Session 1 June 18, 2016 & Session 2 June 25, 2016 & Session 3 July 2, 2016

A.

Concept of Insurance
a.

Historical Background

b.

Sources of Insurance Law

B.

What may be insured

C.

Parties to the contract

D.

Elements of an Insurance Contract

E.

Characteristics/Nature of Insurance Contracts

F.

Classes

(1)

Constantino vs. Asia Life 87 Phil 248

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-1669

August 31, 1950

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-1670

August 31, 1950

AGUSTINA PERALTA, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.
Mariano Lozada for appellant Constantino.
Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
BENGZON, J.:
These two cases, appealed from the Court of First Instance of Manila, call for decision of the
question whether the beneficiary in a life insurance policy may recover the amount thereof
although the insured died after repeatedly failing to pay the stipulated premiums, such failure
having been caused by the last war in the Pacific.

The facts are these:

First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia
Life Insurance Company (a foreign corporation incorporated under the laws of Delaware,
U.S.A.), issued on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the
life of Arcadio Constantino for a term of twenty years. The first premium covered the period up
to September 26, 1942. The plaintiff Paz Lopez de Constantino was regularly appointed
beneficiary. The policy contained these stipulations, among others:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application here for a copy of which is attached hereto and is hereby made a part hereof
made a part hereof, and of the payment in advance during the lifetime and good health
of the Insured of the annual premium of One Hundred fifty-eight and 4/100 pesos
Philippine currency1 and of the payment of a like amount upon each twenty-seventh day
of September hereafter during the term of Twenty years or until the prior death of the
Insured. (Emphasis supplied.)
xxx

xxx

xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22,
1944.
It is admitted that the defendant, being an American corporation , had to close its branch office
in Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy
No. 78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the
lives of the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual
premium stipulated in the policy was regularly paid from August 1, 1938, up to and including
September 30, 1941. Effective August 1, 1941, the mode of payment of premiums was changed
from annual to quarterly, so that quarterly premiums were paid, the last having been delivered
on November 18, 1941, said payment covering the period up to January 31, 1942. No further
payments were handed to the insurer. Upon the Japanese occupation, the insured and the
insurer became separated by the lines of war, and it was impossible and illegal for them to deal
with each other. Because the insured had borrowed on the policy an mount of P234.00 in
January, 1941, the cash surrender value of the policy was sufficient to maintain the policy in
force only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff
Agustina Peralta is his beneficiary. Her demand for payment met with defendant's refusal,
grounded on non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed
application herefor, a copy of which is attached hereto and is hereby made apart hereof,
and of the payment in advance during the life time and good health of the Insured of the
annual premium of Two hundred and 43/100 pesos Philippine currency and of the

payment of a like amount upon each first day of August hereafter during the term of
Twenty years or until the prior death of either of the Insured. (Emphasis supplied.)
xxx

xxx

xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They allege that non-payment of the premiums was
caused by the closing of defendant's offices in Manila during the Japanese occupation and the
impossible circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums,
in accordance with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has
had the benefit of extensive and exhaustive memoranda including those of amici curiae. The
matter has received careful consideration, inasmuch as it affects the interest of thousands of
policy-holders and the obligations of many insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended,
and the Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California.3 And this
court has heretofore announced its intention to supplement the statutory laws with general
principles prevailing on the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance
are contracts of indemnity upon the terms and conditions specified in the policy. The parties
have a right to impose such reasonable conditions at the time of the making of the contract as
they may deem wise and necessary. The rate of premium is measured by the character of the
risk assumed. The insurance company, for a comparatively small consideration, undertakes to
guarantee the insured against loss or damage, upon the terms and conditions agreed upon, and
upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may justly
insists upon a fulfillment of these terms. If the insured cannot bring himself within the conditions
of the policy, he is not entitled for the loss. The terms of the policy constitute the measure of the
insurer's liability, and in order to recover the insured must show himself within those terms; and
if it appears that the contract has been terminated by a violation, on the part of the insured, of its
conditions, then there can be no right of recovery. The compliance of the insured with the terms
of the contract is a condition precedent to the right of recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate
that "all premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse." Wherefore, it would seem that pursuant to the express
terms of the policy, non-payment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding
upon the parties and should be enforced by the courts, if the evidence brings the case

clearly within their meaning and intent. It tends to bring the law itself into disrepute when,
by astute and subtle distinctions, a plain case is attempted to be taken without the
operation of a clear, reasonable and material obligation of the contract.
Mack vs. Rochester German Ins. Co., 106 N.Y., 560, 564. (Young vs. Midland Textile
Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided
because the premium had not been paid within the time fixed, since by its express terms, nonpayment of any premium when due or within the thirty-day period of grace, ipso facto caused
the policy to lapse. This goes to show that although we take the view that insurance policies
should be conserved5 and should not lightly be thrown out, still we do not hesitate to enforce the
agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason alone
refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the
effect of non-payment of premiums occasioned by war, the American cases may be divided into
three groups, according as they support the so-called Connecticut Rule, the New York Rule, or
the United States Rule.
The first holds the view that "there are two elements in the consideration for which the annual
premium is paid First, the mere protection for the year, and second, the privilege of renewing
the contract for each succeeding year by paying the premium for that year at the time agreed
upon. According to this view of the contract, the payment of premiums is a condition precedent,
the non-performance would be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war
between states in which the parties reside merely suspends the contracts of the life insurance,
and that, upon tender of all premiums due by the insured or his representatives after the war
has terminated, the contract revives and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it
would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess
of the premiums paid over the actual risk carried during the years when the policy had been in
force. This rule was announced in the well-known Statham6case which, in the opinion of
Professor Vance, is the correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here.
The appellee and other amici curiae contend that the United States doctrine is the orthodox
view.
We have read and re-read the principal cases upholding the different theories. Besides the
respect and high regard we have always entertained for decisions of the Supreme Court of the
United States, we cannot resist the conviction that the reasons expounded in its decision of the
Statham case are logically and judicially sound. Like the instant case, the policy involved in the

Statham decision specifies that non-payment on time shall cause the policy to cease and
determine. Reasoning out that punctual payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business of life
insurance. All the calculations of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the premiums when due, but
on compounding interest upon them. It is on this basis that they are enabled to offer
assurance at the favorable rates they do. Forfeiture for non-payment is an necessary
means of protecting themselves from embarrassment. Unless it were enforceable, the
business would be thrown into confusion. It is like the forfeiture of shares in mining
enterprises, and all other hazardous undertakings. There must be power to cut-off
unprofitable members, or the success of the whole scheme is endangered. The insured
parties are associates in a great scheme. This associated relation exists whether the
company be a mutual one or not. Each is interested in the engagements of all; for out of
the co-existence of many risks arises the law of average, which underlies the whole
business. An essential feature of this scheme is the mathematical calculations referred
to, on which the premiums and amounts assured are based. And these calculations,
again, are based on the assumption of average mortality, and of prompt payments and
compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at
the option of the company. This has always been the understanding and the practice in
this department of business. Some companies, it is true, accord a grace of thirty days, or
other fixed period, within which the premium in arrear may be paid, on certain conditions
of continued good health, etc. But this is a matter of stipulation, or of discretion, on the
part of the particular company. When no stipulation exists, it is the general
understanding that time is material, and that the forfeiture is absolute if the premium be
not paid. The extraordinary and even desperate efforts sometimes made, when an
insured person is in extremes to meet a premium coming due, demonstrates the
common view of this matter.
The case, therefore, is one in which time is material and of the essence and of the
essence of the contract. Non-payment at the day involves absolute forfeiture if such be
the terms of the contract, as is the case here. Courts cannot with safety vary the
stipulation of the parties by introducing equities for the relief of the insured against their
own negligence.
In another part of the decision, the United States Supreme Court considers and rejects what is,
in effect, the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the war is one
based on considerations of equity and justice, and cannot be invoked to revive a
contract which it would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of the
contract, another strong reason exists why the policy should not be revived. The parties
do not stand on equal ground in reference to such a revival. It would operate most
unjustly against the company. The business of insurance is founded on the law of
average; that of life insurance eminently so. The average rate of mortality is the basis on
which it rests. By spreading their risks over a large number of cases, the companies
calculate on this average with reasonable certainty and safety. Anything that interferes
with it deranges the security of the business. If every policy lapsed by reason of the war

should be revived, and all the back premiums should be paid, the companies would have
the benefit of this average amount of risk. But the good risks are never heard from; only
the bar are sought to be revived, where the person insured is either dead or dying.
Those in health can get the new policies cheaper than to pay arrearages on the old. To
enforce a revival of the bad cases, whilst the company necessarily lose the cases which
are desirable, would be manifestly unjust. An insured person, as before stated, does not
stand isolated and alone. His case is connected with and co-related to the cases of all
others insured by the same company. The nature of the business, as a whole, must be
looked at to understand the general equities of the parties.
The above consideration certainly lend themselves to the approval of fair-minded men.
Moreover, if, as alleged, the consequences of war should not prejudice the insured, neither
should they bear down on the insurer.
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
insured to pay premiums was excused during the war owing to impossibility of performance, and
that consequently no unfavorable consequences should follow from such failure.
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those
after the first, is not an obligation of the insured, so much so that it is not a debt enforceable by
action of the insurer.
Under an Oklahoma decision, the annual premium due is not a debt. It is not an
obligation upon which the insurer can maintain an action against insured; nor is its
settlement governed by the strict rule controlling payments of debts. So, the court in a
Kentucky case declares, in the opinion, that it is not a debt. . . . The fact that it is payable
annually or semi-annually, or at any other stipulated time, does not of itself constitute a
promise to pay, either express or implied. In case of non-payment the policy is forfeited,
except so far as the forfeiture may be saved by agreement, by waiver, estoppel, or by
statute. The payment of the premium is entirely optional, while a debt may be enforced
at law, and the fact that the premium is agreed to be paid is without force, in the absence
of an unqualified and absolute agreement to pay a specified sum at some certain time.
In the ordinary policy there is no promise to pay, but it is optional with the insured
whether he will continue the policy or forfeit it. (3 Couch, Cyc. on Insurance, Sec. 623, p.
1996.)
It is well settled that a contract of insurance is sui generis. While the insured by an
observance of the conditions may hold the insurer to his contract, the latter has not the
power or right to compel the insured to maintain the contract relation with it longer than
he chooses. Whether the insured will continue it or not is optional with him. There being
no obligation to pay for the premium, they did not constitute a debt. (Noblevs. Southern
States M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for
times of war, because the policies contained provisions applicable expressly to wartime days.
The logical inference, therefore, is that the parties contemplated uninterrupted operation of the
contract even if armed conflict should ensue.
For the plaintiffs, it is again argued that in view of the enormous growth of insurance business
since the Statham decision, it could now be relaxed and even disregarded. It is stated "that the

relaxation of rules relating to insurance is in direct proportion to the growth of the business. If
there were only 100 men, for example, insured by a Company or a mutual Association, the
death of one will distribute the insurance proceeds among the remaining 99 policy-holders.
Because the loss which each survivor will bear will be relatively great, death from certain agreed
or specified causes may be deemed not a compensable loss. But if the policy-holders of the
Company or Association should be 1,000,000 individuals, it is clear that the death of one of
them will not seriously prejudice each one of the 999,999 surviving insured. The loss to be
borne by each individual will be relatively small."
The answer to this is that as there are (in the example) one million policy-holders, the "losses"
to be considered will not be the death of one but the death of ten thousand, since the proportion
of 1 to 100 should be maintained. And certainly such losses for 10,000 deaths will not be
"relatively small."
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is
such a vital defense of insurance companies that since the very beginning, said Act no. 2427
expressly preserved it, by providing that after the policy shall have been in force for two years, it
shall become incontestable (i.e. the insurer shall have no defense) except for fraud, nonpayment of premiums, and military or naval service in time of war (sec. 184 [b], Insurance Act).
And when Congress recently amended this section (Rep. Act No. 171), the defense of fraud
was eliminated, while the defense of nonpayment of premiums was preserved. Thus the
fundamental character of the undertaking to pay premiums and the high importance of the
defense of non-payment thereof, was specifically recognized.
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule,
which is in effect a variation of the Connecticut rule for the sake of equity. In this connection, it
appears that the first policy had no reserve value, and that the equitable values of the second
had been practically returned to the insured in the form of loan and advance for premium.
For all the foregoing, the lower court's decision absolving the defendant from all liability on the
policies in question, is hereby affirmed, without costs.
Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.

Footnotes
1

Plus P18 for accident benefits.

Enriquez vs. Sun Life, 41 Phil., 269.

And Giok Chip vs. Springfield Fire, 56 Phil., 375.

Gercio vs. Sun Life, 48 Phil., 53.

Sun Life Ass. Co. vs. Ingersoll, 42 Phil., 331.

New York Life Ins. vs. Statham, 93 U.S., 24; 23 Law, ed., 789.

Op cit., p. 293. It is also the rule in West Virginia and Georgia. It adds to the
Connecticut doctrine the duty to return the reserve value of the policy.

(2)

Insular Life vs. Ebrado 80 SCRA 181

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

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

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in the
life insurance policy of a legally married man claim the proceeds thereof in case of death of the
latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co.,
Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the
same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his
policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a
failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to
pay the coverage in the total amount of P11,745.73, representing the face value of the policy in
the amount of P5,882.00 plus the additional benefits for accidental death also in the amount of
P5,882.00 and the refund of P18.00 paid for the premium due November, 1969, minus the
unpaid premiums and interest thereon due for January and February, 1969, in the sum of
P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured Buenaventura C.
Ebrado were merely living as husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She
asserts that she is the one entitled to the insurance proceeds, not the common-law wife,
Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance of
Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which,
a pre-trial order was entered reading as follows: +.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 commonlaw 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.
Teehankee (Chairman), Makasiar, Mu;oz Palma, Fernandez and Guerrero, JJ.,
concur.1wph1.t

Footnotes+.wph!1
1 Sec. 53 of PD 612 provides: "The insurance proceeds shall be applied
exclusively to the proper interest of the person in whose name or for whose
benefit it is made unless otherwise specified in the policy."

2 See Vance, at 99.

3 Musigi v. West Coast Life Insurance Co., 61 Phil. 867(1935).
4 See Tolentino, Civil Code, Vol. II, 1972, ed., at 525-26.
5 See Padilla, Civil Code Anno., Vol. VI, 1974 ed., at 501.
6 44 Am Jur. 2d 639
7 38 SCRA 287-88 (1971).
8 PVTA v. Delos Angeles, 61 SCRA 489 (1974).

(3)

Qua Che Gan vs. Law Union 98 Phil 85

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-4611

December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER,
BARNES AND CO., LTD., 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, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas
(designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage
of stocks of copra and of hemp, baled and loose, in which the appellee dealth extensively. They
had been, with their contents, insured with the defendant Company since 1937, and the lose
made payable to the Philippine National Bank as mortgage of the hemp and crops, to the extent
of its interest. On June, 1940, the insurance stood as follows:
Policy No.

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

Amount

5,000.00

2637345 (Exhibit
"X")

Merchandise contents (copra and empty sacks of

Bodega No. 1)

150,000.00

2637346 (Exhibit
"Y")

Merchandise contents (hemp) of Bodega No. 3

150,000.00

2637067 (Exhibit
"GG")

Merchandise contents (loose hemp) of Bodega No. 4

Total

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 5gallon 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 socalled "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, receiptsand other
records" (Age 4, Exhibit 9-c); but the refusal of the insured in this instance was well justified,
since the demand for a list of all the vouchers (which were not in use by the insured) and
receipts was positively unreasonable, considering that such listing was superfluous because the
insurer was not denied access to the records, that the volume of Qua Chee Gan's business ran
into millions, and that the demand was made just after the fire when everything was in turmoil.
That the representatives of the insurance company were able to secure all the date they needed
is proved by the fact that the adjuster Alexander Stewart was able to prepare his own balance
sheet (Exhibit L of the criminal case) that did not differ from that 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 apart (70 per cent) of the hemp stock; had the
insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his
copra, hemp and buildings in the same proportion. This also applies to the alleged fraudulent
claim for burned empty sacks, that was likewise explained to our satisfaction and that of the trial
Court. The rule is that to avoid a policy, the false swearing must be wilful and with intent to
defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent
intent would not authorize the collection of the expected profit under the terms of the polices,
and the trial Court correctly deducte the same from its award.
We find no reversible error in the judgment appealed from, wherefore the smae is hereby
affirmed. Costs against the appellant. So ordered.
Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and Concepcion, JJ., concur.

(4)

Ty vs. Filipinas Cia de Seguros 17 SCRA 364

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-21821-22 and L-21824-27

May 31, 1966

DIOSDADO C. TY, plaintiff-appellant,

vs.
FILIPINAS COMPAIA DE SEGUROS, et al., defendants-appellees.
Porfirio V. Villaroman for plaintiff-appellant.
Ramirez and Ortigas for defendants-appellees Filipinas Compaia de Seguros, Philippine
Guaranty Co., Inc. and Universal Insurance and Indemnity Co.
Renato L. Liboro for defendant-appellee People's Surety and Insurance Co., Inc.
Perfecto P. R. Chua Cheng for defendant-appellee South Sea Surety and Insurance Co., Inc.
Gil Carlos and Associates for defendant-appellee Plaridel Surety and Insurance Co., Inc.
BARRERA, J.:
These are appeals instituted by Diosdado C. Ty from a single decision of the Court of First
Instance of Manila (in Civ. Cases Nos. 26343, 26344, 26404, 26405, 26406, 26442, which were
tried together), dismissing the six separate complaints he filed against six 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 collection from each of them, of the sum of
P650.00, as compensation for the disability of his left hand.
The facts of these cases are not controverted:
Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park, Caloocan City,
working as mechanic operator, with monthly salary of P185.00. In the latter part of 1953, he took
Personal Accident Policies from several insurance companies, among which are herein
defendants-appellees, on different dates,1 effective for 12 months. During the effectivity of these
policies, or on December 24, 1953, a fire broke out in the factory where plaintiff was working. As
he was trying to put out said fire with the help of a fire extinguisher, a heavy object fell upon his
left hand. Plaintiff received treatment at the National Orthopedic Hospital from December 26,
1953 to February 8, 1954, for the following injuries, to wit:
(1) Fracture, simple, oraximal phalanx, index finger, left;
(2) Fracture, compound, communite proximal phalanx, middle finger, left and 2nd
phalanx simple;
(3) Fracture, compound, communite phalanx, 4th finger, left;

(4) Fracture, simple, middle phalanx, middle finger, left;

(5) Lacerated wound, sutured, volar aspect, small finger, left;
(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.
which injuries, the attending surgeon certified, would cause temporary total disability of
appellant's left hand.
As the insurance companies refused to pay his claim for compensation under the policies by
reason of the said disability of his left hand, Ty filed motions in the Municipal Court of Manila,
which rendered favorable decision. On appeal to the Court of First Instance by the insurance
companies, the cases were dismissed on the ground that under the uniform terms of the
insurance policies, partial disability of the insured caused by loss of either hand to be
compensable, the loss must result in the amputation of that hand. Hence, these appeals by the
insured.1wph1.t
Plaintiff-appellant is basing his claim for indemnity under the provision of the insurance contract,
uniform in all the cases, which reads:
"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through violent, external,
visible and accidental means, and which shall not prove fatal but shall result,
independently of all other causes and within sixty (60) days from the occurrence, thereof,
in Total or Partial Disability of the Insured, the Company shall pay, subject to the
exceptions as provided for hereinafter, the amount set opposite such injury.
xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

PARTIAL DISABILITY
LOSS OF:

Either Hand P650.00

The loss of a hand shall mean the loss, by amputation through the bones of the wrist.
Appellant contends that to be entitled to indemnification under the foregoing provision, it is
enough that the insured is disabled to such an extent that he cannot substantially perform all
acts or duties of the kind necessary in the prosecution of his business. It is argued that what is
compensable is the disability and not the amputation of the hand. The definition of what
constitutes loss of hand, placed in the contract, according to appellant, consequently, makes the
provision ambiguous and calls for the interpretation thereof by this Court.

This is not the first time that the proper construction of this provision, which is uniformly carried
in personal accident policies, has been questioned. Herein appellant himself has already
brought this matter to the attention of this Court in connection with the other accident policies
which he took and under which he had tried to collect indemnity, for the identical injury that is
the basis of the claims in these cases. And, we had already ruled:
While we sympathize with the plaintiff or his employer, for whose benefit the policies
were issued, we can not go beyond the clear and express conditions of the insurance
policies, all of which definite partial disability as loss of either hand
by amputation through the bones of the wrist. There was no such amputation in the case
at bar. All that was found by the trial court, which is not disputed on appeal, was that the
physical injuries "caused temporary total disability of plaintiff's left hand." Note that the
disability of plaintiff's hand was merely temporary, having been caused by fractures of
the index, the middle and the fourth fingers of the left hand.
We might add that the agreement contained in the insurance policies is the law between the
parties. As the terms of the policies are clear, express and specific that only amputation of the
left hand should be considered as a loss thereof, an interpretation that would include the mere
fracture or other temporary disability not covered by the policies would certainly be
unwarranted.2
We find no reason to depart from the foregoing ruling on the matter.
Plaintiff-appellant cannot come to the courts and claim that he was misled by the terms of the
contract. The provision is clear enough to inform the party entering into that contract that the
loss to be considered a disability entitled to indemnity, must be severance or amputation of that
affected member from the body of the insured.
Wherefore, finding no error in the decision appealed from, the same is hereby affirmed, without
costs. So ordered.
Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez,
JJ., concur.
Footnotes
1

South Sea Surety & Ins. Co., Dec. 17, 1963; The Philippine Guaranty Company, Inc.,
Oct. 30, 1953; Universal Ins. & Indemnity Co., Oct. 30, 1953; Filipinas Compaia de
Seguros, Oct. 30, 1953; People's Surety & Ins. Co., Oct. 19, 1953; Plaridel Surety & Ins.
Co., Dec. 22, 1953, Pacific Union, Ins.Co., Nov. 18, 1953.
2

Ty v. First National Surety & Ins. Co., G.R. Nos. L-16133-16145, April 29, 1961.

(5)

Philamlife vs. Ansaldo 234 SCRA 509

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS
REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON
MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.

QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court, with
preliminary injunction or temporary restraining order, to annul and set aside the Order dated
November 6, 1986 of the Insurance Commissioner and the entire proceedings taken in I.C.
Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr.
dated April 17, 1986, to respondent Commissioner, alleging certain problems encountered by
agents, supervisors, managers and public consumers of the Philippine American Life Insurance
Company (Philamlife) as a result of certain practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de los
Reyes, in his capacity as Philamlife's president, to comment on respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes suggested
that private respondent "submit some sort of a 'bill of particulars' listing and citing actual cases,
facts, dates, figures, provisions of law, rules and regulations, and all other pertinent data which
are necessary to enable him to prepare an intelligent reply" (Rollo, p. 37). A copy of this letter
was sent by the Insurance Commissioner to private respondent for his comments thereon.

On May 16, 1986, respondent Commissioner received a letter from private respondent
maintaining that his letter-complaint of April 17, 1986 was sufficient in form and substance, and
requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986, reiterated
his claim that private respondent's letter of May 16, 1986 did not supply the information he
needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the
validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to specify the
provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent Commissioner
dated July 31, 1986, reiterating his letter of April 17, 1986 and praying that the provisions on
charges and fees stated in the Contract of Agency executed between Philamlife and its agents,
as well as the implementing provisions as published in the agents' handbook, agency bulletins
and circulars, be declared as null and void. He also asked that the amounts of such charges
and fees already deducted and collected by Philamlife in connection therewith be reimbursed to
the agents, with interest at the prevailing rate reckoned from the date when they were deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the
particular information which Philamlife was seeking from him and which he
promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with
regard to the complaint, private respondent must file a verified formal complaint
before any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the
hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986,
and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant Vice-President
and Executive Assistant to the President, asked that respondent Commission first rule on the
questions of the jurisdiction of the Insurance Commissioner over the subject matter of the
letters-complaint and the legal standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case on
November 5, 1986.

On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following

grounds;
1. The Subpoena/Notice has no legal basis and is premature because:
(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued
nor received by the respondent De
los Reyes, and hence, no jurisdiction
has been acquired over his person;
(3) No answer has been filed, and
hence, the hearing scheduled on
November 5, 1986 in the
Subpoena/Notice, and wherein the
respondent is required to appear, is
premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion to Quash.
The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable
and considering the fact that the instant case is an informal administrative
litigation falling outside the operation of the aforecited memorandum circular but
cognizable by this Commission, the hearing officer, in open session ruled as it is
hereby ruled to deny the Motion to Quash Subpoena/Notice for lack of merit
(Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the Contract of
Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take
cognizance of the complaint in the exercise of its quasi-judicial powers. The Solicitor General,
upholding the jurisdiction of the Insurance Commissioner, claims that under Sections 414 and
415 of the Insurance Code, the Commissioner has authority to nullify the alleged illegal
provisions of the Contract of Agency.
III

The general regulatory authority of the Insurance Commissioner is described in Section 414 of
the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to
insurance, insurance companies and other insurance matters, mutual benefit
associations and trusts for charitable uses are faithfully executed and to perform
the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the
Insurance Commissioner is hereby authorized, at his discretion, to impose upon
insurance companies, their directors and/or officers and/or agents, for any willful
failure or refusal to comply with, or violation of any provision of this Code, or any
order, instruction, regulation or ruling of the Insurance Commissioner, or any
commission of irregularities, and/or conducting business in an unsafe and
unsound manner as may be determined by the the Insurance Commissioner, the
following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing,
removal of directors and/or officers
and/or agents.
A plain reading of the above-quoted provisions show that the Insurance Commissioner has the
authority to regulate the business of insurance, which is defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance
business," within the meaning of this Code, shall include
(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. (Insurance Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not included
within the meaning of an insurance business, Section 2 of the Insurance Code cannot be
invoked to give jurisdiction over the same to the Insurance Commissioner. Expressio unius est
exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance
Commissioner under Section 416 of the Insurance Code applies in his case, we likewise rule in
the negative. Section 416 of the Code in pertinent part, provides:
The Commissioner shall have the power to adjudicate claims and complaints
involving any loss, damage or liability for which an insurer may be answerable

under any kind of policy or contract of insurance, or for which such insurer may
be liable under a contract of suretyship, or for which a reinsurer may be used
under any contract or reinsurance it may have entered into, or for which a mutual
benefit association may be held liable under the membership certificates it has
issued to its members, where the amount of any such loss, damage or liability,
excluding interest, costs and attorney's fees, being claimed or sued upon any
kind of insurance, bond, reinsurance contract, or membership certificate does not
exceed in any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance Commissioner
is limited by law "to claims and complaints involving any loss, damage or liability for which an
insurer may be answerable under any kind of policy or contract of insurance, . . ." Hence, this
power does not cover the relationship affecting the insurance company and its agents but is
limited to adjudicating claims and complaints filed by the insured against the insurance
company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the
Insurance Code, the provisions of said Chapter speak only of the licensing requirements and
limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance
companies and their agents. It follows that the Insurance Commissioner cannot, in the exercise
of its quasi-judicial powers, assume jurisdiction over controversies between the insurance
companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA
445 (1989), andInvestment Planning Corporation of the Philippines v. Social Security
Commission, 21 SCRA 904 (1962), that an insurance company may have two classes of agents
who sell its insurance policies: (1) salaried employees who keep definite hours and work under
the control and supervision of the company; and (2) registered representatives, who work on
commission basis.
Under the first category, the relationship between the insurance company and its agents is
governed by the Contract of Employment and the provisions of the Labor Code, while under the
second category, the same is governed by the Contract of Agency and the provisions of the
Civil Code on the Agency. Disputes involving the latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance
Commission is SET ASIDE.
SO ORDERED.
Cruz, Davide, Jr. and Kapunan, JJ., concur.
Bellosillo, J,. is on leave.

(6)

Del Rosario vs. Equitable Insurance 8 SCRA 343

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-16215

June 29, 1963

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.
Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.
K. V. Faylona for defendant-appellant.
PAREDES, J.:
On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued
Personal Accident Policy No. 7136 on the life of Francisco del Rosario, alias Paquito Bolero,
son of herein plaintiff-appellee, binding itself to pay the sum of P1,000.00 to P3,000.00, as
indemnity for the death of the insured. The pertinent provisions of the Policy, recite:
Part I. Indemnity For Death
If the insured sustains any bodily injury which is effected solely through violent, external,
visible and accidental means, and which shall result, independently of all other causes
and within sixty (60) days from the occurrence thereof, in the Death of the Insured, the
Company shall pay the amount set opposite such injury:
Section 1. Injury sustained other than those specified
below unless excepted hereinafter. . . . . . . .
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. . . . . . . .
Section 3. Injury sustained by the burning of a church,
theatre, public library or municipal administration
building while the Insured is therein at the
commencement of the fire. . . . . . . .
Section 4. Injury sustained by the wrecking or
disablement of a regular passenger elevator car in
which the Insured is being conveyed as a passenger
(Elevator in mines excluded) P2,500.00

P1,000.00

P1,500.00

P2,000.00

Section 5. Injury sustained by a stroke of lightning or

by a cyclone. . . . . . . .
xxx

xxx

P3,000.00

xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death,
Disability, Hospital fees, or Loss of Time, caused to the insured:
. . . (h) By drowning except as a consequence of the wrecking or disablement in the
Philippine waters of a passenger steam or motor vessel in which the Insured is travelling
as a farepaying passenger; . . . .
A rider to the Policy contained the following:
IV. DROWNING
It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the
policy is hereby waived by the company, and to form a part of the provision covered by the
policy.
On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board
the motor launch "ISLAMA" together with 33 others, including his beneficiary in the Policy,
Remedios Jayme, were forced to jump off said launch on account of fire which broke out on said
vessel, resulting in the death of drowning, of the insured and beneficiary in the waters of
Jolo. 1wph1.t
On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim
for payment with defendant company, and on September 13, 1957, defendant company paid to
him (plaintiff) the sum of P1,000.00, pursuant to Section 1 of Part I of the policy. The receipt
signed by plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of
PESOS ONE THOUSAND (P1,000.00) Philippine Currency, being settlement in full
for all claims and demands against said Company as a result of an accident which
occurred on February 26, 1957, insured under out ACCIDENT Policy No. 7136, causing
the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and CANCELLED.
LOSS COMPUTATION
Amount of Insurance

P1,000.00
__________
vvvvv

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company
acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but informing said
company that said amount was not the correct one. Atty. Francisco claimed
The amount payable under the policy, I believe should be P1,500.00 under the provision
of Section 2, part 1 of the policy, based on the rule of pari materia as the death of the
insured occurred under the circumstances similar to that provided under the aforecited
section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance
Commissioner, who rendered an opinion that the liability of the company was only P1,000.00,
pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3). Because of the above
opinion, defendant insurance company refused to pay more than P1,000.00. In the meantime,
Atty. Vicente Francisco, in a subsequent letter to the insurance company, asked for P3,000.00
which the Company refused, to pay. Hence, a complaint for the recovery of the balance of
P2,000.00 more was instituted with the Court of First Instance of Rizal (Pasay City, Branch VII),
praying for it further sum of P10,000.00 as attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or
claim is set forth in the complaint had already been released, plaintiff having received the full
amount due as appearing in policy and as per opinion of the Insurance Commissioner. An
opposition to the motion to dismiss, was presented by plaintiff, and other pleadings were
subsequently file by the parties. On December 28, 1957, the trial court deferred action on the
motion to dismiss until termination of the trial of the case, it appearing that the ground thereof
was not indubitable. In the Answer to the complaint, defendant company practically admitted all
the allegations therein, denying only those which stated that under the policy its liability was
P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions
of which read
xxx

xxx

xxx

Since the contemporaneous and subsequent acts of the parties show that it was not
their intention that the payment of P1,000.00 to the plaintiff and the signing of the loss
receipt exhibit "1" would be considered as releasing the defendant completely from its
liability on the policy in question, said intention of the parties should prevail over the
contents of the loss receipt "1" (Articles 1370 and 1371, New Civil Code).
". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to
P3,000.00 as indemnity for the death of the insured. The insured died of drowning.
Death by drowning is covered by the policy the pertinent provisions of which reads as
follows:
xxx

xxx

xxx

"Part I of the policy fixes specific amounts as indemnities in case of death

resulting from "bodily injury which is effected solely thru violence, external, visible
and accidental means" but, Part I of the Policy is not applicable in case of death
by drowning because death by drowning is not one resulting from "bodily injury

which is affected solely thru violent, external, visible and accidental means" as
"Bodily Injury" means a cut, a bruise, or a wound and drowning is death due to
suffocation and not to any cut, bruise or wound."
xxx

xxx

xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for
recovery apart from the bodily injury because death by bodily injury is covered by Part I
of the policy while death by drowning is covered by Part VI thereof. But while the policy
mentions specific amounts that may be recovered for death for bodily injury, yet, there is
not specific amount mentioned in the policy for death thru drowning although the latter is,
under Part VI of the policy, a ground for recovery thereunder. Since the defendant has
bound itself to pay P1000.00 to P3,000.00 as indemnity for the death of the insured but
the policy does not positively state any definite amount that may be recovered in case of
death by drowning, there is an ambiguity in this respect in the policy, which ambiguity
must be interpreted in favor of the insured and strictly against the insurer so as to allow
greater indemnity.
xxx

xxx

xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid
the amount of P1,000.00 to the plaintiff so that there still remains a balance of P2,000.00
of the amount to which plaintiff is entitled to recover under the policy Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of
litigation. However, since it is evident that the defendant had not acted in bad faith in
refusing to pay plaintiff's claim, the Court cannot award plaintiff's claim for attorney's fees
and expenses of litigation.
IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its
decision dated July 21, 1958 and hereby renders judgment, ordering the defendant to
pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and to pay the costs.
The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a
Resolution dated September 29, 1959, elevated the case to this Court, stating that the genuine
issue is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how much should the
indemnity be. We believe that under the proven facts and circumstances, the findings and
conclusions of the trial court, are well taken, for they are supported by the generally accepted
principles or rulings on insurance, which enunciate that where there is an ambiguity with respect
to the terms and conditions of the policy, the same will be resolved against the one responsible
thereof. It should be recalled in this connection, that generally, the insured, has little, if any,
participation in the preparation of the policy, together with the drafting of its terms and
Conditions. The interpretation of obscure stipulations in a contract should not favor the party
who cause the obscurity (Art. 1377, N.C.C.), which, in the case at bar, is the insurance
company.
. . . . 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," (29 Am. Jur. 181) 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" (44 C.J.S. 1174). Calanoc v. Court
of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an insurance policy
may be made, that which allows the greater indemnity will prevail. (L'Engel v. Scotish
Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep. 70, 5
Ann. Cas. 749).
At any event, the policy under consideration, covers death or disability by accidental means,
and the appellant insurance company agreed to pay P1,000.00 to P3,000.00. is indemnity for
death of the insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other issues
raised in the appeal.
The judgment appealed from is hereby affirmed. Without costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon and Regala, JJ.,
concur.
Makalintal, J., reserves his vote.

(7)

Misamis Lumber vs. Capital Insurance 17 SCRA 228

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-21380

May 20, 1966

MISAMIS LUMBER CORPORATION, plaintiff and appellee,

vs.
CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.
Achacoso, Nera and Ocampo for defendant and appellant.
F. Capistrano, Jr. for plaintiff and appellee.
REYES, J.B.L., J.:
Plaintiff-appellee Misamis Lumber Corporation, under its former name, Lanao Timber Mills, Inc.,
insured its Ford Falcon motor car for the amount of P14,000 with the defendant-appellant,
Capital Insurance & Surety Company, Inc. The pertinent provisions of the policy provided, as
follows:
1. The Company will subject to the Limits of Liability indemnify the Insured against loss
or damage to the Motor Vehicle and its accessories and spare parts whilst thereon.
2. (a) by accidental collision or overturning or collision or overturning consequent when
mechanical breakdown or consequent upon wear and tear.
xxx

xxx

xxx

3. At its option, the Company may pay in cash the amount of the loss or damage or may
repair, reinstate or replace the Motor Vehicle or any part thereof or its accessories or
spare parts. The liability of the Company shall not exceed the value of the parts lost or
damaged and the reasonable cost of fitting such parts or the value of the Motor Vehicle
at the time of the loss or damage whichever is the loss. The Insured's estimate of value
stated in the schedule shall be the maximum amount payable by the Company in
respect of any claim for loss or damage.1wph1.t
xxx

xxx

xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for
which the Company may be liable under this policy provided that:
(a) the estimated cost of such repair does not exceed the authorized Repair
Limit.
(b) a detailed estimate of the cost is forwarded to the Company without delay.

and providing also that the authorized repair limit is P150.00.

At around eleven o'clock in the evening of 25 November 1961, and while the above-mentioned
insurance policy was in force, the insured car, while traveling along in Aurora Boulevard in front
of the Pepsi-Cola plant in Quezon City, passed over a water hole which the driver did not see
because an oncoming car did not dim its light. The crankcase and flywheel housing of the car
broke when it hit a hollow block lying alongside the water hole. At the instance of the plaintiffappellee, the car was towed and repaired by Morosi Motors at its shop at 1906 Taft Avenue
Extension at a total cost of P302.27.
On 29 November 1961, when the repairs on the car had already been made, the plaintiffappellee made a report of the accident to the defendant-appellant Capital Insurance & Surety
Company.
Since the defendant-appellant refused to pay for the total cost of to wage and repairs, suit was
filed in the municipal court originally.
The case before Us is now a direct appeal on a point of law from the judgment of the Court of
First Instance of Manila finding for the plaintiff and against the defendant-insurer in its Civil Case
No. 51757. Per our resolution on 13 February 1964, it was resolved to proceed with the case
without the appellee's brief, which was filed late.
The defendant-appellant admits liability in the amount of P150, but not for any excess thereof.
The lower court did not exonerate the said appellant for the excess because, according to it, the
company's absolution would render the insurance contract one-sided and that the said insurer
had not shown that the cost of repairs in the sum of P302.27 is unreasonable, excessive or
padded, nor had it shown that it could have undertaken the repairs itself at less expense.
The above reasoning is beside the point, because the insurance policy stipulated in paragraph 4
that if the insured authorizes the repair the liability of the insurer, per its sub-paragraph (a), is
limited to P150.00. The literal meaning of this stipulation must control, it being the actual
contract, expressly and plainly provided for in the policy (Art. 1370, Civil Code; Young vs.
Midland Textile Ins. Co., 30 Phil. 617; Ty vs. First Nat. Surety & Assur. Co., Inc., L-16138-45, 29
April 1961).
The lower court's recourse to legal hermeneutics is not called for because paragraph 4 of the
policy is clear and specific and leaves no room for interpretation. The interpretation given is
even unjustified because it opposes what was specifically stipulated. Thus, it will be observed
that the policy drew out not only the limits of the insurer's liability but also the mechanics that the
insured had to follow to be entitled to full indemnity of repairs. The option to undertake the
repairs is accorded to the insurance company per paragraph 2. The said company was deprived
of the option because the insured took it upon itself to have the repairs made, and only notified
the insurer when the repairs were done. As a consequence, paragraph 4, which limits the
company's liability to P150.00, applies.
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.

Finally, to require the insurer to prove that the cost of the repairs ordered by the insured is
unreasonable, as the appealed decision does, when the insurer was not given an opportunity to
inspect and assess the damage before the repairs were made, strikes Us as contrary to
elementary justice and equity.
For the foregoing reasons, the appealed decision is hereby modified by ordering the defendantappellant Capital Insurance & Surety Company, Inc. to pay not more than P150.00 to the
plaintiff-appellee Misamis Lumber Corporation. Each party shall bear its own costs and
attorney's fees.
Bengzon, C.J., Bautista Angelo, Concepcion, Barrera, Dizon, Regala, Makalintal, Bengzon, J.P.,
and Sanchez, JJ., concur.
Zaldivar, J., took no part.

(8)

Verendia vs. Court of Appeals 217 SCRA 417

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by Fidelity and
Surety Insurance Company of the Philippines (Fidelity for short) of its Fire Insurance
Policy No. F-18876 effective between June 23, 1980 and June 23, 1981 covering Rafael
(Rex) Verendia's residential building located at Tulip Drive, Beverly Hills, Antipolo, Rizal
in the amount of P385,000.00. Designated as beneficiary was the Monte de Piedad &
Savings Bank. Verendia also insured the same building with two other companies,
namely, The Country Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913
expiring on May 12, 1981, and The Development Insurance for P400,000.00 under Policy
No. F-48867 expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was completely
destroyed by fire on the early morning of December 28, 1980. Fidelity was accordingly
informed of the loss and despite demands, refused payment under its policy, thus
prompting Verendia to file a complaint with the then Court of First Instance of Quezon
City, praying for payment of P385,000.00, legal interest thereon, plus attorney's fees and
litigation expenses. The complaint was later amended to include Monte de Piedad as an
"unwilling defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the policy was
avoided by reason of over-insurance; that Verendia maliciously represented that the
building at the time of the fire was leased under a contract executed on June 25, 1980 to
a certain Roberto Garcia, when actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in
favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that
Paragraph 3 of the policy was also violated by Verendia in that the insured failed to
inform Fidelity of his other insurance coverages with Country Bankers Insurance and
Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision
promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome,
and Ejercito (P), JJ.), the appellate court reversed for the following reasons: (a) there was
no misrepresentation concerning the lease for the contract was signed by Marcelo
Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy contract
requiring Verendia to give notice to Fidelity of other contracts of insurance was waived
by Fidelity as shown by its conduct in attempting to settle the claim of Verendia (pp. 3233, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of
directly filing a motion for reconsideration within 15 days therefrom, Fidelity filed on
April 21, 1986, a motion for extension of 3 days within which to file a motion for
reconsideration. The motion for extension was not filed on April 19, 1986 which was the
15th day after receipt of the decision because said 15th day was a Saturday and of
course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion for
extension was granted by the appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity
had in the meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration
on the ground that the motion for extension was filed out of time because the 15th day
from receipt of the decision which fell on a Saturday was ignored by Fidelity, for indeed,
so Verendia contended, the Intermediate Appellate Court has personnel receiving
pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for
reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition
herein docketed as G.R. No. 75605 was initiated. Subsequently, or more specifically on
October 21, 1986, the appellate court denied Fidelity's motion for reconsideration and
account thereof. Fidelity filed on March 31, 1986, the petition for review on certiorari now
docketed as G.R. No. 76399. The two petitions, inter-related as they are, were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the petition
for review oncertiorari, we must first determine whether the decision of the appellate
court may still be reviewed, or whether the same is beyond further judicial scrutiny.
Stated otherwise, before anything else, inquiry must be made into the issue of whether
Fidelity could have legally asked for an extension of the 15-day reglementary period for
appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that
the pendency of a motion for extension of time to perfect an appeal does not suspend
the running of the period sought to be extended (Garcia vs. Buenaventura 74 Phil. 611
[1944]). To the same effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160
[1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King(20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly
prohibit the filing of a motion for extension of time to file a motion for reconsideration in
regard to a final order or judgment, magistrates, including those in the Court of Appeals,
held sharply divided opinions on whether the period for appealing which also includes
the period for moving to reconsider may be extended. The matter was not definitely
settled until this Court issued its Resolution in Habaluyas Enterprises, Inc. vs.
Japson (142 SCRA [1986]), declaring that beginning one month from the promulgation of
the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for extension of time to
file a motion for new trial or reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30, 1986,
although, of course, Verendia's motion to expunge the motion for reconsideration was
not finally disposed until July 22, 1986, or after the dictum in Habaluyas had taken effect.
Seemingly, therefore, the filing of the motion for extension came before its formal
proscription under Habaluyas, for which reason we now turn our attention to G.R. No.
76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) 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 and (b) whether or not, in submitting the subrogation receipt in evidence, Fidelity
had in effect agreed to settle Verendia's claim in the amount stated in said receipt. 1
Verging on the factual, the issue of the veracity or falsity of the lease contract could have
been better resolved by the appellate court for, in a petition for review on certiorari under
Rule 45, the jurisdiction of this Court is limited to the review of errors of law. The
appellate court's findings of fact are, therefore, conclusive upon this Court except in the
following cases: (1) when the conclusion is a finding grounded entirely on speculation,
surmises, or conjectures; (2) when the inference made is manifestly absurd, mistaken, or
impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4)
when the judgment is premised on a misapprehension of facts; (5) when the findings of
fact are conflicting; and (6) when the Court of Appeals in making its findings went
beyond the issues of the case and the same are contrary to the admissions of both
appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433 [1991]). In view of
the conflicting findings of the trial court and the appellate court on important issues in
these consolidated cases and it appearing that the appellate court judgment is based on
a misapprehension of facts, this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on

December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within the
premises. However, according to the investigation report prepared by Pat. Eleuterio M.
Buenviaje of the Antipolo police, the building appeared to have "no occupant" and that
Mr. Roberto Garcia was "renting on the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster
was able to locate him. Robert Garcia then executed an affidavit before the National
Intelligence and Security Authority (NISA) to the effect that he was not the lessee of
Verendia's house and that his signature on the contract of lease was a complete forgery.
Thus, on the strength of these facts, the adjuster submitted a report dated December 4,
1981 recommending the denial of Verendia's claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed
the lease contract. According to Verendia, it was signed by Marcelo Garcia, cousin of
Robert, who had been paying the rentals all the while. Verendia, however, failed to
explain why Marcelo had to sign his cousin's name when he in fact was paying for the
rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity's
conclusions on these proven facts appear, therefore, to have sufficient bases; Verendia
concocted the lease contract to deflect responsibility for the fire towards an alleged
"lessee", inflated the value of the property by the alleged monthly rental of P6,500 when
in fact, the Provincial Assessor of Rizal had assessed the property's fair market value to
be only P40,300.00, insured the same property with two other insurance companies for a
total coverage of around P900,000, and created a dead-end for the adjuster by the
disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties
(Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and
conditions constitute the measure of the insurer's liability and compliance therewith is a
condition precedent to the insured's right to recovery from the insurer (Oriental
Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla
Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). 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 (Western
Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia used a
false lease contract to support his claim under Fire Insurance Policy No. F-18876, the
terms of the policy should be strictly construed against the insured. Verendia failed to
live by the terms of the policy, specifically Section 13 thereof which is expressed in
terms that are clear and unambiguous, that all benefits under the policy shall be forfeited
"If the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devises are used by the Insured or anyone
acting in his behalf to obtain any benefit under the policy". Verendia, having presented a
false declaration to support his claim for benefits in the form of a fraudulent lease
contract, he forfeited all benefits therein by virtue of Section 13 of the policy in the
absence of proof that Fidelity waived such provision (Pacific Banking Corporation vs.
Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia,

reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and
demand the most abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as
evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears to
have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It is
even incomplete as the blank spaces for a witness and his address are not filled up. More
significantly, the same receipt states that Verendia had received the aforesaid amount.
However, that Verendia had not received the amount stated therein, is proven by the fact
that Verendia himself filed the complaint for the full amount of P385,000.00 stated in the
policy. It might be that there had been efforts to settle Verendia's claims, but surely, the
subrogation receipt by itself does not prove that a settlement had been arrived at and
enforced. Thus, to interpret Fidelity's presentation of the subrogation receipt in evidence
as indicative of its accession to its "terms" is not only wanting in rational basis but
would be substituting the will of the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399
is GRANTED and the decision of the then Intermediate Appellate Court under review is
REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED and
UPHELD.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

# Footnotes
1 Fidelity appears to have agreed with the appellate court that it had waived
Verendia's failure to abide by policy condition No. 3 on disclosure of other
insurance policies by its failure to assign it as an error in the petition in
G.R. No. 76399. It must have likewise realized the futility of assigning it as
an error because on the first page of the policy the following is typewritten:
"Other insurances allowed, the amounts to be declared in the event of loss
or when required."

(9)

Gulf Resorts vs. Phil. Charter Ins. Corp. 458 SCRA 550
SECOND DIVISION

[G.R. No. 156167. May 16, 2005]

GULF

RESORTS,
INC., petitioner, vs.
CORPORATION, respondent.

PHILIPPINE

CHARTER

INSURANCE

DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by
petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court decision [1] which dismissed its two appeals
and affirmed the judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the
insurance companys liability for earthquake damage to petitioners properties. Petitioner avers
that, pursuant to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all
damages to the properties within its resort caused by earthquake. Respondent contends that the
rider limits its liability for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort
insured originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance
policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F;
also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only to
plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and
two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2)
swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs
favor Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and
F-1 was deleted and the entry under Endorsements/Warranties at the time of issue read that plaintiff
renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under Policy
No. 206-4568061-9 (Exh. H) which carried the entry under Endorsement/Warranties at Time of Issue,
which read Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and
paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the

peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 2064568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy to be
issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of March 14,
1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium
against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy
No. 31944 issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the sum included additional premium
the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the
contrary, that this insurance covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990 an
earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No.
31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file
a formal claim, then assigned the investigation of the claim to an independent claims adjuster,
Bayne Adjusters and Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster,
requested petitioner to submit various documents in support of its claim. On August 7, 1990,

Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,[4]rendered a
preliminary report[5] finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that except for the swimming pools, all affected items
have no coverage for earthquake shocks.[6] On August 11, 1990, petitioner filed its formal
demand[7] for settlement of the damage to all its properties in the Agoo Playa Resort. On August
23, 1990, respondent denied petitioners claim on the ground that its insurance policy only afforded
earthquake shock coverage to the two swimming pools of the resort.[8] Petitioner and respondent
failed to arrive at a settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint [10] with
the regional trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with
interest thereon, as computed under par. 29 of the policy (Annex B) until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on
account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of
earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools in
all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider (Exhibit 7-C) means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language
used in an insurance contract or application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which prepared the contract. To the
mind of [the] Court, the language used in the policy in litigation is clear and unambiguous hence there is
no need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake shock
coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having
admitted that the damage to the swimming pools was appraised by defendants adjuster at P386,000.00,
defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is
liable only for the damage caused to the two (2) swimming pools and that defendant has made known to
plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the
action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the

plaintiffs right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2)
swimming pools, with interest at 6% per annum from the date of the filing of the Complaint until
defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the
Court of Appeals based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO.
31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO
THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE PARTIES
AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED
TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON
CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to
award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that
the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU)
and upon which the subject insurance contract with Philippine Charter Insurance Corporation is said to
have been based and copied (Exh. I), covered an extended earthquake shock insurance on all the insured
properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the
imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting
toP4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused on
the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it then
cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award
thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not

be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the
award thereof an exception rather than a rule, it is necessary for the court to make findings of facts and
law that would bring the case within the exception and justify the grant of such award (Country Bankers
Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25,
2002). Therefore, holding that the plaintiff-appellants action is not baseless and highly speculative, We
find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the
Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues:[16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS
FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties
insured and not only the swimming pools. It used the words any property insured by this policy,
and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy itself, which states that it is [s]ubject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt.,
FEA Warranty & Annual Payment Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in
the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission
when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the
wording of the insurance policy, because the rider is the more deliberate expression of the
agreement of the contracting parties.
Sixth, that in their previous insurance policies,
endorsements/warranties enumerated at the time of issue.

limits

were

placed

on

the

Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made
the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement
should be interpreted as a caveat on the standard fire insurance policy, such as to remove the
two swimming pools from the coverage for the risk of fire. It should not be used to limit the
respondents liability for earthquake shock to the two swimming pools only.

Ninth, there is no basis for the appellate court to hold that the additional premium was not
paid under the extended coverage. The premium for the earthquake shock coverage was already
included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact replica of its latest insurance policy
from American Home Assurance Company (AHAC-AIU), which covered all the resorts properties
for earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake,
respondent assured petitioner that it was covered for earthquake shock. Respondents insurance
adjuster, Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the doctrine of
equitable estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of
the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of
the Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in
order to establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioners insured properties other than on the
two swimming pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools
were insured against earthquake shock. From 1988 until 1990, the provisions in its policy were
practically identical to its earlier policies, and there was no increase in the premium paid. AHACAIU, in a letter[19] by its representative Manuel C. Quijano, categorically stated that its previous
policy, from which respondents policy was copied, covered only earthquake shock for the two
swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the
policy only covered earthquake shock damage on the two swimming pools. The amount was the
same amount paid by petitioner for earthquake shock coverage on the two swimming pools from
1990-1991. No additional premium was paid to warrant coverage of the other properties in the
resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the earthquake
shock coverage to all of petitioners properties. As per its agreement with petitioner, respondent
copied its policy from the AHAC-AIU policy provided by petitioner. Although the first five policies
contained the said qualification in their riders title, in the last two policies, this qualification in the
title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere
inadvertence. This inadvertence did not make the policy incomplete, nor did it broaden the scope
of the endorsement whose descriptive title was merely enumerated. Any ambiguity in the policy
can be easily resolved by looking at the other provisions, specially the enumeration of the items
insured, where only the two swimming pools were noted as covered for earthquake shock
damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the
phrase Item 5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock
only) meant that only the swimming pools were insured for earthquake damage. The same phrase
is used in toto in the policies from 1989 to 1990, the only difference being the designation of the
two swimming pools as Item 3.

Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid
for all the properties covered. In all of its seven insurance policies, petitioner only paidP393.00 as
premium for coverage of the swimming pools against earthquake shock. No other premium was
paid for earthquake shock coverage on the other properties. In addition, the use of the qualifier
ANY instead of ALL to describe the property covered was done deliberately to enable the parties
to specify the properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioners own evidence shows that it only required
respondent to follow the exact provisions of its previous policy from AHAC-AIU. Respondent
complied with this requirement. Respondents only deviation from the agreement was when it
modified the provisions regarding the replacement cost endorsement. With regard to the issue
under litigation, the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop
it from maintaining that only the two swimming pools were covered for earthquake shock. The
adjusters letter notifying petitioner to present certain documents for its building claims and repair
costs was given to petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only
after the descriptive name or title of the Earthquake Shock Endorsement. However, the words of
the policy reflect the parties clear intention to limit earthquake shock coverage to the two
swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not
object to any deficiency nor did it institute any action to reform the policy. The policy binds the
petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on the two
swimming pools, it cannot be considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at
bar.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only) [20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly
or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include
the Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED
IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 %
OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .
additional premium the Company agrees, notwithstanding what is stated in the printed conditions of this
Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to any
of the property insured by this Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also
to loss or damage occasioned by or through or in consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of
the earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of
the insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted
in consonance with each other.[25] All its parts are reflective of the true intent of the parties. The
policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made
to control; neither do particular words or phrases necessarily determine its character. Petitioner
cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All
the provisions and riders, taken and interpreted together, indubitably show the intention of the
parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the
parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the
Insurance Code 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. Thus, 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 insurer's promise, the insured pays a premium.[26] (Emphasis
ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the
insured against a specified peril.[27] In fire, casualty, and marine insurance, the premium payable
becomes a debt as soon as the risk attaches.[28] In the subject policy, no premium payments were
made with regard to earthquake shock coverage, except on the two swimming pools. There is no
mention of any premium payable for the other resort properties with regard to earthquake shock.
This is consistent with the history of petitioners previous insurance policies from AHAC-AIU. As
borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty,
there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally
arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of
course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the

earthquake shock coverage must extend to all properties of Agoo Playa Resort in
La Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very important because in April 1987
there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future],
is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by
earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I
was contented already that the previous limitation pertaining to the two swimming
pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies [29] to the
insurance policy as proof of the intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive titles of the riders, clauses,
warranties or endorsements to which the policy is subject, as required under Section 50,
paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting
the coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone.
As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been
previously marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you
have occasion to review of (sic) these six (6) policies issued by your company [in
favor] of Agoo Playa Resort?
WITNESS:

Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is,
on the basis on (sic) the wordings indicated in Exhibits C to H respectively what
was the extent of the coverage [against] the peril of earthquake shock as provided
for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as
provided for in each of the six (6) policies extend to the two (2) swimming pools
only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis.
For swimming pools we do cover earthquake shock. For building we covered it for
full earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are
covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations, they
are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E
and F inclusive [remained] its coverage against earthquake shock to two (2)
swimming pools only but that Exhibits G and H respectively entend the coverage
against earthquake shock to all the properties indicated in the respective
schedules attached to said policies, what can you say about that testimony of
plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the
other half of it. I assure you that this one covers the two swimming pools with
respect to earthquake shock endorsement. Based on it, if we are going to look at
the premium there has been no change with respect to the rates. Everytime (sic)
there is a renewal if the intention of the insurer was to include the earthquake
shock, I think there is a substantial increase in the premium. We are not only going
to consider the two (2) swimming pools of the other as stated in the policy. As I
see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are
going to do some computation based on the rates you will arrive at the same
premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was
placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you
have pointed to during your direct-examination, the phrase Item no. 5 only
meaning to (sic) the two (2) swimming pools was deleted from the policies issued
by AIU, is it not?
xxx
ATTY. ANDRES:

As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that 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.
Respondent only insured the properties as intended by the petitioner. Petitioners own witness
testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
you tell Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the
policy from Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions
as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they
will be charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits I and H sometime in the third week of
March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already
that the policy wordings and rates were copied from the insurance policy I sent
them but it was only when this case erupted that we discovered some
discrepancies.

Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit I and those indicated in
Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be
placed here because this particular provision under the peril of earthquake shock
only is requested because this is an insurance policy and therefore cannot be
insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not
proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster,
Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters
and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement
for earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy
of the insurance coverage policy and it was indicated under Item 3 specifically that
the coverage is only for earthquake shock. Then, I remember I had a talk with Atty.
Umlas (sic), and I relayed to him what I had found out in the policy and he
confirmed to me indeed only Item 3 which were the two swimming pools have
coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except
for the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I
found out that under Item 3 it was specific on the wordings that on the two
swimming pools only, then enclosed in parenthesis (against the peril[s] of
earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no
computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. 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.[31] A contract of adhesion is 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.
Through the years, the courts have held that in these type of contracts, the parties do not bargain
on equal footing, the weaker party's 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 of justice
must protect.[32] Consequently, any ambiguity therein is resolved against the insurer, or construed
liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms where facts
and circumstances will show that they are basically one-sided.[34] Thus, we have called on lower
courts to remain careful in scrutinizing the factual circumstances behind each case to determine
the efficacy of the claims of contending parties. In Development Bank of the Philippines v.
National Merchandising Corporation, et al.,[35] the parties, who were acute businessmen of
experience, were presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner
cannot claim it did not know the provisions of the policy. From the inception of the policy, petitioner
had required the respondent to copy verbatim the provisions and terms of its latest insurance
policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing
the insurance policy of petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC [36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions
of the previous insurance policy we had with American Home Assurance
Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted
in the American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied from the AIU
Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No.
206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in
some terms, specifically in the replacement cost endorsement, but the principal provisions of the
policy remained essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the "fine
print" or "contract of adhesion" rule in this case as the parties intent to limit the coverage of the
policy to the two swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

[1]

The decision was penned by Justice Jose L. Sabio, Jr., of the 10 th Division of the Court of
Appeals.

[2]

Rollo, pp. 10-12.

[3]

Original Records, p. 50.

[4]

Vice-President for the Fire, Engineering and Allied Claims Division.

[5]

Original Records, pp. 44-48.

[6]

Original Records, p. 47.

[7]

Id., p. 49.

[8]

Id., p. 50.

[9]

Id., pp. 50-54.

[10]

Id., pp. 1-7.

[11]

Id., pp. 6-7.

[12]

Original Records, pp. 28-42.

[13]

Original Records, pp. 400-401.

[14]

CA Rollo, p. 42.

[15]

CA Rollo, pp. 184-186.

[16]

Rollo, p. 402.

[17]

Rollo, pp. 408-409.

[18]

Rollo, pp. 348-395.

[19]

Exhibit 9.

[20]

Original Records, p. 17.

[21]

Original Records, p. 17.

[22]

Original Records, p. 68.

[23]

Rollo, p. 70.

[24]

Original Records, p. 71.

[25]

Ruiz v. Sheriff of Manila, 34 SCRA 83 (1970); National Union Fire Insurance Company of
Pittsburg v. Stolt-Nielsen Philippines, Inc., 184 SCRA 682 (1990).

[26]

See Vance, pp. 1-2, cited in Agbayani, Commercial Laws of the Philippines, vol. 2, (1986), p.
6; Philamcare Health Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002).

[27]

43 Am. Jur. 2d 878.

[28]

De Leon, Hector S., The Insurance Code of the Philippines (1992), p. 194.

[29]

Exhibits I and I-2.

[30]

The underwriter for Phil-American Insurance Corporation (formerly AIU) who reviewed the
Agoo Playa Resort insurance policies.

[31]

Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 (1990); Verendia v. Court
of Appeals, 217 SCRA 417 (1993).

[32]

Philippine National Bank v. Court of Appeals, 196 SCRA 536 (1991).

[33]

Verendia v. Court of Appeals, 217 SCRA 417 (1993); New Life Enterprises v. Court of Appeals,
207 SCRA 669 (1992); Sun Insurance Office, Ltd. v. Court of Appeals, 211 SCRA 554
(1992).

[34]

Pan American World Airways, Inc. v. Rapadas, 209 SCRA 67 (1992); BPI Credit Corporation
v. Court of Appeals, 204 SCRA 601 (1991); Serra v. Court of Appeals, 229 SCRA 60
(1994).

[35]

40 SCRA 624 (1971).

[36]

Testimony of the vice president for corporate affairs and corporate secretary of petitioner, TSN,
September 23, 1991.

[37]

Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978); Tan v. Court of Appeals, 174 SCRA 403
(1989).

(10)

Philamcare vs. Court of Appeals 379 SCRA 356

FIRST DIVISION

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA
TRINOS, respondents.
DECISION
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with
petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the
following question:
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). [1]
The application was approved for a period of one year from March 1, 1988 to March 1,
1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondents
husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He
was also entitled to avail of out-patient benefits such as annual physical examinations, preventive health
care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989
to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a
maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital,
respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim
saying that the Health Care Agreement was void. According to petitioner, there was a concealment
regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis
confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application
form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at
home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was
feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where
he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action
for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case
No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorneys fees. After
trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos,
ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the
amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5]Hence,
petitioner brought the instant petition for review, raising the primary argument that a health care agreement
is not an insurance contract; hence the incontestability clause under the Insurance Code [6]does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also points out 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. Moreover, since Health Care Agreements are only
for a period of one year, as compared to insurance contracts which last longer, [7] petitioner argues that the
incontestability clause does not apply, as the same requires an effectivity period of at least two
years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code 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. [8]
Section 3 of the Insurance Code 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 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 respondents husband in obtaining the health care agreement
was his own health. The health care agreement was in the nature of non-life insurance, which is primarily
a contract of indemnity.[9] 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 upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It appears that
in the application for health coverage, petitioners required respondents husband to sign an express
authorization for any person, organization or entity that has any 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.[10] Specifically, the Health Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and in any addendum
annexed to this application are full, complete and true and bind all parties in interest under the Agreement
herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is
issued on this application and the full Membership Fee according to the mode of payment applied for is
actually paid during the lifetime and good health of proposed Members; that no information acquired by
any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the
application; that any physician is, by these presents, expressly authorized to disclose or give testimony at
anytime relative to any information acquired by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any
Agreement issued on this application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health
and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative
to any hospitalization, consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage only. A photographic copy of
this authorization shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or
medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement
from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees
paid. An undisclosed or misrepresented information is deemed material if its revelation would have
resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee
for the benefit or benefits applied for.[13]

The answer assailed by petitioner was in response to the question relating to the medical history of the
applicant. This largely depends on opinion rather than fact, especially coming from respondents husband
who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are untrue.[14]Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured
will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance
at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if
the statement is obviously of the foregoing character, since in such case the insurer is not justified in
relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of
expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is
shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious
and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.[16] 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. In any case, with or without the authority to investigate, petitioner is liable for
claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound
to answer the same to the extent agreed upon. In the end, 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 covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, 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.[17] In this case, no rescission was made. Besides, 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. [18]
None of the above pre-conditions was fulfilled in this case. 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.[19] 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. [20] 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.[21] This is equally applicable to Health Care Agreements. The phraseology used in medical
or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber,
and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to
be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider. [22]

Anent the incontestability of the membership of respondents husband, we quote with approval the
following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve
months from the date of issuance of the Agreement within which to contest the membership of the patient
if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was
sick of diabetes or hypertension. The periods having expired, the defense of concealment or
misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering
that at the time of their marriage, the deceased was previously married to another woman who was still
alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made
to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and
medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses
incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the
attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court
of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.

[1]

Record, p. 28.

[2]

Exhibit 4, Record, p. 156.

[3]

Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp. 134-135.

[4]

Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima, concurred in by Associate
Justices Fermin A. Martin, Jr. and Conchita Carpio Morales; Rollo, p. 45.
[5]

Resolution dated July 23, 1996; Rollo, p. 48.

[6]

Section 48 of P.D. No. 1460 otherwise known as the Insurance Code.

[7]

Petition, pp. 13-14; Rollo, pp. 22-23.

[8]

See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2, 1986 ed. p. 6.

[9]

Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).

[10]

Record, p. 28.

[11]

Ibid.

[12]

Ibid.

[13]

Ibid., p. 13.

[14]

Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.

[15]

Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of America, supra;
Boutelle v. Westchester Fire Ins. Co., 51 Vt 4 cited in 43 Am Jur 2d 1016.
[16]

Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan Zee v. Asian Crusader
Life Assurance Corp., 122 SCRA 461 [1983].
[17]

Section 48, Insurance Code.

[18]

Malayan Insurance v. Cruz Arnaldo, 154 SCRA 672 [1987].

[19]

Heirs of Ildefonso Cosculluela, Sr. v. Rico General Insurance Corporation, 179 SCRA 511 [1989].

[20]

Landicho v. GSIS, 44 SCRA 7 [1972]; Western Guaranty Company v. Court of Appeals, 187 SCRA 652
[1990].
[21]

44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna Insurance Co. v. Rhodes, 170 F2d 111;
Insurance Co. v. Norton, 96 U.S. 234, 24 L ed 689; Pfeiffer v. Missouri State Life Ins. Co., 174 Ark 783,
297 SW 847.
[22]

See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109, 66 ALR3d 1196;
Hunt v. Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am Jur 2d 289.
[23]

Record, p. 257.

[24]

Exhibit B, Exhibits D to D-7; Record, pp. 88-97.

(11)

Filipinas Cia de Seguros vs. Christern Huenfeld and Co. 89 Phil 54

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after
payment of corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire
policy No. 29333 in the sum of P1000,000, covering merchandise contained in a building
located at No. 711 Roman Street, Binondo Manila. On February 27, 1942, or during the
Japanese military occupation, the building and insured merchandise were burned. In due time
the respondent submitted to the petitioner its claim under the policy. The salvage goods were
sold at public auction and, after deducting their value, the total loss suffered by the respondent
was fixed at P92,650. The petitioner refused to pay the claim on the ground that the policy in
favor of the respondent had ceased to be in force on the date the United States declared war
against Germany, the respondent Corporation (though organized under and by virtue of the
laws of the Philippines) being controlled by the German subjects and the petitioner being a
company under American jurisdiction when said policy was issued on October 1, 1941. The
petitioner, however, in pursuance of the order of the Director of Bureau of Financing, Philippine
Executive Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April
19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the
purpose of recovering from the respondent the sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise were burned up after the policy issued in 1941 in
favor of the respondent corporation has ceased to be effective because of the outbreak of the
war between the United States and Germany on December 10, 1941, and that the payment
made by the petitioner to the respondent corporation during the Japanese military occupation
was under pressure. After trial, the Court of First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs. The case is now before us on appeal
by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation
became an enemy when the United States declared war against Germany, relying on English
and American cases which held that a corporation is a citizen of the country or state by and

under the laws of which it was created or organized. It rejected the theory that nationality of
private corporation is determine by the character or citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were
German subjects. This being so, we have to rule that said respondent became an enemy
corporation upon the outbreak of the war between the United States and Germany. The English
and American cases relied upon by the Court of Appeals have lost their force in view of the
latest decision of the Supreme Court of the United States in Clark vs. Uebersee Finanz
Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153,
in which the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a paper
presented to the Second International Conference of the Legal Profession held at the Hague
(Netherlands) in August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies, namely managed under the
influence of individuals or corporations, themselves considered as enemies. It was the
English courts which first the Daimler case applied this new concept of "piercing the
corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.
The United States of America did not adopt the control test during the First World War.
Courts refused to recognized the concept whereby American-registered corporations
could be considered as enemies and thus subject to domestic legislation and
administrative measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be exercised on the management of
the corporation but also by long term loans and other factual situations. For that reason,
legislation on enemy property enacted in various countries during World War II adopted
by statutory provisions to the control test and determined, to various degrees, the
incidents of control. Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during
the last war, include as did other legislations the applications of the control test and
again, as in World War I, courts refused to apply this concept whereby the enemy
character of an American or neutral-registered corporation is determined by the enemy
nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy interest in domestic corporations
and thus the application of the control test. Court decisions sanctioned such
administrative practice enacted under the First War Powers Act of 1941, and more
recently, on December 8, 1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing
with a Swiss corporation allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of the vesting power (of the

Alien Property Custodian) not to appropriate friendly or neutral assets but to reach
enemy interest which masqueraded under those innocent fronts. . . . The power of
seizure and vesting was extended to all property of any foreign country or national so
that no innocent appearing device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the
appealed decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45
Off Gaz., (Supp. 9) 299, we already held that China Banking Corporation came within the
meaning of the word "enemy" as used in the Trading with the Enemy Acts of civilized countries
not only because it was incorporated under the laws of an enemy country but because it was
controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public enemy.
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. (6 Couch, Cyc. of Ins. Law,
pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some
other specified term it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the parties, so far as not vested.
lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the insured goods were burned after December 10,
1941, and during the war, the respondent was not entitled to any indemnity under said policy
from the petitioner. However, elementary rules of justice (in the absence of specific provision in
the Insurance Law) require that the premium paid by the respondent for the period covered by
its policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of
whether the policy in question became null and void upon the declaration of war between the

United States and Germany on December 10, 1941, and its judgment in favor of the respondent
corporation was predicated on its conclusion that the policy did not cease to be in force. The
Court of Appeals necessarily assumed that, even if the payment by the petitioner to the
respondent was involuntary, its action is not tenable in view of the ruling on the validity of the
policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to by the
appellee was not unjust but the exercise of its lawful right to claim for and received the payment
of the insurance policy," and that the ruling of the Bureau of Financing to the effect that "the
appellee was entitled to payment from the appellant was, well founded." Factually, there can be
no doubt that the Director of the Bureau of Financing, in ordering the petitioner to pay the claim
of the respondent, merely obeyed the instruction of the Japanese Military Administration, as
may be seen from the following: "In view of the findings and conclusion of this office contained
in its decision on Administrative Case dated February 9, 1943 copy of which was sent to your
office and the concurrence therein of the Financial Department of the Japanese Military
Administration, and following the instruction of said authority, you are hereby ordered to pay the
claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim, however, should
be made by means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with
the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered
to pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the
premium, in Philippine currency, that should be returned by the petitioner for the unexpired term
of the policy in question, beginning December 11, 1941. Without costs. So ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

Footnotes
*

80 Phil., 604.

(12)

Grepalife vs. Court of Appeals 316 SCRA 677

SYNOPSIS

This is a petition for review under Rule 45 of the Rules of Court, assailing the decision and resolution
of the Court of Appeals dated May 17, 1994 and January 4, 1994, respectively, in CA G.R. CV No. 18341.
The appellate court affirmed in toto the judgment of the Regional Trial Court of Misamis Oriental in an
insurance claim filed by private respondent against Great Pacific Life Assurance Co.
The Supreme Court found the petition not meritorious. Contrary to petitioners 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 petitioner
had not proven nor produced any witness who could attest to Dr. Leuterios medical history. Clearly, it had
failed to establish that there was concealment made by the insured, hence it cannot refuse payment of the
claim.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; MORTGAGE REDEMPTION INSURANCE;
RATIONALE. - 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. 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. 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.
2. ID.; ID.; ID.; INSURED MAY BE REGARDED AS REAL PARTY IN INTEREST, ALTHOUGH
HE HAS ASSIGNED THE POLICY FOR PURPOSE OF COLLECTION, OR HAS ASSIGNED
AS COLLATERAL SECURITY ANY JUDGMENT HE MAY OBTAIN. - 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. 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. In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. 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. 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, the widow
of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
3. ID.; ID.; ID.; FRAUDULENT INTENT ON THE PART OF THE INSURED MUST BE
ESTABLISHED TO ENTITLE THE INSURER TO RESCIND THE CONTRACT. - 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 for 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 x x x Appellant insurance company had
failed to establish that there was concealment made by the insured, hence, 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.
APPEARANCES OF COUNSEL
GA Fortun & Associates for petitioner.
Noel S. Beja for private respondent.

Synopsis/Syllabi
SECOND DIVISION

[G.R. No. 113899. October 13, 1999]

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 widow-beneficiary, for lack of cause of action.[3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer,
diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.[4]
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr.
Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.

On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his
death.Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for Specific
Performance with Damages.[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] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. [12] we held:
Insured, being the person with whom the contract was made, is primarily the proper person to bring suit
thereon. * * * Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in
part for the benefit of another person named or unnamed, and although it is expressly made payable to
another as his interest may appear or otherwise. * * * Although a policy issued to a mortgagor is taken out
for the benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon in his
own name, especially where the 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.
Mendoza, Buena, and De Leon Jr., JJ., concur.
Bellosillo, (Chairman), J., on official leave.

[1]

Rollo, pp. 36-42.

[2]

Id. at 44.

[3]

Id. at 36.

[4]

Id. at 37.

[5]

Civil Case 10788.

[6]

Rollo, pp. 18-19.

[7]

Serrano vs. Court of Appeals, 130 SCRA 327, 335 (1984).

[8]

Ibid.

[9]

43 Am Jur 2d, Insurance Section 766; citing Hill vs. International Indem. Co. 116 Kan 109, 225 P 1056,
38 ALR 362.
[10]

Rollo, p. 12.

[11]

Id. at 180.

[12]

55 Phil. 386 (1930), citing Corpus Juris, volume 26 pages 483 et seq.

[13]

Id. at 391, citing Corpus Juris, volume 26 pages 483 at seq.

[14]

Section 181, Philippine Insurance Code.

[15]

Argente vs. West Coast Life Insurance Co., 51 Phil. 725, 731 (1928). Section 26, Philippine Insurance
Code.- A neglect to communicate that which a party knows and ought to communicate is called a
concealment.
[16]

Rollo, p. 40.

[17]

Id. at 39-40.

[18]

Ng Gan Zee vs. Asian Crusader Life Assurance Corp, 122 SCRA 461, 466 (1983)

[19]

Ibid.

[20]

Third Edition, Lohel A. Martirez, Philippine Insurance Code Annotated, p. 380, citing
Belvin vs. Connecticut Mutual Life Ins., 23 Comm. 244.
[21]

Section 183. Philippine Insurance Code.

[22]

Rollo, p. 12.

(13)

San Miguel vs. Law Union Rock Ins. 40 Phil 674

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-14300

January 19, 1920

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.
Arellano, C.J., Johnson, Araullo, Malcolm and Avancea, JJ., concur.

(14)

Saura Import vs. Phil. Ins. Co. 8 SCRA 143

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-15184

May 31, 1963

SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant,

vs.
PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL
BANK, defendants-appellees.
Saura, Magno & Associates for plaintiff-appellant.
Tolentino, Garcia and D. R. Cruz for defendant-appellee Philippine International Surety Co., Inc.
Ramon B. de los Reyes and Antonio P. Cruz for defendant-appellee Philippine National Bank.
PAREDES, J.:
Instant case was certified by the Court of Appeals to Us, it appearing that the issues involved
are purely of law.
On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil. National
Bank, a parcel of land covered by T.C.T. No. 40445 of the Registry of Deeds of Davao, issued
in its name, to secure the payment of promissory note of P27,000.00 (Exhs. P, B-2). On April
30, 1953, the mortgage was amended to guarantee an increased amount, bringing the total
mortgaged debt to P37,000.00 (Exhs. P-2, B-3). The provisions of the mortgaged contact,
pertinent to the resolution of the present case, provide as follows
2. . . . he shall insure the mortgaged property at all times against fire and earthquake for
an amount and with such company satisfactory to the Mortgagee, indorsing to the latter
the corresponding policies; he shall keep the mortgaged property in good condition,
making repairs and protecting walls that may be necessary; . . .
xxx

xxx

xxx

Erected on the land mortgaged, was a building of strong materials owned by the mortgagor
Saura Import & Export Co., Inc., which had always been covered by insurance, many years
prior to the mortgage contract. Pursuant to the requirement, Saura insured the building and its
contents with the Philippine International Surety, an insurance firm acceptable to mortgagee
Bank, for P29,000.00 against fire for the period of one year from October 2, 1954. As required
therefor, the insurance policy was endorsed to the mortgagee PNB, in a Memo which states
Loss if any, payable to the Philippine National Bank as their interest may appear, subject
to the terms, conditions and warranties of this policy (Exh. A).

The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely thirteen
(13) days after the issuance of the fire insurance policy (October 2, 1954), the insurer cancelled
the same, effective as of the date of issue (Exh. A-2). Notice of the cancellation was given to
appellee bank in writing, sent by Registered Mail and personally addressed to Fortunato
Domingo, Branch Manager of the appellee Bank's Davao Branch, and was received by the
Bank on November 8, 1954. On April 6, 1955, the building and its contents, worth P40,685.69
were burned. On April 11, 1955, Saura filed a claim with the Insurer and mortgagee Bank. Upon
the presentation of notice of loss with the PNB, Saura learned for the first time that the policy
had previously been cancelled on October 2, 1954, by the insurer, when Saura's folder in the
Bank's filed was opened and the notice of cancellation (original and duplicate) sent by the
Insurer to the Bank, was found. Upon refusal of the Insurer Philippine International Surety to pay
the amount of the insurance, Civil Case No. 26847 was filed with the Manila CFI against the
Insurer, and the PNB was later included as party defendant, after it had refused to prosecute the
case jointly with Saura Import & Export Co., Inc.
At the trial, it was established that neither the Insurer nor the mortgagee Bank informed the
plaintiff Saura of the cancellation of the policy. On April 30, 1957, the court a quo rendered the
following judgment
. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is
no proof on the counterclaim of the Philippines International Surety, the same is also
dismissed.
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
A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was
subsequently denied. The decision rendered and the resolution denying the motion for
reconsideration constitute the subject of the instant appeal by plaintiff Saura on the three
alleged errors, which converge on the correctness of the ruling, wholly dismissing the complaint
absolving both the insurance company and the bank from liability.
In the determination of liabilities of the parties herein, let us look into the general principles of
insurance, in matters of cancellations of policy by the insurer. Fire insurance policies and other
contracts of insurance upon property, in addition to the common provision for cancellation of the
policy upon request of the insured, generally provide for cancellation by the insurer by notice to
the insured for a prescribed period, which is usually 5 days, and the return of the unearned
portion of the premium paid by the insured, such provision for cancellation upon notice being
authorized by statutes in some jurisdiction, either specifically or as a provision of an adopted
standard form of policy. The purpose of provisions or stipulations for notice to the insured, is to
prevent the cancellation of the policy, without allowing the insured ample opportunity to
negotiate for other insurance in its stead. The form and sufficiency of a notice of cancellation is
determined by policy provisions. In order to form the basis for the cancellation of a policy, notice
to the insured n not be in any particular form, in the absence of a statute or policy provision
prescribing such form, and it is sufficient, so long as it positively and unequivocally indicates to
the insured, that it is the intention of the company that the policy shall cease to be binding.
Where the policy contains no provisions that a certain number of days notice shall be given, a
reasonable notice and opportunity to obtain other insurance must be given. Actual personal

notice to the insured is essential to a cancellation under a provision for cancellation by notice.
The actual receipt by the insured of a notice of cancellation is universally recognized as a
condition precedent to a cancellation of the policy by the insurer, and consequently a letter
containing notice of cancellation which is mailed by the insurer but not received by the insured,
is ineffective as cancellation (29 Am. Jur. pp. 732-741).
The policy in question (Exh. A), does not provide for the notice, its form or period. The
Insurance Law, Act No. 2427, does not likewise provide for such notice. This being the case, it
devolves upon the Court to apply the generally accepted principles of insurance, regarding
cancellation of the insurance policy by the insurer. From what has been heretofore stated,
actual notice of cancellation in a clear and unequivocal manner, preferably in writing, in view of
the importance of an insurance contract, should be given by the insurer to the insured, so that
the latter might be given an opportunity to obtain other insurance for his own protection. The
notice should be personal to the insured and not to and/or through any unauthorized person by
the policy. In the case at bar, the defendant insurance company, must have realized the
paramount importance of sending a notice of cancellation, when it sent the notice of cancellation
of the policy to the defendant bank (as mortgagee), but not to the insured with which it
(insurance company) had direct dealing. It was the primary duty of the defendant-appellee
insurance company to notify the insured, but it did not. It should be stated that the house and its
contents were burned on April 6, 1955, at the time when the policy was enforced (October 2,
1954 to October 2, 1955); and that under the facts, as found by the trial court, to which We are
bound, it is evident that both the insurance company and the appellee bank failed, wittingly or
unwittingly, to notify the insured appellant Saura of the cancellation made.
Of course, the defendant insurance company contends that it gave notice to the defendantappellee bank as mortgagee of the property, and that was already a substantial compliance with
its duty to notify the insured of the cancellation of the policy. But notice to the bank, as far
appellant herein is concerned, is not effective notice.
If a mortgage or lien exists against the property insured, and the policy contains a clause
stating that loss, if any, shall be payable to such mortgagee or the holder of such lien as
interest may appear, notice of cancellation to the mortgagee or lienholder alone is
ineffective as a cancellation of the policy to the owner of the property. (Connecticut Ins.
Co. v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743).
Upon authority of the above case, therefore, the liability of the insurance company becomes a
fact.
It may be argued that in the appeal brief of appellant, no error has been assigned against the
insurance company and no prayer is found therein asking that it be made liable. It must be
noted, however, that the case was dismissed the lower court and the main object of the appeal
is to secure a reversal of the said judgment. This Court is clothed with ample authority to review
matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is
necessary in arriving at a just decision of the case. Thus it was held:
While an assignment of error which is required by law or rule of court has been held
essential to appellate review, only those assigned will be considered, there are a number
of cases which appear to accord to the appellate court a broad discretionary power to
waive the lack of proper assignment of errors and consider errors not assigned. And an
unassigned error closely related to an error properly assigned, or upon which the

determination of the question raised by the error properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as error.
(Hernandez v. Andal, 78 Phil. 198-199).
Although assigned errors apparently appear to be directed against the appellee bank alone,
they in essence, seek a reversal of the decision on dismissal, entered by the lower court, which
in the main has for its purpose the finding of liability on the policy. In the course of our
examination of the records of the case, the decision and the errors assigned, We found that
liability attached principally the insurance company, for its failure to give notice of the
cancellation of the policy to herein appellant itself.
Because of the conclusions reached, We find it unnecessary to discuss the errors assigned
against appellee bank.
WHEREFORE, the decision appealed from is hereby reversed, and another is entered,
condemning the defendant-appellee Philippine International Surety Co., Inc., to pay Saura
Import & Export Co., Inc., appellant herein, the sum of P29,000.00, the amount involved in
Policy No. 429, subject-matter of the instant case. Without costs.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala and
Makalintal, JJ., concur.
Labrador, J., took no part.

(15)

Palileo vs. Cosio 97 Phil 919

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-7667

November 28, 1955

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.
Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L., JJ., concur.

(16)

Ong Ling sing vs. FEB Leasing 524 SCRA 333

THIRD DIVISION

VICENTE ONG LIM SING, JR.,

Petitioner,

G.R. No. 168115

Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
NACHURA, JJ.

- versus -

Promulgated:

FEB LEASING & FINANCE

CORPORATION,
Respondent.

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 itsdisposal. 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 L-200 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 isREVERSED and SET ASIDE, and a new judgment is
hereby ENTERED 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 UNDATED COMPLAINT 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 SALE INVOLVING THE PICK-UP VEHICLE IS OF NO
CONSEQUENCE.
VII
THE
HONORABLE
COURT
OF
APPEALS
FAILED
TO
TAKE
INTO CONSIDERATION THAT THE CONTRACT OF LEASE, 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 upon during 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] In Aguam 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 than two (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 of P170,494.00. 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 AcceptanceCertificates. The basic purpose 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 ANDTHAT THERE ARE 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 pick-up 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

datedMay

23,

2005 are AFFIRMED. Costs against petitioner.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

ATTESTATION
I attest that the conclusions in the above decision were reached in consultation before the case was assigned
to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Second Division

CERTIFICATION
Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is
hereby certified that the conclusions in the above decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court.

LEONARDO A. QUISUMBING
Acting Chief Justice

[1]

Rollo, pp. 72-104.

Id. at pp. 106-107.
[3]
Lease No. 27:95:20; id. at pp. 121-126.
[4]
Id. at pp. 127-128.
[5]
Id. at pp. 129-144.
[6]
Id. at p. 148.
[7]
Id. at pp. 146-155.
[8]
Id. at pp. 156-171.
[9]
Id. at p. 159.
[10]
Id. at pp. 218-220.
[11]
Id. at p. 222.
[12]
Id. at pp. 223-224.
[13]
Id. at p. 225.
[14]
Id. at p. 87.
[15]
Penned by Associate Justice Celia C. Librea-Leagogo.
[16]
An Act Amending Republic Act No. 5980, as amended, otherwise known as The Financing Company
Act.
.
[17]
Rollo, pp. 101-102.
[2]

[18]

Id. at pp. 41-42.

Cruz v. Fernando, Sr., G.R. No. 145470, December 9, 2005, 477 SCRA 182, 183.
[20]
Barnes v. Padilla, G. R. No. 160753, June 28, 2005, 461 SCRA 539.
[21]
G.R. No. 137672, May 31, 2000, 332 SCRA 789, 790.
[22]
Fabrigas v. San Francisco Del Monte, Inc., G.R. No. 152346, November 25, 2005, 476 SCRA 263.
[23]
Beltran v. PAIC Finance Corporation, G.R. No. 83113, May 19, 1992, 209 SCRA 118.
[24]
Id.
[25]
Id. at pp. 118-119.
[26]
Herrera v. Petrophil Corporation, G.R. No. L-48349, December 29, 1986, 146 SCRA 389.
[19]

[27]

Philippine Communications Satellite Corporation v. Globe Telecom, Inc., G.R. No. 147324, May 25,
2004, 429 SCRA 153.
[28]
Rollo, p. 123.
[29]

Id. at pp. 122-123.

Beltran v. PAIC Finance Corporation, supra, p. 119.
[31]
Article 1372. However general the terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon which the parties
intended to agree.
[32]
Inter-Asia Services Corp. (International) v. Court of Appeals, G.R. No. 106427, October 21, 1996, 263
SCRA 417.
[30]