Insurance Case Digest

Qua Chee Gan v. Law Union Rock

FACTS
After certain insured bodegas and merchandise burned down following the liberation of the
region of Albay in the Second World War, owner and petitioner Qua Chee Gan, a merchant of Albay
and sought to recover the proceeds totaling to P370,000 from fire insurance policies which were
issued by Law Union and Rock Insurance Co., Ltd. The CFI ruled in favor of the petitioner, ordering
the defendant Law Union Rock Insurance Co., to pay the necessary sum. Defendant appealed
directly to the SC.
Records show that before the Second World War, the petitioner owned 4 warehouses/bodegas
in Albay which were used to store various merchandise, all of which were insured with the defendant
company since 1937. A fire from an undetermined origin broke out on July 21, 1940, and lasted
almost a week, resulting to the burning down of a number of bodegas and the merchandise stored
inside . Petitoner then informed defendant company by telegram also on the same day, and by the
next day, the premises were examined and records of the insured goods were investigated. The
petitioner submitted fire claims but the defendant company resisted payment, claiming that there was
a violation of warranties and conditions, that there was a filing of fraudulent claims, and that the fire
was deliberately caused by the insurer or by other persons conniving with him. The petitioner and his
brother, as well as some of his employees, were tried for the crime of arson it being claimed that they
set fire to the warehouses to collect the insurance, but they were acquitted, followed by a civil suit to
collect from the defendant company, with the court ruling in favor of the petitioner.
Defendant company claims that the policies were avoided for breach of fore hydrants warranty
appearing on riders on the face of the policies, arguing that considering the perimeter of the external
walls of the bodegas, the petitioner should have 11 fire hydrants, when he actually had only 2.
The SC claimed that with this argument, the defendant company is estopped, as it issued the
policies in question subject to the warranty and received the corresponding premiums, knowing fully
that the number of hydrants demanded in the warranty never existed from the very beginning and it
still issued the said policies and accepted the premiums.
The defendant also argued that the petitioner violated the Hemp Warranty provisions of one of
the policies, against the storage of gasoline, since there were 36 cans of gasoline in one of the
bodegas that were not affected by the fire.
ISSUE
Whether or not the insured petitioner should be paid the insurance claims by the defendant company
HELD
Yes. The Supreme Court affirmed the decision of the lower court against the defendant company. The
Court held that the insurance company was already aware of the number of fire hydrants installed by
the petitioner, contrary to the requirements of the said warranty. The inspection made of the premises
by the agents of the defendant was done as a prerequisite for the fixing of the discount on the
premium to which the petitioner/insured was entitled, since such discount depended on the number of
hydrants and the firefighting equipment available, therefore the defendant is estopped from claiming
otherwise.
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.
Rationale: Human justiceto 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
o 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.
Furthermore, the Court noted the inequitableness of the conduct of the insurance company, by
the fact that after the petitioner incurred the expense of installing the hydrants, the company collected
the premiums and issued him a policy which gave a smaller discount than what he was normally
entitled to. It is logical that the greater number of fire hydrants and appliances would entail a reduced
risk of loss, but in the case at bar, the defendant company kept the premium discount at the minimum,

giving it a double benefit. The Court held that such abuse is evident in the companys selection of the
words and terms of the contract, over which t had absolute control.
The Court then considered whether the defendant company, by reason of inequitable conduct
show, be estopped from enforcing forfeitures in its favor so as to forestall fraud or imposition on the
insured petitioner. The Court discussed that 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, is already estopped from taking advantage of the forfeiture, and 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 a valid policy in order to earn and collect further premiums.
Regarding the argument of the defendant company regarding the violation of the Hemp
Warranty provisions, the Court held that gasoline was not specifically mentioned among the
prohibited articles listed in the said warranty, and such argument shows the exclusive control of the
phraseology of the contract, and therefore such ambiguity must be held strictly against the insurer
and liberally in favor of the insured, specially to avoid a forfeiture (well-known rule that ambiguities or
obscurities must be strictly interpreted against the party that caused them).
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.
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
The reason behind the rigid application of the rule on ambiguities is because of the
monopolies, cartels and concentrations of capital actually impose upon parties cunningly prepared
agreements, with the other partys participation in the agreement reduced to just take it or leave it.
Such agreements are called contracts of adhesion or contracts of adherence, contrary to contracts
entered into with equal footing. The Courts must be vigilant over such contracts in order to protect the
weaker party from abuses and impositions. A contract of insurance is one of perfect good faith for
both the insurer and insured.
Furthermore, it shows that the gasoline kept inside the bodegas were only incidental to the
business of the petitioner, and apparently the Hemp Warranty forbade storage only in the building of
the insured merchandise, when the said gasoline was found isolated from other insured bodegas.
Regarding the accusation of the defendant company that the petitioner connived at the loss
and fraudulently increased the quantity of the insured stock in the burnt bodegas, the Court did not
agree with such contention as there appears no motive by the petitioner to defraud the insurer, and
since the defendant was not able to present convincing proof to convict the petitioner of the crime of
arson. Regarding the claim that the petitioner filed false and fraudulent statements, such errors were
held by the court to be caused by the petitioners imperfect knowledge of English and were made
without intent to defraud.
Ty v. Filipinas Compana de Seguros
FACTS
Petitioner Diosdado Ty was an employee of the Broadway Cotton Factory as a mechanic
operator, and he took a Personal Accident Policies from the defendant insurance companies, on
different dates, effective for 12 months. During the effectivity of these policies, a fire broke out in the
factory where Ty was working, and an accident caused the temporary total disability of his left hand.
The defendant insurance companies refused to pay Tys claims for compensation under the policies,
but the Municipal Court of Manila ruled in favor of the insurance companies. The CFI dismissed the
appeal by Ty on the grounds that under the uniform terms of the insurance policies, for partial
disability of the insured caused by loss of either hand to be compensable, the loss must result from
the amputation of that hand.
Petitioner argued that pursuant to the provision of the insurance contract regarding indemnity
for total or partial disability, it is enough that the insured is disabled to such extent that he cannot
substantially perform all acts or duties needed in his business, and that what is compensable is not
the amputation of his hand, but its disability. Petitioner claims that the provision was ambiguous,
especially as to what constitutes loss of hand.
Petitioner Ty appealed from the decision of the CFI of Manila which dismissed the 6 separate
complaints he filed against 6 insurance companies (Filipinas Compaia de Seguros, People's Surety
& Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The Philippine Guaranty Company,
Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance Co., Inc.) for the collection
of a sum of money as compensation for the disability of his left hand.
ISSUE
Whether or not petitioner Ty can recover from the claims based on the provisions of the insurance
contracts

HELD
No. The Supreme Court affirmed the ruling of the lower court in favor of the defendant insurance
companies. The conditions in the insurance policies were clear that there is a partial disability when
such loss is caused by amputation. In the case at bar, there was no such amputation, and that all
there was was just temporary total disability of the petitioners left hand. The loss must have been
severe in order for the petitioner to be entitled to indemnity. The Court emphasized that the
agreement contained in the insurance policies is the law between the parties, and since the terms of
the policies are clear, express and specific, there is no need to go beyond such interpretation in order
to cover situations not warranted by the policies.
Del Rosario v. Equitable Insurance
FACTS
Defendant Equitable Insurance and Casualty Co., Inc. issued a Personal Accident Policy on
the life of the son of petitioner Simon del Rosario, Francisco del Rosario, binding to pay the sum of
P1,000-P3,00 as indemnity for the death of the insured and the policy included a rider regarding
drowning, as it stated that death caused by drowning is covered by the policy.
On February 24, 1957, Francisco del Rosario was on board the motor launch ISLAMA
together with 33 others, including his beneficiary in the Policy, Remedios Jayme, and because of a
fire in the vessel, they were forced to jump off the launch, resulting to their death of drowning.
Petitioner del Rosario, as the father of the insured and the sole heir, filed a claim for payment with the
defendant company, and it paid him P1,000. The receipt of the amount was acknowledged, but it was
claimed by the lawyer of the petitioner that it was not the correct amount payable under the policy, as
it should have been P1,500, basing on the provisions of Section 2 part 1 1 of the policy, claiming that
they incident is similar to what is provided in the said section. The Insurance Commissioner of the
defendant company claimed that basing on the provisions of Section 1 part 1 of the policy 2 and it
refused to pay more. A complaint for the recovery of the money was filed, but the defendant company
claimed that the petitioner had already received the full amount due as appearing in the policy.
The court held that while the policy mentions specific amounts that may be recovered for death
for bodily injury, there is no specific amount mentioned in the policy for death through drowning
although it was stated to be a ground for recover. Since the defendant company bound itself to pay
P1,000-P3,000 as indemnity for the death of the insured, but no definite amount was stated for the
case of drowning, there is an ambiguity present and in this respect, such ambiguity must be
interpreted in favor of the insured and strictly against the insurer so as to allow greater indemnity. The
court therefore held that the petitioner is entitled to recover more.
ISSUE
Whether or not because of the ambiguity present in the policy, the petitioner can recover more from
the defendant company
HELD
Yes. The Supreme Court affirmed the ruling of the lower court in favor of the petitioner. It is settled
that when there is an ambiguity with respect to the terms and conditions of the policy, such
ambiguities will be resolved against the one responsible for it. Furthermore, it is noted that the insured
as little, if any, participation in the preparation of the policy, including the drafting of its terms and
conditions, therefore all the more reason that obscure stipulations in a contract should not be
interpreted in favor of the one who caused the obscurity. In the policy in question, the insurance
company agreed to pay P1,000-P3,000 as indemnity for death of the insured.
And so it has been generally held that the "terms in an insurance policy, which are ambiguous,
equivocal or uncertain . . . are to be construed strictly against, the insurer, and liberally in favor
of the insured so as to effect the dominant purpose of indemnity or payment to the insured,
especially where a forfeiture is involved, and the reason for this rule is that the "insured usually
has no voice in the selection or arrangement of the words employed and that the language of
the contract is selected with great care and deliberation by expert and legal advisers employed
by, and acting exclusively in the interest of, the insurance company"
Where two interpretations, equally fair, of languages used in an insurance policy may be made,
that which allows the greater indemnity will prevail.

1 Section 2. Injury sustained by the wrecking or disablement of a railroad passenger car or street
railway car in or on which the Insured is travelling as a farepaying passenger. . . . . . . .P1,500.00
2 Section 1. Injury sustained other than those specified below unless excepted
hereinafter. . . . . . . .P1,000.00

Misamis Lumber v. Capital Insurance

FACTS
Petitioner Misamis Lumber Corporation insured its car for the amount of P14,000 with defendant
Capital Insurance & Surety Company Inc. under certain provisions. In the evening of November 25,
1961, while the insurance policy was effective, the insured car passed over a water hole which the
driver was not able to see because an oncoming car that did not dim its light, and this incident caused
damage to the car which required necessary repairs totally to an amount of P306.27. After the repairs
were completed, the petitioner then filed a claim to recover from the defendant company, but it
refused to pay. The case was brought to the CFI, which ruled in favor of the petitioner. The defendant
company admitted that it was liable in the amount of P150, but not for any excess thereof.
ISSUE
Whether or not the petitioner is entitled to the excess of the amount to be paid by the defendant
insurer
HELD
No. The Supreme Court held that the petitioner is not entitled to such amount, and that the defendant
company should not pay more than P150. Based on the provisions of the policy, if the insured
authorizes the repair, the liability of the insurer is limited to P150. The Court held that the literal
meaning of this stipulation must control, since it is an actual contract, expressly and plainly provided
for in the policy. The policy provided is clear and specific and leaves no room for interpretation, and
the Court held that the interpretation of the lower court cannot stand, as it did not relieve the
defendant company from paying the excess amount because according to it, such would render the
insurance contract one-sided and that the insurer did not show that the cost of the repairs was
unreasonable, excessive or padded, or that it could have been cheaper. The policy set both the limits
and the mechanics that the insured must follow in order to be entitled for full indemnity of repairs.
There was an option in the policy for the insurance company to undertake the repairs, but in the case
at bar, the company was deprived of that option because the insured took it upon himself to make the
repairs, and only notified the insurer when such repairs were done, therefore the limit of P150 applies.
Furthermore, it seems contrary to justice and equity to require that the insurer must prove that the
cost of the repairs were unreasonable, when the insurer was not given a chance to inspect and
assess the damage before repairs were made.
The insurance contract may be rather onerous ("one-sided", as the lower court put it), but that
in itself does not justify the abrogation of its express terms, terms which the insured accepted
or adhered to and which is the law between the contracting parties.
Verendia v. CA
FACTS
Petitioner Rafael Verendias residential building was insured by respondent Fidelity and Surety
Insurance Company of the Philippines (Fidelity), with its Fire Insurance Policy, for the amount of
P385,000, and the designated beneficiary was the Monte de Piedad & Savings Bank. The same
building was also insured with other insurance companies, The Country Bankers Insurance for
P56,000 and The Development Insurance for P400,000. During the effectivity of the three fire
insurance policies, the insured building was destroyed by a fire. Fidelity was informed of the loss but
refused to pay under its policy despite demands, compelling Verandia to file a complaint with the CFI
of QC, with the complaint being amended to include Monte de Piedad as an unwilling defendant.
Fidelity claimed that the policy was avoided by reason of over-insurance, and that Verandia
had maliciously represented that the building was leased to a certain Roberto Garcia, when it was
actually a Marcelo Garcia. The trial court ruled in favor of Fidelity, as apart from affirming the claims of
Fidelity, it also held that par. 3 of the policy was also violated by Verendia as he failed to inform
Fidelity of other insurance coverages (with Country Bankers Insurance and Development Insurance).
The decision was reversed in the appellate court, as it held that: there was no
misrepresentation regarding the lease for the contract signed by Marcelo Garcia in the name of
Roberto Garcia and (b) that the requirement in par. 3 of the policy was waived by Fidelity as shown in
its conduct in attempting to settle Verendias claim.
ISSUE
(1) Whether or not the contract of lease submitted by Verendia to support his claim on the fire
insurance policy constitutes a false declaration which would forfeit his benefits under Section 13 of
the policy
(2) Whether or not, in submitting the subrogation receipt in evidence, Fidelity had in effect agreed to
settle Verendias claim in the amount stated in the receipt

HELD
The Supreme Court ruled in favor of Fidelity, by affirming the decision of the trial court and reversed
and set aside the decision of the appellate court.
(1) Yes. The Supreme Court held that evidence points to the fact that there was indeed falsity
involved. Regarding the falsity of the lease contract, basing on the decision of the appellate court, the
Supreme Court held that there was a misapprehension of facts. Evidence shows that it was Marcelo
Garcia who was the real lessee and was occupying the building when it was burned, and Roberto
Garcia disappeared after the fire, while in an affidavit he stated that he was not the lessee of the
building. Evidence shows that apparently, Marcelo Garcia was the cousin of Robert Garcia, who had
been paying the rentals, but Verendia failed to explain why Marcelo signed his cousins name when
he was the one paying the rent, and why he (Verendia) as the lessor allowed it. These evidence
shows that Verendia concocted the lease contract in order to deflect responsibility for the fire towards
an alleged lessee, inflated the value of the property, insured the same property with two other
insurance companies, and even created a dead-end for the adjuster by Robert Garcias
disappearance .
Basically a contract of indemnity, an insurance contract is the law between the parties, and its
terms and conditions constitute the measure of the insurers liability and compliance therewith
is a condition precedent to the insureds right to recover from the insurer
As it is also a contract of adhesion, an insurance contract should be liberally construed in favor
of the insured and strictly against the insurer company which usually prepares it.
In the case at bar, it is evident that Verendia used a false lease contract in order to support his
claim under the fire insurance policy, therefore the terms of the policy should be strictly construed
against him as the insured. He failed to live by the terms of the policy, which were expressed in terms
that were clear and unambiguous. In having presented a false declaration to support his claim for the
benefits, he forfeited all benefits therein by virtue of section 13 of the policy in the absence of proof
that Fidelity waived such provision (Section 13: forfeited "If the claim be in any respect fraudulent, or if
any false declaration be made or used in support thereof, or if any fraudulent means or devises are
used by the Insured or anyone acting in his behalf to obtain any benefit under the policy". By
presenting a false lease contract, Verendia disregarded the principle that insurance contract are
uberrimae fidae and demand the most abundant good faith.
(2) No. The Supreme Court held that by submitting the subrogation receipt as evidence in court,
Fidelity has bound itself to mutually agree to settle Verendias claim, and it is noted that in the receipt,
it was stated that Verendia had received the amount. But the Court held that the subrogation receipt
by itself does not prove that a settlement had been arrived at and was enforced, therefore it does not
hold that Fidelitys presentation of the subrogation receipt in evidence already indicates that it
accedes to its terms or it would be substituting the will of the Court for that of the parties.
Gulf Resorts v. Phil. Charter Insurance Corp.
FACTS
Petitioner Guld Resorts Inc. is the owner of Plaza Resort in La Union, and it was insured
originally with the AHAC-AIU, and in the first four insurance policies issued by AHAC-AIU, the risk of
loss from earthquake shock was extended only to the petitioners two swimming pools
The issue between petitioner Gulf Resorts Inc. and respondent Philippine Charter Insurance
Corporation involves the insurance companys liability for earthquake damage to petitioners property.
Petitioner claims that pursuant to the policys earthquake shock endorsement rider, the policy covers
all damages to the properties within its resort caused by earthquake, while the respondent claims that
the rider limits the liability for loss only to the two swimming pools of petitioner. Documents show that
apparently petitioner had paid a premium against earthquake shock in the insurance policies
involved, and that the policy was endorsed by the respondent, stating that in consideration of the
payment by the petitioner, included additional premium, the respondent agrees to have the insurance
policy cover loss or damage to shock to any of the property of the insured, but another evidence
shows that apparently the word included was deleted.
Following the earthquake, petitioner advised respondent that it would be making a claim under
its insurance policy for the damages on its properties, as the earthquake caused damage to its
clubhouse and two swimming pools. It was stated by Bayne Adjusters and Surveyors Inc, an
independent claims adjuster assigned by the respondent, that except for the swimming pools, all
affected items have no coverage of earthquake shocks. Petitioner filed a claim for settlement of the
damage to all of its properties, but the respondent denied petitioners claim on the ground that the
insurance policy only afforded earthquake shock to the two swimming pools.
In failing to reach a settlement, the case was brought to the RTC, with the court ruling in favor
of the respondent. Apparently the petitioner only paid a premium against the peril of earthquake
shock, and the same premium covered only the two swimming pools in all the policies issued by
AHAC-AIU. The trial court ordered the respondent to pay the petitioner the amount representing the
damage to the two damaged pools, but held that it is only the two swimming pools which had

earthquake shock coverage (and by virtue of the contract of insurance, the petitioner must be paid the
amount), and the respondent is only liable for the damage caused to the two swimming pools, as it
has been made known to the petitioner that it was ready and willing to settle for such liability, and that
there was no other basis for the grant of other damages prayed by the petitioner. The Court held that
though the petitioner was correct in saying that a policy of insurance is a contract of adhesion and
hence, where the language used in an insurance contract or application is ambiguous, it should be
resolved against the party responsible for it (the insurance company which prepared the contract), in
the case at bar the language used in the policy in litigation is clear and unambiguous and no need for
interpretation or construction but only application of the provisions therein.
The petitioner filed an appeal with the CA, which affirmed the decision of the lower court.
Petitioner claims that the policys earthquake shock endorsement clearly covers all the
properties insured and not only the two swimming pools, and that the unqualified and unrestricted
nature of the earthquake shock endorsement is confirmed in the body of the insurance policy, that the
qualification referring to the two swimming pools had already been deleted in the earthquake shock
endorsement, that the earthquake shock endorsement rider should take precedence over the wording
of the insurance policy because the rider is the more deliberate expression of the agreement of the
contracting parties, that any ambiguity in the earthquake shock endorsement should be resolved in
favor of the petitioner and against the respondent, as it was the respondent which caused the
ambiguity in the policy, that the premium for the earthquake shock coverage already included the
additional premium for the policy, that the parties contemporaneous and subsequent acts show that
they intended to extend earthquake shock coverage to all insured properties.
ISSUE
Whether or not petitioner Gulf Resorts can recover from respondent apart from the claims it can
recover from the insured pools
HELD
No. The Supreme Court did not find merit in the contentions of the petitioner. As evidenced in the
insurance policy, only the two swimming pools were specified as included. Petitioner claims that
because of the rider, there were no qualifications placed on the scope of the earthquake shock
coverage, and therefore the policy extended earthquake shock coverage to all insured properties.
The Court emphasized that it is basic that all the provisions of the insurance policy should be
examined and interpreted in consonance with each other and that the policy should not be construed
piecemeal: certain stipulations cannot be segregated and then made to control, and neither do
particular words or phrases necessarily determine its character. Therefore the petitioner cannot focus
on the earthquake shock endorsement to the exclusion of other provisions, as all the provisions and
riders, taken and interpreted together, clearly show that the intention of the parties is to extend the
policy coverage to the two swimming pools only.
Section 2(1) IC: defines a contract of insurances as an agreement whereby one undertakes for
a consideration to indemnify another against loss, damage or liability arising from an unknown
or contingent event
An insurance contract exists where the following elements concur:
o (1) The insured has an insurable interest
o (2) The insured is subject to a risk of loss by the happening of the designated peril
o (3) The insurer assumes the risk
o (4) Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk
o (5) In consideration of the insurers promise, the insured pays a premium
Insurance premium: Consideration paid an insurer for undertaking to indemnify the insured
against a specified peril
o In fire, casualty, and marine insurance, the premium payable becomes a debt as soon
as the risk attaches
In the case at bar, there were no premiums paid with regard to earthquake shock coverage,
except on the two swimming pools, and there is no mention of any premium payable for other resort
properties with regard to earthquake shock.
The petitioner cannot merely rely on the earthquake shock endorsement alone, and it does not
hold that the respondents contemporaneous and subsequent acts to the issuance of the insurance
policy falsely gave the petitioner assurance that the coverage of the earthquake shock endorsement
included all its properties in the resort.
In sum, there is no ambiguity in the terms of the contract and its riders, and the petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion which should be
liberally construed in favor of the insured and strictly against the insurer company which usually
prepares it
Contract of adhesion: one wherein a party, usually a corporation, prepares the stipulations in
the contract, while the other party merely affixes his signature or his adhesion thereto
o Through the years, the courts have held that in these type of contracts, the parties do
not bargain on equal footing, and the weaker partys participation being reduced to the

alternative to take it or leave it. Thus these contracts are viewed as traps for the weaker
party whom the courts must protect. Consequently any ambiguity therein is resolved
against the insurer or construed liberally in favor of the insured.
The Court will only rule out blind adherence to terms where facts and circumstances will show
that they are basically one-sided
In the case at bar, the petitioner cannot claim that it did not know the provisions of the policy,
as from the inception of the policy, the respondent was already required to copy verbatim the
provisions and terms of its latest insurance policy from AHAC-AIU
White Gold v. Pioneer Insurance
FACTS
Petitioner White Gold Marine Services Inc. procured a protection and indemnity coverage for
its vessels from Steamship Mutual Underwriting Association Limited with respondent Pioneer
Insurance and Surety Corporation, subsequently the petitioner was issued a Certificate of Entry and
Acceptance, and respondent also issued receipts evidencing payments for the coverage. Because
petitioner failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual then filed a case for the collection of sum of money against petitioner in order to
recover its unpaid balance. Petitioner filed a complaint against Steamship Mutual, claiming it violated
Section 186 and 187 IC, while respondent violated Sections 299, 300, 301, in relation to sections 302
and 303 IC.
The Insurance Commission dismissed the complaint against Steamship Mutual, as it was not
required to secure a license since it was not engaged in the insurance business, rather it was a
Protection and Indemnity Club. It also stated that Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged
in the insurance business. Pioneer was already licensed, therefore it would be superfluous to require
Steamship Mutual to be required one. The decision of the Insurance Commissioner was affirmed by
the CA, as it distinguished between P&I Clubs and conventional insurance, and held that Pioneer
merely acted as a collection agent of Steamship Mutual
ISSUE
(1) Whether or not Steamship Mutual, a P&I Club, is engaged in the insurance business in the
Philippines
(2) Whether or not respondent Pioneer needs a license as an insurance agent/broker for Steamship
Mutual
HELD
The Supreme Court reversed and set aside the ruling of the Insurance Commission and ordered
Steamship Mutual and Pioneer to obtain licenses and to secure proper authorizations to do business
as insurer and insurance agent respectively.
(1) Yes. The Supreme Court held that records reveal that Steamship Mutual is doing business in the
country without the requisite certificate of authority as stated in Section 187 IC. It was admitted that
Steamship Mutual is a P&I Club and it does not have a license to do business in the Philippines,
although Pioneer is its resident agent. Petitioner claims that Steamship Mutual as a P&I Club is
engaged in the insurance business (P&I Club: an association composed of shipoowners in general
who band together for the specific purpose of providing insurance cover on mutual basis against
liabilities incidental to shipowning that the members incur in favor of third parties) and that the
purpose of P&I Clubs is to solicit and provide protection and indemnity coverage. Respondents argue
that though it is a P&I Club, it is not engaged in the insurance business, as it is merely an association
of vessel owners who have come together to provide mutual protection against liabilities incidental to
shipowning.
In answering whether or not Steamship Mutual is engaged in the insurance business, the SC
referred to Section 2(2) IC, which enumerates what constitutes doing an insurance business or
transacting an insurance business:
(a) making or proposing to make, as insurer, any insurance contract
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
The same provision also provides that the fact that no profit is derived from the making
of insurance contracts, agreements or transactions, or that no separate or direct
consideration is received therefor, shall not preclude the existence of an insurance
business.
To determine whether or not a contract is an insurance contract, it depends on the nature of
the promise, the act required to be performed, the exact nature of the agreement in the light of the

occurrence, contingency or circumstances under which the performance becomes requisite, and not
by what the contract is called.
Insurance contract: contract of indemnity; one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or
contingent event
Marine insurance: undertakes to indemnify the assured against marine losses, such as
losses incident to a marine adventure
A mutual insurance company is a cooperative enterprise where the members are both the
insurer and he insured, and all the members contribute, by a system of premiums or assessments, to
the creation of a fund from which all losses and liabilities are paid, and where profits are divided
among themselves in proportion to their interest, and these clubs provide three types of coverage:
protection and indemnity, war risks, and defense costs.
A P&I Club is a form of insurance against third party liability, where the third party is anyone
other than the P&I Club and the members, and in the case at bar, Steamship Mutual as a P&I Club is
considered as a mutual insurance company association engaged in the marine insurance business.
As Steamship Mutual is indeed doing business in the country without the necessary certificate
of authority, the Court emphasized that in order for it to continue to do business in the country, it must
secure a license from the Insurance Commission. A contract of insurance involves public interest, and
therefore regulation by the State is necessary. No insurer or insurance company can engage in
insurance business without first securing a license or a certificate of authority from the Insurance
Commission.
(2) Yes. The Supreme Court held that although Pioneer is already a licensed insurance company, it
needs a separate license to act as an insurance agent for Steamship Mutual as provided in Section
299 IC As evidenced by the certificate of registration issued by the Insurance Commission,
respondent Pioneer has been licensed to do or transact insurance business by virtue of the certificate
of authority, but the certification also states that Pioneer does not have a separate license to be an
agent/broker of Steamship Mutual.
Section 299 IC: No person shall act as an insurance agent or as an insurance broker in the
solicitation or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to act from
the Commissioner, which must be renewed annually on the first day of January, or within six
months thereafter
Eternal Gardens Memorial Park Corp. V. Philam
FACTS
Respondent Philamlife agreed to enter into an agreement (Creditor Group Life Policy No. P1920) with petititoner Eternal Gardens Memorial Park, and under the said policy, clients of the
petitioner who purchased burial lots from it on an installment basis would be insured by Philmlife, with
the amount of insurance coverage depending upon the existing balance of the purchased burial lots.
The policy was to be effective for one year, renewable on a yearly basis. Petitioner Eternal was
required to submit to Philamlife a list of all new lot purchasers, together with a copy of the application
of each purchaser, and the amounts of the respective unpaid balances of all insured lot purchasers,
and included in the list as new business was a certain John Chuan, with a balance of payments of
P100,000 and Chuang eventually died. Petitioner Eternal then sent a letter to Philamlife, serving as
an insurance claim for Chuangs death including certain documents (Certificate of Death,
Identificaiton Certificate, Certificate of Claimant, Certificate of Attending Physician, Assureds
Certificate), and respondent Philiamlife required a number of other documents to be submitted, which
petitioner Eternal did submit. More than a year has passed, and respondent Philamlife has not replied
to the petitioners claim, compelling the petitioner to demand from the respondent the payment of the
claim, but the respondent denied such demand stating that Chaung was not covered under the policy
because no application for the insurance has been submitted for approval, and that with regard to the
acceptance of the premiums, these do not connote their approval of the insurance coverage but were
held by them in trust for the payor until the prerequisites for the insurance coverage have been met,
but it also mentioned that it would return all the premiums which have been paid in behald of Chuang.
Petitioner filed a case against Philamlife with the RTC for the recovery of a sum of money, and
the RTC ruled in favor of the petitioner, as it held that Eternal had submitted Chuangs application fo
the insurance which was accomplished before he died, and that Philamlifes inaction on the
application for the insurance and its acceptance of the premiums are acts deemed to have approved
Chuangs application. Furthermore it held that since the contract was a group life insurance, once
proof of death is submitted, the payment must follow.
The decision was reversed and set aside by the CA, as it held that since apparently Chuangs
application was not submitted, such is in violation of Section 26 IC, and therefore Chuang was not
covered by the insurance.

ISSUE
Whether or not respondent Philamlife should have included Chuang in the coverage of the application
HELD
Yes. The Supreme Court ordered Philamlife to pay the necessary proceeds of Chuangs life insurance
policy. The petitioner claims that it had submitted a copy of the insurance application of Chuang
before his death, and that Chuang was included in the list of new business, but Philamlife claims that
the evidence presented by Eternal was insufficient, as Eternal must present evidence showng that
Philamlife received a copy of Chuangs insurance application. The Supreme Court held that evidence
on record shows that Philamlife stamped as received the insurance applications, and such stamp of
receipt has the effect of acknowledging receipt of the letter together with the attachments, therefore
such receipt is considered as ad admission by Philamlife against its own interest. The burden is upon
Philamlife to show that the application letter submitted by petitioner Eternal did not include Chuangs
insurance application, which Philamlife failed to do, therefore it is deemed to have received Chuangs
insurance application.
In answering whether or not Philamlife assumed the risk of loss without approving the
application, the Supreme Court answered in the affirmative, as Philamlife and Eternal entered into a
Creditor Group Life Policy, and it is evident in the Effective Date of Benefit provision that there is an
ambiguity between the first sentence of the provision stating that the insurance coverage of the
clients of Eternal have already become effective upon contracting a loan with Eternal, and the second
sentence requiring Philamlife to approve the insurance contract before it can become effective. The
Court emphasized that a contract is a contract of adhesion which should be construed liberally in
favor of the insured and strictly against the insurer in order to safeguard the latters interest.
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be construed
liberally in favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude the
insurer from noncompliance with its obligations.
When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must
be strictly interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture.
In the case at bar, the vague contractual provision in the policy must be construed in favor of
the insured and in favor of the effectivity of the insurance contract. The conflicting provisions must be
harmonized to mean that upon the purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and effective, valid, and binding until
terminated by Philamlife by disapproving the insurance application. The inaction of the insurer cannot
be interpreted as a termination of the insurance contract, as the termination must be explicit and
unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal
footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast
amounts of experience in the industry purposefully used to its advantage. More often than not,
insurance contracts are contracts of adhesion containing technical terms and conditions of the
industry, confusing if at all understandable to laypersons, that are imposed on those who wish
to avail of insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to be
delineated. Hence, in order to protect the interest of insurance applicants, insurance
companies must be obligated to act with haste upon insurance applications, to either deny or
approve the same, or otherwise be bound to honor the application as a valid, binding, and
effective insurance contract

Philamcare Health Systems Inc. v. Court of Appeals and Julita Trinos

FACTS
Ernani Trinos, the deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare, and the application was approved for a period of one year, and
he was issued a Health Care Agreement, and under the agreement, the respondents husband was
entitled to avail of hospitalization benefits (ordinary or emergency) and was also entitled to avail of
out-patient benefits (annual physical examinations, preventive health care and other out-patient
services). Upon the termination of the agreement, it was extended for another year and the amount of
coverage increased. During that period, Ernani suffered a heart attack, and while he was confined in
the hospital, the respondent tried to claim the benefits under the health care agreement, but was
denied on the grounds that the health care agreement was void, and the fact that there was
apparently concealment regarding Ernanis medical history (he had no answer to the question in the
application form: Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details), and because of this, the respondent had to shoulder the expenses. Ernani eventually died.
The respondent then instituted an action for damages against petitioner Philamcare and its president,
asking for the reimbursement of her expenses, plus moral damages, and the lower court ruled in her
favor, ordering the petitioners to pay and reimburse her. The decision was affirmed by the CA, but
deleted all awards for damages and absolved the petitioners president.
Petitioners claim that he health care agreement is not an insurance contract therefore the
incontestability clause under the IC does not apply. Petitioner claims that the agreement grants living
benefits and that only medical and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is indemnified for his loss. It also
argues that unlike insurance contracts which last longer, the agreement was only for one year,
therefore the incontestability clause does not apply as the same requires an effectivity period of at
least 2 years. Furthermore it argues that it is not an insurance company governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the DOH.
ISSUE
Whether or not the health care agreement is a contract of insurance
HELD
Yes. Section 2(1) IC defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium
Section 3 IC states that any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest against him, may be insured against. Every person has
an insurable interest in the life and health of himself.
Section 10 IC provides: Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he has
a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or
service, of which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of the respondents husband in obtaining the health
care agreement was his own health, and the agreement was in the nature of a non-life insurance
which is practically a contract of indemnity. Once the member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingent, the health care provider must pay
for the same to the extent agreed under the contract.
Petitioner claims that the respondents husband concealed material information in his
application, as the application required that the respondents husband sign an express authorization
for any person, organization or entity that has nay record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any other medical advice
or examination, which may affect the eligibility for health care coverage, and it is also required that
the applicant disclose his medical history.
Though there is a stipulation regarding the invalidation of the agreement, the Court held that
the petitioner cannot merely rely on such stipulation, which states that failure to disclose or

misrepresentation of any material information would invalidate the agreement from the very
beginning. It cannot be claimed that the respondents husband in answering the questions regarding
his medical history would be considered as a fraudulent intent on his part, as the insurer is not
justified in relying upon such statement but is obligated to make further inquiries. It is necessary that
the fraudulent intent on the part of the insured must be established for the insurance contract to be
rescinded.
Concealment as a defense for the health care provider or insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the provider or insurer.
Section 27 IC: a concealment entitles the injured party to rescind a contract of insurance. The
right to rescind should be exercised previous to the commencement of an action on the
contract
With or without the authority to investigate, the petitioner is liable for the claims made under
the contract, and having assumed responsibility, it is bound to answer to them. The liability of the
health care provider attaches once the member is hospitalized for the disease or injury covered by
the agreement or whenever he avails of the benefits he has prepaid.
The cancellation of health care agreements as in insurance policies require the concurrence of
the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request
of insured, to furnish facts on which cancellation is based
But in the case at bar, none of the preconditions were fulfilled in the case.
The Court emphasized that when the terms of insurance contracts contain limitation on liability,
courts should construe them in such a way as to preclude the insurer from non-compliance with his
obligation. As such is a contract of adhesion, the terms of the insurance contract are to be construed
strictly against the party which prepared the contractthe insurer. Because of the insurance
companys exclusive control over the terms and phraseology of the insurance contract, any ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture. This applies to health care agreements.
Though the petitioner claims that the respondent was not the legal wife of the deceased
member, as at the time of their marriage the deceased was previously married to another woman who
was still alive, the Court held that the health care agreement is in the nature of a contract of indemnity
therefore payment must be made to the party who incurred the expenses, therefore the respondent is
entitled to reimbursement.
Phil. Healthcare Insurance Providers v. CIR
FACTS
Petitioner Philippine Health Care Providers Inc. is a domestic corporation whose primary
purpose is to establish, maintain, conduct and operate a prepaid group practice health care delivery
system/health maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan, and to provide for the administrative, legal and financial responsibilities of the
organization. Individuals who are enrolled in this program pay an annual membership fee and are
entitled to various medical services. Respondent Commissioner of Internal Revenue sent a letter to
the petitioner demanding the payment of deficiency taxes from the years 196-1997, and such
deficiency assessment was imposed on the petitioners health care agreement with the members of
the health care program pursuant to Section 185 1997 Tax Code. The petitioner protested the
assessment but because of the inaction of the respondent, the petitioner filed a petition with the CTA
to cancel the deficiency VAT and DST ( documentary tax) assessments. The CTA ordered the
petitioner to pay the VAT deficiency but the DST assessment was cancelled and set aside. The
respondent then appealed to the CA regarding the cancellation of the DST assessment, claiming that
the petitioners healthcare agreement was a contract of insurance subject to DST under Section 185
1997 Tax Code. The CA held that the health care agreement was in the nature of a non-life insurance
contract subject to DST, therefore requiring the petitioner to pay the deficient DST assessment for
1996 and 1997. The petitioner moved for reconsideration by the CA denied it.
ISSUE
Whether or not the petitioners must pay the deficient DST assessment
HELD
No. The Supreme Court granted the motion for reconsideration and reversed and set aside the ruling
of the CA against the petitioners, by cancelling and setting aside the order for the petitioner to pay the
deficiency DST assessment. The petitioner claimed that it is important for the court to characterize the
business it is engaged in, whether it is an HMO (Health Maintenance Organization) or an insurance
company, so as to determine whether or not it is liable for DST on its health care agreements. The

Court emphasized that HMOs are not engaged in insurance business. Based on Section 185 of the
1997 Tax Code, there are two requisites needed before the DST can apply: (1) the document must be
a policy of insurance or an obligation in the nature of indemnity. (2) the maker should be transacting
the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland and fire insurance). The
petitioner is indeed an HMO, which provides, offers or arranges for coverage of designated health
services needed by plan members for a fixed prepaid premium, and the payments do not vary with
the extent, frequency or type of services provided.
In the case at bar, the petitioner was an HMO but not engaged in the business of insurance
during the pertinent taxable years. Section 2(2) IC provides what constitutes an insurance business or
transacting an insurance business:
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as
merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized as
constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business
HMO are not considered as insurance business, and one test applied is whether the
assumption of risk and indemnification of loss (elements of an insurance business) are the principal
object and purpose of the organization, or whether they are merely incidental to its business. If they
are merely incidental and service is the principal purpose, then business is not insurance.
HMO: the cooperative is concerned principally with getting service rendered to its members
and doing so at lower prices made possible by quantity purchasing and economies in
operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to
broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas,
rather than merely protecting against the financial loss caused by extraordinary and unusual
occurrences, such as death, disaster at sea, fire and tornado. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment,
the substantial reduction in cost by quantity purchasing in short, getting the medical job done
and paid for; not, except incidentally to these features, the indemnification for cost after the
services is rendered. Except the last, these are not distinctive or generally characteristic of the
insurance arrangement.
That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function becomes
faint, if not extinct.
The fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is its principal object
purpose.
HMO: service rather than indemnity as the principal purpose; There is another and more
compelling reason for holding that the service is not engaged in the insurance business.
Absence or presence of assumption of risk or peril is not the sole test to be applied in
determining its status. The question, more broadly, is whether, looking at the plan of operation
as a whole, service rather than indemnity is its principal object and purpose.Certainly the
objects and purposes of the corporation organized and maintained by the California physicians
have a wide scope in the field of social service. Probably there is no more impelling need than
that of adequate medical care on a voluntary, low-cost basis for persons of small income. The
medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of
a high order and not indemnity.[26]
The Court emphasized the main difference between an HMO and an insurance company, with
the HMO undertaking to provide or arrange for the provision of medical services through participating
physicians, while insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Therefore the mere presence of risk is not sufficient to
override the primary purpose of the business to provide medical services as needed, with payment
made directly to the provider. So even though the petitioner assumes the risk of paying the cost of
these service, even if significantly more than what the member has prepaid, it nevertheless cannot be

considered as engaged in the insurance business. As an HMO, it is obligated to maintain the good
health of its members, and its health care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part, therefore its agreements are not to indemnify its
members against any loss or damage arising from a medical condition but to provide the health and
medical services needed to prevent such loss or damage.
The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only
undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of
rates contained in the policy.
The primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporations plan, not only will the subscribers
be deprived of the protection which they might reasonably have expected would be provided,
but the corporation will, in effect, be doing business solely as a health and accident indemnity
insurer without having qualified as such and rendering itself subject to the more stringent
financial requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render health
care services to or for persons covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make payment directly to the
participating provider
The Court also noted that the health care agreement in the case is not an insurance contract
contemplated under Section 185 NIRC 1997, as such section states that DST is imposed on all
policies of insurance or obligations of the nature of indemnity for loss, damage or liability. Tax statutes
are strictly imposed against the taxing authority as taxation is a destructive power interfering with
personal and property rights of the people and takes from them a portion of their property for the
support of the government, therefore tax laws cannot be extended by implication beyond the clear
import of their language, nor their operation enlarged as to embrace matters not specifically provided.
Section 2 IC defines a contract of insurance and its necessary elements, but in the case at bar,
the elements characterizing an insurance contract are no present in the health care agreements. The
primary purpose of the HMO is in rendering service, therefore it is not a contract of insurance and it
does not necessarily mean that the contract which contains all the elements would be considered as
an insurance contract. Furthermore, there is no loss, damage or liability on the part of the member
that should be indemnified by the petitioner as an HMO, because under the agreement, the member
pays the petitioner a predetermined consideration in exchange for the medical services, the petitioner
does not reimburse or indemnify the member as the latter does not pay any third party, rather it is the
petitioner who pays the participating health care providers or physicians for the services rendered at
pre-agreed rates, the member does not make any such payment. Indemnification presupposes that a
liability or claim has already been incurred, but in the case of HMO, there is no indemnity because the
member merely avails of medical services to be paid or already paid in advance at a pre-agreed price
under the agreements.
The agreement also allows a member to take advantage of the benefits even in the absence of
any peril, loss or damage on his or her part. Furthermore, though the petitioner is obliged to
reimburse the member who receives care from a non-participating physician or hospital, such is a
minor part of the list of services available, the assumption of the expense by the petitioner is not
confined to the happening of a contingency but includes incident even in the absence of illness or
injury. Though risk is a primary element of an insurance contract, it does not, by itself, is sufficient to
establish it, as almost anyone who undertakes a contractual obligation always bears a certain degree
of financial risk. The risk involved in an HMO is a business risk (a risk that it might fail to earn a
reasonable return on its investment) but it is not the risk peculiar only to insurance companies, and
their objective is to provide medical services at reduced cost and not to distribute risk like an insurer.
Insurance risk: also known as actuarial risk is the risk that the cost of insurance claims might
be higher than the premiums paid. The premiums are calculated on the basis of assumptions
made relative to the insured.

Filipinas Compana De Seguros v. Christern, Heunefeld and Co. Inc.

FACTS
Respondent Christern, Huenefeld and Co. Inc., after paying the corresponding premium,
obtained a fire policy from petitioner Filipinas Comapan de Seguros, covering merchandise contained
in a building in Manila. During the Japanese military occupation, the insured merchandise inside the
building were burned, and so the respondent submitted to the petitioner its claim under the policy. The
salvaged goods were sold at a public auction and the total loss suffered by the responded was fixed
at P92,650. Petitioner refused to pay the claim on the ground that the policy had ceased to be in force
on the date US declared war against Germany, and the respondent corporation, though organized
under and by the virtue of Philippine laws, was being controlled by German subjects and the
petitioner being a company under American jurisdiction. But because of the order by the Director of
Bureau of Financing, Philippine Executive Commission, the petitioner paid the respondent the sum.
Petitioner then filed an action with the CFI of Manila to recover from the respondent the paid
sum, as the petitioner claimed that the insured merchandise were burned after the policy issued in
1941 in favor of the respondent ceased to be effective, and the payment made by the petitioner was
done under pressure. The CFI Manila dismissed the action. The CA affirmed the decision. The CA
held that the petitioner cannot claim that the respondent corporation became an enemy when the US
declared war against Germany, as jurisprudence show that a corporation is a citizen of the country or
state by and under the laws of which it was created or organized, and that the nationality of the
corporation is not determined by the character or citizenship of its stockholders.
ISSUE
Whether or not the fire policy ceased to exist because the respondent corporation is considered as an
enemy corporation
HELD
Yes. The Supreme Court held that the respondent became an enemy corporation upon the outbreak
of WWII, and the jurisprudence relied upon by the CA have lost its force based on the latest decisions
of the SC of the US (Clark v. Uebersee Finanz Corporation). Under the Philippine Insurance Law (Act
No. 2427 Section 8, anyone except a public enemy may be insured.
Effect of war, generally. All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the
enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason
that the subjects of one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do anything detrimental
too their country's interest. The purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one country should destroy its enemy's
property and repay in insurance the value of what has been so destroyed, or that it should in
such manner increase the resources of the enemy, or render it aid, and the commencement of
war determines, for like reasons, all trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who compose the belligerent powers, exist, as
to each other, in a state of utter exclusion, and are public enemies.
Because of the war, the respondent company has become an enemy corporation and the
insurance policy issued in its favor by the petitioner had ceased to be valid and enforceable, as the
respondent was not entitled to any indemnity under the said policy from the petitioner during the war,
however, elementary rules of justice (in the absence of any specific provision in the Insurance Law)
require that the premium paid by the respondent during the period covered by the policy, should be
returned by the petitioner.

Constantino v. Asia Life Insurance Co.

FACTS
In the first case, Respondent Asia Life Insurance Co., a foreign corporation incorporated under
US laws, in consideration of a premium, issued a policy to petitioner Arcadio Constatino for a term of
20 years, with petitioner Paz Lopez de Constantino as the appointed beneficiary. After the first
payment was made, no further premiums were paid, until the insured eventually died. Because of the
Japanese occupation, the respondent corporation had to close its branch office in Manila from 1942
to 1945.
In the second case, respondent corporation issued a policy covering the lives of Tomas Ruiz
and Agustina Peralta, and the annual premium of the policy was regularly paid. Upon the Japanese
occupation, the insured and the insurer became separated by lnes of war and it was impossible and
illegal for them to deal with each other. Eventually Tomas Ruiz died, and petitioner Agusitina Peralta
demanded payment from the respondent corporation, but it refused to pay on the ground of nonpayment of the premiums.
Petitioners in both cases claim that as beneficiaries, they are entitled to receive the proceeds
of the policies, and they allege that the non-payment of the premiums was because of the closing of
the respondents offices in Manila during the Japanese occupation and the impossible circumstances
created by war. The respondent corporation claims 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 respondent.
ISSUE
Whether or not the petitioners are entitled to receive the proceeds of the policies
HELD
No. The Supreme Court affirmed the decision of the lower court, and absolved the respondent
company from all liability on the policies in question. Since 1917, the Philippine law on Insurance was
found in Act No. 2427, which was largely copied from the Civil Code of California. In considering the
express terms of the policy in question, that all premium payments are due in advance and any
unpunctuality in making such payment shall cause the policy to lapse, the Court considered the
definition of contracts of insurance based on jurisprudence: "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."
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.
After considering the Insurance Act, the Court is persuaded that the non-payment of premiums
is a vital defense of insurance companies since the very beginning and Act No. 2427 expressly
preserved it, as it provided that after the policy shall have been in force for 2 years, it shall be
incontestable/the insurer shall have no defense except for fraud, non-payment of premiums, and
military or naval service in time of war, therefore the fundamental character of the undertaking to pay
premiums and the high importance of the defense of its non-payment was recognized.

Great Pacific Life Assurance Corp. v. Court of Appeals

FACTS
A contract of group insurance was executed between petitioner Great Pacific Life Assurance
Corporation (Grepalife) and Development Bank of the Philippines (DBP), with Grepalife agreeing to
insure the lives of eligible housing loan mortgagors of DBP. Dr. Wilfredo Leuterio, a physician and
housing debtor of DBP, applied for membership in the said group life insurance plan, and answerd the
questions concerning his health condition in the application form. Petitioner Grepalife then issued a
certificate as an insurance coverage of Dr. Leuterio to the extent of his DBP mortgage indebtedness.
Dr. Leuterio died because of massive cerebral hemorrhage, and consequently DBP submitted a death
claim to petitioner Grepalife. Grepalife denied the claim, alleging that apparently Dr. Leuterio was not
physically healthy when he applied for the insurance coverage, and that he did not disclose that he
had been suffering from hypertension, which was the cause of his death, and that such nondisclosure constituted a concealment that justified the denial of the claim.
Medarda V. Leuterio, the widow, then filed a complaint with the RTC against petitioner
Grepalife, and the lower court ruled in favor of the respondent widow and against petitioner Grepalife,
a ruling affirmed by the CA.
Petitioner claims that the complaint against them was instituted by the widow of Dr. Leuterio,
who was not the real party in interest, and hence the trial court had not jurisdiction over the case, and
it argued that when the CA affirmed the ruling of the lower court, Grepalife was held liable to pay the
proceeds of insurance contract in favor of DBP which was the indispensable party who was not joined
in the suit.
ISSUE
Whether or not the respondent widow is entitled to the payment of the insurance proceeds
HELD
Yes. The Supreme Court affirmed with modification the decision of the CA and ordered the petitioner
to pay the said insurance proceeds. The Court first considered the insurable interest in the mortgaged
properties and the parties in the case at bar. A group insurance policy of mortgagors or a mortgage
redemption insurance, is a device used for the protection of both the mortgagee and the mortgagor:
for the mortgagee, it has to enter into the contract so that in the event of an unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be
applied to the payment of the mortgage debt, therefore relieve the heirs of the mortgagor from paying
the obligation, similarly, protection is also given to the mortgagor so that in the event of death, the
mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage
indebtedness. Therefore, where the mortgagor pays the insurance premium under the group
insurance policy, making the loss payable to the mortgagee, the insurance is on the mortgagors
interest and the mortgagor continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, and such loss-payable clause does not
make the mortgagee a party to the contract.
Section 8 IC: Unless the policy provides, where a mortgagor of property effects insurance in
his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of
insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor,
who does not cease to be a party to the original contract, and any act of his, prior to the loss,
which would otherwise avoid the insurance, will have the same effect, although the property is
in the hands of the mortgagee, but any act which, under the contract of insurance, is to be
performed by the mortgagor, may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.
In the case at bar, the insured private respondent did not cede to the mortgagee (Leuterio) all
his rights or interest in the insurance: In the event of the debtors death before his indebtedness with
the creditor DBP shall have been fully paid, an amount to pay the outstanding indebtedness shall first
be paid to the creditor and the balance of the sum assured, if there is any, shall then be paid to the
beneficiaries designated by the debtor. There in the case, when DBP submitted the insurance claim
against petitioner, the petitioner denied the payment grounded on the defense of concealment
committed by the insured (Leuterio), thereafter DBP collected the debt from the mortgagor and took
the necessary action of foreclosure on the residential lot.
Insured, being the person with whom the contract was made, is primarily the proper person to
bring suit thereon. * * * Subject to some exceptions, insured may thus sue, although the policy
is taken wholly or in part for the benefit of another person named or unnamed, and although it
is expressly made payable to another as his interest may appear or otherwise. * * * Although a
policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made payable
to him, yet the mortgagor may sue thereon in his own name, especially where the mortgagees
interest is less than the full amount recoverable under the policy, * * *.

 Insured may be regarded as the real party in interest, although he has assigned the policy for
the purpose of collection, or has assigned as collateral security any judgment he may obtain
The Court emphasized that since a policy of insurance upon life or health may actually pass by
transfer, will or succession to any person whether he has insurable interest or not, such person may
recover from the proceeds, therefore in the case at bar, the widow of Dr. Leuterio may file the suit
against Grepalife as insurer.
Regarding the issue that Dr. Leuterio failed to disclose that he had hypertension, the Court
defined concealment to exist where the assured has knowledge of a fact material to the risk, and
honesty, good faith and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same. In the case at bar, Dr. Leuterio answered the
insurance application without consulting a doctor and it might be possible that he died because of
cerebral hemorrhage, probably secondary to hypertension, and the petitioner merely relied on such
reports to ground their refusal to pay the insurance claim. There was no sufficient proof to show that
the insured suffered from hypertension, and it failed to establish that there was concealment made by
the insured, therefore it cannot refuse payment of the claim.
The fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract. Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer. In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.
A life insurance policy is a valued policy. Unless the interest of a person insured is susceptible
of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon
life or health is the sum fixed in the policy. The mortgagor paid the premium according to the
coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtors death during the terms of this
insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor and the
balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies designated
by the debtor
The Court also held that DBP foreclosed the residential lot in satisfaction of the mortgagors
outstanding loan, and considering the supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity requires that DBP should not
unjustly enrich itself at the expense of another, therefore it cannot collect the insurance proceeds after
it already foreclosed the mortgage, and so the proceeds now rightly belong to the heirs of Leuterio.
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CA-G.R. SP No. 31916,
entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance
Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against private respondent
Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22
December 1989, he obtained from the private respondent fire insurance policy No. F-14622 2 for P100,000.00. The
period of the policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-in-trade
consisting principally of dry goods such as RTW's for men and women wear and other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co.,
Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to
P392,130.50, itemized as follows:

Zenco Sales, Inc.

F. Legaspi Gen. Merchandise

Cebu Tesing Textiles

P55,698.00

86,432.50

250,000.00 (on credit)

P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or
which may subsequently be effected, covering any of the property or properties consisting of stocks
in trade, goods in process and/or inventories only hereby insured, and unless such notice be given
and the particulars of such insurance or insurances be stated therein or endorsed in this policy
pursuant to Section 50 of the Insurance Code, by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this policy shall be deemed forfeited, provided
however, that this condition shall not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco,
Agusan del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with the
private respondent a claim under the policy. On 28 December 1990, the private respondent denied the claim
because it found that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire insurance
policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines
First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000.
Phils. First CEB/F 24758. 4
The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.
The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission (Case No. 3340)
for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "AM" 6 thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He
admitted in the said letter that at the time he obtained the private respondent's fire insurance policy he knew that the two
policies issued by the PFIC were already in existence; however, he had no knowledge of the provision in the private
respondent's policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the private
respondent's agent; and had it been mentioned, he would not have withheld such information. He further asserted that the
total of the amounts claimed under the three policies was below the actual value of his stocks at the time of loss, which
was P1,000,000.00.
In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as its principal
defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate Condition 3 as he
had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without informing him or securing his consent; and that Cebu Tesing Textile, as
his creditor, had insurable interest on the stocks. These findings were based on the petitioner's testimony that he came to
know of the PFIC policies only when he filed his claim with the private respondent and that Cebu Tesing Textile obtained
them and paid for their premiums without informing him thereof. The Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant
the sum of P100,000.00 with legal interest from the time the complaint was filed until fully satisfied
plus the amount of P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of
respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in its resolution of
20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a petition for review. The petition
was docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance Commission
because it found that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART
(MR. ARMANDO GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only
the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by the Tesing
Textiles which is alleged to have taken out the other insurance without the knowledge of private

respondent. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both
invoices, Tesing Textiles is indicated to be only the mortgagee of the goods insured but the party to
which they were issued were the "DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the policies on the same
property subject of the insurance with petitioner. Hence, in failing to disclose the existence of these
insurances private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by
his letter to petitioner [of 18 January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision requiring me to inform
your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not
mention about said requirement at the time he was convincing me to insure with you.
If he only die or even inquired if I had other existing policies covering my
establishment, I would have told him so. You will note that at the time he talked to me
until I decided to insure with your company the two policies aforementioned were
already in effect. Therefore I would have no reason to withhold such information and
I would have desisted to part with my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my investments. The
actual value of my stocks damaged by the fire was estimated by the Police
Department to be P1,000,000.00 (Please see xerox copy of Police Report Annex
"A"). My Income Statement as of December 31, 1989 or five months before the fire,
shows my merchandise inventory was already some P595,455.75. . . . These will
support my claim that the amount claimed under the three policies are much below
the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know that there were other
insurances taken on the stock-in-trade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He
contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of
jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A
QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM
AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS
EVIDENCE DURING THE HEARING OR TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE
PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of
the two insurance policies issued by the PFIC when he obtained the fire insurance policy from the private
respondent, thereby, for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he is
precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of
18 January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus
should not have been considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a
copy of this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and
made integral part of the complaint. 12 It has attained the status of a judicial admission and since its due execution and
authenticity was not denied by the other party, the petitioner is bound by it even if it were not introduced as an
independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two
policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in
his letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of
Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under
Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are conclusive and binding
upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18
January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied upon cannot prevail over a written admission madeante litem
motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or

original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed
twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its
incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does
not avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies and is intended to
prevent an increase in the moral hazard. It is commonly known as the additional or "other insurance" clause and has been
upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject matter, the same
interest therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein
and both interests may be one policy, or each may take out a separate policy covering his interest, either at the
same or at separate times. 18 The mortgagor's insurable interest covers the full value of the mortgaged property, even
though the mortgage debt is equivalent to the full value of the property. 19 The mortgagee's insurable interest is to the
extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but
his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the
debt, not exceeding the value of the mortgaged property. 20 Thus, separate insurances covering different insurable
interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The
mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the
consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage
clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or a
"standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may
be attached; or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may
appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made
a party to the contract himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of
the mortgagee. 22 This kind of policy covers only such interest as the mortgagee has at the issuing of the policy. 23
On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an
agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted, however, that
although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his
interest, pays the premiums, and obtains on the assurance that it insures him, the policy is in fact in the form used to
insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause
which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may
appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and
Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or insurances already effected, or
which may subsequently be effected covering any of the property hereby insured, and unless such
notice be given and the particulars of such insurance or insurances be stated in or endorsed on this
Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits
under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured
must be declared by the insured in writing and he must cause the company to add or insert it in the policy, without
which such policy shall be null and void, and the insured will not be entitled to indemnity in case of loss,"Condition
3 in the private respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It
expressly provides that the condition "shall not apply when the total insurance or insurances in force at the time of
the loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the
insured and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the
insured was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that
forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the
person claiming thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit
recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently, provisions, conditions or
exceptions in policies which tend to work a forfeiture of insurance policies should be construed most strictly against those
for whose benefits they are inserted, and most favorably toward those against whom they are intended to operate. 30 The
reason for this is that, except for riders which may later be inserted, the insured sees the contract already in its final form
and has had no voice in the selection or arrangement of the words employed therein. On the other hand, the language of

the contract was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the
interest of the insurers and the technical language employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from
ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition
applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00
of the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the
property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and
the portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile
Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by
several insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC
do not cover the same interest as that covered by the policy of the private respondent, no double insurance exists.
The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private
respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at
the time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's
liability up to a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the
rationale behind the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus
avert the perpetration of fraud. When a property owner obtains insurance policies from two or more insurers in a
total amount that exceeds the property's value, the insured may have an inducement to destroy the property for the
purpose of collecting the insurance. The public as well as the insurer is interested in preventing a situation in which
a fire would be profitable to the insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No.
31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the transaction
entered into between them on December 18, 1951 be declared as one of loan, and the document executed covering
the transaction as one of equitable mortgage to secure the payment of said loan; (2) the defendant be ordered to
credit to the plaintiff with the necessary amount from the sum received by the defendant from the Associated
Insurance & Surety Co., Inc. and to apply the same to the payment of plaintiff's obligation thus considering it as fully
paid; and (3) the defendant be ordered to pay to plaintiff the difference between the alleged indebtedness of plaintiff
and the sum received by defendant from the aforementioned insurance company, plus the sum allegedly paid to
defendant as interest on the alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special defense that the transaction entered into
between the plaintiff and defendant is one of sale with option to repurchase but that the period for repurchase had
expired without plaintiff having returned the price agreed upon as a result of which the ownership of the property had
become consolidated in the defendant. Defendant also set up certain counterclaims which involve a total amount of
P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the
parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor her
counsel appeared, even if the latter had been notified of the postponement almost a month earlier, and so the court
received the evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence presented,
rendered judgment granting the relief prayed for in the complaint.
On February 2, 1954, the original counsel for the defendant was substituted and the new counsel immediately
moved that the judgment be set aside on the ground that, due to mistake or excusable negligence, defendant was
unable to present her evidence and the decision was contrary to law, and this motion having been denied,
defendant took the present appeal.
The important issue to be determined in this appeal is whether the lower court committed a grave abuse of
discretion in not reopening the case to give defendant an opportunity to present her evidence considering that the
failure of her original counsel to appear was due to mistake or execusable negligence which ordinary prudence
could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel showed
interest in the early disposal of this case by moving the court to have it set for trial. The first date set was April 7,
1953, but no hearing was had on that date because plaintiff had moved to postpone it. The case was next set for
hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred to November 6, 1953. Then,

upon petition of defendant, the trial had to be moved to December 15, 1953, and because Atty. Guerrero could not
appear on said date because of a case he had in Cebu City, the hearing was postponed to January 18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed
Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected that
Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at all. It is
averred that "The days that followed his appointment were very busy days for defendant's former counsel. There
was an immediate need for clearing the backlog of official business, including the reorganization of the Department
of Foreign Affairs and our Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in
negotiations of national importance like the Japanese reparations, and the revision of the trade agreement with the
United States, that, Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all these
unavoidable confusion that followed in the wake of Atty. Guerrero's sudden and unexpected appointment, the trial of
this case scheduled for January 18, 1954 escaped his memory, and consequently, Atty. Guerrero and the defendant
were unable to appear when the case was called for trial." These reasons, it is intimated, constitute excusable
negligence which ordinary prudence could not have guarded against and should have been considered by the trial
court as sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of mistake or
excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos, 24 Phil., 446;
Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to be
disturbed unless it is shown that the court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70;
Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821;
Salvavs. Palacio and Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said: "After going
over the same arguments, this Court is of the opinion, and so holds that the decision of this Court of January 18,
1954 should not be disturbed." Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and
the fact that he was given almost one month notice before the date set for trial, we are persuaded to conclude that
the trial court did not abuse its discretion in refusing to reconsider its decision.
Coming now to the merits of the case, we note that the lower court made the following findings: On December 18,
1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following conditions: (a) that
plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that defendant shall deduct from the
loan certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as interest for the first
month; and (c) that after making the above deductions, defendant shall deliver to plaintiff only the balance of the
loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00 corresponding to
nine months from December 18, 1951, on the basis of P250.00 a month, which is more than the maximum interest
authorized by law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign a document
known as "Conditional Sale of Residential Building", purporting to convey to defendant, with right to repurchase, a
two-story building of strong materials belonging to plaintiff. This document did not express the true intention of the
parties which was merely to place said property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the Associated
Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in the name of
defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the
insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that she be credited with the
necessary amount to pay her obligation out of the insurance proceeds but defendant refused to do so. And on the
strength of these facts, the court rendered decision the dispositive part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as
shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the
defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from
the Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the sum of P12,000.00
as stated in the complaint, thus considering the agreement of December 18, 1951 between the herein
plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance
collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as
interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction
does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and
overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to
refund to herein plaintiff, plus the balance of P1,107 representing the difference of the sum loan of P12,000
and the collected insurance of P13,107 from the insurance company abovementioned to which the herein
plaintiff is entitled to receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully compensated
by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107 representing the
difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from the insurance company
notwithstanding the fact that it was not proven that the insurance was taken for the benefit of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an insurance
taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee, independently of the
mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance
proceeds in case of loss, but in such case, he is not allowed to retain his claim against the mortgagor,but is passed
by subrogation to the insurer to the extent of the money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in
another way, "the mortgagee may insure his interest in the property independently of the mortgagor. In that event,
upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the
mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not

allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the
insurance money paid." (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a
case that arose in this jurisdiction. In the case mentioned, an insurance contract was taken out by the mortgagee
upon his own interest, it being stipulated that the proceeds would be paid to him only and when the case came up
for decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the extent of his
credit at the time of the loss. It was declared that the mortgaged had no right of action against the mortgagee on the
policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate interest at his
own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor
has no interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage
debt" (19 R.C.L., p. 405), and that, furthermore, the mortgagee "has still a right to recover his whole debt of the
mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also
Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F.
Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent
the minority view (See case note, 3 Lawyers' Report Annotated, new series, p. 79). "The general rule and the weight
of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage. This is
put upon the analogy of the situation of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of the
insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in ordering
said defendant to deliver to the plaintiff the difference between her indebtedness and the amount of insurance
received by the defendant, for, in the light of the majority rule we have above enunciated, the correct solution should
be that the proceeds of the insurance should be delivered to the defendant but that her claim against the plaintiff
should be considered assigned to the insurance company who is deemed subrogated to the rights of the defendant
to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as follows:(1) the
transaction had between the plaintiff and defendant as shown in Exhibit A is merely an equitable mortgage intended
to secure the payment of the loan of P12,000;(2) that the proceeds of the insurance amounting to P13,107.00 was
properly collected by defendant who is not required to account for it to the plaintiff; (3) that the collection of said
insurance proceeds shall not be deemed to have compensated the obligation of the plaintiff to the defendant, but
bars the latter from claiming its payment from the former; and (4) defendant shall pay to the plaintiff the sum of
P810.00 representing the overpayment made by plaintiff by way of interest on the loan. No pronouncement as to
costs.
HILARIO GERCIO, plaintiff-appellee,
vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.
MALCOLM, J.:
The question of first impression in the law of life insurance to be here decided is whether the insured the husband
has the power to change the beneficiary the former wife and to name instead his actual wife, where the
insured and the beneficiary have been divorced and where the policy of insurance does not expressly reserve to the
insured the right to change the beneficiary. Although the authorities have been exhausted, no legal situation exactly
like the one before us has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer, and Andrea Zialcita,
the beneficiary, are the defendants. The complaint is in the nature of mandamus. Its purpose is to compel the
defendant Sun Life Assurance Co. of Canada to change the beneficiary in the policy issued by the defendant
company on the life of the plaintiff Hilario Gercio, with one Andrea Zialcita as beneficiary.
A default judgment was taken in the lower court against the defendant Andrea Zialcita. The other defendant, the Sun
Life Assurance Co. of Canada, first demurred to the complaint and when the demurrer was overruled, filed an
answer in the nature of a general denial. The case was then submitted for decision on an agreed statement of facts.
The judgment of the trial court was in favor of the plaintiff without costs, and ordered the defendant company to
eliminate from the insurance policy the name of Andrea Zialcita as beneficiary and to substitute therefor such name
as the plaintiff might furnish to the defendant for that purpose.
The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged to have been
committed by the lower court. The appellee has countered with a motion which asks the court to dismiss the appeal
of the defendant Sun Life Assurance Co. of Canada, with costs.
As the motion presented by the appellee and the first two errors assigned by the appellant are preliminary in nature,
we will pass upon the first. Appellee argues that the "substantial defendant" was Andrea Zialcita, and that since she
was adjudged in default, the Sun Life Assurance Co. of Canada has no interest in the appeal. It will be noticed,
however, that the complaint prays for affirmative relief against the insurance company. It will be noticed further that it
is stipulated that the insurance company has persistently refused to change the beneficiary as desired by the
plaintiff. As the rights of Andrea Zialcita in the policy are rights which are enforceable by her only against the
insurance company, the defendant insurance company will only be fully protected if the question at issue is

conclusively determined. Accordingly, we have decided not to accede to the motion of the appellee and not to order
the dismissal of the appeal of the appellant.
This brings us to the main issue. Before, however, discussing its legal aspects, it is advisable to have before us the
essential facts. As they are stipulated, this part of the decision can easily be accomplished.
On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No. 161481 on the life of
Hilario Gercio. The policy was what is known as a twenty-year endowment policy. By its terms, the insurance
company agreed to insure the life of Hilario Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if
the insured should die before said date, then to his wife, Mrs. Andrea Zialcita, should she survive him; otherwise to
the executors, administrators, or assigns of the insured. The policy also contained a schedule of reserves, amounts
in cash, paid-up policies, and renewed insurance, guaranteed. The policy did not include any provision reserving to
the insured the right to change the beneficiary.
On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio. Towards the end of the year
1919, she was convicted of the crime of adultery. On September 4, 1920, a decree of divorce was issued in civil
case no. 17955, which had the effect of completely dissolving the bonds of matrimony contracted by Hilario Gercio
and Andrea Zialcita.
On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada that he had revoked his
donation in favor of Andrea Zialcita, and that he had designated in her stead his present wife, Adela Garcia de
Gercio, as the beneficiary of the policy. Gercio requested the insurance company to eliminate Andrea Zialcita as
beneficiary. This, the insurance company has refused and still refuses to do.
With all of these introductory matters disposed of and with the legal question to the forefront, it becomes our first
duty to determine what law should be applied to the facts. In this connection, it should be remembered that the
insurance policy was taken out in 1910, that the Insurance Act. No. 2427, became effective in 1914, and that the
effort to change the beneficiary was made in 1922. Should the provisions of the Code of Commerce and the Civil
Code in force in 1910, or the provisions of the Insurance Act now in force, or the general principles of law, guide the
court in its decision?
On the supposition, first, that the Code of Commerce is applicable, yet there can be found in it no provision either
permitting or prohibiting the insured to change the beneficiary.
On the supposition, next, that the Civil Code regulates insurance contracts, it would be most difficult, if indeed it is
practicable, to test a life insurance policy by its provisions. Should the insurance contract, whereby the husband
names the wife as the beneficiary, be denominated a donation inter vivos, a donation causa mortis, a contract in
favor of a third person, or an aleatory contract? The subject is further complicated by the fact that if an insurance
contract should be considered a donation, a husband may then never insure his life in favor of his wife and vice
versa, inasmuch as article 1334 prohibits all donations between spouses during marriage. It would seem, therefore,
that this court was right when in the case of Del Val vs. Del Val ([1915]), 29 Phil., 534), it declined to consider the
proceeds of the insurance policy as a donation or gift, saying "the contract of life insurance is a special contract and
the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The
Civil Code has no provisions which relate directly and specifically to life-insurance contracts or to the destination of
life-insurance proceeds. . . ." Some satisfaction is gathered from the perplexities of the Louisiana Supreme Court, a
civil law jurisdiction, where the jurists have disagreed as to the classification of the insurance contract, but have
agreed in their conclusions as will hereafter see. (Re Succession of Leone Desforges [1914], 52 L.R.A. [N.S.], 689;
Lambert vs Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co. [1898], 50 La. Ann., 1027.)
On the further supposition that the Insurance Act applies, it will be found that in this Law, there is likewise no
provision either permitting or prohibiting the insured to change the beneficiary.
We must perforce conclude that whether the case be considered as of 1910, or 1914, or 1922, and whether the
case be considered in the light of the Code of Commerce, the Civil Code, or the Insurance Act, the deficiencies in
the law will have to be supplemented by the general principles prevailing on the subject. To that end, we have
gathered the rules which follow from the best considered American authorities. In adopting these rules, we do so
with the purpose of having the Philippine Law of Insurance conform as nearly as possible to the modern Law of
Insurance as found in the United States proper.
The wife has an insurable interest in the life of her husband. The beneficiary has an absolute vested interest in the
policy from the date of its issuance and delivery. So when a policy of life insurance is taken out by the husband in
which the wife is named as beneficiary, she has a subsisting interest in the policy. And this applies to a policy to
which there are attached the incidents of a loan value, cash surrender value, an automatic extension by premiums
paid, and to an endowment policy, as well as to an ordinary life insurance policy. If the husband wishes to retain to
himself the control and ownership of the policy he may so provide in the policy. But if the policy contains no
provision authorizing a change of beneficiary without the beneficiary's consent, the insured cannot make such
change. Accordingly, it is held that a life insurance policy of a husband made payable to the wife as beneficiary, is
the separate property of the beneficiary and beyond the control of the husband.
As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely provides in section 9 that
the decree of divorce shall dissolve the community property as soon as such decree becomes final. Unlike the
statutes of a few jurisdictions, there is no provision in the Philippine Law permitting the beneficiary in a policy for the
benefit of the wife of the husband to be changed after a divorce. It must follow, therefore, in the absence of a statute
to the contrary, that if a policy is taken out upon a husband's life the wife is named as beneficiary therein, a
subsequent divorce does not destroy her rights under the policy.

These are some of the pertinent principles of the Law of Insurance. To reinforce them, we would, even at the
expense of clogging the decision with unnecessary citation of authority, bring to notice certain decisions which seem
to us to have controlling influence.
To begin with, it is said that our Insurance Act is mostly taken from the statute of California. It should prove of
interest, therefore, to know the stand taken by the Supreme Court of that State. A California decision oft cited in the
Cyclopedias is Yore vs. Booth ([1895]), 110 Cal., 238; 52 Am. St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but slight dissent in the courts of this country, that a person who
procures a policy upon his own life, payable to a designated beneficiary, although he pays the premiums
himself, and keeps the policy in his exclusive possession, has no power to change the beneficiary, unless
the policy itself, or the charter of the insurance company, so provides. In policy, although he has parted with
nothing, and is simply the object of another's bounty, has acquired a vested and irrevocable interest in the
policy, which he may keep alive for his own benefit by paying the premiums or assessments if the person
who effected the insurance fails or refuses to do so.
As carrying great weight, there should also be taken into account two decisions coming from the Supreme Court of
the United States. The first of these decisions, in point of time, is Connecticut Mutual Life Insurance Company vs
Schaefer ([1877]), 94 U.S., 457). There, Mr. Justice Bradley, delivering the opinion of the court, in part said:
This was an action on a policy of the court, in part said: July 25, 1868, on the joint lives of George F. and
Francisca Schaefer, then husband and wife, payable to the survivor on the death of either. In January, 1870,
they were divorced, and alimony was decreed and paid to the wife, and there was never any issue of the
marriage. They both subsequently married again, after which, in February, 1871, George F. Schaefer died.
This action was brought by Francisca, the survivor.
xxx

xxx

xxx

The other point, relating to the alleged cessation of insurable interest by reason of the divorce of the parties,
is entitled to more serious consideration, although we have very little difficulty in disposing of it.
It will be proper, in the first place, to ascertain what is an insurable interest. It is generally agreed that mere
wager policies, that is, policies in which the insured party has no interest in its loss or destruction, are void,
as against public policy. . . . But precisely what interest is necessary, in order to take a policy out of the
category of mere wager, has been the subject of much discussion. In marine and fire insurance the difficulty
is not so great, because there insurance is considered as strictly an indemnity. But in life insurance the loss
can seldom be measured by pecuniary values. Still, an interest of some sort in the insured life must exist. A
man cannot take out insurance on the life of a total stranger, nor on that of one who is not so connected with
him as to make the continuance of the life a matter of some real interest to him.
It is well settled that a man has an insurable interest in his own life and in that of his wife and children; a
woman in the life of her husband; and the creditor in the life of his debtor. Indeed it may be said generally
that any reasonable expectation of pecuniary benefit or advantage from the continued life of another creates
an insurable interest in such life. And there is no doubt that a man may effect an insurance on his own life for
the benefit of a relative or fried; or two or more persons, on their joint lives, for the benefit of the survivor or
survivors. The old tontines were based substantially on this principle, and their validity has never been called
in question.
xxx

xxx

xxx

The policy in question might, in our opinion, be sustained as a joint insurance, without reference to any other
interest, or to the question whether the cessation of interest avoids a policy good at its inception. We do not
hesitate to say, however, that a policy taken out in good faith and valid at its inception, is not avoided by the
cessation of the insurable interest, unless such be the necessary effect of the provisions of the policy
itself. . . .
. . . .In our judgment of life policy, originally valid, does not cease to be so by the cessation of the assured
party's interest in the life insured.
Another controlling decision of the United States Supreme Court is that of the Central National Bank of Washington
City vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief Justice Fuller, as the organ of the court, announced the
following doctrines:
We think it cannot be doubted that in the instance of contracts of insurance with a wife or children, or both,
upon their insurable interest in the life of the husband or father, the latter, while they are living, can exercise
no power of disposition over the same without their consent, nor has he any interest therein of which he can
avail himself; nor upon his death have his personal representatives or his creditors any interest in the
proceeds of such contracts, which belong to the beneficiaries to whom they are payable.
It is indeed the general rule that a policy, and the money to become due under it, belong, the moment it is
issued, to the person or persons named in it as the beneficiary or beneficiaries, and that there is no power in
the person procuring the insurance, by any act of his, by deed or by will, to transfer to any other person the
interest of the person named.

A jurisdiction which found itself in somewhat the same situation as the Philippines, because of having to reconcile
the civil law with the more modern principles of insurance, is Louisiana. In a case coming before the Federal
Courts, In re Dreuil & Co. ([1915]), 221 Fed., 796), the facts were that an endowment insurance policy provided for
payment of the amount thereof at the expiration of twenty years to the insured, or his executors, administrators, or
assigns, with the proviso that, if the insured die within such period, payment was to be made to his wife if she
survive him. It was held that the wife has a vested interest in the policy, of which she cannot be deprived without her
consent. Foster, District Judge, announced:
In so far as the law of Louisiana is concerned, it may also be considered settled that where a policy is of the
semitontine variety, as in this case, the beneficiary has a vested right in the policy, of which she cannot be
deprived without her consent. (Lambert vs Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16.)
(See in same connection a leading decision of the Louisiana Supreme Court, Re Succession of Leonce
Desforges, [1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the insured to destroy the vested interest of the beneficiary in the
policy. That point is well covered in the case of Entwistle vs. Travelers Insurance Company ([1902], 202 Pa. St.,
141). To quote:
. . . The interest of the wife was wholly contingent upon her surviving her husband, and she could convey no
greater interest in the policy than she herself had. The interest of the children of the insured, which was
created for them by the contract when the policy was issued; vested in them at the same time that the
interest of the wife became vested in her. Both interests were contingent. If the wife die before the insured,
she will take nothing under the policy. If the insured should die before the wife, then the children take nothing
under the policy. We see no reason to discriminate between the wife and the children. They are all payees,
under the policy, and together constitute the assured.
The contingency which will determine whether the wife, or the children as a class will take the proceeds, has
not as yet happened; all the beneficiaries are living, and nothing has occurred by which the rights of the
parties are in any way changed. The provision that the policy may be converted into cash at the option of the
holder does not change the relative rights of the parties. We agree entirely with the suggestion that "holder"
or "holders", as used in this connection, means those who in law are the owners of the policy, and are
entitled to the rights and benefits which may accrue under it; in other words, all the beneficiaries; in the
present case, not only the wife, by the children of the insured. If for any reason, prudence required the
conversion of the policy into cash, a guardian would have no special difficulty in reasonable protecting the
interest of his wards. But however that may be, it is manifest that the option can only be exercised by those
having the full legal interest in the policy, or by their assignee. Neither the husband, nor the wife, nor both
together had power to destroy the vested interest of the children in the policy.
The case most nearly on all fours with the one at bar is that of Wallace vs Mutual Benefit Life Insurance Co.([1906],
97 Minn., 27; 3 L.R.A. [N.S.], 478). The opinion there delivered also invokes added interest when it is noted that it
was written by Mr. Justice Elliott, the author of a text on insurance, later a member of this court. In the Minnesota
case cited, one Wallace effected a "twenty-year endowment" policy of insurance on his life, payable in the event of
his death within twenty years to Emma G. Wallace, his wife, but, if he lived, to himself at the end of twenty years. If
Wallace died before the death of his wife, within the twenty years, the policy was payable to the personal
representatives of the insured. During the pendency of divorce proceedings, the parties signed a contract by which
Wallace agreed that, if a divorce was granted to Mrs. Wallace, the court might award her certain specified property
as alimony, and Mrs. Wallace agreed to relinquish all claim to any property arising out of the relation of husband and
wife. The divorce was granted. An action was brought by Wallace to compel Mrs. Wallace to relinquish her interest
in the insurance policy. Mr. Justice Elliott said:
As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of which she could not be
deprived without her consent, except under the terms of the contract with the insurance company. No right to
change the beneficiary was reserved. Her interest in the policy was her individual property, subject to be
divested only by her death, the lapse of time, or by the failure of the insured to pay the premiums. She could
keep the policy alive by paying the premiums, if the insured did not do so. It was contingent upon these
events, but it was free from the control of her husband. He had no interest in her property in this policy,
contingent or otherwise. Her interest was free from any claim on the part of the insured or his creditors. He
could deprive her of her interest absolutely in but one way, by living more than twenty years. We are unable
to see how the plaintiff's interest in the policy was primary or superior to that of the husband. Both interests
were contingent, but they were entirely separate and distinct, the one from the other. The wife's interest was
not affected by the decree of court which dissolved the marriage contract between the parties. It remains her
separate property, after the divorce as before. . .
. . . . The fact that she was his wife at the time the policy was issued may have been, and undoubtedly was,
the reason why she was named as beneficiary in the event of his death. But her property interest in the
policy after it was issued did not in any reasonable sense arise out of the marriage relation.
Somewhat the same question came before the Supreme Court of Kansas in the leading case of Filley vs. Illinois Life
Insurance Company ([1914]), 91 Kansas, 220; L.R.A. [1915 D], 130). It was held, following consideration extending
to two motions for rehearing, as follows:
The benefit accruing from a policy of life insurance upon the life of a married man, payable upon his death to
his wife, naming her, is payable to the surviving beneficiary named, although she may have years thereafter
secured a divorce from her husband, and he was thereafter again married to one who sustained the relation
of wife to him at the time of his death.

The rights of a beneficiary in an ordinary life insurance policy become vested upon the issuance of the
policy, and can thereafter, during the life of the beneficiary, be defeated only as provided by the terms of the
policy.
If space permitted, the following corroborative authority could also be taken into account: Joyce, The Law of
Insurance, second edition, vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp. 394 et seq.; 14 R.C.L., pp. 1376 et
seq.;Green vs. Green ([1912], 147 Ky., 608; 39 L.R.A. [N.S.], 370); Washington Life Insurance Co. vs.
Berwald([1903], 97 Tex., 111); Begley vs. Miller ([1907]), 137 Ill., App., 278); Blum vs. New York L. Ins. Co. ([1906],
197 Mo., 513; 8 L.R.A. [N.S.], 923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49 L.R.A.,
737);Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn. Mut. L. Ins.
Co. of Hartford ([1902]); 95 Md., 101); Snyder vs. Supreme Ruler of Fraternal Mystic Circle ([1909], 122 Tenn. 248;
45 L.R.A. [N.S.], 209); Lloyd vs. Royal Union Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs.
Dunham ([1878], 46 Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep.,
129); Supreme Council American Legion of Honor vs. Smith and Smith ([1889], 45 N.J. Eq., 466); Overhiser vs.
Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon vs. New York Life Insurance Co.
([1918], 183 Iowa, 658); with which compare Foster vs. Gile ([1880], 50 Wis., 603) and Hatch vs. Hatch([1904], 35
Tex. Civ. App., 373).
On the admitted facts and the authorities supporting the nearly universally accepted principles of insurance, we are
irresistibly led to the conclusion that the question at issue must be answered in the negative.
The judgment appealed from will be reversed and the complaint ordered dismissed as to the appellant, without
special pronouncement as to the costs in either instance. So ordered.
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life insurance policy
of a legally married man claim the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy No.
009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same amount Buenaventura C.
Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing branch of a tree.
As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in the total amount of
P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus the additional benefits for
accidental death also in the amount of P5,882.00 and the refund of P18.00 paid for the premium due November,
1969, minus the unpaid premiums and interest thereon due for January and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated beneficiary therein,
although she admits that she and the insured Buenaventura C. Ebrado were merely living as husband and wife
without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that she is the one
entitled to the insurance proceeds, not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co., Ltd.
commenced an action for Interpleader before the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pre-trial order was
entered reading as follows:
+.wph!1

During the pre-trial conference, the parties manifested to the court. that there is no possibility of
amicable settlement. Hence, the Court proceeded to have the parties submit their evidence for the
purpose of the pre-trial and make admissions for the purpose of pretrial. During this conference,
parties Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the deceased
Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six (legitimate)
namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that
during the lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy No.
009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00 with the rider for
accidental death benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant
Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he
was living with his common-wife, Carponia Ebrado, with whom she had 2 children although he was
not legally separated from his legal wife; 4) that Buenaventura in accident on October 21, 1969 as
evidenced by the death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that
complainant Carponia Ebrado filed claim with the Insular Life Assurance Co. which was contested by
Pascuala Ebrado who also filed claim for the proceeds of said policy 6) that in view ofthe adverse
claims the insurance company filed this action against the two herein claimants Carponia and
Pascuala Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of the

policy P11,745.73; 8) that the beneficiary designated by the insured in the policy is Carponia Ebrado
and the insured made reservation to change the beneficiary but although the insured made the
option to change the beneficiary, same was never changed up to the time of his death and the wife
did not have any opportunity to write the company that there was reservation to change the
designation of the parties agreed that a decision be rendered based on and stipulation of facts as to
who among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda from
the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado disqualified
from becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the payment of the insurance
proceeds to the estate of the deceased insured. The trial court held:
+.wph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for adultery
or concubinage is not essential in order to establish the disqualification mentioned therein. Neither is
it also necessary that a finding of such guilt or commission of those acts be made in a separate
independent action brought for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare the nullity of the
donation).
It is, however, essential that such adultery or concubinage exists at the time defendant Carponia T.
Ebrado was made beneficiary in the policy in question for the disqualification and incapacity to exist
and that it is only necessary that such fact be established by preponderance of evidence in the trial.
Since it is agreed in their stipulation above-quoted that the deceased insured and defendant
Carponia T. Ebrado were living together as husband and wife without being legally married and that
the marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid and still
existing at the time the insurance in question was purchased there is no question that defendant
Carponia T. Ebrado is disqualified from becoming the beneficiary of the policy in question and as
such she is not entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the Appellate Court
certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance Code (PD No.
612, as amended) does not contain any specific provision grossly resolutory of the prime question at hand. Section
50 of the Insurance Act which provides that "(t)he insurance shag be applied exclusively to the proper interest of the
person in whose name it is made" 1 cannot be validly seized upon to hold that the mm includes the beneficiary. The word
"interest" highly suggests that the provision refers only to the "insured" and not to the beneficiary, since a contract of
insurance is personal in character. 2 Otherwise, the prohibitory laws against illicit relationships especially on property and
descent will be rendered nugatory, as the same could easily be circumvented by modes of insurance. Rather, the general
rules of civil law should be applied to resolve this void in the Insurance Law. Article 2011 of the New Civil Code states:
"The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code." When not otherwise specifically provided for by the Insurance Law, the contract of life insurance
is governed by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any
person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance
policy by the person who cannot make a donation to him. 4 Common-law spouses are, definitely, barred from receiving
donations from each other. Article 739 of the new Civil Code provides:
+.wph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the time of donation;
Those made between persons found guilty of the same criminal offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of
the donor or donee; and the guilt of the donee may be proved by preponderance of evidence in the
same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned.
Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums
of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said
insurance. As a consequence, the proscription in Article 739 of the new Civil Code should equally operate in life
insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a donation
cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation. 5 Under
American law, a policy of life insurance is considered as a testament and in construing it, the courts will, so far as possible
treat it as a will and determine the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6

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

If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that court
(Court of Appeals), 'to prohibit donations in favor of the other consort and his descendants because
of and undue and improper pressure and influence upon the donor, a prejudice deeply rooted in our
ancient law;" por-que no se enganen desponjandose el uno al otro por amor que han de consuno'
(According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is
very reason to apply the same prohibitive policy to persons living together as husband and wife
without the benefit of nuptials. For it is not to be doubted that assent to such irregular connection for
thirty years bespeaks greater influence of one party over the other, so that the danger that the law
seeks to avoid is correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib.
32 ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the condition 6f
those who incurred guilt should turn out to be better.' So long as marriage remains the cornerstone
of our family law, reason and morality alike demand that the disabilities attached to marriage should
likewise attach to concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any other
conclusion cannot stand the test of scrutiny. It would be to indict the frame of the Civil Code for a
failure to apply a laudable rule to a situation which in its essentials cannot be distinguished.
Moreover, if it is at all to be differentiated the policy of the law which embodies a deeply rooted
notion of what is just and what is right would be nullified if such irregular relationship instead of being
visited with disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of statutory
construction that what is within the spirit of the law is as much a part of it as what is written, this is it.
Otherwise the basic purpose discernible in such codal provision would not be attained. Whatever
omission may be apparent in an interpretation purely literal of the language used must be remedied
by an adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities mentioned in Article
739 may effectuate. More specifically, with record to the disability on "persons who were guilty of adultery or
concubinage at the time of the donation," Article 739 itself provides:
+.wph!1

In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of
the donor or donee; and the guilty of the donee may be proved by preponderance of evidence in the
same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a condition precedent. In fact, it
cannot even be from the aforequoted provision that a prosecution is needed. On the contrary, the law plainly states
that the guilt of the party may be proved "in the same acting for declaration of nullity of donation. And, it would be
sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The quantum of proof in
criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the insured and the beneficiary has
been conveniently supplied by the stipulations between the parties in the pre-trial conference of the case. It case
agreed upon and stipulated therein that the deceased insured Buenaventura C. Ebrado was married to Pascuala
Ebrado with whom she has six legitimate children; that during his lifetime, the deceased insured was living with his
common-law wife, Carponia Ebrado, with whom he has two children. These stipulations are nothing less thanjudicial
admissions which, as a consequence, no longer require proof and cannot be contradicted. 8 A fortiori, on the basis of
these admissions, a judgment may be validly rendered without going through the rigors of a trial for the sole purpose of
proving the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed "that a
decision be rendered based on this agreement and stipulation of facts as to who among the two claimants is entitled to
the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is hereby
declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life insurance policy. As a
consequence, the proceeds of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.
SO ORDERED.
DELFIN NARIO, and ALEJANDRA SANTOS-NARIO, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
Ricardo T. Bancod and Severino C. Zarasate for plaintiffs-appellants.
M. Lim, M. Y. Macias and Associates for defendant-appellee.

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

Direct appeal, on pure question of law, from a decision of the Court of First Instance of Manila, in its Civil Case No.
54942, dismissing plaintiffs' complaint as well as from a later order of the same court, denying a motion to set aside
and/or reconsider said decision of dismissal.
The facts of this case may be stated briefly as follows:
Mrs. Alejandra Santos-Mario was, upon application, issued, on June 12, 1959, by the Philippine American Life
Insurance Co., a life insurance policy (No. 503617) under a 20-year endowment plan, with a face value of
P5,000.00. She designated thereon her husband, Delfin Nario, and their unemancipated minor son, Ernesto Nario,
as her irrevocable beneficiaries.
About the middle of June, 1963, Mrs. Nario applied for a loan on the above stated policy with the Insurance
Company, which loan she, as policy-holder, has been entitled to avail of under one of the provisions of said policy
after the same has been in force for three (3) years, for the purpose of using the proceeds thereof for the school
expenses of her minor son, Ernesto Nario. Said application bore the written signature and consent of Delfin Nario in
two capacities: first, as one of the irrevocable beneficiaries of the policy; and the other, as the father-guardian of
said minor son and irrevocable beneficiary, Ernesto Nario, and as the legal administrator of the minor's properties,
pursuant to Article 320 of the Civil Code of the Philippines.
The Insurance Company denied said application, manifesting to the policy holder that the written consent for the
minor son must not only be given by his father as legal guardian but it must also be authorized by the court in a
competent guardianship proceeding.
After the denial of said policy loan application, Mrs. Nario signified her decision to surrender her policy to the
Insurance Company, which she was also entitled to avail of under one of the provisions of the same policy, and
demanded its cash value which then amounted to P520.00.
The Insurance Company also denied the surrender of the policy, on the same ground as that given in disapproving
the policy loan application; hence, on September 10, 1963, Mrs. Alejandra Santos-Nario and her husband, Delfin
Nario, brought suit against the Philippine American Life Insurance Co. in the above mentioned court of first instance,
seeking to compel the latter (defendant) to grant their policy loan application and/or to accept the surrender of said
policy in exchange for its cash value.
1wph1.t

Defendant Insurance Company answered the complaint, virtually admitting its material allegations, but it set up the
affirmative defense that inasmuch as the policy loan application and the surrender of the policy involved acts of
disposition and alienation of the property rights of the minor, said acts are not within the powers of the legal
administrator, under article 320 in relation to article 326 of the Civil Code; hence, mere written consent given by the
father-guardian, for and in behalf of the minor son, without any court authority therefor, was not a sufficient
compliance of the law, and it (defendant Insurance Company) was, therefore, justified in refusing to grant and in
disapproving the proposed transactions in question.
There having been no substantial disagreement or dispute as to any material fact, the parties, upon joint motion
which the lower court granted, dispensed with the presentation of evidence and submitted their respective
memoranda, after which the case was considered submitted for decision.
The lower court found and opined that since the parties expressly stipulated in the endorsement attached to the
policy and which formed part thereof that
It is hereby understood and agreed that, notwithstanding the provisions of this Policy to the contrary,
inasmuch as the designation of the beneficiaries have been made by the Insured without reserving the right
to change said beneficiaries, the Insured may not designate a new beneficiary or assign, release or
surrender this Policy to the Company and exercise any and all other rights and privileges hereunder or
agree with the Company to any change in or amendment to this Policy, without the consent of the
beneficiaries originally designated;
that under the above quoted provision, the minor son, as one of the designated irrevocable beneficiaries, "acquired
a vested right to all benefits accruing to the policy, including that of obtaining a policy loan to the extent stated in the
schedule of values attached to the policy (Gercio vs. Sun Life Assurance of Canada, 48 Phil. 53, 58)"; that the
proposed transactions in question (policy loan and surrender of policy) involved acts of disposition or alienation of
the minor's properties for which the consent given by the father-guardian for and in behalf of the minor son, must be
with the requisite court authority (U.S.V.A. vs. Bustos, 92 Phil. 327; Visaya vs. Suguitan, G.R. No. L-8300,
November 18, 1955; 99 Phil. 1004 [unrep] and in the case at bar, such consent was given by the father-guardian
without any judicial authority; said court, agreeing with defendant's contention, sustained defendant's affirmative
defense, and rendered, on January 28, 1964, its decision dismissing plaintiffs' complaint.
Unable to secure reconsideration of the trial Court's ruling, petitioner appealed directly to this Court, contending that
the minor's interest amounted to only one-half of the policy's cash surrender value of P520.00; that under Rule 96,
Section 2 of the Revised Rules of Court, payment of the ward's debts is within the powers of the guardian, where no
realty is involved; hence, there is no reason why the father may not validly agree to the proposed transaction on
behalf of the minor without need of court authority.
The appeal is unmeritorious. We agree with the lower court that the vested interest or right of the beneficiaries in the
policy should be measured on its full face value and not on its cash surrender value, for in case of death of the

insured, said beneficiaries are paid on the basis of its face value and in case the insured should discontinue paying
premiums, the beneficiaries may continue paying it and are entitled to automatic extended term or paid-up
insurance options, etc. and that said vested right under the policy cannot be divisible at any given time. We likewise
agree with the conclusion of the lower court that the proposed transactions in question (policy loan and surrender of
policy) constitute acts of disposition or alienation of property rights and not merely of management or administration
because they involve the incurring or termination of contractual obligations.
As above noted, the full face value of the policy is P5,000.00 and the minor's vested interest therein, as one of the
two (2) irrevocable beneficiaries, consists of one-half () of said amount or P2,500.00.
Article 320 of the Civil Code of the Philippines provides
The father, or in his absence the mother, is the legal administrator of the property pertaining to the child
under parental authority. If the property is worth more than two thousand pesos, the father or mother shall
give a bond subject to the approval of the Court of First Instance.
and article 326 of the same Code reads
When the property of the child is worth more than two thousand pesos, the father or mother shall be
considered a guardian of the child's property, subject to the duties and obligations of guardians under the
Rules of Court.
The above quoted provisions of the Civil Code have already been implemented and clarified in our Revised Rules of
Court which provides
SEC. 7. Parents as guardians. When the property of the child under parental authority is worth two
thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be his
legal guardian. When the property of the child is worth more than two thousand pesos, the father or the
mother shall be considered guardian of the child's property, with the duties and obligations of guardians
under these rules, and shall file the petition required by Section 2 hereof. For good reasons the court may,
however, appoint another suitable person. (Rule 93).
It appearing that the minor beneficiary's vested interest or right on the policy exceeds two thousand pesos
(P2,000.00); that plaintiffs did not file any guardianship bond to be approved by the court; and as later implemented
in the abovequoted Section 7, Rule 93 of the Revised Rules of Court, plaintiffs should have, but, had not, filed a
formal application or petition for guardianship, plaintiffs-parents cannot possibly exercise the powers vested on
them, as legal administrators of their child's property, under articles 320 and 326 of the Civil Code. As there was no
such petition and bond, the consent given by the father-guardian, for and in behalf of the minor son, without prior
court authorization, to the policy loan application and the surrender of said policy, was insufficient and ineffective,
and defendant-appellee was justified in disapproving the proposed transactions in question.
The American cases cited by appellants are not applicable to the case at bar for lack of analogy. In those cases,
there were pending guardianship proceedings and the guardians therein were covered by bonds to protect the
wards' interests, which circumstances are wanting in this case.
The result would be the same even if we regarded the interest of the ward to be worth less than P2,000.00. While
the father or mother would in such event be exempt from the duty of filing a bond, and securing judicial appointment,
still the parent's authority over the estate of the ward as a legal-guardian would not extend to acts of encumbrance
or disposition, as distinguished from acts of management or administration. The distinction between one and the
other kind of power is too basic in our law to be ignored. Thus, under Article 1877 of the Civil Code of the
Philippines, an agency in general terms does not include power to encumber or dispose of the property of the
principal; and the Code explicitly requires a special power or authority for the agent "to loan or borrow money,
unless the latter act be urgent or indispensable for the preservation of the thing under administration" (Art. 1878 no.
7). Similarly, special powers are required to required to effect novations, to waive any obligation gratuitously or
obligate the principal as a guarantor or surety (Do., nos. 2, 4 and 11). By analogy, since the law merely constitutes
the parent as legal administrator of the child's property (which is a general power), the parent requires special
authority for the acts above specified, and this authority can be given only by a court. This restricted interpretation of
the parent's authority becomes all the more necessary where as in the case before us, there is no bond to
guarantee the ward against eventual losses.
Appellants seek to bolster their petition by invoking the parental power (patria potestas) under the Civil Code of
1889, which they claim to have been revived by the Civil Code of the Philippines (Rep. Act 386). The appeal profits
them nothing. For the new Civil Code has not effected a restitutio in integrum of the Spanish patria potestas; the
revival has been only in part. And, significantly, the Civil Code now in force did not reenact Article 164 of the Civil
Code of 1889, that prohibited the alienation by the parents of the real property owned by the child without court
authority and led the commentators and interpreters of said Code to infer that the parents could by themselves
alienate the child's movable property. The omission of any equivalent precept in the Civil Code now in force proves
the absence of any authority in the parents to carry out now acts of disposition or alienation of the child's goods
without court approval, as contended by the appellee and the court below.
Wherefore, the decision appealed from is affirmed. Costs against appellants Nario. So ordered.
Intestate estate of the late Esperanza J. Villanueva. PABLO ORO, administrator; MARIANO J. VILLANUEVA,
claimant-appellant.

Nicolas P. Nonato for claimant and Appellant.

Rodrigo J. Harder for administrator and appellee.
SYLLABUS
INSURANCE; LIFE; BENEFICIARY; PROCEEDS, TO WHOM PAYABLE WHEN INSURED OUTLIVES POLICY. Where the insurer
obligates itself, under the life insurance policy, to pay the proceeds to the insured if the latter lives on the date of maturity or
to the designated beneficiary if the insured dies during the continuance of the policy, and where the insured outlives the
policy, the proceeds shall be payable exclusively to the insured or his assignee, the benefit of the policy inuring to the
beneficiary only in case the insured dies during its continuance.

DECISION

PARAS, J.:

The West Coast Life Insurance Company issued two policies of insurance on the life of Esperanza J. Villanueva, one for two
thousand pesos and maturing on April 1, 1943, and the other for three thousand pesos and maturing on March 31, 1943. In
both policies (with corresponding variation in amount and date of maturity) the insurer agreed "to pay two thousand pesos,
at the home office of the Company, in San Francisco, California, to the insured hereunder, if living, on the 1st day of April
1943, or to the beneficiary Bartolome Villanueva, father of the insured, immediately upon receipt of due proof of the prior
death of the insured, Esperanza J. Villanueva, of La Paz, Philippine Islands, during the continuance of this policy, with right on
the part of the insured to change the beneficiary."
cralaw virtua1aw library

After the death of Bartolome Villanueva in 1940, the latter was duly substituted as beneficiary under the policies by Mariano
J. Villanueva, a brother of the insured. Esperanza J. Villanueva survived the insurance period, for she died only on October
15, 1944, without, however, collecting the insurance proceeds. Adverse claims for said proceeds were presented by the
estate of Esperanza J. Villanueva on the one hand and by Mariano J. Villanueva on the other, which conflict was squarely
submitted in the intestate proceedings of Esperanza J. Villanueva pending in the Court of First Instance of Iloilo. From an
order, dated February 26, 1947, holding that the estate of the insured is entitled to the insurance proceeds, to the exclusion
of the beneficiary, Mariano J. Villanueva, the latter has interposed the present appeal.
The lower court committed no error. Under the policies, the insurer obligated itself to pay the insurance proceeds (1) to the
insured if the latter lived on the dates of maturity or (2) to the beneficiary if the insured died during the continuance of the
policies. The first contingency of course excludes the second, and vice versa. In other words, as the insured Esperanza J.
Villanueva was living on April 1, and March 31, 1943, the proceeds are payable exclusively to her or to her estate unless she
had before her death otherwise assigned the matured policies. (It is not here pretended and much less proven, that there
was such assignment.) The beneficiary, Mariano J. Villanueva, could be entitled to said proceeds only in default of the first
contingency. To sustain the beneficiarys claim would be to altogether eliminate from the policies the condition that the
insurer "agrees to pay . . . to the insured hereunder, if living."
There is nothing in the Insurance Law (Act No. 2427) that militates against the construction placed by the lower court on the
disputed condition appearing in the two policies now under advisement. On the contrary, said law provides that "an insurance
upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently
on the continuance or cessation of life" (section 165), and that "a policy of insurance upon life or health may pass by transfer,
will, or succession, to any person, whether he has an insurable interest or not, and such person may recover upon it
whatever the insured might have recovered" (section 166).
Counsel for the beneficiary invokes the decision in Del Val v. Del Val, 29 Phil., 534, 540, in which it was held that "the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was
insured, and that such proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person
whose life was insured." This citation is clearly not controlling, first, because it does not appear therein that the insurance
contract contained the stipulation appearing in the policies issued on the life of Esperanza J. Villanueva and on which the
appealed order in the case at bar is based; and, secondly, because the Del Val doctrine was made upon the authority of the
provisions of the Code of Commerce relating to insurance (particularly section 428) which had been expressly repealed by
the present Insurance Act No. 2427.
Our pronouncement is not novel, since it tallies with the following typical American authorities: "If a policy of insurance
provides that the proceeds shall be payable to the assured, if he lives to a certain date, and, in case of his death before that
date, then they shall be payable to the beneficiary designated, the interest of the beneficiary is a contingent one, and the
benefit of the policy will only inure to such beneficiary in case the assured dies before the end of the period designated in the
policy." (Couch, Cyclopedia of Insurance Law, Vol. 2, sec. 343, p. 1023.) "Under endowment or tontine policies payable to the
insured at the expiration of a certain period, if alive, but providing for the payment of a stated sum to a designated
beneficiary in case of the insureds death during the period mentioned, the insured and the beneficiary take contingent
interests. The interest of the insured in the proceeds of the insurance depends upon his survival of the expiration of
endowment period. Upon the insureds death, within the period, the beneficiary will take, as against the personal
representative or the assignee of the insured. Upon the other hand, if the insured survives the endowment period, the
benefits are payable to him or to his assignee, notwithstanding a beneficiary is designated in the policy." (29 Am. Jur., section
1277, pp. 952, 953.)
The appealed order is, therefore, hereby affirmed, and it is so ordered with costs against the Appellant.

THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,

vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of First Instance of Rizal, and
RODOLFO C. DIMAYUGA, respondents.

PARAS, J.:

Challenged before Us in this petition for review on certiorari are the Orders of the respondent Judge dated March
19, 1980 and June 10, 1980 granting the prayer in the petition in Sp. Proc. No. 9210 and denying petitioner's Motion
for Reconsideration, respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy from the petitioner company and
designated his wife and children as irrevocable beneficiaries of said policy.
Under date February 22, 1980 private respondent filed a petition which was docketed as Civil Case No. 9210 of the
then Court of First Instance of Rizal to amend the designation of the beneficiaries in his life policy from irrevocable
to revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the same date, petitioner filed its
Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge Gregorio G. Pineda, presiding
Judge of the then Court of First Instance of Rizal, Pasig Branch XXI, denied petitioner's Urgent Motion, thus allowing
the private respondent to adduce evidence, the consequence of which was the issuance of the questioned Order
granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an Order June 10, 1980. Hence,
this petition raising the following issues for resolution:
I
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES COULD BE
CHANGED OR AMENDED WITHOUT THE CONSENT OF ALL THE IRREVOCABLE
BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF WHOM IS
ALREADY DECEASED WHILE THE OTHERS ARE ALL MINORS, COULD VALIDLY GIVE
CONSENT TO THE CHANGE OR AMENDMENT IN THE DESIGNATION OF THE IRREVOCABLE
BENEFICIARIES.
We are of the opinion that his Honor, the respondent Judge, was in error in issuing the questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise known as Act No. 2427 as
amended, the policy having been procured in 1968. Under the said law, the beneficiary designated in a life
insurance contract cannot be changed without the consent of the beneficiary because he has a vested interest in
the policy (Gercio v. Sun Life Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International Assurance Co.,
Ltd., 72 Phil. 71).
In this regard, it is worth noting that the Beneficiary Designation Indorsement in the policy which forms part of Policy
Number 0794461 in the name of Rodolfo Cailles Dimayuga states that the designation of the beneficiaries is
irrevocable (Annex "A" of Petition in Sp. Proc. No. 9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions of this policy to the contrary,
inasmuch as the designation of the primary/contingent beneficiary/beneficiaries in this Policy has
been made without reserving the right to change said beneficiary/ beneficiaries, such designation
may not be surrendered to the Company, released or assigned; and no right or privilege under the
Policy may be exercised, or agreement made with the Company to any change in or amendment to
the Policy, without the consent of the said beneficiary/beneficiaries. (Petitioner's Memorandum, p.
72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention the law then applicable, it is
only with the consent of all the beneficiaries that any change or amendment in the policy concerning the irrevocable
beneficiaries may be legally and validly effected. Both the law and the policy do not provide for any other exception,
thus, abrogating the contention of the private respondent that said designation can be amended if the Court finds a
just, reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the beneficiary-wife
predeceased the insured) cannot be considered an effective ratification to the change of the beneficiaries from
irrevocable to revocable. Indubitable is the fact that all the six (6) children named as beneficiaries were minors at the
time,** for which reason, they could not validly give their consent. Neither could they act through their father insured
since their interests are quite divergent from one another. In point is an excerpt from the Notes and Cases on
Insurance Law by Campos and Campos, 1960, readingThe insured ... can do nothing to divest the beneficiary of his rights without his consent. He cannot
assign his policy, nor even take its cash surrender value without the consent of the beneficiary.

Neither can the insured's creditors seize the policy or any right thereunder. The insured may not
even add another beneficiary because by doing so, he diminishes the amount which the beneficiary
may recover and this he cannot do without the beneficiary's consent.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the insurance contract, for
otherwise, the vested rights of the irrevocable beneficiaries would be rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law binding on both of them
and for so many times, this court has consistently issued pronouncements upholding the validity and effectivity of
contracts. Where there is nothing in the contract which is contrary to law, good morals, good customs, public policy
or public order the validity of the contract must be sustained. Likewise, contracts which are the private laws of the
contracting parties should be fulfilled according to the literal sense of their stipulations, if their terms are clear and
leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter in what
form they may be, whenever the essential requisites for their validity are present (Phoenix Assurance Co., Ltd. vs.
United States Lines, 22 SCRA 675, Phil. American General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this Court ruled that:
... it is settled that the parties may establish such stipulations, clauses, terms, and conditions as they
may want to include; and as long as such agreements are not contrary to law, good morals, good
customs, public policy or public order, they shall have the force of law between them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its validity and does not in any
way violate the law, morals, customs, orders, etc. leaving no reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the change in the designation of
beneficiaries could be validly effected means that it was never within the contemplation of the parties. The lower
court, in gratuitously providing for such contingency, made a new contract for them, a proceeding which we cannot
tolerate. Ergo, We cannot help but conclude that the lower court acted in excess of its authority when it issued the
Order dated March 19, 1980 amending the designation of the beneficiaries from "irrevocable" to "revocable" over
the disapprobation of the petitioner insurance company.
WHEREFORE, premises considered, the questioned Orders of the respondent Judge are hereby nullified and set
aside.
SO ORDERED.
BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE, JR., RODRIGO,
LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS, HIGHWAY
DISTRICT ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL SERVICE, and ROSARIO
DIAZ,respondents-appellees.
Bernardino O. Almeda for petitioners-appellants.
Binag and Arevalo, Jr. for respondent-appellee Government Service Insurance System.
Office of the Solicitor General for other respondents-appellees.

ZALDIVAR, J.:
Appeal on purely questions of law from the decision of the Court of First Instance of Surigao del Norte, dated March
7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the office of the District
Engineer in the province of Surigao del Norte. In his lifetime, Consuegra contracted two marriages, the first with
herein respondent Rosario Diaz, solemnized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on
July 15, 1937, out of which marriage were born two children, namely, Jose Consuegra, Jr. and Pedro Consuegra,
but both predeceased their father; and the second, which was contracted in good faith while the first marriage was
subsisting, with herein petitioner Basilia Berdin, on May 1, 1957 in the same parish and municipality, out of which
marriage were born seven children, namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, all
surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when Consuegra died on
September 26, 1965, the proceeds of his life insurance under policy No. 601801 were paid by the GSIS to petitioner
Basilia Berdin and her children who were the beneficiaries named in the policy. Having been in the service of the
government for 22.5028 years, Consuegra was entitled to retirement insurance benefits in the sum of P6,304.47
pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic Acts 1616 and 3836. Consuegra did
not designate any beneficiary who would receive the retirement insurance benefits due to him. Respondent Rosario

Diaz, the widow by the first marriage, filed a claim with the GSIS asking that the retirement insurance benefits be
paid to her as the only legal heir of Consuegra, considering that the deceased did not designate any beneficiary with
respect to his retirement insurance benefits. Petitioner Basilia Berdin and her children, likewise, filed a similar claim
with the GSIS, asserting that being the beneficiaries named in the life insurance policy of Consuegra, they are the
only ones entitled to receive the retirement insurance benefits due the deceased Consuegra. Resolving the
conflicting claims, the GSIS ruled that the legal heirs of the late Jose Consuegra were Rosario Diaz, his widow by
his first marriage who is entitled to one-half, or 8/16, of the retirement insurance benefits, on the one hand; and
Basilia Berdin, his widow by the second marriage and their seven children, on the other hand, who are entitled to
the remaining one-half, or 8/16, each of them to receive an equal share of 1/16.
Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia Berdin and her children 1 filed on
October 10, 1966 a petition for mandamus with preliminary injunction in the Court of First Instance of Surigao, naming as
respondents the GSIS, the Commissioner of Public Highways, the Highway District Engineer of Surigao del Norte, the
Commissioner of Civil Service, and Rosario Diaz, praying that they (petitioners therein) be declared the legal heirs and
exclusive beneficiaries of the retirement insurance of the late Jose Consuegra, and that a writ of preliminary injunction be
issued restraining the implementation of the adjudication made by the GSIS. On October 26, 1966, the trial court issued
an order requiring therein respondents to file their respective answers, but refrained from issuing the writ of preliminary
injunction prayed for. On February 11, 1967, the parties submitted a stipulation of facts, prayed that the same be admitted
and approved and that judgment be rendered on the basis of the stipulation of facts. On March 7, 1967, the court below
rendered judgment, the pertinent portions of which are quoted hereunder:
This Court, in conformity with the foregoing stipulation of facts, likewise is in full accord with the
parties with respect to the authority cited by them in support of said stipulation and which is hereinbelow cited for purposes of this judgment, to wit:
"When two women innocently and in good faith are legally united in holy matrimony to the same
man, they and their children, born of said wedlock, will be regarded as legitimate children and each
family be entitled to one half of the estate. Lao & Lao vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong
Masa, Inc., (CA) 39 OG 79; Pisalbon vs. Bejec, 74 Phil. 88.
WHEREFORE, in view of the above premises, this Court is of the opinion that the foregoing
stipulation of facts is in order and in accordance with law and the same is hereby approved.
Judgment, therefore, is hereby rendered declaring the petitioner Basilia Berdin Vda. de Consuegra
and her co-petitioners Juliana, Pacita, Maria Lourdes, Jose, Jr., Rodrigo, Lenida and Luis, all
surnamed Consuegra, beneficiary and entitled to one-half (1/2) of the retirement benefit in the
amount of Six Thousand Three Hundred Four Pesos and Fourty-Seven Centavos (P6,304.47) due to
the deceased Jose Consuegra from the Government Service Insurance System or the amount of
P3,152.235 to be divided equally among them in the proportional amount of 1/16 each. Likewise, the
respondent Rosario Diaz Vda. de Consuegra is hereby declared beneficiary and entitled to the other
half of the retirement benefit of the late Jose Consuegra or the amount of P3,152.235. The case with
respect to the Highway District Engineer of Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her children.
It is the contention of appellants that the lower court erred in not holding that the designated beneficiaries in the life
insurance of the late Jose Consuegra are also the exclusive beneficiaries in the retirement insurance of said
deceased. In other words, it is the submission of appellants that because the deceased Jose Consuegra failed to
designate the beneficiaries in his retirement insurance, the appellants who were the beneficiaries named in the life
insurance should automatically be considered the beneficiaries to receive the retirement insurance benefits, to the
exclusion of respondent Rosario Diaz. From the arguments adduced by appellants in their brief We gather that it is
their stand that the system of life insurance and the system of retirement insurance, that are provided for in
Commonwealth Act 186 as amended, are simply complementary to each other, or that one is a part or an extension
of the other, such that whoever is named the beneficiary in the life insurance is also the beneficiary in the retirement
insurance when no such beneficiary is named in the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance System is Commonwealth Act 186 which
was enacted by the National Assembly on November 14, 1936. As originally approved, Commonwealth Act 186
provided for the compulsory membership in the Government Service Insurance System of all regularly and
permanently appointed officials and employees of the government, considering as automatically insured on life all
such officials and employees, and issuing to them the corresponding membership policy under the terms and
conditions as provided in the Act.2
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act 186 was amended by
Republic Act 660 which was enacted by the Congress of the Philippines on June 16, 1951, and, among others, the
amendatory Act provided that aside from the system of life insurance under the Government Service Insurance
System there was also established the system of retirement insurance. Thus, We will note in Republic Act 660 that
there is a chapter on life insurance and another chapter on retirement insurance. 3 Under the chapter on life
insurance are sections 8, 9 and 10 of Commonwealth Act 186, as amended; and under the chapter on retirement
insurance are sections 11, 12, 13 and 13-A. On May 31, 1957, Republic Act 1616 was enacted by Congress,
amending section 12 of Commonwealth Act 186 as amended by Republic Act 660, by adding thereto two new
subsections, designated as subsections (b) and (c). This subsection (c) of section 12 of Commonwealth Act 186, as
amended by Republic Acts 660, 1616 and 3096, was again amended by Republic Act 3836 which was enacted on
June 22, 1963. The pertinent provisions of subsection (c) of Section 12 of Commonwealth Act 186, as thus
amended and reamended, read as follows:
lwph1.t

(c) Retirement is likewise allowed to a member, regardless of age, who has rendered at least twenty
years of service. The benefit shall, in addition to the return of his personal contributions plus interest
and the payment of the corresponding employer's premiums described in subsection (a) of Section 5
hereof, without interest, be only a gratuity equivalent to one month's salary for every year of service,
based on the highest rate received, but not to exceed twenty-four months; Provided, That the retiring
officer or employee has been in the service of the said employer or office for at least four years,
immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is hereby authorized to provide
the necessary appropriation to pay the same from any unexpended items of appropriations.
Elective or appointive officials and employees paid gratuity under this subsection shall be entitled to
the commutation of the unused vacation and sick leave, based on the highest rate received, which
they may have to their credit at the time of retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had acquired rights under the
above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as finally amended by Rep. Act 3836 on
June 22, 1963. When Consuegra died on September 26, 1965, he had to his credit 22.5028 years of service in the
government, and pursuant to the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as
amended, on the basis of the highest rate of salary received by him which was P282.83 per month, he was entitled
to receive retirement insurance benefits in the amount of P6,304.47. This is the retirement benefits that are the
subject of dispute between the appellants, on the one hand, and the appellee Rosario Diaz, on the other, in the
present case. The question posed is: to whom should this retirement insurance benefits of Jose Consuegra be paid,
because he did not, or failed to, designate the beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September 26, 1965, it follows that
he started in the government service sometime during the early part of 1943, or before 1943. In 1943 Com. Act 186
was not yet amended, and the only benefits then provided for in said Com. Act 186 were those that proceed from a
life insurance. Upon entering the government service Consuegra became a compulsory member of the GSIS, being
automatically insured on his life, pursuant to the provisions of Com. Act 186 which was in force at the time. During
1943 the operation of the Government Service Insurance System was suspended because of the war, and the
operation was resumed sometime in 1946. When Consuegra designated his beneficiaries in his life insurance he
could not have intended those beneficiaries of his life insurance as also the beneficiaries of his retirement insurance
because the provisions on retirement insurance under the GSIS came about only when Com. Act 186 was amended
by Rep. Act 660 on June 16, 1951. Hence, it cannot be said that because herein appellants were designated
beneficiaries in Consuegra's life insurance they automatically became the beneficiaries also of his retirement
insurance. Rep. Act 660 added to Com. Act 186 provisions regarding retirement insurance, which are Sections 11,
12, and 13 of Com. Act 186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by Rep. Act
660, provides as follows:
(b) Survivors benefit. Upon death before he becomes eligible for retirement, his beneficiaries as
recorded in the application for retirement annuity filed with the System shall be paid his own
premiums with interest of three per centum per annum, compounded monthly. If on his death he is
eligible for retirement, then the automatic retirement annuity or the annuity chosen by him previously
shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186, as amended by Rep. Act
660, clearly indicate that there is need for the employee to file an application for retirement insurance benefits when
he becomes a member of the GSIS, and he should state in his application the beneficiary of his retirement
insurance. Hence, the beneficiary named in the life insurance does not automatically become the beneficiary in the
retirement insurance unless the same beneficiary in the life insurance is so designated in the application for
retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life insurance fund and for a
retirement insurance fund. There was no such provision in Com. Act 186 before it was amended by Rep. Act 660.
Thus, subsections (a) and (b) of Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, partly read as
follows:
(a) Life insurance fund. This shall consist of all premiums for life insurance benefit and/or earnings
and savings therefrom. It shall meet death claims as they may arise or such equities as any member
may be entitled to, under the conditions of his policy, and shall maintain the required reserves to the
end of guaranteeing the fulfillment of the life insurance contracts issued by the System ...
(b) Retirement insurance fund. This shall consist of all contributions for retirement insurance
benefit and of earnings and savings therefrom. It shall meet annuity payments and establish the
required reserves to the end of guaranteeing the fulfillment of the contracts issued by the System. ...
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its members one is the life
insurance and the other is the retirement insurance. These two distinct systems of benefits are paid out from two
distinct and separate funds that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named the beneficiary in the life
insurance policy. As in the case of a life insurance provided for in the Insurance Act (Act 2427, as amended), the

beneficiary in a life insurance under the GSIS may not necessarily be a heir of the insured. The insured in a life
insurance may designate any person as beneficiary unless disqualified to be so under the provisions of the Civil
Code.4 And in the absence of any beneficiary named in the life insurance policy, the proceeds of the insurance will go to
the estate of the insured.
Retirement insurance is primarily intended for the benefit of the employee to provide for his old age, or incapacity,
after rendering service in the government for a required number of years. If the employee reaches the age of
retirement, he gets the retirement benefits even to the exclusion of the beneficiary or beneficiaries named in his
application for retirement insurance. The beneficiary of the retirement insurance can only claim the proceeds of the
retirement insurance if the employee dies before retirement. If the employee failed or overlooked to state the
beneficiary of his retirement insurance, the retirement benefits will accrue to his estate and will be given to his legal
heirs in accordance with law, as in the case of a life insurance if no beneficiary is named in the insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled that the proceeds of the
retirement insurance of the late Jose Consuegra should be divided equally between his first living wife Rosario Diaz,
on the one hand, and his second wife Basilia Berdin and his children by her, on the other; and the lower court did
not commit error when it confirmed the action of the GSIS, it being accepted as a fact that the second marriage of
Jose Consuegra to Basilia Berdin was contracted in good faith. The lower court has correctly applied the ruling of
this Court in the case of Lao, et al. vs. Dee Tim, et al., 45 Phil. 739 as cited in the stipulation of facts and in the
decision appealed from.5 In the recent case of Gomez vs. Lipana, L-23214, June 30, 1970, 6 this Court, in construing the
rights of two women who were married to the same man a situation more or less similar to the case of appellant Basilia
Berdin and appellee Rosario Diaz held "that since the defendant's first marriage has not been dissolved or declared
void the conjugal partnership established by that marriage has not ceased. Nor has the first wife lost or relinquished her
status as putative heir of her husband under the new Civil Code, entitled to share in his estate upon his death should she
survive him. Consequently, whether as conjugal partner in a still subsisting marriage or as such putative heir she has an
interest in the husband's share in the property here in dispute.... " And with respect to the right of the second wife, this
Court observed that although the second marriage can be presumed to be void ab initio as it was celebrated while the first
marriage was still subsisting, still there is need for judicial declaration of such nullity. And inasmuch as the conjugal
partnership formed by the second marriage was dissolved before judicial declaration of its nullity, "[t]he only lust and
equitable solution in this case would be to recognize the right of the second wife to her share of one-half in the property
acquired by her and her husband and consider the other half as pertaining to the conjugal partnership of the first
marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitioners-appellants. It is so ordered.
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.

REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the dispositive part of which
reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at legal rate
from the date of filing of the complaint, and is modified with respect to the third party complaint in
that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party plaintiff the sum of
P25,471.80 with legal interest from the date of payment until the date of reimbursement, and (2) the
third-party complaint against third party defendant Compagnie Maritime Des Chargeurs Reunis is
dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel
SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and seeks to
recover from the defendant insurance company the amount of P51,568.62 representing damages to
said shipment which has been insured by the defendant insurance company under Policy No. M2678. The defendant brought a third party complaint against third party defendants Compagnie
Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against the third (sic)
defendants in case Judgment is rendered against the third party plaintiff. It appears from the
evidence presented that in December 1976, plaintiff insured said shipment with defendant insurance
company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods described
as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to Manila
against all risks under warehouse to warehouse terms. Actually, what was imported was 59.940
metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were
unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc.
and defendant's surveyor ascertained and certified that in such discharge 105 bags were in bad
order condition as jointly surveyed by the ship's agent and the arrastre contractor. The condition of
the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to

120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6- Razon. The
cargo was also surveyed by the arrastre contractor before delivery of the cargo to the consignee and
the condition of the cargo on such delivery was reflected in E. Razon's Bad Order Certificate No.
14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant's surveyor
has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a
survey report Exhibit F with the findings on the extent of shortage or loss on the bad order bags
totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff
made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A formal claim statement was also
presented by the plaintiff against the vessel dated December 21, 1976, Exhibit B, but the defendant
Filipino Merchants Insurance Company refused to pay the claim. Consequently, the plaintiff brought
an action against said defendant as adverted to above and defendant presented a third party
complaint against the vessel and the arrastre contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private respondent, the decretal portion
whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and
against the defendant Filipino Merchant's (sic) Insurance Co., ordering the defendants to pay the
plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;
On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs Reunis
and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff jointly and
severally reimbursement of the amounts paid by the third party plaintiff with legal interest from the
date of such payment until the date of such reimbursement.
Without pronouncement as to costs. 3
On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the complaint is
concerned and modified the same with regard to the adjudication of the third-party complaint. A motion for
reconsideration of the aforesaid decision was denied, hence this petition with the following assignment of errors:
1. The Court of Appeals erred in its interpretation and application of the "all risks" clause of the
marine insurance policy when it held the petitioner liable to the private respondent for the partial loss
of the cargo, notwithstanding the clear absence of proof of some fortuitous event, casualty, or
accidental cause to which the loss is attributable, thereby contradicting the very precedents cited by
it in its decision as well as a prior decision of the same Division of the said court (then composed of
Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that the private respondent had no insurable interest in
the subject cargo, hence, the marine insurance policy taken out by private respondent is null and
void;
3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud in not
disclosing the fact, it being bound out of utmost good faith to do so, that it had no insurable interest
in the subject cargo, which bars its recovery on the policy. 4
On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical meaning in
insurance in that before a claim can be compensable it is essential that there must be "some fortuity, " "casualty" or
"accidental cause" to which the alleged loss is attributable and the failure of herein private respondent, upon whom
lay the burden, to adduce evidence showing that the alleged loss to the cargo in question was due to a fortuitous
event precludes his right to recover from the insurance policy. We find said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured but shall in no
case be deemed to extend to cover loss, damage, or expense proximately caused by delay or
inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be payable
irrespective of percentage. 5
An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an accidental
cause of any kind. The terms "accident" and "accidental", as used in insurance contracts, have not acquired any
technical meaning. They are construed by the courts in their ordinary and common acceptance. Thus, the terms
have been taken to mean that which happens by chance or fortuitously, without intention and design, and which is
unexpected, unusual and unforeseen. An accident is an event that takes place without one's foresight or
expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause and,
therefore, not expected. 6
The very nature of the term "all risks" must be given a broad and comprehensive meaning as covering any loss
other than a willful and fraudulent act of the insured. 7 This is pursuant to the very purpose of an "all risks" insurance to
give protection to the insured in those cases where difficulties of logical explanation or some mystery surround the loss or
damage to property. 8 An "all asks" policy has been evolved to grant greater protection than that afforded by the "perils

clause," in order to assure that no loss can happen through the incidence of a cause neither insured against nor creating
liability in the ship; it is written against all losses, that is, attributable to external causes. 9

The term "all risks" cannot be given a strained technical meaning, the language of the clause under the Institute
Cargo Clauses being unequivocal and clear, to the effect that it extends to all damages/losses suffered by the
insured cargo except (a) loss or damage or expense proximately caused by delay, and (b) loss or damage or
expense proximately caused by the inherent vice or nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an "all
risks" policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks
compensation. The insured under an "all risks insurance policy" has the initial burden of proving that the cargo was
in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel;
thereafter, the burden then shifts to the insurer to show the exception to the coverage. 10 As we held in Paris-Manila
Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company has the burden of proving
that the loss is caused by the risk excepted and for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special type of insurance which
extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of establishing
that the loss was due to the peril falling within the policy's coverage; the insurer can avoid coverage upon
demonstrating that a specific provision expressly excludes the loss from coverage. 12 A marine insurance policy
providing that the insurance was to be "against all risks" must be construed as creating a special insurance and extending
to other risks than are usually contemplated, and covers all losses except such as arise from the fraud of the
insured. 13 The burden of the insured, therefore, is to prove merely that the goods he transported have been lost,
destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils.
To impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the
broad protective purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer is
liable under the policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the authorities
and jurisprudence it discussed
... it is believed that in the absence of any showing that the losses/damages were caused by an
excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and there is no
such showing, the lower court did not err in holding that the loss was covered by the policy.
There is no evidence presented to show that the condition of the gunny bags in which the fishmeal
was packed was such that they could not hold their contents in the course of the necessary transit,
much less any evidence that the bags of cargo had burst as the result of the weakness of the bags
themselves. Had there been such a showing that spillage would have been a certainty, there may
have been good reason to plead that there was no risk covered by the policy (See Berk vs. Style
[1956] cited in Marine Insurance Claims, Ibid, p. 125). Under an 'all risks' policy, it was sufficient to
show that there was damage occasioned by some accidental cause of any kind, and there is no
necessity to point to any particular cause. 14
Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The
agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer's
liability. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. 15
Anent the issue of insurable interest, we uphold the ruling of the respondent court that private respondent, as
consignee of the goods in transit under an invoice containing the terms under "C & F Manila," has insurable interest
in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every interest in property, whether real or
personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly
damnify the insured. In principle, anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction whether he has or has not any title in, or lien upon or possession
of the property y. 16 Insurable interest in property may consist in (a) an existing interest; (b) an inchoate interest founded
on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. 17
Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be
the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of
sale. 18 The perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title
even before delivery or before be performed the conditions of the sale. 19 The contract of shipment, whether under F.O.B.,
C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not
in the goods in transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an
existing interest over the goods sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized
or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for,
the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said
rule not obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the
carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks
of loss of the goods and paid the insurance premium covering them. 20

C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the
goods and freight to the named destination. 21 It simply means that the seller must pay the costs and freight necessary
to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the
buyer when the goods pass the ship's rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioners answer. It was
neither an issue agreed upon by the parties at the pre-trial conference nor was it raised during the trial in the court
below. It is a settled rule that an issue which has not been raised in the court a quo cannot be raised for the first time
on appeal as it would be offensive to the basic rules of fair play, justice and due process. 23 This is but a permuted
restatement of the long settled rule that when a party deliberately adopts a certain theory, and the case is tried and
decided upon that theory in the court below, he will not be permitted to change his theory on appeal because, to permit
him to do so, would be unfair to the adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on the issue of
insurable interest raised by petitioner, it was to put at rest all doubts on the matter under the facts in this case and
also to dispose of petitioner's third assignment of error which consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of Appeals is
AFFIRMED in toto.
SO ORDERED.
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff, the San
Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten respectively by Law
Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros, for the sum of P7,500 each,
insuring certain property which has been destroyed by fire. The plaintiff, the San Miguel Brewery, is named as the
party assured in the two policies referred to, but it is alleged in the complaint that said company was in reality
interested in the property which was the subject of insurance in the character of a mortgage creditor only, and that
the owner of said property upon the date the policies were issued was one D. P. Dunn who was later succeeded as
owner by one Henry Harding. Accordingly said Harding was made a defendant, as a person interested in the subject
of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies named for
the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of P4,505.30 due to
the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be absolved from
liability to the defendants or any of them. The peculiar form of the latter part of the prayer is evidently due to the
design of the plaintiff to lay a foundation for Harding to recover the difference between the plaintiff's credit and the
amount for which the property was insured. Accordingly, as was to be expected, Harding answered, admitting the
material allegations of the complaint and claiming for himself the right to recover the difference between the
plaintiff's mortgage credit and the face value of the policies. The two insurance companies also answered, admitting
in effect their liability to the San Miguel Brewery to the extent of its mortgage credit, but denying liability to Harding
on the ground that under the contracts of insurance the liability of the insurance companies was limited to the
insurable interest of the plaintiff therein. Soon after the action was begun the insurance companies effected a
settlement with the San Miguel Brewery by paying the full amount of the credit claimed by it, with the result that the
litigation as between the original plaintiff and the two insurance companies came to an end, leaving the action to be
prosecuted to final judgement by the defendant Harding with respect to the balance claimed to be due to him upon
the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action whatever
against the companies and absolved them from liability without special finding as to costs. From this decision the
said Henry Harding has appealed.
The two insurance companies who are named as defendants do not dispute their liability to the San Miguel Brewery,
to the extent already stated, and the only question here under discussion is that of the liability of the insurance
companies to Harding. It is therefore necessary to take account of such facts only as bear upon this aspect of the
case.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which the
insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the contract of
mortgage Dunn agreed to keep the property insured at his expense to the full amount of its value in companies to
be selected by the Brewery Company and authorized the latter in case of loss to receive the proceeds of the
insurance and to retain such part as might be necessary to cover the mortgage debt. At the same time, in order
more conveniently to accomplish the end in view, Dunn authorized and requested the Brewery Company to effect

said insurance itself. Accordingly on the same date Antonio Brias, general manager of the Brewery, made a verbal
application to the Law Union and Rock Insurance Company for insurance to the extent of P15,000 upon said
property. In reply to a question of the company's agent as to whether the Brewery was the owner of the property, he
stated that the company was interested only as a mortgagee. No information was asked as to who was the owner of
the property, and no information upon this point was given.
It seems that the insurance company to whom this application was directed did not want to carry more than one-half
the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be issued by the
"Filipinas" Compania de Seguros. Both policies were issued in the name of the San Miguel Brewery as the assured,
and contained no reference to any other interest in the property. Both policies contain the usual clause requiring
assignments to be approved and noted on the policy. The premiums were paid by the Brewery and charged to
Dunn. A year later the policies were renewed, without change, the renewal premiums being paid by the Brewery,
supposedly for the account of the owner. In the month of March of the year 1917 Dunn sold the insured property to
the defendant Henry Harding, but not assignment of the insurance, or of the insurance policies, was at any time
made to him.
We agree with the trial court that no cause of action in Henry Harding against the insurance companies is show. He
is not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy Tam and Uy
Yetvs. Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be made
effective, if at all, through the San Miguel Brewery in whose name the contracts are written. Now the Brewery, as
mortgagee of the insured property, undoubtedly had an insurable interest therein; but it could not, in any event,
recover upon these policies an amount in excess of its mortgage credit. In this connection it will be remembered that
Antonio Brias, upon making application for the insurance, informed the company with which the insurance was
placed that the Brewery was interested only as a mortgagee. It would, therefore, be impossible for the Brewery
mortgage on the insured property.
This conclusion is not only deducible from the principles governing the operation and effect of insurance contracts in
general but the point is clearly covered by the express provisions of sections 16 and 50 of the Insurance Act (Act
No. 2427). In the first of the sections cited, it is declared that "the measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or injury thereof" (sec. 16); while in the other it is stated that
"the insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless
otherwise specified in the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of the
property had continued in him up to the time of the loss; and as regards Harding, an additional insuperable obstacle
is found in the fact that the ownership of the property had been charged, prior to the loss, without any corresponding
change having been effected in the policy of insurance. In section 19 of the Insurance Act we find it stated that "a
change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the
insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the
insurance are vested in the same person." Again in section 55 it is declared that "the mere transfer of a thing insured
does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the
thing insured."
Undoubtedly these policies of insurance might have been so framed as to have been "payable to the Sane Miguel
Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the continuance of the risk, may
become the owner of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have proved an intention to
insure the entire interest in the property, not merely the insurable interest of the San Miguel Brewery, and would
have shown exactly to whom the money, in case of loss, should be paid. But the policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of Brias,
the manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of the insurance
companies was different from that contemplated by Dunn, at whose request the insurance was written, and Brias. In
the contract of mortgage Dunn had agreed, at his own expense, to insure the mortgaged property for its full value
and to indorse the policies in such manner as to authorize the Brewery Company to receive the proceeds in case of
loss and to retain such part thereof as might be necessary to satisfy the remainder then due upon the mortgage
debt. Instead, however, of effecting the insurance himself Dunn authorized and requested the Brewery Company to
procure insurance on the property in the amount of P15,000 at Dunn's expense. The Brewery Company undertook
to carry this mandate into effect, and it of course became its duty to procure insurance of the character
contemplated, that is, to have the policies so written as to protect not only the insurable interest of the Brewery, but
also the owner. Brias seems to have supposed that the policies as written had this effect, but in this he was
mistaken. It was certainly a hardship on the owner to be required to pay the premiums upon P15,000 of insurance
when he was receiving no benefit whatever except in protection to the extent of his indebtedness to the Brewery.
The blame for the situation thus created rests, however, with the Brewery rather than with the insurance companies,
and there is nothing in the record to indicate that the insurance companies were requested to write insurance upon
the insurable interest of the owner or intended to make themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had been agreed between the contracting
parties that the insurance should be so written as to protect not only the interest of the mortgagee but also the
residuary interest of the owner, and the policies had been, by inadvertence, ignorance, or mistake written in the form
in which they were issued, a court would have the power to reform the contracts and give effect to them in the sense
in which the parties intended to be bound. But in order to justify this, it must be made clearly to appear that the
minds of the contracting parties did actually meet in agreement and that they labored under some mutual error or
mistake in respect to the expression of their purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Fed.,
250), it appeared that a mortgage desiring to insure his own insurable interest only, correctly stated his interest, and
asked that the same be insured. The insurance company agreed to accept the risk, but the policy was issued in the
name of the owner, because of the mistaken belief of the company's agent that the law required it to be so drawn. It

was held that a court of equity had the power, at the suit of the mortgage, to reform the instrument and give
judgment in his favor for the loss thereunder, although it had been exactly as it was. Said the court: "If the applicant
correctly states his interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to
comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by
mistake of law adopts the wrong form, a court of equity will reform the instrument so as to make it insurance upon
the interest named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78
Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co., vs.Charter Oak Insurance Co., 31 Conn., 517;
Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation and
permit a recovery by the mortgage in his character as such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa,
377; Spare vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co. (136 U.S., 287;
34 L. 3d., 408), it appeared that one Kearney made application to an insurance company for insurance on certain
property in his hands as receiver and it was understood between him and the company's agent that, in case of loss,
the proceeds of the policy should accrue to him and his successors as receiver and to others whom it might
concern. However, the policy, as issued, was so worded as to be payable only to him as receiver. In an action
brought on the policy by a successor of Kearney, it was alleged that the making of the contract in this form was due
to inadvertence, accident, and mistake upon the part of both Kearney and the company.
Said the court:
If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the
plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have been omitted, whereby the true
intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement
as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and this is demonstrated
by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the
agreement there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the
insurance to an interest in the property less than that agreed to be insured. The written agreement did not effect that
which the parties intended. That a court of equity can afford relief in such a case, is, we think, well settled by the
authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly
appear that the contract failed to express the real agreement between the parties. (Philippine Sugar Estates
Development Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government of
Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state in the
foregoing cases, for it is by means clear from the testimony of Brias and none other was offered that the
parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the
defendant Harding is not entitled to relief in any aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., petitioners, vs. COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
DECISION
PADILLA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set
aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with
private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and
effects placed at any stall or store or space in the leased premises without first obtaining the written
consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the

consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its
own benefit; x x x
[1]

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss
by fire their merchandise inside the leased premises for Five Hundred Thousand (P500,000.00)
with the United Insurance Co., Inc. (hereinafter United) without the written consent of private
respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it
wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract
(between the Cha spouses and United) be paid directly to CKS, based on its lease contract with Cha
spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision ordering
therein defendant United to pay CKS the amount ofP335,063.11 and defendant Cha spouses to
pay P50,000.00 as exemplary damages, P20,000.00 as attorneys fees and costs of suit.
*

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision dated 11

January 1996, affirming the trial court decision, deleting however the awards for exemplary
damages and attorneys fees. A motion for reconsideration by United was denied on 29 March 1996.
**

In the present petition, the following errors are assigned by petitioners to the Court of
Appeals:
I

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE

STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF
THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO
LAW, MORALS AND PUBLIC POLICY
II

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE

CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER
III

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR
BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON
THE WILL OF THE RESPONDENT CORPORATION.
[2]

The core issue to be resolved in this case is whether or not the aforequoted paragraph
18 of the lease contract entered into between CKS and the Cha spouses is valid insofar
as it provides that any fire insurance policy obtained by the lessee (Cha spouses) over
their merchandise inside the leased premises is deemed assigned or transferred to the
lessor (CKS) if said policy is obtained without the prior written of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a
contract cannot be contrary to law, morals, good customs, public order or public policy.
[3]

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitionerspouses over their merchandise is primarily a contract of indemnity. Insurable interest in
the property insured must exist at the time the insurance takes effect and at the time the
loss occurs. The basis of such requirement of insurable interest in property insured is
based on sound public policy: to prevent a person from taking out an insurance policy on
property upon which he has no insurable interest and collecting the proceeds of said
policy in case of loss of the property. In such a case, the contract of insurance is a mere
wager which is void under Section 25 of the Insurance Code, which provides:
[4]

SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured, or that the policy shall
be received as proof of such interest, and every policy executed by way of gaming or
wagering, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the
goods and merchandise inside the leased premises under the provisions of Section 17 of
the Insurance Code which provide.
Section 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a special law be validly
a beneficiary of the fire insurance policy taken by the petitioner-spouses over their
merchandise. This insurable interest over said merchandise remains with the insured, the
Cha spouses. The automatic assignment of the policy to CKS under the provision of the
lease contract previously quoted is void for being contrary to law and/or public policy. The
proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and
Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in
the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha
spouses obtained a fire insurance policy over their own merchandise, without the consent
of CKS, is a separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire insurance
policy to petitioners Nilo Cha and Stella Uy-Cha.
SO ORDERED.

E. M. BACHRACH, plaintiff-appellee,
vs.
BRITISH AMERICAN ASSURANCE COMPANY, a corporation, defendant-appellant.
Haussermann, Ortigas, Cohn and Fisher, for appellant
Kincaid & Hurd and Thomas L. Hartigan, for appellee.

JOHNSON, J.:
On the 13th of July, 1908, the plaintiff commenced an action against the defendant to recover the sum of P9,841.50,
the amount due, deducting the salvage, upon the following fire insurance policy issued by the defendant to the
plaintiff:
[Fire policy No. 3007499.]
This policy of insurance witnesseth, that E. M. Bachrach, esq., Manila (hereinafter called the insured),
having paid to the undersigned, as authorized agent of the British American Assurance Company
(hereinafter called the company), the sum of two thousand pesos Philippine currency, for insuring against
loss or damage by fire, as hereinafter mentioned, the property hereinafter described, in the sum of several
sums following, viz:
Ten thousand pesos Philippine currency, on goods, belonging to a general furniture store, such as iron and
brass bedsteads, toilet tables, chairs, ice boxes, bureaus, washstands, mirrors, and sea-grass furniture (in
accordance with warranty "D" of the tariff attached hereto) the property of the assured, in trust, on
commission or for which he is responsible, whilst stored in the ground floor and first story of house and
dwelling No. 16 Calle Martinez, district 3, block 70, Manila, built, ground floor of stone and or brick, first story
of hard wood and roofed with galvanized iron bounded in the front by the said calle, on one side by Calle
David and on the other two sides by buildings of similar construction and occupation.
Co-insurance allowed, particulars of which to be declared in the event of loss or claim.
The company hereby agrees with the insured (but subject to the conditions on the back hereof, which are to
be taken as a part of this policy) that if the property above described, or any part thereof, shall be destroyed
or damaged by fire, at any time between the 21st day of February, 1908, and 4 o'clock in the afternoon of
the 21st day of February, 1909, or (in case of the renewal of this policy) at any time afterwards, so long as,
and during the period in respect of which the insured shall have paid to the company, and they shall have
accepted, the sum required for the renewal of this policy, the company will, out of their capital stock, and
funds, pay or make good to the insured the value of the property so destroyed, or the amount of such
damage thereto, to any amount not exceeding, in respect of each or any of the several matters above
specified, the sum set opposite thereto, respectively, and not exceeding in the whole the sum of ten
thousand pesos, and also not exceeding, in any case, the amount of the insurable interest therein of the
insured at the time of the happening of such fire.
In witness whereof, the British American Assurance Company has accused these presents to be signed this
21st day of February, in the year of our Lord 1908.
For the company.
W. F. STEVENSON & Co. LTD.,
"By...............................................,
"Manager Agents."
And indorsed on the back the following:
The within policy and includes a "Calalac" automobile to the extent of (P1,250) twelve hundred and
fifty pesos Philippine currency.
Memo: Permission is hereby granted for the use of gasoline not to exceed 10 gallons for the above
automobile, but only whilst contained in the reservoir of the car. It is further warranted that the car be
neither filled nor emptied in the within-described building or this policy be null and void.
Manila, 27th February, 1908.
"W. F. STEVENSON & Co. LTD.,
"By.......................................................,
"Manager Agents."
The defendant answered the complaint, admitting some of the facts alleged by the plaintiff and denying others. The
defendant also alleged certain facts under which it claimed that it was released from all obligations whatever under
said policy. These special facts are as follows:

First. That the plaintiff maintained a paint and varnish shop in the said building where the goods which were insured
were stored.
Second. That the plaintiff transferred his interest in and to the property covered by the policy to H. W. Peabody &
Co. to secure certain indebtedness due and owing to said company, and also that the plaintiff had transferred his
interest in certain of the goods covered by the said policy to one Macke, to secure certain obligations assumed by
the said Macke for and on behalf of the insured. That the sanction of the said defendant had not been obtained by
the plaintiff, as required by the said policy.
Third. That the plaintiff, on the 18th of April, 1908, and immediately preceding the outbreak of the alleged fire,
willfully placed a gasoline can containing 10 gallons of gasoline in the upper story of said building in close proximity
to a portion of said goods, wares, and merchandise, which can was so placed by the plaintiff as to permit the
gasoline to run on the floor of said second story, and after so placing said gasoline, he, the plaintiff, placed in close
proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire.
Fourth. That the plaintiff made no proof of the loss within the time required by condition five of said policy, nor did
the insured file a statement with he municipal or any other judge or court of the goods alleged to have been in said
building at the time of the alleged fire, nor of the goods saved, nor the loss suffered.
The plaintiff, after denying nearly all of the facts set out in the special answer of the defendant, alleged:
First. That he had been acquitted in a criminal action against him, after a trial duly and regularly had, upon a charge
of arson, based upon the same alleged facts set out in the answer of the defendant.
Second. That her had made no proof of the loss set up in his complaint for the reason that immediately after he had,
on the 20th of April, 1908, given the defendant due notice in writing of said loss, the defendant, on the 21st of April,
1908, and thereafter on other occasions, had waived all right to require proof of said loss by denying all liability
under the policy and by declaring said policy to be null and void.
After hearing the evidence adduced during the trial of the cause, the lower court found that the defendant was liable
to the plaintiff and rendered a judgment against the defendant for the sum of P9,841.50, with interest for a period of
one year at 6 per cent, making a total of P10,431.99, with costs.
From that decision the defendant appealed and made the following assignments of error:
1. The court erred in failing to hold that the use of the building, No. 16 Calle Martinez, as a paint and varnish shop
annulled the policy of insurance.
2. The court erred in failing to hold the execution of the chattel mortgages without the knowledge and consent of the
insurance company annulled the policy of insurance.
3. The court erred in holding that the keeping of gasoline and alcohol not in bottles in the building No. 16 Calle
Martinez was not such a violation of the conditions of the policy as to render the same null and void.
4. The court erred in failing to find as a fact that E. M. Bachrach, the insured, willfully placed a gasoline can
containing about 10 gallons of gasoline in the upper story of said building, No. 16 Calle Martinez, in close proximity
to a portion of the goods, wares, and merchandise stored therein, and that said can was so placed by said Bachrach
as to permit the gasoline to run on the floor of said second story.
5. The court erred in failing to find as a fact that E. M. Bachrach, after placing said gasoline can in close proximity to
the goods, wares, and merchandise covered by the policy of insurance, the he (Bachrach) placed in close proximity
to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire.
6. The court erred in holding that the policy of insurance was in force at the time of said fire, and that the acts or
omissions on the part of the insured which cause, or tended to cause, the forfeiture of the policy, were waived by the
defendant.
7. The court erred in holding the defendant liable for the loss under the policy.

lawphil.net

8. The court erred in refusing to deduct from the loss sustained by Bachrach the value of the automobile, which was
saved without damage.
9. The court erred in refusing to grant the motion for a new trial.
10. The court erred in refusing to enter judgment in favor of the defendant and against the plaintiff.
With reference to the first above assignment of error, the lower court in its decision said:
It is claimed that either gasoline or alcohol was kept in violation of the policy in the bodega containing the
insured property. The testimony on this point is somewhat conflicting, but conceding all of the defendant's
claims, the construction given to this claim by American courts would not justify the forfeiture of the policy on
that ground. The property insured consisted mainly of household furniture kept for the purpose of sale. The
preservation of the furniture in a salable condition by retouching or otherwise was incidental to the business.
The evidence offered by the plaintiff is to the effect that alcohol was used in preparing varnish for the

purpose of retouching, though he also says that the alcohol was kept in store and not in the bodegawhere
the furniture was. 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. Thus, where a furniture factory keeps
benzine for the purposes of operation (Davis vs. Pioneer Furniture Company, 78 N. W. Rep., 596; Faust vs.
American Fire Insurance Company, 91 Wis., 158), or where it is used for the cleaning machinery (Mears vs.
Humboldt Insurance Company, 92 Pa. St., 15; 37 Am. Rep., 647), the insurer can not on that ground avoid
payment of loss, though the keeping of the benzine on the premises is expressly prohibited. These
authorities also appear sufficient to answer the objection that the insured automobile contained gasoline and
that the plaintiff on one occasion was seen in the bodega with a lighted lamp. The first was incidental to the
use of the insured article and the second being a single instance falls within the doctrine of the case last
cited.
It may be added that there was no provision in the policy prohibiting the keeping of paints and varnishes upon the
premises where the insured property was stored. If the company intended to rely upon a condition of that character,
it ought to have been plainly expressed in the policy.
With reference to the second above assignment of error, the defendant and appellant contends that the lower court
erred in failing to hold that the execution of the said chattel mortgage, without the knowledge and consent of the
insurance company and without receiving the sanction of said company, annulled the said policy of insurance.
With reference to this assignment of error, upon reading the policy of insurance issued by the defendant to the
plaintiff, it will be noted that there is no provision in said policy prohibiting the plaintiff from placing a mortgage upon
the property insured, but, admitting that such a provision was intended, we think the lower court has completely
answered this contention of the defendant. He said, in passing upon this question as it was presented:
It is claimed that the execution of a chattel mortgage on the insured property violated what is known as the
"alienation clause," which is now found in most policies, and which is expressed in the policies involved in
cases 6496 and 6497 by a purchase imposing forfeiture if the interest in the property pass from the insured.
(Cases 6496 and 6497, in which are involved other action against other insurance companies for the same
loss as in the present action.)
This clause has been the subject of a vast number of judicial decisions (13 Am. & Eng. Encyc. of Law, 2d
ed., pp. 239 et seq.), and it is held by the great weight of authority that the interest in property insured does
not pass by the mere execution of a chattel mortgage and that while a chattel mortgage is a conditional sale,
there is no alienation within the meaning of the insurance law until the mortgage acquires a right to take
possession by default under the terms of the mortgage. No such right is claimed to have accrued in the case
at bar, and the alienation clause is therefore inapplicable.
With reference to the third assignment of error above noted, upon a reading of the decision of the lower court it will
be found that there is nothing in the decision of the lower court relating to the facts stated in this assignment of error,
neither is there any provision in the policy relating to the facts alleged in said assignment of error.
Assignment of error numbers 4 and 5 above noted may be considered together.
The record discloses that some time prior to the commencement of this present action, a criminal action was
commenced against the plaintiff herein in the Court of First Instance of the city of Manila, in which he was charged
with willfully and maliciously burning the property covered by the policy in the present case. At the conclusion of the
criminal action and after hearing the evidence adduced during the trial, the lower court, with the assistance of two
assessors, found that the evidence was insufficient to show beyond peradventure of doubt that the defendant was
guilty of the crime. The evidence adduced during the trial of the criminal cause was introduced as evidence in the
present cause. While the evidence shows some very peculiar and suspicious circumstances concerning the burning
of the goods covered by the said policy, yet, nevertheless, in view of the findings of the lower court and in view of
the apparent conflict in the testimony, we can not find that there is a preponderance of evidence showing that the
plaintiff did actually set fire or cause fire to be set to the goods in question. The lower court, in discussing this
question, said:
As to the claim that the loss occurred through the voluntary act of the insured, we consider it unnecessary to
review the evidence in detail. That was done by another branch of this court in disposing of the criminal
prosecution brought against the insured, on the same ground, based mainly on the same evidence. And
regardless of whether or not the judgment in that proceeding is res adjudicata as to anything here, we are at
least of the opinion that the evidence to establish this defense should not be materially less convincing than
that required in order to convict the insured of the crime of arson. (Turtell vs. Beamount, 25 Rev. Rep., 644.)
In order to find that the defense of incendiarism was established here, we would be obliged, therefore, in
effect to set aside the findings of the judge and assessors in the criminal cause, and this we would be loath
to do even though the evidence now produced were much stronger than it is.
With reference to the sixth assignment of error above noted, to wit: That the court erred in holding that the policy of
insurance was in force at the time of said fire and that the acts or omissions on the part of the insured which caused
or tended to cause a forfeiture of the policy were waived by the defendant, the lower court, in discussing this
question, said:
itc@alf

Regardless of the question whether the plaintiff's letter of April 20 (Exhibit B) was a sufficient compliance
with the requirement that he furnish notice of loss, the fact remains that on the following day the insurers
replied by a letter (Exhibit C) declaring that the "policies were null and void," and in effect denying liability. It
is well settled by a preponderance of authorities that such a denial is a waiver of notice of loss, because if

the "policies are null and void," the furnishing of such notice would be vain and useless. (13 Am. & Eng.
Encyc. of Law, 347, 348, 349.) Besides, "immediate notice" is construed to mean only within a reasonable
time.
Much the same may be said as to the objection that the insured failed to furnish to the insurers his books
and papers or to present a detailed statement to the "juez municipal," in accordance with article 404 of the
Code of Commerce. The last-named provision is similar to one appearing in many American policies
requiring a certificate from a magistrate nearest the loss regarding the circumstance thereof. A denial of
liability on other grounds waives this requirement (O'Niel vs. Buffalo Fire Insurance Company, 3 N. Y., 122;
Peoria Marine Ins. Co. vs. Whitehill, 25 Ill., 382), as well as that relating to the production of books and
papers (Ga. Home Ins. Co. vs. Goode & Co., 95 Va., 751; 66 Jur. Civ., 16). Besides, the insured might have
had difficulty in attempting to comply with this clause, for there is no longer an official here with the title of
"juez municipal."
Besides the foregoing reasons, it may be added that there was no requirement in the policy in question that such
notice be given.
With reference to the assignments of error numbers 7, 9, and 10, they are too general in their character to merit
consideration.
With reference to the eight assignment of error above noted, the defendant and appellant contends that he was
entitled to have the amount of his responsibility reduced by the full value (P1,250) of the said automobile.
It does not positively appear of record that the automobile in question was not included in the other policies. It does
appear that the automobile was saved and was considered as a part of the salvaged. It is alleged that the salvage
amounted to P4,000, including the automobile. This amount (P4,000) was distributed among the different insurers
and the amount of their responsibility was proportionately reduced. The defendant and appellant in the present case
made no objection at any time in the lower court to that distribution of the salvage. The claim is now made for the
first time. No reason is given why the objection was not made at the time of the distribution of the salvage, including
the automobile, among all of the insurers. The lower court had no opportunity to pass upon the question now
presented for the first time. The defendant stood by and allowed the other insurers to share in the salvage, which he
claims now wholly belonged to him. We think it is now too late to raise the question.
For all the foregoing reasons, we are of the opinion that the judgment of the lower court should be affirmed, and it is
hereby ordered that judgment be entered against the defendant and in favor of the plaintiff for the sum of P9,841.50,
with interest at the rate of 6 per cent from the 13th of July, 1908, with costs. So ordered.

VICENTE ONG LIM SING, JR.,

Petitioner,

G.R. No. 168115

Present:

- versus -

FEB LEASING & FINANCE

CORPORATION,
Respondent.

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.
Promulgated:
June 8, 2007

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

DECISION
NACHURA, J.:

This is a petition for review on certiorari assailing the Decision [1] dated March 15, 2005 and the
Resolution[2] dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease [3] of
equipment and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong
Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement [4] with FEB to guarantee the
prompt and faithful performance of the terms and conditions of the aforesaid lease agreement.
Corresponding Lease Schedules with Delivery and Acceptance Certificates[5] over the
equipment and motor vehicles formed part of the agreement. Under the contract, JVL was
obliged to pay FEB an aggregate gross monthly rental of One Hundred Seventy Thousand Four
Hundred Ninety-Four Pesos (P170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears,
including penalty charges and insurance premiums, amounted to Three Million Four Hundred
Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On August
23, 2000, FEB sent a letter to JVL demanding payment of the said amount. However, JVL failed
to pay.[6]
On December 6, 2000, FEB filed a Complaint [7] with the Regional Trial Court of Manila,
docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL,
Lim, and John Doe.
In the Amended Answer,[8] JVL and Lim admitted the existence of the lease agreement
but asserted that it is in reality a sale of equipment on installment basis, with FEB acting as the
financier. JVL and Lim claimed that this intention was apparent from the fact that they were
made to believe that when full payment was effected, a Deed of Sale will be executed by FEB
as vendor in favor of JVL and Lim as vendees.[9] FEB purportedly assured them that
documenting the transaction as a lease agreement is just an industry practice and that the proper
documentation would be effected as soon as full payment for every item was made. They also
contended that the lease agreement is a contract of adhesion and should, therefore, be construed
against the party who prepared it, i.e., FEB.
In upholding JVL and Lims stance, the trial court stressed the contradictory terms it
found in the lease agreement. The pertinent portions of the Decision dated November 22,
2002 read:
A profound scrutiny of the provisions of the contract which is a contract of adhesion
at once exposed the use of several contradictory terms. To name a few, in Section 9 of
the said contract disclaiming warranty, it is stated that the lessor is not the
manufacturer nor the latters agent and therefore does not guarantee any feature or
aspect of the object of the contract as to its merchantability. Merchantability is a term
applied in a contract of sale of goods where conditions and warranties are made to
apply. Article 1547 of the Civil Code provides that unless a contrary intention appears
an implied warranty on the part of the seller that he has the right to sell and to pass
ownership of the object is furnished by law together with an implied warranty that the
thing shall be free from hidden faults or defects or any charge or encumbrance not
known to the buyer.
In an adhesion contract which is drafted and printed in advance and parties are not
given a real arms length opportunity to transact, the Courts treat this kind of contract
strictly against their architects for the reason that the party entering into this kind of
contract has no choice but to accept the terms and conditions found therein even if he
is not in accord therewith and for that matter may not have understood all the terms
and
stipulations prescribed thereat. Contracts of
this character are
prepared
unilaterally by the stronger party with the best legal talents at its disposal. It is upon
that thought that the Courts are called upon to analyze closely said contracts so that
the weaker party could be fully protected.

Another instance is when the alleged lessee was required to insure the thing against
loss, damage or destruction.
In property insurance against loss or other accidental causes, the assured must have an
insurable interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the
assured has a right, title or interest therein that he will be benefited by its preservation
and continued existence or suffer a direct pecuniary loss from its destruction or injury
by the peril insured against. If the defendants were to be regarded as only a lessee,
logically the lessor who asserts ownership will be the one directly benefited or injured
and therefore the lessee is not supposed to be the assured as he has no insurable
interest.
There is also an observation from the records that the actual value of each object of
the contract would be the result after computing the monthly rentals by multiplying
the said rentals by the number of months specified when the rentals ought to be paid.
Still another observation is the existence in the records of a Deed of Absolute Sale by
and between the same parties, plaintiff and defendants which was an exhibit of the
defendant where the plaintiff sold to the same defendants one unit 1995 Mitsubishi L200 STRADA DC PICK UP and in said Deed, The Court noticed that the same terms
as in the alleged lease were used in respect to warranty, as well as liability in case of
loss and other conditions. This action of the plaintiff unequivocally exhibited their real
intention to execute the corresponding Deed after the defendants have paid in full and
as heretofore discussed and for the sake of emphasis the obscurity in the written
contract cannot favor the party who caused the obscurity.
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulations
shall control. If the words appear to be contrary to the evident intention of the parties,
their contemporaneous and subsequent acts shall be principally considered. If the
doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the contract shall be
null and void.[10]

Thus, the court concluded with the following disposition:

In this case, which is held by this Court as a sale on installment there is no chattel
mortgage on the thing sold, but it appears amongst the Complaints prayer, that the
plaintiff elected to exact fulfillment of the obligation.
For the vehicles returned, the plaintiff can only recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of
the units, specially so, as it appears, these returned vehicles were sold at auction and
that the plaintiff can apply the proceeds to the balance. However, with respect to the
unreturned units and machineries still in the possession of the defendants, it is this
Courts view and so hold that the defendants are liable therefore and accordingly are
ordered jointly and severally to pay the price thereof to the plaintiff together with
attorneys fee and the costs of suit in the sum of Php25,000.00.
SO ORDERED.[11]

On December 27, 2002, FEB filed its Notice of Appeal. [12] Accordingly, on January 17,
2003, the court issued an Order [13] elevating the entire records of the case to the CA. FEB
averred that the trial court erred:
A. When it ruled that the agreement between the Parties-Litigants is one of sale of
personal properties on installment and not of lease;
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code)
and not R.A. No. 8556;
C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid
balance of the price because of the previous payments made by the defendants for the
reasonable use of the units;
D.
When it failed to make a ruling or judgment on the Joint and Solidary
Liability of Vicente Ong Lim, Jr. to the Plaintiff-Appellant. [14]

On March 15, 2005, the CA issued its Decision [15] declaring the transaction between the
parties as a financial lease agreement under Republic Act (R.A.) No. 8556.[16] The fallo of the
assailed Decision reads:
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22
November 2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil
Case No. 00-99451 is REVERSED and SET ASIDE, and a new judgment is
herebyENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to
solidarily pay appellant FEB Leasing and Finance Corporation the amount of Three
Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos and
75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per
annum starting from the date of judicial demand on 06 December 2000, until full
payment thereof. Costs against appellees.
SO ORDERED.[17]

Lim filed the instant Petition for Review on Certiorari under Rule 45
contending that:
I
THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED
TO CONSIDER THAT THE UNDATEDCOMPLAINT WAS FILED BY
SATURNINO J. GALANG, JR., WITHOUT ANY AUTHORITY FROM
RESPONDENTS BOARD OF DIRECTORS AND/OR SECRETARYS
CERTIFICATE.
II
THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED
TO STRICTLY APPLY SECTION 7, RULE 18 OF THE 1997 RULES OF CIVIL
PROCEDURE AND NOW ITEM 1, A(8) OF A.M. NO. 03-1-09 SC (JUNE 8, 2004).
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE
APPEAL FOR FAILURE OF THE RESPONDENT TO FILE ON TIME ITS
APPELLANTS BRIEF AND TO SEPARATELY RULE ON THE PETITIONERS
MOTION TO DISMISS.

IV
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE
CONTRACT BETWEEN THE PARTIES IS ONE OF A FINANCIAL LEASE AND
NOT OF A CONTRACT OF SALE.
V
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PAYMENTS PAID BY THE PETITIONER TO THE RESPONDENT ARE
RENTALS AND NOT INSTALLMENTS PAID FOR THE PURCHASE PRICE OF
THE SUBJECT MOTOR VEHICLES, HEAVY MACHINES AND EQUIPMENT.

VI
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PREVIOUS CONTRACT OF SALEINVOLVING THE PICK-UP VEHICLE IS OF
NO CONSEQUENCE.
VII
THE HONORABLE COURT OF APPEALS FAILED TO TAKE
INTO CONSIDERATION THAT THE CONTRACT OFLEASE, A CONTRACT OF
ADHESION, CONCEALED THE TRUE INTENTION OF THE PARTIES, WHICH
IS A CONTRACT OF SALE.
VIII
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PETITIONER IS A LESSEE WITH INSURABLE INTEREST OVER THE
SUBJECT PERSONAL PROPERTIES.
IX
THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE
INTENTIONS OF THE COURT A QUO IN ITS USAGE OF THE TERM
MERCHANTABILITY.[18]

We affirm the ruling of the appellate court.

First, Lim can no longer question Galangs authority as FEBs authorized representative in
filing the suit against Lim.Galang was the representative of FEB in the proceedings before the
trial court up to the appellate court. Petitioner never placed in issue the validity of Galangs
representation before the trial and appellate courts. Issues raised for the first time on appeal are
barred by estoppel. Arguments not raised in the original proceedings cannot be considered on
review; otherwise, it would violate basic principles of fair play.[19]
Second, there is no legal basis for Lim to question the authority of the CA to go beyond
the matters agreed uponduring the pre-trial conference, or in not dismissing the appeal for
failure of FEB to file its brief on time, or in not ruling separately on the petitioners motion to
dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to litigation and
the parties right to due process. In numerous cases, this Court has allowed liberal construction
of the rules when to do so would serve the demands of substantial justice and equity.
[20]
InAguam v. Court of Appeals, the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a
power conferred on the court, not a duty. The "discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities, however, must be avoided.
The law abhors technicalities that impede the cause of justice. The court's primary
duty is to render or dispense justice. "A litigation is not a game of technicalities."
"Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts." Litigations must be decided on
their merits and not on technicality. Every party litigant must be afforded the amplest
opportunity for the proper and just determination of his cause, free from the

unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical

grounds is frowned upon where the policy of the court is to encourage hearings of
appeals on their merits and the rules of procedure ought not to be applied in a very
rigid, technical sense; rules of procedure are used only to help secure, not override
substantial justice. It is a far better and more prudent course of action for the court to
excuse a technical lapse and afford the parties a review of the case on appeal to attain
the ends of justice rather than dispose of the case on technicality and cause a grave
injustice to the parties, giving a false impression of speedy disposal of cases while
actually resulting in more delay, if not a miscarriage of justice.[21]

Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract
is not void per se. It is as binding as any ordinary contract. A party who enters into an adhesion
contract is free to reject the stipulations entirely.[22]If the terms thereof are accepted without
objection, then the contract serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire
agreement between them, and that no representations have been made other than as set
forth herein. This Agreement shall not be amended or altered in any manner, unless
such amendment be made in writing and signed by the parties hereto.

Petitioners claim that the real intention of the parties was a contract of sale of personal property
on installment basis is more likely a mere afterthought in order to defeat the rights of the
respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease within the purview of R.A. No. 8556. Section
3(d) thereof defines financial leasing as:
[A] mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
motor
vehicles,
appliances,
business
and office machines, and other movable or immovable property in consideration of
the periodic payment by the lessee of a fixed amount of money sufficient to amortize
at least seventy (70%) of the purchase price or acquisition cost, including any
incidental expenses and a margin of profit over an obligatory period of not less
thantwo (2) years during which the lessee has the right to hold and use the leased
property with the right to expense the lease rentals paid to the lessor and bears the cost
of repairs, maintenance, insurance and preservation thereof, but with no obligation or
option on his part to purchase the leased property from the owner-lessor at the end of
the lease contract.

FEB leased the subject equipment and motor vehicles to JVL in consideration of a
monthly periodic payment ofP170,494.00. The periodic payment by petitioner is sufficient to
amortize at least 70% of the purchase price or acquisition cost of the said movables in
accordance with the Lease Schedules with Delivery and Acceptance Certificates. The
basicpurpose of a financial leasing transaction is to enable the prospective buyer of equipment,
who is unable to pay for such equipment in cash in one lump sum, to lease such equipment in
the meantime for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition

cost (including the expenses and a margin of profit for the financial lessor) with the expectation
that at the end of the lease period the buyer/financial lessee will be able to pay any remaining
balance of the purchase price.[23]
The allegation of petitioner that the rent for the use of each movable constitutes the value
of the vehicle or equipment leased is of no moment. The law on financial lease does not prohibit
such a circumstance and this alone does not make the transaction between the parties a sale of
personal property on installment. In fact, the value of the lease, usually constituting the value or
amount of the property involved, is a benefit allowed by law to the lessor for the use of the
property by the lessee for the duration of the lease. It is recognized that the value of these
movables depreciates through wear and tear upon use by the lessee. In Beltran v. PAIC Finance
Corporation,[24] we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a
trading company. Neither is it an ordinary leasing company; it does not make its profit
by
buying
equipment
and
repeatedly leasing
out such equipment to
different users thereof. But a financial lease must be preceded by a purchase and sale
contract covering the equipment which becomes the subject matter of the financial
lease. The financial lessor takes the role of the buyer of the equipment leased. And so
the formal or documentary tie between the seller and the real buyer of the equipment,
i.e., the financial lessee, is apparently severed. In economic reality, however, that
relationship remains. The sale of the equipment by the supplier thereof to
the financial lessor and the latter's legal ownership thereof are intended to secure the
repayment over time of the purchase price of the equipment, plus financing charges,
through the payment of lease rentals; that legal title is the upfront security held by the
financial lessor, a security probably superior in some instances to a chattel
mortgagee's lien.[25]

Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL
entered into the lease contract with full knowledge of its terms and conditions. The contract was
in force for more than four years. Since its inception on March 9, 1995, JVL and Lim never
questioned its provisions. They only attacked the validity of the contract after they were
judicially made to answer for their default in the payment of the agreed rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and
conditions as they may want to include in a contract. As long as such agreements are not
contrary to law, morals, good customs, public policy, or public order, they shall have the force
of law between the parties.[26] Contracting parties may stipulate on terms and conditions as they
may see fit and these have the force of law between them.[27]
The stipulation in Section 14[28] of the lease contract, that the equipment shall be insured
at the cost and expense of the lessee against loss, damage, or destruction from fire, theft,
accident, or other insurable risk for the full term of the lease, is a binding and valid
stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor vehicles
leased.Section 17 of the Insurance Code provides that the measure of an insurable interest in
property is the extent to which the insured might be damnified by loss or injury thereof. It
cannot be denied that JVL will be directly damnified in case of loss, damage, or destruction of
any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not
warrant the merchantability of the equipment is a valid stipulation. Section 9.1 of the lease
contract is stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT
THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE
AGENT OF THE MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE
HEREBY ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT AND
THE
SUPPLIER
THEREOF AND THAT THEREARE NO WARRANTIES,
CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE
LESSOR AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY
PART THEREOF, OR AS TO ITS FITNESS, SUITABILITY, CAPACITY,
CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT
WILL MEET THE REQUIREMENTS OF ANY LAW,RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC
MACHINERY OR APPARATUS OR SPECIAL METHODS.[29]

In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of defect of
any kind that will be found by the lessee in any of the equipment, recourse should be made to
the manufacturer. The financial lessor, being a financing company, i.e., an extender of credit
rather than an ordinary equipment rental company, does not extend a warranty of the fitness of
the equipment for any particular use. Thus, the financial lessee was precisely in a position to
enforce such warranty directly against the supplier of the equipment and not against the
financial lessor. We find nothing contra legem or contrary to public policy in such a contractual
arrangement.[30]
Fifth, petitioner further proffers the view that the real intention of the parties was to enter
into a contract of sale on installment in the same manner that a previous transaction between the
parties over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was initially covered by an agreement
denominated as a lease and eventually became the subject of a Deed of Absolute Sale.
We join the CA in rejecting this view because to allow the transaction involving the pickup to be read into the terms of the lease agreement would expand the coverage of the
agreement, in violation of Article 1372 of the New Civil Code. [31] The lease contract subject of
the complaint speaks only of a lease. Any agreement between the parties after the lease contract
has ended is a different transaction altogether and should not be included as part of the
lease. Furthermore, it is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations shall control. No amount of extrinsic aid is necessary in order to
determine the parties' intent.[32]
WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision
of the CA in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23,
2005 are AFFIRMED. Costs against petitioner.
SO ORDERED.
HEIRS OF LORETO C. MARAMAG,
represented by surviving spouse
VICENTA PANGILINAN MARAMAG,
Petitioners,

G.R. No. 181132

- versus -

Present:

YNARES-SANTIAGO, J.,
EVA VERNA DE GUZMAN MARAMAG, Chairperson,
CARPIO,*
ODESSA DE GUZMAN MARAMAG,
CORONA,**
KARL BRIAN DE GUZMAN
NACHURA, and
MARAMAG, TRISHA ANGELIE
PERALTA, JJ.
MARAMAG, THE INSULAR LIFE
ASSURANCE COMPANY, LTD., and
Promulgated:
GREAT PACIFIC LIFE ASSURANCE
CORPORATION,
June 5, 2009
Respondents.
x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

This is a petition[1] for review on certiorari under Rule 45 of the Rules, seeking to reverse and
set aside the Resolution[2]dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV
No. 85948, dismissing petitioners appeal for lack of jurisdiction.
The case stems from a petition[3] filed against respondents with the Regional Trial Court, Branch
29, for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with
prayer for a temporary restraining order (TRO) and a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva de Guzman
Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is
disqualified to receive any proceeds from his insurance policies from Insular Life Assurance
Company, Ltd. (Insular)[4] and Great Pacific Life Assurance Corporation (Grepalife);[5] (3) the
illegitimate children of LoretoOdessa, Karl Brian, and Trisha Angeliewere entitled only to onehalf of the legitime of the legitimate children, thus, the proceeds released to Odessa and those to
be released to Karl Brian and Trisha Angelie were inofficious and should be reduced; and (4)
petitioners could not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged,
among others, that part of the insurance proceeds had already been released in favor of Odessa,
while the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both
minors, upon the appointment of their legal guardian. Petitioners also prayed for the total
amount of P320,000.00 as actual litigation expenses and attorneys fees.
In answer,[6] Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa,
Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the
insurance proceeds of the insurance policies; that when it ascertained that Eva was not the legal
wife of Loreto, it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl
Brian, and Trisha Angelie, as the remaining designated beneficiaries; and that it released
Odessas share as she was of age, but withheld the release of the shares of minors Karl Brian and

Trisha Angelie pending submission of letters of guardianship. Insular alleged that the complaint
or petition failed to state a cause of action insofar as it sought to declare as void the designation
of Eva as beneficiary, because Loreto revoked her designation as such in Policy No.
A001544070 and it disqualified her in Policy No. A001693029; and insofar as it sought to
declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no
settlement of Loretos estate had been filed nor had the respective shares of the heirs been
determined. Insular further claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the
Insurance Code.
In its own answer[7] with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and
Trisha Angelie were denied because Loreto was ineligible for insurance due to a
misrepresentation in his application form that he was born on December 10, 1936 and, thus, not
more than 65 years old when he signed it in September 2001; that the case was premature, there
being no claim filed by the legitimate family of Loreto; and that the law on succession does not
apply where the designation of insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto
failed to file their answer. Hence, the trial court, upon motion of petitioners, declared them in
default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in
their respective answers be resolved first. The trial court ordered petitioners to comment within
15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely
legal whether the complaint itself was proper or not and that the designation of a beneficiary is
an act of liberality or a donation and, therefore, subject to the provisions of Articles 752 [8] and
772[9] of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to
the designated beneficiaries in the policies, not to the estate or to the heirs of the
insured. Grepalife also reiterated that it had disqualified Eva as a beneficiary when it
ascertained that Loreto was legally married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which
reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants
Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian
and Trisha Maramag. The action shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.[10]

In so ruling, the trial court ratiocinated thus

Art. 2011 of the Civil Code provides that the contract of insurance is governed by the
(sic) special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code. The principal law on insurance is the Insurance Code, as

amended.Only in case of deficiency in the Insurance Code that the Civil Code may be
resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person in
whose name or for whose benefit it is made, unless otherwise specified in the
policy. Since the defendants are the ones named as the primary beneficiary (sic) in the
insurances (sic) taken by the deceased Loreto C. Maramag and there is no showing
that herein plaintiffs were also included as beneficiary (sic) therein the insurance
proceeds shall exclusively be paid to them. This is because the beneficiary has a
vested right to the indemnity, unless the insured reserves the right to change the
beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect the
insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which can
be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern
Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme Court
made the following pronouncements[:]
With the finding of the trial court that the proceeds to the Life
Insurance Policy belongs exclusively to the defendant as his individual
and separate property, we agree that the proceeds of an insurance policy
belong exclusively to the beneficiary and not to the estate of the person
whose life was insured, and that such proceeds are the separate and
individual property of the beneficiary and not of the heirs of the person
whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of Section 428 of the
Code of Commerce x x x.
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic)
no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie
Maramag for the reduction and/or declaration of inofficiousness of donation as
primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is
his concubine Eva Verna De Guzman. Any person who is forbidden from receiving
any donation under Article 739 cannot be named beneficiary of a life insurance policy
of the person who cannot make any donation to him, according to said article (Art.
2012, Civil Code). If a concubine is made the beneficiary, it is believed that the
insurance contract will still remain valid, but the indemnity must go to the legal heirs
and not to the concubine, for evidently, what is prohibited under Art. 2012 is the
naming of the improper beneficiary. In such case, the action for the declaration of
nullity may be brought by the spouse of the donor or donee, and the guilt of the donor
and donee may be proved by preponderance of evidence in the same action (Comment
of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the designation
of defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the
insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the
Civil Code, the insurance indemnity that should be paid to her must go to the legal
heirs of the deceased which this court may properly take cognizance as the action for
the declaration for the nullity of a void donation falls within the general jurisdiction of
this Court.[11]

Insular[12] and Grepalife[13] filed their respective motions for reconsideration, arguing, in the
main, that the petition failed to state a cause of action. Insular further averred that the proceeds
were divided among the three children as the remaining named beneficiaries. Grepalife, for its
part, also alleged that the premiums paid had already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on
the basis of the allegations in the complaint, such that the defenses of Insular and Grepalife
would be better threshed out during trial.
On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for
Reconsideration filed by defendants Grepalife and Insular Life are hereby
GRANTED. Accordingly, the portion of the Resolution of this Court dated 21
September 2004 which ordered the prosecution of the case against defendant Eva
Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case
against them is hereby ordered DISMISSED.
SO ORDERED.[14]

In granting the motions for reconsideration of Insular and Grepalife, the trial court considered
the allegations of Insular that Loreto revoked the designation of Eva in one policy and that
Insular disqualified her as a beneficiary in the other policy such that the entire proceeds would
be paid to the illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance
Code. It ruled that it is only in cases where there are no beneficiaries designated, or when the
only designated beneficiary is disqualified, that the proceeds should be paid to the estate of the
insured. As to the claim that the proceeds to be paid to Loretos illegitimate children should be
reduced based on the rules on legitime, the trial court held that the distribution of the insurance
proceeds is governed primarily by the Insurance Code, and the provisions of the Civil Code are
irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted that Eva
was never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it
upheld the dismissal of the case as to the illegitimate children. It further held that the matter of
Loretos misrepresentation was premature; the appropriate action may be filed only upon denial
of the claim of the named beneficiaries for the insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack
of jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to
state a cause of action involved a pure question of law.The appellate court also noted that
petitioners did not file within the reglementary period a motion for reconsideration of the trial
courts Resolution, dated September 21, 2004, dismissing the complaint as against Odessa, Karl
Brian, and Trisha Angelie; thus, the said Resolution had already attained finality.
Hence, this petition raising the following issues:
a.
In determining the merits of a motion to dismiss for failure to state a
cause of action, may the Court consider matters which were not alleged in the
Complaint, particularly the defenses put up by the defendants in their Answer?
b.
In granting a motion for reconsideration of a motion to dismiss for
failure to state a cause of action, did not the Regional Trial Court engage in the
examination and determination of what were the facts and their probative value, or the
truth thereof, when it premised the dismissal on allegations of the defendants in their
answer which had not been proven?

c.
x x x (A)re the members of the legitimate family entitled to the
proceeds of the insurance for the concubine? [15]

In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either
disqualified as a beneficiary by the insurance companies or that her designation was revoked by
Loreto, hypothetically admitted as true, was raised only in the answers and motions for
reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to prosper
on that ground, only the allegations in the complaint should be considered. They further contend
that, even assuming Insular disqualified Eva as a beneficiary, her share should not have been
distributed to her children with Loreto but, instead, awarded to them, being the legitimate heirs
of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the petition failed
to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which
reads
SECTION 1. Grounds. Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.

A cause of action is the act or omission by which a party violates a right of another. [16] A
complaint states a cause of action when it contains the three (3) elements of a cause of action(1)
the legal right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act or
omission of the defendant in violation of the legal right. If any of these elements is absent, the
complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of
action.[17]
When a motion to dismiss is premised on this ground, the ruling thereon should be based
only on the facts alleged in the complaint. The court must resolve the issue on the strength of
such allegations, assuming them to be true. The test of sufficiency of a cause of action rests on
whether, hypothetically admitting the facts alleged in the complaint to be true, the court can
render a valid judgment upon the same, in accordance with the prayer in the complaint. This is
the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1.
2.
3.
4.
5.

the falsity of the allegations is subject to judicial notice;

such allegations are legally impossible;
the allegations refer to facts which are inadmissible in evidence;
by the record or document in the pleading, the allegations appear unfounded; or
there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case.[18]

In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries in the
insurance policies issued by Insular and Grepalife. The basis of petitioners claim is that Eva,
being a concubine of Loreto and a suspect in his murder, is disqualified from being designated
as beneficiary of the insurance policies, and that Evas children with Loreto, being illegitimate
children, are entitled to a lesser share of the proceeds of the policies. They also argued that
pursuant to Section 12 of the Insurance Code,[19] Evas share in the proceeds should be forfeited
in their favor, the former having brought about the death of Loreto. Thus, they prayed that the
share of Eva and portions of the shares of Loretos illegitimate children should be awarded to
them, being the legitimate heirs of Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance
contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the
Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the
proper interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.

Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are
either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the
maturation of the policy.[20] The exception to this rule is a situation where the insurance contract
was intended to benefit third persons who are not parties to the same in the form of favorable
stipulations or indemnity. In such a case, third parties may directly sue and claim from the
insurer.[21]
Petitioners are third parties to the insurance contracts with Insular and Grepalife and,
thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife
have no legal obligation to turn over the insurance proceeds to petitioners. The revocation of
Eva as a beneficiary in one policy and her disqualification as such in another are of no moment
considering that the designation of the illegitimate children as beneficiaries in Loretos insurance
policies remains valid. Because no legal proscription exists in naming as beneficiaries the
children of illicit relationships by the insured, [22] the shares of Eva in the insurance proceeds,
whether forfeited by the court in view of the prohibition on donations under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be
awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any beneficiary,[23] or when
the designated beneficiary is disqualified by law to receive the proceeds, [24] that the insurance
policy proceeds shall redound to the benefit of the estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the appeal; the
issue of failure to state a cause of action is a question of law and not of fact, there being no
findings of fact in the first place.[25]
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the Court of Appeals
(CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the Regional Trial Court,
Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated
April 11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the
local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately obtained
from respondent fire insurance policies with book debt endorsements. The insurance policies provide for coverage
on "book debts in connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines." 2 The policies defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect of the merchandise sold
and delivered by the Insured which are outstanding at the date of loss for a period in excess of six (6)
months from the date of the covering invoice or actual delivery of the merchandise whichever shall first
occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of every
calendar month all amount shown in their books of accounts as unpaid and thus become receivable item
from their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano Superstore
Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the items lost or destroyed
in the fire were stocks of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and LSPI filed
with respondent their claims under their respective fire insurance policies with book debt endorsements; that as of
February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials with
IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC and LSPI and,
by virtue thereof, respondent was subrogated to their rights against petitioner; that respondent made several
demands for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable because the
property covered by the insurance policies were destroyed due to fortuities event or force majeure; that
respondent's right of subrogation has no basis inasmuch as there was no breach of contract committed by it since
the loss was due to fire which it could not prevent or foresee; that IMC and LSPI never communicated to it that they
insured their properties; that it never consented to paying the claim of the insured. 6
At the pre-trial conference the parties failed to arrive at an amicable settlement. 7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint. 8 It held that the fire was
purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner; that it has not
been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is further
agreed that merely for purpose of securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid", IMC and LSPI retained ownership of the
delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside the
decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is
entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured Inter
Capitol Marketing Corporation, plus legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi
Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.
With costs against the defendant-appellee.

SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and cost of
the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso contained in the sales
invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the loss under the principle of res perit
domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the payment of its
unpaid account and as such the obligation to pay is not extinguished, even if the fire is considered a fortuitous
event; that by subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with book
debt endorsements, what was insured was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11, 2001. 13
Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE
OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER ART.
2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be over credit
since an insurance "on credit" belies not only the nature of fire insurance but the express terms of the policies; that it
was not credit that was insured since respondent paid on the occasion of the loss of the insured goods to fire and
not because of the non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over
credit, there was no loss as the accounts were not yet due since no prior demands were made by IMC and LSPI
against petitioner for payment of the debt and such demands came from respondent only after it had already paid
IMC and LSPI under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI assumed
the risk of loss when they secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no valid
insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner upon delivery of
the goods; that petitioner was not privy to the insurance contract or the payment between respondent and its
insured nor was its consent or approval ever secured; that this lack of privity forecloses any real interest on the part
of respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing materials was transferred upon
delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors who stand to suffer direct
pecuniary loss from its destruction by fire; that petitioner is liable for loss of the ready-made clothing materials since
it failed to overcome the presumption of liability under Article 1265 16 of the Civil Code; that the fire was caused
through petitioner's negligence in failing to provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there are defects in their installation or when there
is lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and evident bad faith
in refusing to pay respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the CA is limited
to reviewing questions of law which involves no examination of the probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or weigh evidence
all over again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme Court. 20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by this
Court, such as: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the CA went beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the
CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred in
construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI since such
insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this Policy." 24 Nowhere is it provided in the
questioned insurance policies that the subject of the insurance is the goods sold and delivered to the customers and
dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any
alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the
contract.25 Thus, what were insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by stipulating
in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment of the purchase price
the above described merchandise remains the property of the vendor until the purchase price thereof is fully paid." 26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred
to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether
actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the
contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer
of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis
supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the
buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of
the value of the delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title,
but whether insured has substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal,
or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify
the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in:
(a) an existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or
possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite to the
existence of such an interest, it is sufficient that the insured is so situated with reference to the property that he
would be liable to loss should it be injured or destroyed by the peril against which it is insured. 29 Anyone has an
insurable interest in property who derives a benefit from its existence or would suffer loss from its
destruction.30Indeed, a vendor or seller retains an insurable interest in the property sold so long as he has any
interest therein, in other words, so long as he would suffer by its destruction, as where he has a vendor's lien. 31 In
this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account
45 days after the time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 32 of the Civil Code is
misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for petitioner's
accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA, where the obligation consists in the payment of money, the failure
of the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his liability.33 The
rationale for this is that the rule that an obligor should be held exempt from liability when the loss occurs thru a
fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in
nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of anything
of the same kind does not extinguish the obligation." If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or physical segregation from all others of
the same class, the loss or destruction of anything of the same kind even without the debtor's fault and before he
has incurred in delay will not have the effect of extinguishing the obligation. 35 This rule is based on the principle that

the genus of a thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is
not excused by fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What is
relevant here is whether it has been established that petitioner has outstanding accounts with IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22" 38 show that
petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher
evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent upon
receipt of the insurance proceeds. All these documents have been properly identified, presented and marked as
exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of subrogation
accrues simply upon payment by the insurance company of the insurance claim. 41 Respondent's action against
petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight can
be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager, Stephen S.
Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in
evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI may have
against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and Resolution
dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATIONthat
the order to pay the amount of P535,613.00 to respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.
G.R. No. 128834 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, petitioners,
vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG
KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., petitioners,
vs.
GOYU & SONS, INC. respondent.
MELO, J.:
The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu
& Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage
contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37%
interest per annum commending July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the
amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary
damages and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at P68,785,069.04 as of
April 1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the
common facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's
application for approval by RCBC's executive committee. A credit facility in the amount of P30 million was initially

granted. Upon GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee increased
GOYU's credit facility to P50 million, then to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages
in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of
these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company
approved by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance
Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements
in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").
On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that
the insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts
or that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds
than the insured. GOYU filed a complaint for specific performance and damages which was docketed at the
Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance policies,
but said claims were also denied for the same reasons that MICO denied GOYU's claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch
3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company
obtained their respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten insurance policies be deposited with the said court minus
the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the
amount of P8,696,838.75 (Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as
follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is
deposited with this Court;
b. To pay the plaintiff damages by was of interest for the duration of
the delay since July 27, 1992 (ninety days after defendant insurer's
receipt of the required proof of loss and notice of loss) at the rate of
twice the ceiling prescribed by the Monetary Board, on the following
amounts:
1) P50,000,000.00 from July 27, 1992 up to the
time said amount was deposited with this Court on
January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the
time when the writs of attachments were received by
defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the
amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorney's fees;
3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan
obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the respective promissory notes
(without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interest earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amount awarded
in its favor. MICO and RCBC disputed the trial court's findings of liability on their part. The Court of Appeals party
granted GOYU's appeal, but sustained the findings of the trial court with respect to MICO and RCBC's liabilities,
thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of
P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No.
3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said
amount at the rate of thirty-seven (37%) percent per annum which is
twice the ceiling prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;
a) To pay the plaintiff actual and compensatory damages in the
amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL
BANKING CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.
4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its
loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992
without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release
to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by
Malayan Insurance Co., Inc., together with all the interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent
reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of
the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of
herein G.R. No. 128833). At issue in said petition is RCBC's right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of
Sebastian.
After a careful reviews of the material facts as found by the two courts below in relation to the pertinent and
applicable laws, we find merit in the submission of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted
in the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not
RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the
occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several
mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall
insure the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the
mortgaged property with MICO, an insurance company acceptable to RCBC. Bases on their stipulations in the
mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to
RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject insurance

policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to "59RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However, because these endorsements do
not bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the
endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same
mortgaged property, such that each one of them may insure the same property for his own sole benefit. There is no
question that GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although
it appears that GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the
parties as shown by their contemporaneous acts, must be given due consideration in order to better serve the
interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by
the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a
sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that
the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by
GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of obtaining insurance
coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not
have endorsed the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor
RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94
SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied thereon.
The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed
to aid the law in the administration of justice where without its aid injustice might result. It has been
applied by this Court wherever and whenever special circumstances of a case so demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in
quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in favor of
RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were
sent to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn, February 23, pp. 7-8).
GOYU has not denied having received from Alchester the originals of these documents.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation
in the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to
seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above
this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the
occurrence of the loss insure against, it was too late for GOYU to disown the endorsements for any imagined or
contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an
implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least
estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these
endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith
that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of
public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the
peculiar circumstances obtaining in this case, the Court is bound to recognize RCBC's right to the proceeds of the
insurance polices if not for the actual endorsement of the policies, at least on the basis of the equitable principle of
estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance
shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of
the circumstances obtaining in the instant case presents a justification to take exception to the strict application of
said provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as
the party for whose benefit the insurance policies were taken out. Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between
RCBC and GOYU in consideration of and for securing GOYU's credit facilities from RCBC. The mortgage contracts
contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly
covered against any loss by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister
company of RCBC and definitely an acceptable insurance company to RCBC.
3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC
which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the
mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by
Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to
be sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to
extend the benefits of its credits facilities and GOYU continued to benefit therefrom. Just as plain too is the intention
of the parties to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU. The
intention of the parties will have to be given full force and effect particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or
entity for whose benefit the polices were clearly intended.
Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged property is
expressed in Article 2127 of the Civil Code which states:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by
law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have
been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as
shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"
Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43
e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76
f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"
Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00
g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00
i. Policy Number F-114-07402 Exhibit "8-Malayan"
Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20
j. Policy Number F-114-07525 Exhibit "9-Malayan"
Issue Date November 20, 1991

Expiry Date December 5, 1992

Amount P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for MICO.)
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's witness, Atty.
Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-12803341 [(h) above]. Also, one of the endorsement documents, Exhibit "5-Malayan", refers to a certain insurance
policy number ACIA-F-07066, which is not among the insurance policies involved in the complaint.
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being excessively
payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force
and effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other creditors up to
the extent of the GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains that the
insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for
whose benefit it was made. In this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the
subject policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no
longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which
may nonetheless forthwith be dismissed for being moot and academic in view of the results reached herein. Only
the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's
other creditors. To the extent of GOYU's outstanding obligation with RCBC, all the rest of the other insurance
policies above-listed which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment,
and levy by the other creditors of GOYU.
This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation with RCBC
which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of
GOYU's liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to RCBC
was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory Note No.
421-92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No.
952-91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also
because the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of
Appeals speculated thusly:
. . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff
in bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the
same practice of procedure has always been adopted in its previous dealings with the bank.
(Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents
are spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument
has the burden of proof of showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of
Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap
when he answered the queries of the trial court.
ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the
amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but the amount I asked which is
correct, Your Honor.

COURT
Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as
hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation be fixed at P116,301,992.60 as
shown in its letter date March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the current past due account of
this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10,
and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and
in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from
the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and
confirm this amount of P116,301,992.60 as stated as true and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated
after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus,
careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewalsof
Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for
bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan
represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis
for giving GOYU's judicial admission of liability in the amount of P116,301,992.60 full force and effect.
It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of
the mortgage property will, nonetheless, have to be applied as payment against GOYU's obligation. But, contrary to
the lower courts' findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted.
Such payments had obviously been duly considered by GOYU, in its aforequoted letter date March 9, 1993, wherein
it admitted that its past due account totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:
Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
Broken down as follows:
Principal 1 Interest
Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81
2) Proceeds from
Equitable Insurance
Company 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
___________
9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90
The need for the payment of interest due the principal amount of the obligation, which is the cost of money to
RCBC, the primary end and the ultimate reason for RCBC's existence and being, was duly recognized by the trial
court when it ruled favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with RCBC in the
amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective

promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479).
Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for its ruling, modified
the trial court's ruling and ordered GOYU "to pay the principal amount of P68,785,069.04 without any interest,
surcharges and penalties" (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment
of additional interest, penalties, and charges, in this manner:
Regarding defendant RCBC's commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of writing to
be binding and enforceable. The principle is well known that generally a verbal agreement or
contract is no less binding and effective than a written one. And the existence of such a verbal
agreement has been amply established by the evidence in this case. In any event, regardless of the
existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to
charge the plaintiff with surcharges and penalties considering the latter's pitiful situation. (Emphasis
supplied).
(Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and distinct from that of
surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties
despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The
charging of interest for loans forms a very essential and fundamental element of the banking business, which may
truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for
which it will not charge any interest at all. We fail to find justification for the Court of Appeal's outright deletion of the
payment of interest as agreed upon in the respective promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court
in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the actual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default,i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and
tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed interest rates must be followed.
This is very clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be taken
into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether
be deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun
Bing, may have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we
cannot accept the lower courts' finding that RCBC had thereby ipso facto effectively waived collection of any
additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of
additional interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:
Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges
and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in
another. This provision of law will have to be applied to the established facts of any given case. Given the
circumstance under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable.
The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYU's offer to pay the
amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which RCBC refused, we find it more in
keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time
onward.
Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for denying or
withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the
right to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU
lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of
insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA.
185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a
difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a
claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without
reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th]
42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs.
Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in
bad faith delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of
the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance
proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the
outcome herein, justified MICO in withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two
simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for
foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single
cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due consideration to
this argument of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R.
CV No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the
resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of
discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691 [1995]):
It should have been enough, nonetheless, for the appellate court to merely set aside the questioned
ordered of the trial court for having been issued by the latter with grave abuse of discretion. In
likewise enjoining permanently herein petitioner "from entering in and interfering with the use or
occupation and enjoyment of petitioner's (now private respondent) residential house and
compound," the appellate court in effect, precipitately resolved with finality the case for injunction
that was yet to be heard on the merits by the lower court. Elevated to the appellate court, it might be
stressed, were mere incidents of the principal case still pending with the trial court. In Municipality of
Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have
"no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the
main case itself which was not on appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it
has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is
rendered moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over
the MICO insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior
mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life
Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April
3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch
3 of the Manila Trial Court for lack of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation
the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis
& Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of P50,505,594.60 (per O.R. No.
3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation
in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan
Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its
earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastian's right as
attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan
insurance policies as first mortgagee.
SO ORDERED.
THELMA VDA. DE CANILANG, petitioner,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE CORPORATION, respondents.
Simeon C. Sato for petitioner.
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from "sinus
tachycardia." The doctor prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug.
Mr. Canilang consulted the same doctor again on 3 August 1982 and this time was found to have "acute bronchitis."
On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with respondent Great
Pacific Life Assurance Company ("Great Pacific") naming his wife, Thelma Canilang, as his beneficiary. 1 Jaime
Canilang was issued ordinary life insurance Policy No. 345163, with the face value of P19,700, effective as of 9 August
1982.
On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic anemia." 2 Petitioner,
widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on 5 December 1983 upon
the ground that the insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of the insurance
proceeds. During the hearing called by the Insurance Commissioner, petitioner testified that she was not aware of
any serious illness suffered by her late husband 3 and that, as far as she knew, her husband had died because of a
kidney disorder. 4 A deposition given by Dr. Wilfredo Claudio was presented by petitioner. There Dr. Claudio stated that he
was the family physician of the deceased Jaime Canilang 5 and that he had previously treated him for "sinus tachycardia"
and "acute bronchitis." 6 Great Pacific for its part presented Dr. Esperanza Quismorio, a physician
and a medical underwriter working for Great Pacific. 7 She testified that the deceased's insurance application had been
approved on the basis of his medical declaration. 8 She explained that as a rule, medical examinations are required only in
cases where the applicant has indicated in his application for insurance coverage that he has previously undergone
medical consultation and hospitalization. 9
In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo ordered Great Pacific to pay
P19,700 plus legal interest and P2,000.00 as attorney's fees after holding that:
1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it would not
have affected Great Pacific's decision to insure him;
2. Great Pacific had waived its right to inquire into the health condition of the applicant by the
issuance of the policy despite the lack of answers to "some of the pertinent questions" in the
insurance application;
3. there was no intentional concealment on the part of the insured Jaime Canilang as he had
thought that he was merely suffering from a minor ailment and simple cold; 10 and
4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not concealment was
intentionally made, was not applicable to Canilang's case as that law became effective only on 1
June 1985.

On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the Insurance
Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's counterclaim. The Court of Appealed
found that the use of the word "intentionally" by the Insurance Commissioner in defining and resolving the issue
agreed upon by the parties at pre-trial before the Insurance Commissioner was not supported by the evidence; that
the issue agreed upon by the parties had been whether the deceased insured, Jaime Canilang, made a material
concealment as the state of his health at the time of the filing of insurance application, justifying respondent's denial
of the claim. The Court of Appeals also found that the failure of Jaime Canilang to disclose previous medical
consultation and treatment constituted material information which should have been communicated to Great Pacific
to enable the latter to make proper inquiries. The Court of Appeals finally held that the Ng Gan Zee case which had
involved misrepresentation was not applicable in respect of the case at bar which involves concealment.
Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging that:
1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that the issue
in the case agreed upon between the parties before the Insurance Commission is whether or not
Jaime Canilang "intentionally" made material concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions does not
amount to fraud and private respondent is deemed to have waived inquiry thereto. 11
The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as
follows:
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any medical or
surgical advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney, stomach disorder, or any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
_______________________________________________________________________________
_
GENERAL DECLARATION
I hereby declare that all the foregoing answers and statements are complete, true and correct. I
herebyagree that if there be any fraud or misrepresentation in the above statements material to the
risk, the INSURANCE COMPANY upon discovery within two (2) years from the effective date of
insurance shall have the right to declare such insurance null and void. That the liabilities of the
Company under the said Policy/TA/Certificate shall accrue and begin only from the date of
commencement of risk stated in the Policy/TA/Certificate, provided that the first premium is paid and
the Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual good
health.
Signed at Manila his 4th day of August, 1992.
Illegibl
e

Signat
ure of
Applica
nt. 12
We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of the medical
declaration, he failed to disclose in the appropriate space, under the caption "Exceptions," that he had twice
consulted Dr. Wilfredo B. Claudio who had found him to be suffering from "sinus tachycardia" and "acute bronchitis."
The relevant statutory provisions as they stood at the time Great Pacific issued the contract of insurance and at the
time Jaime Canilang died, are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into
effect on 11 June 1978. These provisions read as follows:
Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a
concealment.

xxx xxx xxx

Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all
factorswithin his knowledge which are material to the contract and as to which he makes no
warranty, and which the other has not the means of ascertaining. (Emphasis supplied)
Under the foregoing provisions, the information concealed must be information which the concealing party knew and
"ought to [have] communicate[d]," that is to say, information which was "material to the contract." The test of
materiality is contained in Section 31 of the Insurance Code of 1978 which reads:
Sec. 31. Materially is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in making his inquiries. (Emphasis supplied)
"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per minute." 13 The symptoms of
this condition include pounding in the chest and sometimes faintness and weakness of the person affected. The following
elaboration was offered by Great Pacific and set out by the Court of Appeals in its Decision:
Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per minute.
(Harrison' s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is, among others, a common
reaction to heart disease, including myocardial infarction, and heart failure per se. (Henry J.L.
Marriot, M.D.,Electrocardiography, 6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio
for treatment of Canilang's ailment on June 18, 1982, indicates the condition that said physician was
trying to manage. Thus, he prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS),
Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anti-convulsant, muscle-relaxant; and Aptin,
(Idem, p. 36) a cardiac drug, for palpitations and nervous heart. Such treatment could have been a
very material information to the insurer in determining the action to be take on Canilang's application
for life insurance coverage. 14
We agree with the Court of Appeals that the information which Jaime Canilang failed to disclose was material to the
ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang
disclosed his visits to his doctor, the diagnosis made and medicines prescribed by such doctor, in the insurance
application, it may be reasonably assumed that Great Pacific would have made further inquiries and would have
probably refused to issue a non-medical insurance policy or, at the very least, required a higher premium for the
same coverage. 15 The materiality of the information withheld by Great Pacific did not depend upon the state of mind of
Jaime Canilang. A man's state of mind or subjective belief is not capable of proof in our judicial process, except through
proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably drawn. Neither
does materiality depend upon the actual or physical events which ensue. Materiality relates rather to the "probable and
reasonable influence of the facts" upon the party to whom the communication should have been made, in assessing the
risk involved in making or omitting to make further inquiries and in accepting the application for insurance; that "probable
and reasonable influence of the facts" concealed must, of course, be determined objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v. Philippine-American
Life Insurance Company, 16 this Court held that:
. . . if anything, the waiver of medical examination [in a non-medical insurance contract] renders
even more material the information required of the applicant concerning previous condition of health
and diseases suffered, for such information necessarily constitutes an important factor which the
insurer takes into consideration in deciding whether to issue the policy or not . . . . 17 (Emphasis
supplied)
The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the
insurer was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor
ailment like a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is,
throughout the time range material for present purposes, provided that:
Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:
Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)
The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional
or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the injured party to "intentional concealments." This
argument is not persuasive. As a simple matter of grammar, it may be noted that "intentional" and "unintentional"
cancel each other out. The net result therefore of the phrase "whether intentional or unitentional" is precisely to
leave unqualified the term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as

referring to "any concealment" without regard to whether such concealment is intentional or unintentional. The
phrase "whether intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether intentional
or unintentional" could not have had the effect of imposing an affirmative requirement that a concealment must be
intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg.
874 of the phrase "whether intentional or unintentional" merely underscored the fact that all throughout (from 1914
to 1985), the statute did not require proof that concealment must be "intentional" in order to authorize rescission by
the injured party.
In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely inadvertent. For Jaime Canilang could not have been
unaware that his heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice
in the two (2) months before applying for non-medical insurance. Indeed, the last medical consultation took place
just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor
precisely because of the discomfort and concern brought about by his experiencing "sinus tachycardia."
We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the concealment by
issuing the insurance policy notwithstanding Canilang's failure to set out answers to some of the questions in the
insurance application. Such failure precisely constituted concealment on the part of Canilang. Petitioner's argument,
if accepted, would obviously erase Section 27 from the Insurance Code of 1978.
It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial before the
Insurance Commission that the relevant issue was whether or not Jaime Canilang had intentionally concealed
material information from the insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself dated
17 October 1984 and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows that the
word "intentional" does not appear in the statement or definition of the issue in the said Order and Minutes." 18
WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of Appeals dated
16 October 1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the costs.
SO ORDERED.
SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, respondents.

QUIASON, J.:
This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the
Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April
22, 1992, denying reconsideration thereof.
We grant the petition.
I
On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was
issued Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The
designated beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner,
seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings
prompted it to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts relevant
to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total
premiums paid in the amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when he answered the following
questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?

6. Have you ever had or sought advice for:

xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a certain
Dr. Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The
other questions were answered in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined
at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the
deceased was subjected to urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an action
for specific performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list of exhibits consisting of medical records furnished by the Lung
Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment" where
they manifested that they "have no evidence to refute the documentary evidence of concealment/misrepresentation
by the decedent of his health condition (Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents as
well as allegations regarding the health of the insured. Private respondents failed to oppose said request or reply
thereto, thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The
dispositive portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant,
condemning the latter to pay the former the amount of One Hundred Thousand Pesos (P100,000.00)
the face value of insured's Insurance Policy No. 3903766, and the Accidental Death Benefit in the
amount of One Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the
concept of reasonable attorney's fees and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in
good faith and under a belief that they need not be disclosed. Moreover, it held that the health history of the insured
was immaterial since the insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court ruled
that petitioner cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the
facts concealed by the insured. It also sustained the finding of the trial court that matters relating to the health
history of the insured were irrelevant since petitioner waived the medical examination prior to the approval and
issuance of the insurance policy. Moreover, the appellate court agreed with the trial court that the policy was "nonmedical" (Rollo, pp. 4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding on this Court is not absolute and
admits of exceptions, such as when the judgment is based on a misappreciation of the facts (Geronimo v. Court of
Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there was concealment and
misrepresentation, however, the same was made in "good faith" and the facts concealed or misrepresented were
irrelevant since the policy was "non-medical". We disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the
other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no
warranty, and which the other has no means of ascertaining. Said Section provides:
A neglect to communicate that which a party knows and ought to communicate, is called
concealment.
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts
upon the party to whom communication is due, in forming his estimate of the disadvantages of the proposed
contract or in making his inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to
his health.
The information which the insured failed to disclose were material and relevant to the approval and issuance of the
insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either
by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a
disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably
assess the risk involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld
does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which
ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized
for two weeks prior to filing his application for insurance, raises grave doubts about his bonafides. It appears that
such concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts
concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance Company, 7
SCRA 316 (1963), that " . . . the waiver of a medical examination [in a non-medical insurance contract] renders even
more material the information required of the applicant concerning previous condition of health and diseases
suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration
in deciding whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows the
injured party to rescind a contract of insurance where there is concealment, ineffective (See Vda. de Canilang v.
Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that
the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure
misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries
(Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of the
concealment employed by the insured. It must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.
SO ORDERED.
NG GAN ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant.
Alberto Q. Ubay for plaintiff-appellee.
Santiago F. A lidio for defendant-appellant.

ESCOLIN, J.:
This is an appeal from the judgment of the Court of First Instance of Manila, ordering the appellant Asian-Crusader
Life Assurance Corporation to pay the face value of an insurance policy issued on the life of Kwong Nam the
deceased husband of appellee Ng Gan Zee. Misrepresentation and concealment of material facts in obtaining the
policy were pleaded to avoid the policy. The lower court rejected the appellant's theory and ordered the latter to pay
appellee "the amount of P 20,000.00, with interest at the legal rate from July 24, 1964, the date of the filing of the
complaint, until paid, and the costs. "
The Court of Appeals certified this appeal to Us, as the same involves solely a question of law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the sum of P20,000.00,
with his wife, appellee Ng Gan Zee as beneficiary. On the same date, appellant, upon receipt of the required
premium from the insured, approved the application and issued the corresponding policy. On December 6, 1963,
Kwong Nam died of cancer of the liver with metastasis. All premiums had been religiously paid at the time of his
death.
On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment of the face
value of the policy. On the same date, she submitted the required proof of death of the insured. Appellant denied the
claim on the ground that the answers given by the insured to the questions appealing in his application for life
insurance were untrue.

Appellee brought the matter to the attention of the Insurance Commissioner, the Hon. Francisco Y. Mandamus, and
the latter, after conducting an investigation, wrote the appellant that he had found no material concealment on the
part of the insured and that, therefore, appellee should be paid the full face value of the policy. This opinion of the
Insurance Commissioner notwithstanding, appellant refused to settle its obligation.
Appellant alleged that the insured was guilty of misrepresentation when he answered "No" to the following question
appearing in the application for life insuranceHas any life insurance company ever refused your application for insurance or for reinstatement of a
lapsed policy or offered you a policy different from that applied for? If, so, name company and date.
In its brief, appellant rationalized its thesis thus:
... As pointed out in the foregoing summary of the essential facts in this case, the insured had in
January, 1962, applied for reinstatement of his lapsed life insurance policy with the Insular Life
Insurance Co., Ltd, but this was declined by the insurance company, although later on approved for
reinstatement with a very high premium as a result of his medical examination. Thus notwithstanding
the said insured answered 'No' to the [above] question propounded to him. ... 1
The lower court found the argument bereft of factual basis; and We quote with approval its disquisition on the
matterOn the first question there is no evidence that the Insular Life Assurance Co., Ltd. ever refused any
application of Kwong Nam for insurance. Neither is there any evidence that any other insurance
company has refused any application of Kwong Nam for insurance.
... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong Nam's request for
reinstatement and amendment of his lapsed insurance policy on April 24, 1962 [Exh. L-2 Stipulation
of Facts, Sept. 22, 1965). The Court notes from said application for reinstatement and amendment,
Exh. 'L', that the amount applied for was P20,000.00 only and not for P50,000.00 as it was in the
lapsed policy. The amount of the reinstated and amended policy was also for P20,000.00. It results,
therefore, that when on May 12, 1962 Kwong Nam answered 'No' to the question whether any life
insurance company ever refused his application for reinstatement of a lapsed policy he did not
misrepresent any fact.
... the evidence shows that the application of Kwong Nam with the Insular Life Assurance Co., Ltd.
was for the reinstatement and amendment of his lapsed insurance policy-Policy No. 369531 -not an
application for a 'new insurance policy. The Insular Life Assurance Co., Ltd. approved the said
application on April 24, 1962. Policy No. 369531 was reinstated for the amount of P20,000.00 as
applied for by Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the Insular Life
Assurance Co., Ltd. to Kwong Nam in connection with said application for reinstatement and
amendment. Such being the case, the Court finds that there is no misrepresentation on this matter. 2
Appellant further maintains that when the insured was examined in connection with his application for life insurance,
he gave the appellant's medical examiner false and misleading information as to his ailment and previous operation.
The alleged false statements given by Kwong Nam are as follows:
Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been associated with
ulcer of stomach. Tumor taken out was hard and of a hen's egg size. Operation was two [2] years
ago in Chinese General Hospital by Dr. Yap. Now, claims he is completely recovered.
To demonstrate the insured's misrepresentation, appellant directs Our attention to:
[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General Hospital on May
22, 1960, i.e., about 2 years before he applied for an insurance policy on May 12, 1962. According to said report, Dr.
Fu Sun Yuan had diagnosed the patient's ailment as 'peptic ulcer' for which, an operation, known as a 'sub-total
gastric resection was performed on the patient by Dr. Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from the patient's
body was 'a portion of the stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15
cm. along the greatest dimension.
On the bases of the above undisputed medical data showing that the insured was operated on for peptic ulcer",
involving the excision of a portion of the stomach, appellant argues that the insured's statement in his application
that a tumor, "hard and of a hen's egg size," was removed during said operation, constituted material concealment.
The question to be resolved may be propounded thus: Was appellant, because of insured's aforesaid
representation, misled or deceived into entering the contract or in accepting the risk at the rate of premium agreed
upon?
The lower court answered this question in the negative, and We agree.
Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party a contract of insurance must communicate to the other, in good faith, all facts
within his knowledge which are material to the contract, and which the other has not the means of
ascertaining, and as to which he makes no warranty. 3
Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith,
and fair dealing requires that he should communicate it to the assurer, but he designedly and intentionally withholds
the same." 4
It has also been held "that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or
the fact must have been intentionally withheld." 5
Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of the
Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of the insured be established
to entitle the insurer to rescind the contract. And as correctly observed by the lower court, "misrepresentation as a
defense of the insurer to avoid liability is an 'affirmative' defense. The duty to establish such a defense by
satisfactory and convincing evidence rests upon the defendant. The evidence before the Court does not clearly and
satisfactorily establish that defense."
It bears emphasis that Kwong Nam had informed the appellant's medical examiner that the tumor for which he was
operated on was "associated with ulcer of the stomach." In the absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish between "peptic ulcer" and "a tumor", his statement that said
tumor was "associated with ulcer of the stomach, " should be construed as an expression made in good faith of his
belief as to the nature of his ailment and operation. Indeed, such statement must be presumed to have been made
by him without knowledge of its incorrectness and without any deliberate intent on his part to mislead the appellant.
While it may be conceded that, from the viewpoint of a medical expert, the information communicated was
imperfect, the same was nevertheless sufficient to have induced appellant to make further inquiries about the
ailment and operation of the insured.
Section 32 of Insurance Law [Act No. 24271 provides as follows:
Section 32. The right to information of material facts maybe waived either by the terms of insurance
or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of
which information is communicated.
It has been held that where, upon the face of the application, a question appears to be not answered at all or to be
imperfectly answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the
answer and render the omission to answer more fully immaterial. 6
As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had such an important bearing on the
question of whether the defendant would undertake the insurance or not, the court cannot understand why the
defendant or its medical examiner did not make any further inquiries on such matters from the Chinese General
Hospital or require copies of the hospital records from the appellant before acting on the application for insurance.
The fact of the matter is that the defendant was too eager to accept the application and receive the insured's
premium. It would be inequitable now to allow the defendant to avoid liability under the circumstances."
Finding no reversible error committed by the trial court, the judgment appealed from is hereby affirmed, with costs
against appellant Asian-Crusader life Assurance Corporation.
SO ORDERED.
IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF CARLOS SATURNINO,
minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.
Eleazaro A. Samson for plaintiffs-appellants.
Abello & Macias for defendant-appellee.
MAKALINTAL, J.:
Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to recover the sum of P5,000.00,
corresponding to the face value of an insurance policy issued by defendant on the life of Estefania A. Saturnino, and
the sum of P1,500.00 as attorney's fees. Defendant, now appellee, set up special defenses in its answer, with a
counterclaim for damages allegedly sustained as a result of the unwarranted presentation of this case. Both the
complaint and the counterclaim were dismissed by the trial court; but appellants were declared entitled to the return
of the premium already paid; plus interest at 6% up to January 8, 1959, when a check for the corresponding amount
P359.65 was sent to them by appellee.
The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy dispenses with the
medical examination of the applicant usually required in ordinary life policies. However, detailed information is called
for in the application concerning the applicant's health and medical history. The written application in this case was
submitted by Saturnino to appellee on November 16, 1957, witnessed by appellee's agent Edward A. Santos. The
policy was issued on the same day, upon payment of the first year's premium of P339.25. On September 19, 1958

Saturnino died of pneumonia, secondary to influenza. Appellants here, who are her surviving husband and minor
child, respectively, demanded payment of the face value of the policy. The claim was rejected and this suit was
subsequently instituted.
It appears that two months prior to the issuance of the policy or on September 9, 1957, Saturnino was operated on
for cancer, involving complete removal of the right breast, including the pectoral muscles and the glands found in the
right armpit. She stayed in the hospital for a period of eight days, after which she was discharged, although
according to the surgeon who operated on her she could not be considered definitely cured, her ailment being of the
malignant type.
Notwithstanding the fact of her operation Estefania A. Saturnino did not make a disclosure thereof in her application
for insurance. On the contrary, she stated therein that she did not have, nor had she ever had, among other ailments
listed in the application, cancer or other tumors; that she had not consulted any physician, undergone any operation
or suffered any injury within the preceding five years; and that she had never been treated for nor did she ever have
any illness or disease peculiar to her sex, particularly of the breast, ovaries, uterus, and menstrual disorders. The
application also recites that the foregoing declarations constituted "a further basis for the issuance of the policy."
The question at issue is whether or not the insured made such false representations of material facts as to avoid the
policy. There can be no dispute that the information given by her in her application for insurance was false, namely,
that she had never had cancer or tumors, or consulted any physician or undergone any operation within the
preceding period of five years. Are the facts then falsely represented material? The Insurance Law (Section 30)
provides that "materiality is to be determined not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom the communication is due, in forming his estimate of the proposed contract, or in
making his inquiries." It seems to be the contention of appellants that the facts subject of the representation were
not material in view of the "non-medical" nature of the insurance applied for, which does away with the usual
requirement of medical examination before the policy is issued. The contention is without merit. If anything, the
waiver of medical examination renders even more material the information required of the applicant concerning
previous condition of health and diseases suffered, for such information necessarily constitutes an important factor
which the insurer takes into consideration in deciding whether to issue the policy or not. It is logical to assume that if
appellee had been properly apprised of the insured's medical history she would at least have been made to undergo
medical examination in order to determine her insurability.
Appellants argue that due information concerning the insured's previous illness and operation had been given to
appellees agent Edward A. Santos, who filled the application form after it was signed in blank by Estefania A.
Saturnino. This was denied by Santos in his testimony, and the trial court found such testimony to be true. This is a
finding of fact which is binding upon us, this appeal having been taken upon questions of law alone. We do not
deem it necessary, therefore, to consider appellee's additional argument, which was upheld by the trial court, that in
signing the application form in blank and leaving it to Edward A. Santos to fill (assuming that to be the truth) the
insured in effect made Santos her agent for that purpose and consequently was responsible for the errors in the
entries made by him in that capacity.
In the application for insurance signed by the insured in this case, she agreed to submit to a medical examination by
a duly appointed examiner of appellee if in the latter's opinion such examination was necessary as further evidence
of insurability. In not asking her to submit to a medical examination, appellants maintain, appellee was guilty of
negligence, which precluded it from finding about her actual state of health. No such negligence can be imputed to
appellee. It was precisely because the insured had given herself a clean bill of health that appellee no longer
considered an actual medical checkup necessary.
Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself did not
know, since her doctor never told her, that the disease for which she had been operated on was cancer. In the first
place the concealment of the fact of the operation itself was fraudulent, as there could not have been any mistake
about it, no matter what the ailment. Secondly, in order to avoid a policy it is not necessary to show actual fraud on
the part of the insured. In the case of Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214, it was held:
Moreover, if it were the law that an insurance company could not depend a policy on the ground of
misrepresentation, unless it could show actual knowledge on the part of the applicant that the statements
were false, then it is plain that it would be impossible for it to protect itself and its honest policyholders
against fraudulent and improper claims. It would be wholly at the mercy of any one who wished to apply for
insurance, as it would be impossible to show actual fraud except in the extremest cases. It could not rely on
an application as containing information on which it could act. There would be no incentive to an applicant to
tell the truth.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by
this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts.
1wph1.t

In this jurisdiction a concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of
insurance, concealment being defined as "negligence to communicate that which a party knows and ought to
communicate" (Sections 24 & 26, Act No. 2427). In the case of Argente v. West Coast Life Insurance Co., 51 Phil.
725, 732, this Court said, quoting from Joyce, The Law of Insurance, 2nd ed., Vol. 3:
"The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer
into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the
belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled

into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk
upon a false basis that it does not exist."
The judgment appealed from, dismissing the complaint and awarding the return to appellants of the premium
already paid, with interest at 6% up to January 29, 1959, affirmed, with costs against appellants.
REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants,
vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL,
BRANCH V, QUEZON CITY, respondents-appellees.
K.V. Faylona for petitioners-appellants.
L. L. Reyes for respondents-appellees.

VASQUEZ, J.:
The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance
Rizal, Branch V, Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the
private respondent insurance corporation of the premium and the issuance of the corresponding certificate of
insurance should be deemed a waiver of the exclusionary condition of overage stated in the said certificate of
insurance.
The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance
corporation for insurance coverage against accident and injuries. She filled up the blank application form given to
her and filed the same with the respondent insurance corporation. In the said application form which was dated April
15, 1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the sum of P20.00
representing the premium for which she was issued the corresponding receipt signed by an authorized agent of the
respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said application and the payment of the premium
on the policy applied for, the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of
Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.
On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular
accident in the North Diversion Road.
On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the
policy, filed her claim for the proceeds of the insurance, submitting all the necessary papers and other requisites
with the private respondent. Her claim having been denied, Regina L. Edillon instituted this action in the Court of
First Instance of Rizal on August 27, 1969.
In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the
Certificate of Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are under the
age of sixteen (16) years of age or over the age of sixty (60) years ..." It is pointed out that the insured being over
sixty (60) years of age when she applied for the insurance coverage, the policy was null and void, and no risk on the
part of the respondent insurance corporation had arisen therefrom.
The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the
petitioner to pay attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private
respondent; and ordered the private respondent to return the sum of TWENTY (P20.00) PESOS received by way of
premium on the insurancy policy. It was reasoned out that a policy of insurance being a contract of adhesion, it was
the duty of the insured to know the terms of the contract he or she is entering into; the insured in this case, upon
learning from its terms that she could not have been qualified under the conditions stated in said contract, what she
should have done is simply to ask for a refund of the premium that she paid. It was further argued by the trial court
that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured and strictly against
the insurer may not be applied in the present case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the
insurance company. Her application for insurance coverage which was on a printed form furnished by private
respondent and which contained very few items of information clearly indicated her age of the time of filing the same
to be almost 65 years of age. Despite such information which could hardly be overlooked in the application form,
considering its prominence thereon and its materiality to the coverage applied for, the respondent insurance
corporation received her payment of premium and issued the corresponding certificate of insurance without
question. The accident which resulted in the death of the insured, a risk covered by the policy, occurred on May 31,
1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was sufficient time for the
private respondent to process the application and to notice that the applicant was over 60 years of age and thereby
cancel the policy on that ground if it was minded to do so. If the private respondent failed to act, it is either because
it was willing to waive such disqualification; or, through the negligence or incompetence of its employees for which it
has only itself to blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is
already deemed in estoppel. It inaction to revoke the policy despite a departure from the exclusionary condition
contained in the said policy constituted a waiver of such condition, as was held in the case of "Que Chee Gan vs.
Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an insurance policy which contained a
provision as to the installation of fire hydrants the number of which depended on the height of the external wan
perimeter of the bodega that was insured. When it was determined that the bodega should have eleven (11) fire

hydrants in the compound as required by the terms of the policy, instead of only two (2) that it had, the claim under
the policy was resisted on that ground. In ruling that the said deviation from the terms of the policy did not prevent
the claim under the same, this Court stated the following:
We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to
claim violation of the so-called fire hydrants warranty, for the reason that knowing fully an that the
number of hydrants demanded therein never existed from the very beginning, the appellant
nevertheless 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 claim 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 Que 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 it moreover rendered probable by its being a prerequisite for the fixing of the
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 known 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 execute 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 is 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 be abhorent to fairminded men. It would be to allow
the company to treat the policy as valid long enough to get the premium 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, 543544).
A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134,
which involved a violation of the provision of the policy requiring the payment of premiums before the insurance
shall become effective. The company issued the policy upon the execution of a promissory note for the payment of
the premium. A check given subsequent by the insured as partial payment of the premium was dishonored for lack
of funds. Despite such deviation from the terms of the policy, the insurer was held liable.
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
impliedly 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:
... 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...
WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private
respondent insurance corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND

(P10,000.00) PESOS as proceeds of Insurance Certificate No. 128866 with interest at the legal rate from May 31,
1969 until fully paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and the
costs of suit.
SO ORDERED.

MA. LOURDES S. FLORENDO, G.R. No. 186983

Petitioner,
Present:
VELASCO, JR., J., Chairperson,
- versus - PERALTA,
ABAD,
MENDOZA, and
PERLAS-BERNABE, JJ.
PHILAM PLANS, INC.,
PERLA ABCEDE and Promulgated:
MA. CELESTE ABCEDE,
Respondents. February 22, 2012

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

DECISION
ABAD, J.:

This case is about an insureds alleged concealment in his pension plan

application of his true state of health and its effect on the life insurance
portion of that plan in case of death.

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for

comprehensive pension plan with respondent Philam Plans, Inc. (Philam
Plans) after some convincing by respondent Perla Abcede. The plan had a
pre-need price ofP997,050.00, payable in 10 years, and had a maturity
value of P2,890,000.00 after 20 years.[1] Manuel signed the application and
left to Perla the task of supplying the information needed in the application.

Respondent Ma. Celeste Abcede, Perlas daughter, signed the application

as sales counselor.[3]
[2]

Aside from pension benefits, the comprehensive pension plan also

provided life insurance coverage to Florendo. [4]This was covered by a Group
Master Policy that Philippine American Life Insurance Company (Philam Life)
issued to Philam Plans.[5] Under the master policy, Philam Life was to
automatically provide life insurance coverage, including accidental death, to
all who signed up for Philam Plans comprehensive pension plan. [6] If the plan
holder died before the maturity of the plan, his beneficiary was to instead
receive the proceeds of the life insurance, equivalent to the pre-need
price. Further, the life insurance was to take care of any unpaid premium
until the pension plan matured, entitling the beneficiary to the maturity
value of the pension plan.[7]

On October 30, 1997 Philam Plans issued Pension Plan Agreement

PP43005584[8] to Manuel, with petitioner Ma. Lourdes S. Florendo, his wife,
as beneficiary. In time, Manuel paid his quarterly premiums. [9]
Eleven months later or on September 15, 1998, Manuel died of blood
poisoning. Subsequently, Lourdes filed a claim with Philam Plans for the
payment of the benefits under her husbands plan. [10] Because Manuel died
before his pension plan matured and his wife was to get only the benefits of
his life insurance, Philam Plans forwarded her claim to Philam Life. [11]

On May 3, 1999 Philam Plans wrote Lourdes a letter,[12] declining her

claim. Philam Life found that Manuel was on maintenance medicine for his
heart and had an implanted pacemaker. Further, he suffered from diabetes
mellitus and was taking insulin. Lourdes renewed her demand for payment
under the plan[13] but Philam Plans rejected it,[14] prompting her to file the
present action against the pension plan company before the Regional Trial
Court (RTC) of Quezon City.[15]

On March 30, 2006 the RTC rendered judgment,[16] ordering Philam

Plans, Perla and Ma. Celeste, solidarily, to pay Lourdes all the benefits from
her husbands pension plan, namely: P997,050.00, the proceeds of his term
insurance, andP2,890,000.00 lump sum pension benefit upon maturity of his
plan; P100,000.00 as moral damages; and to pay the costs of the suit. The
RTC ruled that Manuel was not guilty of concealing the state of his health
from his pension plan application.

On December 18, 2007 the Court of Appeals (CA) reversed the RTC
decision,[17] holding
that
insurance
policies
are
traditionally
contracts uberrimae fidae or contracts of utmost good faith. As such, it
required Manuel to disclose to Philam Plans conditions affecting the risk of
which he was aware or material facts that he knew or ought to know. [18]

Issues Presented

The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing

his illness when he kept blank and did not answer questions in his pension
plan application regarding the ailments he suffered from;

2. Whether or not the CA erred in holding that Manuel was bound by

the failure of respondents Perla and Ma. Celeste to declare the condition of
Manuels health in the pension plan application; and

3. Whether or not the CA erred in finding that Philam Plans approval of

Manuels pension plan application and acceptance of his premium payments
precluded it from denying Lourdes claim.

Rulings of the Court

One. Lourdes points out that, seeing the unfilled spaces in Manuels pension
plan application relating to his medical history, Philam Plans should have
returned it to him for completion. Since Philam Plans chose to approve the
application just as it was, it cannot cry concealment on Manuels
part. Further, Lourdes adds that Philam Plans never queried Manuel directly
regarding the state of his health. Consequently, it could not blame him for
not mentioning it.[19]

But Lourdes is shifting to Philam Plans the burden of putting on the pension
plan application the true state of Manuels health. She forgets that since
Philam Plans waived medical examination for Manuel, it had to rely largely
on his stating the truth regarding his health in his application. For, after all,
he knew more than anyone that he had been under treatment for heart
condition and diabetes for more than five years preceding his submission of
that application. But he kept those crucial facts from Philam Plans.

Besides, when Manuel signed the pension plan application, he adopted as

his own the written representations and declarations embodied in it. It is
clear from these representations that he concealed his chronic heart ailment
and diabetes from Philam Plans. The pertinent portion of his representations
and declarations read as follows:
I hereby represent and declare to the best of my knowledge that:

xxxx

(c) I have never been treated for heart condition, high blood
pressure, cancer, diabetes, lung, kidney or stomach disorder
or any other physical impairment in the last five years.

(d) I am in good health and physical condition.

If your answer to any of the statements above reveal

otherwise, please give details in the space provided for:

Date of confinement : ____________________________

Name of Hospital or Clinic : ____________________________
Name of Attending Physician : ____________________________
Findings : ____________________________
Others: (Please specify) : ____________________________
x x x x.[20] (Emphasis supplied)

Since Manuel signed the application without filling in the details

regarding his continuing treatments for heart condition and diabetes, the
assumption is that he has never been treated for the said illnesses in the
last five years preceding his application. This is implicit from the phrase If
your answer to any of the statements above (specifically, the statement: I
have never been treated for heart condition or diabetes) reveal otherwise,
please give details in the space provided for. But this is untrue since he had
been on Coumadin, a treatment for venous thrombosis, [21] and insulin, a
drug used in the treatment of diabetes mellitus, at that time. [22]

Lourdes insists that Manuel had concealed nothing since Perla, the
soliciting agent, knew that Manuel had a pacemaker implanted on his chest
in the 70s or about 20 years before he signed up for the pension plan. [23] But
by its tenor, the responsibility for preparing the application belonged to
Manuel. Nothing in it implies that someone else may provide the information
that Philam Plans needed. Manuel cannot sign the application and disown
the responsibility for having it filled up. If he furnished Perla the needed
information and delegated to her the filling up of the application, then she
acted on his instruction, not on Philam Plans instruction.

Lourdes next points out that it made no difference if Manuel failed to

reveal the fact that he had a pacemaker implant in the early 70s since this
did not fall within the five-year timeframe that the disclosure contemplated.

But a pacemaker is an electronic device implanted into the body and

connected to the wall of the heart, designed to provide regular, mild,
electric shock that stimulates the contraction of the heart muscles and
restores normalcy to the heartbeat. [25] That Manuel still had his pacemaker
when he applied for a pension plan in October 1997 is an admission that he
remained under treatment for irregular heartbeat within five years
preceding that application.
[24]

Besides, as already stated, Manuel had been taking medicine for his
heart condition and diabetes when he submitted his pension plan
application. These clearly fell within the five-year period. More, even if
Perlas knowledge of Manuels pacemaker may be applied to Philam Plans
under the theory of imputed knowledge, [26] it is not claimed that Perla was
aware of his two other afflictions that needed medical treatments. Pursuant
to Section 27[27] of the Insurance Code, Manuels concealment entitles Philam
Plans to rescind its contract of insurance with him.
Two. Lourdes contends that the mere fact that Manuel signed the
application in blank and let Perla fill in the required details did not make her
his agent and bind him to her concealment of his true state of health. Since
there is no evidence of collusion between them, Perlas fault must be
considered solely her own and cannot prejudice Manuel. [28]

But Manuel forgot that in signing the pension plan application, he certified
that he wrote all the information stated in it or had someone do it under his
direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension

Plan Program described herein in accordance with the General
Provisions set forth in this application and hereby certify that the
date and other information stated herein are written by me
or under my direction. x x x.[29] (Emphasis supplied)

Assuming that it was Perla who filled up the application form, Manuel is
still bound by what it contains since he certified that he authorized her
action. Philam Plans had every right to act on the faith of that certification.

Lourdes could not seek comfort from her claim that Perla had assured
Manuel that the state of his health would not hinder the approval of his
application and that what is written on his application made no difference to
the insurance company. But, indubitably, Manuel was made aware when he
signed the pension plan application that, in granting the same, Philam Plans

and Philam Life were acting on the truth of the representations contained in
that application. Thus:

DECLARATIONS AND REPRESENTATIONS

xxxx

I agree that the insurance coverage of this application is

based on the truth of the foregoing representations and is
subject to the provisions of the Group Life Insurance Policy issued by
THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS,
INC.[30] (Emphasis supplied)

As the Court said in New Life Enterprises v. Court of Appeals:[31]

It may be true that x x x insured persons may accept policies

without reading them, and that this is not negligence per se. But,
this is not without any exception. It is and was incumbent upon
petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a
businessman since 1965 and the contract concerns indemnity in
case of loss in his money-making trade of which important
consideration he could not have been unaware as it was precisely
the reason for his procuring the same.[32]

The same may be said of Manuel, a civil engineer and manager of a

construction company.[33] He could be expected to know that one must read
every document, especially if it creates rights and obligations affecting him,
before signing the same. Manuel is not unschooled that the Court must
come to his succor. It could reasonably be expected that he would not trifle
with something that would provide additional financial security to him and
to his wife in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuels
pension plan, Lourdes points out that any defect or insufficiency in the
information provided by his pension plan application should be deemed
waived after the same has been approved, the policy has been issued, and
the premiums have been collected. [34]

The Court cannot agree. The comprehensive pension plan that Philam Plans
issued contains a one-year incontestability period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we
can no longer contest for health reasons any claim for insurance
under this Agreement, except for the reason that installment has not
been paid (lapsed), or that you are not insurable at the time you
bought this pension program by reason of age. If this Agreement
lapses but is reinstated afterwards, the one (1) year contestability
period shall start again on the date of approval of your request for
reinstatement.[35]

The above incontestability clause precludes the insurer from disowning

liability under the policy it issued on the ground of concealment or
misrepresentation regarding the health of the insured after a year of its
issuance.

Since Manuel died on the eleventh month following the issuance of his
plan,[36] the one year incontestability period has not yet set
in. Consequently,
Philam
Plans
was
not
barred
from
questioning Lourdes entitlement to the benefits of her husbands pension
plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court
of Appeals in CA-G.R. CV 87085 dated December 18, 2007.

SO ORDERED.
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, respondents.
DECISION
QUISUMBING, J.:

This petition for review, under Rule 45 of the Rules of Court, assails the Decision [1] dated May 17, 1993, of
the Court of Appeals and its Resolution [2] dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate court
affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance claim
filed by private respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial courts
decision reads:

WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE

ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim, with costs against the
defendant and dismissing the complaint in respect to the plaintiffs, other than the widowbeneficiary, for lack of cause of action.[3]

The facts, as found by the Court of Appeals, are as follows:

A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer, diabetes, lung,
kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.[4]

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to
the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred (P86,200.00)
pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently, DBP submitted a
death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy when
he applied for an insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not
disclose he had been suffering from hypertension, which caused his death. Allegedly, such non-disclosure
constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for Specific
Performance with Damages.[5] During the trial, Dr. Hernando Mejia, who issued the death certificate, was called
to testify. Dr. Mejias findings, based partly from the information given by the respondent widow, stated that Dr.
Leuterio complained of headaches presumably due to high blood pressure. The inference was not conclusive
because Dr. Leuterio was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial courts decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE FOR
PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF
CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF JURISDICTION
OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON OF THE
DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS THE
ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE
CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION FOR
MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF
THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO.[6]

Synthesized below are the assigned errors for our resolution:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life
insurance contract from a complaint filed by the widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had hypertension, which
would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand, two
hundred (P86,200.00) pesos without proof of the actual outstanding mortgage payable by the mortgagor to
DBP.

Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of Appeals
affirmed the trial courts judgment, Grepalife was held liable to pay the proceeds of insurance contract in favor
of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this
type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the mortgage
redemption insurance, is a device for the protection of both the mortgagee and the mortgagor. On the part of the
mortgagee, it has to enter into such form of contract so that in the event of the unexpected demise of the
mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied to
the payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. [7] In a
similar vein, ample protection is given to the mortgagor under such a concept so that in the event of death; the
mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage
indebtedness.[8] Consequently, where the mortgagor pays the insurance premium under the group insurance
policy, making the loss payable to the mortgagee, the insurance is on the mortgagors interest, and the mortgagor
continues to be a party to the contract. In this type of policy insurance, the mortgagee is simply an appointee of
the insurance fund, such loss-payable clause does not make the mortgagee a party to the contract.[9]
Section 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to
be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid
the insurance, will have the same effect, although the property is in the hands of the mortgagee, but
any act which, under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the same effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance, the
policy stating that: In the event of the debtors death before his indebtedness with the Creditor [DBP] shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the creditor and the balance
of sum assured, if there is any, shall then be paid to the beneficiary/ies designated by the debtor.[10] When DBP
submitted the insurance claim against petitioner, the latter denied payment thereof, interposing the defense of
concealment committed by the insured.Thereafter, DBP collected the debt from the mortgagor and took the
necessary action of foreclosure on the residential lot of private respondent. [11] InGonzales La O vs. Yek Tong Lin
Fire & Marine Ins. Co.[12] we held:

Insured, being the person with whom the contract was made, is primarily the proper person to bring
suit thereon. * * * Subject to some exceptions, insured may thus sue, although the policy is taken
wholly or in part for the benefit of another person named or unnamed, and although it is expressly
made payable to another as his interest may appear or otherwise. * * * Although a policy issued to
a mortgagor is taken out for the benefit of the mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name, especially where the mortgagees interest is less than
the full amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:

Insured may be regarded as the real party in interest, although he has assigned the policy for the
purpose of collection, or has assigned as collateral security any judgment he may obtain. [13]
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might have
recovered,[14] the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to
annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension,
which might have caused his death. Concealment exists where the assured had knowledge of a fact material to
the risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same.[15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by
the information given by the widow of the decedent. Grepalife asserts that Dr. Mejias technical diagnosis of the
cause of death of Dr. Leuterio was a duly documented hospital record, and that the widows declaration that her
husband had possible hypertension several years ago should not be considered as hearsay, but as part of res
gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy on
the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr.
Leuterios any previous hospital confinement.[16] Dr. Leuterios death certificate stated that hypertension was only
the possible cause of death. The private respondents statement, as to the medical history of her husband, was
due to her unreliable recollection of events. Hence, the statement of the physician was properly considered by
the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:

The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and
that he had not consulted a doctor or any of the enumerated ailments, including hypertension; when
he died the attending physician had certified in the death certificate that the former died of cerebral
hemorrhage, probably secondary to hypertension. From this report, the appellant insurance
company refused to pay the insurance claim. Appellant alleged that the insured had concealed the
fact that he had hypertension.
Contrary to appellants allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insureds widow who was not even sure if the
medicines taken by Dr. Leuterio were for hypertension, the appellant had not proven nor produced
any witness who could attest to Dr. Leuterios medical history...
xxx

Appellant insurance company had failed to establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim. [17]
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty
to establish such defense by satisfactory and convincing evidence rests upon the insurer. [19] In the case at bar, the
petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of
the insurance.
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterios outstanding indebtedness to DBP at the time of the mortgagors
death. Hence, for private respondents failure to establish the same, the action for specific performance should be
dismissed. Petitioners claim is without merit. A life insurance policy is a valued policy.[20] Unless the interest of a
person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy. [21] The mortgagor paid the premium according to the
coverage of his insurance, which states that:

The policy states that upon receipt of due proof of the Debtors death during the terms of this
insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor and the
balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies designated by
the debtor.[22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was promulgated on May 17, 1993. In private
respondents memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagors outstanding loan. Considering this supervening event, the insurance proceeds shall inure to the
benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not unjustly
enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the
insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly belong to Dr.
Leuterios heirs represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in
CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the
insurance proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the
insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagors
indebtedness to Development Bank of the Philippines. Costs against petitioner.
SO ORDERED.

Soliman v. US Life- Rescind Contract

of Insurance
104 PHIL 1046
Facts:
> US Life issued a 20 yr endowment life policy on the joint lives of Patricio Soliman and his wife Rosario, each of
them being the beneficiary of the other.
> In Mar. 1949, the spouses were informed that the premium for Jan 1949 was still unpaid notwithstanding that the
31-day grace period has already expired, and they were furnished at the same time long-form health certificates for
the reinstatement of the policies.
> In Apr 1949, they submitted the certificates and paid the premiums.
> In Jan. 1950, Rosario died of acute dilation of the heart, and thereafter, Patricio filed a claim for the proceeds of
the insurance.
> US life denied the claim and filed for the rescission of the contract on the ground that the certificates failed to
disclose that Rosario had been suffering from bronchial asthma for 3 years prior to their submission.

Issue:
Whether or not the contract can still be rescinded.

Held:

Yes.
The insurer is once again given two years from the date of reinstatement to investigate into the veracity of the facts
represented by the insured in the application for reinstatement. When US life sought to rescind the contract on the
ground of concealment/misrepresentation, two years had not yet elapsed. Hence, the contract can still be
rescinded.
THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,
vs.
SERAFIN D. FELICIANO ET AL., respondents.
Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.

OZAETA, J.:
In a four-to-three decision promulgated on September 13, 1941, 1 this Court affirmed the judgment of the Court of
Appeals in favor of the respondents and against the petitioner for the sum of P25,000, representing the value of two
insurance policies issued by the petitioner on the life of Evaristo Feliciano. A motion to reconsider and set aside said
decision has been filed by the petitioner, and both parties have submitted exhaustive and luminous written
arguments in support of their respective contentions.
The facts of the case are set forth in the majority and dissenting opinions heretofore handed down by this Court, the
salient points of which may be briefly restated as follows:
Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced pulmonary tuberculosis when he
signed his applications for insurance with the petitioner on October 12, 1934. On that same date Doctor Trepp, who
had taken X-ray pictures of his lungs, informed the respondent Dr. Serafin D. Feliciano, brother of Evaristo, that the
latter "was already in a very serious ad practically hopeless condition." Nevertheless the question contained in the
application "Have you ever suffered from any ailment or disease of the lungs, pleurisy, pneumonia or asthma?"
appears to have been answered , "No" And above the signature of the applicant, following the answers to the
various questions propounded to him, is the following printed statement:
1awphil.net

I declare on behalf of myself and of any person who shall have or claim any interest in any policy issued
hereunder, that each of the above answers is full, complete and true, and that to the best of my knowledge
and belief I am a proper subject for life insurance. (Exhibit K.)
The false answer above referred to, as well as the others, was written by the Company's soliciting agent Romulo M.
David, in collusion with the medical examiner Dr. Gregorio Valdez, for the purpose of securing the Company's
approval of the application so that the policy to be issued thereon might be credited to said agent in connection with
the inter-provincial contest which the Company was then holding among its soliciting agents to boost the sales of its
policies. Agent David bribed Medical Examiner Valdez with money which the former borrowed from the applicant's
mother by way of advanced payment on the premium, according to the finding of the Court of Appeals. Said court
also found that before the insured signed the application he, as well as the members of his family, told the agent and
the medical examiner that he had been sick and coughing for some time and that he had gone three times to the
Santol Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such information the agent and the
medical examiner told them that the applicant was a fit subject for insurance.
Each of the policies sued upon contains the following stipulations:
This policy and the application herefor constitute the entire contract between the parties hereto. . . . Only the
President, or the Manager, acting jointly with the Secretary or Assistant Secretary (and then only in writing
signed by them) have power in behalf of the Company to issue permits, or to modify this or any contract, or
to extend the same time for making any premium payment, and the Company shall not be bound by any
promise or representation heretofore or hereafter given by any person other than the above-named officials,
and by them only in writing and signed conjointly as stated.
The application contains, among others, the following statements:
18. I [the applicant] hereby declare that all the above statements and answers as well as all those that I
may make to the Company's Medical Examiner in continuation of this application, to be complete, true and
correct to the best of my knowledge and belief, and I hereby agree as follows:

1. That his declaration, with the answers to be given by me to the Medical Examiner, shall be the basis of
the policy and form part of same.
xxx

xxx

xxx

3. That the said policy shall not take effect until the first premium has been paid and the policy has been
delivered to and accepted by me, while I am in good health.
4. That the agent taking this application has no authority to make, modify or discharge contracts, or to waive
any of the Company's rights or requirements.
5. My acceptance of any policy issued on this application will constitute a ratification by me of any
corrections in or additions to this application made by the Company in the space provided "For Home Office
Corrections or Additions Only." I agree that photographic copy of this applications as corrected or added to
shall constitute sufficient notice to me of the changes made. (Emphasis added.)
The petitioner insists that upon the facts of the case the policies in question are null and void ab initio and that all
that the respondents are entitled to is the refund of the premiums paid thereon. After a careful re-examination of the
facts and the law, we are persuaded that petitioner's contention is correct. To the reasons adduced in the dissenting
opinion heretofore published, we only desire to add the following considerations:
When Evaristo Feliciano, the applicant for insurance, signed the application in blank and authorized the soliciting
agent and/or medical examiner of the Company to write the answers for him, he made them his own agents for that
purpose, and he was responsible for their acts in that connection. If they falsified the answers for him, he could not
evade the responsibility for he falsification. He was not supposed to sign the application in blank. He knew that the
answers to the questions therein contained would be "the basis of the policy," and for that every reason he was
required with his signature to vouch for truth thereof.
Moreover, from the facts of the case we cannot escape the conclusion that the insured acted in connivance with the
soliciting agent and the medical examiner of the Company in accepting the policies in question. Above the signature
of the applicant is the printed statement or representation: " . . . I am a proper subject for life insurance." In another
sheet of the same application and above another signature of the applicant was also printed this statement: "That
the said policy shall not take effect until he first premium has been paid and the policy as been delivered to and
accepted by me, while I am in good health." When the applicant signed the application he was "having difficulty in
breathing, . . . with a very high fever." He had gone three times to the Santol Sanatorium and had X-ray pictures
taken of his lungs. He therefore knew that he was not "a proper subject for life insurance." When he accepted the
policy, he knew that he was not in good health. Nevertheless, he not only accepted the first policy of P20,000 but
then and there applied for and later accepted another policy of P5,000.
We cannot bring ourselves to believe that the insured did not take the trouble to read the answers contained in the
photostatic copy of the application attached to and made a part of the policy before he accepted it and paid the
premium thereon. He must have notice that the answers to the questions therein asked concerning his clinical
history were false, and yet he accepted the first policy and applied for another. In any event, he obligated himself to
read the policy when he subscribed to this statement: "My acceptance of any policy issued on this application will
constitute a ratification by me of any corrections in or additions to this application made by the Company . . ." By
accepting the policy he became charged with knowledge of its contents, whether he actually read it or not. He could
not ostrich-like hide his head from it in order to avoid his part of the bargain and at the same time claim the benefit
thereof. He knew, or was chargeable with knowledge, from the very terms of the two policies sued upon (one of
which is printed in English and the other in Spanish) that the soliciting agent and the medical examiner had no
power to bind the Company by any verbal promise or oral representation. The insured, therefore, had no right to rely
and we cannot believe he relied in good faith upon the oral representation. The insured, therefore, had no right
to rely and we cannot believe he relied in good faith upon the oral representation of said agent and medical
examiner that he (the applicant) was a fit subject for insurance notwithstanding that he had been and was still
suffering with advanced pulmonary tuberculosis.
From all the facts and circumstances of this case, we are constrained to conclude that the insured was a
coparticipant, and coresponsible with Agent David and Medical Examiner Valdez, in the fraudulent procurement of
the policies in question and that by reason thereof said policies are void ab initio.
Wheretofore, the motion for reconsideration is sustained and the judgment of the Court of Appeals is hereby
reversed. Let another judgment be entered in favor of the respondents and against the petitioner for the refund of
the premiums amounting to P1,389, with legal interest thereon from the date of the complaint, and without any
finding as to costs.

Insular Life v. Feliciano - Concealment

73 PHIL 201
Facts:
> Evaristo Feliciano filed an application with Insular Life upon the solicitation of one of its agents.
> It appears that during that time, Evaristo was already suffering from tuberculosis. Such fact appeared during the
medical exam, but the examiner and the companys agent ignored it.
> After that, Evaristo was made to sign an application form and thereafter the blank spaces were filled by the
medical examiner and the agent making it appear that Evaristo was a fit subject of insurance. (Evaristo could not
read and understand English)
> When Evaristo died, Insular life refused to pay the proceeds because of concealment.

Issue:
Whether or not Insular Life was bound by their agents acts.

Held:
Yes.
The insurance business has grown so vast and lucrative within the past century. Nowadays, even people of modest
means enter into insurance contracts. Agents who solicit contracts are paid large commissions on the policies
secured by them. They act as general representatives of insurance companies.

IN the case at bar, the true state of health of the insured was concealed by the agents of the insurer. The insurers
medical examiner approved the application knowing fully well that the applicant was sick. The situation is one in
which of two innocent parties must bear a loss for his reliance upon a third person. In this case, it is the one who
drafted and accepted the policy and consummated the contract. It seems reasonable that as between the two of
them, the one who employed and gave character to the third person as its agent should be the one to bear the loss.
Hence, Insular is liable to the beneficiaries.
QUA CHEE GAN, plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO.,
LTD., defendant-appellant.
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:
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;

(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.
The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166167.)
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.

Property Insured

2637164 (Exhibit
"LL")

Bodega No. 1 (Building)

P15,000.00

Bodega No. 2 (Building)

10,000.00

Bodega No. 3 (Building)

25,000.00

Bodega No. 4 (Building)

10,000.00

2637165 (Exhibit
"JJ")

Hemp Press moved by steam engine

2637345 (Exhibit "X")

Merchandise contents (copra and empty sacks of

Bodega No. 1)

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3

2637067 (Exhibit
"GG")
Total

Merchandise contents (loose hemp) of Bodega No. 4

Amount

5,000.00
150,000.00
150,000.00
5,000.00

P370,000.00

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 so-called 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 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.)
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.)
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.
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 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.
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).
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).
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. 1447-1448). "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, receipts and 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 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
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 entitle the insurer to avoid the policy. It is well to
note that the overchange of 20 per cent was claimed only on a part (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.