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G.R. No. 124520.

August 18, 1997]


CO., INC., petitioners, vs. COURT OF APPEALS and CKS


This petition for review on certiorari under Rule 45 of the Rules of Court
seeks to set aside a decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS), as
lessor, on 5 October 1988.

2. One of the stipulations of the one (1) year lease contract states:

18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles,
goods and effects placed at any stall or store or space in the leased premises without
first obtaining the written consent and approval of the LESSOR. If the LESSEE
obtain(s) the insurance thereof without the consent of the LESSOR then the policy is
deemed assigned and transferred to the LESSOR for its own benefit; x x x [1]

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire their merchandise inside the leased premises for Five Hundred
Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter United)
without the written consent of private respondents CKS.

4. On the day that the lease contract was to expire, fire broke out inside the leased

5. When CKS learned of the insurance earlier procured by the Cha spouses (without
its consent), it wrote the insurer (United) a demand letter asking that the proceeds of
the insurance contract (between the Cha spouses and United) be paid directly to CKS,
based on its lease contract with Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.

7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a

decision ordering therein defendant United to pay CKS the amount of P335,063.11

and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as

attorneys fees and costs of suit.

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

decision dated 11 January 1996, affirming the trial court decision, deleting however

the awards for exemplary damages and attorneys fees. A motion for reconsideration
by United was denied on 29 March 1996.

In the present petition, the following errors are assigned by petitioners to

the Court of Appeals:












The core issue to be resolved in this case is whether or not the

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

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable
except for the benefit of some person having an insurable interest in the
property insured.
A non-life insurance policy such as the fire insurance policy taken by
petitioner-spouses over their merchandise is primarily a contract of
indemnity. Insurable interest in the property insured must exist at the time the
insurance takes effect and at the time the loss occurs. The basis of such

requirement of insurable interest in property insured is based on sound public

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

Republic of the Philippines



G.R. No. 114427 February 6, 1995




Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CA-G.R. SP No.
31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the
decision of the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner
Armando Geagonia against private respondent Country Bankers Insurance Corporation.

The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22
December 1989, he obtained from the private respondent fire insurance policy No. F-14622 2 for P100,000.00. The
period of the policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-
in-trade consisting principally of dry goods such as RTW's for men and women wear and other usual to
assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co.,
Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to
P392,130.50, itemized as follows:

Zenco Sales, Inc. P55,698.00

F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)


The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or
which may subsequently be effected, covering any of the property or properties consisting of stocks
in trade, goods in process and/or inventories only hereby insured, and unless such notice be given
and the particulars of such insurance or insurances be stated therein or endorsed in this policy
pursuant to Section 50 of the Insurance Code, by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under this policy shall be deemed forfeited, provided
however, that this condition shall not apply when the total insurance or insurances in force at the
time of the loss or damage is not more than P200,000.00.

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco,
Agusan del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with the
private respondent a claim under the policy. On 28 December 1990, the private respondent denied the claim because
it found that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No.
GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance
Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000.
Phils. First CEB/F 24758. 4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission (Case
No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees
and costs of litigation. He attached as Annex "AM" 6 thereof his letter of 18 January 1991 which asked for
the reconsideration of the denial. He admitted in the said letter that at the time he obtained the private
respondent's fire insurance policy he knew that the two policies issued by the PFIC were already in
existence; however, he had no knowledge of the provision in the private respondent's policy requiring him
to inform it of the prior policies; this requirement was not mentioned to him by the private respondent's
agent; and had it been mentioned, he would not have withheld such information. He further asserted that
the total of the amounts claimed under the three policies was below the actual value of his stocks at the
time of loss, which was P1,000,000.00.

In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as its
principal defense the violation of Condition 3 of the policy.

In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate Condition
3 as he had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that
it was Cebu Tesing Textiles which procured the PFIC policies without informing him or securing his
consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC policies only when he
filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid for their
premiums without informing him thereof. The Insurance Commission then decreed:

WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant
the sum of P100,000.00 with legal interest from the time the complaint was filed until fully satisfied
plus the amount of P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of
respondent is hereby dismissed.

Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in its
resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a
petition for review. The petition was docketed as CA-G.R. SP No. 31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued by
the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner herein]. The policy states that "DISCOUNT
[was] only the mortgagee of the goods.

In addition, the premiums on both policies were paid for by private respondent, not by the Tesing
Textiles which is alleged to have taken out the other insurance without the knowledge of private
respondent. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In
both invoices, Tesing Textiles is indicated to be only the mortgagee of the goods insured but the
party to which they were issued were the "DISCOUNT MART (MR. ARMANDO GEAGONIA)."

In is clear that it was the private respondent [petitioner herein] who took out the policies on the
same property subject of the insurance with petitioner. Hence, in failing to disclose the existence of
these insurances private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied
by his letter to petitioner [of 18 January 1991. The body of the letter reads as follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision requiring me to

inform your office about my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not
mention about said requirement at the time he was convincing me to insure with
you. If he only die or even inquired if I had other existing policies covering my
establishment, I would have told him so. You will note that at the time he talked
to me until I decided to insure with your company the two policies
aforementioned were already in effect. Therefore I would have no reason to
withhold such information and I would have desisted to part with my hard earned
peso to pay the insurance premiums [if] I know I could not recover anything.

Sir, I am only an ordinary businessman interested in protecting my investments.

The actual value of my stocks damaged by the fire was estimated by the Police
Department to be P1,000,000.00 (Please see xerox copy of Police Report Annex
"A"). My Income Statement as of December 31, 1989 or five months before the
fire, shows my merchandise inventory was already some P595,455.75. . . .
These will support my claim that the amount claimed under the three policies are
much below the value of my stocks lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that there were other
insurances taken on the stock-in-trade and seriously puts in question his credibility.

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He
contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of







The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of the
two insurance policies issued by the PFIC when he obtained the fire insurance policy from the private respondent,
thereby, for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded
from recovering therefrom.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18
January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus should
not have been considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of
this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral
part of the complaint. 12 It has attained the status of a judicial admission and since its due execution and
authenticity was not denied by the other party, the petitioner is bound by it even if it were not introduced
as an independent evidence. 13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two
policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in his
letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of
Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under
Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are conclusive and binding
upon this Court. 14

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18
January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied upon cannot prevail over a written admission made ante litem
motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or
original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed
twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its
incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which invariably appears in fire
insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as
the additional or "other insurance" clause and has been upheld as valid and as a warranty that no other
insurance exists. Its violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject
matter, the same interest therein, and the same risk. 17

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein
and both interests may be one policy, or each may take out a separate policy covering his interest, either at the same
or at separate times. 18 The mortgagor's insurable interest covers the full value of the mortgaged property,
even though the mortgage debt is equivalent to the full value of the property. 19 The mortgagee's insurable
interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he
is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering different insurable interests may be obtained by the
mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The
mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the
consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage
clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or a
"standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may
be attached; or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an
equitable lien upon the proceeds. 21

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may
appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a
party to the contract himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the
mortgagee. 22 This kind of policy covers only such interest as the mortgagee has at the issuing of the
policy. 23

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an
agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted, however,
that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains on the assurance that it insures him, the
policy is in fact in the form used to insure a mortgagor with loss payable clause. 25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause
which reads:

Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may
appear subject to the terms of this policy.

This is clearly a simple loss payable clause, not a standard mortgage clause.

It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety
Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances already effected, or
which may subsequently be effected covering any of the property hereby insured, and unless such
notice be given and the particulars of such insurance or insurances be stated in or endorsed on this
Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits
under this Policy shall be forfeited.

or in the 1930 case of Santa Ana vs. Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to
add or insert it in the policy, without which such policy shall be null and void, and the insured will
not be entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-
14622 does not absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the time of the loss or
damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured
and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the insured
was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not
favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for
example, by finding a waiver for such forfeiture. 29 Stated differently, provisions, conditions or exceptions in
policies which tend to work a forfeiture of insurance policies should be construed most strictly against
those for whose benefits they are inserted, and most favorably toward those against whom they are
intended to operate. 30 The reason for this is that, except for riders which may later be inserted, the
insured sees the contract already in its final form and has had no voice in the selection or arrangement of
the words employed therein. On the other hand, the language of the contract was carefully chosen and
deliberated upon by experts and legal advisers who had acted exclusively in the interest of the insurers
and the technical language employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from
ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition
applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of
the total policies obtained.

The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the
property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the
portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile
Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by several
insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC
do not cover the same interest as that covered by the policy of the private respondent, no double insurance exists.
The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private
respondent's policy.

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the
time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up
to a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale
behind the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus avert the
perpetration of fraud. When a property owner obtains insurance policies from two or more insurers in a total amount
that exceeds the property's value, the insured may have an inducement to destroy the property for the purpose of
collecting the insurance. The public as well as the insurer is interested in preventing a situation in which a fire would
be profitable to the insured. 32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No.
31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.

Costs against private respondent Country Bankers Insurance Corporation.

Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.

[G.R. Nos. 128833. April 20, 1998]


ELI D. LAO, petitioners, vs. COURT OF APPEALS and GOYU &
SONS, INC., respondents.

[G.R. No. 128834. April 20, 1998]


CHIU SUK YING alias BETTY GO, respondents.

[G.R. No. 128866. April 20, 1998]


INC. respondent.


The issues relevant to the herein three consolidated petitions revolve around the fire
loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance
Company, Inc. (MICO) in connection with the mortgage contracts entered into by and
between Rizal Commercial Banking Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was
ordered to pay actual and compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU
P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys fees. GOYUs
obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest,
surcharges, and penalties. RCBC and MICO appealed separately but, in view of the
common facts and issues involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo
Branch. After due evaluation, RCBC Binondo Branch, through its key officers,
petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for approval
by RCBCs executive committee. A credit facility in the amount of P30 million was
initially granted. Upon GOYUs application and Uys and Laos recommendation, RCBCs
executive committee increased GOYUs credit facility to P50 million, then to P90 million,
and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were registered with the
Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage
contracts, GOYU committed itself to insure the mortgaged property with an insurance
company approved by RCBC, and subsequently, to endorse and deliver the insurance
policies to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February
1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the
Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly
upon instructions of GOYU (Exhibits 1-Malayan to 9-Malayan).
On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by
fire. Consequently, GOYU submitted its claim for indemnity on account of the loss
insured against. MICO denied the claim on the ground that the insurance policies were
either attached pursuant to writs of attachments/garnishments issued by various courts
or that the insurance proceeds were also claimed by other creditors of GOYU alleging
better rights to the proceeds than the insured. GOYU filed a complaint for specific
performance and damages which was docketed at the Regional Trial Court of the
National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYUs claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the
Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other creditors,
namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the ten insurance policies be
deposited with the said court minus the aforementioned P14,938,080.23. Accordingly,
on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of
the Manila RTC.
In the meantime, another notice of garnishment was handed down by another
Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and

against the defendant, Malayan Insurance Company, Inc. and Rizal
Commercial Banking Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of
P74,040,518.58 less the amount of P50,000,000.00 which is
deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of

the delay since July 27, 1992 (ninety days after defendant
insurers receipt of the required proof of loss and notice of loss) at
the rate of twice the ceiling prescribed by the Monetary Board, on
the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount

was deposited with this Court on January 7, 1994;

2) P24,040,518.58 from July 27, 1992 up to the time when the writs
of attachments were received by defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount

of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to
pay its loan obligations with defendant RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with interest thereon at the rate
stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby
ordered to release immediately to the plaintiff the amount of P50,000,000.00
deposited with the Court by defendant Malayan, together with all the interests
earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the trial
courts findings of liability on their part. The Court of Appeals partly granted GOYUs
appeal, but sustained the findings of the trial court with respect to MICO and RCBCs
liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby
modified as follows:


a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58
less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in
court and damages by way of interest commencing July 27, 1992 until the
time Goyu receives the said amount at the rate of thirty-seven (37%) percent
per annum which is twice the ceiling prescribed by the Monetary Board.


a) To pay the plaintiff actual and compensatory damages in the amount of




a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to
pay its loan obligation with RCBC in the amount of P68,785,069.04 as of April
27, 1992 without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered
to immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60
(per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc.,
together with all the interests thereon.

(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively,
seeking review and consequent reversal of the above dispositions of the Court of
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-
48376, which case, by virtue of the Court of Appeals resolution dated August 7, 1996,
was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At
issue in said petition is RCBCs right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies
were attached in favor of Sebastian.
After a careful review of the material facts as found by the two courts below in
relation to the pertinent and applicable laws, we find merit in the submissions of RCBC
and MICO.
The several causes of action pursued below by GOYU gave rise to several related
issues which are now submitted in the petitions before us. This Court, however,
discerns one primary and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in
case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to
GOYU, the latter executed several mortgage contracts in favor of RCBC. It was
expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged
property with any of the insurance companies acceptable to RCBC. GOYU indeed
insured the mortgaged property with MICO, an insurance company acceptable to
RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to
endorse these insurance policies in favor of, and deliver them, to RCBC.Alchester
Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan;
also Exh. 51-RCBC to 59-RCBC), copies of which were delivered to GOYU, RCBC, and
MICO. However, because these endorsements do not bear the signature of any officer
of GOYU, the trial court, as well as the Court of Appeals, concluded that the
endorsements are defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separate and distinct insurable
interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the present case, although it
appears that GOYU obtained the subject insurance policies naming itself as the sole
payee, the intentions of the parties as shown by their contemporaneous acts, must be
given due consideration in order to better serve the interest of justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in
favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any particular beneficiary or payee
other than the insured had not such named payee or beneficiary been specifically
disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely
took the insurance policies from MICO, a sister company of RCBC, and not just from
any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily
disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have known
of GOYUs intention of obtaining insurance coverage in compliance with its undertaking
in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed
the policies to RCBC had it not been so directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is
constrained to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine
was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]),
to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair
dealing, good faith and justice, and its purpose is to forbid one to speak
against his own act, representations, or commitments to the injury of one to
whom they were directed and who reasonably relied thereon. The doctrine of
estoppel springs from equitable principles and the equities in the case. It is
designed to aid the law in the administration of justice where without its aid
injustice might result. It has been applied by this Court wherever and
whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a
certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine
endorsement documents for GOYUs nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU, and
the others were sent to RCBC and MICO, while the fourth copies were retained for
Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received from
Alchester the originals of these endorsements.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was
only pursuant to the stipulation in the mortgage contracts. We find such reliance to be
justified under the circumstances of the case. GOYU failed to seasonably repudiate the
authority of the person or persons who prepared such endorsements. Over and above
this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities
extended to it by RCBC. After the occurrence of the loss insured against, it was too late
for GOYU to disown the endorsements for any imagined or contrived lack of authority of
Alchester to prepare and issue said endorsements. If there had not been actually an
implied ratification of said endorsements by virtue of GOYUs inaction in this case,
GOYU is at the very least estopped from assailing their operative effects. To permit
GOYU to capitalize on its non-confirmation of these endorsements while it continued to
enjoy the benefits of the credit facilities of RCBC which believed in good faith that there
was due endorsement pursuant to their mortgage contracts, is to countenance grave
contravention of public policy, fair dealing, good faith, and justice. Such an unjust
situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this
case, the Court is bound to recognize RCBCs right to the proceeds of the insurance
policies if not for the actual endorsement of the policies, at least on the basis of the
equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides
that the proceeds of insurance shall exclusively apply to the interest of the person in
whose name or for whose benefit it is made. The peculiarity of the circumstances
obtaining in the instant case presents a justification to take exception to the strict
application of said provision, it having been sufficiently established that it was the
intention of the parties to designate RCBC as the party for whose benefit the insurance
policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of

mortgage contracts entered into between RCBC and GOYU in consideration
of and for securing GOYUs credit facilities from RCBC. The mortgage
contracts contained common provisions whereby GOYU, as mortgagor,
undertook to have the mortgaged property properly covered against any loss
by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged

property from MICO, no less than a sister company of RCBC and definitely an
acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester

Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and
RCBC. GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the
credit facilities extended by RCBC which was conditioned upon the
endorsement of the insurance policies to be taken by GOYU to cover the
mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence of
its written conformity thereto, obviously considered said endorsement to be sufficient
compliance with its obligation under the mortgage contracts since RCBC accordingly
continued to extend the benefits of its credit facilities and GOYU continued to benefit
therefrom. Just as plain too is the intention of the parties to constitute RCBC as the
beneficiary of the various insurance policies obtained by GOYU. The intention of the
parties will have to be given full force and effect in this particular case. The insurance
proceeds may, therefore, be exclusively applied to RCBC, which under the factual
circumstances of the case, is truly the person or entity for whose benefit the policies
were clearly intended.
Moreover, the laws evident intention to protect the interests of the mortgagee upon
the mortgaged property is expressed in Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received when
the obligation becomes due, and to the amount of the indemnity granted or
owing to the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of
the mortgagor, or it passes into the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of this
case, only 8 of them appear to have been subject of the endorsements prepared and
delivered by Alchester for and upon instructions of GOYU as shown below:


a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

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

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00
g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991

Expiry Date : October 19, 1992

Amount : P32,252,125.20

j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was
admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the
record shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one
of the endorsement documents, Exhibit 5-Malayan, refers to a certain insurance policy
number ACIA-F-07066, which is not among the insurance policies involved in the
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to
P89,974,488.36. Being exclusively payable to RCBC by reason of the endorsement by
Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other
creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. Section
53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies
shall be applied exclusively to the proper interest of the person for whose benefit it was
made. In this case, to the extent of GOYUs obligation with RCBC, the interest of GOYU
in the subject policies had been transferred to RCBC effective as of the time of the
endorsement. These policies may no longer be attached by the other creditors of
GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached
herein. Only the two other policies amounting to P19,646,224.92 may be validly
attached, garnished, and levied upon by GOYUs other creditors. To the extent of
GOYUs outstanding obligation with RCBC, all the rest of the other insurance policies
above-listed which were endorsed to RCBC, are, therefore, to be released from
attachment, garnishment, and levy by the other creditors of GOYU.
This brings us to the next relevant issue to be resolved, which is, the extent of
GOYUs outstanding obligation with RCBC which the proceeds of the 8 insurance
policies will discharge and liquidate, or put differently, the actual amount of GOYUs
liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial court finding that
GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus
sanctioning the trial courts exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory
Note No. 952-91) on the ground that their execution is highly questionable for not only
are these dated after the fire, but also because the signatures of either GOYU or any its
representative are conspicuously absent. Accordingly, the Court of Appeals speculated

Hence, this Court is inclined to conclude that said promissory notes were pre-
signed by plaintiff in blank terms, as averred by plaintiff, in contemplation of
the speedy grant of future loans, for the same practice of procedure has
always been adopted in its previous dealings with the bank.
(Rollo, pp. 181-

The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that the ordinary
course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts
and All, Inc., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable
instrument has the burden of proof of showing that he no longer owes the obligee any
amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private transactions, receipt of
the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU
as indicated in the testimony of Go Song Hiap when he answered the queries of the trial
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts
stated therein?
A: Yes, sir, I received the amount.
He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
Yes, Your Honor, I received all the amounts.
Indicated in the Promissory Notes?
A. The promissory Notes they did not give to me but the amount I asked which is correct,
Your Honor.
Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
A: Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received all the proceeds of
the 29 promissory notes as hereinabove quoted, GOYU also offered and admitted to
RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated March
9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the
current past due account of this company in the amount of P116,301,992.60
as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your
affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and
in the Zamboanga case at Zamboanga city, respectively, less the total of
P8,851,519.71 paid from the Seaboard and Equitable insurance companies
and other legitimate deductions. We accept and confirm this amount of
P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the
excluded promissory notes are dated after the fire. It failed to consider that said notes
had for their origin transactions consummated prior to the fire. Thus, careful attention
must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are
mere renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of by
The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are
mere renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and legal
basis for giving GOYUs judicial admission of liability in the amount of P116,301,992.60
full force and effect
It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgaged property will, nonetheless, have to
be applied as payment against GOYUs obligation. But, contrary to the lower courts
findings, payments effected by GOYU prior to January 21, 1993 should no longer be
deducted. Such payments had obviously been duly considered by GOYU, in its
aforequoted letter dated March 9, 1993, wherein it admitted that its past due account
totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90
as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21,

1993: P116,301,992.60

Broken down as follows

Principal[1] Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________
Total: 108,083,971.49 8,218,021.11[2]


1) Proceeds from

Seaboard Eastern

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89


NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the
obligation, which is the cost of money to RCBC, the primary end and the ultimate
reason for RCBCs existence and being, was duly recognized by the trial court when it
ruled favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with
RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest thereon at the
rate stipulated in the respective promissory notes(without surcharges and penalties) per
computation, pp. 14-A, 14-B, 14-C (Record, p. 479). Inexplicably, the Court of Appeals,
without even laying down the factual or legal justification for its ruling, modified the trial
courts ruling and ordered GOYU to pay the principal amount of P68,785,069.04 without
any interest, surcharges and penalties (Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment ofadditional interest, penalties, and charges, in this

Regarding defendant RCBCs commitment not to charge additional interest,

penalties and surcharges, the same does not require that it be embodied in a
document or some form of writing to be binding and enforceable. The principle
is well known that generally a verbal agreement or contract is no less binding
and effective than a written one. And the existence of such a verbal
agreement has been amply established by the evidence in this case. In any
event, regardless of the existence of such verbal agreement, it would still be
unjust and inequitable for defendant RCBC to charge the plaintiff with
surcharges and penalties considering the latters pitiful situation. (Emphasis

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate
and distinct from that of surcharges and penalties. What may justify a court in not
allowing the creditor to charge surcharges and penalties despite express stipulation
therefor in a valid agreement, may not equally justify non-payment of interest. The
charging of interest for loans forms a very essential and fundamental element of the
banking business, which may truly be considered to be at the very core of its existence
or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeals outright deletion of the
payment of interest as agreed upon in the respective promissory notes. This constitutes
gross error.
For the computation of the interest due to be paid to RCBC, the following rules of
thumb laid down by this Court inEastern Shipping Lines, Inc. vs. Court of Appeals (234
SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date of
the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision (pp.470
and 471, Record) such agreed interest rates must be followed.This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYUs
pitiful situation must be taken into account. We do not agree, however, that payment of
any amount as surcharges and penalties should altogether be deleted. Even assuming
that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun
Bing, may have relayed its assurance for assistance to GOYU immediately after the
occurrence of the fire, we cannot accept the lower courts finding that RCBC had
thereby ipso facto effectively waived collection of any additional interests, surcharges,
and penalties from GOYU. Assurances of assistance are one thing, but waiver of
additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake
of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the
Civil Code. Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty,

shall be equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable,

the Court must consider the circumstances of each case. It should be stressed that the
Court will not make any sweeping ruling that surcharges and penalties imposed by
banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be
totally just and equitable in another.This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which GOYU found
itself after the occurrence of the fire, the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous
and unconscionable. The Court tempers these rates to 2% and 3%,
respectively. Furthermore, in the light of GOYUs offer to pay the amount of
P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we
find it more in keeping with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.
Given the factual milieu spread hereover, we rule that it was error to hold MICO
liable in damages for denying or withholding the proceeds of the insurance claim to
Firstly, by virtue of the mortgage contracts as well as the endorsements of the
insurance policies, RCBC has the right to claim the insurance proceeds, in substitution
of the property lost in the fire. Having assigned its rights, GOYU lost its standing as the
beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and
withholding payment of insurance proceeds, the delay must be wanton, oppressive, or
malevolent (Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is generally
agreed, however, that an insurer may in good faith and honesty entertain a difference of
opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless the evidence and circumstances
show that such refusal was willful and without reasonable cause as the facts appear to
a reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53,
70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep
307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case
at bar does not show that MICO wantonly and in bad faith delayed the release of the
proceeds. The problem in the determination of who is the actual beneficiary of the
insurance policies, aggravated by the claim of various creditors who wanted to partake
of the insurance proceeds, not to mention the importance of the endorsement to RCBC,
to our mind, and as now borne out by the outcome herein, justified MICO in withholding
payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that
RCBC cannot avail itself of two simultaneous remedies in enforcing the claim of an
unpaid creditor, one for specific performance and the other for foreclosure. In doing so,
said the appellate court, the second action is deemed barred, RCBC having split a
single cause of action (Rollo, pp. 195-199). The Court of Appeals was too
accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV
No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court
of Appeals pre-empted the resolution of said foreclosure case which is not before
it. This is plain reversible error if not grave abuse of discretion.
As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely set
aside the questioned orders of the trial court for having been issued by the
latter with grave abuse of discretion. In likewise enjoining permanently herein
petitioner from entering in and interfering with the use or occupation and
enjoyment of petitioners (now private respondent) residential house and
compound, the appellate court in effect, precipitately resolved with finality the
case for injunction that was yet to be heard on the merits by the lower
court. Elevated to the appellate court, it might be stressed, were mere
incidents of the principal case still pending with the trial court. In Municipality
of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court
of Appeals would have no jurisdiction in a certiorari proceeding involving an
incident in a case to rule on the merits of the main case itself which was not
on appeal before it.

(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of RCBC
over the MICO insurance policies. It is basic and fundamental that the first mortgagee
has superior rights over junior mortgagees or attaching creditors (Alpha Insurance &
Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs.
Gonzales Diaz, 52 Phil. 271 [1928]).
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution
of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby
REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No.

93-65442 before Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial

Banking Corporation the proceeds of the insurance policies in the amount of
P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc.,
Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per O.R. No.

3. Ordering the Clerk of Court to release the amount of P50,505,594.60

including the interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial
Banking Corporation in the principal amount of P107,246,887.90, with interest
at the respective rates stipulated in each promissory note from January 21,
1993 until finality of this judgment, and surcharges at 2% and penalties at 3%
from January 21, 1993 to March 9, 1993, minus payments made by Malayan
Insurance Company, Inc. and the proceeds of the amount deposited with the
trial court and its earned interest. The total amount due RCBC at the time of
the finality of this judgment shall earn interest at the legal rate of 12% in lieu of
all other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court
in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results
herein arrived at. Respondent Sebastians right as attaching creditor must yield to the
preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance
policies as first mortgagee.
Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.

Republic of the Philippines



G.R. No. 147839 June 8, 2006





Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the Court of Appeals
(CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the Regional Trial Court,
Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated
April 11, 2001 which denied petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the
local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately obtained
from respondent fire insurance policies with book debt endorsements. The insurance policies provide for coverage on
"book debts in connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines."2 The policies defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the merchandise sold
and delivered by the Insured which are outstanding at the date of loss for a period in excess of six (6)
months from the date of the covering invoice or actual delivery of the merchandise whichever shall first

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of every
calendar month all amount shown in their books of accounts as unpaid and thus become receivable item
from their customers and dealers. x x x4


Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano Superstore
Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the items lost or destroyed
in the fire were stocks of ready-made clothing materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and LSPI filed
with respondent their claims under their respective fire insurance policies with book debt endorsements; that as of
February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials with
IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC and LSPI and,
by virtue thereof, respondent was subrogated to their rights against petitioner; that respondent made several
demands for payment upon petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable because the
property covered by the insurance policies were destroyed due to fortuities event or force majeure; that respondent's
right of subrogation has no basis inasmuch as there was no breach of contract committed by it since the loss was due
to fire which it could not prevent or foresee; that IMC and LSPI never communicated to it that they insured their
properties; that it never consented to paying the claim of the insured. 6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the fire was
purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner; that it has not been
established that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is further agreed
that merely for purpose of securing the payment of purchase price, the above-described merchandise remains the
property of the vendor until the purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods
and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside the
decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is
entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured Inter
Capitol Marketing Corporation, plus legal interest from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi
Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and cost of
the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso contained in the sales
invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the loss under the principle of res perit domino;
that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid account
and as such the obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that by
subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with book debt
endorsements, what was insured was the vendor's interest as a creditor. 11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11, 2001. 13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:




Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be over credit
since an insurance "on credit" belies not only the nature of fire insurance but the express terms of the policies; that it
was not credit that was insured since respondent paid on the occasion of the loss of the insured goods to fire and not
because of the non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over credit,
there was no loss as the accounts were not yet due since no prior demands were made by IMC and LSPI against
petitioner for payment of the debt and such demands came from respondent only after it had already paid IMC and
LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI assumed
the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no valid
insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner upon delivery of
the goods; that petitioner was not privy to the insurance contract or the payment between respondent and its insured
nor was its consent or approval ever secured; that this lack of privity forecloses any real interest on the part of
respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials was transferred upon
delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors who stand to suffer direct
pecuniary loss from its destruction by fire; that petitioner is liable for loss of the ready-made clothing materials since it
failed to overcome the presumption of liability under Article 1265 16 of the Civil Code; that the fire was caused through
petitioner's negligence in failing to provide stringent measures of caution, care and maintenance on its property
because electric wires do not usually short circuit unless there are defects in their installation or when there is lack of
proper maintenance and supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing
to pay respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation expenses
and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the CA is limited
to reviewing questions of law which involves no examination of the probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or weigh evidence
all over again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme Court. 20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by this
Court, such as: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the CA went beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the
CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred in
construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI since such
insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still appearing in the Book of Account
of the Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is it provided in the questioned
insurance policies that the subject of the insurance is the goods sold and delivered to the customers and dealers of
the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any
alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the
contract.25 Thus, what were insured against were the accounts of IMC and LSPI with petitioner which remained
unpaid 45 days after the loss through fire, and not the loss or destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by stipulating
in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment of the purchase price
the above described merchandise remains the property of the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to
the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual
delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract
and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his
obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied)


Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the
buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of the
value of the delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title,
but whether insured has substantial economic interest in the property. 28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal,
or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify
the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in: (a)
an existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or
possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite to the
existence of such an interest, it is sufficient that the insured is so situated with reference to the property that he would
be liable to loss should it be injured or destroyed by the peril against which it is insured.29 Anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its destruction. 30 Indeed, a
vendor or seller retains an insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor's lien.31In this case, the insurable
interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of
the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of the Civil Code is
misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for petitioner's
accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA, where the obligation consists in the payment of money, the failure
of the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his liability.33 The
rationale for this is that the rule that an obligor should be held exempt from liability when the loss occurs thru a
fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation." If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or physical segregation from all others of
the same class, the loss or destruction of anything of the same kind even without the debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation. 35This rule is based on the principle that the
genus of a thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is not
excused by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What is
relevant here is whether it has been established that petitioner has outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show that petitioner
has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing
payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly identified, presented and marked as exhibits in court.
The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as insurer and IMC
as the insured, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon
payment by the insurance company of the insurance claim.41 Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for
the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight can be
given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager, Stephen S.
Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's
products in the amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in
evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI may have against
petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the amount
of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and Resolution dated
April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATIONthat the
order to pay the amount of P535,613.00 to respondent is DELETED for lack of factual basis.

No pronouncement as to costs.



Associate Justice


Chief Justice

(On Leave)
Associate Justice Asscociate Justice

Associate Justice


Pursuant to Section 13, Article VIII of the Constitution, 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's Division.

Chief Justice