policy should not be revived. The parties do not stand on equal
ground in reference to such a revival. It would operate most
unjustly against the company. The business of insurance is founded
on the law of average; that of life insurance eminently so. The
average rate of mortality is the basis on which it rests. By
spreading their risks over a large number of cases, the companies
calculate on this average with reasonable certainty and safety.
Anything that interferes with it deranges the security of the
business. If every policy lapsed by reason of the war should be
revived, and all the back premiums should be paid, the companies
would have the benefit of this average amount of risk. But the good
risks are never heard from; only the bar are sought to be revived,
where the person insured is either dead or dying. Those in health
can get the new policies cheaper than to pay arrearages on the old.
To enforce a revival of the bad cases, whilst the company
necessarily lose the cases which are desirable, would be manifestly
unjust. An insured person, as before stated, does not stand isolated
and alone. His case is connected with and co-related to the cases of

all others insured by the same company. The nature of the

business, as a whole, must be looked at to understand the general
equities of the parties.
The above consideration certainly lend themselves to the approval
of fair-minded men. Moreover, if, as alleged, the consequences of
war should not prejudice the insured, neither should they bear
down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point
out that the obligation of the insured to pay premiums was excused
during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such
failure.
The appellee answers, quite plausibly, that the periodic payment of
premiums, at least those after the first, is not an obligation of the
insured, so much so that it is not a debt enforceable by action of
the insurer.
Under an Oklahoma decision, the annual premium due is not a
debt. It is not an obligation upon which the insurer can maintain an
action against insured; nor is its settlement governed by the strict
rule controlling payments of debts. So, the court in a Kentucky case
declares, in the opinion, that it is not a debt. . . . The fact that it is
payable annually or semi-annually, or at any other stipulated time,
does not of itself constitute a promise to pay, either express or
implied. In case of non-payment the policy is forfeited, except so far
as the forfeiture may be saved by agreement, by waiver, estoppel,
or by statute. The payment of the premium is entirely optional,
while a debt may be enforced at law, and the fact that the premium
is agreed to be paid is without force, in the absence of an
unqualified and absolute agreement to pay a specified sum at some
certain time. In the ordinary policy there is no promise to pay, but it
is optional with the insured whether he will continue the policy or
forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)
It is well settled that a contract of insurance is sui generis. While
the insured by an observance of the conditions may hold the
insurer to his contract, the latter has not the power or right to
compel the insured to maintain the contract relation with it longer
than he chooses. Whether the insured will continue it or not is
optional with him. There being no obligation to pay for the

23
premium, they did not constitute a debt. (Noblevs. Southern States
M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)

high importance of the defense of non-payment thereof, was

specifically recognized.

It should be noted that the parties contracted not only for

peacetime conditions but also for times of war, because the policies
contained provisions applicable expressly to wartime days. The
logical inference, therefore, is that the parties contemplated
uninterrupted operation of the contract even if armed conflict
should ensue.

In keeping with such legislative policy, we feel no hesitation to

adopt the United States Rule, which is in effect a variation of the
Connecticut rule for the sake of equity. In this connection, it
appears that the first policy had no reserve value, and that the
equitable values of the second had been practically returned to the
insured in the form of loan and advance for premium.

For the plaintiffs, it is again argued that in view of the enormous

growth of insurance business since the Statham decision, it could
now be relaxed and even disregarded. It is stated "that the
relaxation of rules relating to insurance is in direct proportion to the
growth of the business. If there were only 100 men, for example,
insured by a Company or a mutual Association, the death of one
will distribute the insurance proceeds among the remaining 99
policy-holders. Because the loss which each survivor will bear will
be relatively great, death from certain agreed or specified causes
may be deemed not a compensable loss. But if the policy-holders of
the Company or Association should be 1,000,000 individuals, it is
clear that the death of one of them will not seriously prejudice each
one of the 999,999 surviving insured. The loss to be borne by each
individual will be relatively small."

For all the foregoing, the lower court's decision absolving the
defendant from all liability on the policies in question, is hereby
affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes,
JJ., concur.
G.R. No. L-1669

Lessons Applicable: General Principles on Insurance (Insurance)

FACTS:

The answer to this is that as there are (in the example) one million
policy-holders, the "losses" to be considered will not be the death
of one but the death of ten thousand, since the proportion of 1 to
100 should be maintained. And certainly such losses for 10,000
deaths will not be "relatively small."
After perusing the Insurance Act, we are firmly persuaded that the
non-payment of premiums is such a vital defense of insurance
companies that since the very beginning, said Act no. 2427
expressly preserved it, by providing that after the policy shall have
been in force for two years, it shall become incontestable (i.e. the
insurer shall have no defense) except for fraud, non-payment of
premiums, and military or naval service in time of war (sec. 184 [b],
Insurance Act). And when Congress recently amended this section
(Rep. Act No. 171), the defense of fraud was eliminated, while the
defense of nonpayment of premiums was preserved. Thus the
fundamental character of the undertaking to pay premiums and the

August 31, 1950

Case 1:

The life of Arcadio Constantino was insured with Asia

Life Insurance Company (Asia) for a term of 20 years
with Paz Lopez de Constantino as beneficiary. The
first premium covered the period up to September
26, 1942.

After the first premium, no further premiums were

paid. The insured died on September 22, 1944.

Asia Life Insurance Company, being an American

Corp., had to close its branch office in Manila by
reason of the Japanese occupation, i.e. from January
2, 1942, until the year 1945.

Case 2:

24

Spouses Tomas Ruiz and Agustina Peralta. Their

premium were initially annually but subsequently
changed to quarterly. The last quarterly premium
was delivered on on November 18, 1941 and it
covered the period until January 31, 1942.
Upon the Japanese occupation, the insurer and
insured were not able to deal with each other

Nevertheless, inasmuch as the non-payment of premium

was the consequence of war, it should be excused and
should not cause the forfeiture of the policy

3 Rules in case of war:

Connecticut Rule

Because the insured had borrowed on the policy

P234.00 in January, 1941, the cash surrender value of
the policy was sufficient to maintain the policy in
force only up to September 7, 1942.
Tomas Ruiz died on February 16, 1945 with Agustina
Peralta as beneficiary. Her demand for payment was
refused on the ground of non-payment of the
premiums.

Plaintiffs: As beneficiaries, they are entitled to receive the

proceeds of the policies minus all sums due for premiums in
arrears. The non-payment of the premiums was caused by
the closing of Asia's offices in Manila during the Japanese
occupation and the impossible circumstances created by
war.

ISSUE: W/N the insurers still have a right to claim.

HELD: YES. lower court affirmed.

it would seem that pursuant to the express terms of the

policy, non-payment of premium produces its avoidance

Forfeitures of insurance policies are not favored, but courts

cannot for that reason alone refuse to enforce an insurance
contract according to its meaning.

mere protection for the year

privilege of renewing the contract for

each succeeding year by paying the
premium for that year at the time
agreed upon

payment of premiums is a condition

precedent, the non-performance would be
illegal necessarily defeats the right to renew
the contract

New York Rule - greatly followed by a number of

cases

lower court: absolved Asia

2 elements in the consideration for which the

annual premium is paid:

war between states in which the parties reside

merely suspends the contracts of the life
insurance, and that, upon tender of all
premiums due by the insured or his
representatives after the war has terminated,
the contract revives and becomes fully
operative

United States Rule

contract is not merely suspended, but is

abrogated by reason of non-payments is
peculiarly of the essence of the contract

it would be unjust to allow the insurer to

retain the reserve value of the policy, which is
the excess of the premiums paid over the

25
actual risk carried during the years when the
policy had been in force

The business of insurance is founded on the law of average;

that of life insurance eminently so

contract of insurance is sui generis

Whether the insured will continue it or not is optional

with him. There being no obligation to pay for the
premium, they did not constitute a debt.

It should be noted that the parties contracted not only for

peacetime conditions but also for times of war, because the
policies contained provisions applicable expressly to
wartime days. The logical inference, therefore, is that the
parties contemplated uninterrupted operation of the
contract even if armed conflict should ensue.

the fundamental character of the undertaking to pay

premiums and the high importance of the defense of nonpayment thereof, was specifically recognized

adopt the United States Rule: first policy had no reserve

value, and that the equitable values of the second had been
practically returned to the insured in the form of loan and
advance for premium

26
[G.R.

No.

L-2668.

September

30,

1950.]

NATIONAL LEATHER CO., INC., Plaintiff-Appellant, v. THE

UNITED STATES LIFE INSURANCE CO., Defendant-Appellee.
David

Guevara

and

Jose

G.

Flores,

for Appellant.

Perkins, Ponce Enrile, Contreras & Gomez, for Appellee.

SYLLABUS
1. INSURANCE; LIFE INSURANCE; NON-PAYMENT OF STIPULATED
PREMIUM DUE TO WAR; FORFEITURE OF POLICY. The nonpayment
of premium does not merely suspend but puts an end to an
insurance contract, since the time of the payment is peculiarly of
the essence of the contract. The rule is not affected by the fact that
the nonpayment is due to war or that the insured has not been
negligent. (Ruling in the case of Constantino v. Asia Life Insurance
Company, G.R. No. L-1669, August 31, 1950, reiterated.)

DECISION

REYES, J.:

This is an appeal from a decision of the Court of First Instance of

Manila dismissing plaintiffs action for the recovery of the proceeds
of a life insurance policy. Though the amount sought to be
recovered is only P10,000, the case has been elevated to this court
by agreement of the parties upon representation that only
questions
of
law
are
involved.
It appears from the stipulation of facts that plaintiff is a Philippine
corporation with offices in the City of Manila, while defendant is a
foreign life insurance company incorporated under the laws of New

York, U. S. A., and licensed to do business in the Philippines (except

during the period of the Japanese occupation) with main office in
New York but with a branch office in Manila. On April 14, 1939,
plaintiff insured with the defendant the life of Pedro Alejandrino for
P5,000 under a 10-year term non-participating policy in
consideration of the payment to the defendant, in advance, of the
sum of $23.11 as quarterly premium beginning April 14, 1939, and
the payment of a like sum every quarter, thereafter, also in
advance, for a period of 10 years or until the prior death of said
Pedro Alejandrino. The stipulated quarterly premiums on the policy
were regularly paid up to October 14, 1941, when the last quarterly
premium payment was made, covering the period from that date to
January 14, 1942. Thereafter no more premiums were paid, it
appearing that, because defendant was an American corporation,
its branch office in Manila was closed when that city was occupied
by the Japanese forces on January 2, 1942, and it had remained
closed during the entire period of enemy occupation. It was not
reopened until March, 1945. Pedro Alejandrino died on September
23, 1943, that is, beyond the period covered by the premiums paid
by the insured. But just the same, after the liberation of Manila in
1945, plaintiff, as the beneficiary named in the policy, made a
claim for the proceeds thereof and tendered a check for P323.54,
the total unpaid premiums from January 14, 1942, to October 14,
1943. Defendant, however, rejected the claim and returned the
check on the ground that the policy had ceased to be in force as of
January 14, 1942, for non-payment of the stipulated premiums. It
was to secure the judicial enforcement of this claim that plaintiff
brought the present action and took this appeal when its complaint
was
dismissed
by
the
court
below.
Among the provisions of the policy issued by the defendant to
plaintiff
are
the
following:jgc:chanrobles.com.ph
"This policy is issued in consideration of the application therefor,
copy of which application is attached hereto and made a part
hereof, and of the payment, on or before delivery hereof, of the
quarterly premium of $23.11 and of the payment of a like amount
upon each 14th day of April, July, October and January hereafter
during the term of ten years or until the prior death of the insured.
x

27

"Payment of Premiums. Except as herein provided the payment

of a premium or installment shall not maintain this policy in force
beyond the date when the next premium or installment thereof is
payable.
"All premiums are payable in advance at the Shanghai or New York
City Office or to any agent of the company upon delivery, on or
before date due, of a receipt signed by an executive officer, viz: the
Chairman of the Board of Directors, President, Vice-President,
Secretary, Assistant Secretary, Actuary, Assistant Actuary or
Cashier of the Company and countersigned by said agent.
"A grace of one month or thirty days (whichever period is the
longer) shall be granted for the payment of every premium after
the first, during which time the insurance shall continue in force. If
death occur within the days of grace the unpaid portion of the
premium for the then current policy year shall be deducted from
the
amount
payable
hereunder.
"Upon written request therefor, approved by the company at its
Shanghai or New York City Office, premium payments may be
changed at any anniversary of this policy so as to be payable
annually, semi- annually, or quarterly in accordance with the
published rates in force at the date of issue of this policy. If this
policy become a claim by death any unpaid portion of the annual
premium for the policy year in which death occurs shall be an
indebtedness to be deducted from the amount payable hereunder.
x

"Reinstatement. If this policy shall lapse in consequence of

default in payment of any premium, it may be reinstated at any
time upon evidence of insurability satisfactory to the company and
the payment of all overdue premiums with interest at six per
centum per annum to the date of reinstatement."cralaw virtua1aw
library
As correctly stated by the appellee, the sole question at issue in

this case is whether or not a life insurance policy lapses pursuant to

its terms because of non payment of the stipulated premium when
such non-payment occurred at a time when the insurer and the
assured were separated by the lines of war. This question, though
new in this jurisdiction, has already been determined in the recent
decision of this court in the case of Lopez de Constantino v. Asia
Life Insurance Company, G. R. No. L-1669 * , and that of Peralta v.
Asia Life Insurance Company, G. R. No. L-1670 (August 31, 1950). *
It would, therefore, be idle to discuss the question again, it being
sufficient for the purposes of the present action that we quote the
following
from
that
decision:jgc:chanrobles.com.ph
"Professor Vance of Yale, in his standard treatise on insurance, says
that in determining the effect of non-payment of premiums
occasioned by war, the American cases may be divided into three
groups, according as they support the so-called Connecticut Rule,
the
New
York
Rule,
or
the
United
States
Rule.
"The first holds the view that there are two elements in the
consideration for which the annual premium is paid First, the
mere protection for the year, and, second, the privilege of renewing
the contract for each succeeding year by paying the premium for
that year at the time agreed upon. According to this view of the
contract, the payment of premiums is a condition precedent, the
nonperformance of which, even when performance would be illegal,
necessarily defeats the right to renew the contract.
"The second rule, apparently followed by the greater number of
decisions, holds that war between states in which the parties
reside merely suspends the contract of life insurance, and that,
upon tender of all premiums due by the insured or his
representative after the war has terminated, the contract revives
and
becomes
fully
operative.
"The United States rule declares that the contract is not merely
suspended, but is abrogated by reason of non-payment of
premiums, since the time of the payments is peculiarly of the
essence of the contract. It additionally holds that it would be unjust
to allow the insurer to retain the reserve value of the policy, which
is the excess of the premium paid over the actual risk carried
during the years when the policy had been in force. This rule was

28
announced in the well- known Statham 6 case which, in the opinion
of
Professor
Vance,
is
the
correct
rule.
7
"The appellants and some amici curi contend that the New York
rule should be applied here. The appellee and other amici curi
contend that the United States doctrine is the orthodox view.
"We have read and re-read the principal cases upholding the
different theories. Besides the respect and high regard we have
always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded
in its decision of the Statham case are logically and juridically
sound. Like the instant case, the policies involved in the Statham
decision specifies that non-payment on time shall cause the policy
to cease and determine. Reasoning out that punctual payments
were essential, the court said:chanrob1es virtual 1aw library
It must be conceded that promptness of payment is essential in
the business of life insurance. All the calculations of the insurance
company are based on the hypothesis of prompt payments. They
not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are
enabled to offer assurance at the favorable rates they do. Forfeiture
for non-payment is a necessary means of protecting themselves
from embarrassment. Unless it were enforceable, the business
would be thrown into utter confusion. It is like the forfeiture of
shares in mining enterprises, and all other hazardous undertakings.
There must be power to cut off unprofitable members, or the
success of the whole scheme is endangered. The insured parties
are associates in a great scheme. This associated relation exists
whether the company be a mutual one or not. Each is interested in
the engagements of all; for out of the co-existence of many risks
arises the law of average, which underlies the whole business. An
essential feature of this scheme is the mathematical calculations
referred to, on which the premiums and amounts assured are
based. And those calculations, again, are based on the assumption
of average mortality, and of prompt payments and compound
interest thereon. Delinquency cannot be tolerated nor redeemed,
except at the option of the company. This has always been the
understanding and the practice in this department of business.
Some companies, it is true, accord a grace of thirty days, or other

fixed period, within which the premiums in arrears may be paid, on

certain conditions of continued good health, etc. But this is a
matter of stipulation, or of discretion, on the part of the particular
company. When no stipulation exists, it is the general
understanding that time is material, and that the forfeiture is
absolute if the premium be not paid. The extraordinary and even
desperate efforts sometimes made, when an insured person is in
extremis to meet a premium coming due, demonstrates the
common
view
of
this
matter.
The case, therefore, is one in which time is material and of the
essence of the contract. Non-payment at the day involves absolute
forfeiture if such be the terms of the contract, as is the case here.
Courts cannot with safety vary the stipulation of the parties by
introducing equities for the relief of the insured against their own
negligence.
"In another part of the decision, the United States Supreme Court
considers and rejects what is, in effect; the New York theory in the
following words and phrases:chanrob1es virtual 1aw library
The truth is, that the doctrine of the revival of contracts suspended
during the war is one based on considerations of equity and justice,
and cannot be invoked to revive a contract which it would be unjust
or
inequitable
to
revive.
In the case of life insurance, besides the materiality of time in the
performance of the contract, another strong reason exists why the
policy should not be revived. The parties do not stand on equal
ground in reference to such a revival. It would operate most
unjustly against the company. The business of insurance is founded
on the law of averages; that of life insurance eminently so. The
average rate of mortality is the basis on which it rests. By
spreading their risks over a large number of cases, the companies
calculate on this average with reasonable certainty and safety.
Anything that interferes with it deranges the security of the
business. If every policy lapsed by reason of the war should be
revived, and all the back premiums be paid, the companies would
have the benefit of this average amount of risk. But the good risks
are never heard from; only the bad are sought to be revived, where
the person insured is either dead or dying. Those in health can get

29
new policies cheaper than to pay arrearage on the old. To enforce a
revival of the bad cases, whilst the company necessarily lose the
cases which are desirable, would be manifestly unjust. An insured
person, as before stated, does not stand isolated and alone. His
case is connected with and co-related to the cases of all others
insured by the same company. The nature of the business, as a
whole, must be looked at to understand the general equities of the
parties.
"The above consideration certainly lend themselves to the approval
of fair-minded man. Moreover, if, as alleged, the consequences of
war should not prejudice the insured, neither should they bear
down
on
the
insurer.
"Urging adoption of the New York Theory, counsel for plaintiff point
out that the obligation of the insured to pay premiums was excused
during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such
failure.
"The appellee answers, quite plausibly, that the periodic payment
of premiums, at least those after the first, is not an obligation of the
insured, so much so that it is not a debt enforceable by action of
the
insurer.
Under a Oklahoma decision, the annual premium due is not a debt.
It is not an obligation upon which the insurer can maintain an
action against insured; nor is its settlement governed by the strict
rule controling payment of debts. So, the court in a Kentucky case
declares, in the opinion, that it is not a debt. . . . The fact that it is
payable annually or semi-annually, or at any other stipulated time,
does not of itself constitute a promise to pay, either express or
implied. In case of non-payment, the policy is forfeited, except so
far as the forfeiture may be saved by agreement, by waiver,
estoppel, or by statute. The payment of the premium is entirely
optional, while a debt may be enforced at law, and the fact that the
premium is agreed to be paid is without force, in the absence of an
unqualified and absolute agreement to pay a specified sum at some
certain time. In the ordinary policy there is no promise to pay, but it
is optional with the insured whether he will continue the policy or
forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.)

It is well settled that a contract of insurance is sui generis. While

the insured by an observance of the conditions may hold the
insurer to his contract, the latter has not the power or right to
compel the insured to maintain the contract relation with it longer
than he chooses. Whether the insured will continue it or not is
optional with him. There being no obligation to pay for the
premium, they did not constitute a debt. (Noble v. Southern States
M. D. Inc. Co., 157 Ky., 46; 162 S. M., 528.) (Emphasis Supplied.)
"It should be noted that the parties contracted not only for
peacetime conditions but also for times of war, because the policies
contained provisions applicable expressly to wartime days. The
logical inference, therefore, is that the parties contemplated
uninterrupted operation of the contract even if armed conflict
should
ensue.
"For the plaintiffs, it is again argued that in view of the enormous
growth of insurance business since the Statham decision, it could
now be relaxed and even disregarded. It is stated that the
relaxation of rules relating to insurance is in direct proportion to the
growth of the business. If there were only 100 men, for example,
insured by a company or a mutual association, the death of one will
distribute the insurance proceeds among the remaining 99 policyholders. Because the loss which each survivor will bear will be
relatively great, death from certain agreed or specified causes may
be deemed not a compensable loss. But if the policy-holders of the
company or association should be 1,000,000 individuals, it is clear
that the death of one of them will not seriously prejudice each one
of the 999,999 surviving insured. The loss to be borne by each
individual
will
be
relatively
small.
"The answer to this is that as there are (in the example) one million
policy-holders, the losses to be considered will not be the death of
one but the death of ten thousand, since the proportion of 1 to 100
should be maintained. And certainly such losses for 10,000 deaths
will
not
be
relatively
small.
"After perusing the insurance Act, we are firmly persuaded that the
non-payment of premiums is such a vital defense of insurance
companies that since the very beginning, said Act 2427 expressly

30
preserved it, by providing that after the policy shall have been in
force for two years, it shall become incontestable (i. e., the insurer
shall have no defense) except for fraud, non-payment of premiums,
and military or naval service in time for war (sec. 184[b], Insurance
Act). And when Congress recently amended this section (Rep. Act
171), the defense of fraud was eliminated, while the defense of
non-payment of premiums was preserved. Thus the fundamental
character of the undertaking to pay premiums and the high
importance of the defense of non-payment thereof, was specifically
recognized.
"In keeping with such legislative policy, we feel no hesitation to
adopt the United States Rule, which is in effect a variation of the
Connecticut rule for the sake of equity. In this connection, it
appears that the first policy had no reserve value, and that the
equitable values of the second had been practically returned to the
insured in the form of loan and advance for premium."cralaw
virtua1aw
library
We see nothing in the present case which would justify a departure
from the ruling laid down in the above decision, according to which
the nonpayment of premiums does not merely suspend but puts an
end to an insurance contract, "since the time of the payment is
peculiarly of the essence of the contract." The rule is not affected
by the fact that the nonpayment is due to war or that the insured
has not been negligent. There is, therefore, nothing to the
argument that in this case plaintiffs failure to make premium
payments after January 14, 1942, should be excused as being due,
not to its own negligence, but to defendants omission to make
arrangements for the receipt of premiums that were to fall due
during the period of enemy occupation. And, besides, as the trial
court says in its decision,." . . It is unreasonable to expect the
defendant to send notice of its closing to the thousands of its
insured in the Philippines immediately before and after the fall of
Manila, because then such a step would be impracticable owing to
the confusion and disorder occasioned by the war. Besides, even if
such a notice were actually sent, defendant could not have
received payments of insurance premiums because its offices were
closed and its American officials interned upon orders of the
Japanese
authorities."cralaw
virtua1aw
library

In view of the foregoing, the decision below is affirmed, with costs.

G.R. No. L-4197

March 20, 1952

FIDELA
SALES
DE
GONZAGA, plaintiff-appellant,
vs.
THE CROWN LIFE INSURANCE COMPANY, defendant-appellee.
Beltran
and
Anuat
Nicodemus L. Dasig for appellee.

for

appellant.

TUASON, J.:
This is one more case wherein the question of the effects of war in
a pre-war insurance contracts is presented.
Reduced to their absolute essentials, the facts are that, on
September 26, 1939 the Crown Life Insurance Co., whose home
office is in Toronto, Canada, issued to Ramon Gonzaga through its
branch office in Manila a 20-year endowment policy for P15,000.
The insured paid in due time the agreed yearly premium, which was
P591.00, for three consecutive years, the last payment having been
effected on September 6, 1941. On account of the outbreak of war,
no premiums were paid after that date, although the policy was
continued in force up to June 12, 1943, under its automatic
premium loan clause.
Ramon Gonzaga died on June 27, 1945 from an accident.
Unsuccessful in her attempt to collect the amount of the policy his
widow and the beneficiary named in the policy began this suit on
December 18, 1947. The defendant set up the defense that the
policy had lapsed by non-payment of the stipulated premiums of
the stipulated dates. And the trial court in a carefully written
decision ruled against the plaintiff.
Since this action was decided by the court below, several cases
analogous to this one in its main characteristics have come up
before this Court. (Paz Lopez de Constantino vs. Asia Life Insurance
Company,1 G.R. No. L-1669; Agustina Peralta vs. Asia Life Insurance
Company,2 G.R. No. L-1670; James McGuire vs. The Manufacturers
Life Insurance Co;3 G. R. No. L-3581; National Leather Co; Inc. vs.
The United States Life Insurance Co., 4 G.R. No. L-2668; Victoria
Hidalgo Vda. de Carrero, et al., vs. The Manufacturers Life

31
Insurance Co.,5 G. R. No. L-3032; and West Coast Life Insurance Co.
vs. Patricio H. Gubagaras,6 G. R. No. L-2810) In Paz Lopez de
Constantinos. Asia Life Insurance Company, G. R. No. L-1669, the
leading case, the Court speaking through Mr. Justice Bengzon,
adopted this doctrine:
The case, therefore, is one in which time is material and of the
essence of the contract. Non-payment at the day involves absolute
forfeiture is such be the terms of the contract, as is the case here.
Courts cannot with safety vary the stipulation of the parties by
introducing equities for the relief of the insured against their own
negligence.
The aforecited decisions are decisive of the proposition that nonpayment of premiums by reason of war puts an end to the contract.
There is, however, one aspect of the case at bar not raised before
and upon which the plaintiff rest her case in the alternative.
In its answer, the defendant alleged that "through its General
Agents, Hanson, Orth and Stevenson, Inc., it had its offices open in
the city of Manila during the Japanese occupation in the
Philippines." Taking advantage of this allegation, and ignoring her
own in her complaint that "for the whole duration of the (war)
and from thence to sometime thereafter, that is, in October, 1945, .
. . defendant closed its business in the Islands, and had absolutely
no agency or representative here to represent it, with authority to
collect premiums from the Insured." the plaintiff asserts that it
was the defendant's duty to notify her husbands of its postal
address during the war, and that its failure to do so excused
deliquency in the payment of the premiums. The plaintiff cites the
provision of the contract which states that "all premiums
subsequent to the first year are payable to the Company's
authorized cashier at the place stated in the fourth page hereof, or
at such other place instead thereof as may be designated from time
to time by noticed to the Company mailed to the Insured at his last
known post office address."
The evidence on this feature of the case reveals that, the defendant
being an enemy corporation, its offices, which were housed at the
Chaco building when the hostilities broke out, were ordered closed
by the Japanese Military authorities in January 1942, and the
officers of Hanson, Orth and Stevenson, Inc., defendants general

agents, being American citizens, were entered. In addition, on

August 25 the Japanese administration issued "Instruction No. 71"
by which enemy alien insurance companies were expressly
prohibited from doing business.
But before that instruction was promulgated Hanson, Orth and
Stevenson, had opened in the house of one of their Filipino
employees on Gonzales Street in Ermita an office with skeleton
force, all Filipinos, for the purpose of receiving premiums from their
policy holders; and notwithstanding the prohibition that office was
not closed.
In the face of the Japanese Military decrees, which found sanctions
in international law, the failure of the defendant or its Filipino
employees to advise the insured of the defendant's new address
did not work as a forfeiture of the right to have the premiums
satisfied promptly. While clandestine transactions between the
parties during the war might be binding, it was not obligatory on
the insurer, and it was well-nigh risky for its employees, to send out
notices to its widely scattered policy holders, what with the postal
service under the control and administration of the ruthless
occupants.
There is no duty when the law forbids; and there is no obligation
without corresponding right enjoyed by another. The insured had no
right to demand that the defendant maintain an office during the
war, and the defendant was not obligated to do so. Had the
defendant not opened any office at all during the occupation and
stopped receiving premiums absolutely, the plaintiff's position
would not have been any better or worse for the closing and
suspension of the defendant's business. Had the plaintiff's husband
actually tendered his premiums and the defendant's employees
rejected them, he could not have insisted on the payment as a
matter of right. Stated otherwise, the defendant's opening of an
interim office partook of the nature of the privilege to the policy
holders to keep their policies operative rather than a duty to them
under the contract.
Of this privilege, incidentally, Gonzaga could have taken advantage
if he was really intent on preserving his policy. Uncontroverted or
admitted is the fact that the defendant's agent, through whom he
had been insured, lived in Malabon, Rizal, and was his close

32
acquaintance; and so were some of the defendant's Filipino
employees who handled the insurance business of Hanson, Orth
and Stevenson during the occupation. And Gonzaga admittedly
come to Manila on a visit every now and then, and could have,
without difficulty, contacted any of those people.
For another thing, the policy carried a clause providing for its
reinstatement under certain conditions within three years from the
date of lapse on application of the insured. The present policy
lapsed on June 12, 1943, the Company's Manila branch was
reopened on May 1, 1945 and resumed regular business through
the same general agents at the Wilson Building on Juan Luna
Street, Manila and Ramon Gonzaga died on June 27, 1945. It is
undoubted that Gonzaga knew all that. It is not denied that he was
an employee in the United States Navy, that the united States Navy
had an office in the same Wilson Building, and that he came at
least twice a month to that office for his salary.
Both in law and in reason, the action was properly dismissed and
the appealed decision is hereby affirmed, with costs.

Through the automatic premium loan clause, it continued

until June 12, 1943

May 1, 1945: It reopened but still Gonzaga did not pay

although there was a reinstatement clause providing certain
conditions within three years from the date of lapse on
application of the insured

June 27, 1945: Gonzaga died from an accident

Crown refused to pay because of the lapse of premium

payment

RTC: against Gonzaga

ISSUE: W/N Gonzaga's widow can claim despite the absence of

premium
payment
during
the
outbreak
of
the
war

HELD: NO. Affirmed

Paras, C.J., Pablo, Bengzon, Montemayor, Reyes, Jugo and Bautista

Angelo, JJ., concur.

Non-payment at the day involves absolute forfeiture is such

be the terms of the contract

Lessons Applicable: Effect of Non-Payment (Insurance)

failure to notify the postal address during the war is not an

excuse

Laws

Applicable:

FACTS:

September 26, 1939: Crown Life Insurance Co. whose home

office is based in Toronto, Canada issued to Ramon Gonzaga
through its branch office in Manila a 20-year endowment
policy for P15,000 which had an annual premium of P591.

Payment was only until September 6, 1941 because of the

outbreak of the war since Crown is an enemy corp. order to
be closed during the Japanese occupation. However,
despite that it offered a privilege to accept premium
payments in the place of its employee in Ermita but of which
Gonzaga did not avail.

There is no duty when the law forbids and there is no

obligation without corresponding right enjoyed by
another

opening of an interim office partook of the nature of the

privilege to the policy holders to keep their policies
operative rather than a duty to them under the contract

33
G.R. No. L-22684

August 31, 1967

PHILIPPINE PHOENIX SURETY & INSURANCE, INC., plaintiffappellee,

vs.
WOODWORKS, INC., defendant-appellant.
Zosimo
Rivas
for
Manuel O. Chan for plaintiff-appellee.

defendant-appellant.

DIZON, J.:
Appeal upon a question of law taken by Woodworks, Inc. from the
judgment of the Court of First Instance of Manila in Civil Case No.
50710 "ordering the defendant, Woodworks, Inc. to pay to the
plaintiff, Philippine Phoenix Surety & Insurance, Inc., the sum of
P3,522.09 with interest thereon at the legal rate of 6% per annum
from the date of the filing of the complaint until fully paid, and
costs of the suit."
Appellee Philippine Phoenix Surety & Insurance Co., Inc.
commenced this action in the Municipal Court of Manila to recover
from appellant Woodworks, Inc. the sum of P3,522.09, representing
the unpaid balance of the premiums on a fire insurance policy
issued by appellee in favor of appellant for a term of one year from
April 1, 1960 to April 1, 1961. From an adverse decision of said
court, Woodworks, Inc. appealed to the Court of First Instance of
Manila (Civil Case No. 50710) where the parties submitted the
following stipulation of facts, on the basis of which the appealed
decision was rendered:
That plaintiff and defendant are both corporations duly organized
and existing under and by virtue of the laws of the Philippines;
That on April 1, 1960, plaintiff issued to defendant Fire Policy No.
9652 for the amount of P300,000.00, under the terms and
conditions therein set forth in said policy a copy of which is hereto
attached and made a part hereof as Annex "A";
That the premiums of said policy as stated in Annex "A" amounted
to P6,051.95; the margin fee pursuant to the adopted plan as an
implementation of Republic Act 2609 amounted to P363.72, copy of
said adopted plan is hereto attached as Annex "B" and made a part
hereof, the documentary stamps attached to the policy was P96.42;

That the defendant paid P3,000.00 on September 22, 1960 under

official receipt No. 30245 of plaintiff;
That plaintiff made several demands on defendant to pay the
amount of P3,522.09.1wph1.t
In the present appeal, appellant
quo committed the following errors:

claims

that

the

court a

I. The lower court erred in stating that in fire insurance policies the
risk attached upon the issuance and delivery of the policy to the
insured.
II. The lower court erred in deciding that in a perfected contract of
insurance non-payment of premium does not cancel the policy.
III. The lower court erred in deciding that the premium in the policy
was still collectible when the complaint was filed.
IV. The lower court erred in deciding that a partial payment of the
premium made the policy effective during the whole period of the
policy.
It is clear from the foregoing that on April 1, 1960 Fire Insurance
Policy No. 9652 was issued by appellee and delivered to appellant,
and that on September 22 of the same year, the latter paid to the
former the sum of P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no doubt at all that,
as between the insurer and the insured, there was not only a
perfected contract of insurance but a partially performed one as far
as the payment of the agreed premium was concerned. Thereafter
the obligation of the insurer to pay the insured the amount for
which the policy was issued in case the conditions therefor had
been complied with, arose and became binding upon it, while the
obligation of the insured to pay the remainder of the total amount
of the premium due became demandable.
We can not agree with appellant's theory that non-payment by it of
the premium due, produced the cancellation of the contract of
insurance. Such theory would place exclusively in the hands of one
of the contracting parties the right to decide whether the contract
should stand or not. Rather the correct view would seem to be this:
as the contract had become perfected, the parties could demand
from each other the performance of whatever obligations they had

34
assumed. In the case of the insurer, it is obvious that it had the
right to demand from the insured the completion of the payment of
the premium due or sue for the rescission of the contract. As it
chose to demand specific performance of the insured's obligation to
pay the balance of the premium, the latter's duty to pay is indeed
indubitable.
Having thus resolved that the fourth and last assignment of error
submitted in appellant's brief is without merit, the first three
assignments of error must likewise be overruled as lacking in merit.
Wherefore, the appealed decision being in accordance with law and
the evidence, the same is hereby affirmed, with costs.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar,
Sanchez, Castro, Angeles and Fernando, JJ., concur.

35
G.R. No. L-25317 August 6, 1979
PHILIPPINE
PHOENIX
SURETY
COMPANY, plaintiff-appellee,
vs.
WOODWORKS, INC., defendant-appellant.

&

INSURANCE

Zosimo Rivas for appellant.

Manuel O. Chan for appellee.

MELENCIO-HERRERA, J.:
This case was certified to this Tribunal by the Court of Appeals in its
Resolution of October 4, 1965 on a pure question of law and
"because the issues raised are practically the same as those in CAG.R. No. 32017-R" between the same parties, which case had been
forwarded to us on April 1, 1964. The latter case, "Philippine
Phoenix Surety & Insurance Inc. vs. Woodworks, Inc.," docketed in
this Court as L-22684, was decided on August 31, 1967 and has
been reported in 20 SCRA 1270.

said Indorsement, plaintiff credited defendant with the amount of

P3,110.25 for the unexpired period of 94 days, and claimed the
balance of P7,483.11 representing ,learned premium from July 21,
1960 to 18th April 1961 or, say 271 days." On July 6, 1961, plaintiff
demanded in writing for the payment of said amount. 2Defendant,
through counsel, disclaimed any liability in its reply- letter of August
15, 1961, contending, in essence, that it need not pay premium
"because the Insurer did not stand liable for any indemnity during
the period the premiums were not paid." 3
On January 30, 1962, plaintiff commenced action in the Court of
First Instance of Manila, Branch IV (Civil Case No. 49468), to recover
the amount of P7,483.11 as "earned premium." Defendant
controverted basically on the theory that its failure "to pay the
premium after the issuance of the policy put an end to the
insurance contract and rendered the policy unenforceable." 4

Specifically, this action is for recovery of unpaid premium on a fire

insurance policy issued by plaintiff, Philippine Phoenix Surety &
Insurance Company, in favor of defendant Woodworks, Inc.

On September 13, 1962, judgment was rendered in plaintiff's favor

"ordering defendant to pay plaintiff the sum of P7,483.11, with
interest thereon at the rate of 6%, per annum from January 30,
1962, until the principal shall have been fully paid, plus the sum of
P700.00 as attorney's fees of the plaintiff, and the costs of the suit."
From this adverse Decision, defendant appealed to the Court of
Appeals which, as heretofore stated, certified the case to us on a
question of law.

The following are the established facts:

The errors assigned read:

On July 21, 1960, upon defendant's application, plaintiff issued in its

favor Fire Insurance Policy No. 9749 for P500,000.00 whereby
plaintiff insured defendant's building, machinery and equipment for
a term of one year from July 21, 1960 to July 21, 1961 against loss
by fire. The premium and other charges including the margin fee
surcharge of P590.76 and the documentary stamps in the amount
of P156.60 affixed on the Policy, amounted to P10,593.36.

1. The lower court erred in sustaining that Fire Insurance Policy,

Exhibit A, was a binding contract even if the premium stated in the
policy has not been paid.

It is undisputed that defendant did not pay the premium stipulated

in the Policy when it was issued nor at any time thereafter.
On April 19, 1961, or before the expiration of the one-year term,
plaintiff notified defendant, through its Indorsement No. F-6963/61,
of the cancellation of the Policy allegedly upon request of
defendant. 1 The latter has denied having made such a request. In

2. That the lower court erred in sustaining that the premium in

Insurance Policy, Exhibit B, became an obligation which was
demandable even after the period in the Policy has expired.
3. The lower court erred in not deciding that a premium not paid is
not a debt enforceable by action of the insurer.
We find the appeal meritorious.
Insurance is "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event." 5 The consideration

36
is the "premium". "The premium must be paid at the time and in
the way and manner specified in the policy and, if not so paid, the
policy will lapse and be forfeited by its own terms." 6
The provisions on premium in the subject Policy read:
THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of
MESSRS. WOODWORKS, INC. hereinafter called the
Insured, paying to the
PHILIPPINE
PHOENIX
SURETY
AND
INSURANCE, INC., hereinafter called the Company, the sum of
PESOS NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY the
Premium for the first period hereinafter mentioned. ...
xxx xxx xxx
THE COMPANY HEREBY AGREES with the Insured ... that if the
Property above described, or any part thereof, shall be destroyed or
damaged by Fire or Lightning after payment of Premium, at any
time between 4:00 o'clock in the afternoon of the TWENTY FIRST
day of JULY One Thousand Nine Hundred and SIXTY and 4:00 o'clock
in the afternoon of the TWENTY FIRST day of JULY One Thousand
Nine Hundred and SIXTY ONE. ... (Emphasis supplied)
Paragraph "2" of the Policy further contained the following
condition:
2. No payment in respect of any premium shall be deemed to be
payment to the Company unless a printed form of receipt for the
same signed by an Official or duly-appointed Agent of the Company
shall have been given to the Insured.
Paragraph "10" of the Policy also provided:
10. This insurance may be terminated at any time at the request of
the Insured, in which case the Company will retain the customary
short period rate for the time the policy has been in force. This
insurance may also at any time be terminated at the option of the
Company, on notice to that effect being given to the Insured, in
which case the Company shall be liable to repay on demand a
ratable proportion of the premium for the unexpired term from the
date of the cancelment.
Clearly, the Policy provides for pre-payment of premium.
Accordingly; "when the policy is tendered the insured must pay the

premium unless credit is given or there is a waiver, or some

agreement obviating the necessity for prepayment." 7 To constitute
an extension of credit there must be a clear and express agreement
therefor." 8
From the Policy provisions, we fail to find any clear agreement that
a credit extension was accorded defendant. And even if it were to
be presumed that plaintiff had extended credit from the
circumstances of the unconditional delivery of the Policy without
prepayment of the premium, yet it is obvious that defendant had
not accepted the insurer's offer to extend credit, which is essential
for the validity of such agreement.
An acceptance of an offer to allow credit, if one was made, is as
essential to make a valid agreement for credit, to change a
conditional delivery of an insurance policy to an unconditional
delivery, as it is to make any other contract. Such an acceptance
could not be merely a mental act or state of mind, but would
require a promise to pay made known in some manner to
defendant. 9
In this respect, the instant case differs from that involving the same
parties entitled Philippine Phoenix Surety & Insurance Inc. vs.
Woodworks, Inc., 10 where recovery of the balance of the unpaid
premium was allowed inasmuch as in that case "there was not only
a perfected contract of insurance but a partially performed one as
far as the payment of the agreed premium was concerned." This is
not the situation obtaining here where no partial payment of
premiums has been made whatsoever.
Since the premium had not been paid, the policy must be deemed
to have lapsed.
The non-payment of premiums does not merely suspend but put,
an end to an insurance contract, since the time of the payment is
peculiarly of the essence of the contract. 11
... the rule is that under policy provisions that upon the failure to
make a payment of a premium or assessment at the time provided
for, the policy shall become void or forfeited, or the obligation of
the insurer shall cease, or words to like effect, because the contract
so prescribes and because such a stipulation is a material and

37
essential part of the contract. This is true, for instance, in the case
of life, health and accident, fire and hail insurance policies. 12
In fact, if the peril insured against had occurred, plaintiff, as insurer,
would have had a valid defense against recovery under the Policy it
had issued. Explicit in the Policy itself is plaintiff's agreement to
indemnify defendant for loss by fire only "after payment of
premium," supra. Compliance by the insured with the terms of the
contract is a condition precedent to the right of recovery.
The burden is on an insured to keep a policy in force by the
payment of premiums, rather than on the insurer to exert every
effort to prevent the insured from allowing a policy to elapse
through a failure to make premium payments. The continuance of
the insurer's obligation is conditional upon the payment of
premiums, so that no recovery can be had upon a lapsed policy, the
contractual relation between the parties having ceased. 13
Moreover, "an insurer cannot treat a contract as valid for the
purpose of collecting premiums and invalid for the purpose of
indemnity." 14
The foregoing findings are buttressed by section 77 of the
Insurance Code (Presidential Decree No. 612, promulgated on
December 18, 1974), which now provides that no contract of
insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid,
notwithstanding any agreement to the contrary.
WHEREFORE, the judgment appealed from is reversed, and
plaintiff's complaint hereby dismissed.
Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ.,
concur.

PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, vs.

WOODWORKS,
INC.
G.R.
No.
L-25317
August
6,
1979
FIRST
DIVISION
MELENCIO-HERRERA, J.:

FACTS:
Upon WOODWORKSs application, PHIL. PHOENIX issued in its favor
a fire insurance policy whereby PHIL. PHOENIX insured
WOODWORKS building, machinery and equipment for a term of
one year from against loss by fire. The premium and other charges
amounted to P10,593.36.
It is undisputed that WOODWORKS did not pay the premium
stipulated in the Policy when it was issued nor at any time
thereafter.
Before the expiration of the one-year term, PHIL. PHOENIX notified
WOODWORKS of the cancellation of the Policy allegedly upon
request of WOODWORKS. The latter has denied having made such
a request. PHIL. PHOENIX credited WOODWORKS with the amount
of P3,110.25 for the unexpired period of 94 days, and claimed the
balance of P7,483.11 representing , earned premium. Thereafter,
PHIL. PHOENIX demanded in writing for the payment of said
amount.
WOODWORKS disclaimed any liability contending, in essence, that
it need not pay premium because the Insurer did not stand liable
for any indemnity during the period the premiums were not paid.
For this reason, PHIL. PHOENIX commenced action in the CFI of
Manila. Judgment was rendered in PHIL. PHOENIXs favor . From this
adverse Decision, WOODWORKS appealed to the Court of Appeals
which certified the case to SC on a question of law.
ISSUE:
May the insurer collect the earned premiums?
HELD:
NO. The Courts findings are buttressed by Section 77 of the
Insurance Code (Presidential Decree No. 612, promulgated on
December 18, 1974), which now provides that no contract of
insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid,
notwithstanding any agreement to the contrary.
Since the premium had not been paid, the policy must be deemed
to have lapsed.

38
The non-payment of premiums does not merely suspend but put,
an end to an insurance contract, since the time of the payment is
peculiarly of the essence of the contract.
In fact, if the peril insured against had occurred, PHIL. PHOENIX, as
insurer, would have had a valid defense against recovery under the
Policy it had issued. Explicit in the Policy itself is PHIL. PHOENIXs
agreement to indemnify WOODWORKS for loss by fire only after
payment of premium, Compliance by the insured with the terms
of the contract is a condition precedent to the right of recovery.
The burden is on an insured to keep a policy in force by the
payment of premiums, rather than on the insurer to exert every
effort to prevent the insured from allowing a policy to elapse
through a failure to make premium payments. The continuance of
the insurers obligation is conditional upon the payment of
premiums, so that no recovery can be had upon a lapsed policy, the
contractual relation between the parties having ceased.
Moreover, an insurer cannot treat a contract as valid for the
purpose of collecting premiums and invalid for the purpose of
indemnity.
DISPOSITION:
The judgment appealed from was reversed, and PHIL. PHOENIXs
complaint dismissed.

39
G.R. No. L-22375 July 18, 1975
THE CAPITAL INSURANCE & SURETY CO., INC., petitioner,
vs.
PLASTIC
ERA
CO.,
INC.,
AND
COURT
OF
APPEALS, respondents.
Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.
K.V. Faylona for Private respondent.

MARTIN, J.:
Petition for review of a decision of the Court of Appeals affirming
the decision of the Court of First Instance of Manila in Civil Case No.
47934 entitled "Plastic Era Manufacturing Co., Inc. versus The
Capital Insurance and Surety Co., Inc."
On December 17, 1960, petitioner Capital Insurance & Surety Co.,
Inc. (hereinafter referred to as Capital Insurance) delivered to the
respondent Plastic Era Manufacturing Co., Inc., (hereinafter referred
to as Plastic Era) its open Fire Policy No. 22760 1 wherein the former
undertook to insure the latter's building, equipments, raw
materials, products and accessories located at Sheridan Street,
Mandaluyong, Rizal. The policy expressly provides that if the
property insured would be destroyed or damaged by fire after the
payment of the premiums, at anytime between the 15th day of
December 1960 and one o'clock in the afternoon of the 15th day of
December 1961, the insurance company shall make good all such
loss or damage in an amount not exceeding P100,000.00. When the
policy was delivered, Plastic Era failed to pay the corresponding
insurance premium. However, through its duly authorized
representative, it executed the following acknowledgment receipt:
This acknowledged receipt of Fire Policy) NO. 22760 Premium
x
x
x
x
x)
(I
promise
to
pay)
(P2,220.00)
(has
been
paid)
THIRTY
DAYS
AFTER
on
effective
date
--------------------(Date)
On January 8, 1961, in partial payment of the insurance premium,
Plastic Era delivered to Capital Insurance, a check 2 for the amount

of P1,000.00 postdated January 16, 1961 payable to the order of

the latter and drawn against the Bank of America. However, Capital
Insurance tried to deposit the check only on February 20, 1961 and
the same was dishonored by the bank for lack of funds. The records
show that as of January 19, 1961 Plastic Era had a balance of
P1,193.41 with the Bank of America.
On January 18, 1961 or two days after the insurance premium
became due, at about 4:00 to 5:00 o'clock in the morning, the
property insured by Plastic Era was destroyed by fire. In due time,
the latter notified Capital Insurance of the loss of the insured
property by fire 3 and accordingly filed its claim for indemnity thru
the Manila Adjustment Company. 4 The loss and/or damage suffered
by Plastic Era was estimated by the Manila Adjustment Company to
be P283,875. However, according to the records the same property
has been insured by Plastic Era with the Philamgen Insurance
Company for P200,000.00.
In less than a month Plastic Era demanded from Capital Insurance
the payment of the sum of P100,000.00 as indemnity for the loss of
the insured property under Policy No. 22760 but the latter refused
for the reason that, among others, Plastic Era failed to pay the
insurance premium.
On August 25, 1961, Plastic Era filed its complaint against Capital
Insurance for the recovery of the sum of P100,000.00 plus
P25,000.00 for attorney's fees and P20,000.00 for additional
expenses. Capital Insurance filed a counterclaim of P25,000.00 as
and for attorney's fees.
On November 15, 1961, the trial court rendered judgment, the
dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendant for the sum of P88,325.63 with interest at
the legal rate from the filing of the complaint and to pay the costs.
From said decision, Capital Insurance appealed to the Court of
Appeals.
On December 5, 1963, the Court of Appeals rendered its decision
affirming that of the trial court. Hence, this petition for review
by certiorari to this Court.

40
Assailing the decision of the Court of Appeals petitioner assigns the
following errors, to wit:
1. THE COURT OF APPEALS ERRED IN SENTENCING PETITIONER TO
PAY PLASTIC ERA THE SUM OF P88,325.63 PLUS INTEREST, AND
COST OF SUIT, ALTHOUGH PLASTIC ERA NEVER PAID PETITIONER
THE INSURANCE PREMIUM OF P2,220.88.
2. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
SHOULD HAVE INSTITUTED AN ACTION FOR RESCISSION OF THE
INSURANCE CONTRACT ENTERED INTO BETWEEN IT AND PLASTIC
ERA BEFORE PETITIONER COULD BE RELIEVED OF RESPONSIBILITY
UNDER ITS FIRE INSURANCE POLICY.
3. WE HAVE SHOWN ABOVE THAT PLASTIC ERA'S ACTION WAS
UNWARRANTED AND THAT THE PETITIONER SHOULD HAVE BEEN
ABSOLVED FROM THE COMPLAINT, AND CONSEQUENTLY, THE
LOWER COURT SHOULD HAVE AWARDED PETITIONER A
REASONABLE SUM AND AS ATTORNEY'S FEES P25,000.00.
The pivotal issue in this petition is whether or not a contract of
insurance has been duly perfected between the petitioner, Capital
Insurance, and respondent Plastic Era. Necessarily, the issue calls
for a correct interpretation of the insurance policy which states:
This Policy of Insurance Witnesseth That in consideration
of PLASTIC ERA MANUFACTURING COMPANY, INC. hereinafter called
the Insured, paying to the Capital Insurance & Surety Co., Inc.,
hereinafter called the Company, the sum of PESOS TWO THOUSAND
ONE HUNDRED EIGHTY EIGHT the premium for the first period
hereinafter mentioned, for insuring against Loss or Damage by only
Fire or Lightning, as hereinafter appears, the Property hereinafter
described and contained, or described herein and not elsewhere, in
the several sums following namely: PESOS ONE HUNDRED
THOUSAND ONLY, PHILIPPINE CURRENCY; ... THE COMPANY HEREBY
AGREES with the Insured but subject to the terms and conditions
endorsed or otherwise expressed hereon, which are to be taken as
part of this Policy), that if the Property described, or any part
thereof, shall be destroyed or damaged by Fire or Lightning after
payment of the Premiums, at anytime between the 15th day of
December One Thousand Nine Hundred and Sixty and 1 'clock in
the afternoon of the 15th day of December One Thousand Nine
Hundred and Sixty-One of the last day of any subsequent period in

respect of which the insured, or a successor in interest to whom the

insurance is by an endorsement hereon declared to be or is
otherwise continued, shall pay to the Company and the Company
shall accept the sum required for the renewal of this Policy, the
Company will pay or make good all such loss or Damage, to an
amount not exceeding during any one period of the insurance in
respect of the several matters specified, the sum; set opposite
thereto respectively, and not exceeding the whole sum of PESOS,
ONE HUNDRED THOUSAND ONLY, PHIL. CUR....
In clear and unequivocal terms the insurance policy provides that it
is only upon payment of the premiums by Plastic Era that Capital
Insurance agrees to insure the properties of the former against loss
or damage in an amount not exceeding P100,000.00.
The crux of the problem then is whether at the time the insurance
policy was delivered to Plastic Era on December 17, 1960, the latter
was able to pay the stipulated premium. It appears on record that
on the day the insurance policy was delivered, Plastic Era did not
pay
the
Capital
Insurance,
but
instead
executed
an
acknowledgment receipt of Policy No. 22760. In said receipt Plastic
Era promised to pay the premium within thirty (30) days from the
effectivity date of the policy on December 17, 1960 and Capital
Insurance accepted it. What then is the effect of accepting such
acknowledgment receipt from the Plastic Era? Did the Capital
Insurance mean to agree to make good its undertaking under the
policy if the premium could be paid on or before January 16, 1961?
And what would be the effect of the delivery to Capital Insurance on
January 8, 1961 of a postdated check (January 16, 1961) in the
amount of P1,000.00, payable to the order of the latter? Could not
this have been considered a valid payment of the insurance
premium? Pursuant to Article 1249 of the New Civil Code:
xxx xxx xxx
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
xxx xxx xxx

41
In the meantime, the action derived from the original obligation
shall be held in abeyance.

any way operate as a forfeiture of its rights under the policy, there
being no express stipulation therein to that effect.

Under this provision the mere delivery of a bill of exchange in

payment of a debt does not immediately effect payment. It simply
suspends the action arising from the original obligation in
satisfaction of which it was delivered, until payment is
accomplished either actually or presumptively. 5 Tender of draft or
check in order to effect payment that would extinguish the debtor's
liability should be actually cashed. 6 If the delivery of the check of
Plastic Era to Capital Insurance were to be viewed in the light of the
foregoing, no payment of the premium had been effected, for it is
only when the check is cashed that it is said to effect payment.

In the absence of express agreement or stipulation to that effect in

the policy, the non-payment at maturity of a note given for and
accepted as premium on a policy does not operate to forfeit the
rights of the insured even though the note is given for an initial
premium, nor does the fact that the collection of the note had been
enjoined by the insured in any way affect the policy. 8

Significantly, in the case before Us the Capital Insurance accepted

the promise of Plastic Era to pay the insurance premium within
thirty (30) days from the effective date of policy. By so doing, it has
implicitly agreed to modify the tenor of the insurance policy and in
effect, waived the provision therein that it would only pay for the
loss or damage in case the same occurs after the payment of the
premium. Considering that the insurance policy is silent as to the
mode of payment, Capital Insurance is deemed to have accepted
the promissory note in payment of the premium. This rendered the
policy immediately operative on the date it was delivered. The view
taken in most cases in the United States:

By accepting its promise to pay the insurance premium within thirty

(30) days from the effectivity date of the policy December 17,
1960 Capital Insurance had in effect extended credit to Plastic Era.
The payment of the premium on the insurance policy therefore
became an independent obligation the non-fulfillment of which
would entitle Capital Insurance to recover. It could just deduct the
premium due and unpaid upon the satisfaction of the loss under the
policy. 10 It did not have the right to cancel the policy for
nonpayment of the premium except by putting Plastic Era in default
and giving it personal notice to that effect. This Capital Insurance
failed to do.

... is that although one of conditions of an insurance policy is that

"it shall not be valid or binding until the first premium is paid", if it
is silent as to the mode of payment, promissory notes received by
the company must be deemed to have been accepted in payment
of the premium. In other words, a requirement for the payment of
the first or initial premium in advance or actual cash may be
waived by acceptance of a promissory note ... 7

... Where credit is given by an insurance company for the payment

of the premium it has no right to cancel the policy for nonpayment
except by putting the insured in default and giving him personal
notice.... 11

Precisely, this was what actually happened when the Capital

Insurance accepted the acknowledgment receipt of the Plastic Era
promising to pay the insurance premium within thirty (30) days
from December 17, 1960. Hence, when the damage or loss of the
insured property occurred, the insurance policy was in full force and
effect. The fact that the check issued by Plastic Era in partial
payment of the promissory note was later on dishonored did not in

... If the check is accepted as payment of the premium even though

it turns out to be worthless, there is payment which will prevent
forfeiture. 9

On the contrary Capital Insurance had accepted a check for

P1,000.00 from Plastic Era in partial payment of the premium on
the insurance policy. Although the check was due for payment on
January 16, 1961 and Plastic Era had sufficient funds to cover it as
of January 19, 1961, Capital Insurance decided to hold the same for
thirty-five (35) days before presenting it for payment. Having held
the check for such an unreasonable period of time, Capital
Insurance was estopped from claiming a forfeiture of its policy for
non-payment even if the check had been dishonored
later.1wph1.t

42
Where the check is held for an unreasonable time before presenting
it for payment, the insurer may be held estopped from claiming a
forfeiture if the check is dishonored. 12

January 8, 1961: Plastic Era delivered to Capital Insurance

its partial payment through check P1,000 postdated January
16, 1961

Finally, it is submitted by petitioner that:

We are here concerned with a case of reciprocal obligations, and

respondent having failed to comply with its obligation to pay the
insurance premium due on the policy within thirty days from
December 17, 1960, petitioner was relieved of its obligation to pay
anything under the policy, without the necessity of first instituting
an action for rescission of the contract of insurance entered into by
the parties.

February 20, 1961: Capital Insurance tried to deposit the

check but it was dishonored due to lack of funds. According
to the records, on January 19, 1961 Plastic Era has had a
bank balance of P1,193.41

January 18, 1961: Plastic Era's properties were destroyed by

fire amounting to a loss of P283,875. The property was also
insured to Philamgen Insurance Company for P200K.

Capital Insurance refused Plastic Era's claim for failing to

pay the insurance premium

CFI: favored Capital Insurance

CA: affirmed

But precisely in this case, Plastic Era has complied with its
obligation to pay the insurance premium and therefore Capital
Insurance is obliged to make good its undertaking to Plastic Era.
WHEREFORE, finding no reversible error in the decision appealed
from, We hereby affirm the same in toto. Costs against the
petitioner.

ISSUE: W/N there was a valid insurance contract because there was
an extention of credit despite failing to encash the check payment

SO ORDERED.
Castro, Makasiar, Esguerra and Muoz Palma, JJ., concur.
G.R.No.
L-22375
July
18,
1975
Lessons Applicable: Estoppel and credit extension (Insurance)
Laws

Applicable: Article

1249

of

the

New

Civil

HELD: YES. Affirmed

Code

FACTS:

December 17, 1960: Capital Insurance & Surety Co.,

Inc. delivered to the respondent Plastic Era Manufacturing
Co.,
Inc. its
open
Fire
Policy insuring
its building,
equipments, raw materials, products and accessories
located
at
Sheridan
Street,
Mandaluyong,
Rizal
between December 15, 1960 1 pm - December 15, 1961 1
pm up to P100,000 but Plastic Era did not pay the premium

Article 1249 of the New Civil Code

The delivery of promissory notes payable to order, or

bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the
creditor they have been impaired

Capital Insurance accepted the promise of Plastic Era to pay

the insurance premium within 30 days from the effective
date of policy. Considering that the insurance policy is silent
as to the mode of payment, Capital Insurance is deemed to
have accepted the promissory note in payment of the
premium. This rendered the policy immediately operative on
the date it was delivered.

43

By accepting its promise to pay the insurance premium

within thirty (30) days from the effectivity date of the policy
December 17, 1960 Capital Insurance had in effect
extended credit to Plastic Era.

Where credit is given by an insurance company for the

payment of the premium it has no right to cancel the policy
for nonpayment except by putting the insured in default and
giving him personal notice

Having held the check for such an unreasonable period of

time, Capital Insurance was estopped from claiming a
forfeiture of its policy for non-payment even if the check had
been dishonored later.

44
G.R. No. L-28501 September 30, 1982
PEDRO
ARCE, plaintiff-appellee,
vs.
THE CAPITAL INSURANCE & SURETY CO., INC., defendantappellant.

ABAD SANTOS, J.:

In Civil Case No. 66466 of the Court of First Instance of Manila, the
Capital Insurance and Surety Co., Inc., (COMPANY) was ordered to
pay Pedro Arce (INSURED) the proceeds of a fire insurance policy.
Not satisfied with the decision, the company appealed to this Court
on questions of law.
The INSURED was the owner of a residential house in Tondo, Manila,
which had been insured with the COMPANY since 1961 under Fire
Policy No. 24204. On November 27, 1965, the COMPANY sent to the
INSURED Renewal Certificate No. 47302 to cover the period
December 5, 1965 to December 5, 1966. The COMPANY also
requested payment of the corresponding premium in the amount of
P 38.10.
Anticipating that the premium could not be paid on time, the
INSURED, thru his wife, promised to pay it on January 4, 1966. The
COMPANY accepted the promise but the premium was not paid on
January 4, 1966. On January 8, 1966, the house of the INSURED was
totally destroyed by fire.
On January 10, 1966, INSURED's wife presented a claim for
indemnity to the COMPANY. She was told that no indemnity was due
because the premium on the policy was not paid. Nonetheless the
COMPANY tendered a check for P300.00 as financial aid which was
received by the INSURED's daughter, Evelina R. Arce. The voucher
for the check which Evelina signed stated that it was "in full
settlement (ex gratia) of the fire loss under Claim No. F-554 Policy
No. F-24202." Thereafter the INSURED and his wife went to the
office of the COMPANY to have his signature on the check Identified
preparatory to encashment. At that time the COMPANY reiterated
that the check was given "not as an obligation, but as a
concession" because the renewal premium had not been paid, The

INSURED cashed the check but then sued the COMPANY on the
policy.
The court a quo held that since the COMPANY could have
demanded payment of the premium, mutuality of obligation
requires that it should also be liable on its policy. The court a
quo also held that the INSURED was not bound by the signature of
Evelina on the check voucher because he did not authorize her to
sign the waiver.
The appeal is impressed with merit.
The trial court cited Capital Insurance and Surety Co., Inc. vs.
Delgado, L-18567, Sept. 30, 1963, 9 SCRA 177, to support its first
proposition. In that case, this Court said:
On the other hand, the preponderance of the evidence shows that
appellee issued fire insurance policy No. C-1137 in favor of
appellants covering a certain property belonging to the latter
located in Cebu City; that appellants failed to pay a balance of
P583.95 on the premium charges due, notwithstanding demands
made upon them. As with the issuance of the policy to appellants
the same became effective and binding upon the contracting
parties, the latter can not avoid the obligation of paying the
premiums agreed upon. In fact, appellant Mario Delgado, in a letter
marked in the record as Exhibit G, expressly admitted his unpaid
account for premiums and asked for an extension of time to pay the
same. It is clear from the foregoing that appellants are under
obligation to pay the amount sued upon. (At p. 180.)
Upon the other hand, Sec. 72 of the Insurance Act, as amended by
R.A. No. 3540 reads:
SEC. 72. An insurer is entitled to payment of premium as soon as
the thing insured is exposed to the perils insured against, unless
there is clear agreement to grant credit extension for the premium
due. No policy issued by an insurance company is valid and binding
unless and until the premium thereof has been paid " (Italics
supplied.) (p. 11, Appellant's Brief.)
Morever, the parties in this case had stipulated:
IT IS HEREBY DECLARED AND AGREED that not. withstanding
anything to the contrary contained in the within policy, this

45
insurance will be deemed valid and binding upon the Company only
when the premium and documentary stamps therefor have actually
been paid in full and duly acknowledged in an official receipt signed
by an authorized official/representative of the Company, " (pp. 4546, Record on Appeal.)
It is obvious from both the Insurance Act, as amended, and the
stipulation of the parties that time is of the essence in respect of
the payment of the insurance premium so that if it is not paid the
contract does not take effect unless there is still another stipulation
to the contrary. In the instant case, the INSURED was given a grace
period to pay the premium but the period having expired with no
payment made, he cannot insist that the COMPANY is nonetheless
obligated to him.
It is to be noted that Delgado was decided in the light of the
Insurance Act before Sec. 72 was amended by the addition of the
underscored portion, supra, Prior to the amendment, an insurance
contract was effective even if the premium had not been paid so
that an insurer was obligated to pay indemnity in case of loss and
correlatively he had also the right to sue for payment of the
premium. But the amendment to Sec. 72 has radically changed the
legal regime in that unless the premium is paid there is no
insurance.
With the foregoing, it is not necessary to dwell at length on the trial
court's second proposition that the INSURED had not authorized his
daughter Evelina to make a waiver because the INSURED had
nothing to waive; his policy ceased to have effect when he failed to
pay the premium.
We commiserate with the INSURED. We are wen aware that many
insurance companies have fallen into the condemnable practice of
collecting premiums promptly but resort to all kinds of excuses to
deny or delay payment of just claims. Unhappily the instant case is
one where the insurer has the law on its side.
WHEREFORE, the decision of the court a quo is reversed; the
appellee's complaint is dismissed. No special pronouncement as to
costs.
SO ORDERED.

Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, De Castro

and Escolin, JJ., concur.

46
G.R. No. L-67835 October 12, 1987
MALAYAN
INSURANCE
CO.,
INC.
(MICO), petitioner,
vs.
GREGORIA CRUZ ARNALDO, in her capacity as the
INSURANCE
COMMISSIONER,
and
CORONACION
PINCA, respondents.

CRUZ, J.:
When a person's house is razed, the fire usually burns down the
efforts of a lifetime and forecloses hope for the suddenly somber
future. The vanished abode becomes a charred and painful
memory. Where once stood a home, there is now, in the sighing
wisps of smoke, only a gray desolation. The dying embers leave
ashes in the heart.
For peace of mind and as a hedge against possible loss, many
people now secure fire insurance. This is an aleatory contract. By
such insurance, the insured in effect wagers that his house will be
burned, with the insurer assuring him against the loss, for a fee. If
the house does burn, the insured, while losing his house, wins the
wagers. The prize is the recompense to be given by the insurer to
make good the loss the insured has sustained.
It would be a pity then if, having lost his house, the insured were
also to lose the payment he expects to recover for such loss.
Sometimes it is his fault that he cannot collect, as where there is a
defect imputable to him in the insurance contract. Conversely, the
reason may be an unjust refusal of the insurer to acknowledge a
just obligation, as has happened many times.
In the instant case the private respondent has been sustained by
the Insurance Commission in her claim for compensation for her
burned property. The petitioner is now before us to dispute the
decision, 1 on the ground that there was no valid insurance
contract at the time of the loss.
The chronology of the relevant antecedent facts is as follows:
On June 7, 1981, the petitioner (hereinafter called (MICO) issued to
the private respondent, Coronacion Pinca, Fire Insurance Policy No.

F-001-17212 on her property for the amount of P14,000.00

effective July 22, 1981, until July 22, 1982. 2
On October 15,1981, MICO allegedly cancelled the policy for nonpayment, of the premium and sent the corresponding notice to
Pinca. 3
On December 24, 1981, payment of the premium for Pinca was
received by DomingoAdora, agent of MICO. 4
On January 15, 1982, Adora remitted
MICO,together with other payments. 5

this

payment

On January 18, 1982, Pinca's property was completely burned.

to

On February 5, 1982, Pinca's payment was returned by MICO to

Adora on the ground that her policy had been cancelled earlier. But
Adora refused to accept it. 7
In due time, Pinca made the requisite demands for payment, which
MICO rejected. She then went to the Insurance Commission. It is
because she was ultimately sustained by the public respondent
that the petitioner has come to us for relief.
From the procedural viewpoint alone, the petition must be rejected.
It is stillborn.
The records show that notice of the decision of the public
respondent dated April 5, 1982, was received by MICO on April 10,
1982. 8 On April 25, 1982, it filed a motion for reconsideration,
which was denied on June 4, 1982. 9 Notice of this denial was
received by MICO on June 13, 1982, as evidenced by Annex "1" duly
authenticated by the Insurance Commission. 10 The instant
petition was filed with this Court on July 2, 1982. 11
The position of the petition is that the petition is governed by
Section 416 0f the Insurance Code giving it thirty days wthin which
to appeal by certiorari to this Court. Alternatively, it also invokes
Rule 45 of the Rules of Court. For their part, the public and private
respondents insist that the applicable law is B.P. 129, which they
say governs not only courts of justice but also quasi-judicial bodies
like the Insurance Commission. The period for appeal under this law
is also fifteen days, as under Rule 45.

47
The pivotal date is the date the notice of the denial of the motion
for reconsideration was received by MICO.
MICO avers this was June 18, 1982, and offers in evidence its Annex
"B," 12 which is a copy of the Order of June 14, 1982, with a signed
rubber-stamped notation on the upper left-hand corner that it was
received on June 18, 1982, by its legal department. It does not
indicate from whom. At the bottom, significantly, there is another
signature under which are the ciphers "6-13-82," for which no
explanation has been given.
Against this document, the private respodent points in her Annex
"1," 13 the authenticated copy of the same Order with a rubberstamped notation at the bottom thereof indicating that it was
received for the Malayan Insurance Co., Inc. by J. Gotladera on "613-82." The signature may or may not habe been written by the
same person who signed at the bottom of the petitioner's Annex
"B."
Between the two dates, the court chooses to believe June 13, 1982,
not only because the numbers "6-13-82" appear on both annexes
but also because it is the date authenticated by the administrative
division of the Insurance Commission. Annex "B" is at worst selfserving; at best, it might only indicate that it was received on June
18, 1982, by the legal department of MICO, after it had been
received earlier by some other of its personnel on June 13, 1982.
Whatever the reason for the delay in transmitting it to the legal
department need not detain us here.
Under Section 416 of the Insurance Code, the period for appeal is
thirty days from notice of the decision of the Insurance
Commission. The petitioner filed its motion for reconsideration on
April 25, 1981, or fifteen days such notice, and the reglementary
period began to run again after June 13, 1981, date of its receipt of
notice of the denial of the said motion for reconsideration. As the
herein petition was filed on July 2, 1981, or nineteen days later,
there is no question that it is tardy by four days.
Counted from June 13, the fifteen-day period prescribed under Rule
45, assuming it is applicable, would end on June 28, 1982, or
also four days from July 2, when the petition was filed.

If it was filed under B.P. 129, then, considering that the motion for
reconsideration was filed on the fifteenth day after MICO received
notice of the decision, only one more day would have remained for
it to appeal, to wit, June 14, 1982. That would make the
petition eighteen days late by July 2.
Indeed, even if the applicable law were still R.A. 5434, governing
appeals from administrative bodies, the petition would still be tardy.
The law provides for a fixed period of ten days from notice of the
denial of a seasonable motion for reconsideration within which to
appeal from the decision. Accordingly, that ten-day period, counted
from June 13, 1982, would have ended on June 23, 1982, making
the petition filed on July 2, 1982, nine dayslate.
Whichever law is applicable, therefore, the petition can and should
be dismissed for late filing.
On the merits, it must also fail. MICO's arguments that there was no
payment of premium and that the policy had been cancelled before
the occurence of the loss are not acceptable. Its contention that the
claim was allowed without proof of loss is also untenable.
The petitioner relies heavily on Section 77 of the Insurance Code
providing that:
SEC. 77. An insurer is entitled to payment of the premium as soon
as the thing is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except
in the case of a life or an industrial life policy whenever the grace
period provision applies.
The above provision is not applicable because payment of the
premium was in fact eventually made in this case. Notably, the
premium invoice issued to Pinca at the time of the delivery of the
policy on June 7, 1981 was stamped "Payment Received" of the
amoung of P930.60 on "12-24-81" by Domingo Adora. 14 This is
important because it suggests an understanding between MICO and
the insured that such payment could be made later, as agent Adora
had assured Pinca. In any event, it is not denied that this payment
was actually made by Pinca to Adora, who remitted the same to
MICO.

48
The payment was made on December 24, 1981, and the fire
occured on January 18, 1982. One wonders: suppose the payment
had been made and accepted in, say, August 1981, would the
commencement date of the policy have been changed to the date
of the payment, or would the payment have retroacted to July 22,
1981? If MICO accepted the payment in December 1981 and the
insured property had not been burned, would that policy not have
expired just the same on July 22, 1982, pursuant to its original
terms, and not on December 24, 1982?
It would seem from MICO's own theory, that the policy would have
become effective only upon payment, if accepted and so would
have been valid only from December 24, 1981m but only up to July
22, 1981, according to the original terms. In others words, the
policy would have run for only eight months although the premium
paid was for one whole year.
It is not disputed that the preium was actually paid by Pinca to
Adora on December 24, 1981, who received it on behalf of MICO, to
which it was remitted on January 15, 1982. What is questioned is
the validity of Pinca's payment and of Adora's authority to receive
it.
MICO's acknowledgment of Adora as its agent defeats its
contention that he was not authorized to receive the premium
payment on its behalf. It is clearly provided in Section 306 of the
Insurance Code that:
SEC. 306. xxx xxx xxx
Any insurance company which delivers to an insurance agant or
insurance broker a policy or contract of insurance shall be demmed
to have authorized such agent or broker to receive on its behalf
payment of any premium which is due on such policy or contract of
insurance at the time of its issuance or delivery or which becomes
due thereon.
And it is a well-known principle under the law of agency that:
Payment to an agent having authority to receive or collect payment
is equivalent to payment to the principal himself; such payment is
complete when the money delivered is into the agent's hands and
is a discharge of the indebtedness owing to the principal. 15

There is the petitioner's argument, however, that Adora was not

authorized to accept the premium payment because six months
had elapsed since the issuance by the policy itself. It is argued that
this prohibition was binding upon Pinca, who made the payment to
Adora at her own riskl as she was bound to first check his authority
to receive it. 16
MICO is taking an inconsistent stand. While contending that
acceptance of the premium payment was prohibited by the policy,
it at the same time insists that the policy never came into force
because the premium had not been paid. One surely, cannot have
his cake and eat it too.
We do not share MICO's view that there was no existing insurance
at the time of the loss sustained by Pinca because her policy never
became effective for non-payment of premium. Payment was in fact
made, rendering the policy operative as of June 22, 1981, and
removing it from the provisions of Article 77, Thereafter, the policy
could be cancelled on any of the supervening grounds enumerated
in Article 64 (except "nonpayment of premium") provided the
cancellation was made in accordance therewith and with Article 65.
Section 64 reads as follows:
SEC. 64. No policy of insurance other than life shall be cancelled by
the insurer except upon prior notice thereof to the insured, and no
notice of cancellation shall be effective unless it is based on the
occurrence, after the effective date of the policy, of one or more of
the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard
insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful, or reckless acts or commissions increasing
the hazard insured against;
(e) physical changes in the property insured which result in the
property becoming uninsurable;or

49
(f) a determination by the Commissioner that the continuation of
the policy would violate or would place the insurer in violation of
this Code.
As for the method of cancellation, Section 65 provides as follows:
SEC. 65. All notices of cancellation mentioned in the preceding
section shall be in writing, mailed or delivered to the named insured
at the address shown in the policy, and shall state (a) which of the
grounds set forth in section sixty-four is relied upon and (b) that,
upon written request of the named insured, the insurer will furnish
the facts on which the cancellation is based.
A valid cancellation must, therefore, require concurrence of the
following conditions:
(1) There must be prior notice of cancellation to the insured; 17
(2) The notice must be based on the occurrence, after the effective
date of the policy, of one or more of the grounds mentioned;18
(3) The notice must be (a) in writing, (b) mailed, or delivered to the
named insured, (c) at the address shown in the policy; 19
(4) It must state (a) which of the grounds mentioned in Section 64
is relied upon and (b) that upon written request of the insured, the
insurer will furnish the facts on which the cancellation is based. 20
MICO's claims it cancelled the policy in question on October 15,
1981, for non-payment of premium. To support this assertion, it
presented one of its employees, who testified that "the original of
the endorsement and credit memo" presumably meaning the
alleged cancellation "were sent the assured by mail through our
mailing section" 21 However, there is no proof that the notice,
assuming it complied with the other requisites mentioned above,
was actually mailed to and received by Pinca. All MICO's offers to
show that the cancellation was communicated to the insured is its
employee's testimony that the said cancellation was sent "by mail
through our mailing section." without more. The petitioner then
says that its "stand is enervated (sic) by the legal presumption of
regularity and due performance of duty." 22(not realizing perhaps
that "enervated" means "debilitated" not "strengthened").

On the other hand, there is the flat denial of Pinca, who says she
never received the claimed cancellation and who, of course, did not
have to prove such denial Considering the strict language of
Section 64 that no insurance policy shall be cancelled except upon
prior notice, it behooved MICO's to make sure that the cancellation
was actually sent to and received by the insured. The presumption
cited is unavailing against the positive duty enjoined by Section 64
upon MICO and the flat denial made by the private respondent that
she had received notice of the claimed cancellation.
It stands to reason that if Pinca had really received the said notice,
she would not have made payment on the original policy on
December 24, 1981. Instead, she would have asked for a new
insurance, effective on that date and until one year later, and so
taken advantage of the extended period. The Court finds that if she
did pay on that date, it was because she honestly believed that the
policy issued on June 7, 1981, was still in effect and she was willing
to make her payment retroact to July 22, 1981, its stipulated
commencement date. After all, agent Adora was very accomodating
and had earlier told her "to call him up any time" she was ready
with her payment on the policy earlier issued. She was obviously
only reciprocating in kind when she paid her premium for the period
beginning July 22, 1981, and not December 24, 1981.
MICO's suggests that Pinca knew the policy had already been
cancelled and that when she paid the premium on December 24,
1981, her purpose was "to renew it." As this could not be done by
the agent alone under the terms of the original policy, the renewal
thereof did not legally bind MICO. which had not ratified it. To
support this argument, MICO's cites the following exchange:
Q: Now, Madam Witness, on December 25th you made the alleged
payment. Now, my question is that, did it not come to your mind
that after the lapse of six (6) months, your policy was cancelled?
A: I have thought of that but the agent told me to call him up at
anytime.
Q: So if you thought that your policy was already intended to revive
cancelled policy?
A: Misleading, Your Honor.

50
Hearing Officer: The testimony of witness is that, she thought of
that.

indespensable, as MICO suggests. Section 325, which it cites,

simply speaks of the licensing and duties of adjusters.

Q: I will revise the question. Now, Mrs. Witness, you stated that you
thought the policy was cancelled. Now, when you made the
payment of December 24, 1981, your intention was to revive the
policy if it was already cancelled?

We see in this cases an obvious design to evade or at least delay

the discharge of a just obligation through efforts bordering on bad
faith if not plain duplicity, We note that the motion for
reconsideration was filed on the fifteenth day from notice of the
decision of the Insurance Commission and that there was a feeble
attempt to show that the notice of denial of the said motion was
not received on June 13, 1982, to further hinder the proceedings
and justify the filing of the petition with this Court fourteen days
after June 18, 1982. We also look askance at the alleged
cancellation, of which the insured and MICO's agent himself had no
knowledge, and the curious fact that although Pinca's payment was
remitted to MICO's by its agent on January 15, 1982, MICO sought
to return it to Adora only on February 5, 1982, after it presumably
had learned of the occurrence of the loss insured against on
January 18, 1982. These circumstances make the motives of the
petitioner highly suspect, to say the least, and cast serious doubts
upon its candor and bona fides.

A: Yes, to renew it.

23

A close study of the above transcript will show that Pinca meant to
renew the policy if it had really been already cancelled but not if it
was stffl effective. It was all conditional. As it has not been shown
that there was a valid cancellation of the policy, there was
consequently no need to renew it but to pay the premium thereon.
Payment was thus legally made on the original transaction and it
could be, and was, validly received on behalf of the insurer by its
agent Adora. Adora. incidentally, had not been informed of the
cancellation either and saw no reason not to accept the said
payment.
The last point raised by the petitioner should not pose much
difficulty. The valuation fixed in fire insurance policy is conclusive in
case of total loss in the absence of fraud, 24 which is not shown
here. Loss and its amount may be determined on the basis of such
proof as may be offered by the insured, which need not be of such
persuasiveness as is required in judicial proceedings. 25 If, as in this
case, the insured files notice and preliminary proof of loss and the
insurer fails to specify to the former all the defects thereof and
without unnecessary delay, all objections to notice and proof of loss
are deemed waived under Section 90 of the Insurance Code.
The certification 26 issued by the Integrated National Police, Laoang, Samar, as to the extent of Pinca's loss should be considered
sufficient. Notably,MICO submitted no evidence to the contrary nor
did it even question the extent of the loss in its answer before the
Insurance Commission. It is also worth observing that Pinca's
property was not the only building bumed in the fire that razed the
commercial district of Lao-ang, Samar, on January 18, 1982. 27
There is nothing in the Insurance Code that makes the participation
of an adjuster in the assessment of the loss imperative or

WHEREFORE, the petition is DENIED. The decision of the Insurance

Commission dated April 10, 1981, and its Order of June 4, 1981, are
AFFIRMED in full, with costs against the petitioner. This decision is
immediately executory.
SO ORDERED.
Teehankee, C.J., Narvasa and Paras, JJ., concur.
G.R. No. L-67835 October 12, 1987
Lessons Applicable: Authority to Receive Payment/Effect of Payment
(Insurance)
Laws Applicable: Article 64, Article 65, Section 77, Section 306 of
the
Insurance
Code

FACTS:

51

June 7, 1981: Malayan insurance co., inc. (MICO) issued

to Coronacion Pinca, Fire Insurance Policy for her
property effective July 22, 1981, until July 22, 1982

October 15,1981: MICO allegedly cancelled the policy for

non-payment, of the premium and sent the corresponding
notice to Pinca

December 24, 1981: payment of the premium for Pinca was

received by Domingo Adora, agent of MICO

January 15, 1982: Adora remitted

MICO,together with other payments

January 18, 1982: Pinca's property was completely burned

February 5, 1982: Pinca's payment was returned by MICO to

Adora on the ground that her policy had been cancelled
earlier but Adora refused to accept it and instead
demanded for payment

this

payment

to

Insurance Commission: favored Pinca

MICO appealed

ISSUE: W/N MICO should be liable because its agent Adora was
authorized
to
receive
it

HELD: YES. petition is DENIED

SEC. 77. An insurer is entitled to payment of the premium

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

SEC. 306. xxx xxx xxx

Any insurance company which delivers to an insurance agant or

insurance broker a policy or contract of insurance shall be demmed
to have authorized such agent or broker to receive on its behalf
payment of any premium which is due on such policy or contract of
insurance at the time of its issuance or delivery or which becomes
due thereon.

Under Section 416 of the Insurance Code, the period for

appeal is thirty days from notice of the decision of the
Insurance Commission. The petitioner filed its motion for
reconsideration on April 25, 1981, or fifteen days such
notice, and the reglementary period began to run again
after June 13, 1981, date of its receipt of notice of the denial
of the said motion for reconsideration. As the herein petition
was filed on July 2, 1981, or nineteen days later, there is no
question that it is tardy by four days.

(a)

Payment to an agent having authority to receive or collect

payment is equivalent to payment to the principal himself;
such payment is complete when the money delivered is into
the agent's hands and is a discharge of the indebtedness
owing to the principal.

SEC. 64.
No policy of insurance other than life shall be
cancelled by the insurer except upon prior notice thereof to
the insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective date
of the policy, of one or more of the following:

non-payment of premium;

(b) conviction of a crime arising out of acts increasing the hazard

insured against;

(c)

discovery of fraud or material misrepresentation;

52
(d) discovery of willful, or reckless acts or commissions increasing
the hazard insured against;

(e) physical changes in the property insured which result in the

property becoming uninsurable;or

(f)
a determination by the Commissioner that the continuation of
the policy would violate or would place the insurer in violation of
this Code.

(4) It must state (a) which of the grounds mentioned in Section 64

is relied upon and (b) that upon written request of the insured, the
insurer will furnish the facts on which the cancellation is based.

All MICO's offers to show that the cancellation was

communicated to the insured is its employee's testimony
that the said cancellation was sent "by mail through our
mailing section." without more

It stands to reason that if Pinca had really received the said

notice, she would not have made payment on the original
policy on December 24, 1981. Instead, she would have
asked for a new insurance, effective on that date and until
one year later, and so taken advantage of the extended
period.

Incidentally, Adora had not been informed of the

cancellation either and saw no reason not to accept the said
payment

Although Pinca's payment was remitted to MICO's by its

agent on January 15, 1982, MICO sought to return it to Adora
only on February 5, 1982, after it presumably had learned of
the occurrence of the loss insured against on January 18,
1982 make the motives of MICO highly suspicious

As for the method of cancellation, Section 65 provides as follows:

(1)

SEC. 65.
All notices of cancellation mentioned in the
preceding section shall be in writing, mailed or delivered to
the named insured at the address shown in the policy, and
shall state (a) which of the grounds set forth in section sixtyfour is relied upon and (b) that, upon written request of the
named insured, the insurer will furnish the facts on which
the cancellation is based.
A valid cancellation must, therefore, require concurrence of
the following conditions:

There must be prior notice of cancellation to the insured;

(2)
The notice must be based on the occurrence, after the
effective date of the policy, of one or more of the grounds
mentioned;

(3) The notice must be (a) in writing, (b) mailed, or delivered to

the named insured, (c) at the address shown in the policy;

53
[G.R. No. 115024. February 7, 1996]
MA. LOURDES VALENZUELA, petitioner, vs. COURT OF
APPEALS, RICHARD LI and ALEXANDER COMMERCIAL,
INC.,respondents.
[G.R. No. 117944. February 7, 1996]
RICHARD LI, petitioner, vs. COURT OF APPEALS and MA.
LOURDES VALENZUELA, respondents.
DECISION
KAPUNAN, J.:
These two petitions for review on certiorari under Rule 45 of the
Revised Rules of Court stem from an action to recover damages by
petitioner Lourdes Valenzuela in the Regional Trial Court of Quezon
City for injuries sustained by her in a vehicular accident in the early
morning of June 24, 1990. The facts found by the trial court are
succinctly summarized by the Court of Appeals below:
This is an action to recover damages based on quasi-delict, for
serious physical injuries sustained in a vehicular accident.
Plaintiffs version of the accident is as follows: At around 2:00 in the
morning of June 24, 1990, plaintiff Ma. Lourdes Valenzuela was
driving a blue Mitsubishi lancer with Plate No. FFU 542 from her
restaurant at Marcos highway to her home at Palanza
Street, Araneta Avenue. She was travelling along Aurora Blvd. with
a companion, Cecilia Ramon, heading towards the direction
of Manila. Before reaching A. Lake Street, she noticed something
wrong with her tires; she stopped at a lighted place where there
were people, to verify whether she had a flat tire and to solicit help
if needed. Having been told by the people present that her rear
right tire was flat and that she cannot reach her home in that cars
condition, she parked along the sidewalk, about 1 feet away, put on
her emergency lights, alighted from the car, and went to the rear to
open the trunk. She was standing at the left side of the rear of her
car pointing to the tools to a man who will help her fix the tire when
she was suddenly bumped by a 1987 Mitsubishi Lancer driven by
defendant Richard Li and registered in the name of defendant
Alexander Commercial, Inc. Because of the impact plaintiff was
thrown against the windshield of the car of the defendant, which

was destroyed, and then fell to the ground. She was pulled out from
under defendants car. Plaintiffs left leg was severed up to the
middle of her thigh, with only some skin and sucle connected to the
rest
of
the
body.
She
was
brought
to
the UERM Medical Memorial Center where she was found to have a
traumatic amputation, leg, left up to distal thigh (above knee). She
was confined in the hospital for twenty (20) days and was
eventually fitted with an artificial leg. The expenses for the hospital
confinement (P 120,000.00) and the cost of the artificial leg
(P27,000.00) were paid by defendants from the car insurance.
In her complaint, plaintiff prayed for moral damages in the amount
of P1 million, exemplary damages in the amount of P100,000.00
and other medical and related expenses amounting to a total of
P180,000.00, including loss of expected earnings.
Defendant Richard Li denied that he was negligent. He was on his
way home, travelling at 55 kph; considering that it was raining,
visibility was affected and the road was wet. Traffic was light. He
testified that he was driving along the inner portion of the right
lane of Aurora Blvd. towards the direction of Araneta Avenue, when
he was suddenly confronted, in the vicinity of A. Lake Street, San
Juan, with a car coming from the opposite direction, travelling at 80
kph, with full bright lights. Temporarily blinded, he instinctively
swerved to the right to avoid colliding with the oncoming vehicle,
and bumped plaintiffs car, which he did not see because it was
midnight blue in color, with no parking lights or early warning
device, and the area was poorly lighted. He alleged in his defense
that the left rear portion of plaintiffs car was protruding as it was
then at a standstill diagonally on the outer portion of the right lane
towards Araneta Avenue (par. 18, Answer). He confirmed the
testimony of plaintiffs witness that after being bumped the car of
the plaintiff swerved to the right and hit another car parked on the
sidewalk. Defendants counterclaimed for damages, alleging that
plaintiff was reckless or negligent, as she was not a licensed driver.
The police investigator, Pfc. Felic Ramos, who prepared the
vehicular accident report and the sketch of the three cars involved
in the accident, testified that the plaintiffs car was near the
sidewalk; this witness did not remember whether the hazard lights
of plaintiffs car were on, and did not notice if there was an early
warning device; there was a street light at the corner of Aurora

54
Blvd. and F. Roman, about 100 meters away. It was not mostly dark,
i.e. things can be seen (p. 16, tsn, Oct. 28, 1991).
A witness for the plaintiff, Rogelio Rodriguez, testified that after
plaintiff alighted from her car and opened the trunk compartment,
defendants car came approaching very fast ten meters from the
scene; the car was zigzagging. The rear left side of plaintiffs car
was bumped by the front right portion of defendants car; as a
consequence, the plaintiffs car swerved to the right and hit the
parked car on the sidewalk. Plaintiff was thrown to the windshield of
defendants car, which was destroyed, and landed under the car. He
stated that defendant was under the influence of liquor as he could
smell it very well (pp. 43, 79, tsn., June 17, 1991).
After trial, the lower court sustained the plaintiffs submissions and
found defendant Richard Li guilty of gross negligence and liable for
damages under Article 2176 of the Civil Code. The trial court
likewise held Alexander Commercial, Inc., Lis employer, jointly and
severally liable for damages pursuant to Article 2180. It ordered the
defendants to jointly and severally pay the following amounts:
1. P41,840.00, as actual damages, representing the miscellaneous
expenses of the plaintiff as a result of her severed left leg;
2. The sums of (a) P37,500.00, for the unrealized profits because of
the stoppage of plaintiffs Bistro La Conga restaurant three (3)
weeks after the accident on June 24, 1990; (b) P20,000.00, a
month, as unrealized profits of the plaintiff in her Bistro La Conga
restaurant, from August, 1990 until the date of this judgment; and
(c) P30,000.00, a month, for unrealized profits in plaintiffs two (2)
beauty salons from July, 1990 until the date of this decision;
3. P1,000,000.00, in moral damages;
4. P50,000.00, as exemplary damages,
5. P60,000.00, as reasonable attorneys fees; and
6. Costs.
As a result of the trial courts decision, defendants filed an Omnibus
Motion for New Trial and for Reconsideration, citing testimony in
Criminal Case O.C. No. 804367 (People vs. Richard Li), tending to
show that the point of impact, as depicted by the pieces of

glass/debris from the parties cars, appeared to be at the center of

the right lane of Aurora Blvd. The trial court denied the motion.
Defendants forthwith filed an appeal with the respondent Court of
Appeals. In a Decision rendered March 30, 1994, the Court of
Appeals found that there was ample basis from the evidence of
record for the trial courts finding that the plaintiffs car was properly
parked at the right, beside the sidewalk when it was bumped by
defendants car.[1] Dismissing the defendants argument that the
plaintiffs car was improperly parked, almost at the center of the
road, the respondent court noted that evidence which was
supposed to prove that the car was at or near center of the right
lane was never presented during the trial of the case.[2] The
respondent court furthermore observed that:
Defendant Lis testimony that he was driving at a safe speed
of 55 km./hour is self serving; it was not corroborated. It was in fact
contradicted by eyewitness Rodriguez who stated that he was
outside his beerhouse located at Aurora Boulevard after A. Lake
Street, at or about 2:00 a.m. of June 24, 1990 when his attention
was caught by a beautiful lady (referring to the plaintiff) alighting
from her car and opening the trunk compartment; he noticed the
car of Richard Li approaching very fast ten (10) meters away from
the scene; defendants car was zigzagging, although there were no
holes and hazards on the street, and bumped the leg of the plaintiff
who was thrown against the windshield of defendants car, causing
its destruction. He came to the rescue of the plaintiff, who was
pulled out from under defendants car and was able to say hurting
words to Richard Li because he noticed that the latter was under
the influence of liquor, because he could smell it very well (p. 36,
et. seq., tsn, June 17, 1991). He knew that plaintiff owned a
beerhouse in Sta. Mesa in the 1970s, but did not know either
plaintiff or defendant Li before the accident.
In agreeing with the trial court that the defendant Li was liable for
the injuries sustained by the plaintiff, the Court of Appeals, in its
decision, however, absolved the Lis employer, Alexander
Commercial, Inc. from any liability towards petitioner Lourdes
Valenzuela and reduced the amount of moral damages to
P500,000.00. Finding justification for exemplary damages, the
respondent court allowed an award of P50,000.00 for the same, in
addition to costs, attorneys fees and the other damages. The Court
of Appeals, likewise, dismissed the defendants counterclaims. [3]

55
Consequently, both parties assail the respondent courts decision by
filing two separate petitions before this Court. Richard Li, in G.R.
No. 117944, contends that he should not be held liable for damages
because the proximate cause of the accident was Ma. Lourdes
Valenzuelas own negligence. Alternatively, he argues that in the
event that this Court finds him negligent, such negligence ought to
be mitigated by the contributory negligence of Valenzuela.

allegation that Valenzuelas car was close to the center of the right
lane. We agree that as between Lis self-serving asseverations and
the observations of a witness who did not even know the accident
victim personally and who immediately gave a statement of the
incident similar to his testimony to the investigator immediately
after the incident, the latters testimony deserves greater weight. As
the court emphasized:

On the other hand, in G.R. No. 115024, Ma. Lourdes Valenzuela

assails the respondent courts decision insofar as it absolves
Alexander Commercial, Inc. from liability as the owner of the car
driven by Richard Li and insofar as it reduces the amount of the
actual and moral damages awarded by the trial court.[4]

The issue is one of credibility and from Our own examination of the
transcript, We are not prepared to set aside the trial courts reliance
on the testimony of Rodriguez negating defendants assertion that
he was driving at a safe speed. While Rodriguez drives only a
motorcycle, his perception of speed is not necessarily impaired. He
was subjected to cross-examination and no attempt was made to
question his competence or the accuracy of his statement that
defendant was driving very fast. This was the same statement he
gave to the police investigator after the incident, as told to a
newspaper report (Exh. P). We see no compelling basis for
disregarding his testimony.

As the issues are intimately related, both petitions are hereby

consolidated. It is plainly evident that the petition for review in G.R.
No. 117944 raises no substantial questions of law. What it, in effect,
attempts to have this Court review are factual findings of the trial
court, as sustained by the Court of Appeals finding Richard Li
grossly negligent in driving the Mitsubishi Lancer provided by his
company in the early morning hours of June 24, 1990. This we will
not do. As a general rule, findings of fact of the Court of Appeals
are binding and conclusive upon us, and this Court will not normally
disturb such factual findings unless the findings of fact of the said
court are palpably unsupported by the evidence on record or unless
the judgment itself is based on a misapprehension of facts.[5]
In the first place, Valenzuelas version of the incident was fully
corroborated by an uninterested witness, Rogelio Rodriguez, the
owner-operator of an establishment located just across the scene of
the accident. On trial, he testified that he observed a car being
driven at a very fast speed, racing towards the general direction
of Araneta Avenue.[6] Rodriguez further added that he was standing
in front of his establishment, just ten to twenty feet away from the
scene of the accident, when he saw the car hit Valenzuela, hurtling
her against the windshield of the defendants Mitsubishi Lancer,
from where she eventually fell under the defendants car.
Spontaneously reacting to the incident, he crossed the street,
noting that a man reeking with the smell of liquor had alighted from
the offending vehicle in order to survey the incident. [7] Equally
important, Rodriguez declared that he observed Valenzuelas car
parked parallel and very near the sidewalk, [8] contrary to Lis

The alleged inconsistencies in Rodriguez testimony are not borne

out by an examination of the testimony. Rodriguez testified that the
scene of the accident was across the street where his beerhouse is
located about ten to twenty feet away (pp. 35-36, tsn, June 17,
1991). He did not state that the accident transpired immediately in
front of his establishment. The ownership of the Lambingan sa
Kambingan is not material; the business is registered in the name
of his mother, but he explained that he owns the establishment (p.
5, tsn., June 20, 1991).
Moreover, the testimony that the streetlights on his side of Aurora
Boulevard were on the night the accident transpired (p. 8) is not
necessarily contradictory to the testimony of Pfc. Ramos that there
was a streetlight at the corner of Aurora Boulevard and F. Roman
Street (p. 45, tsn., Oct. 20, 1991).
With respect to the weather condition, Rodriguez testified that
there was only a drizzle, not a heavy rain and the rain has stopped
and he was outside his establishment at the time the accident
transpired (pp. 64-65, tsn., June 17, 1991). This was consistent with
plaintiffs testimony that it was no longer raining when she left
Bistro La Conga (pp. 10-11, tsn., April 29, 1991). It was defendant Li

56
who stated that it was raining all the way in an attempt to explain
why he was travelling at only 50-55 kph. (p. 11, tsn., Oct. 14,
1991). As to the testimony of Pfc. Ramos that it was raining, he
arrived at the scene only in response to a telephone call after the
accident had transpired (pp. 9-10, tsn, Oct. 28, 1991). We find no
substantial inconsistencies in Rodriguezs testimony that would
impair the essential integrity of his testimony or reflect on his
honesty. We are compelled to affirm the trial courts acceptance of
the testimony of said eyewitness.
Against the unassailable testimony of witness Rodriguez we note
that Lis testimony was peppered with so many inconsistencies
leading us to conclude that his version of the accident was merely
adroitly crafted to provide a version, obviously self-serving, which
would exculpate him from any and all liability in the incident.
Against Valenzuelas corroborated claims, his allegations were
neither backed up by other witnesses nor by the circumstances
proven in the course of trial. He claimed that he was driving merely
at a speed of 55 kph. when out of nowhere he saw a dark maroon
lancer right in front of him, which was (the) plaintiffs car. He alleged
that upon seeing this sudden apparition he put on his brakes to no
avail as the road was slippery.[9]
One will have to suspend disbelief in order to give credence to Lis
disingenuous and patently self-serving asseverations. The
average motorist alert to road conditions will have no difficulty
applying the brakes to a car traveling at the speed claimed by Li.
Given a light rainfall, the visibility of the street, and the road
conditions on a principal metropolitan thoroughfare like Aurora
Boulevard, Li would have had ample time to react to the changing
conditions of the road if he were alert - as every driver should be to those conditions. Driving exacts a more than usual toll on the
senses. Physiological fight or flight[10] mechanisms are at work,
provided such mechanisms were not dulled by drugs, alcohol,
exhaustion, drowsiness, etc.[11] Lis failure to react in a manner
which would have avoided the accident could therefore have been
only due to either or both of the two factors: 1) that he was driving
at a very fast speed as testified by Rodriquez; and 2) that he was
under the influence of alcohol. [12] Either factor working
independently would have diminished his responsiveness to
roadconditions, since normally he would have slowed down prior to
reaching Valenzuelas car, rather than be in a situation forcing him

to suddenly apply his brakes. As the trial court noted (quoted with
approval by respondent court):
Secondly, as narrated by defendant Richard Li to the San Juan
Police immediately after the incident, he said that while driving
along Aurora Blvd., out of nowhere he saw a dark maroon lancer
right in front of him, which was plaintiffs car, indicating, again,
thereby that, indeed, he was driving very fast, oblivious of his
surroundings and the road ahead of him, because if he was not,
then he could not have missed noticing at a still far distance the
parked car of the plaintiff at the right side near the sidewalk which
had its emergency lights on, thereby avoiding forcefully bumping at
the plaintiff who was then standing at the left rear edge of her car.
Since, according to him, in his narration to the San Juan Police, he
put on his brakes when he saw the plaintiffs car in front of him, but
that it failed as the road was wet and slippery, this goes to show
again, that, contrary to his claim, he was, indeed, running very fast.
For, were it otherwise, he could have easily completely stopped his
car, thereby avoiding the bumping of the plaintiff, notwithstanding
that the road was wet and slippery. Verily, since, if, indeed, he was
running slow, as he claimed, at only about 55 kilometers per hour,
then, inspite of the wet and slippery road, he could have avoided
hitting the plaintiff by the mere expedient or applying his brakes at
the proper time and distance.
It could not be true, therefore, as he now claims during his
testimony, which is contrary to what he told the police immediately
after the accident and is, therefore, more believable, that he did not
actually step on his brakes, but simply swerved a little to the right
when he saw the on-coming car with glaring headlights, from the
opposite direction, in order to avoid it.
For, had this been what he did, he would not have bumped the car
of the plaintiff which was properly parked at the right beside the
sidewalk. And, it was not even necessary for him to swerve a little
to the right in order to safely avoid a collision with the on-coming
car, considering that Aurora Blvd. is a double lane avenue
separated at the center by a dotted white paint, and there is plenty
of space for both cars, since her car was running at the right lane
going towards Manila and the on-coming car was also on its right
lane going to Cubao.[13]

57
Having come to the conclusion that Li was negligent in driving his
company-issued Mitsubishi Lancer, the next question for us to
determine is whether or not Valenzuela was likewise guilty of
contributory negligence in parking her car alongside Aurora
Boulevard, which entire area Li points out, is a no parking zone.
We agree with the respondent court that Valenzuela was not guilty
of contributory negligence.
Contributory negligence is conduct on the part of the injured party,
contributing as a legal cause to the harm he has suffered, which
falls below the standard to which he is required to conform for his
own protection. [14] Based on the foregoing definition, the standard
or act to which, according to petitioner Li, Valenzuela ought to have
conformed for her own protection was not to park at all at any point
of Aurora Boulevard, a no parking zone. We cannot agree.
Courts have traditionally been compelled to recognize that an actor
who is confronted with an emergency is not to be held up to the
standard of conduct normally applied to an individual who is in no
such situation. The law takes stock of impulses of humanity when
placed in threatening or dangerous situations and does not require
the same standard of thoughtful and reflective care from persons
confronted by unusual and oftentimes threatening conditions.
[15]
Under the emergency rule adopted by this Court in Gan vs Court
of Appeals,[16] an individual who suddenly finds himself in a
situation of danger and is required to act without much time to
consider the best means that may be adopted to avoid the
impending danger, is not guilty of negligence if he fails to
undertake what subsequently and upon reflection may appear to be
a better solution, unless the emergency was brought by his own
negligence.[17]
Applying this principle to a case in which the victims in a vehicular
accident swerved to the wrong lane to avoid hitting two children
suddenly darting into the street, we held, in Mc Kee vs.
Intermediate Appellate Court,[18] that the driver therein, Jose Koh,
adopted the best means possible in the given situation to avoid
hitting the children. Using the emergency rule the court concluded
that Koh, in spite of the fact that he was in the wrong lane when the
collision with an oncoming truck occurred, was not guilty of
negligence.[19]

While the emergency rule applies to those cases in which reflective

thought, or the opportunity to adequately weigh a threatening
situation is absent, the conduct which is required of an individual in
such cases is dictated not exclusively by the suddenness of the
event which absolutely negates thoughtful care, but by the over-all
nature of the circumstances. A woman driving a vehicle suddenly
crippled by a flat tire on a rainy night will not be faulted for
stopping at a point which is both convenient for her to do so and
which is not a hazard to other motorists. She is not expected to run
the entire boulevard in search for a parking zone or turn on a dark
Street or alley where she would likely find no one to help her. It
would be hazardous for her not to stop and assess the emergency
(simply because the entire length of Aurora Boulevard is a noparking zone) because the hobbling vehicle would be both a threat
to her safety and to other motorists. In the instant case, Valenzuela,
upon reaching that portion of Aurora Boulevard close to A. Lake St.,
noticed that she had a flat tire. To avoid putting herself and other
motorists in danger, she did what was best under the situation. As
narrated by respondent court:
She stopped at a lighted place where there were people, to verify
whether she had a flat tire and to solicit help if needed. Having
been told by the people present that her rear right tire was flat and
that she cannot reach her home she parked along the sidewalk,
about 1 feet away, behind a Toyota Corona Car. [20] In fact,
respondent court noted, Pfc. Felix Ramos, the investigator on the
scene of the accident confirmed that Valenzuelas car was parked
very close to the sidewalk.[21] The sketch which he prepared after
the incident showed Valenzuelas car partly straddling the sidewalk,
clear and at a convenient distance from motorists passing the right
lane of Aurora Boulevard. This fact was itself corroborated by the
testimony of witness Rodriguez.[22]
Under the circumstances described, Valenzuela did exercise the
standard reasonably dictated by the emergency and could not be
considered to have contributed to the unfortunate circumstances
which eventually led to the amputation of one of her lower
extremities. The emergency which led her to park her car on a
sidewalk in Aurora Boulevard was not of her own making, and it
was evident that she had taken all reasonable precautions.

58
Obviously in the case at bench, the only negligence ascribable was
the negligence of Li on the night of the accident. Negligence, as it is
commonly understood is conduct which creates an undue risk of
harm to others.[23] It is the failure to observe that degree of care,
precaution, and vigilance which the circumstances justly demand,
whereby such other person suffers injury.[24] We stressed, in Corliss
vs. Manila Railroad Company,[25] that negligence is the want of care
required by the circumstances.
The circumstances established by the evidence adduced in the
court below plainly demonstrate that Li was grossly negligent in
driving his Mitsubishi Lancer. It bears emphasis that he was driving
at a fast speed at about 2:00 A.M. after a heavy downpour had
settled into a drizzle rendering the street slippery. There is ample
testimonial evidence on record to show that he was under the
influence of liquor. Under these conditions, his chances of
effectively dealing with changing conditions on the road were
significantly lessened. As Prosser and Keaton emphasize:
[U]nder present day traffic conditions, any driver of an automobile
must be prepared for the sudden appearance of obstacles and
persons on the highway, and of other vehicles at intersections,
such as one who sees a child on the curb may be required to
anticipate its sudden dash into the street, and his failure to act
properly when they appear may be found to amount to
negligence. [26]
Lis obvious unpreparedness to cope with the situation confronting
him on the night of the accident was clearly of his own making.
We now come to the question of the liability of Alexander
Commercial, Inc. Lis employer. In denying liability on the part of
Alexander Commercial, the respondent court held that:
There is no evidence, not even defendant Lis testimony, that the
visit was in connection with official matters. His functions as
assistant manager sometimes required him to perform work outside
the office as he has to visit buyers and company clients, but he
admitted that on the night of the accident he came from BF Homes
Paraaque he did not have business from the company (pp. 25-26,
tsn, Sept. 23, 1991). The use ofthe company car was partly
required by the nature of his work, but the privilege of using it for

non-official business is a benefit, apparently referring to the fringe

benefits attaching to his position.
Under the civil law, an employer is liable for the negligence of his
employees in the discharge of their respective duties, the basis of
which liability is not respondeat superior,but the relationship
of pater familias, which theory bases the liability of the master
ultimately on his own negligence and not on that of his servant
(Cuison v. Norton and Harrison Co., 55 Phil. 18). Before an employer
may be held liable for the negligence of his employee, the act or
omission which caused damage must have occurred while an
employee was in the actual performance of his assigned tasks or
duties (Francis High School vs. Court of Appeals, 194 SCRA 341). In
defining an employers liability for the acts done within the scope of
the employees assigned tasks, the Supreme Court has held that
this includes any act done by an employee, in furtherance of the
interests of the employer or for the account of the employer at the
time of the infliction of the injury or damage (Filamer Christian
Institute vs. Intermediate Appellate Court, 212 SCRA 637). An
employer is expected to impose upon its employees the necessary
discipline called for in the performance of any act indispensable to
the business and beneficial to their employer (at p. 645).
In light of the foregoing, We are unable to sustain the trial courts
finding that since defendant Li was authorized by the company to
use the company car either officially or socially or even bring it
home, he can be considered as using the company car in the
service of his employer or on the occasion of his functions. Driving
the company car was not among his functions as assistant
manager; using it for non-official purposes would appear to be a
fringe benefit, one of the perks attached to his position. But to
impose liability upon the employer under Article 2180 of the Civil
Code, earlier quoted, there must be a showing that the damage
was caused by their employees in the service of the employer or on
the occasion of their functions. There is no evidence that Richard Li
was at the time of the accident performing any act in furtherance of
the companys business or its interests, or at least for its benefit.
The imposition of solidary liability against defendant Alexander
Commercial Corporation must therefore fail.[27]
We agree with the respondent court that the relationship in
question is not based on the principle of respondeat superior, which

59
holds the master liable for acts of the servant, but that of pater
familias, in which the liability ultimately falls upon the employer, for
his failure to exercise the diligence of a good father of the family in
the selection and supervision of his employees. It is up to this point,
however, that our agreement with the respondent court ends.
Utilizing thebonus pater familias standard expressed in Article 2180
of the Civil Code,[28] we are of the opinion that Lis employer,
Alexander Commercial, Inc. is jointly and solidarily liable for the
damage caused by the accident of June 24, 1990.

It is customary for large companies to provide certain classes of

their employees with courtesy vehicles. These company cars are
either wholly owned and maintained by the company itself or are
subject to various plans through which employees eventually
acquire their vehicles after a given period of service, or after paying
a token amount. Many companies provide liberal car plans to
enable their managerial or other employees of rank to purchase
cars, which, given the cost of vehicles these days, they would not
otherwise be able to purchase on their own.

First, the case of St. Francis High School vs. Court of

Appeals[29] upon which respondent court has placed undue reliance,
dealt with the subject of a school and its teachers supervision of
students during an extracurricular activity. These cases now fall
under the provision on special parental authority found in Art. 218
of the Family Code which generally encompasses all authorized
school activities, whether inside or outside school premises.

Under the first example, the company actually owns and maintains
the car up to the point of turnover of ownership to the employee; in
the second example, the car is really owned and maintained by the
employee himself. In furnishing vehicles to such employees, are
companies totally absolved of responsibility when an accident
involving a company-issued car occurs during private use after
normal office hours?

Second, the employers primary liability under the concept of pater

familias embodied by Art. 2180 (in relation to Art. 2176) of the Civil
Code is quasi-delictual or tortious in character. His liability is
relieved on a showing that he exercised the diligence of a good
father of the family in the selection and supervision of its
employees. Once evidence is introduced showing that the employer
exercised the required amount of care in selecting its employees,
half of the employers burden is overcome. The question of
diligent supervision, however, depends on the circumstances of
employment.

Most pharmaceutical companies, for instance, which provide cars

under the first plan, require rigorous tests of road worthiness from
their agents prior to turning over the car (subject of company
maintenance) to their representatives. In other words, like a good
father of a family, they entrust the company vehicle only after they
are satisfied that the employee to whom the car has been given full
use of the said company car for company or private purposes will
not be a threat or menace to himself, the company or to others.
When a company gives full use and enjoyment of a company car to
its employee, it in effect guarantees that it is, like every good
father, satisfied that its employee will use the privilege reasonably
and responsively.

Ordinarily, evidence demonstrating that the employer has

exercised diligent supervision of its employee during the
performance of the latters assigned tasks would be enough to
relieve him of the liability imposed by Article 2180 in relation to
Article 2176 of the Civil Code. The employer is not expected to
exercise supervision over either the employees private activities or
during the performance of tasks either unsanctioned by the former
or unrelated to the employees tasks. The case at bench presents a
situation of a different character, involving a practice utilized by
large companies with either their employees of managerial rank or
their representatives.

In the ordinary course of business, not all company employees are

given the privilege of using a company-issued car. For large
companies other than those cited in the example of the preceding
paragraph, the privilege serves important business purposes either
related to the image of success an entity intends to present to its
clients and to the public in general, or for practical and utilitarian
reasons - to enable its managerial and other employees of rank or
its sales agents to reach clients conveniently. In most cases,
providing a company car serves both purposes. Since important
business transactions and decisions may occur at all hours in all
sorts of situations and under all kinds of guises, the provision for

60
the unlimited use of a company car therefore principally serves the
business and goodwill of a company and only incidentally the
private purposes of the individual who actually uses the car, the
managerial employee or company sales agent. As such, in
providing for a company car for business use and/or for the purpose
of furthering the companys image, a company owes a responsibility
to the public to see to it that the managerial or other employees to
whom it entrusts virtually unlimited use of a company issued car
are able to use the company issue capably and responsibly.
In the instant case, Li was an Assistant Manager of Alexander
Commercial, Inc. In his testimony before the trial court, he admitted
that his functions as Assistant Manager did not require him to
scrupulously keep normal office hours as he was required quite
often to perform work outside the office, visiting prospective buyers
and contacting and meeting with company clients. [30] These
meetings, clearly, were not strictly confined to routine hours
because, as a managerial employee tasked with the job of
representing his company with its clients, meetings with clients
were both social as well as work-related functions. The service car
assigned to Li by Alexander Commercial, Inc. therefore enabled
both Li - as well as the corporation - to put up the front of a highly
successful entity, increasing the latters goodwill before its clientele.
It also facilitated meeting between Li and its clients by providing
the former with a convenient mode of travel.
Moreover, Lis claim that he happened to be on the road on the
night of the accident because he was coming from a social visit
with an officemate in Paraaque was a bare allegation which was
never corroborated in the court below. It was obviously self-serving.
Assuming he really came from his officemates place, the same
could give rise to speculation that he and his officemate had just
been from a work-related function, or they were together to discuss
sales and other work related strategies.
In fine, Alexander Commercial, Inc. has not demonstrated, to our
satisfaction, that it exercised the care and diligence of a good
father of the family in entrusting its company car to Li. No
allegations were made as to whether or not the company took the
steps necessary to determine or ascertain the driving proficiency
and history of Li, to whom it gave full and unlimited use of a
company car.[31] Not having been able to overcome the burden of

demonstrating that it should be absolved of liability for entrusting

its company car to Li, said company, based on the principle
of bonus pater familias, ought to be jointly and severally liable with
the former for the injuries sustained by Ma. Lourdes Valenzuela
during the accident.
Finally, we find no reason to overturn the amount of damages
awarded by the respondent court, except as to the amount of moral
damages. In the case of moral damages, while the said damages
are not intended to enrich the plaintiff at the expense of a
defendant, the award should nonetheless be commensurate to the
suffering inflicted. In the instant case we are of the opinion that the
reduction in moral damages from an amount of P 1,000,000.00 to
P500,000.00 by the Court of Appeals was not justified considering
the nature of the resulting damage and the predictable sequelae of
the injury.
As a result of the accident, Ma. Lourdes Valenzuela underwent a
traumatic amputation of her left lower extremity at the distal left
thigh just above the knee. Because of this, Valenzuela will forever
be deprived of the full ambulatory functions of her left extremity,
even with the use of state of the art prosthetic technology. Well
beyond the period of hospitalization (which was paid for by Li), she
will be required to undergo adjustments in her prosthetic devise
due to the shrinkage of the stump from the process of healing.
These adjustments entail costs, prosthetic replacements and
months of physical and occupational rehabilitation and therapy.
During her lifetime, the prosthetic devise will have to be replaced
and re-adjusted to changes in the size of her lower limb effected by
the biological changes of middle-age, menopause and aging.
Assuming she reaches menopause, for example, the prosthetic will
have to be adjusted to respond to the changes in bone resulting
from a precipitate decrease in calcium levels observed in the bones
of all post-menopausal women. In other words, the damage done to
her would not only be permanent and lasting, it would also be
permanently changing and adjusting to the physiologic changes
which her body would normally undergo through the years. The
replacements, changes, and adjustments will require corresponding
adjustive physical and occupational therapy. All of these
adjustments, it has been documented, are painful.

61
The foregoing discussion does not even scratch the surface of the
nature of the resulting damage because it would be highly
speculative to estimate the amount of psychological pain, damage
and injury which goes with the sudden severing of a vital portion of
the human body. A prosthetic device, however technologically
advanced, will only allow a reasonable amount of functional
restoration of the motor functions of the lower limb. The sensory
functions are forever lost. The resultant anxiety, sleeplessness,
psychological injury, mental and physical pain are inestimable.
As the amount of moral damages are subject to this Courts
discretion, we are of the opinion that the amount of P1,000,000.00
granted by the trial court is in greater accord with the extent and
nature of the injury -. physical and psychological - suffered by
Valenzuela as a result of Lis grossly negligent driving of his
Mitsubishi Lancer in the early morning hours of the accident.
WHEREFORE, PREMISES CONSIDERED, the decision of the court of
Appeals is modified with the effect of REINSTATING the judgment of
the Regional Trial Court.
SO ORDERED.
Lessons Applicable: Effect of Non-Payment (Insurance)
Laws Applicable: Art. 19,Art. 20,Art. 21, Art. 2200 of the new Civil
Code;Section
77
of
the
Insurance
Code

and carry basis thus removing the 60-day credit for

premiums due, threatened to cancel policies issued by his
agency and leaked out the news that he has substantial
accounts with Philamgen.

December 27, 1978: His agency with Philamgen was

terminated

Valenzuela sought relief from the RTC

RTC: favored Valenzuela with reinstatement, commission

with interest, monthly compensatory damages, moral
damages, attorney's fees and cost of suit

CA modified by holding Philamgen and Valenzuela jointly

and severally liable for the premium

ISSUE: W/N Valuenuela should be NOT be held liable since nonpayment

of
the
premium
renders
the
policy
invalid

HELD: YES. petition is GRANTED. RTC reinstated with modification

that upon satisfaction of the judgment, contractual relationship is
terminated

The principal may not defeat the agent's right to

indemnification by a termination of the contract of
agency. Where the principal terminates or repudiates the
agent's employment in violation of the contract of
employment and without cause ... the agent is entitled to
receive either the amount of net losses caused and gains
prevented by the breach, or the reasonable value of the
services rendered. Thus, the agent is entitled to prospective
profits which he would have made except for such wrongful
termination provided that such profits are not conjectural, or
speculative but are capable of determination upon some
fairly reliable basis.

If a principal violates a contractual or quasi-contractual duty

which he owes his agent, the agent may as a rule bring an
appropriate action for the breach of that duty. The agent

FACTS:

Valenzuela, General Agent of Philippine American General

Insurance Company, Inc authorized to sell in behalf
of Philamgen solicited marine insurance from Delta Motors,
Inc. amounting to P4.4M entitling him to a 32% commission
or P1.6M

1976-1978: premium payments of P1,946,886 were paid

directly to Philamgen. Philamgen wanted a 50% share of
Valenzuela's commission but Valenzuela refused.

Because of his refusal, the officers of Philamgen reversed his

commission due him, placed agency transactions on a cash

62
may in a proper case maintain an action at law for
compensation or damages

question of whether or not the agency agreement is coupled

with interest is helpful to the petitioners' cause but is not
the primary and compelling reason

Section 77 of the Insurance Code, the remedy for the nonpayment of premiums is to put an end to and render the
insurance policy not binding

unless premium is paid, an insurance contract does not take

effect

since admittedly the premiums have not been paid, the

policies issued have lapsed

to sue Valenzuela for the unpaid premiums would be

the height of injustice and unfair dealing

Under Article 2200 of the new Civil Code, "indemnification

for damages shall comprehend not only the value of the loss
suffered, but also that of the profits which the obligee failed
to obtain."

63
G.R. No. 95546 November 6, 1992
MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO.,
represented by American International Underwriters
(Phils.), Inc., respondent.

BELLOSILLO, J.:
This case involves a purely legal question: whether payment by
installment of the premiums due on an insurance policy invalidates
the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise
known as the Insurance Code, as amended, which provides:
Sec. 77. An insurer is entitled to the payment of the premium as
soon as the thing is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except
in the case of a life or an industrial life policy whenever the grace
period provision applies.
Sometime in early 1982, private respondent American Home
Assurance Co. (AHAC), represented by American International
Underwriters (Phils.), Inc., issued in favor of petitioner Makati
Tuscany Condominium Corporation (TUSCANY) Insurance Policy No.
AH-CPP-9210452 on the latter's building and premises, for a period
beginning 1 March 1982 and ending 1 March 1983, with a total
premium of P466,103.05. The premium was paid on installments on
12 March 1982, 20 May 1982, 21 June 1982 and 16 November
1982, all of which were accepted by private respondent.
On 10 February 1983, private respondent issued to petitioner
Insurance Policy No. AH-CPP-9210596, which replaced and renewed
the previous policy, for a term covering 1 March 1983 to 1 March
1984. The premium in the amount of P466,103.05 was again paid
on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9
September 1983, and 21 November 1983. All payments were
likewise accepted by private respondent.

On 20 January 1984, the policy was again renewed and private

respondent issued to petitioner Insurance Policy No. AH-CPP9210651 for the period 1 March 1984 to 1 March 1985. On this
renewed policy, petitioner made two installment payments, both
accepted by private respondent, the first on 6 February 1984 for
P52,000.00 and the second, on 6 June 1984 for P100,000.00.
Thereafter, petitioner refused to pay the balance of the premium.
Consequently, private respondent filed an action to recover the
unpaid balance of P314,103.05 for Insurance Policy No. AH-CPP9210651.
In its answer with counterclaim, petitioner admitted the issuance of
Insurance Policy No. AH-CPP-9210651. It explained that it
discontinued the payment of premiums because the policy did not
contain a credit clause in its favor and the receipts for the
installment payments covering the policy for 1984-85, as well as
the two (2) previous policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company
rights to deny liability on any claim under the policy arising before
such payments or after the expiration of the credit clause of the
policy; and
3. Subject to no loss prior to premium payment. If there be any loss
such is not covered.
Petitioner further claimed that the policy was never binding and
valid, and no risk attached to the policy. It then pleaded a
counterclaim for P152,000.00 for the premiums already paid for
1984-85, and in its answer with amended counterclaim, sought the
refund of P924,206.10 representing the premium payments for
1982-85.
After some incidents, petitioner and private respondent moved for
summary judgment.
On 8 October 1987, the trial court dismissed the complaint and the
counterclaim upon the following findings:
While it is true that the receipts issued to the defendant contained
the aforementioned reservations, it is equally true that payment of
the premiums of the three aforementioned policies (being sought to
be refunded) were made during the lifetime or term of said policies,

64
hence, it could not be said, inspite of the reservations, that no risk
attached
under
the
policies.
Consequently,
defendant's
counterclaim for refund is not justified.
As regards the unpaid premiums on Insurance Policy No. AH-CPP9210651, in view of the reservation in the receipts ordinarily issued
by the plaintiff on premium payments the only plausible conclusion
is that plaintiff has no right to demand their payment after the
lapse of the term of said policy on March 1, 1985. Therefore, the
defendant was justified in refusing to pay the same. 1
Both parties appealed from the judgment of the trial court.
Thereafter, the Court of Appeals rendered a decision 2modifying
that of the trial court by ordering herein petitioner to pay the
balance of the premiums due on Policy No. AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the
denial of the counterclaim. The appellate court thus explained
The obligation to pay premiums when due is ordinarily as indivisible
obligation to pay the entire premium. Here, the parties herein
agreed to make the premiums payable in installments, and there is
no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two
succeeding years, the second and third policies being a
renewal/replacement for the previous one. And the insured never
informed the insurer that it was terminating the policy because the
terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code,
the parties may not agree to make the insurance contract valid and
binding without payment of premiums, there is nothing in said
section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract
as valid and binding upon payment of the first premium. Otherwise,
we would allow the insurer to renege on its liability under the
contract, had a loss incurred (sic) before completion of payment of
the entire premium, despite its voluntary acceptance of partial
payments, a result eschewed by a basic considerations of fairness
and equity.
To our mind, the insurance contract became valid and binding upon
payment of the first premium, and the plaintiff could not have

denied liability on the ground that payment was not made in full,
for the reason that it agreed to accept installment payment. . . . 3
Petitioner now asserts that its payment by installment of the
premiums for the insurance policies for 1982, 1983 and 1984
invalidated said policies because of the provisions of Sec. 77 of the
Insurance Code, as amended, and by the conditions stipulated by
the insurer in its receipts, disclaiming liability for loss for occurring
before payment of premiums.
It argues that where the premiums is not actually paid in full, the
policy would only be effective if there is an acknowledgment in the
policy of the receipt of premium pursuant to Sec. 78 of the
Insurance Code. The absence of an express acknowledgment in the
policies of such receipt of the corresponding premium payments,
and petitioner's failure to pay said premiums on or before the
effective dates of said policies rendered them invalid. Petitioner
thus concludes that there cannot be a perfected contract of
insurance upon mere partial payment of the premiums because
under Sec. 77 of the Insurance Code, no contract of insurance is
valid and binding unless the premium thereof has been paid,
notwithstanding any agreement to the contrary. As a consequence,
petitioner seeks a refund of all premium payments made on the
alleged invalid insurance policies.
We hold that the subject policies are valid even if the premiums
were paid on installments. The records clearly show that petitioner
and private respondent intended subject insurance policies to be
binding and effective notwithstanding the staggered payment of
the premiums. The initial insurance contract entered into in 1982
was renewed in 1983, then in 1984. In those three (3) years, the
insurer accepted all the installment payments. Such acceptance of
payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity
and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later
deny liability on the lame excuse that the premiums were not
prepared in full.

65
We therefore sustain the Court of Appeals. We quote with approval
the well-reasoned findings and conclusion of the appellate court
contained in its Resolution denying the motion to reconsider its
Decision
While the import of Section 77 is that prepayment of premiums is
strictly required as a condition to the validity of the contract, We
are not prepared to rule that the request to make installment
payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and
acceptance of the initial premium or first installment. Section 78 of
the Insurance Code in effect allows waiver by the insurer of the
condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the
parties from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to morals,
good customs, public order or public policy (De Leon, the Insurance
Code, at p. 175). So is an understanding to allow insured to pay
premiums in installments not so proscribed. At the very least, both
parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted. 4
The reliance by petitioner on Arce vs. Capital Surety and Insurance
Co. 5 is unavailing because the facts therein are substantially
different from those in the case at bar. In Arce, no payment was
made by the insured at all despite the grace period given. In the
case before Us, petitioner paid the initial installment and thereafter
made staggered payments resulting in full payment of the 1982
and 1983 insurance policies. For the 1984 policy, petitioner paid
two (2) installments although it refused to pay the balance.
It appearing from the peculiar circumstances that the parties
actually intended to make three (3) insurance contracts valid,
effective and binding, petitioner may not be allowed to renege on
its obligation to pay the balance of the premium after the expiration
of the whole term of the third policy (No. AH-CPP-9210651) in March
1985. Moreover, as correctly observed by the appellate court,
where the risk is entire and the contract is indivisible, the insured is
not entitled to a refund of the premiums paid if the insurer was

exposed to the risk insured for any period, however brief or

momentary.
WHEREFORE, finding no reversible error in the judgment appealed
from, the same is AFFIRMED. Costs against petitioner.
SO ORDERED.
Cruz, Padilla and Grio-Aquino, JJ., concur.
Makati Tuscany Condominium Corporation v CA (Insurance)

G.R.
No.
95546
November
6,
1992
MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs. THE COURT OF APPEALS, AMERICAN HOME ASSURANCE
CO., represented by American International Underwriters
(Phils.),
Inc., respondent.
FACTS:
Sometime in early 1982, private respondent American Home
Assurance Co. (AHAC), represented by American International
Underwriters (Phils.), Inc., issued in favor of petitioner Makati
Tuscany Condominium Corporation (TUSCANY) Insurance Policy No.
AH-CPP-9210452 on the latter's building and premises, for a period
beginning 1 March 1982 and ending 1 March 1983, with a total
premium of P466,103.05. The premium was paid on installments on
12 March 1982, 20 May 1982, 21 June 1982 and 16 November
1982, all of which were accepted by private respondent.
Successive renewals of the policies were made in the same manner.
On 1984, the policy was again renewed and petitioner made two
installment payments, both accepted by private respondent, the
first on 6 February 1984 for P52,000.00 and the second, on 6 June
1984 for P100,000.00. Thereafter, petitioner refused to pay the
balance
of
the
premium.
Private respondent filed an action to recover the unpaid balance of
P314,103.05 for Insurance Policy. Petitioner explained that it
discontinued the payment of premiums because the policy did not
contain a credit clause in its favor. Petitioner further claimed that
the policy was never binding and valid, and no risk attached to the

66
policy. It then pleaded a counterclaim for P152,000.00 for the
premiums already paid for 1984-85, and in its answer with
amended counterclaim, sought the refund of P924,206.10
representing
the
premium
payments
for
1982-85.
DECISION
OF
LOWER
COURTS:
(1) Trial Court: dismissed the complaint and counterclaim
(2) CA: ordering herein petitioner to pay the balance of the
premiums
due
ISSUE:
Whether payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance, in view of
Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as
amended,
which
provides:
Sec. 77. An insurer is entitled to the payment of the premium as
soon as the thing is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the
grace
period
provision
applies.
RULING:
No, the contract remains valid even if the premiums were paid on
installments. Certainly, basic principles of equity and fairness would
not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on
the lame excuse that the premiums were not prepared in full.
At the very least, both parties should be deemed in estoppel to
question the arrangement they have voluntarily accepted.
Moreover, as correctly observed by the appellate court, where the
risk is entire and the contract is indivisible, the insured is not
entitled to a refund of the premiums paid if the insurer was exposed
to the risk insured for any period, however brief or momentary. The
obligation to pay premiums when due is ordinarily as indivisible
obligation to pay the entire premium.

67
G.R. No. 102253 June 2, 1995
SOUTH
SEA
SURETY
AND
INSURANCE
COMPANY,
INC., petitioner,
vs.
HON. COURT OF APPEALS and VALENZUELA HARDWOOD
AND INDUSTRIAL SUPPLY, INC., respondents.
RESOLUTION

VITUG, J.:
Two issues on the subject of insurance are raised in this petition,
that assails the decision, that assails the decision of the Court of
Appeals. (in CA-G.R. NO. CV-20156), the first dealing on the
requirement of premium payment and the second relating to the
agency relationship of parties under that contract.
The court litigation started when Valenzuela Hardwood and
Industrial Supply, Inc. ("Hardwood"), filed with the Regional, Trial
Court of the National Capital Judicial Region, Branch l71 in
Valenzuela, Metro Manila, a complaint for the recovery of the value
of lost logs and freight charges from Seven Brothers Shipping
Corporation or, to the extent of its alleged insurance cover, from
South Sea Surety and insurance Company.
The factual backdrop is described briefly by the appellate court
thusly:
It appears that on 16 January 1984, plaintiff [Valenzuela Hardwood
and Industrial Supply, Inc.] entered into an agreement with the
defendant Seven Brothers whereby the latter undertook to load on
board its vessel M/V Seven Ambassador the former's lauan round
logs numbering 940 at the port of Maconacon, Isabela for shipment
to Manila.
On 20 January 1984, plaintiff insured the logs, against loss and/or,
damage with defendant South Sea Surety and Insurance Co., Inc.
for P2,000,000.00 end the latter issued its Marine Cargo Insurance
Policy No. 84/24229 for P2,000,000.00 on said date.
On 24 January 1984, the plaintiff gave the check in payment of the
premium on the insurance policy to Mr. Victorio Chua.

In the meantime, the said vessel M/V Seven Ambassador sank on

25 January 1984 resulting in the loss of the plaintiffs insured logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover
payment of the premium and documentary stamps due on the
policy was tendered to the insurer but was not accepted. Instead,
the South Sea Surety and Insurance Co., Inc. cancelled the
insurance policy it issued as of the date of inception for nonpayment of the premium due in accordance with Section 77 of the
Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South Sea
Surety and Insurance Co., Inc. the payment of the proceeds of the
policy but the latter denied liability under the policy. Plaintiff
likewise filed a formal claim with defendant Seven Brothers
Shipping Corporation for the value of the lost logs but the latter
denied the claim. 1
In its decision, dated 11 May 1988, the trial court rendered
judgment in favor of plaintiff Hardwood.
On appeal perfected by both the shipping firm and the insurance
company, the Court of Appeals affirmed the judgment of the
court a quo only against the insurance corporation; in absolving the
shipping entity from liability, the appellate court ratiocinated:
The primary issue to be resolved before us is whether defendants
shipping corporation and the surety company are liable to the
plaintiff for the latter's lost logs.
It appears that there is a stipulation in the charter party that the
ship owner would be exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil Code on
common carriers to establish the liability of the shipping
corporation. The provisions on common carriers should not be
applied where the carrier is not acting as such but as a private
carrier.
Under American jurisprudence, a common carrier undertaking to
carry a special or chartered to a special person only, becomes a
private carrier.

68
As a private carrier, a stipulation exempting the owner from liability
even for the negligence of its agent is valid (Home Insurance
Company, Inc. vs. American Steamship Agencies, Inc., 23 SCRA 24).
The shipping corporation should not therefore be held liable for the
loss of the logs. 2
In this petition for review on certiorari brought by South Sea Surety
and Insurance Co., Inc., petitioner argues that it likewise should
have been freed from any liability to Hardwood. It faults the
appellate court (a) for having Supposedly disregarded Section 77 of
the insurance Code and (b) for holding Victorio Chua to have been
an authorized representative of the insurer.
Section 77 of the Insurance Code provides:
Sec. 77. An insurer is entitled to payment of the premium as soon
as the thing insured is exposed to the peril insured against.
Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except
in the case of a life or an industrial life policy whenever the grace
period provision applies.
Undoubtedly, the payment of the premium is a condition precedent
to, and essential for, the efficaciousness of the contract. The only
two statutorily provided exceptions are (a) in case the insurance
coverage relates to life or industrial life (health) insurance when a
grace period applies and (b) when the insurer makes a written
acknowledgment of the receipt of premium, this acknowledgment
being declared by law to be then conclusive evidence of the
premium payment (Secs. 77-78, Insurance Code). The appellate
court, contrary to what the petition suggests, did not make any
pronouncement to the contrary. Indeed, it has said:
Concerning the issue as to whether there is a valid contract of
insurance between plaintiff-appellee and defendant-appellant South
Sea Surety and Insurance Co., Inc., Section 77 of the Insurance
Code explicitly provides that notwithstanding any agreement to the
contrary, no policy issued by an insurance company is valid and
binding unless and until premium thereof has been paid. It is
therefore important to determine whether at the time of the loss,
the premium was already paid. 3

No attempt becloud the issues can disguise the fact that the sole
question raised in the instant petition is really evidentiary in
nature, i.e., whether or not Victorio Chua, in receiving the check for
the insurance premium prior to the occurrence of the risk insured
against has so acted as an agent of petitioner. The appellate court,
like the trial court, has found in the affirmative. Said the appellate
court:
In the instant case, the Marine Cargo Insurance Policy No. 84/24229
was issued by defendant insurance company on 20 January 1984.
At the time the vessel sank on 25 January 1984 resulting in the loss
of the insured logs, the insured had already delivered to Victorio
Chua the check in payment of premium. But, as Victorio Chua
testified, it was only in the morning of 30 January 1984 or 5 days
after the vessel sank when his messenger tendered the check to
defendant South Sea Surety and Insurance Co., Inc. (TSN, pp. 3-27,
16-17, 22 October 1985).
The pivotal issue to be resolved to determine the liability, of the
surety corporation is whether Mr. Chua acted as an agent of the
surety company or of the insured when he received the check for
insurance premiums.
Appellant surety company insists that Mr. Chua is an administrative
assistant for the past ten years and an agent for less than ten years
of the Columbia Insurance Brokers, Ltd. He is paid a salary as a
administrative assistant and a commission as agent based on the
premiums he turns over to the broker. Appellant therefore argues
that Mr. Chua, having received the insurance premiums as an agent
of the Columbia Insurance Broker, acted as an agent of the insured
under Section 301 of the Insurance Code which provides as follows:
Sec. 301. Any person who for any compensation, commission or
other thing of value, acts, or aids in soliciting, negotiating or
procuring the making of any insurance contract or in placing risk or
taking out insurance, on behalf of an insured other than
himself,shall be an insurance broker within the intent of this Code,
and shall thereby become liable to all the duties requirements,
liabilities and penalties to which an insurance broker is subject.
The appellees, upon the other hand, claim that the second
paragraph of Section 306 of the Insurance Code provide as follows:

69
Sec. 306. . . . Any insurance company which delivers to an
insurance agent or insurance broker a policy or contract of
insurance shall be deemed to have authorized such agent or broker
to receive on its behalf payment of any premium which is due on
such policy of contract of insurance at the time of its issuance or
delivery or which becomes due thereon.
On cross-examination in behalf of South Sea Surety and Insurance
Co., Inc. Mr. Chua testified that the marine cargo insurance policy
for the plaintiff's logs was delivered to him on 21 January 1984 at
his office to be delivered to the plaintiff.
When the appellant South Sea Surety and Insurance Co., Inc.
delivered to Mr. Chua the marine cargo insurance policy for the
plaintiffs logs, he is deemed to have been authorized by the South
Sea Surety and Insurance Co., Inc. to receive the premium which is
due on its behalf.
When therefore the insured logs were lost, the insured had already
paid the premium to an agent of the South Sea Surety and
Insurance Co., Inc., which is consequently liable to pay the
insurance proceeds under the policy it issued to the insured. 4
We see no valid reason to discard the factual conclusions of the
appellate court. Just as so correctly pointed out by private
respondent, it is not the function of this Court to assess and
evaluate all over again the evidence, testimonial and documentary,
adduced by the parties particularly where, such as here, the
findings of both the trial court and the appellate court on the
matter coincide.
WHEREFORE, the resolution, dated 01 February 1993, granting due
course to the petition is RECALLED, and the petition is DENIED.
Costs against petitioner.
SO ORDERED.
South Sea v CA G.R. No. 102253 June 2, 1995

Valenzuela Hardwood entered

into
an
agreement
with the
defendant Seven Brothers whereby the latter undertook to load the
former's 940 lauan logs for shipment to Manila.
South Sea insured the logs for P2,000,000.00 in its marine
policy. Valenzuela then gave the check in payment of the premium
on the insurance policy to Mr. Victorio Chua.
Seven Brothers ship sank resulting in the loss of the logs.
A check for P5,625.00 to cover payment of the premium tendered
to the insurer but was not accepted. Instead, the South Sea Surety
and Insurance Co., Inc. cancelled the insurance policy it issued as of
the date of inception for non-payment of the premium due
in accordance with Section 77 of the Insurance Code.
Valenzuela demanded from South Sea the payment of the proceeds
of the policy but the latter denied liability under the policy. Plaintiff
likewise filed a formal claim with defendant Seven Brothers
Shipping Corporation for the value of the lost logs but the latter
denied the claim.
Valenzuela filed a complaint a complaint for the recovery of the
value of lost logs and freight charges from Seven Brothers Shipping
Corporation or from South Sea Surety and Insurance Company, the
insurer.
The trial court rendered judgment in favor of plaintiff Valenzuela.
The Court of Appeals affirmed the judgment only against the
insurance corporation and absolved the shipping entity from
liability. The court held that there was a stipulation in the charter
party exempted the ship owner from liability in case of loss.
In the SC petition, petitioner argues that it should have been freed
from any liability to Hardwood. It faults the appellate court (a) for
having disregarded Section 77 of the insurance Code and (b) for
holding Victorio Chua to have been an authorized representative of
the insurer.

J. Vitug
Issue:
Facts:

WON Mr. Chua acted as an agent of the surety company or of the

insured when he received the check for insurance premiums.

70

Held: Agent of the surety. Petition denied.

When the logs were lost, the insured had already paid the premium
to an agent of the South Sea Surety and Insurance Co., Inc., which
is consequently liable to pay the insurance proceeds under the
policy it issued to the insured.

Ratio:

The court followed the factual evidence of the lower courts and
held that they didnt try questions of fact.

To determine if there was a valid contract of insurance, it must be

determine if the premium was validly paid to the company or its
agents at the time of the loss.
The appellate and trial courts have found that Chua acted as an
agent.
South Sea insisted that Chua has been an agent for less than ten
years of the Columbia Insurance Brokers, a different company.
Appellant argued that Mr. Chua, having received the premiums,
acted as an agent under Section 301 of the Insurance Code which
provides:
Sec. 301. Any person who for any compensation, commission or
other thing of value, acts, or aids in soliciting, negotiating or
procuring the making of any insurance contract or in placing risk or
taking out insurance, on behalf of an insured other than himself,
shall be an insurance broker within the intent of this Code, and shall
thereby become liable to all the dutiesrequirements, liabilities and
penalties to which an insurance broker is subject.
Valenzuela claimed that the second paragraph of Section 306 of the
Insurance Code provided:
Sec. 306 Any insurance company which delivers to an insurance
agent or insurance broker a policy or contract of insurance shall be
deemed to have authorized such agent or broker to receive on its
behalf payment of any premium which is due on such policy of
contract of insurance at the time of its issuance or delivery or which
becomes due thereon.
Mr. Chua testified that the marine cargo insurance policy logs was
by South Sea to be given to the wood company.
When South Sea delivered to Mr. Chua the marine cargo insurance
policy for Valenzuelas logs, he is deemed to have been authorized
by former to receive the premium which is due on its behalf.

71
G.R. No. 95641 September 22, 1994
SANTOS B. AREOLA and LYDIA D. AREOLA, petitionersappellants,
vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND
ASSURANCE, INC., respondents-appellees.
Gutierrez, Cortes & Gonzales for petitioners.
Bengzon, Bengzon, Baraan & Fernandez Law Offices for private
respondent.

ROMERO, J.:
On June 29, 1985, seven months after the issuance of petitioner
Santos Areola's Personal Accident Insurance Policy No. PA-20015,
respondent insurance company unilaterally cancelled the same
since company records revealed that petitioner-insured failed to
pay his premiums.
On August 3, 1985, respondent insurance company offered to
reinstate same policy it had previously cancelled and even
proposed to extend its lifetime to December 17, 1985, upon a
finding that the cancellation was erroneous and that the premiums
were paid in full by petitioner-insured but were not remitted by
Teofilo M. Malapit, respondent insurance company's branch
manager.
These, in brief, are the material facts that gave rise to the action for
damages due to breach of contract instituted by petitioner-insured
before
Branch 40 RTC, Dagupan City against respondent insurance
company.
There are two issues for resolution in this case:
(1) Did the erroneous act of cancelling subject insurance policy
entitle petitioner-insured to payment of damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled

insurance policy by respondent insurance company, in an effort to
rectify such error, obliterate whatever liability for damages it may
have to bear, thus absolving it therefrom?
From the factual findings of the trial court, it appears that
petitioner-insured, Santos Areola, a lawyer from Dagupan City,
bought,
through
the Baguio City branch of Prudential Guarantee and Assurance, Inc.
(hereinafter referred to as Prudential), a personal accident
insurance policy covering the one-year period between noon of
November 28, 1984 and noon of November 28, 1985. 1 Under the
terms of the statement of account issued by respondent insurance
company, petitioner-insured was supposed to pay the total amount
of P1,609.65 which included the premium of P1,470.00,
documentary stamp of P110.25 and 2% premium tax of P29.40. 2 At
the lower left-hand corner of the statement of account, the
following is legibly printed:
This Statement of Account must not be considered a receipt.
Official Receipt will be issued to you upon payment of this account.
If payment is made to our representative, demand for a Provisional
Receipt and if our Official Receipts is (sic) not received by you
within 7 days please notify us.
If payment is made to our office, demand for an OFFICIAL RECEIPT.
On December 17, 1984, respondent insurance company issued
collector's provisional receipt No. 9300 to petitioner-insured for the
amount of P1,609.65 3 On the lower portion of the receipt the
following is written in capital letters:
Note: This collector's provisional receipt will be confirmed by our
official receipt. If our official receipt is not received by you within 7
days, please notify us. 4
On June 29, 1985, respondent insurance company, through its
Baguio City manager, Teofilo M. Malapit, sent petitioner-insured
Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for
non-payment of premium effective as of inception dated." 5 The
same endorsement also credited "a return premium of P1,609.65

72
plus documentary stamps and premium tax" to the account of the
insured.
Shocked by the cancellation of the policy, petitioner-insured
confronted Carlito Ang, agent of respondent insurance company,
and demanded the issuance of an official receipt. Ang told
petitioner-insured that the cancellation of the policy was a mistake
but he would personally see to its rectification. However, petitionerinsured failed to receive any official receipt from Prudential.
Hence, on July 15, 1985, petitioner-insured sent respondent
insurance company a letter demanding that he be insured under
the same terms and conditions as those contained in Policy No. PABG-20015 commencing upon its receipt of his letter, or that the
current commercial rate of increase on the payment he had made
under provisional receipt No. 9300 be returned within five
days. 6 Areola also warned that should his demands be unsatisfied,
he would sue for damages.
On July 17, 1985, he received a letter from production manager
Malapit informing him that the "partial payment" of P1,000.00 he
had made on the policy had been "exhausted pursuant to the
provisions of the Short Period Rate Scale" printed at the back of the
policy. Malapit warned Areola that should be fail to pay the balance,
the company's liability would cease to operate. 7
In reply to the petitioner-insured's letter of July 15, 1985,
respondent insurance company, through its Assistant Vice-President
Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985
stating that the company was verifying whether the payment had
in fact been issued therefor. Ampil emphasized that the official
receipt should have been issued seven days from the issuance of
the provisional receipt but because no official receipt had been
issued in Areola's name, there was reason to believe that no
payment had been made. Apologizing for the inconvenience, Ampil
expressed the company's concern by agreeing "to hold you cover
(sic) under the terms of the referenced policy until such time that
this matter is cleared." 8
On August 3, 1985, Ampil wrote Areola another letter confirming
that the amount of P1,609.65 covered by provisional receipt No.
9300 was in fact received by Prudential on December 17, 1984.
Hence,
Ampil
informed

Areola that Prudential was "amenable to extending PGA-PA-BG20015 up to December 17, 1985 or one year from the date when
payment was received." Apologizing again for the inconvenience
caused Areola, Ampil exhorted him to indicate his conformity to the
proposal by signing on the space provided for in the letter. 9
The letter was personally delivered by Carlito Ang to Areola on
August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as
early as August 6, 1985 had filed a complaint for breach of contract
with damages before the lower court.
In its Answer, respondent insurance company admitted that the
cancellation of petitioner-insured's policy was due to the failure of
Malapit to turn over the premiums collected, for which reason no
official receipt was issued to him. However, it argued that, by
acknowledging the inconvenience caused on petitioner-insured and
after taking steps to rectify its omission by reinstating the cancelled
policy prior to the filing of the complaint, respondent insurance
company had complied with its obligation under the contract.
Hence, it concluded that petitioner-insured no longer has a cause of
action against it. It insists that it cannot be held liable for damages
arising from breach of contract, having demonstrated fully well its
fulfillment of its obligation.
The trial court, on June 30, 1987, rendered a judgment in favor of
petitioner-insured, ordering respondent insurance company to pay
the former the following:
a) P1,703.65 as actual damages;
b) P200,000.00 as moral damages; and
c) P50,000.00 as exemplary damages;
2. To pay to the plaintiff, as and for attorney's fees the amount of
P10,000.00; and
3. To pay the costs.
In its decision, the court below declared that respondent insurance
company acted in bad faith in unilaterally cancelling subject
insurance policy, having done so only after seven months from the
time that it had taken force and effect and despite the fact of full
payment of premiums and other charges on the issued insurance

73
policy. Cancellation from the date of the policy's inception,
explained the lower court, meant that the protection sought by
petitioner-insured from the risks insured against was never
extended by respondent insurance company. Had the insured met
an accident at the time, the insurance company would certainly
have disclaimed any liability because technically, the petitioner
could not have been considered insured. Consequently, the trial
court held that there was breach of contract on the part of
respondent insurance company, entitling petitioner-insured to an
award of the damages prayed for.

Petitioner-insured moved for the reconsideration of the said

decision which the Court of Appeals denied. Hence, this petition for
review on certiorari anchored on these arguments:

This ruling was challenged on appeal by respondent insurance

company, denying bad faith on its part in unilaterally cancelling
subject insurance policy.

II

After consideration of the appeal, the appellate court issued a

reversal of the decision of the trial court, convinced that the latter
had erred in finding respondent insurance company in bad faith for
the cancellation of petitioner-insured's policy. According to the
Court of Appeals, respondent insurance company was not
motivated by negligence, malice or bad faith in cancelling subject
policy. Rather, the cancellation of the insurance policy was based
on what the existing records showed, i.e., absence of an official
receipt issued to petitioner-insured confirming payment of
premiums. Bad faith, said the Court of Appeals, is some motive of
self-interest or ill-will; a furtive design of ulterior purpose, proof of
which must be established convincingly. On the contrary, it further
observed, the following acts indicate that respondent insurance
company did not act precipitately or willfully to inflict a wrong on
petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if
petitioner-insured had indeed paid the premium; (b) the letter of
August 3, 1985 confirming that the premium had been paid on
December 17, 1984; (c) the reinstatement of the policy with a
proposal to extend its effective period to December 17, 1985; and
(d)
respondent insurance
company's apologies for
the
"inconvenience" caused upon petitioner-insured. The appellate
court added that respondent insurance company even relieved
Malapit, its Baguio City manager, of his job by forcing him to resign.

I
Respondent Court of Appeals is guilty of grave abuse of discretion
and committed a serious and reversible error in not holding
Respondent Prudential liable for the cancellation of the insurance
contract which was admittedly caused by the fraudulent acts and
bad faith of its own officers.

Respondent Court of Appeals committed serious and reversible

error and abused its discretion in ruling that the defenses of good
faith and honest mistake can co-exist with the admitted fraudulent
acts and evident bad faith.
III
Respondent Court of Appeals committed a reversible error in not
finding that even without considering the fraudulent acts of its own
officer in misappropriating the premium payment, the act itself in
cancelling the insurance policy was done with bad faith and/or
gross negligence and wanton attitude amounting to bad faith,
because
among
others,
it
was
Mr. Malapit the person who committed the fraud who sent and
signed the notice of cancellation.
IV
Respondent Court of Appeals has decided a question of substance
contrary to law and applicable decision of the Supreme Court when
it refused to award damages in favor of herein PetitionerAppellants.
It is petitioner-insured's submission that the fraudulent act of
Malapit, manager of respondent insurance company's branch office
in Baguio, in misappropriating his premium payments is the
proximate cause of the cancellation of the insurance policy.
Petitioner-insured theorized that Malapit's act of signing and even
sending the notice of cancellation himself, notwithstanding his
personal knowledge of petitioner-insured's full payment of

74
premiums, further reinforces the allegation of bad faith. Such
fraudulent act committed by Malapit, argued petitioner-insured, is
attributable to respondent insurance company, an artificial
corporate being which can act only through its officers or
employees. Malapit's actuation, concludes petitioner-insured, is
therefore not separate and distinct from that of respondentinsurance company, contrary to the view held by the Court of
Appeals. It must, therefore, bear the consequences of the
erroneous cancellation of subject insurance policy caused by the
non-remittance by its own employee of the premiums paid.
Subsequent reinstatement, according to petitioner-insured, could
not possibly absolve respondent insurance company from liability,
there being an obvious breach of contract. After all, reasoned out
petitioner-insured, damage had already been inflicted on him and
no amount of rectification could remedy the same.
Respondent insurance company, on the other hand, argues that
where reinstatement, the equitable relief sought by petitionerinsured was granted at an opportune moment, i.e. prior to the filing
of the complaint, petitioner-insured is left without a cause of action
on which to predicate his claim for damages. Reinstatement, it
further explained, effectively restored petitioner-insured to all his
rights under the policy. Hence, whatever cause of action there
might have been against it, no longer exists and the consequent
award of damages ordered by the lower court in unsustainable.
We uphold petitioner-insured's submission. Malapit's fraudulent act
of misappropriating the premiums paid by petitioner-insured is
beyond doubt directly imputable to respondent insurance company.
A corporation, such as respondent insurance company, acts solely
thru its employees. The latters' acts are considered as its own for
which it can be held to account. 11 The facts are clear as to the
relationship between private respondent insurance company and
Malapit. As admitted by private respondent insurance company in
its answer, 12 Malapit was the manager of its Baguio branch. It is
beyond doubt that he represented its interest and acted in its
behalf. His act of receiving the premiums collected is well within the
province of his authority. Thus, his receipt of said premiums is
receipt by private respondent insurance company who, by provision
of law, particularly under Article 1910 of the Civil Code, is bound by
the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which
the agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly.
Malapit's failure to remit the premiums he received cannot
constitute a defense for private respondent insurance company; no
exoneration from liability could result therefrom. The fact that
private respondent insurance company was itself defrauded due to
the anomalies that took place in its Baguio branch office, such as
the non-accrual of said premiums to its account, does not free the
same from its obligation to petitioner Areola. As held inPrudential
Bank v. Court of Appeals 13 citing the ruling in McIntosh v. Dakota
Trust Co.: 14
A bank is liable for wrongful acts of its officers done in the interests
of the bank or in the course of dealings of the officers in their
representative capacity but not for acts outside the scope of their
authority. A bank holding out its officers and agent as worthy of
confidence will not be permitted to profit by the frauds they may
thus be enabled to perpetrate in the apparent scope of their
employment; nor will it be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank
therefrom. Accordingly, a banking corporation is liable to innocent
third persons where the representation is made in the course of its
business by an agent acting within the general scope of his
authority even though, in the particular case, the agent is secretly
abusing his authority and attempting to perpetrate a fraud upon his
principal or some other person, for his own ultimate benefit.
Consequently, respondent insurance company is liable by way of
damages for the fraudulent acts committed by Malapit that gave
occasion to the erroneous cancellation of subject insurance policy.
Its earlier act of reinstating the insurance policy can not obliterate
the injury inflicted on petitioner-insured. Respondent company
should be reminded that a contract of insurance creates reciprocal
obligations for both insurer and insured. Reciprocal obligations are
those which arise from the same cause and in which each party is

75
both a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. 15
Under the circumstances of instant case, the relationship as
creditor and debtor between the parties arose from a common
cause: i.e., by reason of their agreement to enter into a contract of
insurance under whose terms, respondent insurance company
promised to extend protection to petitioner-insured against the risk
insured for a consideration in the form of premiums to be paid by
the latter. Under the law governing reciprocal obligations,
particularly the second paragraph of Article 1191, 16 the injured
party, petitioner-insured in this case, is given a choice between
fulfillment or rescission of the obligation in case one of the obligors,
such as respondent insurance company, fails to comply with what is
incumbent upon him. However, said article entitles the injured
party to payment of damages, regardless of whether he demands
fulfillment or rescission of the obligation. Untenable then is
reinstatement insurance company's argument, namely, that
reinstatement being equivalent to fulfillment of its obligation,
divests petitioner-insured of a rightful claim for payment of
damages. Such a claim finds no support in our laws on obligations
and contracts.
The nature of damages to be awarded, however, would be in the
form of nominal damages 17 contrary to that granted by the court
below. Although the erroneous cancellation of the insurance policy
constituted a breach of contract, private respondent insurance
company, within a reasonable time took steps to rectify the wrong
committed by reinstating the insurance policy of petitioner.
Moreover, no actual or substantial damage or injury was inflicted on
petitioner Areola at the time the insurance policy was cancelled.
Nominal damages are "recoverable where a legal right is
technically violated and must be vindicated against an invasion
that has produced no actual present loss of any kind, or where
there has been a breach of contract and no substantial injury or
actual damages whatsoever have been or can be shown. 18
WHEREFORE, the petition for review on certiorari is hereby
GRANTED and the decision of the Court of Appeals in CA-G.R. No.
16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC
Dagupan City, in Civil Case No. D-7972 rendered on June 30, 1987
is hereby REINSTATED subject to the following modifications: (a)

that nominal damages amounting to P30,000.00 be awarded

petitioner in lieu of the damages adjudicated by court a quo; and
(b) that in the satisfaction of the damages awarded therein,
respondent insurance company is ORDERED to pay the legal rate of
interest computed from date of filing of complaint until final
payment thereof.
SO ORDERED.
Feliciano, Melo and Vitug, JJ., concur.
Areola v CA G.R. No. 95641 September 22, 1994
J. Romero

Facts:
Prudential
Guarantee
cancelled
Areolas
personal accident
insurance on the grounds that the latter failed to pay his premiums
7 months after issuing the policy. Areola was supposed to pay the
total amount of P1,609.65 which included the premium of
P1,470.00, documentary stamp of P110.25 and 2% premium tax of
P29.40. The statement of account had a stipulation not considering
it a receipt. It also reminded the customer to ask for a receipt after
payment. There was also a stipulation calling for a demand for a
provisional receipt after payment to an agent. A provisional receipt
was sent to petitioner telling him that the provisional receipt would
be confirmed by an official one. The company then cancelled the
policy for non-payment of premiums. After being surprised, Areola
confronted a company agent and demanded an official receipt. The
latter told him that it was a mistake, but never gave him an official
receipt. Areola sent a letter demanding that he be reinstated or he
would file for damages if his demand was not met. The company
then told him that his payments werent in full yet. The company
replied to Areola by telling him that there was reason to believe
that no payment has been made since no official receipt was
issued. The company then told him that they would still hold him
under the policy. The company then confirmed that he paid the
premium and that they would extend the policy by one year.
Thereby, the company offered to reinstate same policy it had
previously cancelled and even proposed to extend its lifetime on

76
finding that the cancellation was erroneous and that the premiums
were paid in full by petitioner-insured but were not remitted by the
company's branch manager, Mr. Malapit.
However, they were too late for Areola already filed an action
for breach of contract in the trial court.
The companys defense lay in rectifying its omission; hence, there
was no breach of contract.
The court ruled in favor of Areola and asked Prudential to pay
250,000 pesos in moral and exemplary damages. The court held
that the company was in bad faith in cancelling the policy. Had the
insured met an accident at that time, he wouldnt be covered by
the policy.
This ruling was challenged on appeal by respondent insurance
company, denying bad faith in unilaterally cancelling the policy. The
AC absolved Prudential on the grounds that it was not motivated by
negligence, malice or bad faith in cancelling subject policy. Rather,
the cancellation of the insurance policy was based on what the
existing records showed. The court even added that the errant
manager who didnt remit the profits was forced to resign. Areola
then filed for a petition in the Supreme Court.

1. Petitioner alleged that the managers misappropriation of his

premium payments is the proximate cause of the cancellation of
the insurance policy. Subsequent reinstatement could not possibly
absolve respondent insurance company from liability, due to
the breach of contract. He contended that damage had already
been done.
Prudential averred that the equitable relief sought by petitionerinsured was granted to the filing of the complaint, petitionerinsured is left without a cause of action. Reinstatement effectively
restored petitioner-insured to all his rights under the policy.
The court held that Malapit's fraudulent act of misappropriating the
premiums paid by petitioner-insured is directly imputable to
respondent insurance company. A corporation, such as respondent
insurance company, acts solely thru its employees. The latters' acts
are considered as its own. Malapit represented its interest and
acted in its behalf. His act of receiving the premiums collected is
well within the province of his authority. Thus, his receipt of said
premiums is receipt by private respondent insurance company who,
by provision of law is bound by the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which
the agent may have contracted within the scope of his authority.

Issue:
1. Did the erroneous act of cancelling subject insurance
policy entitle petitioner-insured to payment of damages?
2. Did the subsequent act of reinstating the wrongfully cancelled
insurance policy by respondent insurance company, in an effort to
rectify such error, obliterate whatever liability for damages it may
have to bear, thus absolving it?

Held: Yes. No. Petition granted.

Ratio:

As for any obligation wherein the agent has exceeded his power,
the principal is not bound except when he ratifies it expressly or
tacitly.
Malapit's failure to remit the premiums he received cannot
constitute a defense for private respondent insurance company; no
exoneration from liability could result therefrom. The fact that
private respondent insurance company was itself defrauded due to
the anomalies that took place does not free the same from its
obligation to petitioner Areola. As held in Prudential Bank v. Court
of Appeals
A bank is liable for wrongful acts of its officers done in the interests
of the bank or in the course of dealings of the officers in their
representative capacity but not for acts outside the scope of their
authority. Accordingly, a banking corporation is liable to innocent

77
third persons where the representation is made in the course of its
business by an agent acting within the general scope of his
authority even though the agent is secretly abusing his authority
and attempting to perpetrate a fraud upon his principal or some
other person.
Prudential is liable for damages for the fraudulent acts committed
by Malapit. Reinstating the insurance policy can not obliterate the
injury inflicted. A contract of insurance creates reciprocal
obligations for both insurer and insured. Reciprocal obligations are
those which arise from the same cause and in which each party is
both a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other.
2. Due to the agreement to enter into a contract of insurance where
Prudential promised to extend protection to petitioner-insured
against the risk insured, there was a debtor creditor relation ship
between the two parties. Under Article 1191, the injured party is
given a choice between fulfillment or rescission of the obligation in
case one of the obligors fails to comply with what is incumbent
upon him. However, said article entitles the injured party to
payment of damages, regardless of whether he demands fulfillment
or rescission of the obligation.
The damages would be nominal because the insurance company
took steps to rectify the contract . There was also no actual or
substantial damage inflicted. Nominal damages are "recoverable
where a legal right is technically violated and must be vindicated
against an invasion that has produced no actual present loss of any
kind, or where there has been abreach of contract and no
substantial injury or actual damages whatsoever have been or can
be shown.

78
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA
M. RORALDO, VICTORINA M. RORALDO, VIRGILIO M.
RORALDO, MYRNA M. RORALDO and ROSABELLA M.
RORALDO, petitioners,
vs. COURT
OF
APPEALS
and
FORTUNE
LIFE
AND
GENERAL
INSURANCE
CO.,
INC., respondents.
D E C I S I O N*
BELLOSILLO, J.:
May a fire insurance policy be valid, binding and enforceable upon
mere partial payment of premium?
On 22 January 1987 private respondent Fortune Life and General
Insurance Co., Inc. (FORTUNE) issued Fire Insurance Policy No.
136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their
two-storey residential building located at 5855 Zobel Street, Makati
City, together with all their personal effects therein. The insurance
was for P600,000.00 covering the period from 23 January 1987 to
23 January 1988. On 23 January 1987, of the total premium of
P2,983.50, petitioner Violeta Tibay only paid P600.00 thus leaving a
considerable balance unpaid.
On 8 March 1987 the insured building was completely destroyed by
fire. Two days later or on 10 March 1987 Violeta Tibay paid the
balance of the premium. On the same day, she filed with FORTUNE
a claim on the fire insurance policy. Her claim was accordingly
referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI),
which immediately wrote Violeta requesting her to furnish it with
the necessary documents for the investigation and processing of
her claim. Petitioner forthwith complied. On 28 March 1987 she
signed a non-waiver agreement with GASI to the effect that any
action taken by the companies or their representatives in
investigating the claim made by the claimant for his loss which
occurred at 5855 Zobel Roxas, Makati on March 8, 1987, or in the
investigating or ascertainment of the amount of actual cash value
and loss, shall not waive or invalidate any condition of the policies
of such companies held by said claimant, nor the rights of either or
any of the parties to this agreement, and such action shall not be,
or be claimed to be, an admission of liability on the part of said
companies or any of them.[1]

In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta

for violation of Policy Condition No. 2 and of Sec. 77 of the
Insurance Code. Efforts to settle the case before the Insurance
Commission proved futile. On 3 March 1988 Violeta and the other
petitioners sued FORTUNE for damages in the amount of
P600,000.00 representing the total coverage of the fire insurance
policy plus 12% interest per annum, P 100,000.00 moral damages,
and attorneys fees equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged
FORTUNE liable for the total value of the insured building and
personal properties in the amount of P600,000.00 plus interest at
the legal rate of 6% per annum from the filing of the complaint until
full payment, and attorneys fees equivalent to 20% of the total
amount claimed plus costs of suit.[2]
On 24 March 1995 the Court of Appeals reversed the court a quo by
declaring FORTUNE not to be liable to plaintiff-appellees therein but
ordering defendant-appellant to return to the former the premium
of P2,983.50 plus 12% interest from 10 March 1987 until full
payment.[3]
Hence this petition for review with petitioners contending mainly
that contrary to the conclusion of the appellate court, FORTUNE
remains liable under the subject fire insurance policy inspite of the
failure of petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of
Appeals.
Insurance is a contract whereby one undertakes for a consideration
to indemnify another against loss, damage or liability arising from
an unknown or contingent event.[4] The consideration is the
premium, which must be paid at the time and in the way and
manner specified in the policy, and if not so paid, the policy will
lapse and be forfeited by its own terms.[5]
The pertinent provisions in the Policy on premium read
THIS POLICY OF INSURANCE WITNESSETH, THAT only after payment
to the Company in accordance with Policy Condition No. 2 of the
total premiums by the insuredas stipulated above for the period

79
aforementioned for insuring against Loss or Damage by Fire or
Lightning as herein appears, the Property herein described x x x
2. This policy including any renewal thereof and/or any
endorsement thereon is not in force until the premium has been
fully paid to and duly receipted by the Company in the manner
provided herein.
Any supplementary agreement seeking to amend this condition
prepared by agent, broker or Company official, shall be deemed
invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and
regulations which are or may hereafter be in force provide for the
payment of the stipulated premiums in periodic installments at
fixed percentage, it is hereby declared, agreed and warranted
that this policy shall be deemed effective, valid and binding upon
the Company only when the premiums therefor have actually been
paid in full and duly acknowledged in a receipt signed by any
authorized official or representative/agent of the Company in such
manner as provided herein, (Italics supplied).[6]
Clearly the Policy provides for payment of premium in
full. Accordingly, where the premium has only been partially paid
and the balance paid only after the peril insured against has
occurred, the insurance contract did not take effect and the insured
cannot collect at all on the policy. This is fully supported by Sec. 77
of the Insurance Code which provides
SEC. 77. An insurer is entitled to payment of the premium as soon
as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been
paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies (Italics supplied).
Apparently the crux of the controversy lies in the phrase unless and
until the premium thereof has been paid. This leads us to the
manner of payment envisioned by the law to make the insurance
policy operative and binding. For whatever judicial construction

may be accorded the disputed phrase must ultimately yield to the

clear mandate of the law. The principle that where the law does not
distinguish the court should neither distinguish assumes that the
legislature made no qualification on the use of a general word or
expression. In Escosura v. San Miguel Brewery, inc., [7] the Court
through Mr. Justice Jesus G. Barrera, interpreting the phrase with
pay used in connection with leaves of absence with pay granted to
employees, ruled x x x the legislative practice seems to be that when the intention is
to distinguish between full and partial payment, the modifying term
is used x x x
Citing C. A. No. 647 governing maternity leaves of married women
in government, R. A. No. 679 regulating employment of women and
children, R.A. No. 843 granting vacation and sick leaves to judges of
municipal courts and justices of the peace, and finally, Art. 1695 of
the New Civil Code providing that every househelp shall be allowed
four (4) days vacation each month, which laws simply stated with
pay, the Court concluded that it was undisputed that in all these
laws the phrase with pay used without any qualifying adjective
meant that the employee was entitled to full compensation during
his leave of absence.
Petitioners maintain otherwise. Insisting that FORTUNE is liable on
the policy despite partial payment of the premium due and the
express stipulation thereof to the contrary, petitioners rely heavily
on the 1967 case of Philippine Phoenix and Insurance Co., Inc. v.
Woodworks, Inc.[8] where the Court through Mr. Justice Arsenio P.
Dizon sustained the ruling of the trial court that partial payment of
the premium made the policy effective during the whole period of
the policy. In that case, the insurance company commenced action
against the insured for the unpaid balance on a fire insurance
policy. In its defense the insured claimed that nonpayment of
premium produced the cancellation of the insurance contract.
Ruling otherwise the Court held
It is clear x x x that on April 1, 1960, Fire Insurance Policy No. 9652
was issued by appellee and delivered to appellant, and that on
September 22 of the same year, the latter paid to the former the
sum of P3,000.00 on account of the total premium of P6,051.95 due
thereon. There is, consequently, no doubt at all that, as between

80
the insurer and the insured, there was not only a perfected contract
of insurance but a partially performed one as far as the payment of
the agreed premium was concerned. Thereafter the obligation of
the insurer to pay the insured the amount, for which the policy was
issued in case the conditions therefor had been complied with,
arose and became binding upon it, while the obligation of the
insured to pay the remainder of the total amount of the premium
due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of
the
instant
dispute. For
one,
the
factual
scenario
is
different. In Phoenix it was the insurance company that sued for the
balance of the premium, i.e., it recognized and admitted the
existence of an insurance contract with the insured. In the case
before us, there is, quite unlike inPhoenix, a specific stipulation
that (t)his policy xxx is not in force until the premium has been
fully paid and duly receipted by the Company x x x. Resultantly, it
is correct to say that in Phoenix a contract was perfected upon
partial payment of the premium since the parties had not otherwise
stipulated that prepayment of the premium in full was a condition
precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then
later demanding the remainder of the premium without any other
precondition to its enforceability as in the instant case, the insurer
in effect had shown its intention to continue with the existing
contract of insurance, as in fact it was enforcing its right to collect
premium, or exact specific performance from the insured. This is
not so here. By express agreement of the parties, no vinculum
juris or bond of law was to be established until full payment was
effected prior to the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals [9] the
parties mutually agreed that the premiums could be paid in
installments, which in fact they did for three (3) years, hence, this
Court refused to invalidate the insurance policy. In giving effect to
the policy, the Court quoted with approval the Court of Appeals
The obligation to pay premiums when due is ordinarily an
indivisible obligation to pay the entire premium. Here, the parties x
x x agreed to make the premiums payable in installments, and
there is no pretense that the parties never envisioned to make the

insurance contract binding between them. It was renewed for two

succeeding years, the second and third policies being a
renewal/replacement for the previous one. And the insured never
informed the insurer that it was terminating the policy because the
terms were unacceptable.
While it maybe true that under Section 77 of the Insurance Code,
the parties may not agree to make the insurance contract valid and
binding without payment of premiums, there is nothing in said
section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract
as valid and binding upon payment of the first premium. Otherwise
we would allow the insurer to renege on its liability under the
contract, had a loss incurred (sic) before completion of payment of
the entire premium, despite its voluntary acceptance of partial
payments, a result eschewed by basic considerations of fairness
and equity x x x.
These two (2) cases, Phoenix and Tuscany, adequately demonstrate
the waiver, either express or implied, of prepayment in full by the
insurer: impliedly, by suing for the balance of the premium
as inPhoenix, and expressly, by agreeing to make premiums
payable in installments as in Tuscany. But contrary to the stance
taken by petitioners, there is no waiver express or implied in the
case at bench. Precisely, the insurer and the insured expressly
stipulated that (t)his policy including any renewal thereof and/or
any indorsement thereon is not in force until the premium has been
fully paid to and duly receipted by the Company x x x and that this
policy shall be deemed effective, valid and binding upon the
Company only when the premiums therefor have actually been
paid in full and duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded and
taken in conjunction with Sec. 77 of the Insurance Code the
payment of partial premium by the assured in this particular
instance should not be considered the payment required by the law
and the stipulation of the parties. Rather, it must be taken in the
concept of a deposit to be held in trust by the insurer until such
time that the full amount has been tendered and duly receipted
for. In other words, as expressly agreed upon in the contract, full
payment must be made before the risk occurs for the policy to be
considered effective and in force.

81
Thus, no vinculum juris whereby the insurer bound itself to
indemnify the assured according to law ever resulted from the
fractional payment of premium.The insurance contract itself
expressly provided that the policy would be effective only when the
premium was paid in full. It would have been altogether different
were it not so stipulated. Ergo, petitioners had absolute freedom of
choice whether or not to be insured by FORTUNE under the terms of
its policy and they freely opted to adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the
construction of an insurance contract is the intention of the parties
as expressed in the policy. [10] Courts have no other function but to
enforce the same. The rule that contracts of insurance will be
construed in favor of the insured and most strongly against the
insurer should not be permitted to have the effect of making a plain
agreement ambiguous and then construe it in favor of the insured.
[11]
Verily, it is elemental law that the payment of premium is
requisite to keep the policy of insurance in force. If the premium is
not paid in the manner prescribed in the policy as intended by the
parties the policy is ineffective. Partial payment even when
accepted as a partial payment will not keep the policy alive even
for such fractional part of the year as the part payment bears to the
whole payment.[12]
Applying further the rules of statutory construction, the position
maintained by petitioners becomes even more untenable. The case
of South Sea Surety and Insurance Company, Inc. v. Court of
Appeals,[13] speaks only of two (2) statutory exceptions to the
requirement of payment of the entire premium as a prerequisite to
the validity of the insurance contract. These exceptions are: (a) in
case the insurance coverage relates to life or industrial life (health)
insurance when a grace period applies, and (b) when the insurer
makes a written acknowledgment of the receipt of premium, this
acknowledgment being declared by law to, be then conclusive
evidence of the premium payment.[14]
A maxim of recognized practicality is the rule that the expressed
exception or exemption excludes others. Exceptio firm at regulim in
casibus non exceptis.The express mention of exceptions operates
to exclude other exceptions; conversely, those which are not within
the enumerated exceptions are deemed included in the general
rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is

paid, and the law has not expressly excepted partial payments,
there is no valid and binding contract. Hence, in the absence of
clear waiver of prepayment in full by the insurer, the insured
cannot collect on the proceeds of the policy.
In the desire to safeguard the interest of the assured, itmust not be
ignored that the contract of insurance is primarily a risk-distributing
device, a mechanism by which all members of a group exposed to a
particular risk contribute premiums to an insurer. From these
contributory funds are paid whatever losses occur due to exposure
to the peril insured against. Each party therefore takes a risk: the
insurer, that of being compelled upon the happening of the
contingency to pay the entire sum agreed upon, and the insured,
that of parting with the amount required as premium, without
receiving anything therefor in case the contingency does not
happen. To ensure payment for these losses, the law mandates all
insurance companies to maintain a legal reserve fund in favor of
those claiming under their policies.[15] It should be understood that
the integrity of this fund cannot be secured and maintained if by
judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an
express agreement to the contrary. For what could prevent the
insurance applicant from deliberately or wilfully holding back full
premium payment and wait for the risk insured against to transpire
and then conveniently pass on the balance of the premium to be
deducted from the proceeds of the insurance? Worse, what if the
insured makes an initial payment of only 10%, or even 1%, of the
required premium, and when the risk occurs simply points to the
proceeds from where to source the balance? Can an insurance
company then exist and survive upon the payment of 1%, or even
10%, of the premium stipulated in the policy on the basis that, after
all, the insurer can deduct from the proceeds of the insurance
should the risk insured against occur?
Interpreting the contract of insurance stringently against the
insurer but liberally in favor of the insured despite clearly defined
obligations of the parties to the policy can be carried out to
extremes that there is the danger that we may, so to speak, kill the
goose that lays the golden egg. We are well aware of insurance
companies falling into the despicable habit of collecting premiums
promptly yet resorting to all kinds of excuses to deny or delay
payment of just insurance claims. But, in this case, the law is

82
manifestly on the side of the insurer. For as long as the
current Insurance Code remains unchanged and partial payment of
premiums is not mentioned at all as among the exceptions
provided in Secs. 77 and 78, no policy of insurance can ever
pretend to be efficacious or effective until premium has been fully
paid.

SO ORDERED.

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

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

Facts:

The terms of the insurance policy constitute the measure of the

insurers liability. In the absence of statutory prohibition to the
contrary, insurance companies have the same rights as individuals
to limit their liability and to impose whatever conditions they deem
best upon their obligations not inconsistent with public policy.
[17]
The validity of these limitations is by law passed upon by the
Insurance Commissioner who is empowered to approve all forms of
policies, certificates or contracts of insurance which insurers intend
to issue or deliver. That the policy contract in the case at bench
was approved and allowed issuance simply reaffirms the validity of
such policy, particularly the provision in question.
WHEREFORE, the petition is DENIED and the assailed Decision of
the Court of Appeals dated 24 March 1995 is AFFIRMED.

Tibay v CA G.R. No. 119655. May 24, 1996

J. Bellosillo:

Fortune Life issued a fire insurance Policy to Tibay on her twostorey residential building at Zobel Street, Makati City. The
insurance was for P600,000.00 covering the period from January
23, 1987 to January 23, 1988. On January 23 1987, Tibay only paid
P600.00 of 3,000 peso premium and left a balance.
The insured building was completely destroyed by fire. Tibay then
paid the balance. On the same day, she filed a claim on the policy.
Her claim was accordingly referred to the adjuster, Goodwill, which
immediately wrote Violeta requesting her to furnish it with
the necessary documents for the investigation and processing of
her claim. Petitioner complied, and she signed a non-waiver
agreement.
Fortune denied the claim for violation of the Insurance Code. Tibay
sued for damages in the amount of P600,000.00 representing the
total coverage of the policy.
The trial court ruled for petitioners and made fortune liable for the
total value of the insured building and personal properties. The
Court of Appeals reversed the court by removing liability from
Fortune after returning the premium.
Hence this petition for review.
The petitioner contended that Fortune remained liable under the
subject fire insurance policy in spite of the failure of petitioners to
pay their premium in full.

Issue: May a fire insurance policy be valid, binding and enforceable

upon mere partial payment of premium?

83
Held: No. Petition dismissed.

Ratio:
The pertinent provisions read:
2. This policy including any renewal thereof and/or any
endorsement thereon is not in force until the premium has been
fully paid to and duly receipted by the Company in the manner
provided herein.
This policy shall be deemed effective, valid and binding upon the
Company only when the premiums therefor have actually been paid
in full and duly acknowledged in a receipt signed by any authorized
official of the company
Where the premium has only been partially paid and the balance
paid only after the peril insured against has occurred, the insurance
contract did not take effect and the insured cannot collect at all on
the policy. The Insurance Code which says that no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium has been paid.
What does unless and until the premium thereof has been paid
mean?
Escosura v. San Miguel- the legislative practice was to interpret
with pay in accordance to the intention of distinguish between full
and partial payment, where the modifying term is used.
Petitioners used Philippine Phoenix v. Woodworks, where partial
payment of the premium made the policy effective during the
whole period of the policy.
The SC didnt consider the 1967 Phoenix case as persuasive due to
the different factual scenario.
In Makati Tuscany v CA, the parties mutually agreed that the
premiums could be paid in installments, hence, this Court refused
to invalidate the insurance policy.
Nothing in Article 77 of the Code suggested that the parties may
not agree to allow payment of the premiums in installment, or to

consider the contract as valid and binding upon payment of the first
premium.
Phoenix and Tuscany demonstrated the waiver of prepayment in
full by the insurer. In this case however, there was no waiver. There
was a stipulation that the policy wasnt in force until the premium
has been fully paid and receipted.
There was no juridical tie of indemnification from the fractional
payment of premium. The insurance contract itself expressly
provided that the policy would be effective only when the premium
was paid in full.
Verily, it is elemental law that the payment of premium is requisite
to keep the policy of insurance in force. If the premium is not paid
in the manner prescribed in the policy as intended by the parties
the policy is ineffective. Partial payment even when accepted as a
partial payment will not keep the policy alive.
South Sea v CA stipulated 2 exceptions to the requirement of
payment of the entire premium as a prerequisite to the validity of
the insurance contract.
These are when in case the
insurance coverage relates to life or insurance when a grace period
applies, and when the insurer makes a written acknowledgment of
the receipt of premium to be conclusive evidence of payment.
Hence, in the absence of clear waiver of prepayment in full by the
insurer, the insured cannot collect on the proceeds of the policy.
The terms of the insurance policy constitute the measure of the
insurers liability. In the absence of statutory prohibition to the
contrary, insurance companies have the same rights as individuals
to limit their liability and to impose whatever conditions they deem
best upon their obligations not inconsistent with public policy.
Dissent:
J. Vitug
All the calculations of the company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the
premiums when due, but on the compounding interest upon them.
It is on this basis that they are enabled to offer assurance at the
favorable rates they do.

84
The failure of appellants to fully pay their premium prevented the
contract of insurance from becoming binding an Fortune. This
series of acts is tainted with misrepresentation and violates the
uberrimae fidae principle of insurance contracts.
Tibay had entered into a "Non-Waiver Agreement" with
the adjuster which permitted Fortune to claim non-payment of
premium as a defense.
The law neither requires, nor measures the strength of the
vinculum juris by any specific amount of premium payment.
Payment on the premium, partly or in full, is made by the insured
which the insurer accepts. In fine, it is either that a juridical tie
exists (by such payment) or that it is not extant at all (by an
absence thereof). Once the juridical relation comes into being, the
full efficacy follows. This is a partially performed contract.
The non-payment of the balance shouldnt result in an automatic
cancellation of the contract; otherwise, the right to decide the
effectivity of the contract would become potestative.
Instead, the parties should be able to demand from each other the
performance of whatever obligations they had assumed or, if
desired, sue timely for the rescission of the contract.
In the meanwhile, the contract endures, and an occurrence of the
risk
insured
riggers
the
insurer's
liability.
Also, legal
compensation arises where insurer's liability to the insured would
simply be reduced by the balance of the premium.
It must here be noted that the insured had made, and the insurer
had accepted partial premium payment on the policy weeks before
the risk insured against took place. An insurance is an aleatory
contract effective upon its perfection although the occurrence of a
condition or event may later dictate the demandability of certain
obligations. Fortunes stipulation that insurance shall not "be . . . in
force until the premium has been fully paid," and that it "shall be
deemed effective, valid and binding upon the company only when
the premiums therefor have actually been paid in full and duly
acknowledged," override the efficaciousness of the insurance
contract despite the payment and acceptance.

Article 78 of the Insurance Code An acknowledgment in a policy or

contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding
until the premium is actually paid
Even
if
a
portion
was
paid
in
the
premium,
the
insurance coverage becomes effective and binding, any stipulation
in the policy to the contrary notwithstanding.

85
UCPB
GENERAL
INSURANCE
CO.,
INC., petitioner,
vs. MASAGANA TELAMART, INC., respondent.

occurred on June 13, 1992, before respondent's tender of premium

payment.

DECISION

On July 21, 1992, respondent filed with the Regional Trial Court,
Branch 58, Makati City, a civil complaint against petitioner for
recovery of P18,645,000.00, representing the face value of the
policies covering respondent's insured property razed by fire, and
for attorney's fees.[2]

PARDO, J.:
The case is an appeal via certiorari seeking to set aside the
decision of the Court of Appeals,[1] affirming with modification that
of the Regional Trial Court, Branch 58, Makati, ordering petitioner to
pay respondent the sum of P18,645,000.00, as the proceeds of the
insurance coverage of respondent's property razed by fire; 25% of
the total amount due as attorney's fees and P25,000.00 as litigation
expenses, and costs.
The facts are undisputed and may be related as follows:

On October 23, 1992, after its motion to dismiss had been denied,
petitioner filed an answer to the complaint. It alleged that the
complaint "fails to state a cause of action"; that petitioner was not
liable to respondent for insurance proceeds under the policies
because at the time of the loss of respondent's property due to
fire, the policies had long expired and were not renewed.[3]

On April 15, 1991, petitioner issued five (5) insurance policies

covering respondent's various property described therein against
fire, for the period from May 22, 1991 to May 22, 1992.

After due trial, on March 10, 1993, the Regional Trial Court, Branch
58, Makati, rendered decision, the dispositive portion of which
reads:

In March 1992, petitioner evaluated the policies and decided not to

renew them upon expiration of their terms on May 22,
1992. Petitioner advised respondent's broker, Zuellig Insurance
Brokers, Inc. of its intention not to renew the policies.

"WHEREFORE, premises considered, judgment is hereby rendered

in favor of the plaintiff and against the defendant, as follows:

On April 6, 1992, petitioner gave written notice to respondent of

the non-renewal of the policies at the address stated in the policies.
On June 13, 1992, fire razed respondent's property covered by
three of the insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its
head office five (5) manager's checks in the total amount of
P225,753.95, representing premium for the renewal of the policies
from May 22, 1992 to May 22, 1993. No notice of loss was filed by
respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim
for indemnification of the insured property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent
the five (5) manager's checks that it tendered, and at the same
time rejected respondent's claim for the reasons (a) that the
policies had expired and were not renewed, and (b) that the fire

"(1) Authorizing and allowing the plaintiff to consign/deposit with

this Court the sum of P225,753.95 (refused by the defendant) as
full payment of the corresponding premiums for the replacementrenewal policies for Exhibits A, B, C, D and E;
"(2) Declaring plaintiff to have fully complied with its obligation to
pay the premium thereby rendering the replacement-renewal policy
of Exhibits A, B, C, D and E effective and binding for the duration
May 22, 1992 until May 22, 1993; and, ordering defendant to
deliver forthwith to plaintiff the said replacement-renewal policies;
"(3) Declaring Exhibits A & B, in force from August 22, 1991 up to
August 23, 1992 and August 9, 1991 to August 9, 1992,
respectively; and
"(4) Ordering the defendant to pay plaintiff the sums of: (a)
P18,645,000.00 representing the latter's claim for indemnity under
Exhibits A, B & C and/or its replacement-renewal policies; (b) 25%
of the total amount due as and for attorney's fees; (c) P25,000.00
as necessary litigation expenses; and, (d) the costs of suit.

86
"All other claims and counterclaims asserted by the parties are
denied and/or dismissed, including plaintiff's claim for interests.
"SO ORDERED.
"Makati, Metro-Manila, March 10, 1993.
"ZOSIMO Z. ANGELES
Judge.[4]
In due time, petitioner appealed to the Court of Appeals. [5]
On September 7, 1998, the Court of Appeals promulgated its
decision[6] affirming that of the Regional Trial Court with the
modification that item No. 3 of the dispositive portion was deleted,
and the award of attorney's fees was reduced to 10% of the total
amount due.[7]
The Court of Appeals held that following previous practise,
respondent was allowed a sixty (60) to ninety (90) day credit term
for the renewal of its policies, and that the acceptance of the late
premium payment suggested an understanding that payment could
be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent
to comment on the petition, not to file a motion to dismiss within
ten (10) days from notice.[8] On April 22, 1999, respondent filed
its comment.[9]
Respondent submits that the Court of Appeals correctly ruled that
no timely notice of non-renewal was sent. The notice of nonrenewal sent to broker Zuellig which claimed that it verbally
notified the insurance agency but not respondent itself did not
suffice. Respondent submits further that the Court of Appeals did
not err in finding that there existed a sixty (60) to ninety (90) days
credit agreement between UCPB and Masagana, and that, finally,
the Supreme Court could not review factual findings of the lower
court affirmed by the Court of Appeals.[10]
We give due course to the appeal.

The basic issue raised is whether the fire insurance policies issued
by petitioner to the respondent covering the period May 22, 1991
to May 22, 1992, had expired on the latter date or had been
extended or renewed by an implied credit arrangement though
actual payment of premium was tendered on a later date after the
occurrence of the risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance
policy, other than life, issued originally or on renewal, is not valid
and binding until actual payment of the premium. Any agreement
to the contrary is void.[11] The parties may not agree expressly or
impliedly on the extension of credit or time to pay the premium and
consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, [12] cited by
the Court of Appeals, is not applicable. In that case, payment of the
premium was in fact actually made on December 24, 1981, and the
fire occurred on January 18, 1982. Here, the payment of the
premium for renewal of the policies was tendered on July 13, 1992,
a monthafter the fire occurred on June 13, 1992. The assured did
not even give the insurer a notice of loss within a reasonable time
after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the
decision of the Court of Appeals in CA-G.R. CV No. 42321. In lieu
thereof, the Court renders judgment dismissing respondent's
complaint and petitioner's counterclaims thereto filed with the
Regional Trial Court, Branch 58, Makati City, in Civil Case No. 922023.Without costs.
SO ORDERED.

87
[G.R. No. 137172. April 4, 2001]
UCPB
GENERAL
INSURANCE
CO.
INC., petitioner,
vs. MASAGANA TELAMART, INC., respondent.
RESOLUTION
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and set
aside the assailed decision[1] of the Court of Appeals, which affirmed
with modification the judgment of the trial court (a) allowing
Respondent to consign the sum of P225,753.95 as full payment of
the premiums for the renewal of the five insurance policies on
Respondents properties; (b) declaring the replacement-renewal
policies effective and binding from 22 May 1992 until 22 May 1993;
and (c) ordering Petitioner to pay RespondentP18,645,000.00 as
indemnity for the burned properties covered by the renewalreplacement policies. The modification consisted in the (1) deletion
of the trial courts declaration that three of the policies were in force
from August 1991 to August 1992; and (2) reduction of the award
of the attorneys fees from 25% to 10% of the total amount due the
Respondent.
The material operative facts upon which the appealed judgment
was based are summarized by the Court of Appeals in its assailed
decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein
Petitioner] five (5) insurance policies (Exhibits "A" to "E", Record,
pp. 158-175) on its properties [in Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from
4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On June 13,
1992, plaintiff's properties located at 2410-2432 and 2442-2450
Taft Avenue, Pasay City were razed by fire. On July 13, 1992,
plaintiff tendered, and defendant accepted, five (5) Equitable Bank
Manager's Checks in the total amount of P225,753.45 as renewal
premium payments for which Official Receipt Direct Premium No.
62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On
July 14, 1992, Masagana made its formal demand for
indemnification for the burned insured properties. On the same
day, defendant returned the five (5) manager's checks stating in its

letter (Exhibit "R"/"8", Record, p. 192) that it was rejecting

Masagana's claim on the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed
for another term;
b) Defendant had put plaintiff and its alleged broker on notice of
non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire
that took place last June 13, 1992, or before tender of premium
payment."
(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that
Respondents tender of payment of the premiums on 13 July 1992
did not result in the renewal of the policies, having been made
beyond the effective date of renewal as provided under Policy
Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days
in advance of the end of the policy period mails or delivers to the
assured at the address shown in the policy notice of its intention
not to renew the policy or to condition its renewal upon reduction of
limits or elimination of coverages, the assured shall be entitled to
renew the policy upon payment of the premium due on the
effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient
proof exists that Respondent, which had procured insurance
coverage from Petitioner for a number of years, had been granted a
60 to 90-day credit term for the renewal of the policies. Such a
practice had existed up to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22,
1991 was issued on May 7, 1990 but premium was paid more than
90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T"
and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk
Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB
on May 4, 1990 but premium was collected by UCPB only on July
13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs.

88
"V" and "V-1"). And so were as other policies: Fire Insurance Policy
No. 34657 covering risks from May 22, 1990 to May 22, 1991 was
issued on May 7, 1990 but premium therefor was paid only on July
19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire
Insurance Policy No. 34661 covering risks from May 22, 1990 to
May 22, 1991 was issued on May 3, 1990 but premium was paid
only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X1"). Fire Insurance Policy No. 34688 for insurance coverage from
May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium was paid only on July 19, 1990 under O.R. No. 46585
(Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover
insurance risks from May 22, 1989 to May 22, 1990 was issued on
May 22, 1989 but premium therefor was collected only on July 25,
1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire
Insurance Policy No. HO/F-26408 covering risks from January 12,
1989 to January 12, 1990 was issued to Intratrade Phils.
(Masagana's sister company) dated December 10, 1988 but
premium therefor was paid only on February 15, 1989 under O.R.
No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128
was issued on May 22, 1989 but premium was paid only on July 25,
1989 under O.R. No. 40800 for insurance coverage from May 22,
1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy
No. 29127 was issued on May 22, 1989 but premium was paid only
on July 17, 1989 under O.R. No. 40682 for insurance risk coverage
from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire
Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but
premium was paid only on February 13, 1990 under O.R. No. 39233
for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs.
"EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on
November 22, 1988 but premium therefor was collected only on
March 15, 1989 under O.R. NO. 38573 for insurance risks coverage
from December 15, 1988 to December 15, 1989 (Exhs. "FF" and
"FF-1").
Moreover, according to the Court of Appeals the following
circumstances constitute preponderant proof that no timely notice
of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11,
Record, p. 350) from Ultramar Reinsurance Brokers that plaintiffs
reinsurance facility had been confirmed up to 67.5% only on April
15, 1992 as indicated on Exhibit 11. Apparently, the notice of non-

renewal (Exhibit 7, Record, p. 320) was sent not earlier than said
date, or within 45 days from the expiry dates of the policies as
provided under Policy Condition No. 26; (2) Defendant insurer
unconditionally accepted, and issued an official receipt for, the
premium payment on July 1[3], 1992 which indicates defendant's
willingness to assume the risk despite only a 67.5% reinsurance
cover[age]; and (3) Defendant insurer appointed Esteban Adjusters
and Valuers to investigate plaintiffs claim as shown by the letter
dated July 17, 1992 (Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be
whether the fire insurance policies issued by petitioner to the
respondent covering the period from May 22, 1991 to May 22, 1992
had been extended or renewed by an implied credit arrangement
though actual payment of premium was tendered on a later date
and after the occurrence of the (fire) risk insured against. We
resolved this issue in the negative in view of Section 77 of the
Insurance Code and our decisions in Valenzuela v. Court of
Appeals[2]; South Sea Surety and Insurance Co., Inc. v. Court of
Appeals[3]; and Tibay v. Court of Appeals.[4] Accordingly, we
reversed and set aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the
adverse verdict. It alleges in the motion that we had made in the
decision our own findings of facts, which are not in accord with
those of the trial court and the Court of Appeals. The courts below
correctly found that no notice of non-renewal was made within 45
days before 22 May 1992, or before the expiration date of the fire
insurance policies. Thus, the policies in question were renewed by
operation of law and were effective and valid on 30 June 1992 when
the fire occurred, since the premiums were paid within the 60- to
90-day credit term.
Respondent likewise disagrees with our ruling that parties may
neither agree expressly or impliedly on the extension of credit or
time to pay the premium nor consider a policy binding before actual
payment. It urges the Court to take judicial notice of the fact that
despite the express provision of Section 77 of the Insurance Code,
extension of credit terms in premium payment has been the
prevalent practice in the insurance industry. Most insurance
companies, including Petitioner, extend credit terms because
Section 77 of the Insurance Code is not a prohibitive injunction but

89
is merely designed for the protection of the parties to an insurance
contract. The Code itself, in Section 78, authorizes the validity of a
policy notwithstanding non-payment of premiums.
Respondent also asserts that the principle of estoppel applies to
Petitioner. Despite its awareness of Section 77 Petitioner persuaded
and induced Respondent to believe that payment of premium on
the 60- to 90-day credit term was perfectly alright; in fact it
accepted payments within 60 to 90 days after the due dates. By
extending credit and habitually accepting payments 60 to 90 days
from the effective dates of the policies, it has implicitly agreed to
modify the tenor of the insurance policy and in effect waived the
provision therein that it would pay only for the loss or damage in
case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for
reconsideration. It argues that both the trial court and the Court of
Appeals overlooked the fact that on 6 April 1992 Petitioner sent by
ordinary mail to Respondent a notice of non-renewal and sent by
personal delivery a copy thereof to Respondents broker,
Zuellig. Both courts likewise ignored the fact that Respondent was
fully aware of the notice of non-renewal. A reading of Section 66 of
the Insurance Code readily shows that in order for an insured to be
entitled to a renewal of a non-life policy, payment of the premium
due on the effective date of renewal should first be
made. Respondents argument that Section 77 is not a prohibitive
provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the
issues raised in the motion for reconsideration and the pleadings
filed thereafter by the parties, we resolved to grant the motion for
reconsideration. The following facts, as found by the trial court and
the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the
Respondent, and these policies were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit
term within which to pay the premiums on the renewed policies.

3. There was no valid notice of non-renewal of the policies in

question, as there is no proof at all that the notice sent by ordinary
mail was received by Respondent, and the copy thereof allegedly
sent to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate
amount of P225,753.95 were paid by Respondent within the 60- to
90-day credit term and were duly accepted and received by
Petitioners cashier.
The instant case has to rise or fall on the core issue of whether
Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be
strictly applied to Petitioners advantage despite its practice of
granting a 60- to 90-day credit term for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon
as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy whenever the
grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The
Insurance Code) promulgated on 18 December 1974. In turn, this
Section has its source in Section 72 of Act No. 2427 otherwise
known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:
SEC. 72. An insurer is entitled to payment of premium as soon as
the thing insured is exposed to the peril insured against, unless
there is clear agreement to grant the insured credit extension of
the premium due. No policy issued by an insurance company is
valid and binding unless and until the premium thereof has been
paid. (Underscoring supplied)
It can be seen at once that Section 77 does not restate the portion
of Section 72 expressly permitting an agreement to extend the
period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.

90
The first exception is provided by Section 77 itself, and that is, in
case of a life or industrial life policy whenever the grace period
provision applies.
The second is that covered by Section 78 of the Insurance Code,
which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance
of the receipt of premium is conclusive evidence of its payment, so
far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until premium is actually paid.
A
third
exception
was
laid
down
in Makati
Tuscany
Condominium Corporation vs. Court of Appeals,[5] wherein we ruled
that Section 77 may not apply if the parties have agreed to the
payment in installments of the premium and partial payment has
been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums
were paid on installments. The records clearly show that the
petitioners and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered
payment of the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In those three
years, the insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurers intention to
honor the policies it issued to petitioner. Certainly, basic principles
of equity and fairness would not allow the insurer to continue
collecting and accepting the premiums, although paid on
installments, and later deny liability on the lame excuse that the
premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the
following pronouncement of the Court of Appeals in its Resolution
denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is
strictly required as a condition to the validity of the contract, We
are not prepared to rule that the request to make installment
payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and
acceptance of the initial premium or first installment. Section 78 of
the Insurance Code in effect allows waiver by the insurer of the

condition of prepayment by making an acknowledgment in the

insurance policy of receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the
parties from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to morals,
good customs, public order or public policy (De Leon, The Insurance
Code, p. 175). So is an understanding to allow insured to pay
premiums in installments not so prescribed. At the very least, both
parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the
Court of Appeals, Tuscany has provided a fourth exception to
Section 77, namely, that the insurer may grant credit extension for
the payment of the premium. This simply means that if the insurer
has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the premium
is paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties
in an insurance contract to provide a credit term within which to
pay the premiums. That agreement is not against the law, morals,
good customs, public order or public policy. The agreement binds
the parties. Article 1306 of the Civil Code provides:
ART. 1306. The contracting parties may establish such stipulations
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public
order, or public policy.
Finally in the instant case, it would be unjust and inequitable if
recovery on the policy would not be permitted against Petitioner,
which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section
77. Estoppel bars it from taking refuge under said Section, since
Respondent relied in good faith on such practice. Estoppel then is
the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999
is RECONSIDERED and SET ASIDE, and a new one is hereby

91
entered DENYING the instant petition for failure of Petitioner to
sufficiently show that a reversible error was committed by the Court
of Appeals in its challenged decision, which is hereby AFFIRMED in
toto.
No pronouncement as to cost.
UCPB v Masagana G.R. No. 137172. April 4, 2001
C.J. Davide

Facts:
In our decision of 15 June 1999 in this case, we reversed and set
aside the assailed decision[1] of the Court of Appeals, which
affirmed with modification the judgment of the trial court (a)
allowing Respondent to consign the sum of P225,753.95 as full
payment of the premiums for the renewal of the five insurance
policies on Respondents properties; (b) declaring the replacementrenewal policies effective and binding from 22 May 1992 until 22
May 1993; and (c) ordering Petitioner to pay Respondent
P18,645,000.00 as indemnity for the burned properties covered by
the renewal-replacement policies. The modification consisted in
the (1) deletion of the trial courts declaration that three of the
policies were in force from August 1991 to August 1992; and
(2) reduction of the award of the attorneys fees from 25% to 10%
of the total amount due the Respondent.
Masagana obtained from UCPB five (5) insurance policies on its
Manila properties.
The policies were effective from May 22, 1991 to May 22, 1992. On
June 13, 1992, Masaganas properties were razed by fire. On July
13, 1992, plaintiff tendered five checks for P225,753.45
as renewal premium payments. A receipt was issued. On July 14,
1992, Masagana made its formal demand for indemnification for
the burned insured properties. UCPB then rejected Masaganas
claims under the argument that the fire took place before the
tender of payment.
Hence Masagana filed this case.

The Court of Appeals disagreed with UCPBs argument that

Masaganas tender of payment of the premiums on 13 July 1992
did not result in the renewal of the policies, having been made
beyond the effective date of renewal as provided under Policy
Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days
in advance of the end of the policy period mails or delivers to the
assured at the address shown in the policy notice of its intention
not to renew the policy or to condition itsrenewal upon reduction of
limits or elimination of coverages, the assured shall be entitled to
renew the policy upon payment of the premium due on the
effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient
proof exists that Masagana, which had procured insurance
coverage from UCPB for a number of years, had been granted a 60
to 90-day credit term for the renewal of the policies. Such a
practice had existed up to the time the claims were filed. Most of
the premiums have been paid for more than 60 days after
the issuance. Also, no timely notice of non-renewal was made by
UCPB.
The Supreme Court ruled against UCPB in the first case on the issue
of whether the fire insurance policies issued by petitioner to the
respondent covering the period from May 22, 1991 to May 22, 1992
had been extended or renewed by an implied credit arrangement
though actual payment of premium was tendered on a later date
and after the occurrence of the risk insured against.
UCPB filed a motion for reconsideration.
The Supreme Court, upon observing the facts, affirmed that there
was no valid notice of non-renewal of the policies in question, as
there is no proof at all that the notice sent by ordinary mail was
received by Masagana. Also, the premiums were paid within
the grace period.

Issue: Whether Section 77 of the Insurance Code of 1978 must be

strictly applied to Petitioners advantage despite its practice of
granting a 60- to 90-day credit term for the payment of premiums.

92

Held: No. Petition denied.

Ratio:
Section 77 of the Insurance Code provides: No policy or contract of
insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid
An exception to this section is Section 78 which provides: Any
acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make
the policy binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid.
Makati Tuscany v Court of Appeals- Section 77 may not apply if the
parties have agreed to the payment in installments of the premium
and partial payment has been made at the time of loss.
Section 78 allows waiver by the insurer of the condition of
prepayment and makes the policy binding despite the fact that
premium is actually unpaid. Section 77 does not expressly prohibit
an agreement granting credit extension. At the very least, both
parties should be deemed in estoppel to question the arrangement
they have voluntarily accepted.
The Tuscany case has provided another exception to Section 77
that the insurer may grant credit extension for the payment of the
premium. If the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration
of the term, recovery on the policy should be allowed even though
the premium is paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties
in an insurance contract to provide a credit term within which to
pay the premiums. That agreement is not against the law, morals,
good customs, public order or public policy. The agreement binds
the parties.
It would be unjust if recovery on the policy would not be permitted
against Petitioner, which had consistently granted a 60- to 90-day
credit term for the payment of premiums. Estoppel bars it from

taking refuge since Masagana relied in good faith on such practice.

Estoppel then is the fifth exception.

93
[G.R. No. 130421. June 28, 1999]
AMERICAN
HOME
ASSURANCE
vs. ANTONIO CHUA, respondent.

COMPANY, petitioner,

DECISION
DAVIDE, JR. C.J.:
In this petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure, petitioner seeks the reversal of the
decision[1] of the Court of Appeals in CA-G.R. CV No. 40751, which
affirmed in toto the decision of the Regional Trial Court, Makati City,
Branch 150 (hereafter trial court), in Civil Case No. 91-1009.
Petitioner is a domestic corporation engaged in the insurance
business. Sometime in 1990, respondent obtained from petitioner a
fire insurance covering the stock-in-trade of his business, Moonlight
Enterprises, located at Valencia, Bukidnon. The insurance was due
to expire on 25 March 1990.
On 5 April 1990 respondent issued PCIBank Check No. 352123 in
the amount of P2,983.50 to petitioners agent, James Uy, as
payment for the renewal of the policy. In turn, the latter delivered
Renewal Certificate No. 00099047 to respondent. The check was
drawn against a Manila bank and deposited in petitioners bank
account in Cagayan de Oro City. The corresponding official receipt
was issued on 10 April. Subsequently, a new insurance policy,
Policy No. 206-4234498-7, was issued, whereby petitioner
undertook to indemnify respondent for any damage or loss arising
from fire up to P200,000 for the period 25 March 1990 to 25 March
1991.
On 6 April 1990 Moonlight Enterprises was completely razed by
fire. Total
loss
was
estimated
between P4,000,000
and P5,000,000. Respondent filed an insurance claim with
petitioner and four other co-insurers, namely, Pioneer Insurance
and Surety Corporation, Prudential Guarantee and Assurance, Inc.,
Filipino Merchants Insurance Co. and Domestic Insurance Company
of the Philippines. Petitioner refused to honor the claim
notwithstanding several demands by respondent, thus, the latter
filed an action against petitioner before the trial court.

In its defense, petitioner claimed there was no existing insurance

contract when the fire occurred since respondent did not pay the
premium. It also alleged that even assuming there was a contract,
respondent
violated
several
conditions
of
the
policy,
particularly: (1) his submission of fraudulent income tax return and
financial statements; (2) his failure to establish the actual loss,
which petitioner assessed at P70,000; and (3) his failure to notify to
petitioner of any insurance already effected to cover the insured
goods. These violations, petitioner insisted, justified the denial of
the claim.
The trial court ruled in favor of respondent. It found that respondent
paid by way of check a day before the fire occurred. The check,
which was deposited in petitioners bank account, was even
acknowledged in the renewal certificate issued by petitioners
agent. It declared that the alleged fraudulent documents were
limited to the disparity between the official receipts issued by the
Bureau of Internal Revenue (BIR) and the income tax returns for the
years 1987 to 1989. All the other documents were found to be
genuine. Nonetheless, it gave credence to the BIR certification that
respondent paid the corresponding taxes due for the questioned
years.
As to respondents failure to notify petitioner of the other insurance
contracts covering the same goods, the trial court held that
petitioner failed to show that such omission was intentional and
fraudulent. Finally, it noted that petitioners investigation of
respondent's claim was done in collaboration with the
representatives of other insurance companies who found no
irregularity therein. In fact, Pioneer Insurance and Surety
Corporation and Prudential Guarantee and Assurance, Inc. promptly
paid the claims filed by respondent.
The trial court decreed as follows:
WHEREFORE, judgment is hereby rendered in favor of [respondent]
and against the [petitioner] ordering the latter to pay the former
the following:
1. P200,000.00, representing the amount of the insurance, plus
legal interest from the date of filing of this case;
2. P200,000.00 as moral damages;

94
3. P200,000.00 as loss of profit;

6. Cost of suit.

void. It underscores the trial courts neglect in considering the

Commission on Audits certification that the BIR receipts submitted
by respondent were, in effect, fake since they were issued to other
persons.Finally, petitioner argues that the award of damages was
excessive and unreasonable considering that it did not act in bad
faith in denying respondents claim.

On appeal, the assailed decision was affirmed in toto by the Court

of Appeals. The Court of Appeals found that respondents claim was
substantially proved and petitioners unjustified refusal to pay the
claim entitled respondent to the award of damages.

Respondent counters that the issue of non-payment of premium is

a question of fact which can no longer be assailed. The trial courts
finding on the matter, which was affirmed by the Court of Appeals,
is conclusive.

Its motion for reconsideration of the judgment having been denied,

petitioner filed the petition in this case. Petitioner reiterates its
stand that there was no existing insurance contract between the
parties. It invokes Section 77 of the Insurance Code, which
provides:

Respondent refutes the reason for petitioners denial of his claim. As

found by the trial court, petitioners loss adjuster admitted prior
knowledge of respondents existing insurance contracts with the
other insurance companies. Nonetheless, the loss adjuster
recommended the denial of the claim, not because of the said
contracts, but because he was suspicious of the authenticity of
certain documents which respondent submitted in filing his claim.

4. P100,000.00 as exemplary damages;

5. P50,000.00 as attorneys fees; and

An insurer is entitled to payment of the premium as soon as the

thing
insured
is
exposed
to
the
peril
insured
against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid,
except in the case of life or an industrial life policy whenever the
grace period provision applies.
and cites the case of Arce v. Capital Insurance & Surety Co., Inc.,
[2]
where we ruled that unless and until the premium is paid there is
no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990
the insurance contract was not yet subsisting pursuant to Article
1249[3] of the Civil Code, which recognizes that a check can only
effect payment once it has been cashed. Although respondent
testified that he gave the check on 5 April to a certain James Uy,
the check, drawn against a Manila bank and deposited in a
Cagayan de Oro City bank, could not have been cleared by 6 April,
the date of the fire. In fact, the official receipt issued for
respondents check payment was dated 10 April 1990, four days
after the fire occurred.
Citing jurisprudence,[4] petitioner also contends that respondents
non-disclosure of the other insurance contracts rendered the policy

To bolster his argument, respondent cites Section 66 of the

Insurance Code,[5] which requires the insurer to give a notice to the
insured of its intention to terminate the policy forty-five days before
the policy period ends. In the instant case, petitioner opted not to
terminate the policy. Instead, it renewed the policy by sending its
agent to respondent, who was issued a renewal certificate upon
delivery of his check payment for the renewal of premium. At this
precise moment the contract of insurance was executed and
already in effect. Respondent also claims that it is standard
operating procedure in the provinces to pay insurance premiums by
check when collected by insurance agents.
On the issue of damages, respondent maintains that the amounts
awarded were reasonable. He cites numerous trips he had to make
from Cagayan de Oro City to Manila to follow up his rightful
claim. He imputes bad faith on petitioner who made enforcement of
his claim difficult in the hope that he would eventually abandon
it. He further emphasizes that the adjusters of the other insurance
companies recommended payment of his claim, and they complied
therewith.
In its reply, petitioner alleges that the petition questions the
conclusions of law made by the trial court and the Court of Appeals.

95
Petitioner invokes respondents admission that his check for the
renewal of the policy was received only on 10 April 1990, taking
into account that the policy period was 25 March 1990 to 25 March
1991. The official receipt was dated 10 April 1990. Anent
respondents testimony that the check was given to petitioners
agent, a certain James Uy, the latter points out that even
respondent was not sure if Uy was indeed its agent. It faults
respondent for not producing Uy as his witness and not taking any
receipt from him upon presentment of the check. Even assuming
that the check was received a day before the occurrence of the fire,
there still could not have been any payment until the check was
cleared.
Moreover, petitioner denies respondents allegation that it intended
a renewal of the contract for the renewal certificate clearly
specified the following conditions:
Subject to the payment by the assured of the amount due prior to
renewal date, the policy shall be renewed for the period stated.
Any payment tendered other than in cash is received subject to
actual cash collection.
Subject to no loss prior to premium payment. If there be any loss,
and is not covered [sic].
Petitioner asserts that an insurance contract can only be enforced
upon the payment of the premium, which should have been made
before the renewal period.
Finally, in assailing the excessive damages awarded to respondent
petitioner stresses that the policy in issue was limited to a liability
of P200,000; but the trial court granted the following monetary
awards: P200,000 as actual damages; P200,000 as moral
damages; P100,000 as exemplary damages; and P50,000 as
attorneys fees.

The following issues must be resolved: first, whether there was a

valid payment of premium, considering that respondents check was
cashed after the occurrence of the fire; second, whether
respondent violated the policy by his submission of fraudulent
documents and non-disclosure of the other existing insurance
contracts; and finally, whether respondent is entitled to the award
of damages.
The general rule in insurance laws is that unless the premium is
paid the insurance policy is not valid and binding. The only
exceptions are life and industrial life insurance. [6] Whether payment
was indeed made is a question of fact which is best determined by
the trial court. The trial court found, as affirmed by the Court of
Appeals, that there was a valid check payment by respondent to
petitioner. Well-settled is the rule that the factual findings and
conclusions of the trial court and the Court of Appeals are entitled
to great weight and respect, and will not be disturbed on appeal in
the absence of any clear showing that the trial court overlooked
certain facts or circumstances which would substantially affect the
disposition of the case.[7] We see no reason to depart from this
ruling.
According to the trial court the renewal certificate issued to
respondent contained the acknowledgment that premium had been
paid. It is not disputed that the check drawn by respondent in favor
of petitioner and delivered to its agent was honored when
presented and petitioner forthwith issued its official receipt to
respondent on 10 April 1990.Section 306 of the Insurance Code
provides that any insurance company which delivers a policy or
contract of insurance to an insurance agent or insurance broker
shall be deemed to have authorized such agent or broker to receive
on its behalf payment of any premium which is due on such policy
or contract of insurance at the time of its issuance or delivery or
which becomes due thereon.[8] In the instant case, the best
evidence of such authority is the fact that petitioner accepted the
check and issued the official receipt for the payment. It is, as well,
bound by its agents acknowledgment of receipt of payment.
Section 78 of the Insurance Code explicitly provides:
An acknowledgment in a policy or contract of insurance of the
receipt of premium is conclusive evidence of its payment, so far as

96
to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid.
This Section establishes a legal fiction of payment and should be
interpreted as an exception to Section 77.[9]
Is respondent guilty of the policy violations imputed against
him? We are not convinced by petitioners arguments. The
submission of the alleged fraudulent documents pertained to
respondents income tax returns for 1987 to 1989. Respondent,
however, presented a BIR certification that he had paid the proper
taxes for the said years. The trial court and the Court of Appeals
gave credence to the certification and it being a question of fact,
we hold that said finding is conclusive.
Ordinarily, where the insurance policy specifies as a condition the
disclosure of existing co-insurers, non-disclosure thereof is a
violation that entitles the insurer to avoid the policy. This condition
is common in fire insurance policies and is known as the other
insurance clause. The purpose for the inclusion of this clause is to
prevent an increase in the moral hazard. We have ruled on its
validity and the case of Geagonia v. Court of Appeals[10] clearly
illustrates such principle. However, we see an exception in the
instant case.
Citing Section 29[11] of the Insurance Code, the trial court reasoned
that respondents failure to disclose was not intentional and
fraudulent. The application of Section 29 is misplaced. Section 29
concerns concealment which is intentional. The relevant provision
is Section 75, which provides that:
A policy may declare that a violation of specified provisions thereof
shall avoid it, otherwise the breach of an immaterial provision does
not avoid the policy.
To constitute a violation the other existing insurance contracts must
be upon the same subject matter and with the same interest and
risk.[12] Indeed, respondent acquired several co-insurers and he
failed to disclose this information to petitioner. Nonetheless,
petitioner is estopped from invoking this argument. The trial court
cited the testimony of petitioners loss adjuster who admitted
previous knowledge of the co-insurers. Thus,

COURT:
Q The matter of additional insurance of other companies, was that
ever discussed in your investigation?
A Yes, sir.
Q In other words, from the start, you were aware the insured was
insured with other companies like Pioneer and so on?
A Yes, Your Honor.
Q But in your report you never recommended the denial of the
claim simply because of the non-disclosure of other insurance? [sic]
A Yes, Your Honor.
Q In other words, to be emphatic about this, the only reason you
recommended the denial of the claim, you found three documents
to be spurious. That is your only basis?
A Yes, Your Honor.[13] [Emphasis supplied]
Indubitably, it cannot be said that petitioner was deceived by
respondent by the latters non-disclosure of the other insurance
contracts when petitioner actually had prior knowledge
thereof. Petitioners loss adjuster had known all along of the other
existing insurance contracts, yet, he did not use that as basis for
his recommendation of denial.The loss adjuster, being an employee
of petitioner, is deemed a representative of the latter whose
awareness of the other insurance contracts binds petitioner. We,
therefore, hold that there was no violation of the other insurance
clause by respondent.
Petitioner is liable to pay its share of the loss. The trial court and
the Court of Appeals were correct in awarding P200,000 for
this. There is, however, merit in petitioners grievance against the
damages and attorneys fees awarded.
There is no legal and factual basis for the award of P200,000 for
loss of profit. It cannot be denied that the fire totally gutted
respondents business; thus, respondent no longer had any business
to operate. His loss of profit cannot be shouldered by petitioner
whose obligation is limited to the object of insurance, which was
the stock-in-trade, and not the expected loss in income or profit.

97
Neither can we approve the award of moral and exemplary
damages. At the core of this case is petitioners alleged breach of its
obligation under a contract of insurance.Under Article 2220 of the
Civil Code, moral damages may be awarded in breaches of
contracts where the defendant acted fraudulently or in bad
faith. We find no such fraud or bad faith. It must again be stressed
that moral damages are emphatically not intended to enrich a
plaintiff at the expense of the defendant. Such damages are
awarded only to enable the injured party to obtain means, diversion
or amusements that will serve to obviate the moral suffering he has
undergone, by reason of the defendants culpable action.Its award is
aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and it must be proportional to the
suffering inflicted.[14] When awarded, moral damages must not be
palpably and scandalously excessive as to indicate that it was the
result of passion, prejudice or corruption on the part of the trial
court judge.[15]

damages, and b) reducing

from P50,000 toP10,000.

The law[16] is likewise clear that in contracts and quasi-contracts the

court may award exemplary damages if the defendant acted in a
wanton,
fraudulent,
reckless,
oppressive,
or
malevolent manner. Nothing thereof can be attributed to petitioner
which merely tried to resist what it claimed to be an unfounded
claim for enforcement of the fire insurance policy.

On April 5, 1990, Chua issued a check for P2,983.50 to American

Homes agent, James Uy, as payment for the renewal of the policy.
The official receipt was issued on April 10. In turn, the latter
a renewal certificate. A new insurance policy was issued where
petitioner undertook to indemnify respondent for any damage or
loss arising from fire up to P200,000 March 20, 1990 to March 25,
1991.

As to attorneys fees, the general rule is that attorneys fees cannot

be recovered as part of damages because of the policy that no
premium should be placed on the right to litigate. [17] In short, the
grant of attorneys fees as part of damages is the exception rather
than the rule; counsels fees are not awarded every time a party
prevails in a suit. It can be awarded only in the cases enumerated
in Article 2208 of the Civil Code, and in all cases it must be
reasonable.[18] Thereunder, the trial court may award attorneys fees
where it deems just and equitable that it be so granted. While we
respect the trial courts exercise of its discretion in this case, the
award of P50,000 is unreasonable and excessive. It should be
reduced to P10,000.
WHEREFORE, the instant petition is partly GRANTED. The
challenged decision of the Court of Appeals in CA-G.R. No. 40751 is
hereby MODIFIED by a) deleting the awards of P200,000 for loss of
profit, P200,000 as moral damages and P100,000 as exemplary

the

award

of

attorneys

fees

No pronouncement as to costs.
SO ORDERED.
Melo, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
American Home v Chua G.R. No. 130421. June 28, 1999
C.J. Davide

Facts:
Chua obtained from American Home a fire insurance covering the
stock-in-trade of his business. The insurance was due to expire on
March 25, 1990.

On April 6, 1990, the business was completely razed by fire. Total

loss was estimated between P4,000,000 and P5,000,000.
Respondent filed an insurance claim with petitioner and four other
co-insurers, namely, Pioneer Insurance, Prudential Guarantee,
Filipino Merchants and Domestic Insurance. Petitioner refused to
honor the claim hence, the respondent filed an action in the trial
court.
American Home claimed there was no existing contract because
respondent did not pay the premium. Even with a contract, they
contended that he was ineligible bacue of his fraudulent tax
returns, his failure to establish the actual loss and his failure to
notify to petitioner of any insurance already effected. The trial court
ruled in favor of respondent because the respondent paid by way of
check a day before the fire occurred and that the other insurance

98
companies promptly paid the claims. American homes was made to
pay 750,000 in damages.

the payment. It is, as well, bound by its agents acknowledgment

of receipt of payment.

The Court of Appeals found that respondents claim was

substantially proved and petitioners unjustified refusal to pay the
claim entitled respondent to the award of damages.

Section 78 of the Insurance Code explicitly provides:

American Home filed the petition reiterating its stand that there
was no existing insurance contract between the parties. It invoked
Section 77 of the Insurance Code, which provides that no policy or
contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid and the
case of Arce v. Capital Insurance that until the premium is paid
there is no insurance.

An acknowledgment in a policy or contract of insurance of the

receipt of premium is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid.
2. Submission of the alleged fraudulent documents pertained to
respondents income tax returns for 1987 to 1989. Respondent,
however, presented a BIR certification that he had paid the proper
taxes for the said years. Since this is a question of fact, the finding
is conclusive.

1. Whether there was a valid payment of premium, considering that

respondents check was cashed after the occurrence of the fire

Ordinarily, where the insurance policy specifies as a condition the

disclosure of existing co-insurers, non-disclosure is a violation that
entitles the insurer to avoid the policy. The purpose for the
inclusion of this clause is to prevent an increase in the moral
hazard. The relevant provision is Section 75, which provides that:

2. Whether respondent violated the policy by his submission of

fraudulent documents and non-disclosure of the other existing
insurance contracts

A policy may declare that a violation of specified provisions thereof

shall avoid it, otherwise the breach of an immaterial provision does
not avoid the policy.

3. Whether respondent is entitled to the award of damages.

Respondent acquired several co-insurers and he failed to disclose

this information to petitioner. Nonetheless, petitioner is estopped
from invoking this argument due to the loss adjusters admission of
previous knowledge of the co-insurers.

Issues:

Held: Yes. No. Yes, but not all damages valid. Petition granted.
Damages modified.

Ratio:
1. The trial court found, as affirmed by the Court of Appeals, that
there was a valid check payment by respondent to petitioner. The
court respected this.
The renewal certificate issued to respondent
acknowledgment that premium had been paid.

contained

the

In the instant case, the best evidence of such authority is the fact
that petitioner accepted the check and issued the official receipt for

It cannot be said that petitioner was deceived by respondent by the

latters non-disclosure of the other insurance contracts when
petitioner actually had prior knowledge thereof. The loss adjuster,
being an employee of petitioner, is deemed a representative of the
latter whose awareness of the other insurance contracts binds
petitioner.
3. Petitioner is liable to pay the loss. But there is merit in
petitioners grievance against the damages and attorneys fees
awarded. There was no basis for an award for loss of profit. This
cannot be shouldered by petitioner whose obligation is limited to
the object of insurance.

99
There was no fraud to justify moral damages. Exemplary damages
cant be awarded because the defendant never acted in a reckless
manner to claim insurance. Attorneys fees cant be recovered as
part of damages because no premium should be placed on the right
to litigate.

100
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU
D.
MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna &
Manalo for petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the
Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878, p.
58), because the petitioners in both cases seek similar relief,
through these petitions for certiorari by way of appeal, from the
amended decision of respondent Court of Appeals which affirmed in
toto the decision of the Court of First Instance of Cebu, ordering
"the defendants (herein petitioners Great Pacific Ligfe Assurance
Company and Mondragon) jointly and severally to pay plaintiff
(herein private respondent Ngo Hing) the amount of P50,000.00
with interest at 6% from the date of the filing of the complaint, and
the sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing
filed an application with the Great Pacific Life Assurance Company
(hereinafter referred to as Pacific Life) for a twenty-year
endownment policy in the amount of P50,000.00 on the life of his
one-year old daughter Helen Go. Said respondent supplied the
essential data which petitioner Lapulapu D. Mondragon, Branch
Manager of the Pacific Life in Cebu City wrote on the corresponding
form in his own handwriting (Exhibit I-M). Mondragon finally typewrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premuim the sum

of P1,077.75 going over to the Company, but he reatined the

amount of P1,317.00 as his commission for being a duly authorized
agebt of Pacific Life. Upon the payment of the insurance premuim,
the binding deposit receipt (Exhibit E) was issued to private
respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at
the bottom of the back page of the application form his strong
recommendation for the approval of the insurance application.
Then on April 30, 1957, Mondragon received a letter from Pacific
Life disapproving the insurance application (Exhibit 3-M). The letter
stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years old,
but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile
Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was
allegedly not communicated by petitioner Mondragon to private
respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote
back Pacific Life again strongly recommending the approval of the
20-year endowment insurance plan to children, pointing out that
since 1954 the customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen
Go died of influenza with complication of bronchopneumonia.
Thereupon, private respondent sought the payment of the proceeds
of the insurance, but having failed in his effort, he filed the action
for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to
against both petitioners.
The decisive issues in these cases are: (1) whether the binding
deposit receipt (Exhibit E) constituted a temporary contract of the
life insurance in question; and (2) whether private respondent Ngo
Hing concealed the state of health and physical condition of Helen
Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before
a deposit is considered a BINDING RECEIPT. These conditions state
that:
A. If the Company or its agent, shan have received the premium
deposit ... and the insurance application, ON or PRIOR to the date of

101
medical examination ... said insurance shan be in force and in
effect from the date of such medical examination, for such period
as is covered by the deposit ...,PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard
rates under its rule for the amount of insurance and the kind of
policy requested in the application.
D. If the Company does not accept the application on standard rate
for the amount of insurance and/or the kind of policy requested in
the application but issue, or offers to issue a policy for a different
plan and/or amount ..., the insurance shall not be in force and in
effect until the applicant shall have accepted the policy as issued
or offered by the Company and shall have paid the full premium
thereof. If the applicant does not accept the policy, the deposit shall
be refunded.
E. If the applicant shall not have been insurable under Condition A
above, and the Company declines to approve the application the
insurance applied for shall not have been in force at any time and
the sum paid be returned to the applicant upon the surrender of
this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the
binding deposit receipt is intended to be merely a provisional or
temporary insurance contract and only upon compliance of the
following conditions: (1) that the company shall be satisfied that
the applicant was insurable on standard rates; (2) that if the
company does not accept the application and offers to issue a
policy for a different plan, the insurance contract shall not be
binding until the applicant accepts the policy offered; otherwise,
the deposit shall be reftmded; and (3) that if the applicant is not ble
according to the standard rates, and the company disapproves the
application, the insurance applied for shall not be in force at any
time, and the premium paid shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding
deposit receipt in question is merely an acknowledgment, on behalf
of the company, that the latter's branch office had received from
the applicant the insurance premium and had accepted the
application subject for processing by the insurance company; and
that the latter will either approve or reject the same on the basis of
whether or not the applicant is "insurable on standard rates." Since

petitioner Pacific Life disapproved the insurance application of

respondent Ngo Hing, the binding deposit receipt in question had
never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is,
manifestly, merely conditional and does not insure outright. As held
by this Court, where an agreement is made between the applicant
and the agent, no liability shall attach until the principal approves
the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in
approving or rejecting the application. Thus, in life insurance, a
"binding slip" or "binding receipt" does not insure by itself (De Lim
vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication
of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the
insurance application in question on the ground that it is not
offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another
plan known as the Juvenile Triple Action, which private respondent
failed to accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing over the 20year endowment life insurance in the amount of P50,000.00 in
favor of the latter's one-year old daughter, and with the noncompliance of the abovequoted conditions stated in the disputed
binding deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the deposit paid
by private respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of
Canada, supra, "a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents ...
The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be
dione, nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no contract of
insurance unless the minds of the parties have met in agreement."
We are not impressed with private respondent's contention that
failure of petitioner Mondragon to communicate to him the rejection
of the insurance application would not have any adverse effect on
the allegedly perfected temporary contract (Respondent's Brief, pp.

102
13-14). In this first place, there was no contract perfected between
the parties who had no meeting of their minds. Private respondet,
being an authorized insurance agent of Pacific Life at Cebu branch
office, is indubitably aware that said company does not offer the life
insurance applied for. When he filed the insurance application in
dispute, private respondent was, therefore, only taking the chance
that Pacific Life will approve the recommendation of Mondragon for
the acceptance and approval of the application in question along
with his proposal that the insurance company starts to offer the 20year endowment insurance plan for children less than seven years.
Nonetheless, the record discloses that Pacific Life had rejected the
proposal and recommendation. Secondly, having an insurable
interest on the life of his one-year old daughter, aside from being
an insurance agent and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must have known and
followed the progress on the processing of such application and
could not pretend ignorance of the Company's rejection of the 20year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt
observation of then Appellate Associate Justice Ruperto G. Martin
who later came up to this Court, from his dissenting opinion to the
amended decision of the respondent court which completely
reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of
rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon
reiterating the desire for applicant's father to have the application
considered as one for a 20-year endowment plan was ever duly
communicated to Ngo; Hing, father of the minor applicant. I am not
quite conninced that this was so. Ngo Hing, as father of the
applicant herself, was precisely the "underwriter who wrote this
case" (Exhibit H-1). The unchallenged statement of appellant
Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically
admits that said Ngo Hing was "our associate" and that it was the
latter who "insisted that the plan be placed on the 20-year
endowment plan." Under these circumstances, it is inconceivable
that the progress in the processing of the application was not
brought home to his knowledge. He must have been duly apprised
of the rejection of the application for a 20-year endowment plan
otherwise Mondragon would not have asserted that it was Ngo Hing
himself who insisted on the application as originally filed, thereby

implictly declining the offer to consider the application under the

Juvenile Triple Action Plan. Besides, the associate of Mondragon
that he was, Ngo Hing should only be presumed to know what kind
of policies are available in the company for minors below 7 years
old. What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the
business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is
however, adopted by the company, it can hardly be said that it
could have been bound at all under the binding slip for a plan of
insurance that it could not have, by then issued at all. (Amended
Decision, Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is
of the firm belief that private respondent had deliberately
concealed the state of health and piysical condition of his daughter
Helen Go. Wher private regpondeit supplied the required essential
data for the insurance application form, he was fully aware that his
one-year old daughter is typically a mongoloid child. Such a
congenital physical defect could never be ensconced nor
disguished. Nonetheless, private respondent, in apparent bad faith,
withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought
to know, as he surely must have known. his duty and responsibility
to such a material fact. Had he diamond said significant fact in the
insurance application fom Pacific Life would have verified the same
and would have had no choice but to disapprove the application
outright.
The contract of insurance is one of perfect good faith uberrima
fides meaning good faith, absolute and perfect candor or openness
and honesty; the absence of any concealment or demotion,
however slight [Black's Law Dictionary, 2nd Edition], not for the
alone but equally so for the insurer (Field man's Insurance Co., Inc.
vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a partY knows aDd Ought to communicate
(Section 25, Act No. 2427). Whether intentional or unintentional the
concealment entitles the insurer to rescind the contract of
insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et
al, 105 Phil 930; Satumino vs. Philippine American Life Insurance
Company, 7 SCRA 316). Private respondent appears guilty thereof.

103
We are thus constrained to hold that no insurance contract was
perfected between the parties with the noncompliance of the
conditions provided in the binding receipt, and concealment, as
legally defined, having been comraitted by herein private
respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in
lieu thereof, one is hereby entered absolving petitioners Lapulapu
D. Mondragon and Great Pacific Life Assurance Company from their
civil liabilities as found by respondent Court and ordering the
aforesaid insurance company to reimburse the amount of
P1,077.75, without interest, to private respondent, Ngo Hing. Costs
against private respondent.

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

allegedly not communicated by petitioner Mondragon to private
respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote
back Pacific Life again strongly recommending the approval of the
20-year endowment insurance plan to children, pointing out that
since the customers were asking for such coverage.
Helen Go died of influenza. Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in his effort, he filed
the action for the recovery before the Court of First Instance of
Cebu, which ruled against him.

SO ORDERED.

Issues:

Great Pacific v CA G.R. No. L-31845 April 30, 1979

1. Whether the binding deposit receipt constituted a temporary

contract of the life insurance in question

J. De Castro

2. Whether Ngo Hing concealed the state of health and physical

condition of Helen Go, which rendered void the policy

Facts:
Ngo Hing filed an application with the Great Pacific for a twentyyear endowment policy in the amount of P50,000.00 on the life of
his one-year old daughter Helen. He supplied the essential data
which petitioner Mondragon, the Branch Manager, wrote on the
form. The latter paid the annual premium the sum of P1,077.75
going over to the Company, but he retained the amount of
P1,317.00 as his commission for being a duly authorized agent of
Pacific Life.
Upon the payment of the insurance premium, the binding deposit
receipt was issued Ngo Hing. Likewise, petitioner Mondragon
handwrote at the bottom of the back page of the application
form his strong recommendation for the approval of the insurance
application. Then Mondragon received a letter from Pacific Life
disapproving the insurance application. The letter stated that the
said life insurance application for 20-year endowment plan is not
available for minors below seven years old, but Pacific Life can
consider the same under the Juvenile Triple Action Plan, and
advised that if the offeris acceptable, the Juvenile Non-Medical
Declaration be sent to the company.

Held: No. Yes. Petition dismissed.

Ratio:
The receipt was intended to be merely a provisional insurance
contract. Its perfection was subject to compliance of the following
conditions: (1) that the company shall be satisfied that
the applicant was insurable on standard rates; (2) that if the
company does not accept the application and offers to issue a
policy for a different plan, the insurance contract shall not be
binding until the applicant accepts the policy offered; otherwise,
the deposit shall be refunded; and (3) that if the company
disapproves the application, the insurance applied for shall not be
in force at any time, and the premium paid shall be returned to
the applicant.
The receipt is merely an acknowledgment that the latter's branch
office had received from the applicant the insurance premium and
had accepted the application subject for processing by the

104
insurance company. There was still approval or rejection the same
on the basis of whether or not the applicant is "insurable on
standard rates." Since Pacific Lifedisapproved the insurance
application of respondent Ngo Hing, the binding deposit receipt in
question had never become in force at any time. The binding
deposit receipt is conditional and does not insure outright. This was
held in Lim v Sun.

his one-year old daughter is typically a mongoloid child. He

withheld the fact material to the risk insured.

The deposit paid by private respondent shall have to be refunded

by Pacific Life.

The concealment entitles the insurer to rescind the contract of

insurance.

2. Ngo Hing had deliberately concealed the state of health of his

daughter Helen Go. When he supplied data, he was fully aware that

The contract of insurance is one of perfect good faith uberrima

fides meaning good faith, absolute and perfect candor or openness
and honesty; the absence of any concealment or demotion,
however slight.