G.R. No.

147839 June 8, 2006 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
GAISANO CAGAYAN, INC. Petitioner,
breach of contract committed by it since the loss was due to fire which it could not prevent or
vs.
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
consented to paying the claim of the insured.6

DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 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.
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.

The factual background of the case is as follows: 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:
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 WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a
and LSPI separately obtained from respondent fire insurance policies with book debt endorsements. new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
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
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to
anywhere in the Philippines."2 The policies defined book debts as the "unpaid account still
the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this
demand until fully paid;
Policy."3 The policies also provide for the following conditions:

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to

1. Warranted that the Company shall not be liable for any unpaid account in respect of the
the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully
merchandise sold and delivered by the Insured which are outstanding at the date of loss
paid.
for a period in excess of six (6) months from the date of the covering invoice or actual
delivery of the merchandise whichever shall first occur.
With costs against the defendant-appellee.
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 SO ORDERED.10
and thus become receivable item from their customers and dealers. x x x4
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
xxxx 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
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
of the thing at the time the loss under the principle of res perit domino; that petitioner's obligation
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.
to IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid account and as
Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials sold
such the obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that
and delivered by IMC and LSPI.
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
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
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale
April 11, 2001.13
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 Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
demands for payment upon petitioner but these went unheeded. 5
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS
ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
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.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT. 14
Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to
be over credit since an insurance "on credit" belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit that was insured since respondent paid on the
occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of
any obligation; that, even if the insurance is deemed as one over credit, there was no loss as the
accounts were not yet due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only after it had already paid IMC
and LSPI under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and
LSPI assumed the risk of loss when they secured fire insurance policies over the goods.
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.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent
Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to
as no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to
read into it any alleged intention of the parties, the terms are to be understood literally just as they
petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or the
appear on the face of the contract.25 Thus, what were insured against were the accounts of IMC and
payment between respondent and its insured nor was its consent or approval ever secured; that
LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or
this lack of privity forecloses any real interest on the part of respondent in the obligation to pay,
destruction of the goods delivered.
limiting its interest to keeping the insured goods safe from fire.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
For its part, respondent counters that while ownership over the ready- made clothing materials was
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as
securing the payment of the purchase price the above described merchandise remains the property
creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is
of the vendor until the purchase price thereof is fully paid."26
liable for loss of the ready-made clothing materials since it failed to overcome the presumption of
liability under Article 126516 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 The Court is not persuaded.
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
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
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
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
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it
goods are at the buyer's risk whether actual delivery has been made or not, except that:
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 (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
of the appellate court are generally conclusive on the Supreme Court. 20 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)
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; xxxx
(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
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of
beyond the issues of the case, or its findings are contrary to the admissions of both the appellant
loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
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
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, 22"38 show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00.
where ownership is the basis for consideration of who bears the risk of loss, in property insurance, Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation
one's interest is not determined by concept of title, but whether insured has substantial economic receipt executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these
interest in the property.28 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
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether
subrogation accrues simply upon payment by the insurance company of the insurance
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the
Code which provides:
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. 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
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a
the person who has violated the contract. x x x
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 Petitioner failed to refute respondent's evidence.
the peril against which it is insured.29 Anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction. 30Indeed, a vendor or seller
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
retains an insurable interest in the property sold so long as he has any interest therein, in other
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from
words, so long as he would suffer by its destruction, as where he has a vendor's lien.31 In this case,
petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's
the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of
unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00
Account 45 days after the time of the loss covered by the policies.
in the fire that razed petitioner's building on February 25, 1991.

The next question is: Is petitioner liable for the unpaid accounts?
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
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is
117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) fatal to petitioner's case for recovery of the amount of P535,613.00.
of the Civil Code.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the respondent is DELETED for lack of factual basis.
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
No pronouncement as to costs.
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 SO ORDERED.
obligation is pecuniary in nature.34

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

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this
case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.
 [G.R. No. 114427. February 6, 1995.]
ARMANDO GEAGONIA, Petitioner, v. COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, Respondents.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE; "OTHER INSURANCE" CLAUSE AS A CONDITION; ALLOWED TO
PREVENT AN INCREASE IN THE MORAL HAZARD. — 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. 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
conclusive 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 nor proscribed by law. Its incorporation in
the policy is allowed by Section 75 of the Insurance Code 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. However, in
order to constitute a violation, the other insurance must be upon the same subject matter, the same
interest therein, and the same risk.
2. ID.; ID.; ID.; CONCEPT; GENERAL INSURANCE AND SURETY CORP. v. NG HUA (106 PHIL. 1117);
NOT APPLICABLE IN CASE AT BAR. — It must, however, be underscored that unlike the "other
insurance" clauses involved in General Insurance and Surety Corp. v. Ng Hua (106 Phil. 1117) or in
Pioneer Insurance & Surety Corp. v. Yap, which read: "The insured shall give notice to the company
of any insurance 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 v. Commercial Union Assurance Co. (55 Phil 329, 334 [1930]) 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 damage is not more than
P200,000.00."cralaw virtua1aw library
3. ID.; ID.; CONTRACT THEREOF MUST BE LIBERALLY CONSTRUED. — 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 possible to construe
the policy in a manner which would permit recovery, as, for example, by finding a waiver for such
forfeiture. 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. The
reason for this it 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.
4. ID.; ID.; INSURABLE INTEREST; EXTENT THEREOF BY MORTGAGEE AND MORTGAGOR; RULE. —
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable
interest therein and both interests may be covered by one policy, or each may take out a separate
policy covering his interest, either at the same or at separate times. 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. 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.
Thus, separate insurances covering different insurable interests may be obtained by the mortgagor
and the mortgagee.
5. ID.; ID.; RULE WHEN A MORTGAGOR OBTAINED THEREOF FOR THE BENEFIT OF 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. 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 itself. Hence, any act of the mortgagor which defeats his right will also
defeat the right of the mortgagee. This kind of policy covers only such interest as the mortgagee has
at the issuing of the policy. 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. 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 a policy on the assurance that it insures him, the policy is
in fact in the form used to insure a mortgagor with loss payable clause.
6. ID.; ID.; DOUBLE INSURANCE; DOES NOT EXIST WHEN TWO (2) POLICIES DO NOT COVER THE
SALE INTEREST; CASE AT BAR. — 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 to 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 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.
DECISION
DAVIDE, JR., J.:
For 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." chanroblesvirtuallawlibrary
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:chanrob1es virtual 1aw library
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
========
P392,130.50
The policy contained the following condition:jgc:chanrobles.com.ph
"3. 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 or properties consisting of stocks
in trade, goods in process and/or inventories only hereby insured, and unless 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." chanroblesvirtuallawlibrary
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 stocks-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:jgc:chanrobles.com.ph
"MORTGAGEE: 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:chanrob1es virtual 1aw library
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 "M" 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 so
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:chanroblesvirtuallawlibrary
"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."cralaw virtua1aw library
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:jgc:chanrobles.com.ph
"It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner herein]. The policy states that ‘DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)’ was assured and that ‘TESING TEXTILES’ [was] only the
mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by the Tesing
Textiles which is alleged to have taken out the other insurances 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).’
It 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. 14622. . . .
Indeed private respondent’s allegation of lack of knowledge of the previous insurances is belied by
his letter to petitioner [of 18 January 1991. The body of the letter reads as
follows:]chanroblesvirtuallawlibrary
x x x admission by the petitioner in his letter to the private respondent of 18 January 1991, which was
‘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 did 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 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 under the three policies are much below the value of my
stocks lost.
x x x
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." chanroblesvirtuallawlibrary
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 of excess of jurisdiction:jgc:chanrobles.com.ph
"A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A
QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND
WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS
EVIDENCE DURING THE HEARING OR TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE
RESPONDENT."cralaw virtua1aw library
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. 3340 as Annex "M" thereof and made an 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
quoted in the challenged decision of the Court of Appeals. These divergent findings of facts
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.chanroblesvirtuallawlibrary
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 the 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 covered by 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 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 itself. 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 a
policy on the assurance that it insures him, the policy is in fact in the form used to insure a
mortgagor with loss payable clause.25cralaw:red
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a
mortgage clause which reads:chanroblesvirtuallawlibrary
"Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear
subject to the terms of the policy."cralaw virtua1aw library
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. v. Ng Hua 26 or in Pioneer Insurance & Surety Corp. v. Yap, 27 which
read:jgc:chanrobles.com.ph
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.chanroblesvirtuallawlibrary
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

"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."cralaw virtua1aw library
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.

or in the 1930 case of Santa Ana v. Commercial Union Assurance Co. 28 which provided "that any SO ORDERED.
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." chanroblesvirtuallawlibrary

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
 G.R. No. 128833 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, Petitioners,
vs. COURT OF APPEALS and GOYU & SONS, INC., Respondents.
G.R. No. 128834 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, Petitioners, vs. COURT OF APPEALS, ALFREDO
C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU
SUK YING alias BETTY GO, Respondents.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., Petitioners, vs. GOYU & SONS, INC. respondent.
MELO, J.:
The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of
respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in
connection with the mortgage contracts entered into by and between Rizal Commercial Banking
Corporation (RCBC) and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58,
plus 37% interest per annum commending July 27, 1992. RCBC was ordered to pay actual and
compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable
to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorney's fees. GOYU's
obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges,
and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues
involved, their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due
evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao,
recommended GOYU's application for approval by RCBC's executive committee. A credit facility in
the amount of P30 million was initially granted. Upon GOYU's application and Uy's and Lao's
recommendation, RCBC's executive committee increased GOYU's credit facility to P50 million, then
to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two
chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela,
Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the
mortgaged property with an insurance company approved by RCBC, and subsequently, to endorse
and deliver the insurance polices to RCBC.
GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester
Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies,
issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-
Malayan" to "9-Malayan").
On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently,
GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the
claim on the ground that the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance proceeds were also
claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU
filed a complaint for specific performance and damages which was docketed at the Regional Trial
Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied GOYU's
claims.
In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of
Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian,
and Philippine Trust Company obtained their respective writs of attachments from various courts,
covering an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten
insurance policies be deposited with the said court minus the aforementioned P14,938,080.23.
Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of
the Manila RTC.
In the meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as
follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by was of interest for the duration of the delay since July 27, 1992
(ninety days after defendant insurer's receipt of the required proof of loss and notice of loss) at the
rate of twice the ceiling prescribed by the Monetary Board, on the following amounts:
1) P50,000,000.00 - from July 27, 1992 up to the time said amount was deposited with this Court on
January 7, 1994;
2) P24,040,518.58 - from July 27, 1992 up to the time when the writs of attachments were received
by defendant Malayan;
2. For defendant Rizal Commercial Banking Corporation:
a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally, the following amounts:
1) P1,000,000.00 as exemplary damages;
2) P1,000,000.00 as, and for, attorney's fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with
defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the
rate stipulated in the respective promissory notes (without surcharges and penalties) per
computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interest earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the
amount awarded in its favor. MICO and RCBC disputed the trial court's findings of liability on their
part. The Court of Appeals party granted GOYU's appeal, but sustained the findings of the trial court
with respect to MICO and RCBC's liabilities, thusly:
WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:
a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven
(37%) percent per annum which is twice the ceiling prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION;
a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING
CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:
1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.
4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation
with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges
and penalties.
The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately
release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it
by Malayan Insurance Co., Inc., together with all the interests thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and
consequent reversal of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case,
by virtue of the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R.
No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBC's right to
intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where
the subject insurance policies were attached in favor of Sebastian.
After a careful reviews of the material facts as found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the submission of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise to several related issues which are
now submitted in the petitions before us. This Court, however, discerns one primary and central
issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies
taken by GOYU, the mortgagor, in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage
contracts that GOYU shall insure the mortgaged property with any of the insurance companies
acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance
company acceptable to RCBC. Bases on their stipulations in the mortgage contracts, GOYU was
supposed to endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester
Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject insurance
policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-
RCBC" to "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 separated and distinct insurable interests in the
same mortgaged property, such that each one of them may insure the same property for his own
sole benefit. There is no question that GOYU could insure the mortgaged property for its own
exclusive benefit. In the present case, although it appears that GOYU obtained the subject insurance
policies naming itself as the sole payee, the intentions of the parties as shown by their
contemporaneous acts, must be given due consideration in order to better serve the interest of
justice and equity.
It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC.
The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific
insurance policy in favor of any particular beneficiary or payee other than the insured had not such
named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that
GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC,
and not just from any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by
GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of
obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with
RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so
directed by GOYU.
On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in
favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine
National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:
The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied thereon.
The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed
to aid the law in the administration of justice where without its aid injustice might result. It has
been applied by this Court wherever and whenever special circumstances of a case so demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she
prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine
insurance policies in favor of RCBC. The original copies of each of these nine endorsement
documents were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth copies
were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has not denied having received
from Alchester the originals of these documents.
RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to
the stipulation in the mortgage contracts. We find such reliance to be justified under the
circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or
persons who prepared such endorsements. Over and above this, GOYU continued, in the meantime,
to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss
insure against, it was too late for GOYU to disown the endorsements for any imagined or contrived
lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually
an implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the
very least estopped from assailing their operative effects. To permit GOYU to capitalize on its non-
confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities of
RCBC which believed in good faith that there was due endorsement pursuant to their mortgage
contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice.
Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in
this case, the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if not
for the actual endorsement of the policies, at least on the basis of the equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of
insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it
is made. The peculiarity of the circumstances obtaining in the instant case presents a justification to
take exception to the strict application of said provision, it having been sufficiently established that
it was the intention of the parties to designate RCBC as the party for whose benefit the insurance
policies were taken out. Consider thus the following:
1. It is undisputed that the insured pieces of property were the subject of mortgage contracts
entered into between RCBC and GOYU in consideration of and for securing GOYU's credit facilities
from RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor,
undertook to have the mortgaged property properly covered against any loss by an insurance
company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no
less than a sister company of RCBC and definitely an acceptable insurance company to RCBC.
3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc.,
and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the
validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities
extended by RCBC which was conditioned upon the endorsement of the insurance policies to be
taken by GOYU to cover the mortgaged properties.
This Court can not over stress the fact that upon receiving its copies of the endorsement documents
prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously
considered said endorsement to be sufficient compliance with its obligation under the mortgage
contracts since RCBC accordingly continued to extend the benefits of its credits facilities and GOYU
continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as
the beneficiary of the various insurance policies obtained by GOYU. The intention of the parties will
have to be given full force and effect particular case. The insurance proceeds may, therefore, be
exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person
or entity for whose benefit the polices were clearly intended.
Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged
property is expressed in Article 2127 of the Civil Code which states:
Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the mortgagor, or it passes into
the hands of a third person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them
appear to have been subject of the endorsements prepared and delivered by Alchester for and upon
instructions of GOYU as shown below:
INSURANCE POLICY PARTICULARS ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92
b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan" results reached herein. Only the two other policies amounting to P19,646,224.92 may be validly
Issue Date January 18, 1992 attached, garnished, and levied upon by GOYU's other creditors. To the extent of GOYU's outstanding
Expiry Date (not legible) obligation with RCBC, all the rest of the other insurance policies above-listed which were endorsed
Amount P6,603,586.43 to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other
creditors of GOYU.
e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"
Issue Date January 18, 1992 This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation
Expiry Date February 9, 1993 with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put
Amount P9,457,972.76 differently, the actual amount of GOYU's liability to RCBC.

f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan" The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total
Issue Date January 13, 1992 obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's
Expiry Date January 13, 1993 exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory
Amount P24,750,000.00 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
g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"
speculated thusly:
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00 . . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff
in bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the
same practice of procedure has always been adopted in its previous dealings with the bank.
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992 (Rollo, pp. 181-182.)
Amount P10,000,000.00
The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that
i. Policy Number F-114-07402 Exhibit "8-Malayan" the documents are spurious, for it is presumed that the ordinary course of business had been
Issue Date September 16, 1991 followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The
Expiry Date October 19, 1992 obligor and not the holder of the negotiable instrument has the burden of proof of showing that he
Amount P32,252,125.20 no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).

j. Policy Number F-114-07525 Exhibit "9-Malayan" Even casting aside the presumption of regularity of private transactions, receipt of the loan
Issue Date November 20, 1991 amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the
Expiry Date December 5, 1992 testimony of Go Song Hiap when he answered the queries of the trial court.
Amount P6,603,586.43
ATTY. NATIVIDAD
(pp. 456-457, Record; Folder of Exhibits for MICO.)
Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated
Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's therein?
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
A: Yes, sir, I received the amount.
"5-Malayan", refers to a certain insurance policy number ACIA-F-07066, which is not among the
insurance policies involved in the complaint.
COURT
The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
excessively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?
ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be
attached by GOYU's other creditors up to the extent of the GOYU's outstanding obligation in RCBC's
WITNESS:
favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies
shall be applied exclusively to the proper interest of the person for whose benefit it was made. In
this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the subject policies Yes, Your Honor, I received all the amounts.
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.
COURT
128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the
Indicated in the Promissory Notes? Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
WITNESS
Broken down as follows:
A. The promissory Notes they did not give to me but the amount I asked which is correct, Your
Honor. Principal 1 Interest

COURT Regular 80,535,946.32

FDU 27,548,025.17
____________
Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?
Total 108,083,971.49 8,218,021.11 2

A Yes, Your Honor.

LESS:

(tsn, Jan. 14, 1994, p. 26.)

1) Proceeds from
Seaboard Eastern
Furthermore, aside from its judicial admission of having received all the proceeds of the 29 Insurance Company 6,095,145.81
promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation
be fixed at P116,301,992.60 as shown in its letter date March 9, 1993, which pertinently reads:
2) Proceeds from
Equitable Insurance
We wish to inform you, therefore that we are ready and willing to pay the current past due account Company 2,756,373.00
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
3) Payment from
in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the
foreign department
Seaboard and Equitable insurance companies and other legitimate deductions. We accept and
negotiation: 203,584.89
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 GOYU.
The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The
proceeds of the loan represented by these promissory notes were admittedly received by GOYU.
There is ample factual and legal basis for giving GOYU's judicial admission of liability in the amount
of P116,301,992.60 full force and effect.
9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90
The need for the payment of interest due the principal amount of the obligation, which is the cost of
money to RCBC, the primary end and the ultimate reason for RCBC's existence and being, was duly
recognized by the trial court when it ruled favorably on RCBC's counterclaim, ordering GOYU "to
pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27, 1992, with
interest thereon at the rate stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479). Inexplicably, the Court of
Appeals, without even laying down the factual or legal justification for its ruling, modified the trial
court's ruling and ordered GOYU "to pay the principal amount of P68,785,069.04 without any
interest, surcharges and penalties" (Rollo, p. 200).

It should, however, be quickly added that whatever amount RCBC may have recovered from the
other insurers of the mortgage property will, nonetheless, have to be applied as payment against
GOYU's obligation. But, contrary to the lower courts' findings, payments effected by GOYU prior to
January 21, 1993 should no longer be deducted. Such payments had obviously been duly considered
by GOYU, in its aforequoted letter date March 9, 1993, wherein it admitted that its past due account
totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21,
1993, to wit:
It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted
the payment of additional interest, penalties, and charges, in this manner:
Regarding defendant RCBC's commitment not to charge additional interest, penalties and
surcharges, the same does not require that it be embodied in a document or some form of writing to
be binding and enforceable. The principle is well known that generally a verbal agreement or
contract is no less binding and effective than a written one. And the existence of such a verbal
agreement has been amply established by the evidence in this case. In any event, regardless of the
existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to
charge the plaintiff with surcharges and penalties considering the latter's pitiful situation. (Emphasis
supplied).
 (Record, p. 476)
The essence or rationale for the payment of interest or cost of money is separate and distinct from
that of surcharges and penalties. What may justify a court in not allowing the creditor to charge
surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally
justify non-payment of interest. The charging of interest for loans forms a very essential and
fundamental element of the banking business, which may truly be considered to be at the very core
of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment
of interest as agreed upon in the respective promissory notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down
by this Court in Eastern Shipping Lines, Inc. v. Court of Appeals (234 SCRA 78 [1994]), shall apply, to
wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the actual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of interest owing on each specific promissory note as
summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed
interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation
must be taken into account. We do not agree, however, that payment of any amount as surcharges
and penalties should altogether be deleted. Even assuming that RCBC, through its responsible
officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance
to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts' finding
that RCBC had thereby ipso facto effectively waived collection of any additional interests,
surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of
additional interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227
thereof provides:
Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should be stressed that the Court will not make any
sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans
extended by them are generally iniquitous and unconscionable. What may be iniquitous and
unconscionable in one case, may be totally just and equitable in another. This provision of law will
have to be applied to the established facts of any given case. Given the circumstance under which
GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and
unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the
light of GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit
"BB"), which RCBC refused, we find it more in keeping with justice and equity for RCBC not to
charge additional interest, surcharges, and penalties from that time onward.
Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for
denying or withholding the proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies,
RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the fire.
Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith
Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer
may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the
statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the
evidence and circumstances show that such refusal was willful and without reasonable cause as the
facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d]
53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs.
Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO
wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of
who is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors
who wanted to partake of the insurance proceeds, not to mention the importance of the
endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO in
withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself
of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific
performance and the other for foreclosure. In doing so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals
was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure
suit is still pending appeal before the same Court of Appeals in CA G.R. CV No. 46247, the case
having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals
pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible
error if not grave abuse of discretion.
As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):
earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn
interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.
The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV
48376 is DISMISSED for being moot and academic in view of the results herein arrived at.
Respondent Sebastian's right as attaching creditor must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.
SO ORDERED.

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

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial
Court, since it has been determined that RCBC has the right to the insurance proceeds, the subject
matter of intervention is rendered moot and academic. Respondent Sebastian must, however, yield
to the preferential right of RCBC over the MICO insurance policies. It is basic and fundamental that
the first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha
Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs.
Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16,
1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new
one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3
of the Manila Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation
the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster
Toplis & Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of P50,505,594.60 (per
O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests
earned to Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation
in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each
promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and
penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan
Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its
 [G.R. No. 124520. August 18, 1997] In the present petition, the following errors are assigned by petitioners to the Court of Appeals:

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., Petitioners, I
v. COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, Respondents.
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION
. IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO
RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY
DECISION
II
PADILLA, J.:
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF LEASE
ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE PROVISION
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
THEREIN TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED
decision of respondent Court of Appeals.
OUT IN FAVOR OF PETITIONER

The undisputed facts of the case are as follows:

III

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE
private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.
POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE
INSURANCE LAW
2. One of the stipulations of the one (1) year lease contract states:
IV
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
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE
consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the
POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION
consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own
AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE RESPONDENT
benefit; x x x1chanroblesvirtuallawlibrary
CORPORATION.2chanroblesvirtuallawlibrary

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the
by fire their merchandise inside the leased premises for Five Hundred Thousand (P500,000.00)
lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that any
with the United Insurance Co., Inc. (hereinafter United) without the written consent of private
fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased
respondents CKS.
premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the
prior written of the latter.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it contrary to law, morals, good customs, public order or public policy. 3chanroblesvirtuallawlibrary
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
Sec. 18 of the Insurance Code provides:
spouses.

Sec. 18. No contract or policy of insurance on property shall be enforceable except for
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.
the benefit of some person having an insurable interest in the property insured.

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.
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. 4 The basis of such
requirement of insurable interest in property insured is based on sound public policy: to prevent a
person from taking out an insurance policy on property upon which he has no insurable interest
and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract
of insurance is a mere wager which is void under Section 25 of the Insurance Code, which provides:
 SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured, or that the
policy shall be received as proof of such interest, and every policy executed by way of
gaming or wagering, is void.

In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code
which provide.

Section 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof."

Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary
of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable
interest over said merchandise remains with the insured, the Cha spouses. The automatic
assignment of the policy to CKS under the provision of the lease contract previously quoted is void
for being contrary to law and/or public policy. The proceeds of the fire insurance policy thus
rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer
(United) cannot be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who
has no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease contract in that Cha spouses obtained
a fire insurance policy over their own merchandise, without the consent of CKS, is a separate and
distinct issue which we do not resolve in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo
Cha and Stella Uy-Cha.

SO ORDERED.
 [G.R. No. L-20853. May 29, 1967.]
BONIFACIO BROS., INC., ET AL., Plaintiffs-Appellants, v. ENRIQUE MORA, ET AL., Defendants-
Appellees.
G. Magsaysay, for Plaintiffs-Appellants.
Abad Santos & Pablo for defendant-appellee H. E. Reyes, Inc.
J. P. Santilla & A. D. Hidalgo, Jr. for other Defendant-Appellee.
SYLLABUS
1. CONTRACTS; CONTRACTS TAKE EFFECT ONLY BETWEEN THE PARTIES THERETO; EXCEPTION.
— It is fundamental that contracts take effect only between the parties thereto, except on some
specific instances provided by law where the contract contains some stipulation in favor of a third
person (Art. 1311, Civil Code). Such stipulation is known as stipulation pour autrui or a provision in
favor of a third person not a party to the contract. Under this doctrine, a third person is allowed to
avail himself of a benefit granted to him by the terms of the contract, provided that the contracting
parties have clearly and deliberately conferred a favor upon such person (Art. 1311, Civil Code; Uy
Tam, Et. Al. v. Leonard, 30 Phil.. 471). Consequently, a third person not a party to the contract has no
action against the parties thereto, and cannot generally demand the enforcement of the same
(Manila Railroad Co. v. Compañia Transatlantica, 38 Phil. 676).
2. ID.; STIPULATION POUR AUTRUI; HOW TO DETERMINE WHETHER A THIRD PERSON HAS AN
ENFORCEABLE INTEREST IN THE CONTRACT. — The question of whether a third person has an
enforceable interest in a contract, must be settled by determining whether the contracting parties
intended to tender him such an interest by deliberately inserting terms in their agreement with the
avowed purpose of conferring a favor upon such third person. In this connection, this Court has laid
down the rule that the fairest test to determine whether the interest of a third person in a contract
is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the
parties as disclosed by their contract (Uy Tam, Et. Al. v. Leonard, supra).
3. ID.; NATURE OF INSURANCE POLICY. — A policy of insurance is a distinct and independent
contract between the insured and insurer, and third persons have no right either in a court of
equity, or in a court of law, to the proceeds of it, unless there be some contract of trust, expressed or
implied, by the insured and third person (Lampano v. Jose, 30 Phil. 537).
DECISION
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil case
48823, affirming the decision of the Municipal Court of Manila, declaring the H.S. Reyes, Inc. as
having a better right than the Bonifacio Bros. Inc. and the Ayala Auto Parts Company, appellants
herein, to the proceeds of motor insurance policy A-0615, in the sum of P2,002.73, issued by the
State Bonding & Insurance Co. Inc., and directing payment of the said amount to the H.S. Reyes, Inc.
Enrique Mora, owner of an Oldsmobile sedan model 1956, bearing plate No. QC - 8088, mortgaged
the same to the H.S. Reyes, Inc., with the condition that the former would insure the automobile,
with the latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the
State Bonding & Insurance Co. Inc., and motor car insurance policy A-0615 was issued to Enrique
Mora, the pertinent provisions of which read:jgc:chanrobles.com.ph
"1. The Company (referring to the State Bonding & Insurance Co., Inc) will, subject to the Limits of
Liability, indemnify the Insured against loss of or damages to the Motor Vehicle and its accessories
and spare parts whilst thereon; (a) by accidental collision or overturning or collision or overturning
consequently upon mechanical breakdown or consequent upon wear and tear.
x x x
2. At its own 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 to value of the parts whichever is the less. The Insured’s
estimate of value stated in the schedule will be the maximum amount payable by the Company in
respect of any claim for loss or damage.
x x x
4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the
Company may he 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, subject to the condition that ‘Loss, if any, is payable to H.S. Reyes, Inc.’, by
virtue of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and
that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as
Mortgagee;
x x x
During the effectivity of an insurance contract, the car met with an accident. The insurance company
then assigned the accident to the H.H. Bayne Adjustment Co. for investigation and appraisal of the
damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the
Bonifacio Bros. Inc. to furnish the labor and materials, some of which were supplied by the Ayala
Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the
H. H. Bayne Adjustment Co. The insurance company, after claiming a franchise in the amount of
P100, drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to the
order of Enrique Mora or H.S. Reyes, Inc., and entrusted the check to the H.H. Bayne Adjustment Co.
for disposition and delivery to the proper party. In the meantime, the car was delivered to Enrique
Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and
Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc.
and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila
against Enrique Mora and the State Bonding & Insurance Co. Inc. for the collection of the sum of
P2,002.73. The insurance company filed its answer with a counterclaim for interpleader, requiring
the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to determine who has a better
right to the insurance proceeds in question. Enrique Mora was declared in default for failure to
appear at the hearing, and evidence against him was received ex parte. However, the counsel for the
Bonifacio Bros. Inc., Ayala Auto Parts Co. and State Bonding & Insurance Co. Inc. submitted a
stipulation of facts, on the basis of which the Municipal Court rendered a decision declaring the H.S.
Reyes, Inc. as having a better right to the disputed amount, and ordering the State Bonding &
Insurance Co. Inc. to pay to the H.S Reyes, Inc. the said sum of P2,002.73. From this decision, the
herein appellants elevated the case to the Court of First Instance of Manila before which the
stipulation of facts was reproduced. On October 19, 1962 the latter court rendered a decision,
affirming the decision of the Municipal Court. The Bonifacio Bros. Inc. and the Ayala Auto Parts Co.
moved for reconsideration of the decision, but the trial court denied the motion. Hence, this appeal.
The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc and the
Ayala Auto Parts Co. on the one hand and the insurance company on the other. The appellants argue
that the insurance company and Enrique Mora are parties to the repair of the car as well as the to
wage thereof performed. The authority for this assertion is to be found, it is alleged, in paragraph 4
of the insurance contract which provides that "the insured may authorize the repair of the Motor
Vehicle necessitated by damage for which the company may liable under the policy provided that
(a) the estimated cost of such repair does not exceed the Authorized Repair Limit, and (b) a detailed
estimate of the cost is forwarded to the company without delay." It is stressed that the H.H. Bayne
Adjustment Company’s recommendation of payment of the appellants’ bill for materials and repairs
for which the latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne Adjustment
Co. acted for and in representation of the insurance company.
company is that "a policy of insurance is a distinct and independent contract between the insured
and insurer, and third persons have no right either in a court of equity, or in a court of law, to the
proceeds of it, unless there be some contract of trust, expressed or implied, by the insured and third
person." 5 In this case, no contract of trust, expressed or implied exists. We, therefore, agree with
the trial court that no cause of action exists in favor of the appellants in so far as the proceeds of
insurance are concerned. The appellant’s claim, if at all, is merely equitable in nature and must be
made effective through Enrique Mora who entered into a contract with the Bonifacio Bros Inc. This
conclusion is deducible not only from the principle governing the operation and effect of insurance
contracts in general, but is clearly covered by the express provisions of section 50 of the Insurance
Act which read:jgc:chanrobles.com.ph
"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."cralaw virtua1aw library

This argument is, in our view, beside the point, because from the undisputed facts and from the The policy in question has been so framed that "Loss, if any, is payable to H. S. Reyes, Inc." which
pleadings it will be seen that the appellants’ alleged cause of action rests exclusively upon the terms unmistakably shows the intention of the parties.
of the insurance contract. The appellants seek to recover the insurance proceeds, and for this
purpose, they rely upon paragraph 4 of the insurance contract document executed by and between The final contention of the appellants is that the right of the H. S. Reyes, Inc. to the insurance
the State Bonding & Insurance Company, Inc. and Enrique Mora. The appellants are not mentioned proceeds arises only if there was loss and not where there is mere damage as in the instant case.
in the contract as parties thereto; nor is there any clause or provision thereof from which we can Suffice it to say that any attempt to draw a distinction between "loss" and "damage" is uncalled for,
infer that there is an obligation on the part of the insurance company to pay the cost of repairs because the word "loss" in insurance law embraces injury or damage.
directly to them. It is fundamental that contracts take effect only between the parties thereto, except
in some specific instances provided by law where the contract contains some stipulation in favor of "Loss in insurance, defined. — The injury or damage sustained by the insured in consequence of the
a third person. 1 Such stipulation is known as stipulation pour autrui or a provision in favor of a happening of one or more of the accidents or misfortune against which the insurer, in consideration
third person not a party to the contract. Under this doctrine, a third person is allowed to avail of the premium, has undertaken to indemnify the insured." (1 Bouv. Ins. No. 1215; Black’s Law
himself of a benefit granted to him by the terms of the contract, provided that the contracting Dictionary; Cyclopedic Law Dictionary, cited in Martin’s Phil. Commercial Laws, Vol. 1, 1961 ed. p.
parties have clearly and deliberately conferred a favor upon such person. 2 Consequently a third 608).
person not a party to the contract has no action against the parties thereto, and cannot generally
demand the enforcement of the same. 3 The question of whether a third person has an enforceable Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
interest in a contract, must be settled by determining whether the contracting parties intended to
tender him such an interest by deliberately inserting terms in their agreement with the avowed Accordingly, the judgment appealed from is hereby affirmed, at appellants’ cost.
purpose of conferring a favor upon such third person. In this connection, this Court has laid down
the rule that the fairest test to determine whether the interest of a third person in a contract is a
stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract. 4 In the instant case the insurance contract does not contain any words
or clauses to disclose an intent to give any benefit to any repairmen or material men in case of
repair of the car in question. The parties to the insurance contract omitted such stipulation, which is
a circumstance that supports the said conclusion. On the other hand, the "loss payable" clause of the
insurance policy stipulates that "Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only
the H.S. Reyes, Inc. which they intended to benefit.

We likewise observe from the brief of the State Bonding & Insurance Company that it has
vehemently opposed the assertion or pretension of the appellants that they are privy to the
contract. If it were the intention of the Insurance Company to make itself liable to the repair shop or
material men, it could have easily inserted in the contract a stipulation to that effect. To hold now
that the original parties to the insurance contract intended to confer upon the appellants the benefit
claimed by them would require as to ignore the indispensable requisite that a stipulation pour
autrui must be clearly expressed by the parties, which we cannot do.

As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of
establishing privity between the appellant and the insurance company, such stipulation merely
establishes the procedure that the insured has to follow in order to be entitled to indemnity for
repair. This paragraph therefore should not be construed as bringing into existence in favor of the
appellants a right of action against the insurance company as such intention can never be inferred
therefrom.

Another cogent reason for not recognizing a right of action by the appellants against the insurance
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: ñé+.£ªwph!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: ñé+.£ªwph!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 should an illicit relationship be restricted by these disabilities. Thus, in Matabuena v.
Code (PD No. 612, as amended) does not contain any specific provision grossly resolutory of the Cervantes, 7 this Court, through Justice Fernando, said: ñé+.£ªwph!1
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
If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
validly seized upon to hold that the mm includes the beneficiary. The word "interest" highly
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the
suggests that the provision refers only to the "insured" and not to the beneficiary, since a contract of
other consort and his descendants because of and undue and improper
insurance is personal in character. 2 Otherwise, the prohibitory laws against illicit relationships
pressure and influence upon the donor, a prejudice deeply rooted in our
especially on property and descent will be rendered nugatory, as the same could easily be
ancient law;" por-que no se enganen desponjandose el uno al otro por amor
circumvented by modes of insurance. Rather, the general rules of civil law should be applied to
que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV),
resolve this void in the Insurance Law. Article 2011 of the New Civil Code states: "The contract of
reiterating the rationale 'No Mutuato amore invicem spoliarentur' the
insurance is governed by special laws. Matters not expressly provided for in such special laws shall be
Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is very
regulated by this Code." When not otherwise specifically provided for by the Insurance Law, the
reason to apply the same prohibitive policy to persons living together as
contract of life insurance is governed by the general rules of the civil law regulating contracts. 3 And
husband and wife without the benefit of nuptials. For it is not to be doubted
under Article 2012 of the same Code, "any person who is forbidden from receiving any donation
that assent to such irregular connection for thirty years bespeaks greater
under Article 739 cannot be named beneficiary of a fife insurance policy by the person who cannot
influence of one party over the other, so that the danger that the law seeks to
make a donation to him. 4 Common-law spouses are, definitely, barred from receiving donations
avoid is correspondingly increased. Moreover, as already pointed out by Ulpian
from each other. Article 739 of the new Civil Code provides: ñé+.£ªwph!1
(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
The following donations shall be void: 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.
1. Those made between persons who were guilty of adultery or concubinage at
the time of donation;
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
Those made between persons found guilty of the same criminal offense, in
would be to indict the frame of the Civil Code for a failure to apply a laudable
consideration thereof;
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
3. Those made to a public officer or his wife, descendants or ascendants by rooted notion of what is just and what is right would be nullified if such
reason of his office. 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
In the case referred to in No. 1, the action for declaration of nullity may be
construction that what is within the spirit of the law is as much a part of it as
brought by the spouse of the donor or donee; and the guilt of the donee may be
what is written, this is it. Otherwise the basic purpose discernible in such codal
proved by preponderance of evidence in the same action.
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is adherence to its avowed objective.
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
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons
739 of the new Civil Code should equally operate in life insurance contracts. The mandate of Article
who were guilty of adultery or concubinage at the time of the donation," Article 739 itself
2012 cannot be laid aside: any person who cannot receive a donation cannot be named as
provides: ñé+.£ªwph!1
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 In the case referred to in No. 1, the action for declaration of nullity may be
beneficiary by rules under which wins are interpreted. 6 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.
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 The underscored clause neatly conveys that no criminal conviction for the offense is a condition
nuptial and filial rights of the legitimate family There is every reason to hold that the bar in precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On
donations between legitimate spouses and those between illegitimate ones should be enforced in the contrary, the law plainly states that the guilt of the party may be proved "in the same acting for
life insurance policies since the same are based on similar consideration As above pointed out, a declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the
beneficiary in a fife insurance policy is no different from a donee. Both are recipients of pure guilt of the consort for the offense indicated. The quantum of proof in criminal cases is not
beneficence. So long as manage remains the threshold of family laws, reason and morality dictate demanded.
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
In the caw before Us, the requisite proof of common-law relationship between the insured and the
beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial
conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate children;
that during his lifetime, the deceased insured was living with his common-law wife, Carponia
Ebrado, with whom he has two children. These stipulations are nothing less than judicial
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.
G.R. No. 119655 May 24, 1996
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M.
RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO and ROSABELLA M.
RORALDO, petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.
BELLOSILLO, J.:p
May a fire insurance policy be valid, binding and enforceable upon mere partial payment of
premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE)
issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their
two-storey residential building located at 5855 Zobel Street, Makati City, together with all their
personal effects therein. The insurance was for P600,000.00 covering the period from 23 January
1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta
Tibay only paid P600.00 thus leaving a considerable balance unpaid.
On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10
March 1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with
FORTUNE a claim on the fire insurance policy. Her claim was accordingly referred to its adjuster,
Goodwill Adjustment Services, Inc. (GASI), which immediately wrote Violeta requesting her to
furnish it with the necessary documents for the investigation and processing of her claim. Petitioner
forthwith complied. On 28 March 1987 she signed a non-waiver agreement with GASI to the effect
that any action taken by the companies or their representatives in investigating the claim made by the
claimant for his loss which occurred at 5855 Zobel Roxas, Makati on March 8, 1987, or in the
investigating or ascertainment of the amount of actual cash value and loss, shall not waive or
invalidate any condition of the policies of such companies held by said claimant, nor the rights of either
or any of the parties to this agreement, and such action shall not be, or be claimed to be, an admission
of liability on the part of said companies or any of them.1
In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition
No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance
Commission proved futile. On 3 March 1988 Violets and the other petitioners sued FORTUNE for
damages in the amount of P600,000.00 representing the total coverage of the fire insurance policy
plus 12% interest per annum, P100,000.00 moral damages, and attorney's fees equivalent to 20% of
the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value
of the insured building and personal properties in the amount of P600,000.00 plus interest at the
legal rate of 6% per annum from the filing of the complaint until full payment, and attorney's fees
equivalent to 20% of the total amount claimed plus costs of suit.2
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be
liable to plaintiff-appellees therein but ordering defendant-appellant to return to the former the
premium of P2,983.50 plus 12% interest from 10 March 1987 until full payment. 3
Hence this petition for review with petitioners contending mainly that contrary to the conclusion of
the appellate court, FORTUNE remains liable under the subject fire insurance policy in spite of the
failure of petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event.4 The consideration is the
premium, which must be paid at the time and in the way and manner specified in the policy, and if
not so paid, the policy will lapse and be forfeited by its own terms. 5
The pertinent provisions in the Policy on premium read —
THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the
Company in accordance with Policy Condition No. 2 of the total premiums by the
insured as stipulated above for the period aforementioned for insuring against
Loss or Damage by Fire or Lightning as herein appears, the Property herein
described . . .
2. This policy including any renewal thereof and/or any endorsement thereon is
not in force until the premium has been fully paid to and duly receipted by the
Company in the manner provided herein.
Any supplementary agreement seeking to amend this condition prepared by
agent, broker or Company official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and regulations
which are or may hereafter be in force provide for the payment of the
stipulated premiums in periodic installments at fixed percentage, it is hereby
declared, agreed and warranted that this policy shall be deemed effective, valid
and binding upon the Company only when the premiums therefor have actually
been paid in full and duly acknowledged in a receipt signed by any authorized
official or representative/agent of the Company in such manner as provided
herein. (emphasis supplied).6
Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has
only been partially paid and the balance paid only after the peril insured against has occurred, the
insurance contract did not take effect and the insured cannot collect at all on the policy. This is fully
supported by Sec. 77 of the Insurance Code which provides —
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been
paid, except in the case of a life or an industrial life policy whenever the grace
period provision applies (emphasis supplied).
Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has
been paid." This leads us to the manner of payment envisioned by the law to make the insurance
policy operative and binding. For whatever judicial construction may be accorded the disputed
phrase must ultimately yield to the clear mandate of the law. The principle that where the law does
not distinguish the court should neither distinguish assumes that the legislature made no
qualification on the use of a general word or expression. In Escosura v. San Miguel Brewery, Inc.,7 the
Court through Mr. Justice Jesus G. Barrera, interpreting the phrase "with pay" used in connection
with leaves of absence with pay granted to employees, ruled —
. . . the legislative practice seems to be that when the intention is to distinguish
between full and partial payment, the modifying term is used . . .
Citing C.A. No. 647 governing maternity leaves of married women in government, R. A.
No. 679 regulating employment of women and children, R.A. No. 843 granting vacation
and sick leaves to judges of municipal courts and justices of the peace, and finally, Art.
1695 of the New Civil Code providing that every househelp shall be allowed four (4) days
vacation each month, which laws simply stated "with pay," the Court concluded that it
was undisputed that in all these laws the phrase "with pay" used without any qualifying
adjective meant that the employee was entitled to full compensation during his leave of
absence.
Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial
payment of the premium due and the express stipulation thereof to the contrary, petitioners rely
heavily on the 1967 case of Philippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc.8 where the
Court through Mr. Justice Arsenio P. Dizon sustained the ruling of the trial court that partial
payment of the premium made the policy effective during the whole period of the policy. In that
case, the insurance company commenced action against the insured for the unpaid balance on a fire
insurance policy. In its defense the insured claimed that nonpayment of premium produced the
cancellation of the insurance contract. Ruling otherwise the Court held —
It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued
by appellee and delivered to appellant, and that on September 22 of the same
year, the latter paid to the former the sum of P3,000.00 on account of the total
premium of P6,051.95 due thereon. There is, consequently, no doubt at all that,
as between the insurer and the insured, there was not only a perfected
contract of insurance but a partially performed one as far as the payment of
the agreed premium was concerned. Thereafter the obligation of the insurer to
pay the insured the amount, for which the policy was issued in case the
conditions therefor had been complied with, arose and became binding upon it,
while the obligation of the insured to pay the remainder of the total amount of
the premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the
factual scenario is different. In Phoenix it was the insurance company that sued for the balance of the
premium, i.e., it recognized and admitted the existence of an insurance contract with the insured. In
the case before us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is not in
force until the premium has been fully paid and duly receipted by the Company . . . Resultantly, it is
correct to say that in Phoenix a contract was perfected upon partial payment of the premium since
the parties had not otherwise stipulated that prepayment of the premium in full was a condition
precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of
the premium without any other precondition to its enforceability as in the instant case, the insurer
in effect had shown its intention to continue with the existing contract of insurance, as in fact it was
enforcing its right to collect premium, or exact specific performance from the insured. This is not so
here. By express agreement of the parties, no vinculum juris or bond of law was to be established
until full payment was effected prior to the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals9 the parties mutually agreed that the
premiums could be paid in installments, which in fact they did for three (3) years, hence, this Court
refused to invalidate the insurance policy. In giving effect to the policy, the Court quoted with
approval the Court of Appeals —
The obligation to pay premiums when due is ordinarily an indivisible
obligation to pay the entire premium. Here, the parties . . . agreed to make the
premiums payable in installments, and there is no pretense that the parties
never envisioned to make the insurance contract binding between them. It was
renewed for two succeeding years, the second and third policies being a
renewal/replacement for the previous one. And the insured never informed
the insurer that it was terminating the policy because the terms were
unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties
may not agree to make the insurance contract valid and binding without
payment of premiums, there is nothing in said section which suggests that the
parties may not agree to allow payment of the premiums in installment, or to
consider the contract as valid and binding upon
payment of the first premium. Otherwise we would allow the insurer to renege
on its liability under the contract, had a loss incurred (sic) before completion of
payment of the entire premium, despite its voluntary acceptance of partial
payments, a result eschewed by basic considerations of fairness and equity . . .
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or
implied, of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as
in Phoenix, and expressly, by agreeing to make premiums payable in installments as in Tuscany. But
contrary to the stance taken by petitioners, there is no waiver express or implied in the case at
bench. Precisely, the insurer and the insured expressly stipulated that (t)his policy including any
renewal thereof and/or any indorsement thereon is not in force until the premium has been fully paid
to and duly receipted by the Company . . . and that this policy shall be deemed effective, valid and
binding upon the Company only when the premiums therefor have actually been paid in full and duly
acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77
of the Insurance Code the payment of partial premium by the assured in this particular instance
should not be considered the payment required by the law and the stipulation of the parties. Rather,
it must be taken in the concept of a deposit to be held in trust by the insurer until such time that the
full amount has been tendered and duly receipted for. In other words, as expressly agreed upon in
the contract, full payment must be made before the risk occurs for the policy to be considered
effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law
ever resulted from the fractional payment of premium. The insurance contract itself expressly
provided that the policy would be effective only when the premium was paid in full. It would have
been altogether different were it not so stipulated. Ergo, petitioners had absolute freedom of choice
whether or not to be insured by FORTUNE under the terms of its policy and they freely opted to
adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract
is the intention of the parties as expressed in the
policy. 10 Courts have no other function but to enforce the same. The rule that contracts of insurance
will be construed in favor of the insured and most strongly against the insurer should not be
permitted to have the effect of making a plain agreement ambiguous and then construe it in favor of
the insured. 11 Verily, it is elemental law that the payment of premium is requisite to keep the policy obligations to the public, hence, the imperative need for its prompt payment and full
of insurance in force. If the premium is not paid in the manner prescribed in the policy as intended satisfaction. 16 It must be emphasized here that all actuarial calculations and various tabulations of
by the parties the policy is ineffective. Partial payment even when accepted as a partial payment will probabilities of losses under the risks insured against are based on the sound hypothesis of prompt
not keep the policy alive even for such fractional part of the year as the part payment bears to the payment of premiums. Upon this bedrock insurance firms are enabled to offer the assurance of
whole security to the public at favorable rates. But once payment of premium is left to the whim and
payment.12 caprice of the insured, as when the courts tolerate the payment of a mere P600.00 as partial
undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid even after
the risk insured against has occurred, as petitioners have done in this case, on the principle that the
Applying further the rules of statutory construction, the position maintained by petitioners becomes
strength of the vinculum juris is not measured by any specific amount of premium payment, we will
even more untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of
surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise
Appeals, 13 speaks only of two (2) statutory exceptions to the requirement of payment of the entire
to arrive at a fair and equitable distribution of risks and benefits between the insurer and the
premium as a prerequisite to the validity of the insurance contract. These exceptions are: (a) in case
insured.
the insurance coverage relates to life or industrial life (health) insurance when a grace period
applies, and (b) when the insurer makes a written acknowledgment of the receipt of premium, this
acknowledgment being declared by law to be then conclusive evidence of the premium payment. 14 The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to
limit their liability and to impose whatever conditions they deem best upon their obligations not
A maxim of recognized practicality is the rule that the expressed exception or exemption excludes
inconsistent with public policy. 17 The validity of these limitations is by law passed upon by the
others. Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates
Insurance Commissioner who is empowered to approve all forms of policies, certificates or
to exclude other exceptions; conversely, those which are not within the enumerated exceptions are
contracts of insurance which insurers intend to issue or deliver. That the policy contract in the case
deemed included in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is
at bench was approved and allowed issuance simply reaffirms the validity of such policy,
paid, and the law has not expressly excepted partial payments, there is no valid and binding
particularly the provision in question.
contract. Hence, in the absence of clear waiver of prepayment in full by the insurer, the insured
cannot collect on the proceeds of the policy.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24
March 1995 is AFFIRMED.
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are SO ORDERED.
paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes a
risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire
sum agreed upon, and the insured, that of parting with the amount required as premium, without
receiving anything therefor in case the contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. 15 It should be understood that the integrity of this fund cannot be
secured and maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to the contrary. For
what could prevent the insurance applicant from deliberately or wilfully holding back full premium
payment and wait for the risk insured against to transpire and then conveniently pass on the
balance of the premium to be deducted from the proceeds of the insurance? Worse, what if the
insured makes an initial payment of only 10%, or even 1%, of the required premium, and when the
risk occurs simply points to the proceeds from where to source the balance? Can an insurance
company then exist and survive upon the payment of 1%, or even 10%, of the premium stipulated in
the policy on the basis that, after all, the insurer can deduct from the proceeds of the insurance
should the risk insured against occur?

Interpreting the contract of insurance stringently against the insurer but liberally in favor of the
insured despite clearly defined obligations of the parties to the policy can be carried out to extremes
that there is the danger that we may, so to speak, "kill the goose that lays the golden egg." We are
well aware of insurance companies falling into the despicable habit of collecting premiums
promptly yet resorting to all kinds of excuses to deny or delay payment of just insurance claims. But,
in this case, the law is manifestly on the side of the insurer. For as long as the current Insurance
Code remains unchanged and partial payment of premiums is not mentioned at all as among the
exceptions provided in Sees. 77 and 78, no policy of insurance can ever pretend to be efficacious or
effective until premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance
business because by law the insurer must maintain a legal reserve fund to meet its contingent
 [G.R. No. 83122. October 19, 1990.]
ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, Petitioners, v. THE HONORABLE
COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E. PARNELL, CARLOS K. CATOLICO
and THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., Respondents.
Albino B. Achas, for Petitioners.
Angara, Abello, Concepcion, Regala & Cruz for Private Respondents.
DECISION
GUTIERREZ, JR., J.:
This is a petition for review of the January 29, 1988 decision of the Court of Appeals and the April
27, 1988 resolution denying the petitioners’ motion for reconsideration, which decision and
resolution reversed the decision dated June 23, 1986 of the Court of First Instance of Manila, Branch
34 in Civil Case No. 121126 upholding the petitioners’ causes of action and granting all the reliefs
prayed for in their complaint against private respondents.chanrobles virtual lawlibrary
The antecedent facts of the case are as follows:chanrob1es virtual 1aw library
Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private respondent
Philippine American General Insurance Company, Inc. (Philamgen for short) since 1965. As such, he
was authorized to solicit and sell in behalf of Philamgen all kinds of non-life insurance, and in
consideration of services rendered was entitled to receive the full agent’s commission of 32.5%
from Philamgen under the scheduled commission rates (Exhibits "A" and "1"). From 1973 to 1975,
Valenzuela solicited marine insurance from one of his clients, the Delta Motors, Inc. (Division of
Electronics Airconditioning and Refrigeration) in the amount of P4.4 Million from which he was
entitled to a commission of 32% (Exhibit "B"). However, Valenzuela did not receive his full
commission which amounted to P1.6 Million from the P4.4 Million insurance coverage of the Delta
Motors. During the period 1976 to 1978, premium payments amounting to P1,946,886.00 were paid
directly to Philamgen and Valenzuela’s commission to which he is entitled amounted to
P632,737.00.
In 1977, Philamgen started to become interested in and expressed its intent to share in the
commission due Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela
refused (Exhibit "D").
On February 8, 1978 Philamgen and its President, Bienvenido M. Aragon insisted on the sharing of
the commission with Valenzuela (Exhibit E). This was followed by another sharing proposal dated
June 1, 1978. On June 16, 1978, Valenzuela firmly reiterated his objection to the proposals of
respondents stating that: "It is with great reluctance that I have to decline upon request to signify
my conformity to your alternative proposal regarding the payment of the commission due me.
However, I have no choice for to do otherwise would be violative of the Agency Agreement executed
between our goodselves." (Exhibit B-1)
Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido Aragon, Carlos
Catolico and Robert E. Parnell took drastic action against Valenzuela. They: (a) reversed the
commission due him by not crediting in his account the commission earned from the Delta Motors,
Inc. insurance (Exhibit "J" and "2"); (b) placed agency transactions on a cash-and-carry basis; (c)
threatened the cancellation of policies issued by his agency (Exhibits "H" to "H-2"); and (d) started
to leak out news that Valenzuela has a substantial account with Philamgen. All of these acts resulted
in the decline of his business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on
December 27, 1978, Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit
"J", pp. 1-3, Decision Trial Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition).
The petitioners sought relief by filing the complaint against the private respondents in the court a
quo (Complaint of January 24, 1979, Annex "F" Petition). After due proceedings, the trial court
found:chanrob1es virtual 1aw library
x x x
"Defendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of defendant
PHILAMGEN’s General Agent by making it appear that plaintiff Arturo P. Valenzuela has a
substantial account with defendant PHILAMGEN, particularly Delta Motors, Inc.’s Account, thereby
prejudicing defendant PHILAMGEN’s interest (Exhibits 6, ‘11,’ ‘11- ,’ ‘12-A’ and ‘13-A’).
"Defendants also invoked the provisions of the Civil Code of the Philippines (Article 1868) and the
provisions of the General Agency Agreement as their basis for terminating plaintiff Arturo P.
Valenzuela as one of their General Agents.
"That defendants’ position could have been justified had the termination of plaintiff Arturo P.
Valenzuela was (sic) based solely on the provisions of the Civil Code and the conditions of the
General Agency Agreement. But the records will show that the principal cause of the termination of
the plaintiff as General Agent of defendant PHILAMGEN was his refusal to share his Delta
commission.
"That it should be noted that there were several attempts made by defendant Bienvenido M. Aragon
to share with the Delta commission of plaintiff Arturo P. Valenzuela. He had persistently pursued
the sharing scheme to the point of terminating plaintiff Arturo P. Valenzuela, and to make matters
worse, defendants made it appear that plaintiff Arturo P. Valenzuela had substantial accounts with
defendant PHILAMGEN.
"Not only that, defendants have also started (a) to treat separately the Delta Commission of plaintiff
Arturo P. Valenzuela, (b) to reverse the Delta commission due plaintiff Arturo P. Valenzuela by not
crediting or applying said commission earned to the account of plaintiff Arturo P. Valenzuela, (c)
placed plaintiff Arturo P. Valenzuela’s agency transactions on a ‘cash-and-carry’ basis, (d) sending
threats to cancel existing policies issued by plaintiff Arturo P. Valenzuela’s agency, (e) to divert
plaintiff Arturo P. Valenzuela’s insurance business to other agencies, and (f) to spread wild and
malicious rumors that plaintiff Arturo P. Valenzuela has substantial account with defendant
PHILAMGEN to force plaintiff Arturo P. Valenzuela into agreeing with the sharing of his Delta
commission." (pp. 9-10, Decision, Annex 1, Petition).
x x x
"These acts of harassment done by defendants on plaintiff Arturo P. Valenzuela to force him to agree
to the sharing of his Delta commission, which culminated in the termination of plaintiff Arturo P.
Valenzuela as one of defendant PHILAMGEN’s General Agent, do not justify said termination of the
General Agency Agreement entered into by defendant PHILAMGEN and plaintiff Arturo P.
Valenzuela.
"That since defendants are not justified in the termination of plaintiff Arturo P. Valenzuela as one of
their General Agents, defendants shall be liable for the resulting damage and loss of business of
plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the Philippines). (Ibid, p. 11)
The court accordingly rendered judgment, the dispositive portion of which
reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against defendants
ordering the latter to reinstate plaintiff Arturo P. Valenzuela as its General Agent, and to pay
plaintiffs, jointly and severally, the following:jgc:chanrobles.com.ph
"1. The amount of five hundred twenty-one thousand nine hundred sixty four and 16/100 pesos
(P521,964.16) representing plaintiff Arturo P. Valenzuela’s Delta Commission with interest at the
legal rate from the time of the filing of the complaint, which amount shall be adjusted in accordance
with Article 1250 of the Civil Code of the Philippines;
"2. The amount of seventy-five thousand pesos (P75,000.00) per month as compensatory damages
from 1980 until such time that defendant Philamgen shall reinstate plaintiff Arturo P. Valenzuela as
one of its general agents;
3. The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff as moral
damages;
4. The amount of seventy-five thousand pesos (P75,000.00) as and for attorney’s fees;
5. Costs of the suit.’ (Ibid., p. 12)
From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell, Carlos K.
Catolico and PHILAMGEN respondents herein, and defendants-appellants below, interposed an
appeal on the following:chanrobles law library : red
ASSIGNMENT OF ERRORS
I Agreement it entered into with the petitioners. In its questioned decision the Court of Appeals
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA HAD NO
OUTSTANDING ACCOUNT WITH DEFENDANT PHILAMGEN AT THE TIME OF THE TERMINATION
OF THE AGENCY.
II
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA IS ENTITLED
TO THE FULL COMMISSION OF 32.5% ON THE DELTA ACCOUNT.
III
THE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF PLAINTIFF ARTURO P.
VALENZUELA WAS NOT JUSTIFIED AND THAT CONSEQUENTLY DEFENDANTS ARE LIABLE FOR
ACTUAL AND MORAL DAMAGES, ATTORNEY’S FEES AND COSTS.
IV
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST DEFENDANT PHILAMGEN WAS
PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES EVEN AGAINST THE INDIVIDUAL
DEFENDANTS WHO ARE MERE CORPORATE AGENTS ACTING WITHIN THE SCOPE OF THEIR
AUTHORITY.
V
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF PLAINTIFF ARTURO P.
VALENZUELA WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES IN FAVOR OF
HOSPITALITA VALENZUELA, WHO, NOT BEING THE REAL PARTY IN INTEREST IS NOT TO OBTAIN
RELIEF.
On January 29, 1988, respondent Court of Appeals promulgated its decision in the appealed case.
The dispositive portion of the decision reads:jgc:chanrobles.com.ph
"WHEREFORE, the decision appealed from is hereby modified accordingly and judgment is hereby
rendered ordering:chanrob1es virtual 1aw library
1. Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one million nine
hundred thirty two thousand five hundred thirty-two pesos and seventeen centavos
(P1,932,532.17), with legal interest thereon from the date of finality of this judgment until fully
paid.
2. Both plaintiff-appellees to pay jointly and severally defendants-appellants the sum of fifty
thousand pesos (P50,000.00) as and by way of attorney’s fees.
No pronouncement is made as to costs." (p. 44, Rollo)
There is in this instance irreconcilable divergence in the findings and conclusions of the Court of
Appeals, vis-a-vis those of the trial court particularly on the pivotal issue whether or not Philamgen
and/or its officers can be held liable for damages due to the termination of the General Agency
observed that:jgc:chanrobles.com.ph
"In any event the principal’s power to revoke an agency at will is so pervasive, that the Supreme
Court has consistently held that termination may be effected even if the principal acts in bad faith,
subject only to the principal’s liability for damages (Danon v. Antonio A. Brimo & Co., 42 Phil. 133;
Reyes v. Mosqueda, 53 O.G. 2158 and Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V, Civil
Code of the Philippines Annotated [1986] 696).
"The lower court, however, thought the termination of Valenzuela as General Agent improper
because the record will show the principal cause of the termination of the plaintiff as General Agent
of defendant Philamgen was his refusal to share his Delta commission" (Decision, p. 9; p. 13, Rollo,
41).
Because of the conflicting conclusions, this Court deemed it necessary in the interest of substantial
justice to scrutinize the evidence and records of the cases. While it is an established principle that
the factual findings of the Court of Appeals are final and may not be reviewed on appeal to this
Court, there are however certain exceptions to the rule which this Court has recognized and
accepted, among which, are when the judgment is based on a misapprehension of facts and when
the findings of the appellate court, are contrary to those of the trial court (Manlapaz v. Court of
Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the
findings of the Court of Appeals and the trial court are contrary to each other, this Court may
scrutinize the evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v. Court
of Appeals, 156 SCRA 597 [1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the conclusion of
the Court of Appeals is grounded entirely on speculation, surmises or conjectures, or when the
inference made is manifestly mistaken, absurd or impossible, or when there is grave abuse of
discretion, or when the judgment is based on a misapprehension of facts, and when the findings of
facts are conflicting the exception also applies (Malaysian Airline System Bernad v. Court of Appeals,
156 SCRA 321 [1987]).
After a painstaking review of the entire records of the case and the findings of facts of both the court
a quo and respondent appellate court, we are constrained to affirm the trial court’s findings and rule
for the petitioners.
We agree with the court a quo that the principal cause of the termination of Valenzuela as General
Agent of Philamgen arose from his refusal to share his Delta commission. The records sustain the
conclusions of the trial court on the apparent bad faith of the private respondents in terminating the
General Agency Agreement of petitioners. It is axiomatic that the findings of fact of a trial judge are
entitled to great weight (People v. Atanacio, 128 SCRA 22 [1984]) and should not be disturbed on
appeal unless for strong and cogent reasons because the trial court is in a better position to examine
the evidence as well as to observe the demeanor of the witnesses while testifying (Chase v.
Buencamino, Sr., 136 SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag
Trans., Inc. v. Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the
findings and conclusions of the trial court are supported by substantial evidence and there appears
to be no cogent reason to disturb them (Mendoza v. Court of Appeals, 156 SCRA 597
[1987]).chanrobles.com:cralaw:red
As early as September 30, 1977, Philamgen told the petitioners of its desire to share the Delta
Commission with them. It stated that should Delta back out from the agreement, the petitioners
would be charged interests through a reduced commission after full payment by Delta.
On January 23, 1978 Philamgen proposed reducing the petitioners’ commissions by 50% thus giving
them an agent’s commission of 16.25%. On February 8, 1978, Philamgen insisted on the reduction
scheme followed on June 1, 1978 by still another insistence on reducing commissions and proposing
two alternative schemes for reduction. There were other pressures. Demands to settle accounts, to
confer and thresh out differences regarding the petitioners’ income and the threat to terminate the
agency followed. The petitioners were told that the Delta commissions would not be credited to
their account (Exhibit "J"). They were informed that the Valenzuela agency would be placed on a
cash and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26, 1979, pp.
54-57). Existing policies were threatened to be cancelled (Exhibits "H" and "14" ; TSN., March 26,
1979, pp. 29-30). The Valenzuela business was threatened with diversion to other agencies. (Exhibit
"NNN"). Rumors were also spread about alleged accounts of the Valenzuela agency (TSN., January
25, 1980, p. 41). The petitioners consistently opposed the pressures to hand over the agency or half
of their commissions and for a treatment of the Delta account distinct from other accounts. The
pressures and demands, however, continued until the agency agreement itself was finally
terminated.
It is also evident from the records that the agency involving petitioner and private respondent is one
"coupled with an interest," and, therefore, should not be freely revocable at the unilateral will of the
latter.
In the insurance business in the Philippines, the most difficult and frustrating period is the
solicitation and persuasion of the prospective clients to buy insurance policies. Normally, agents
would encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation
and procurement of the insurance policies. To sell policies, an agent exerts great effort, patience,
perseverance, ingenuity, tact, imagination, time and money. In the case of Valenzuela, he was able to
build up an agency from scratch in 1965 to a highly productive enterprise with gross billings of
about Two Million Five Hundred Thousand Pesos (P2,500,000.00) premiums per annum. The
records sustain the finding that the private respondent started to covet a share of the insurance
business that Valenzuela had built up, developed and nurtured to profitability through over thirteen
(13) years of patient work and perseverance. When Valenzuela refused to share his commission in
the Delta account, the boom suddenly fell on him.
The private respondents by the simple expedient of terminating the General Agency Agreement
appropriated the entire insurance business of Valenzuela. With the termination of the General
Agency Agreement, Valenzuela would no longer be entitled to commission on the renewal of
insurance policies of clients sourced from his agency. Worse, despite the termination of the agency,
Philamgen continued to hold Valenzuela jointly and severally liable with the insured for unpaid
premiums. Under these circumstances, it is clear that Valenzuela had an interest in the continuation
of the agency when it was unceremoniously terminated not only because of the commissions he
should continue to receive from the insurance business he has solicited and procured but also for
the fact that by the very acts of the respondents, he was made liable to Philamgen in the event the
insured fail to pay the premiums due. They are estopped by their own positive averments and
claims for damages. Therefore, the respondents cannot state that the agency relationship between
Valenzuela and Philamgen is not coupled with interest. "There may be cases in which an agent has
been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the
authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to
personal loss or liability" (See MEC 569 p. 406).
Furthermore, there is an exception to the principle that an agency is revocable at will and that is
when the agency has been given not only for the interest of the principal but for the interest of third
persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the
agency ceases to be freely revocable by the sole will of the principal (See Padilla, Civil Code
Annotated, 56 ed., Vol. IV p. 350). The following citations are apropos:jgc:chanrobles.com.ph
"The principal may not defeat the agent’s right to indemnification by a termination of the contract of
agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32 ALR 196).
"Where the principal terminates or repudiates the agent’s employment in violation of the contract of
employment and without cause . . . the agent is entitled to receive either the amount of net losses
caused and gains prevented by the breach, or the reasonable value of the services rendered. Thus,
the agent is entitled to prospective profits which he would have made except for such wrongful
termination provided that such profits are not conjectural, or speculative but are capable of
determination upon some fairly reliable basis. And a principal’s revocation of the agency agreement
made to avoid payment of compensation for a result which he has actually accomplished
(Hildendorf v. Hague, 293 NW 2d 272; Newhall v. Journal Printing Co., 105 Minn 44, 117 NW 228;
Gaylen Machinery Corp. v. Pitman-Moore Co. [CA 2 NY] 273 F 2d 340)
"If a principal violates a contractual or quasi-contractual duty which he was his agent, the agent may
as a rule bring an appropriate action for the breach of that duty. The agent may in a proper case
maintain an action at law for compensation or damages . . . A wrongfully discharged agent has a
right of action for damages and in such action the measure and element of damages are controlled
generally by the rules governing any other action for the employer’s breach of an employment
contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419; Tiffin Glass Co. v. Stoehr, 54 Ohio 157, 43 NE
2798)
At any rate, the question of whether or not the agency agreement is coupled with interest is helpful
to the petitioners’ cause but is not the primary and compelling reason. For the pivotal factor
rendering Philamgen and the other private respondents liable in damages is that the termination by
them of the General Agency Agreement was tainted with bad faith. Hence, if a principal acts in bad
faith and with abuse of right in terminating the agency, then he is liable in damages. This is in
accordance with the precepts in Human Relations enshrined in our Civil Code that "every person
must in the exercise of his rights and in the performance of his duties act with justice, give every one
his due, and observe honesty and good faith: (Art. 19, Civil Code), and every person who, contrary to
law, wilfully or negligently causes damages to another, shall indemnify the latter for the same (Art.
20, id). "Any person who wilfully causes loss or injury to another in a manner contrary to morals,
good customs and public policy shall compensate the latter for the damages" (Art. 21, id.)
As to the issue of whether or not the petitioners are liable to Philamgen for the unpaid and
uncollected premiums which the respondent court ordered Valenzuela to pay Philamgen the
amount of One Million Nine Hundred Thirty-Two Thousand Five Hundred Thirty-Two and 17/100
Pesos (P1,932,532.17) with legal interest thereon until fully paid (Decision - January 20, 1988, p. 16;
Petition, Annex "A"), we rule that the respondent court erred in holding Valenzuela liable. We find
no factual and legal basis for the award. Under Section 77 of the Insurance Code, the remedy for the
non-payment of premiums is to put an end to and render the insurance policy not binding -
"Sec. 77 . . . [N]otwithstanding any agreement to the contrary, no policy or contract of insurance is
valid and binding unless and until the premiums thereof have been paid except in the case of a life
or industrial life policy whenever the grace period provision applies (P.D. 612, as amended
otherwise known as the Insurance Code of 1974)
In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979]) we held
that the non-payment of premium does not merely suspend but puts an end to an insurance
contract since the time of the payment is peculiarly of the essence of the contract. And in Arce v. The
Capital Insurance and Surety Co., Inc. (117 SCRA 63-[1982]), we reiterated the rule that unless
premium is paid, an insurance contract does not take effect. Thus:chanrobles lawlibrary : rednad
"It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9 SCRA 177 [1963]
was decided in the light of the Insurance Act before Sec. 72 was amended by the underscored
portion. Supra. Prior to the Amendment, an insurance contract was effective even if the premium
had not been paid so that an insurer was obligated to pay indemnity in case of loss and correlatively
he had also the right to sue for payment of the premium. But the amendment to Sec. 72 has radically
changed the legal regime in that unless the premium is paid there is no insurance." (Arce v. Capitol
Insurance and Surety Co., Inc., 117 SCRA 66; Italics supplied)
In Philippine Phoenix Surety case, we held:jgc:chanrobles.com.ph
"Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums and
invalid for the purpose of indemnity. (Citing Insurance Law and Practice by John Alan Appleman,
Vol. 15, p. 331; Emphasis supplied)
"The foregoing findings are buttressed by Section 776 of the Insurance Code (Presidential Decree
No. 612, promulgated on December 18, 1974), which now provides that no contract of Insurance by
an insurance company is valid and binding unless and until the premium thereof has been paid,
notwithstanding any agreement to the contrary" (Ibid., 92 SCRA 425).
Perforce, since admittedly the premiums have not been paid, the policies issued have lapsed. The
insurance coverage did not go into effect or did not continue and the obligation of Philamgen as
insurer ceased. Hence, for Philamgen which had no more liability under the lapsed and inexistent
policies to demand, much less sue Valenzuela for the unpaid premiums would be the height of
injustice and unfair dealing. In this instance, with the lapsing of the policies through the non-
payment of premiums by the insured there were no more insurance contracts to speak of. As this
Court held in the Philippine Phoenix Surety case, (supra) — "the non-payment of premiums does
not merely suspend but puts an end to an insurance contract since the time of the payment is
peculiarly of the essence of the contract."cralaw virtua1aw library
The respondent appellate court also seriously erred in according undue reliance to the report of
Banaria and Banaria and Company, auditors, that as of December 31, 1978, Valenzuela owed
Philamgen P1,528,698.40. This audit report of Banaria was commissioned by Philamgen after
Valenzuela was almost through with the presentation of his evidence. In essence, the Banaria report
started with an unconfirmed and unaudited beginning balance of account of P1,758,185.43 as of
August 20, 1976. But even with that unaudited and unconfirmed beginning balance of
P1,758,185.43, Banaria still came up with the amount of P3,865.49 as Valenzuela’s balance as of
December 1978 with Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December 31,
1977, Valenzuela had no unpaid account with Philamgen (Ref: Annexes "D", "D-1" "E", Petitioner’s
Memorandum). But even disregarding these annexes which are records of Philamgen and addressed
to Valenzuela in due course of business, the facts show that as of July 1977, the beginning balance of
Valenzuela’s account with Philamgen amounted to P744,159.80. This was confirmed by Philamgen
itself not only once but four (4) times on different occasions, as shown by the records.
On April 3, 1978, Philamgen sent Valenzuela a statement of account with a beginning balance of
P744,159.80 as of July 1977.
On May 23, 1978, another statement of account with exactly the same beginning balance was sent to
Valenzuela.
On November 17, 1978, Philamgen sent still another statement of account with P744,159.80 as the
beginning balance.
And on December 20, 1978, a statement of account with exactly the same figure was sent to
Valenzuela.
It was only after the filing of the complaint that a radically different statement of accounts surfaced
in court. Certainly, Philamgen’s own statements made by its own accountants over a long period of
time and covering examinations made on four different occasions must prevail over unconfirmed
and unaudited statements made to support a position made in the course of defending against a
lawsuit.
It is not correct to say that Valenzuela should have presented its own records to refute the
unconfirmed and unaudited finding of the Banaria auditor. The records of Philamgen itself are the
best refutation against figures made as an afterthought in the course of litigation. Moreover,
Valenzuela asked for a meeting where the figures would be reconciled. Philamgen refused to meet
with him and, instead, terminated the agency agreement.
After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of credits
representing the commission due from Delta and other accounts, Valenzuela had overpaid
Philamgen the amount of P530,040.37 as of November 30, 1978. Philamgen cannot later be heard to
complain that it committed a mistake in its computation. The alleged error may be given credence if
committed only once. But as earlier stated, the reconciliation of accounts was arrived at four (4)
times on different occasions where Philamgen was duly represented by its account executives. On
the basis of these admissions and representations, Philamgen cannot later on assume a different
posture and claim that it was mistaken in its representation with respect to the correct beginning
balance as of July 1977 amounting to P744,159.80. The Banaria audit report commissioned by
Philamgen is unreliable since its results are admittedly based on an unconfirmed and unaudited
beginning balance of P1,758,185.43 as of August 20, 1976.chanrobles virtual lawlibrary
As so aptly stated by the trial court in its decision:jgc:chanrobles.com.ph
"Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after the
controversy has started. In fact, after hearing plaintiffs have already rested their case.
"The results of said audit were presented in Court to show plaintiff Arturo P. Valenzuela’s
accountability to defendant PHILAMGEN. However, the auditor, when presented as witness in this
case testified that the beginning balance of their audit report was based on an unaudited amount of
P1,758,185.43 (Exhibit 46-A) as of August 20, 1976, which was unverified and merely supplied by
the officers of defendant PHILAMGEN.
"Even defendants very own Exhibit 38-A-3, showed that plaintiff Arturo P. Valenzuela’s balance as
of 1978 amounted to only P3,865.59, not P826,128.46 as stated in defendant Bienvenido M.
Aragon’s letter dated December 20, 1978 (Exhibit 14) or P1,528,698.40 as reflected in defendant’s
Exhibit 46 (Audit Report of Banaria dated December 24, 1980).
"These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela to defendant
PHILAMGEN only lends credence to the claim of plaintiff Arturo P. Valenzuela that he has no
outstanding account with defendant PHILAMGEN when the latter, thru defendant Bienvenido M.
Aragon, terminated the General Agency Agreement entered into by plaintiff (Exhibit A) effective
January 31, 1979 (see Exhibits "2" and "2-A"). Plaintiff Arturo P. Valenzuela has shown that as of
October 31, 1978, he has overpaid defendant PHILAMGEN in the amount of P53,040.37 (Exhibit
"EEE", which computation was based on defendant PHILAMGEN’s balance of P744,159.80 furnished
on several occasions to plaintiff Arturo P. Valenzuela by defendant PHILAMGEN (Exhibits H-1, VV,
VV-1, WW, WW-1, YY, YY-2, ZZ and ZZ-2).

Prescinding from the foregoing, and considering that the private respondents terminated
Valenzuela with evident mala fide, it necessarily follows that the former are liable in damages.
Respondent Philamgen has been appropriating for itself all these years the gross billings and
income that it unceremoniously took away from the petitioners. The preponderance of the
authorities sustain the preposition that a principal can be held liable for damages in cases of unjust
termination of agency. In Danon v. Brimo, 42 Phil. 133 [1921]), this Court ruled that where no time
for the continuance of the contract is fixed by its terms, either party is at liberty to terminate it at
will, subject only to the ordinary requirements of good faith. The right of the principal to terminate
his authority is absolute and unrestricted, except only that he may not do so in bad faith.

The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand Pesos
(P75,000,00) per month as compensatory damages from June 1980 until its decision becomes final
and executory. This award is justified in the light of the evidence extant on record (Exhibits "N", "N-
10", "O", "0-1, "P" and "P-1") showing that the average gross premium collection monthly of
Valenzuela over a period of four (4) months from December 1978 to February 1979, amounted to
over P300,000.00 from which he is entitled to a commission of P100,000.00 more or less per month.
Moreover, his annual sales production amounted to P2,500,000.00 from where he was given 32.5%
commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall
comprehend not only the value of the loss suffered, but also that of the profits which the obligee
failed to obtain."cralaw virtua1aw library

The circumstances of the case, however, require that the contractual relationship between the
parties shall be terminated upon the satisfaction of the judgment. No more claims arising from or as
a result of the agency shall be entertained by the courts after that date.cralawnad

ACCORDINGLY, the petition is GRANTED. The impugned decision of January 29, 1988 and resolution
of April 27, 1988 of respondent court are hereby SET ASIDE. The decision of the trial court dated
January 23, 1986 in Civil Case No. 121126 is REINSTATED with the MODIFICATIONS that the
amount of FIVE HUNDRED TWENTY-ONE THOUSAND NINE HUNDRED SIXTY-FOUR AND 16/100
PESOS (P521,964.16) representing the petitioners Delta commission shall earn only legal interests
without any adjustments under Article 1250 of the Civil Code and that the contractual relationship
between Arturo P. Valenzuela and Philippine American General Insurance Company shall be
deemed terminated upon the satisfaction of the judgment as modified.

SO ORDERED.
 [G.R. No. 95546. November 6, 1992.]
MAKATI TUSCANY CONDOMINIUM CORPORATION, Petitioner, v. THE COURT OF APPEALS,
AMERICAN HOME ASSURANCE CO., represented by American International Underwriters
(Phils.), Inc., Respondent.
Agcaoili & Associates for Petitioner.
Salonga & Associates for Private Respondent.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE POLICY, VALID EVEN IF PREMIUMS WERE PAID ON
INSTALLMENTS. — We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent intended subject
insurance policies to be binding and effective notwithstanding the staggered payment of the
premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984.
In those three (3) years, the insurer accepted all the installment payments. Such acceptance of
payments speaks loudly of the insurer’s intention to honor the policies it issued to petitioner.
Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting
and accepting the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.
2. ID.; ID.; PREMIUMS; REFUND THEREOF, WHEN NOT AVAILABLE; RULE. — As correctly observed
by the appellate court, where the risk is entire and the contract is indivisible, the insured is not
entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any
period, however brief or momentary.
DECISION
BELLOSILLO, J.:
This case involves a purely legal question: whether payment by installment of the premiums due on
an insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise
known as the Insurance Code, as amended, which provides:chanrobles.com:cralaw:red
"SECTION 77. An insurer is entitled to the payment of the premium as soon as the thing is exposed
to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life policy whenever the grace
period provision applies."cralaw virtua1aw library
Sometime in early 1982, private respondent American Home Assurance Co. (A H A C), represented
by American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany
Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter’s
building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total
premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982,
21 June 1982 and 16 November 1982, all of which were accepted by private Respondent.
On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-
9210596, which replaced and renewed the previous policy, for a term covering 1 March 1903 to 1
March 1984. The premium in the amount of P466,103.05 was again paid on installments on 13 April
1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21 November 1983. All payments were
likewise accepted by private Respondent.
On 20 January 1984, the policy was again renewed and private respondent issued to petitioner
Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this
renewed policy, petitioner made two installment payments, both accepted by private respondent,
the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00.
Thereafter, petitioner refused to pay the balance of the premium.
Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-
9210651. It explained that it discontinued the payment of premiums because the policy did not
contain a credit clause in its favor and the receipts for the installment payments covering the policy
for 1984-85, as well as the two (2) previous policies, stated the following
reservations:chanroblesvirtualawlibrary
"2. Acceptance of this payment shall not waive any of the company rights to deny liability on any
claim under the policy arising before such payments or after the expiration of the credit clause of
the policy; and
"3. Subject to no loss prior to premium payment. If there be any loss such is not covered."cralaw
virtua1aw library
Petitioner further claimed that the policy was never binding and valid, and no risk attached to the
policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85,
and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the
premium payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following
findings:jgc:chanrobles.com.ph
"While it is true that the receipts issued to the defendant contained the aforementioned
reservations, it is equally true that payment of the premiums of the three aforementioned policies
(being sought to be refunded) were made during the lifetime or term of said policies, hence, it could
not be said, inspite of the reservations, that no risk attached under the policies. Consequently,
defendant’s counterclaim for refund is not justified.
"As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of the
reservation in the receipts ordinarily issued by the plaintiff on premium payments the only
plausible conclusion is that plaintiff has no right to demand their payment after the lapse of the
term of said policy on March 1, 1985. Therefore, the defendant was justified in refusing to pay the
same." 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals
rendered a decision 2 modifying that of the trial court by ordering herein petitioner to pay the
balance of the premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until
fully paid, and affirming the denial of the counterclaim. The appellate court thus explained —
"The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire
premium. Here, the parties herein agreed to make the premiums payable in installments, and there
is no pretense that the parties never envisioned to make the insurance contract binding between
them. It was renewed for two succeeding years, the second and third policies being a
renewal/replacement for the previous one. And the insured never informed the insurer that it was
terminating the policy because the terms were unacceptable.
"While it may be true that under Section 77 of the Insurance Code, the parties may not agree to
make the insurance contract valid and binding without payment of premiums, there is nothing in
said section which suggests that the parties may not agree to allow payment of the premiums in
installment, or to consider the contract as valid and binding upon payment of the first premium.
Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss
incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance
of partial payments, a result eschewed by basic considerations of fairness and equity.
"To our mind, the insurance contract became valid and binding upon payment of the first premium,
and the plaintiff could not have denied liability on the ground that payment was not made in full, for
the reason that it agreed to accept installment payments . . ." 3
Petitioner now asserts that its payment by installment of the premiums for the insurance policies
for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the
Insurance Code, as amended, and by the conditions stipulated by the insurer in its receipts,
disclaiming liability for loss occurring before payment of premiums.
The reliance by petitioner on Arce v. Capital Surety and Insurance Co. 5 is unavailing because the
facts therein are substantially different from those in the case at bar. In Arce, no payment was made
by the insured at all despite the grace period given. In the case before Us, petitioner paid the initial
installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983
insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to
pay the balance.chanrobles lawlibrary : rednad
It appearing from the peculiar circumstances that the parties actually intended to make the three
(3) insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its
obligation to pay the balance of the premium after the expiration of the whole term of the third
policy (No. AH-CPP-9210651) in March 1985. Moreover, as correctly observed by the appellate
court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of
the premiums paid if the insurer was exposed to the risk insured for any period, however brief or
momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED.
Costs against petitioner.

It argues that where the premium is not actually paid in full, the policy would only be effective if SO ORDERED.
there is an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the
Insurance Code. The absence of an express acknowledgment in the policies of such receipt of the
corresponding premium payments, and petitioner’s failure to pay said premiums on or before the
effective dates of said policies rendered them invalid. Petitioner thus concludes that there cannot be
a perfected contract of insurance upon mere partial payment of the premiums because under Sec.
77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof
has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a
refund of all premium payments made on the alleged invalid insurance policies.chanrobles law
library : red

We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that petitioner and private respondent intended subject insurance policies to
be binding and effective notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3)
years, the insurer accepted all the installment payments. Such acceptance of payments speaks
loudly of the insurer’s intention to honor the policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny liability on the lame excuse that the
premiums were not prepaid in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and
conclusion of the appellate court contained in its Resolution denying the motion to reconsider its
Decision —

"While the import of Section 77 is that prepayment of premiums is strictly required as a condition to
the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer, would prevent the entire contract of insurance from going
into effect despite payment and acceptance of the initial premium or first installment. Section 78 of
the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making
an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums
are not paid, but does not expressly prohibit an agreement granting credit extension, and such an
agreement is not contrary to morals, good customs, public order or public policy (De Leon, the
Insurance Code, at p. 175). So is an understanding to allow insured to pay premiums in installments
not so proscribed. At the very least, both parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted." 4
 [G.R. NO. 156167 : May 16, 2005] P100,000.00 - for furniture, fixtures, lines air-con and opera

GULF RESORTS, INC., Petitioner, v. PHILIPPINE CHARTER INSURANCE

CORPORATION, Respondent. that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-
4568061-9 (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
DECISION 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, defendant's Policy No. 31944 (Exh. "I"), which is
PUNO, J.: the policy in question, contained on the right-hand upper portion of page 7 thereof, the following:

Before the Court is the Petition for Certiorariunder Rule 45 of the Revised Rules of Court by Rate-Various
petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE
CORPORATION. Petitioner assails the appellate court decision1 which dismissed its two appeals and Premium ' P37,420.60 F/L
affirmed the judgment of the trial court. ' 2,061.52 ' Typhoon
' 1,030.76 ' EC
For review are the warring interpretations of petitioner and respondent on the scope of the
insurance company's liability for earthquake damage to petitioner's properties. Petitioner avers ' 393.00 ' ES
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 Doc. Stamps 3,068.10
rider limits its liability for loss to the two swimming pools of petitioner. F.S.T. 776.89
Prem. Tax 409.05
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
TOTAL 45,159.92;
[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 that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C",
earthquake shock (ES); that in all the six insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the
"D", "E" and "F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. "C" and "1-B"; "2-
was extended only to plaintiff's two swimming pools, thus, "earthquake shock endt." (Item 5 only) B" and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs.
(Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only (Exhs. "C-1"; 'D-1", "E" and "F-1"). "C", "D", "E", "F", "G" and "H") and in Policy No. 31944 issued by defendant, the shock endorsement
"Item 5" in those policies referred to the two (2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and provide(sic):
"F-2"); that subsequently AHAC(AIU) issued in plaintiff's favor Policy No. 206-4182383-0 covering
the period March 14, 1988 to March 14, 1989 (Exhs. "G" also "G-1") and in said policy the
earthquake endorsement clause as indicated in Exhibits "C-1", "D-1", Exhibits "E" and "F-1" was In consideration of the payment by the insured to the company of the sum included additional
deleted and the entry under Endorsements/Warranties at the time of issue read that plaintiff premium the Company agrees, notwithstanding what is stated in the printed conditions of this
renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under policy due to the contrary, that this insurance covers loss or damage to shock to any of the property
Policy No. 206-4568061-9 (Exh. "H") which carried the entry under "Endorsement/Warranties at insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2-D",
Time of Issue", which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the amount "3-A", "4-B", "5-A", "6-D" and "7-C");
of P10,700.00 and paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof, computed as
follows:
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 plaintiff's properties covered by
Item - P7,691,000.00 - on the Clubhouse only Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort
were damaged.2

- 1,500,000.00 -
- 393,000.00 -
- 116,600.00
a) Tilter House
b) Power House
c) House Shed
@ .392%;
After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance
on the furniture, etc. contained in the building Policy No. 31944
above-mentioned@ for damages on its properties. Respondent instructed petitioner to file a
.490%;
formal claim, then assigned the investigation of the claim to an independent claims adjuster, Bayne
on the two swimming pools, only (against theAdjusters
peril of earthquake shock
and Surveyors, only)
Inc. 3 On@ 0.100%
July 30, 1990, respondent, through its adjuster, requested
other buildings include as follows: 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 report5 finding
- P19,800.00 - 0.551% 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
- P41,000.00 - 0.551% earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand7 for settlement of the
- P55,000.00 - 0.540% damage to all its properties in the Agoo Playa Resort. On August 23, 1990, respondent denied
petitioner's 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 complaint10with 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 defendant's 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 attorney's 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 defendant's
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 plaintiff's 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
defendant's obligation to plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner's 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-APPELLANT'S RIGHT TO RECOVER
UNDER DEFENDANT-APPELLEE'S 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 court's failure to award it
attorney's 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-appellant's prayer for the
imposition of interest - 24% on the insurance claim and 6% on loss of income allegedly amounting
to P4,280,000.00. 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-appellant's prayer for an attorney's 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-appellant's
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 RESPONDENT'S
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 PETITIONER'S PRAYER FOR
DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEY'S FEES AND EXPENSES
OF LITIGATION.
Petitioner contends:
First, that the policy's 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, limits were placed on the endorsements/warranties
enumerated at the time of issue.
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 respondent's 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 resort's properties for
earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake shock. Respondent's 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 petitioner's 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. AHAC-
AIU, in a letter19 by its representative Manuel C. Quijano, categorically stated that its previous policy,
from which respondent's policy was copied, covered only earthquake shock for the two swimming
pools.
Second, petitioner's 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 petitioner's 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 rider's 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 paid P393.00 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. Petitioner's 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. Respondent's 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 adjuster's
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-AIU's 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, attorney's 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
xxx
3 393,000.00 0.100%-E/S
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.25All 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
PREMIUM
contingent event. Thus, an insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
393.0022]
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; andcralawlibrary
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.27In 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 petitioner's previous insurance policies from AHAC-AIU. As
borne out by petitioner's 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?cralawlibrary
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?cralawlibrary
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?cralawlibrary
A. Yes, sir.
Q. Did you also do this through your insurance agency?cralawlibrary
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?cralawlibrary
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?cralawlibrary
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?cralawlibrary
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?cralawlibrary
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?cralawlibrary
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that
correct?cralawlibrary
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?cralawlibrary
A. Are you referring to the insurance policy issued by American Home Assurance Company marked
Exhibit "G"?cralawlibrary
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 III30
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?cralawlibrary
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. Plaintiff's 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
plaintiff's witness?cralawlibrary
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 don't, sir.
Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was placed, is it
not?cralawlibrary
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 petitioner's contention that respondent's 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. Petitioner's 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?cralawlibrary
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?cralawlibrary
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium rates?cralawlibrary
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?cralawlibrary
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?cralawlibrary
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?cralawlibrary
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 respondent's representative Atty. Umlas were not proved.
Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondent's 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?cralawlibrary
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 Q. What steps did you take?cralawlibrary
swimming pools all affected items have no coverage for earthquake shock?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told
xxx him that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.

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.
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-AIU's 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 sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The Petition for Certiorari is
general rule that insurance contracts are contracts of adhesion which should be liberally construed dismissed. No costs.
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
SO ORDERED.
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 petitioner's knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36

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?cralawlibrary

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?cralawlibrary

A. Yes, sir.
G.R. No. 125678 March 18, 2002 2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,
vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
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,
respondent’s 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
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorney’s 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 Petitioner’s 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 Code6 does not apply.1âwphi1.nêt
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
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
unknown or contingent event. An insurance contract exists where the following elements concur:
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 Ernani’s medical history. Doctors at the MMC 1. The insured has an insurable interest;
allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization
2. The insured is subject to a risk of loss by the happening of the designated peril;
expenses herself, amounting to about P76,000.00.

3. The insurer assumes the risk;

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 4. Such assumption of risk is part of a general scheme to distribute actual losses among a
and was feeling very weak. Respondent was constrained to bring him back to the Chinese General large group of persons bearing a similar risk; and
Hospital where he died on the same day.
5. In consideration of the insurer’s promise, the insured pays a premium. 8
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
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or
Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and
future, which may damnify a person having an insurable interest against him, may be insured
attorney’s fees. After trial, the lower court ruled against petitioners, viz:
against. Every person has an insurable interest in the life and health of himself. Section 10 provides:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff
Every person has an insurable interest in the life and health:
Julita Trinos, ordering:

(1) of himself, of his spouse and of his children;

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) 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 respondent’s 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 respondent’s husband concealed a material fact in his application. It appears
that in the application for health coverage, petitioners required respondent’s 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
respondent’s 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 applicant’s 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 respondent’s
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.17In 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 respondent’s 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 deceased’s
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.
G.R. No. 137172 April 4, 2001 Hence Masagana filed this case.

UCPB GENERAL INSURANCE CO., INC., petitioner, The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the
vs. premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond
MASAGANA TELAMART, INC., respondent. the effective date of renewal as provided under Policy Condition No. 26, which states:

RESOLUTION 26. Renewal Clause. — Unless the company at least forty five days in advance of the end of
the policy period mails or delivers to the assured at the address shown in the policy
notice of its intention not to renew the policy or to condition its renewal upon reduction
DAVIDE, JR., C.J.:
of limits or elimination of coverages, the assured shall be entitled to renew the policy
upon payment of the premium due on the effective date of renewal.
In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the
Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent,
Respondent to consign the sum of P225,753.95 as full payment of the premiums for the renewal of
which had procured insurance coverage from Petitioner for a number of years, had been granted a
the five insurance policies on Respondent's properties; (b) declaring the replacement-renewal
60 to 90-day credit term for the renewal of the policies. Such a practice had existed up to the time
policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to
the claims were filed. Thus:
pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-
replacement policies. The modification consisted in the (1) deletion of the trial court's declaration
that three of the policies were in force from August 1991 to August 1992; and (2) reduction of the Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on
award of the attorney's fees from 25% to 10% of the total amount due the Respondent. May 7, 1990 but premium was paid more than 90 days later on August 31, 1990 under
O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk
Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but
The material operative facts upon which the appealed judgment was based are summarized by the
premium was collected by UCPB only on July 13, 1990 or more than 60 days later under
Court of Appeals in its assailed decision as follows:
O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy
No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W"
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22,
City and Manila] . . . . 1991 was issued on May 3, 1990 but premium was paid only on July 19, 1990 under O.R.
No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688 for insurance coverage
from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May
only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy
1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at
No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on
2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992,
May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R.
plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's Checks in
No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks
the total amount of P225,753.45 as renewal premium payments for which Official Receipt
from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's
Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July
sister company) dated December 10, 1988 but premium therefor was paid only on
14, 1992, Masagana made its formal demand for indemnification for the burned insured
February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy
properties. On the same day, defendant returned the five (5) manager's checks stating in
No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989
its letter (Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on the
under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs.
following grounds:
"CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22, 1989 but
premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk
"a) Said policies expired last May 22, 1992 and were not renewed for another coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance
term; Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid only on
February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22, 1989 to
May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on
b) Defendant had put plaintiff and its alleged broker on notice of non-renewal
November 22, 1988 but premium therefor was collected only on March 15, 1989 under
earlier; and
O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15,
1989 (Exhs. "FF" and "FF-1").
c) The properties covered by the said policies were burned in a fire that took
place last June 13, 1992, or before tender of premium payment."
Moreover, according to the Court of Appeals the following circumstances constitute preponderant
proof that no timely notice of non-renewal was made by Petitioner:
(Record, p. 5)
(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from
Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up
to 67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice of
 non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or within 45 for reconsideration. The following facts, as found by the trial court and the Court of Appeals, are
days from the expiry dates of the policies as provided under Policy Condition No. 26; (2) indeed duly established:
Defendant insurer unconditionally accepted, and issued an official receipt for, the
premium payment on July 1[3], 1992 which indicates defendant's willingness to assume
1. For years, Petitioner had been issuing fire policies to the Respondent, and these
the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer
policies were annually renewed.
appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by the
letter dated July 17, 1992 (Exhibit "11", Record, p. 254).
2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to
pay the premiums on the renewed policies.
In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies
issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . .
had been extended or renewed by an implied credit arrangement though actual payment of 3. There was no valid notice of non-renewal of the policies in question, as there is no
premium was tendered on a later date and after the occurrence of the (fire) risk insured against." proof at all that the notice sent by ordinary mail was received by Respondent, and the
We resolved this issue in the negative in view of Section 77 of the Insurance Code and our decisions copy thereof allegedly sent to Zuellig was ever transmitted to Respondent.
in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of
Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the
4. The premiums for the policies in question in the aggregate amount of P225,753.95
Court of Appeals.
were paid by Respondent within the 60- to 90-day credit term and were duly accepted
and received by Petitioner's cashier.
Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own findings of facts, which are not in accord with
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of
those of the trial court and the Court of Appeals. The courts below correctly found that no notice of
1978 (P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of
non-renewal was made within 45 days before 22 May 1992, or before the expiration date of the fire
granting a 60- to 90-day credit term for the payment of premiums.
insurance policies. Thus, the policies in question were renewed by operation of law and were
effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within
the 60- to 90-day credit term. Section 77 of the Insurance Code of 1978 provides:

Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly SECTION 77. An insurer is entitled to payment of the premium as soon as the thing
on the extension of credit or time to pay the premium nor consider a policy binding before actual insured is exposed to the peril insured against. Notwithstanding any agreement to the
payment. It urges the Court to take judicial notice of the fact that despite the express provision of contrary, no policy or contract of insurance issued by an insurance company is valid and
Section 77 of the Insurance Code, extension of credit terms in premium payment has been the binding unless and until the premium thereof has been paid, except in the case of a life or
prevalent practice in the insurance industry. Most insurance companies, including Petitioner, extend an industrial life policy whenever the grace period provision applies.
credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely
designed for the protection of the parties to an insurance contract. The Code itself, in Section 78,
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18
authorizes the validity of a policy notwithstanding non-payment of premiums.
December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known
as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read:
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of
Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on
SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is
the 60- to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days
exposed to the peril insured against, unless there is clear agreement to grant the insured
after the due dates. By extending credit and habitually accepting payments 60 to 90 days from the
credit extension of the premium due. No policy issued by an insurance company is valid
effective dates of the policies, it has implicitly agreed to modify the tenor of the insurance policy and
and binding unless and until the premium thereof has been paid. (Italic supplied)
in effect waived the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?
Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both
the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by
ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to The answer is in the affirmative.
Respondent's broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware
of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows that in
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life
order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on
policy whenever the grace period provision applies.
the effective date of renewal should first be made. Respondent's argument that Section 77 is not a
prohibitive provision finds no authoritative support.
The second is that covered by Section 78 of the Insurance Code, which provides:
Upon a meticulous review of the records and reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of
premium is conclusive evidence of its payment, so far as to make the policy binding,
 notwithstanding any stipulation therein that it shall not be binding until premium is Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
actually paid. permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
exception to Section 77.
Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment
in installments of the premium and partial payment has been made at the time of loss. We said
therein, thus: WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET
ASIDE, and a new one is hereby entered DENYING the instant petition for failure of
Petitioner to sufficiently show that a reversible error was committed by the Court of
We hold that the subject policies are valid even if the premiums were paid on
Appeals in its challenged decision, which is hereby AFFIRMED in toto.
installments. The records clearly show that the petitioners and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in 1982 No pronouncement as to cost.
was renewed in 1983, then in 1984. In those three years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's
SO ORDERED.
intention to honor the policies it issued to petitioner. Certainly, basic principles of equity
and fairness would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse that
the premiums were not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court
of Appeals in its Resolution denying the motion for reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as a

condition to the validity of the contract, We are not prepared to rule that the request to
make installment payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the initial
premium or first installment. Section 78 of the Insurance Code in effect allows waiver by
the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to
make the policy binding despite the fact that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting credit extension, and
such an agreement is not contrary to morals, good customs, public order or public policy
(De Leon, The Insurance Code, p. 175). So is an understanding to allow insured to pay
premiums in installments not so prescribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for
the payment of the premium. This simply means that if the insurer has granted the insured a credit
term for the payment of the premium and loss occurs before the expiration of the term, recovery on
the policy should be allowed even though the premium is paid after the loss but within the credit
term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to
provide a credit term within which to pay the premiums. That agreement is not against the law,
morals, good customs, public order or public policy. The agreement binds the parties. Article 1306
of the Civil Code provides:

ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
 [G.R. No. 130421. June 28, 1999.]
AMERICAN HOME ASSURANCE COMPANY, Petitioner, v. ANTONIO CHUA, Respondent.
DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
petitioner seeks the reversal of the decision 1 of the Court of Appeals in CA-G.R. CV No. 40751,
which affirmed in toto the decision of the Regional Trial Court, Makati City, Branch 150 (hereafter
trial court), in Civil Case No. 91-1009.chanroblesvirtualawlibrary
Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990,
respondent obtained from petitioner a fire insurance covering the stock-in-trade of his business,
Moonlight Enterprises, located at Valencia, Bukidnon. The insurance was due to expire on 25 March
1990.
On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to
petitioner’s agent, James Uy, as payment for the renewal of the policy. In turn, the latter delivered
Renewal Certificate No. 00099047 to Respondent. The check was drawn against a Manila bank and
deposited in petitioner’s bank account in Cagayan de Oro City. The corresponding official receipt
was issued on 10 April. Subsequently, a new insurance policy, Policy No. 206-4234498-7, was
issued, whereby petitioner undertook to indemnify respondent for any damage or loss arising from
fire up to P200,000 for the period 25 March 1990 to 25 March 1991.
On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated
between P4,000,000 and P5,000,000. Respondent filed an insurance claim with petitioner and four
other co-insurers, namely, Pioneer Insurance and Surety Corporation, Prudential Guarantee and
Assurance, Inc., Filipino Merchants Insurance Co. and Domestic Insurance Company of the
Philippines. Petitioner refused to honor the claim notwithstanding several demands by respondent,
thus, the latter filed an action against petitioner before the trial court.
In its defense, petitioner claimed there was no existing insurance contract when the fire occurred
since respondent did not pay the premium. It also alleged that even assuming there was a contract,
respondent violated several conditions of the policy, particularly: (1) his submission of fraudulent
income tax return and financial statements; (2) his failure to establish the actual loss, which
petitioner assessed at P70,000; and (3) his failure to notify to petitioner of any insurance already
effected to cover the insured goods. These violations, petitioner insisted, justified the denial of the
claim.chanrobles.com.ph : virtual law library
The trial court ruled in favor of Respondent. It found that respondent paid by way of check a day
before the fire occurred. The check, which was deposited in petitioner’s bank account, was even
acknowledged in the renewal certificate issued by petitioner’s agent. It declared that the alleged
fraudulent documents were limited to the disparity between the official receipts issued by the
Bureau of Internal Revenue (BIR) and the income tax returns for the years 1987 to 1989. All the
other documents were found to be genuine. Nonetheless, it gave credence to the BIR certification
that respondent paid the corresponding taxes due for the questioned years.
As to respondent’s failure to notify petitioner of the other insurance contracts covering the same
goods, the trial court held that petitioner failed to show that such omission was intentional and
fraudulent. Finally, it noted that petitioner’s investigation of respondent’s claim was done in
collaboration with the representatives of other insurance companies who found no irregularity
therein. In fact, Pioneer Insurance and Surety Corporation and Prudential Guarantee and Assurance,
Inc. promptly paid the claims filed by Respondent.
The trial court decreed as follows:chanrob1es virtual 1aw library
WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the [petitioner]
ordering the latter to pay the former the following:chanrob1es virtual 1aw library
1. P200,000.00, representing the amount of the insurance, plus legal interest from the date of filing
of this case;
2. P200,000.00 as moral damages;
3. P200,000.00 as loss of profit;
4. P100,000.00 as exemplary damages;
5. P50,000.00 as attorney’s fees; and
6. Cost of suit.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals
found that respondent’s claim was substantially proved and petitioner’s unjustified refusal to pay
the claim entitled respondent to the award of damages.
Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in
this case. Petitioner reiterates its stand that there was no existing insurance contract between the
parties. It invokes Section 77 of the Insurance Code, which provides:chanrob1es virtual 1aw library
An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been
paid, except in the case of life or an industrial life policy whenever the grace period provision
applies.
and cites the case of Arce v. Capital Insurance & Surety Co., Inc., 2 where we ruled that unless and
until the premium is paid there is no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not
yet subsisting pursuant to Article 1249 3 of the Civil Code, which recognizes that a check can only
effect payment once it has been cashed. Although respondent testified that he gave the check on 5
April to a certain James Uy, the check, drawn against a Manila bank and deposited in a Cagayan de
Oro City bank, could not have been cleared by 6 April, the date of the fire. In fact, the official receipt
issued for respondent’s check payment was dated 10 April 1990, four days after the fire
occurred.chanrobles virtual lawlibrary
Citing jurisprudence, 4 petitioner also contends that respondent’s non-disclosure of the other
insurance contracts rendered the policy void. It underscores the trial court’s neglect in considering
the Commission on Audit’s certification that the BIR receipts submitted by respondent were, in
effect, fake since they were issued to other persons. Finally, petitioner argues that the award of
damages was excessive and unreasonable considering that it did not act in bad faith in denying
respondent’s claim.
Respondent counters that the issue of non-payment of premium is a question of fact which can no
longer be assailed. The trial court’s finding on the matter, which was affirmed by the Court of
Appeals, is conclusive.
Respondent refutes the reason for petitioner’s denial of his claim. As found by the trial court,
petitioner’s loss adjuster admitted prior knowledge of respondent’s existing insurance contracts
with the other insurance companies. Nonetheless, the loss adjuster recommended the denial of the
claim, not because of the said contracts, but because he was suspicious of the authenticity of certain
documents which respondent submitted in filing his claim.
To bolster his argument, respondent cites Section 66 of the Insurance Code, 5 which requires the
insurer to give a notice to the insured of its intention to terminate the policy forty-five days before
the policy period ends. In the instant case, petitioner opted not to terminate the policy. Instead, it
renewed the policy by sending its agent to respondent, who was issued a renewal certificate upon
delivery of his check payment for the renewal of premium. At this precise moment the contract of
insurance was executed and already in effect. Respondent also claims that it is standard operating
procedure in the provinces to pay insurance premiums by check when collected by insurance
agents.chanrobles.com : virtual law library
On the issue of damages, respondent maintains that the amounts awarded were reasonable. He cites
numerous trips he had to make from Cagayan de Oro City to Manila to follow up his rightful claim.
He imputes bad faith on petitioner who made enforcement of his claim difficult in the hope that he
would eventually abandon it. He further emphasizes that the adjusters of the other insurance
companies recommended payment of his claim, and they complied therewith.
In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial
court and the Court of Appeals.
Petitioner invokes respondent’s admission that his check for the renewal of the policy was received
only on 10 April 1990, taking into account that the policy period was 25 March 1990 to 25 March
1991. The official receipt was dated 10 April 1990. Anent respondent’s testimony that the check was
given to petitioner’s agent, a certain James Uy, the latter points out that even respondent was not
sure if Uy was indeed its agent. It faults respondent for not producing Uy as his witness and not
taking any receipt from him upon presentment of the check. Even assuming that the check was
received a day before the occurrence of the fire, there still could not have been any payment until
the check was cleared.
Moreover, petitioner denies respondent’s allegation that it intended a renewal of the contract for
the renewal certificate clearly specified the following conditions:chanrob1es virtual 1aw library
Subject to the payment by the assured of the amount due prior to renewal date, the policy shall be
renewed for the period stated.
Any payment tendered other than in cash is received subject to actual cash collection.
Subject to no loss prior to premium payment. If there be any loss, and is not covered [sic].
Petitioner asserts that an insurance contract can only be enforced upon the payment of the
premium, which should have been made before the renewal period.chanrobles lawlibrary : rednad
Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy
in issue was limited to a liability of P200,000; but the trial court granted the following monetary
awards: P200,000 as actual damages; P200,000 as moral damages; P100,000 as exemplary
damages; and P50,000 as attorney’s fees.
The following issues must be resolved: first, whether there was a valid payment of premium,
considering that respondent’s check was cashed after the occurrence of the fire; second, whether
respondent violated the policy by his submission of fraudulent documents and non-disclosure of the
other existing insurance contracts; and finally, whether respondent is entitled to the award of
damages.
The general rule in insurance laws is that unless the premium is paid the insurance policy is not
valid and binding. The only exceptions are life and industrial life insurance. 6 Whether payment was
indeed made is a question of fact which is best determined by the trial court. The trial court found,
as affirmed by the Court of Appeals, that there was a valid check payment by respondent to
petitioner. Well-settled is the rule that the factual findings and conclusions of the trial court and the
Court of Appeals are entitled to great weight and respect, and will not be disturbed on appeal in the
absence of any clear showing that the trial court overlooked certain facts or circumstances which
would substantially affect the disposition of the case. 7 We see no reason to depart from this ruling.
According to the trial court the renewal certificate issued to respondent contained the
acknowledgment that premium had been paid. It is not disputed that the check drawn by
respondent in favor of petitioner and delivered to its agent was honored when presented and
petitioner forthwith issued its official receipt to respondent on 10 April 1990. Section 306 of the
Insurance Code provides that any insurance company which delivers a policy or contract of
insurance to an insurance agent or insurance broker shall be deemed to have authorized such agent
or broker to receive on its behalf payment of any premium which is due on such policy or contract
of insurance at the time of its issuance or delivery or which becomes due thereon. 8 In the instant
case, the best evidence of such authority is the fact that petitioner accepted the check and issued the
official receipt for the payment. It is, as well, bound by its agent’s acknowledgment of receipt of
payment.chanroblesvirtual|awlibrary
Section 78 of the Insurance Code explicitly provides:chanrob1es virtual 1aw library
An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is actually paid.
This Section establishes a legal fiction of payment and should be interpreted as an exception to
Section 77. 9
Is respondent guilty of the policy violations imputed against him? We are not convinced by
petitioner’s arguments. The submission of the alleged fraudulent documents pertained to
respondent’s income tax returns for 1987 to 1989. Respondent, however, presented a BIR
certification that he had paid the proper taxes for the said years. The trial court and the Court of
Appeals gave credence to the certification and it being a question of fact, we hold that said finding is
conclusive.chanroblesvirtual|awlibrary
Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers,
non-disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is
common in fire insurance policies and is known as the "other insurance clause." The purpose for the
inclusion of this clause is to prevent an increase in the moral hazard. We have ruled on its validity
and the case of Geagonia v. Court of Appeals 10 clearly illustrates such principle. However, we see
an exception in the instant case.
Citing Section 29 11 of the Insurance Code, the trial court reasoned that respondent’s failure to
disclose was not intentional and fraudulent. The application of Section 29 is misplaced. Section 29
concerns concealment which is intentional. The relevant provision is Section 75, which provides
that:chanrob1es virtual 1aw library
A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid the policy.
To constitute a violation the other existing insurance contracts must be upon the same subject
matter and with the same interest and risk. 12 Indeed, respondent acquired several co-insurers and
he failed to disclose this information to petitioner. Nonetheless, petitioner is estopped from
invoking this argument. The trial court cited the testimony of petitioner’s loss adjuster who
admitted previous knowledge of the co-insurers. Thus,
COURT:chanrob1es virtual 1aw library
 because of the policy that no premium should be placed on the right to litigate. 17 In short, the grant
Q The matter of additional insurance of other companies, was that ever discussed in your of attorney’s fees as part of damages is the exception rather than the rule; counsel’s fees are not
investigation? awarded every time a party prevails in a suit. It can be awarded only in the cases enumerated in
Article 2208 of the Civil Code, and in all cases it must be reasonable. 18 Thereunder, the trial court
A Yes, sir. may award attorney’s fees where it deems just and equitable that it be so granted. While we respect
the trial court’s exercise of its discretion in this case, the award of P50,000 is unreasonable and
Q In other words, from the start, you were aware the insured was insured with other companies like excessive. It should be reduced to P10,000.
Pioneer and so on?
WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of
A Yes, Your Honor. Appeals in CA-G.R. No. 40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss of
profit, P200,000 as moral damages and P100,000 as exemplary damages, and b) reducing the award
Q But in your report you never recommended the denial of the claim simply because of the non- of attorney’s fees from P50,000 to P10,000.chanroblesvirtuallawlibrary
disclosure of other insurance? [sic]
No pronouncement as to costs.
A Yes, Your Honor.
SO ORDERED.
Q In other words, to be emphatic about this, the only reason you recommended the denial of the
claim, you found three documents to be spurious. That is your only
basis?chanrobles.com:cralaw:red

A Yes, Your Honor. 13 [Emphasis supplied]

Indubitably, it cannot be said that petitioner was deceived by respondent by the latter’s non-
disclosure of the other insurance contracts when petitioner actually had prior knowledge thereof.
Petitioner’s loss adjuster had known all along of the other existing insurance contracts, yet, he did
not use that as basis for his recommendation of denial. The loss adjuster, being an employee of
petitioner, is deemed a representative of the latter whose awareness of the other insurance
contracts binds petitioner. We, therefore, hold that there was no violation of the "other insurance"
clause by Respondent.

Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct
in awarding P200,000 for this. There is, however, merit in petitioner’s grievance against the
damages and attorney’s fees awarded.

There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied
that the fire totally gutted respondent’s business; thus, respondent no longer had any business to
operate. His loss of profit cannot be shouldered by petitioner whose obligation is limited to the
object of insurance, which was the stock-in-trade, and not the expected loss in income or profit.

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

The law 16 is likewise clear that in contracts and quasi-contracts the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Nothing thereof can be attributed to petitioner which merely tried to resist what it claimed to be an
unfounded claim for enforcement of the fire insurance policy.

As to attorney’s fees, the general rule is that attorney’s fees cannot be recovered as part of damages
 [G.R. No. 85141. November 28, 1989.]
FILIPINO MERCHANTS INSURANCE CO., INC., Petitioner, v. COURT OF APPEALS and CHOA TIEK
SENG, Respondents.
Balgos & Perez Law Offices for Petitioner.
Lapuz Law Office for Private Respondent.
SYLLABUS
1. COMMERCIAL LAW; MARINE INSURANCE; "ALL RISKS POLICY;" COVERS ALL LOSSES BY ANY
KIND OF ACCIDENTS. — An "all risks policy" should be read literally as meaning all risks
whatsoever and covering all losses by an accidental cause of any kind. The terms "accident" and
"accidental", as used in insurance contracts, have not acquired any technical meaning. They are
construed by the courts in their ordinary and common acceptance. Thus, the terms have been taken
to mean that which happens by chance or fortuitously, without intention and design, and which is
unexpected, unusual and unforeseen. An accident is an event that takes place without one’s
foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a
known cause and, therefore, not expected.
2. ID.; INSURANCE; CONSIDERED CONTRACTS OF INDEMNITY; IF TERMS ARE CLEAR, POLICY
MUST BE UNDERSTOOD IN THEIR PLAIN, ORDINARY AND POPULAR SENSE. — Contracts of
insurance are contracts of indemnity upon the terms and conditions specified in the policy. The
agreement has the force of law between the parties. The terms of the policy constitute the measure
of the insurer’s liability. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense.
3. ID.; ID.; INSURABLE INTEREST, DEFINITION OF; KINDS. — Section 13 of the Insurance Code
defines insurable interest in property as every interest in property, whether real or personal, or any
relation thereto, or liability in respect thereof, of such nature that a contemplated peril might
directly damnify the insured. In principle, anyone has an insurable interest in property who derives
a benefit from its existence or would suffer loss from its destruction whether he has or has not any
title in, or lien upon or possession of the property. Insurable interest in property may consist in (a)
an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy,
coupled with an existing interest in that out of which the expectancy arises.
4. ID.; ID.; VENDEE OF GOODS INSURED HAS AN EQUITABLE TITLE EVEN BEFORE DELIVERY ON
PERFORMANCE OF CONDITIONS OF SALE. — Herein private respondent, as vendee/consignee of
the goods in transit has such existing interest therein as may be the subject of a valid contract of
insurance. His interest over the goods is based on the perfected contract of sale. The perfected
contract of sale between him and the shipper of the goods operates to vest in him an equitable title
even before delivery or before he performed the conditions of the sale. The contract of shipment,
whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether
the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale
even without delivery vests in the vendee an equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
5. CIVIL LAW; SALES; DELIVERY OF GOODS ON BOARD THE CARRYING VESSEL CONSIDERED AN
ACTUAL DELIVERY. — Article 1523 of the Civil Code provides that where, in pursuance of a contract
of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a
carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed
to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present
case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels
partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks
of loss of the goods and paid the insurance premium covering them.
6. COMMERCIAL LAW; CODE OF COMMERCE; C & F CONTRACTS MEAN SELLER MUST PAY THE
COSTS AND FREIGHT BUT BUYER ASSUMES RISKS OF LOSS. — C & F contracts are shipment
contracts. The term means that the price fixed includes in a lump sum the cost of the goods and
freight to the named destination. It simply means that the seller must pay the costs and freight
necessary to bring the goods to the named destination but the risk of loss or damage to the goods is
transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment.
7. REMEDIAL LAW; APPEAL; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR
THE FIRST TIME ON APPEAL. — It is a settled rule that an issue which has not been raised in the
court a quo cannot be raised for the first time on appeal as it would be offensive to the basic rules of
fair play, justice and due process. This is but a permuted restatement of the long settled rule that
when a party deliberately adopts a certain theory, and the case is tried and decided upon that
theory in the court below, he will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party.
DECISION
REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July 19, 1988, the
dispositive part of which reads:chanrobles law library : red
"WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino
Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at legal rate
from the date of filing of the complaint, and is modified with respect to the third party complaint in
that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party plaintiff the sum of
P25,471.80 with legal interest from the date of payment until the date of reimbursement, and (2)
the third-party complaint against third party defendant Compagnie Maritime Des Chargeurs Reunis
is dismissed." 1
The facts as found by the trial court and adopted by the Court of Appeals are as
follows:jgc:chanrobles.com.ph
"This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel
SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and seeks to
recover from the defendant insurance company the amount of P51,568.62 representing damages to
said shipment which has been insured by the defendant insurance company under Policy No. M-
2678. The defendant brought a third party complaint against third party defendants Compagnie
Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against the third (sic)
defendants in case judgment is rendered against the third party plaintiff. It appears from the
evidence presented that in December 1976, plaintiff insured said shipment with defendant
insurance company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods
described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand
to Manila against all risks under warehouse to warehouse terms. Actually, what was imported was
59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags
were unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon,
Inc. and defendant’s surveyor ascertained and certified that in such discharge 105 bags were in bad
order condition as jointly surveyed by the ship’s agent and the arrastre contractor. The condition of
the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to
120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6-Razon. The
cargo was also surveyed by the arrastre contractor before delivery of the cargo to the consignee and
the condition of the cargo on such delivery was reflected in E. Razon’s Bad Order Certificate No.
14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant’s surveyor
has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a
survey report Exhibit F with the findings on the extent of shortage or loss on the bad order bags
totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff
made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A formal claim statement was also
presented by the plaintiff against the vessel dated December 21, 1976, Exhibit B, but the defendant
Filipino Merchants Insurance Company refused to pay the claim. Consequently, the plaintiff brought
an action against said defendant as adverted to above and defendant presented a third party
complaint against the vessel and the arrastre contractor." 2
The court below, after trial on the merits, rendered judgment in favor of private respondent, the
decretal portion whereof reads:jgc:chanrobles.com.ph
"WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and
against the defendant Filipino Merchant’s (sic) Insurance Co., ordering the defendants to pay the
plaintiff the following amount:jgc:chanrobles.com.ph
"The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;
"On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs Reunis
and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff jointly and
severally reimbursement of the amounts paid by the third party plaintiff with legal interest from the
date of such payment until the date of such reimbursement.
"Without pronouncement as to costs." 3
On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the
complaint is concerned and modified the same with regard to the adjudication of the third-party
complaint. A motion for reconsideration of the aforesaid decision was denied, hence this petition
with the following assignment of errors:chanrobles virtual lawlibrary
"1. The Court of Appeals erred in its interpretation and application of the ‘all risks’ clause of the
marime insurance policy when it held the petitioner liable to the private respondent for the partial
loss of the cargo, notwithstanding the clear absence of proof of some fortuitous event, casualty, or
accidental cause to which the loss is attributable, thereby contradicting the very precedents cited by
it in its decision as well as a prior decision of the same Division of the said court (then composed of
Justices Cacdac, Castro-Bartolome, and Pronove);
"2. The Court of Appeals erred in not holding that the private respondent had no insurable interest
in the subject cargo, hence, the marine insurance policy taken out by private respondent is null and
void;
"3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud in not
disclosing the fact, it being bound out of utmost good faith to do so, that it had no insurable interest
in the subject cargo, which bars its recovery on the policy." 4
On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical
meaning in insurance in that before a claim can be compensable it is essential that there must be
"some fortuity," "casualty" or "accidental cause" to which the alleged loss is attributable and the
failure of herein private respondent, upon whom lay the burden, to adduce evidence showing that
the alleged loss to the cargo in question was due to a fortuitous event precludes his right to recover
from the insurance policy. We find said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:jgc:chanrobles.com.ph
"5. This insurance is against all risks of logs or damage to the subject-matter insured but shall in no
case be deemed to extend to cover loss, damage, or expense proximately caused by delay or
inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be
payable irrespective of percentage." 5
An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses
by an accidental cause of any kind. The terms "accident" and "accidental", as used in insurance
contracts, have not acquired any technical meaning. They are construed by the courts in their
ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by
chance or fortuitously, without intention and design, and which is unexpected, unusual and
unforeseen. An accident is an event that takes place without one’s foresight or expectation; an event
that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not
expected. 6
The very nature of the term "all risks" must be given a broad and comprehensive meaning as
covering any loss other than a wilful and fraudulent act of the insured. 7 This is pursuant to the very
purpose of an "all risks" insurance to give protection to the insured in those cases where difficulties
of logical explanation or some mystery surround the loss or damage to property. 8 An "all risks"
policy has been evolved to grant greater protection than that afforded by the "perils clause," in
order to assure that no loss can happen through the incidence of a cause neither insured against nor
creating liability in the ship; it is written against all losses, that is, attributable to external causes. 9
The term "all risks" cannot be given a strained technical meaning, the language of the clause under
the Institute Cargo Clauses being unequivocal and clear, to the effect that it extends to all
damages/losses suffered by the insured cargo except (a) loss or damage or expense proximately
caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or
nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but
under an "all risks" policy the burden is not on the insured to prove the precise cause of loss or
damage for which it seeks compensation. The insured under an "all risks insurance policy" has the
initial burden of proving that the cargo was in good condition when the policy attached and that the
cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer
to show the exception to the coverage. 10 As we held in Paris-Manila Perfumery Co. v. Phoenix
Assurance Co., Ltd. 11 the basic rule is that the insurance company has the burden of proving that
the loss is caused by the risks excepted and for want of such proof, the company is liable.chanrobles
virtual lawlibrary
Coverage under an "all risks" provision of a marine insurance policy creates a special type of
insurance which extends coverage to risks not usually contemplated and avoids putting upon the
insured the burden of establishing that the loss was due to the peril falling within the policy’s
coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly
excludes the loss from coverage. 12 A marine insurance policy providing that the insurance was to
be "against all risks" must be construed as creating a special insurance and extending to other risks
than are usually contemplated, and covers all losses except such as arise from the fraud of the
insured. 13 The burden of the insured, therefore, is to prove merely that the goods he transported
have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove
that the loss was due to excepted perils. To impose on the insured the burden of proving the precise
cause of the loss or damage would be inconsistent with the broad protective purpose of "all risks"
insurance.
In the present case, there being no showing that the loss was caused by any of the excepted perils,
the insurer is liable under the policy. As aptly stated by the respondent Court of Appeals, upon due
consideration of the authorities and jurisprudence it discussed —
". . . it is believed that in the absence of any showing that the losses/damages were caused by an
excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and there is no
such showing, the lower court did not err in holding that the loss was covered by the policy.

"There is no evidence presented to show that the condition of the gunny bags in which the fishmeal
was packed was such that they could not hold their contents in the course of the necessary transit,
much less any evidence that the bags of cargo had burst as the result of the weakness of the bags
themselves. Had there been such a showing that spillage would have been a certainty, there may
have been good reason to plead that there was no risk covered by the policy (See Berk v. Style
[1956] cited in Marine Insurance Claims, ibid, p. 125). Under an ‘all risks’ policy, it was sufficient to
show that there was damage occasioned by some accidental cause of any kind, and there is no
necessity to point to any particular cause." 14
Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the
policy. The agreement has the force of law between the parties. The terms of the policy constitute
the measure of the insurer’s liability. If such terms are clear and unambiguous, they must be taken
and understood in their plain, ordinary and popular sense. 15
that theory in the court below, he will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on
the issue of insurable interest raised by petitioner, it was to put at rest all doubts on the matter
under the facts in this case and also to dispose of petitioner’s third assignment of error which
consequently needs no further discussion.chanrobles lawlibrary : rednad
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of
Appeals is AFFIRMED in toto.
SO ORDERED.

Anent the issue of insurable interest, we uphold the ruling of the respondent court that private
respondent, as consignee of the goods in transit under an invoice containing the terms under "C & F
Manila," has insurable interest in said goods.

Section 13 of the Insurance Code defines insurable interest in property as every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured. In principle, anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its
destruction whether he has or has not any title in, or lien upon or possession of the property. 16
Insurable interest in property may consist in (a) an existing interest; (b) an inchoate interest
founded on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of
which the expectancy arises. 17

Herein private respondent, as vendee/consignee of the goods in transit has such existing interest
therein as may be the subject of a valid contract of insurance. His interest over the goods is based on
the perfected contract of sale. 18 The perfected contract of sale between him and the shipper of the
goods operates to vest in him an equitable title even before delivery or before he performed the
conditions of the sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this
case, is immaterial in the determination of whether the vendee has an insurable interest or not in
the goods in transit. The perfected contract of sale even without delivery vests in the vendee an
equitable title, an existing interest over the goods sufficient to be the subject of insurance.

Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the
seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier,
whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed to be a
delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The
Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of
the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the
goods and paid the insurance premium covering them. 20

C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum
the cost of the goods and freight to the named destination. 21 It simply means that the seller must
pay the costs and freight necessary to bring the goods to the named destination but the risk of loss
or damage to the goods is transferred from the seller to the buyer when the goods pass the ship’s
rail in the port of shipment. 22

Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioner’s
answer. It was neither an issue agreed upon by the parties at the pre-trial conference nor was it
raised during the trial in the court below. It is a settled rule that an issue which has not been raised
in the court a quo cannot be raised for the first time on appeal as it would be offensive to the basic
rules of fair play, justice and due process. 23 This is but a permuted restatement of the long settled
rule that when a party deliberately adopts a certain theory, and the case is tried and decided upon
 [G.R. No. 171468 : August 24, 2011]
NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., PETITIONER, VS. NYK-FILJAPAN
SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP INTERNATIONAL
PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC., MARINA PORT SERVICES, INC.,
SERBROS CARRIER CORPORATION, AND SEABOARD-EASTERN INSURANCE CO., INC.,
RESPONDENTS.
[G.R. NO. 174241]
NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., PETITIONER, VS. SEABOARD-
EASTERN INSURANCE CO., INC., RESPONDENT.
DECISION
ABAD, J.:
These consolidated petitions involve a cargo owner's right to recover damages from the loss of
insured goods under the Carriage of Goods by Sea Act and the Insurance Code.
The Facts and the Case
Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT
Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency
generator sets worth US$721,500.00.
DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International,
Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California,
where it was loaded on S/S California Luna V59, owned and operated by NYK Fil-Japan Shipping
Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued a bill of lading,
declaring that it received the goods in good condition.
NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also
owned and operated. On its journey to Manila, however, ACX Ruby encountered
typhoon Kadiang whose captain filed a sea protest on arrival at the Manila South Harbor on October
5, 1993 respecting the loss and damage that the goods on board his vessel suffered.
Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator,
received the shipment on October 7, 1993. Upon inspection of the three container vans separately
carrying the generator sets, two vans bore signs of external damage while the third van appeared
unscathed. The shipment remained at Pier 3's Container Yard under Marina's care pending
clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs authorities
allowed petitioner's customs broker, Serbros Carrier Corporation (Serbros), to withdraw the
shipment and deliver the same to petitioner New World's job site in Makati City.
An examination of the three generator sets in the presence of petitioner New World's
representatives, Federal Builders (the project contractor) and surveyors of petitioner New World's
insurer, Seaboard-Eastern Insurance Company (Seaboard), revealed that all three sets suffered
extensive damage and could no longer be repaired. For these reasons, New World demanded
recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP International
Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged receipt of the
demand, both denied liability for the loss.
Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it a
formal claim dated November 16, 1993. Replying on February 14, 1994, Seaboard required
petitioner New World to submit to it an itemized list of the damaged units, parts, and accessories,
with corresponding values, for the processing of the claim. But petitioner New World did not
submit what was required of it, insisting that the insurance policy did not include the submission of
such a list in connection with an insurance claim. Reacting to this, Seaboard refused to process the
claim.
On October 11, 1994 petitioner New World filed an action for specific performance and damages
against all the respondents before the Regional Trial Court (RTC) of Makati City, Branch 62, in Civil
Case 94-2770.
On August 16, 2001 the RTC rendered a decision absolving the various respondents from liability
with the exception of NYK. The RTC found that the generator sets were damaged during transit
while in the care of NYK's vessel, ACX Ruby. The latter failed, according to the RTC, to exercise the
degree of diligence required of it in the face of a foretold raging typhoon in its path.
The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK
beyond the one year provided under the Carriage of Goods by Sea Act (COGSA). New World filed its
complaint on October 11, 1994 when the deadline for filing the action (on or before October 7,
1994) had already lapsed. The RTC held that the one-year period should be counted from the date
the goods were delivered to the arrastre operator and not from the date they were delivered to
petitioner's job site.[1]
As regards petitioner New World's claim against Seaboard, its insurer, the RTC held that the latter
cannot be faulted for denying the claim against it since New World refused to submit the itemized
list that Seaboard needed for assessing the damage to the shipment. Likewise, the belated filing of
the complaint prejudiced Seaboard's right to pursue a claim against NYK in the event of subrogation.
On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006, [2] affirming the RTC's
rulings except with respect to Seaboard's liability. The CA held that petitioner New World can still
recoup its loss from Seaboard's marine insurance policy, considering a) that the submission of the
itemized listing is an unreasonable imposition and b) that the one-year prescriptive period under
the COGSA did not affect New World's right under the insurance policy since it was the Insurance
Code that governed the relation between the insurer and the insured.
Although petitioner New World promptly filed a petition for review of the CA decision before the
Court in G.R. 171468, Seaboard chose to file a motion for reconsideration of that decision. On
August 17, 2006 the CA rendered an amended decision, reversing itself as regards the claim against
Seaboard. The CA held that the submission of the itemized listing was a reasonable requirement
that Seaboard asked of New World. Further, the CA held that the one-year prescriptive period for
maritime claims applied to Seaboard, as insurer and subrogee of New World's right against the
vessel owner. New World's failure to comply promptly with what was required of it prejudiced such
right.
Instead of filing a motion for reconsideration, petitioner instituted a second petition for review
before the Court in G.R. 174241, assailing the CA's amended decision.
The Issues Presented
The issues presented in this case are as follows:
a) In G.R. 171468, whether or not the CA erred in affirming the RTC's release from liability of
respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who were at one time or another
involved in handling the shipment; and
b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard's request from petitioner
New World for an itemized list is a reasonable imposition and did not violate the insurance contract
between them; and 2) whether or not the CA erred in failing to rule that the one-year COGSA
prescriptive period for marine claims does not apply to petitioner New World's prosecution of its
claim against Seaboard, its insurer.
 The Court's Rulings
In G.R. 171468 --
Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina
and Serbros in handling and transporting its shipment from Wisconsin to Manila collectively
resulted in the damage to the same, rendering such respondents solidarily liable with NYK, the
vessel owner.
But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a
proper subject of a petition for review on certiorari. And petitioner New World has been unable to
make out an exception to this rule.[3] Consequently, the Court will not disturb the finding of the RTC,
affirmed by the CA, that the generator sets were totally damaged during the typhoon which beset
the vessel's voyage from Hong Kong to Manila and that it was her negligence in continuing with that
journey despite the adverse condition which caused petitioner New World's loss.
That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil Code,
does not automatically relieve the common carrier of liability. The latter had the burden of proving
that the typhoon was the proximate and only cause of loss and that it exercised due diligence to
prevent or minimize such loss before, during, and after the disastrous typhoon. [4] As found by the
RTC and the CA, NYK failed to discharge this burden.
In G.R. 174241 --
One. The Court does not regard as substantial the question of reasonableness of Seaboard's
additional requirement of an itemized listing of the damage that the generator sets suffered. The
record shows that petitioner New World complied with the documentary requirements evidencing
damage to its generator sets.
The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy
insured against all causes of conceivable loss or damage except when otherwise excluded or when
the loss or damage was due to fraud or intentional misconduct committed by the insured. The
policy covered all losses during the voyage whether or not arising from a marine peril. [5]
Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in
voyage, or vessels unseaworthiness, among others.[6] But Seaboard had been unable to show that
petitioner New World's loss or damage fell within some or one of the enumerated exceptions.
What is more, Seaboard had been unable to explain how it could not verify the damage that New
World's goods suffered going by the documents that it already submitted, namely, (1) copy of the
Supplier's Invoice KL2504; (2) copy of the Packing List; (3) copy of the Bill of Lading
01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy of
Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and Insurance
Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of Received Formal
Claim from the following: a) LEP International Philippines, Inc.; b) Marina Port Services, Inc.; and c)
Serbros Carrier Corporation.[7] Notably, Seaboard's own marine surveyor attended the inspection of
the generator sets.
Seaboard cannot pretend that the above documents are inadequate since they were precisely the
documents listed in its insurance policy.[8] Being a contract of adhesion, an insurance policy is
construed strongly against the insurer who prepared it. The Court cannot read a requirement in the
policy that was not there.
Further, it appears from the exchanges of communications between Seaboard and Advatech that
submission of the requested itemized listing was incumbent on the latter as the seller DMT's local
agent. Petitioner New World should not be made to suffer for Advatech's shortcomings.
Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the
ship shall be discharged from all liability in case of loss or damage unless the suit is brought within
one year after delivery of the goods or the date when the goods should have been delivered.
But whose fault was it that the suit against NYK, the common carrier, was not brought to court on
time? The last day for filing such a suit fell on October 7, 1994. The record shows that petitioner
New World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had the right to
take, as early as November 16, 1993 or about 11 months before the suit against NYK would have
fallen due.
In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would
have been subrogated to petitioner New World's right to recover from NYK. And it could have then
filed the suit as a subrogee. But, as discussed above, Seaboard made an unreasonable demand on
February 14, 1994 for an itemized list of the damaged units, parts, and accessories, with
corresponding values when it appeared settled that New World's loss was total and when the
insurance policy did not require the production of such a list in the event of a claim.
Besides, when petitioner New World declined to comply with the demand for the list, Seaboard
against whom a formal claim was pending should not have remained obstinate in refusing to
process that claim. It should have examined the same, found it unsubstantiated by documents if that
were the case, and formally rejected it. That would have at least given petitioner New World a clear
signal that it needed to promptly file its suit directly against NYK and the others. Ultimately, the
fault for the delayed court suit could be brought to Seaboard's doorstep.
Section 241 of the Insurance Code provides that no insurance company doing business in the
Philippines shall refuse without just cause to pay or settle claims arising under coverages provided
by its policies. And, under Section 243, the insurer has 30 days after proof of loss is received and
ascertainment of the loss or damage within which to pay the claim. If such ascertainment is not had
within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or settle the
claim. And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be
entitled to interest on the proceeds of the policy for the duration of delay at the rate of twice the
ceiling prescribed by the Monetary Board.
Notably, Seaboard already incurred delay when it failed to settle petitioner New World's claim as
Section 243 required. Under Section 244, a prima facie evidence of unreasonable delay in payment
of the claim is created by the failure of the insurer to pay the claim within the time fixed in Section
243.
Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the
delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary
Board. The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of
12% per annumprovided in Central Bank Circular 416, pursuant to Presidential Decree
116.[9] Section 244 of the Insurance Code also provides for an award of attorney's fees and other
expenses incurred by the assured due to the unreasonable withholding of payment of his claim.
In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,[10] the Court regarded
as proper an award of 10% of the insurance proceeds as attorney's fees. Such amount is fair
considering the length of time that has passed in prosecuting the claim.[11] Pursuant to the Court's
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] a 12% interest per annum from the
finality of judgment until full satisfaction of the claim should likewise be imposed, the interim
period equivalent to a forbearance of credit.
Petitioner New World is entitled to the value stated in the policy which is commensurate to the
value of the three emergency generator sets or US$721,500.00 with double interest plus attorney's
fees as discussed above.
WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of Appeals
decision of January 31, 2006 insofar as petitioner New World International Development (Phils.),
Inc. is not allowed to recover against respondents DMT Corporation, Advatech Industries, Inc., LEP
International Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and Serbros
Carrier Corporation.

With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and SETS ASIDE the
Court of Appeals Amended Decision of August 17, 2006. The Court DIRECTS Seaboard-Eastern
Insurance Company, Inc. to pay petitioner New World International Development (Phils.), Inc.
US$721,500.00 under Policy MA-HO-000266, with 24% interest per annum for the duration of delay
in accordance with Sections 243 and 244 of the Insurance Code and attorney's fees equivalent to
10% of the insurance proceeds. Seaboard shall also pay, from finality of judgment, a 12%
interest per annumon the total amount due to petitioner until its full satisfaction.

SO ORDERED.
G.R. No. 120262 July 17, 1997
PHILIPPINE AIRLINES, INC., petitioner,
vs.
COURT OF APPEALS and LEOVIGILDO A. PANTEJO, respondents.
REGALADO, J.:
In this appeal by certiorari, petitioner Philippine Airlines, Inc. (PAL) seeks to set aside the decision
of respondent Court of Appeals, 1 promulgated on December 29, 1994, which affirmed the award for
damages made by the trial court in favor of herein private respondent Leovegildo A. Pantejo.
On October 23, 1988, private respondent Pantejo, then City Fiscal of Surigao City, boarded a PAL
plane in Manila and disembarked in Cebu City where he was supposed to take his connecting flight
to Surigao City However, due to typhoon Osang, the connecting flight to Surigao City was cancelled.
To accommodate the needs of its stranded passengers, PAL initially gave out cash assistance of
P100.00 and, the next day, P200.00, for their expected stay of two days in Cebu. Respondent Pantejo
requested instead that he be billeted in a hotel at PAL's expense because he did not have cash with
him at that time, but PAL refused. Thus, respondent Pantejo was forced to seek and accept the
generosity of a co-passenger, an engineer named Andoni Dumlao, and he shared a room with the
latter at Sky View Hotel with the promise to pay his share of the expenses upon reaching Surigao.
On October 25, 1988 when the flight for Surigao was resumed, respondent Pantejo came to know
that the hotel expenses of his co-passengers, one Superintendent Ernesto Gonzales and a certain
Mrs. Gloria Rocha, an auditor of the Philippine National Bank, were reimbursed by PAL. At this
point, respondent Pantejo informed Oscar Jereza, PAL's Manager for Departure Services at Mactan
Airport and who was in charge of cancelled flights, that he was going to sue the airline for
discriminating against him. It was only then that Jereza offered to pay respondent Pantejo P300.00
which, due to the ordeal and anguish he had undergone, the latter decline.
On March 18, 1991, the Regional Trial Court of Surigao City, Branch 30, rendered judgment in the
action for damages filed by respondent Pantejo against herein petitioner, Philippine Airlines, Inc.,
ordering the latter to pay Pantejo P300.00 for actual damages, P150,000.00 as moral damages,
P100,000.00 as exemplary damages, P15,000.00 as attorney's fees, and 6% interest from the time of
the filing of the complaint until said amounts shall have been fully paid, plus costs of suit. 2 On
appeal, respondent court affirmed the decision of the court a quo, but with the exclusion of the
award of attorney's fees and litigation expenses.
The main issue posed for resolution is whether petitioner airlines acted in bad faith when it failed
and refused to provide hotel accommodations for respondent Pantejo or to reimburse him for hotel
expenses incurred by reason of the cancellation of its connecting flight to Surigao City due to force
majeure.
To begin with, it must be emphasized that a contract to transport passengers is quite different in
kind and degree from any other contractual relation, and this is because of the relation which an air
carrier sustain with the public. Its business is mainly with the travelling public. It invites people to
avail of the comforts and advantages it offers. The contract of air carriage, therefore, generates a
relation attended with a public duty. Neglect or malfeasance of the carrier's employees naturally
could give ground for an action for damages.3
In ruling for respondent Pantejo, both the trial court and the Court of Appeals found that herein
petitioner acted in bad faith in refusing to provide hotel accommodations for respondent Pantejo or
to reimburse him for hotel expenses incurred despite and in contrast to the fact that other
passengers were so favored.
In declaring that bad faith existed, respondent court took into consideration the following factual
circumstances:
1. Contrary to petitioner's claim that cash assistance was given instead because of non-availability of
rooms in hotels where petitioner had existing tie-ups, the evidence shows that Sky View Hotel,
where respondent Pantejo was billeted, had plenty of rooms available.
2. It is not true that the P300.00 Paid to Ernesto Gonzales, a co-passenger of respondent, was a
refund for his plane ticket, the truth being that it was a reimbursement for hotel and meal expenses.
3. It is likewise not denied that said Gonzales and herein respondent came to know about the
reimbursements only because another passenger, Mrs. Rocha, informed them that she was able to
obtain the refund for her own hotel expenses.
4. Petitioner offered to pay P300.00 to private respondent only after he had confronted the airline's
manager about the discrimination committed against him, which the latter realized was an
actionable wrong.
5. Service Voucher No. 199351, presented by petitioner to prove that it gave cash assistance to its
passengers, was based merely on the list of passengers already given cash assistance and was
purportedly prepared at around 10:00 A.M. of October 23, 1988. This was two
hours before respondent came to know of the cancellation of his flight to Surigao, hence private
respondent could not have possibly refused the same.4
It must be stressed that these factual findings, which are supported by substantial evidence, are
binding, final and conclusive upon this Court absent any reason, and we find none, why this settled
evidential rule should not apply.
Petitioner theorizes that the hotel accommodations or cash assistance given in case a flight is
cancelled is in the nature of an amenity and is merely a privilege that may be extended at its own
discretion, but never a right that may be demanded by its passengers. Thus, when respondent
Pantejo was offered cash assistance and he refused it, petitioner cannot be held liable for whatever
befell respondent Pantejo on that fateful day, because it was merely exercising its discretion when it
opted to just give cash assistance to its passengers.
Assuming arguendo that the airline passengers have no vested right to these amenities in case a
flight is cancelled due to force majeure, what makes petitioner liable for damages in this particular
case and under the facts obtaining herein is its blatant refusal to accord the so-called amenities
equally to all its stranded passengers who were bound for Surigao City. No compelling or justifying
reason was advanced for such discriminatory and prejudicial conduct.
More importantly, it has been sufficiently established that it is petitioner's standard company policy,
whenever a flight has been cancelled, to extend to its hapless passengers cash assistance or to
provide them accommodations in hotels with which it has existing tie-ups. In fact, petitioner's
Mactan Airport Manager for departure services, Oscar Jereza, admitted that PAL has an existing
arrangement with hotels to accommodate stranded passengers, 5 and that the hotel bills of Ernesto
Gonzales were reimbursed 6 obviously pursuant to that policy.
Also, two witnesses presented by respondent, Teresita Azarcon and Nerie Bol, testified that
sometime in November, 1988, when their flight from Cebu to Surigao was cancelled, they were
billeted at Rajah Hotel for two nights and three days at the expense of PAL. 7 This was never denied
by PAL.
Further, Ernesto Gonzales, the aforementioned co-passenger of respondent on that fateful flight,
testified that based on his previous experience hotel accommodations were extended by PAL to its
stranded passengers either in Magellan or Rajah Hotels, or even in Cebu Plaza. Thus, we view as
impressed with dubiety PAL's present attempt to represent such emergency assistance as being
merely ex gratia and not ex debito.
While petitioner now insists that the passengers were duly informed that they would be reimbursed
for their hotel expenses, it miserably and significantly failed to explain why the other passengers
were given reimbursement while private respondent was not. Although Gonzales was subsequently
given a refund, this was only so because he came to know about it by accident through Mrs. Rocha,
as earlier explained.
Petitioner could only offer the strained and flimsy pretext that possibly the passengers were not
listening when the announcement was made. This is absurd because when respondent Pantejo came
to know that his flight had been cancelled, he immediately proceeded to petitioner's office and
requested for hotel accommodations. He was not only refused accommodations, but he was not
even informed that he may later on be reimbursed for his hotel expenses. This explains why his co-
passenger, Andoni Dumlao, offered to answer for respondent's hotel bill and the latter promised to
pay him when they arrive in Surigao. Had both know that they would be reimbursed by the airline,
such arrangement would not have been necessary.
Respondent Court of Appeals thus correctly concluded that the refund of hotel expenses was
surreptitiously and discriminatorily made by herein petitioner since the same was not made known
to everyone, except through word of mouth to a handful of passengers. This is a sad commentary on
the quality of service and professionalism of an airline company, which is the country's flag carrier
at that.
On the bases of all the foregoing, the inescapable conclusion is that petitioner acted in bad faith in
disregarding its duties as a common carrier to its passengers and in discriminating against herein
respondent Pantejo. It was even oblivious to the fact that this respondent was exposed to
humiliation and embarrassment especially because of his government position and social
prominence, which altogether necessarily subjected him to ridicule, shame and anguish. It remains
uncontroverted that at the time of the incident, herein respondent was then the City Prosecutor of
Surigao City, and that he is a member of the Philippine Jaycee Senate, past Lt. Governor of the
Kiwanis Club of Surigao, a past Master of the Mount Diwata Lodge of Free Masons of the Philippines,
member of the Philippine National Red Cross, Surigao Chapter,
and past Chairman of the Boy Scouts of the Philippines, Surigao del Norte Chapter. 8
It is likewise claimed that the moral and exemplary damages awarded to respondent Pantejo are
excessive and unwarranted on the ground that respondent is not totally blameless because of his
refusal to accept the P100.00 cash assistance which was inceptively offered to him. It bears
emphasis that respondent Pantejo had every right to make such refusal since it evidently could not
meet his needs and that was all that PAL claimed it could offer.
His refusal to accept the P300.00 proffered as an afterthought when he threatened suit was justified
by his resentment when he belatedly found out that his co-passengers were reimbursed for hotel
expenses and he was not. Worse, he would not even have known about it were it not for a co-
passenger who verbally told him that she was reimbursed by the airline for hotel and meal
expenses. It may even be said that the amounts, the time and the circumstances under which those
amounts were offered could not salve the moral wounds inflicted by PAL on private respondent but
even approximated insult added to injury.
The discriminatory act of petitioner against respondent ineludibly makes the former liable for moral
damages under Article 21 in relation to Article 2219 (10) of the Civil Code. 9 As held in Alitalia
Airways vs. CA, et al., 10 such inattention to and lack of care by petitioner airline for the interest of its
passengers who are entitled to its utmost consideration, particularly as to their convenience,
amount to bad faith which entitles the passenger to the award of moral damages.
Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant.
They are awarded only to allow the former to obtain means, diversion, or amusements that will
serve to alleviate the moral suffering he has undergone due to the defendant's culpable action and
must, perforce, be proportional to the suffering inflicted. 11 However, substantial damages do not
translate into excessive damages. 12 Except for attorney's fees and costs of suit, it will be noted that
the Court of Appeals affirmed point by point the factual findings of the lower court upon which the
award of damages had been based.13 We, therefore, see no reason to modify the award of damages
made by the trial court.
Under the peculiar circumstances of this case, we are convinced that the awards for actual, moral
and exemplary damages granted in the judgment of respondent court, for the reasons meticulously
analyzed and thoroughly explained in its decision, are just and equitable. It is high time that the
travelling public is afforded protection and that the duties of common carriers, long detailed in our
previous laws and jurisprudence and thereafter collated and specifically catalogued in our Civil
Code in 1950, be enforced through appropriate sanctions.
We agree, however, with the contention that the interest of 6% imposed by respondent court should
be computed from the date of rendition of judgment and not from the filing of the complaint. The
rule has been laid down in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al. 14 that:
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 the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
This is because at the time of the filing of the complaint, the amount of damages to which plaintiff
may be entitled remains unliquidated and not known, until it is definitely ascertained, assessed and
determined by the court, and only after the presentation of proof thereon. 15
WHEREFORE, the challenged judgment of respondent Court of Appeals is hereby AFFIRMED, subject
to the MODIFICATION regarding the computation of the 6% legal rate of interest on the monetary
awards granted therein to private respondent
SO ORDERED.
 G.R. No. 183272, October 15, 2014
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, v. SANDRA TAN KIT AND THE ESTATE OF
THE DECEASED NORBERTO TAN KIT, Respondents.
DECISION
DEL CASTILLO, J.:
The Court of Appeals’ (CA) imposition of 12% interest on the P13,080.93 premium refund is the
only matter in question in this case.
This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in CA-G.R. CV No.
86923, which, among others, imposed a 12% per annum rate of interest reckoned from the time of
death of the insured until fully paid, on the premium to be reimbursed by petitioner Sun Life of
Canada (Philippines), Inc. (petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the
Estate of the Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is the
CA’s June 12, 2008 Resolution3 denying petitioner’s Motion for Reconsideration of the said Decision.
Factual Antecedents
Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose
application for a life insurance policy,4 with face value of P300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or within the two-year contestability period,5 Norberto
died of disseminated gastric carcinoma.6 Consequently, respondent Tan Kit filed a claim under the
subject policy.
In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of
Norberto’s failure to fully and faithfully disclose in his insurance application certain material and
relevant information about his health and smoking history. Specifically, Norberto answered “No” to
the question inquiring whether he had smoked cigarettes or cigars within the last 12 months prior
to filling out said application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the
several physicians that Norberto consulted for his illness, reveals that he was a smoker and had only
stopped smoking in August 1999. According to petitioner, its underwriters would not have
approved Norberto’s application for life insurance had they been given the correct information.
Believing that the policy is null and void, petitioner opined that its liability is limited to the refund of
all the premiums paid. Accordingly, it enclosed in the said letter a check for P13,080.93 representing
the premium refund.
In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted
on the payment of the insurance proceeds.
On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance Contract before the
Regional Trial Court (RTC) of Makati City.
Ruling of the Regional Trial Court
In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. Charity Salvador
(Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy
E. Javelosa (Javelosa), answered “NO” to the question “Are you aware of anything about the life to be
insured’s lifestyle, hazardous sports, habits, medical history, or any risk factor that would have an
adverse effect on insurability?” in her Agent’s Report. Javelosa also already knew Norberto two years
prior to the approval of the latter’s application for insurance. The RTC concluded that petitioner,
through the above-mentioned circumstances, had already cleared Norberto of any
misrepresentation that he may have committed. The RTC also opined that the affidavit of Dr. Chua,
presented as part of petitioner’s evidence and which confirmed the fact that the insured was a
smoker and only stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in
court. Further, since Norberto had a subsisting insurance policy with petitioner during his
application for insurance subject of this case, it was incumbent upon petitioner to ascertain the
health condition of Norberto considering the additional burden that it was assuming. Lastly,
petitioner did not comply with the requirements for rescission of insurance contract as held
in Philamcare Health Systems, Inc. v. Court of Appeals.12 Thus, the dispositive portion of the RTC
Decision:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the
[respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay the
[respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(P300,000.00), representing the face value of the insurance policy with interest at six percent (6%)
per annum from October 4, 2002 until fully paid.
Cost de oficio.
SO ORDERED.13
Petitioner moved for reconsideration,14 but was denied in an Order15 dated February 15, 2006.
Hence, petitioner appealed to the CA.
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17, 2007.
From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr.
Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom he
confided that he had stopped smoking only in 1999. At the time therefore that he applied for
insurance policy on October 28, 1999, there is no truth to his claim that he did not smoke cigarettes
within 12 months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the insurance policy.
This gave petitioner the right to rescind the insurance contract which it properly exercised in this
case.
In addition, the CA held that the content of Norberto’s medical records are deemed admitted by
respondents since they failed to deny the same despite having received from petitioner a Request
for Admission pursuant to Rule 26 of the Rules of Court.17 And since an admission is in the nature of
evidence the legal effects of which form part of the records, the CA discredited the RTC’s ruling that
the subject medical records and the affidavits executed by Norberto’s physicians attesting to the
truth of the same were hearsay.
The dispositive portion of the CA Decision reads:chanRoblesvirtualLawlibrary
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed
Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered GRANTING
the complaint a quo.
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93 representing
the [premium] paid by the insured with interest at the rate of 12% per annum from the time of
the death of the insured until fully paid.
SO ORDERED.18chanrobleslaw
The parties filed their separate motions for reconsideration. 19 While respondents questioned the
factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the imposition of
interest on the premium ordered refunded to respondents.
However, the appellate court denied the motions in its June 12, 2008
Resolution,20viz:chanRoblesvirtualLawlibrary
WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the
[petitioner] and the [respondents] are hereby DENIED.
SO ORDERED.21
Only petitioner appealed to this Court through the present Petition for Review on Certiorari.
Issue
The sole issue in this case is whether petitioner is liable to pay interest on the premium to be
refunded to respondents.
The Parties’ Arguments
Petitioner argues that no interest should have been imposed on the premium to be refunded
because the CA Decision does not provide any legal or factual basis therefor; that petitioner directly
and timely tendered to respondents an amount representing the premium refund but they rejected
it since they opted to pursue their claim for the proceeds of the insurance policy; that respondents
should bear the consequence of their unsound decision of rejecting the refund tendered to them;
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it liable for
interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals,22 no interest can be assessed
against petitioner.
Respondents, on the other hand, contend that the reimbursement of premium is clearly a money
obligation or one that arises from forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they admit that they refused the
tender of payment of the premium refund, they aver that they only did so because they did not want
to abandon their claim for the proceeds of the insurance policy. In any case, what petitioner should
have done under the circumstances was to consign the amount of payment in court during the
pendency of the case.
Our Ruling
Tio Khe Chio is not applicable in this case.
Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue
of payment of interest. There, the Court pointed to Sections 243 and 244 of the Insurance Code
which explicitly provide for payment of interest when there is unjustified refusal or withholding of
payment of the claim by the insurer, 23 and to Article 220924 of the New Civil Code which likewise
provides for payment of interest when the debtor is in delay.
The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of
interest on the insurance proceeds in which the claim therefor was either unreasonably denied or
withheld or the insurer incurred delay in the payment thereof. In this case, what is involved is an
order for petitioner to refund to respondents the insurance premium paid by Norberto as a
consequence of the rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not unreasonably deny
or withhold the insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.
Nature of interest imposed by the CA
There are two kinds of interest – monetary and compensatory.
“Monetary interest refers to the compensation set by the parties for the use or forbearance of
money.”25No such interest shall be due unless it has been expressly stipulated in writing. 26 “On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law
or by the courts.”27 The interest mentioned in Articles 2209 and 221228 of the Civil Code applies to
compensatory interest.29cralawlawlibrary
Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this
case, the subject interest was not one which was agreed upon by the parties in writing. This being
the case and judging from the tenor of the CA, to wit:chanRoblesvirtualLawlibrary
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93 representing
the [premium] paid by the insured with interest at the rate of 12% per annum from time of
death of the insured until fully paid.30chanrobleslaw
there can be no other conclusion than that the interest imposed by the appellate court is in the
nature of compensatory interest.
The CA incorrectly imposed
compensatory interest on the premium
refund reckoned from the time of death
of the insured until fully paid
As a form of damages, compensatory interest is due only if the obligor is proven to have failed to
comply with his obligation.31cralawlawlibrary
In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching to
the said notice a check representing the amount of refund. However, respondents refused to accept
the same since they were seeking for the release of the proceeds of the policy. Because of this
discord, petitioner filed for judicial rescission of the contract. Petitioner, after receiving an adverse
judgment from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance contract and
consequently decreed the obligation of petitioner to return to respondents the premium paid by
Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.
Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.
Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within
the said period, then the amount shall be deemed equivalent to a forbearance of credit. 32 In such a
case, the rate of interest shall be 6% per annum.33cralawlawlibrary
WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse
to respondents Sandra Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of
P13,080.93 representing the premium paid by the insured within fifteen (15) days from date of
finality of this Decision. If the amount is not reimbursed within said period, the same shall earn
interest of 6% per annum until fully paid.
SO ORDERED.cralawred
G.R. No. 152313 October 19, 2011
REPUBLIC FLOUR MILLS CORPORATION, Petitioner,
vs.
FORBES FACTORS, INC. Respondent.
DECISION
SERENO, J.:
Petitioner filed this present Petition for Review1 under Rule 45 of the Rules of Court, seeking a
reversal of the Court of Appeals Decision,2 the dispositive portion of which states:
WHEREFORE, premises considered, the Decision dated April 15, 1996 rendered by the Regional
Trial Court of Makati City, Branch 60, is hereby AFFIRMED, with MODIFICATIONS, as follows:
1) The legal interest rate of six percent (6%) per annum should be computed from the
date of the filing of the complaint which shall become twelve percent (12%) per annum
from the time the judgment becomes final and executory until its satisfaction.
2) The award of ₱300,000.00 as exemplary damages is reduced to ₱50,000.00;
3) The award of ₱400,00.00 as attorney’s fees is likewise reduced to ₱75,000.00;
4) The Decision is hereby affirmed in all other respects.
SO ORDERED.
The case arose when petitioner refused to pay the demurrage being collected by respondent.
The facts are as follows:
In a contract dated 26 April 1983, respondent was appointed as the exclusive Philippine indent
representative of Richco Rotterdam B.V. (Richco), a foreign corporation, in the sale of the latter’s
commodities. Under one of the terms of the contract, respondent was to assume the liabilities of all
the Philippine buyers, should they fail to honor the commitments on the discharging operations of
each vessel, including the payment of demurrage and other penalties. In such instances, Richco shall
have the option to debit the account of respondent corresponding to the liabilities of the buyers, and
respondent shall then be deemed to be subrogated to all the rights of Richco against these defaulting
buyers.3
Sometime in 1987, petitioner purchased Canadian barley and soybean meal from Richco. The latter
thereafter chartered four (4) vessels to transport the products to the Philippines. Each of the carrier
bulk cargoes was covered by a Contract of Sale executed between respondent as the seller and duly
authorized representative of Richco and petitioner as the buyer. The four contracts specifically
referred to the charter party in determining demurrage or dispatch rate. The contract further
provided that petitioner guarantees to settle any demurrage due within one (1) month from
respondent’s presentation of the statement.
Upon delivery of the barley and soybean meal, petitioner failed to discharge the cargoes from the
four (4) vessels at the computed allowable period to do so. Thus, it incurred a demurrage amounting
to a total of US$193,937.41.
On numerous occasions, on behalf of Richco, respondent demanded from petitioner the payment of
the demurrage, to no avail. Consequently, on 20 October 1991, Richco sent a communication to
respondent, informing it that the demurrage due from petitioner had been debited from the
respondent’s account.
Thereafter, on 12 February 1992, respondent filed with the Regional Trial Court (RTC), National
Capital Judicial Region, Makati City, a Complaint for demurrage and damages against petitioner.
Meanwhile, the latter raised the defense that the delay was due to respondent’s inefficiency in
unloading the cargo.
On 15 April 1996, after trial on the merits, the RTC rendered a Decision4 holding petitioner liable to
pay demurrage and damages to respondent, to wit:
34. WHEREFORE, the Court hereby renders judgment as follows:
34.1 The defendant REPUBLIC FLOUR MILLS CORPORATION is ordered to pay the
plaintiff FORBES FACTORS, INC. the following:
34.1.1. US$193,937.41 or its Philippine PESO equivalent at the rate of exchange
at the time of payment – As demurrage.
34.1.2 Six (6) percent of the amount in the preceding paragraph 34.1.1 – Per
annum from October 29, 1991 until the said amount is fully paid – As damages.
34.1.3. ₱300,000.00 – As exemplary damages.
34.1.4. ₱ 400,000.00 – As attorney’s fees.
34.2. The COUNTERCLAIM is DISMISSED; and
34.3. Cost is taxed against the defendant.
The RTC found that the delay in discharging the cargoes within the allowable period was due to
petitioner’s failure to provide enough barges on which to load the goods. It likewise found that
petitioner in fact acknowledged that the latter had incurred demurrage when it alleged that the
computation was bloated. Petitioner was thus liable to pay demurrage based on the sales contracts
executed with respondent and on the contract executed between respondent and Richco.
Finally, the court ruled that respondent was entitled to damages from petitioner’s "wanton,
fraudulent, reckless, oppressive or malevolent" refusal to pay the latter’s liabilities despite repeated
demands.
Subsequently, petitioner appealed to the Court of Appeals (CA), alleging that respondent was not a
real party-in-interest to bring the collection suit. Petitioner insisted that the payment of demurrage
should be made to the owner of the vessels that transported the goods, and not to respondent who
was merely the indent representative of Richco, the charterer of the vessel. In addition, petitioner
claimed that it was denied due process when the RTC refused to reset the hearing for the
presentation of Reynaldo Santos, petitioner’s witness and export manager. Finally, petitioner
contested the RTC’s award of exemplary damages and attorney’s fees.
On 18 February 2002, the CA promulgated the assailed Decision. It upheld the validity of the
Contracts of Sale and held that these had the force of law between the contracting parties and must
be complied with in good faith. However, the appellate court modified the trial court’s award of
damages. It held that exemplary damages are not intended to enrich anyone, thus, reducing the
amount from ₱300,000 to ₱50,000. It also found the award of attorney’s fees to be excessive, and
consequently reduced it from ₱400,000 to ₱75,000.
Hence this Petition.
Three issues are raised for the resolution by this Court. First, petitioner assails the right of
respondent to demand payment of demurrage. Petitioner asserts that, by definition, demurrage is
the sum fixed by the contract of carriage as remuneration to the ship owner for the detention of the
vessel beyond the number of days allowed by the charter party. 5 Thus, since respondent is not the
ship owner, it has no right to demand the payment of demurrage and has no personality to bring the
claim against petitioner. Second, petitioner questions the propriety of the award of damages in favor
of respondent. And third, the former insists that it was denied due process when the RTC denied its
Motion to reset the hearing to present its witness.
We find the petition without merit.
The facts are undisputed. The delay incurred by petitioner in discharging the cargoes from the
vessels was due to its own fault. Its obligation to demurrage is established by the Contracts of Sale it
executed, wherein it agreed to the conditions to provide all discharging facilities at its expense in
order to effect the immediate discharge of cargo; and to place for its account all discharging costs,
fees, taxes, duties and all other charges incurred due to the nature of the importation.6
Meanwhile, respondent unequivocally established that Richco charged to it the demurrage due from
petitioner. Thus, at the moment that Richco debited the account of respondent, the latter is deemed
to have subrogated to the rights of the former, who in turn, paid demurrage to the ship owner. It is
therefore immaterial that respondent is not the ship owner, since it has been able to prove that it
has stepped into the shoes of the creditor.
Subrogation is either "legal" or "conventional." Legal subrogation is an equitable doctrine and arises
by operation of the law, without any agreement to that effect executed between the parties;
conventional subrogation rests on a contract, arising where "an agreement is made that the person
paying the debt shall be subrogated to the rights and remedies of the original creditor." 7 The case at
bar is an example of legal subrogation, the petitioner and respondent having no express agreement
on the right of subrogation. Thus, it is of no moment that the Contracts of Sale did not expressly
state that demurrage shall be paid to respondent. By operation of law, respondent has become the
real party-in-interest to pursue the payment of demurrage. As aptly stated by the RTC:
19. True it is that demurrage is, as a rule, an amount payable to a shipowner by a charterer for the
detention of the vessel beyond the period allowed for the loading or unloading or sailing. This
however, does not mean that a party cannot stipulate with another who is not a shipowner, on
demurrage. In this case, FORBES stipulated under the charter parties on demurrage with the
shipowners. This stipulation could be the basis of the provisions on demurrage in the four (4)
Contracts of Sale (Exhs. B, N, X, and CC) and contract between FORBES and RICHCO (Exh. A).
xxx xxx xxx
20. RICHCO debited the US$193,937.41 from the accounts of FORBES as evidenced by Exh. OO.
Hence, FORBES was subrogated to the right of RICHCO to collect the said amount from RFM
pursuant to the contract between RICHCO and FORBES (Exh. A).
21. Under Exh. A, FORBES guaranteed its "…buyers (sic) payment schedule…" Consequently, it was
subrogated to the rights of RICHCO arising from the failure of RFM to pay its demurrage and
FORBES paid for it. The subrogation was pursuant to Articles 1302 and 2067, New Civil Code, which
read:
"Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as to the
latter’s share."
"Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than
what he has really paid."
As we held in Fireman’s Fund Insurance Company v. Jamila & Company, Inc.:
…Subrogation has been referred to as the doctrine of substitution. It "is an arm of equity that may
guide or even force one to pay a debt for which an obligation was incurred but which was in whole
or in part paid by another" (83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State
Compensation Insurance Fund, 209 Pac. 2d 55).
"Subrogation is founded on principles of justice and equity, and its operation is governed by
principles of equity. It rests on the principle that substantial justice should be attained regardless of
form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties
without regard to form"(83 C.J.S. 579- 80)81avvphi1
Anent the second issue, we have previously held in Pepsi Cola Products Phil., Inc. v. Court of
Appeals,9 that a motion for continuance of postponement is not a matter of right. Rather, the motion
is addressed to the sound discretion of the court, whose action thereon will not be disturbed by
appellate courts in the absence of clear and manifest abuse of discretion, resulting in a denial of
substantial justice.
On the last issue, we find that the award of exemplary damages proper. Petitioner refused to honor
the contract despite respondent’s repeated demands and its proof of payment to Richco; and despite
its repeated promise to settle its outstanding obligations in the span of almost five years. Petitioner
indeed acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Because
respondent was also forced to initiate the present Complaint, it was only proper that it was awarded
attorney’s fees. Lastly, the CA was correct in reducing the award of exemplary damages or attorney’s
fees, since neither is meant to enrich anyone.

WHEREFORE, in view of the foregoing, the assailed Decision of the Court of Appeals is hereby
AFFIRMED. The present Petition is DENIED.

SO ORDERED.
G.R. No. 185565 November 26, 2014
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL SHIPPING
COMPANY, INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company, Incorporated and
Loadstar International Shipping Company, Incorporated (petitioners) against Malayan Insurance
Company, Incorporated (Malayan) seeking to set aside the Decision2 dated April 14, 2008 and
Resolution3 dated December 11, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 82758, which
reversed and set aside the Decision4 dated March 31, 2004 of the Regional Trial Court of Manila,
Branch 34, in Civil Case No. 01-101885.
The facts as found by the CA, are as follows:
Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated Smelting and
Refining Corporation (PASAR) entered into a Contract of Affreightment for domestic bulk transport
of the latter’s copper concentrates for a period of one year from November 1, 1998 to October 31,
1999. The contract was extended up to the end of October 2000.
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were loaded in
Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar International Shipping
Co., Inc. (Loadstar International) and operated by Loadstar Shipping under a charter party
agreement. The shipper and consignee under the Bill of Lading are Philex Mining Corporation
(Philex) and PASAR, respectively. The cargo was insured with Malayan Insurance Company, Inc.
(Malayan) under Open Policy No. M/OP/2000/001-582. P & I Association is the third party liability
insurer of Loadstar Shipping.
On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San Fernando, La Union
bound for Isabel, Leyte. On September 12, 2000, while in the vicinity of Cresta de Gallo, the vessel’s
chief officer on routine inspection found a crack on starboard sideof the main deck which caused
seawater to enter and wet the cargo inside Cargo Hold No. 2 forward/aft. The cracks at the top deck
starboard side of Cargo Hold No. 2, measuring 1.21 meters long x 0.39 meters wide, and at top deck
aft section starboard side on other point, measuring 0.82 meters long x 0.32 meters wide, were
welded.
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September 13, 2000, PASAR
and Philex’s representatives boarded and inspected the vessel and undertook sampling of the
copper concentrates. In its preliminary report dated September 15, 2000, the Elite Adjusters and
Surveyor, Inc. (Elite Surveyor) confirmed that samples of copper concentrates from Cargo Hold No.
2 were contaminated by seawater. Consequently, PASAR rejected 750 MT of the 2,300 MT cargo
discharged from Cargo Hold No. 2.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of [P]37,477,361.31 to
Loadstar Shipping. In its final report dated November 16, 2000, Elite Surveyor recommended
payment to the assured the amount of [P]32,351,102.32 as adjusted. On the basis of such
recommendation, Malayan paid PASAR the amount of [P]32,351,102.32.
Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper concentrates and the opportunity to nominate/refer
other salvage buyers to PASAR. On November 29, 2000, Malayan wrote Loadstar Shipping informing
the latter of the acceptance of PASAR’s proposal to take the damaged copper concentrates at a
residual value of US$90,000.00. On December 9, 2000, Loadstar Shipping wrote Malayan requesting
for the reversal of its decision to accept PASAR’s proposal and the conduct of a public bidding to
allow Loadstar Shipping to match or top PASAR’s bid by 10%.
On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To recover the
amount paid and in the exercise of its right of subrogation, Malayan demanded reimbursement from
Loadstar Shipping, which refused to comply. Consequently, on September 19, 2001, Malayan
instituted with the RTC a complaint for damages. The complaint was later amended to include
Loadstar International as party defendant.
In its amended complaint, Malayan mainly alleged that as a direct and natural consequence of the
unseaworthiness of the vessel, PASAR suffered loss of the cargo. It prayed for the amount of
[P]33,934,948.75, representing actual damages plus legal interest fromdate of filing of the complaint
until fully paid, and attorney’s fees in the amount of not less than [P]500,000.00. It also sought to
declare the bill of lading as void since it violates the provisions of Articles 1734 and 1745 of the Civil
Code.
On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer with
counterclaim, denying plaintiff appellant’s allegations and averring as follows: that they are not
engaged in the business as common carriers but as private carriers; that the vessel was seaworthy
and defendants-appellees exercised the required diligence under the law; that the entry of water
into Cargo Hold No. 2 must have been caused by force majeureor heavy weather; that due to the
inherent nature of the cargo and the use of water in its production process, the same cannot be
considered damaged or contaminated; that defendants-appellees were denied reasonable
opportunity to participate in the salvage sale; that the claim had prescribed in accordance with the
bill of lading provisions and the Code of Commerce; that plaintiff-appellant’s claim is excessive,
grossly overstated, unreasonable and unsubstantiated; that their liability, if any, should not exceed
the CIFvalue of the lost/damaged cargo as set forth in the bill of lading, charter party or customary
rules of trade; and that the arbitration clause in the contract of affreightment should be followed.
After trial, and considering that the billof lading, which was marked as Exhibit "B", is unreadable,
the RTC issued on February 17, 2004 an order directing the counsel for Malayan to furnish it with a
clearer copy of the same within three (3) days from receipt of the order. On February 23, 2004,
Malayan filed a compliance attaching thereto copy of the bill of lading.
On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as the
counterclaim. The RTC was convinced that the vessel was seaworthy at the time of loading and that
the damage was attributable to the perils of the sea (natural disaster) and not due to the fault or
negligence of Loadstar Shipping.
The RTC found that although contaminated by seawater, the copper concentrates can still be used.
Itgave credence to the testimony of Francisco Esguerra, defendants-appellees’ expert witness, that
despite high chlorine content, the copper concentrates remain intact and will not lose their value.
The gold and silver remain with the grains/concentrates even if soaked with seawater and does not
melt. The RTC observed that the purchase agreement between PASAR and Philex contains a penalty
clause and has no rejection clause. Despite this agreement, the parties failed to sit down and assess
the penalty.
The RTC also found that defendants-appellees were not afforded the opportunity to object or
participate or nominate a participant in the sale of the contaminated copper concentrates to lessen
the damages to be paid. No record was presented to show that a public bidding was conducted.
Malayan sold the contaminated copper concentrates to PASAR at a low price then paid PASAR the
total value of the damaged concentrate without deducting anything from the claim.
Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of basis because
what was attached to Malayan’s compliance was still an unreadable machine copy
thereof.5 (Citations omitted)
Ruling of the CA
On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which reads:
WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004 of the RTC, Branch 34,
Manila in Civil Case No. 01-101885, is REVERSED and SET ASIDE. In lieu thereof, a new judgment is
entered, ORDERING defendants-appellees to pay plaintiff-appellant ₱33,934,948.75 as actual
damages, plus legal interest at 6% annually from the date of the trial court’s decision. Upon the
finality of the decision, the total amount of the judgment shall earn annual interest at 12% until full
payment.
SO ORDERED.7
On December 11, 2008, the CA modified the above decision through a Resolution,8 the fallo thereof
states:
WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of this Court dated
April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED. Defendants-appellees are ORDERED
to pay to plaintiff-appellant ₱33,934,948.74 as actual damages, less US$90,000.00, computed at the
exchange rate prevailing on November 29, 2000, plus legal interest at 6% annually from the date of
the trial court’s decision. Upon the finality of the decision, the total amount of the judgment shall
earn annual interest at 12% until full payment.
SO ORDERED.9
The CA discussed that the amount of US$90,000.00 should have been deducted from Malayan’s
claim against the petitioners in order to prevent undue enrichment on the part of Malayan.
Otherwise, Malayan would recover from the petitioners not merely the entire amount of
33,934,948.74 as actual damages, but would also end up unjustly enriching itself in the amount of
US$90,000.00 – the residual value of the subject copper concentrates it sold to Philippine Associated
Smelting and Refining Corporation (PASAR) on November 29, 2000. 10 Issues
In sum, the grounds presented by the petitioners for the Court’s consideration are the following:
I.
THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT. THERE IS NOTHING
IN THE DECISION OF THE HONORABLE COURT THAT REVERSED THE FACTUAL FINDINGS AND
CONCLUSIONS OF THE TRIAL COURT, THAT THERE WAS NO ACTUAL LOSS OR DAMAGE TO THE
CARGO OF COPPER CONCENTRATES WHICH WOULD MAKE LOADSTAR AS THE SHIPOWNER
LIABLE FOR A CARGO CLAIM. CONSEQUENTLY, THERE IS NO BASIS FOR THE COURT TO ORDER
LOADSTAR TO PAY ACTUAL DAMAGES IN THE AMOUNT OF PH₱33 MILLION. 11
II.
M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS IN RULING THAT IT
IS A COMMON CARRIER. THE DECISION OF THE TRIAL COURT IS BEREFT OF ANY CATEGORICAL
FINDING THAT M/V BOBCAT IS A COMMON CARRIER.12
III.
THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT
RESPONDENT’S PAYMENT TO PASAR, ON THE BASIS OF THE LATTER’S FRAUDULENT CLAIM,
ENTITLED RESPONDENT AUTOMATIC RIGHT OF RECOVERY BY VIRTUE OF SUBROGATION. 13
Ruling of the Court
I. Proof of actual damages
It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point, La Union to
Isabel, Leyte were indeed contaminated with seawater. The issue lies on whether such
contamination resulted to damage, and the costs thereof, if any,incurred by the insured PASAR.
The petitioners argued that the copper concentrates, despite being dampened with seawater, is
neither subject to penalty nor rejection. Under the Philex Mining Corporation (Philex)-PASAR
Purchase Contract Agreement, there is no rejection clause. Instead, there is a pre-agreed formula for
the imposition of penalty in case other elements exceeding the provided minimum level would be
found on the concentrates.14 Since the chlorine content on the copper concentrates is still below the
minimum level provided under the Philex-PASAR purchase contract, no penalty may be imposed
against the petitioners.15
Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase agreement, stating that
the contract involved in this case is a contract of affreightment between the petitioners and PASAR,
not the agreement between Philex and PASAR, which was a contract for the sale of copper
concentrates.16
On this score, the Court agrees withMalayan that contrary to the trial court’s disquisition, the
petitioners cannot validly invoke the penalty clause under the Philex-PASAR purchase agreement,
where penalties are to be imposed by the buyer PASAR against the seller Philex if some elements
exceeding the agreed limitations are found on the copper concentrates upon delivery. The
petitioners are not privy tothe contract of sale of the copper concentrates. The contract between
PASAR and the petitioners is a contract of carriage of goods and not a contract of sale. Therefore, the
petitioners and PASAR are bound by the laws on transportation of goods and their contract of
affreightment. Since the Contract of Affreightment17 between the petitioners and PASAR is silent as
regards the computation of damages, whereas the bill of lading presented before the trial court is
undecipherable, the New Civil Code and the Code ofCommerce shall govern the contract between
the parties.
Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of damage to the
cargo.18 This is based on the recommendation of Elite Adjustors and Surveyors, Inc. (Elite) which
both Malayan and PASAR agreed to. The computation of Elite is presented as follows:
Computation of Loss Payable.We computed for the insured value of the loss and loss payable, based
on the following pertinent data:
1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L)
4,568.907 dry metric tons
 2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)
3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336 dry
metric tons discharge & sampling Cert.dated September 21, 2000)
Computation:
Total sum insured x Qty. damaged= Insured value of damage
Total Qty. in DMT (DMT) (DMT)
[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32
4,568.907 DMT
Insured value of damage = [P] 32,315,312.3219
Based on the preceding computation, the sum of ₱32,315,312.32 represents damages for the total
loss ofthat portion of the cargo which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming damages for the total loss of that portion,
PASAR bought back the contaminated copper concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to conclude that the contamination of the copper
concentrates cannot be considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how damages on goods delivered by the
carrier should be appraised:
Article 361. The merchandise shall be transported at the risk and venture of the shipper, if the
contrary has not been expressly stipulated. As a consequence, all the losses and deteriorations
which the goods may suffer during the transportation by reason of fortuitous event, force majeure,
or the inherent nature and defect of the goods, shall be for the account and risk of the shipper. Proof
of these accidents is incumbent upon the carrier.
Article 362. Nevertheless, the carrier shall be liable for the losses and damages resulting from the
causes mentioned in the preceding article if it is proved, as against him, that they arose through his
negligence or by reason of his having failed to take the precautions which usage has established
among careful persons, unless the shipper has committed fraud in the bill of lading, representing the
goods to be of a kind or quality different from what they really were.
If, notwithstanding the precautions referred to in this article, the goods transported run the risk of
being lost, on account of their nature or by reason of unavoidable accident, there being no time for
their owners to dispose of them, the carrier may proceed to sell them, placing them for this purpose
at the disposal of the judicial authority or of the officials designated by special provisions.
xxxx
Article 364. If the effect of the damage referred to in Article 361 is merely a diminution in the value
of the goods, the obligation of the carrier shall be reduced to the payment of the amount which, in
the judgment of experts, constitutes such difference in value.
Article 365. If, in consequence of the damage, the goods are rendered useless for sale and
consumption for the purposes for which they are properly destined, the consignee shall not be
bound to receive them, and he may have them in the hands of the carrier, demanding of the latter
their value at the current price on that day.
If among the damaged goods there should be some pieces in good condition and without any defect,
the foregoing provision shall be applicable with respect to those damaged and the consignee shall
receive those which are sound, this segregation to be made by distinct and separate pieces and
without dividing a single object, unless the consignee proves the impossibility of conveniently
making use of them in this form.
The same rule shall be applied to merchandise in bales or packages, separating those parcels which
appear sound.
From the above-cited provisions, if the goods are delivered but arrived at the destination in
damaged condition, the remedies to be pursued by the consignee depend on the extent of damage
on the goods.
If the goods are rendered useless for sale, consumption or for the intended purpose, the consignee
may reject the goods and demand the payment of such goods at their marketprice on that day
pursuant to Article 365. In case the damaged portion of the goods can be segregated from those
delivered in good condition, the consignee may reject those in damaged condition and accept merely
those which are in good condition. But if the consignee is able to prove that it is impossible to use
those goods which were delivered in good condition without the others, then the entire shipment
may be rejected. To reiterate, under Article 365, the nature of damage must be such that the goods
are rendered useless for sale, consumption or intended purpose for the consignee to be able to
validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound to
pay only the difference between its price on that day and its depreciated value as provided under
Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered useless or
unfit for the purpose intended by PASAR due to contamination with seawater. Hence, there is no
basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is erroneous for
Malayan to reimburse PASAR as though the latter suffered from total loss of goods in the absence of
proof that PASAR sustained such kind of loss. Otherwise, there will be no difference inthe
indemnification of goods which were not delivered at all; or delivered but rendered useless,
compared against those which were delivered albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its decision to sell back the rejected copper
concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself asthe owner
of the rejected copper concentrates to have these validly disposed of. If the goods were rejected, it
only means there was no acceptance on the part of PASAR from the carrier. Furthermore, PASAR
and Malayan simply agreed on the purchase price of US$90,000.00 without any allegation or proof
that the said price was the depreciated value based on the appraisal of experts as provided under
Article 364 of the Code of Commerce.
II. Subrogation of Malayan to the rights of PASAR
Malayan’s claim against the petitioners is based on subrogation to the rights possessed by PASAR as
consignee of the allegedly damaged goods. The right of subrogation stems from Article 2207 of the
New Civil Code which states:
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the "The burden of proof is on the party who would be defeated if no evidence would be presented on
insurance company for the injury or loss arising out of the wrong or breach of contract complained either side. The burden is to establish one’s case by a preponderance of evidence which means that
of, the insurance company shall be subrogated to the rights of the insured against the wrong doer or the evidence, as a whole, adduced by one side, is superior tothat of the other. Actual damages are
the person who has violated the contract. If the amount paid by the insurance company does not not presumed. The claimant must prove the actual amount of loss with a reasonable degree of
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the certainty premised upon competent proof and on the best evidence obtainable. Specific facts that
person causing the loss or injury. could afford a basis for measuring whatever compensatory or actual damages are borne must be
pointed out. Actual damages cannot be anchored on mere surmises, speculations or conjectures." 24
"The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim by the Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which the latter was
insurer."20 The right of subrogation is however, not absolute. "There are a few recognized questionably indemnified, there is no necessity to expound further on the other issues raised by the
exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third petitioners and Malayan in this case.
party liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated. x x x
Similarly, where the insurer pays the assured the value of the lostgoods without notifying the
WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and Resolution dated
carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both
December 11, 2008 of the Court of Appeals in CA-G.R. CV No. 82758 are hereby REVERSED and SET
the assured and the insurer, and the latter cannot bring an action against the carrier on his right of
ASIDE. The Decision dated March 31, 2004 of the Regional Trial Comi of Manila, Branch 34 in Civil
subrogation. x x x And where the insurer pays the assured for a loss which is not a risk covered by
Case No·. 01-101885 is REINSTATED.
the policy, thereby effecting ‘voluntary payment,’ the former has no right of subrogation against the
third party liable for the loss x x x."21
SO ORDERED.
The rights of a subrogee cannot be superior to the rights possessed by a subrogor. "Subrogation is
the substitution of one person in the place of another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including
its remedies or securities. The rights to which the subrogee succeeds are the same as, but not
greaterthan, those of the person for whom he is substituted, that is, he cannot acquire any claim,
security or remedy the subrogor did not have. In other words, a subrogee cannot succeed to a right
not possessed by the subrogor. A subrogee in effect steps into the shoes of the insured and can
recover only ifthe insured likewise could have recovered."22 Consequently, an insurer indemnifies
the insured based on the loss or injury the latter actually suffered from. If there is no loss or injury,
then there is no obligation on the part of the insurer to indemnify the insured. Should the insurer
pay the insured and it turns out that indemnification is not due, or if due, the amount paid is
excessive, the insurer takes the risk of not being able to seek recompense from the alleged
wrongdoer. This is because the supposed subrogor did not possessthe right to be indemnified and
therefore, no right to collect is passed on to the subrogee. As regards the determination of actual
damages, "[i]t is axiomatic that actual damages must be proved with reasonable degree of certainty
and a party is entitled only to such compensation for the pecuniary loss that was duly
proven."23 Article 2199 of the New Civil Code speaks of how actual damages are awarded:

Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation
only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred
to as actual or compensatory damages.

Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount of
US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because PASAR and
Malayan never proved the actual damages sustained by PASAR. It is a flawed notion to merely
accept that the salvage value of the goods is US$90,000.00, since the price was arbitrarily fixed
between PASAR and Malayan. Actual damages to PASAR, for example, could include the diminution
in value as appraised by experts or the expenses which PASAR incurred for the restoration of the
copper concentrates to its former condition, ifthere is damage and rectification is still possible.

It is also note worthy that when the expert witness for the petitioners, Engineer Francisco Esguerra
(Esguerra), testified as regards the lack of any adverse effect of seawater on copper concentrates,
Malayan never presented evidence of its own in refutation to Esguerra’s testimony. And, even if the
Court will disregard the entirety of his testimony, the effect on Malayan’s cause of action is nil. As
Malayan is claiming for actual damages, it bears the burden of proof to substantiate its claim.

[G.R. No. 116940. June 11, 1997.]
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., Petitioner, v. COURT OF
APPEALS and FELMAN SHIPPING LINES, Respondents.
DECISION
BELLOSILLO, J.:
This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe
the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer
to be subrogated to the rights of the insured upon payment of the insurance claim.
On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel owned and
operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-
Cola softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola
Bottlers Philippines, Inc., Cebu. 1 The shipment was insured with petitioner Philippine American
General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG.
"MV Asilda" left the port of Zamboanga in fine weather at eight o’clock in the evening of the same
day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of
Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of
1-liter Coca-Cola softdrink bottles.
On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with
respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink
bottles that sank with "MV Asilda." Respondent denied the claim thus prompting the consignee to
file an insurance claim with PHILAMGEN which paid its claim of P755,250.00.
Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which
disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the
shipowner for sum of money and damages.
In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo were
due to the vessel’s unseaworthiness as she was put to sea in an unstable condition. It further alleged
that the vessel was improperly manned and that its officers were grossly negligent in failing to take
appropriate measures to proceed to a nearby port or beach after the vessel started to list.
On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no
right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event,
FELMAN had abandoned all its rights, interests and ownership over "MV Asilda" together with her
freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587
of the Code of Commerce. 2
On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of
Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits.
FELMAN filed a petition for certiorari with this Court but it was subsequently denied on 13
February 1989.
On 28 February 1992 the trial court rendered judgment in favor of FELMAN. 3 It ruled that "MV
Asilda" was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the
Philippine Coast Guard and the shipowner’s surveyor attesting to its seaworthiness. Thus the loss of
the vessel and its entire shipment could only be attributed to either a fortuitous event, in which
case, no liability should attach unless there was a stipulation to the contrary, or to the negligence of
the captain and his crew, in which case, Art. 587 of the Code of Commerce should apply.
The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN could
not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its
implied warranty on the vessel’s seaworthiness. Resultantly, the payment made by PHILAMGEN to
the assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not
give PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee.
On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994
respondent appellate court rendered judgment finding "MV Asilda" unseaworthy for being top-
heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other
words, while the vessel possessed the necessary Coast Guard certification indicating its
seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to
the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that the
assured’s implied warranty of seaworthiness was not complied with. Perfunctorily, PHILAMGEN
was not properly subrogated to the rights and interests of the shipper. Furthermore, respondent
court held that the filing of notice of abandonment had absolved the shipowner/agent from liability
under the limited liability rule.
The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left
the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce
should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions
which the shipper had against FELMAN, the shipowner.
"MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain
as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of
Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink
bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty
boxes for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles
on deck. 4 The ship captain stated that around four o’clock in the morning of 7 July 1983 he was
awakened by the officer on duty to inform him that the vessel had hit a floating log. At that time he
noticed that the weather had deteriorated with strong southeast winds inducing big waves. After
thirty minutes he observed that the vessel was listing slightly to starboard and would not correct
itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from
starboard to portside until the vessel was balanced. At about seven o’clock in the morning, the
master of the vessel stopped the engine because the vessel was listing dangerously to portside. He
ordered his crew to shift the cargo back to starboard. The shifting of cargo took about an hour
afterwhich he rang the engine room to resume full speed.
At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide
on his next move, some of the cargo on deck were thrown overboard and seawater entered the
engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his
crew to abandon ship. Shortly thereafter, "MV Asilda" capsized and sank. He ascribed the sinking to
the entry of seawater through a hole in the hull caused by the vessel’s collision with a partially
submerged log. 5
The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report, which
was adopted by the Court of Appeals, reads —
We found in the course of our investigation that a reasonable explanation for the series of lists
experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel was
top-heavy which is to say that while the vessel may not have been overloaded, yet the distribution
or stowage of the cargo on board was done in such a manner that the vessel was in top-heavy
condition at the time of her departure and which condition rendered her unstable and unseaworthy
for that particular voyage.
In this connection, we wish to call attention to the fact that this vessel was designed as a fishing
vessel . . . and it was not designed to carry a substantial amount or quantity of cargo on deck.
Therefore, we believe strongly that had her cargo been confined to those that could have been
accommodated under deck, her stability would not have been affected and the vessel would not
have been in any danger of capsizing, even given the prevailing weather conditions at that time of
sinking.
But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was
rendered unseaworthy for the purpose of carrying the type of cargo because the weight of the deck
cargo so decreased the vessel’s metacentric height as to cause it to become unstable.
Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out
that ships are precisely designed to be able to navigate safely even during heavy weather and
frequently we hear of ships safely and successfully weathering encounters with typhoons and
although they may sustain some amount of damage, the sinking of ship during heavy weather is not
a frequent occurrence and is not likely to occur unless they are inherently unstable and
unseaworthy . . .
We believe, therefore, and so hold that the proximate cause of the sinking of the M/V "Asilda" was
her condition of unseaworthiness arising from her having been top-heavy when she departed from
the Port of Zamboanga. Her having capsized and eventually sunk was bound to happen and was
therefore in the category of an inevitable occurrence (Emphasis supplied). 6
We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate
cause of the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship captain’s
allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on
deck. Several days after "MV Asilda" sank, an estimated 2,500 empty Coca-Cola plastic cases were
recovered near the vicinity of the sinking. Considering that the ship’s hatches were properly
secured, the empty Coca-Cola cases recovered could have come only from the vessel’s deck cargo. It
is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be
shown that the deck cargo will not interfere with the proper management of the ship. However, in
this case it was established that "MV Asilda" was not designed to carry substantial amount of cargo
on deck. The inordinate loading of cargo deck resulted in the decrease of the vessel’s metacentric
height 7 thus making it unstable. The strong winds and waves encountered by the vessel are but the
ordinary vicissitudes of a sea voyage and as such merely contributed to its already unstable and
unseaworthy condition.
On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. 8 Simply
put, the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the
vessel. This liability however can be limited through abandonment of the vessel, its equipment and
freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the
ship agent could still be held answerable despite the abandonment, as where the loss or injury was
due to the fault of the shipowner and the captain. 9 The international rule is to the effect that the
right of abandonment of vessels, as a legal limitation of a shipowner’s liability, does not apply to
cases where the injury or average was occasioned by the shipowner’s own fault. 10 It must be
stressed at this point that Art. 587 speaks only of situations where the fault or negligence is
committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not
apply, and such situation will be covered by the provisions of the Civil Code on common carrier. 11
It was already established at the outset that the sinking of "MV Asilda" was due to its
unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as
an excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner
could have prevented this fatal miscalculation. As such, FELMAN was equally negligent. It cannot
therefore escape liability through the expedient of filing a notice of abandonment of the vessel by
virtue of Art. 587 of the Code of Commerce.
Under Art 1733 of the Civil Code," (c)ommon carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the
goods and for the safety of the passengers transported by them, according to all the circumstances
of each case . . ." In the event of loss of goods, common carriers are presumed to have acted
negligently. FELMAN, the shipowner, was not able to rebut this presumption.
In relation to the question of subrogation, respondent appellate court found "MV Asilda"
unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of
seaworthiness that rendered the assured not entitled to the payment of his claim under the policy.
Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a "voluntary
payment" and no right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it
did so at its own risk.
It is generally held that in every marine insurance policy the assured impliedly warrants to the
assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if
expressly written on the face of the policy. 12 Thus Sec. 113 of the Insurance Code provides that"
(i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the
subject of marine insurance, a warranty is implied that the ship is seaworthy." Under Sec. 114, a ship
is "seaworthy when reasonably fit to perform the service, and to encounter the ordinary perils of
the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of the cargo
owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. He may
have no control over the vessel but he has full control in the selection of the common carrier that
will transport his goods. He also has full discretion in the choice of assurer that will underwrite a
particular venture.
We need not belabor the alleged breach of warranty of seaworthiness by the assured as
painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In
policies where the law will generally imply a warranty of seaworthiness, it can only be excluded by
terms in writing in the policy in the clearest language. 13 And where the policy stipulates that the
seaworthiness of the vessel as between the assured and the assurer is admitted, the question of
seaworthiness cannot be raised by the assurer without showing concealment or misrepresentation
by the assured. 14
The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances
has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No.
100367-PAG reads" (t)he liberties as per Contract of Affreightment the presence of the Negligence
Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of
Affreightment as between the Assured and the Company shall not prejudice the insurance. The
seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted." 15
The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states"
(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted . . ."
16
The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two
things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of
unseaworthiness is assumed by the insurance company. 17 The insertion of such waiver clauses in
cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the
vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of
unseaworthiness so that if the ship should sink by unseaworthiness, as what occurred in this case,
PHILAMGEN is liable.
Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN’s action
against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:chanrob1es
virtual 1aw library
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. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury.

In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the assurer
to the assured operates as an equitable assignment to the assurer of all the remedies which the
assured may have against the third party whose negligence or wrongful act caused the loss. The
right of subrogation is not dependent upon, nor does it grow out of any privity of contract or upon
payment by the insurance company of the insurance claim. It accrues simply upon payment by the
insurance company of the insurance claim.cralawnad

The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in
justice, equity and good conscience ought to pay. 19 Therefore, the payment made by PHILAMGEN
to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee
against FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss
of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.

WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay
petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five
Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29
November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. 20

SO ORDERED.
 [G.R. No. 81026. April 3, 1990.]
PAN MALAYAN INSURANCE CORPORATION, Petitioner, v. COURT OF APPEALS, ERLINDA FABIE
AND HER UNKNOWN DRIVER, Respondents.
Regulus E. Cabote & Associates for Petitioner.
Benito P. Fabie for Private Respondents.
SYLLABUS
1. CIVIL LAW; DAMAGES; TIGHT OF SUBROGATION; NOT DEPENDENT UPON, NOR DOES IT GROW
OUT OF, ANY PRIVITY OF CONTRACT OR UPON WRITTEN ASSIGNMENT OF CLAIM. — Article 2207
of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is
destroyed or damaged through the fault or negligence of a party other than the assured, then the
insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover
from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer
to the assured operates as an equitable assignment to the former of all remedies which the latter
may have against the third party whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer.
2. ID.; ID.; ID.; ID.; EXCEPTION; NOT AVAILABLE IN CASE AT BAR. — There are a few recognized
exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third
party liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated.
Similarly, where the insurer pays the assured the value of the lost goods without notifying the
carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both
the assured and the insurer, and the latter cannot bring an action against the carrier on his right of
subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer
pays the assured for a loss which is not a risk covered by the policy, thereby effecting "voluntary
payment", the former has no right of subrogation against the third party liable for the loss [Sveriges
Angfartygs Assurans Forening v. Qua Chee Gan, G.R. No. L-22146, September 5, 1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
3. ID.; INTERPRETATION OF CONTRACTS; TERMS THEREOF ARE TO BE CONSTRUED ACCORDING
TO THE SENSE AND MEANING THE PARTIES THERETO HAVE USED; CASE AT BAR. — It is a basic
rule in the interpretation of contracts that the terms of a contract are to be construed according to
the sense and meaning of the terms which the parties thereto have used. In the case of property
insurance policies, the evident intention of the contracting parties, i.e., the insurer and the assured,
determine the import of the various terms and provisions embodied in the policy. It is only when
the terms of the policy are ambiguous, equivocal or uncertain, such that the parties themselves
disagree about the meaning of particular provisions, that the courts will intervene. In such an event,
the policy will be construed by the courts liberally in favor of the assured and strictly against the
insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R. No. L-27932, October 30,
1972, 47 SCRA 271; and other cases.] PANMALAY contends that the coverage of insured risks under
the above section, specifically Section III-1(a), is comprehensive enough to include damage to the
insured vehicle arising from collision or overturning due to the fault or negligence of a third party.
CANLUBANG is apparently of the same understanding. Considering that the very parties to the
policy were not shown to be in disagreement regarding the meaning and coverage of Section III-1,
specifically sub-paragraph (a) thereof, it was improper for the appellate court to indulge in contract
construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to the clear
intention and understanding of these parties.
4. COMMERCIAL LAW; INSURANCE CONTRACT; ACCIDENT OR ACCIDENTAL; DEFINED. — It cannot
be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental
collision or overturning" found in the first part of sub-paragraph (a) is untenable. Although the
terms "accident" or "accidental" as used in insurance contracts have not acquired a technical
meaning, the Court has on several occasions defined these terms to mean that which takes place
"without one’s foresight or expectation, an event that proceeds from an unknown cause, or is an
unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance &
Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc.
v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be inferred from
jurisprudence that these terms, without qualification, exclude events resulting in damage or loss
due to the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily
synonymous with the concept of "no fault." It may be utilized simply to distinguish intentional or
malicious acts from negligent or careless acts of man.
5. ID.; ID.; INTERPRETATION THEREOF MUST FAVOR THE ASSURED OR BENEFICIARY. — The
Court, furthermore, finds it noteworthy that the meaning advanced by PANMALAY regarding the
coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that
insisted upon by respondents herein. By arguing that this section covers losses or damages due not
only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a
more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping
with the rationale behind the various rules on the interpretation of insurance contracts favoring the
assured or beneficiary so as to effect the dominant purpose of indemnity or payment [See Calanoc v.
Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc.,
G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16,
1984, 130 SCRA 327].
DECISION
CORTES, J.:
Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the
Court of Appeals which upheld an order of the trial court dismissing for no cause of action
PANMALAY’s complaint for damages against private respondents Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is whether or not the insurer
PANMALAY may institute an action to recover the amount it had paid its assured in settlement of an
insurance claim against private respondents as the parties allegedly responsible for the damage
caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against
private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured
a Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang
Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness,
recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the
insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed
the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG
against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated
demands, Defendants, failed and refused to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion
thereto. In compliance therewith, PANMALAY clarified, among others, that the damage caused to the
insured car was settled under the "own damage" coverage of the insurance policy, and that the
driver of the insured car was, at the time of the accident, an authorized driver duly licensed to drive
the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and
Subrogation Receipt executed by CANLUBANG in favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had
no cause of action against them. They argued that payment under the "own damage" clause of the
insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification
thereunder was made on the assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an
order dated June 16, 1986 dismissing PANMALAY’s complaint for no cause of action. On August 19,
1986, the RTC denied PANMALAY’s motion for reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27,
1987. Consequently, PANMALAY filed the present petition for review.chanrobles.com : virtual law
library
After private respondents filed its comment to the petition, and petitioner filed its reply, the Court
considered the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the
petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had
indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident
allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie. PANMALAY
contended, therefore, that its cause of action against private respondents was anchored upon Article
2207 of the Civil Code, which reads:chanrob1es virtual 1aw library
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 . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured
property is destroyed or damaged through the fault or negligence of a party other than the assured,
then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by
the insurer to the assured operates as an equitable assignment to the former of all remedies which
the latter may have against the third party whose negligence or wrongful act caused the loss. The
right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon
written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer
[Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964,
12 SCRA 213; Fireman’s Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April
7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by his own act
releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer’s right
of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US
312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway
Co., 229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the assured’s claim for loss, the
settlement is binding on both the assured and the insurer, and the latter cannot bring an action
against the carrier on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil.
488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by the
policy, thereby effecting "voluntary payment", the former has no right of subrogation against the
third party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G.R. No. L-
22146, September 5, 1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally
subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not
have any cause of action against private respondents. On the one hand, the trial court held that
payment by PANMALAY of CANLUBANG’s claim under the "own damage" clause of the insurance
policy was an admission by the insurer that the damage was caused by the assured and/or its
representatives. On the other hand, the Court of Appeals in applying the ejusdem generis rule held
that Section III-1 of the policy, which was the basis for settlement of CANLUBANG’s claim, did not
cover damage arising from collision or overturning due to the negligence of third parties as one of
the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207
and claim reimbursement from private respondents as alleged wrongdoers or parties responsible
for the damage.
The above conclusion is without merit.
It must be emphasized that the lower court’s ruling that the "own damage" coverage under the
policy implies damage to the insured car caused by the assured itself, instead of third parties,
proceeds from an incorrect comprehension of the phrase "own damage" as used by the insurer.
When PANMALAY utilized the phrase "own damage" — a phrase which, incidentally, is not found in
the insurance policy — to define the basis for its settlement of CANLUBANG’s claim under the policy,
it simply meant that it had assumed to reimburse the costs for repairing the damage to the insured
vehicle [See PANMALAY’s Compliance with Supplementary Motion for Bill of Particulars, p. 1;
Record, p. 31]. It is in this sense that the so-called "own damage" coverage under Section III of the
insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability"
coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from
Section IV-2 which refer to "Property Damage" coverage (liabilities arising from damage caused by
the insured vehicle to the properties of third parties).
Neither is there merit in the Court of Appeals’ ruling that the coverage of insured risks under
Section III-1 of the policy does not include damage to the insured vehicle arising from collision or
overturning due to the negligent acts of a third party. Not only does it stem from an erroneous
interpretation of the provisions of the section, but it also violates a fundamental rule on the
interpretation of property insurance contracts.cralawnad
It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed
according to the sense and meaning of the terms which the parties thereto have used. In the case of
property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and provisions embodied in the policy. It is only
when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties
themselves disagree about the meaning of particular provisions, that the courts will intervene. In
such an event, the policy will be construed by the courts liberally in favor of the assured and strictly
against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R. No. L-27932,
October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No. L-43706,
November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-
41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].
Section III-1 of the insurance policy which refers to the conditions under which the insurer
PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the insured
vehicle, reads as follows:chanrob1es virtual 1aw library
SECTION III — LOSS OR DAMAGE.
1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: —
(a) by accidental collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear; 1984, 130 SCRA 327].

(b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading) incidental to such transit by
road, rail, inland, water-way, lift or elevator.
Parenthetically, even assuming for the sake of argument that Section III-1(a)of the insurance policy
does not cover damage to the insured vehicle caused by negligent acts of third parties, and that
PANMALAY’s settlement of CANLUBANG’s claim for damages allegedly arising from a collision due
to private respondents’ negligence would amount to unwarranted or "voluntary payment",
dismissal of PANMALAY’s complaint against private respondents for no cause of action would still
be a grave error of law.

x x x For even if under the above circumstances PANMALAY could not be deemed subrogated to the
[Annex "A-1" of PANMALAY’s Compliance with Supplementary Motion for Bill of Particulars;
Record, p. 34; Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section, specifically Section
III-1(a), is comprehensive enough to include damage to the insured vehicle arising from collision or
overturning due to the fault or negligence of a third party. CANLUBANG is apparently of the same
understanding. Based on a police report wherein the driver of the insured car reported that after
the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20],
CANLUBANG filed its claim with PANMALAY for indemnification of the damage caused to its car. It
then accepted payment from PANMALAY, and executed a Release of Claim and Subrogation Receipt
in favor of latter.chanrobles law library
Considering that the very parties to the policy were not shown to be in disagreement regarding the
meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for
the appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to
ascribe meaning contrary to the clear intention and understanding of these parties.
It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by
accidental collision or overturning" found in the first part of sub-paragraph (a) is untenable.
Although the terms "accident" or "accidental" as used in insurance contracts have not acquired a
technical meaning, the Court has on several occasions defined these terms to mean that which takes
place "without one’s foresight or expectation, an event that proceeds from an unknown cause, or is
an unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance
& Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants Insurance Co.,
Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be inferred from
jurisprudence that these terms, without qualification, exclude events resulting in damage or loss
due to the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily
synonymous with the concept of "no fault." It may be utilized simply to distinguish intentional or
malicious acts from negligent or careless acts of man.
rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of
action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening
v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation due
to "voluntary" payment may nevertheless recover from the third party responsible for the damage
to the insured property under Article 1236 of the Civil Code.chanroblesvirtualawlibrary
In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee
merely prays that it be allowed to institute an action to recover from third parties who allegedly
caused damage to the insured vehicle, the amount which it had paid its assured under the insurance
policy. Having thus shown from the above discussion that PANMALAY has a cause of action against
third parties whose negligence may have caused damage to CANLUBANG’s car, the Court holds that
there is no legal obstacle to the filing by PANMALAY of a complaint for damages against private
respondents as the third parties allegedly responsible for the damage. Respondent Court of Appeals
therefore committed reversible error in sustaining the lower court’s order which dismissed
PANMALAY’s complaint against private respondents for no cause of action. Hence, it is now for the
trial court to determine if in fact the damage caused to the insured vehicle was due to the
"carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner’s complaint for
damages against private respondents is hereby REINSTATED. Let the case be remanded to the lower
court for trial on the merits.
SO ORDERED.

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the
insured vehicle due to negligent or careless acts of third parties is not listed under the general and
specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance
policy itself [See Annex "A-1" of PANMALAY’s Compliance with Supplementary Motion for Bill of
Particulars, supra.]

The Court, furthermore, finds it noteworthy that the meaning advanced by PANMALAY regarding
the coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that
insisted upon by respondents herein. By arguing that this section covers losses or damages due not
only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a
more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping
with the rationale behind the various rules on the interpretation of insurance contracts favoring the
assured or beneficiary so as to effect the dominant purpose of indemnity or payment [See Calanoc v.
Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc.,
G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16,
G.R. No. 168402 August 6, 2008
ABOITIZ SHIPPING CORPORATION, petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, respondent.
DECISION
REYES, R.T., J.:
THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the
assured. As subrogee, the insurer steps into the shoes of the assured and may exercise only those
rights that the assured may have against the wrongdoer who caused the damage.
Before Us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) which
reversed the Decision2 of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping
Corporation to pay the sum of P280,176.92 plus interest and attorney's fees in favor of respondent
Insurance Company of North America (ICNA).
The Facts
Culled from the records, the facts are as follows:
On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary
Companies (MSAS) procured a marine insurance policy from respondent ICNA UK Limited of
London. The insurance was for a transshipment of certain wooden work tools and workbenches
purchased for the consignee Science Teaching Improvement Project (STIP), Ecotech Center, Sudlon
Lahug, Cebu City, Philippines.3 ICNA issued an "all-risk" open marine policy,4 stating:
This Company, in consideration of a premium as agreed and subject to the terms and
conditions printed hereon, does insure for MSAS Cargo International Limited &/or
Associated &/or Subsidiary Companies on behalf of the title holder: - Loss, if any, payable
to the Assured or order.5
The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany
on board M/S Katsuragi. A clean bill of lading6 was issued by Hapag-Lloyd which stated the
consignee to be STIP, Ecotech Center, Sudlon Lahug, Cebu City.
On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the
Cebu International Port. It was then brought to the Cebu Bonded Warehousing Corporation pending
clearance from the Customs authorities. In the Stripping Report 9 dated August 5, 1993, petitioner's
checker noted that the crates were slightly broken or cracked at the bottom.
On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science
Teaching Improvement Project (STIP) and delivered to Don Bosco Technical High School, Punta
Princesa, Cebu City. It was received by Mr. Bernhard Willig. On August 13, 1993, Mayo B. Perez, then
Claims Head of petitioner, received a telephone call from Willig informing him that the cargo
sustained water damage. Perez, upon receiving the call, immediately went to the bonded warehouse
and checked the condition of the container and other cargoes stuffed in the same container. He
found that the container van and other cargoes stuffed there were completely dry and showed no
sign of wetness.10
Perez found that except for the bottom of the crate which was slightly broken, the crate itself
appeared to be completely dry and had no water marks. But he confirmed that the tools which were
stored inside the crate were already corroded. He further explained that the "grounded outside
warehouse" notation in the bill of lading referred only to the container van bearing the cargo.11
In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the
cargo.12 The letter stated that the crate was broken at its bottom part such that the contents were
exposed. The work tools and workbenches were found to have been completely soaked in water
with most of the packing cartons already disintegrating. The crate was properly sealed off from the
inside with tarpaper sheets. On the outside, galvanized metal bands were nailed onto all the edges.
The letter concluded that apparently, the damage was caused by water entering through the broken
parts of the crate.
The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the
Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of the
damage. CAC reported to ICNA that the goods sustained water damage, molds, and corrosion which
were discovered upon delivery to consignee.13
On September 21, 1993, the consignee filed a formal claim14 with Aboitiz in the amount
of P276,540.00 for the damaged condition of the following goods:
ten (10) wooden workbenches
three (3) carbide-tipped saw blades

one (1) set of ball-bearing guides

The container van was then off-loaded at Singapore and transshipped on board M/S Vigour
Singapore. On July 18, 1993, the ship arrived and docked at the Manila International Container Port
where the container van was again off-loaded. On July 26, 1993, the cargo was received by one (1) set of overarm router bits
petitioner Aboitiz Shipping Corporation (Aboitiz) through its duly authorized booking
representative, Aboitiz Transport System. The bill of lading7 issued by Aboitiz contained the
twenty (20) rolls of sandpaper for stroke sander
notation "grounded outside warehouse."

In a Supplemental Report dated October 20, 1993,15 CAC reported to ICNA that based on official
The container van was stripped and transferred to another crate/container van without any
weather report from the Philippine Atmospheric, Geophysical and Astronomical Services
notation on the condition of the cargo on the Stuffing/Stripping Report.8 On August 1, 1993, the
Administration, it would appear that heavy rains on July 28 and 29, 1993 caused water damage to
container van was loaded on board petitioner's vessel, MV Super Concarrier I. The vessel left
the shipment. CAC noted that the shipment was placed outside the warehouse of Pier No. 4, North
Manila en route to Cebu City on August 2, 1993.
Harbor, Manila when it was delivered on July 26, 1993. The shipment was placed outside the
warehouse as can be gleaned from the bill of lading issued by Aboitiz which contained the notation
"grounded outside warehouse." It was only on July 31, 1993 when the shipment was stuffed inside
another container van for shipment to Cebu.
Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to
consignee. A subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the
claim and subrogation receipt executed in its favor. Despite follow-ups, however, no reply was
received from Aboitiz.
signed by a representative of Science Teaching Improvement Project. Such
representative, however, was not presented on the witness stand. Hence, the Subrogation
Form is self-serving and has no probative value.19 (Emphasis supplied)
The trial court also found that ICNA failed to produce evidence that it was a foreign corporation duly
licensed to do business in the Philippines. Thus, it lacked the capacity to sue before Philippine
Courts, to wit:

RTC Disposition
ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum
of P280,176.92, plus interest and attorney's fees.16 ICNA alleged that the damage sustained by the
shipment was exclusively and solely brought about by the fault and negligence of Aboitiz when the
shipment was left grounded outside its warehouse prior to delivery.
Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It
countered that the complaint stated no cause of action, plaintiff ICNA had no personality to institute
the suit, the cause of action was barred, and the suit was premature there being no claim made upon
Aboitiz.
Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign
insurance company duly authorized to do business in the Philippines. This allegation
was, however, denied by the defendant. In fact, in the Pre-Trial Order of 12 March 1996,
one of the issues defined by the court is whether or not the plaintiff has legal capacity to
sue and be sued. Under Philippine law, the condition is that a foreign insurance company
must obtain licenses/authority to do business in the Philippines. These licenses/authority
are obtained from the Securities and Exchange Commission, the Board of Investments and
the Insurance Commission. If it fails to obtain these licenses/authority, such foreign
corporation doing business in the Philippines cannot sue before Philippine courts.
Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524. (Emphasis supplied)
CA Disposition

On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the
ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is
decision17 states:
anchored on the right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the
same as the ICNA UK Limited as made known in the dorsal portion of the Open Policy. 20
WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the
relief claimed in the complaint for being baseless and without merit. The complaint is
On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal
hereby DISMISSED. The defendant's counterclaims are, likewise, DISMISSED for lack of
claim was not filed within the period required under Article 366 of the Code of Commerce; that
basis.18
ICNA had no right of subrogation because the subrogation receipt should have been signed by MSAS,
the assured in the open policy, and not Willig, who is merely the representative of the consignee.
The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim
against Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK
On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:
Limited with address at Cigna House, 8 Lime Street, London EC3M 7NA. However, complainant ICNA
Phils. did not present any evidence to show that ICNA UK is its predecessor-in-interest, or that ICNA
UK assigned the insurance policy to ICNA Phils. Moreover, ICNA Phils.' claim that it had been WHEREFORE, premises considered, the present appeal is hereby GRANTED. The
subrogated to the rights of the consignee must fail because the subrogation receipt had no probative appealed decision of the Regional Trial Court of Makati City in Civil Case No. 94-1590 is
value for being hearsay evidence. The RTC reasoned: hereby REVERSED and SET ASIDE. A new judgment is hereby rendered ordering
defendant-appellee Aboitiz Shipping Corporation to pay the plaintiff-appellant Insurance
Company of North America the sum of P280,176.92 with interest thereon at the legal rate
While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of
from the date of the institution of this case until fully paid, and attorney's fees in the sum
North America (U.K.) Limited (ICNA UK) with address at Cigna House, 8 Lime Street,
of P50,000, plus the costs of suit.21
London EC3M 7NA, no evidence has been adduced which would show that ICNA UK is the
same as or the predecessor-in-interest of plaintiff Insurance Company of North America
ICNA with office address at Cigna-Monarch Bldg., dela Rosa cor. Herrera Sts., Legaspi The CA opined that the right of subrogation accrues simply upon payment by the insurance
Village, Makati, Metro Manila or that ICNA UK assigned the Marine Policy to ICNA. Second, company of the insurance claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even
the assured in the Marine Policy appears to be MSAS Cargo International Limited &/or assuming that it is an unlicensed foreign corporation. The CA ruled:
Associated &/or Subsidiary Companies. Plaintiff's witness, Francisco B. Francisco, claims
that the signature below the name MSAS Cargo International is an endorsement of the
At any rate, We find the ground invoked for the dismissal of the complaint as legally
marine policy in favor of Science Teaching Improvement Project. Plaintiff's witness,
untenable. Even assuming arguendo that the plaintiff-insurer in this case is an unlicensed
however, failed to identify whose signature it was and plaintiff did not present on the
foreign corporation, such circumstance will not bar it from claiming reimbursement from
witness stand or took (sic) the deposition of the person who made that signature. Hence, the
the defendant carrier by virtue of subrogation under the contract of insurance and as
claim that there was an endorsement of the marine policy has no probative value as it is
recognized by Philippine courts. x x x
hearsay.

xxxx
Plaintiff, further, claims that it has been subrogated to the rights and interest of Science
Teaching Improvement Project as shown by the Subrogation Form (Exhibit "K") allegedly
 Plaintiff insurer, whether the foreign company or its duly authorized
Agent/Representative in the country, as subrogee of the claim of the insured under the
subject marine policy, is therefore the real party in interest to bring this suit and recover
the full amount of loss of the subject cargo shipped by it from Manila to the consignee in
Cebu City. x x x22
The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not
overcome by any countervailing evidence. Hence, the trial court erred in dismissing the complaint
and in not finding that based on the evidence on record and relevant provisions of law, Aboitiz is
liable for the loss or damage sustained by the subject cargo.
Issues
"transacting" or "doing business" in the country will a license be necessary before it can institute
suits.24 It may, however, bring suits on isolated business transactions, which is not prohibited under
Philippine law.25 Thus, this Court has held that a foreign insurance company may sue in Philippine
courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes
shipped by a Philippine carrier, even if it has no license to do business in this country. It is the act of
engaging in business without the prescribed license, and not the lack of license per se, which bars a
foreign corporation from access to our courts.26
In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the
subject marine policy, the present suit was filed by the said company's authorized agent in Manila. It
was the domestic corporation that brought the suit and not the foreign company. Its authority is
expressly provided for in the open policy which includes the ICNA office in the Philippines as one of
the foreign company's agents.

The following issues are up for Our consideration:

As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the
insurance policy by MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the
(1) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN consignee.
RULING THAT ICNA HAS A CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE
RIGHT OF SUBROGATION BUT WITHOUT CONSIDERING THE ISSUE CONSISTENTLY
The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought
RAISED BY ABOITIZ THAT THE FORMAL CLAIM OF STIP WAS NOT MADE WITHIN THE
against ICNA UK, the company who issued the insurance, or against any of its listed agents
PERIOD PRESCRIBED BY ARTICLE 366 OF THE CODE OF COMMERCE; AND, MORE SO,
worldwide.27 MSAS accepted said provision when it signed and accepted the policy. The acceptance
THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT.
operated as an acceptance of the authority of the agents. Hence, a formal indorsement of the policy
to the agent in the Philippines was unnecessary for the latter to exercise the rights of the insurer.
(2) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT THE SUIT FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY
Likewise, the Open Policy expressly provides that:
FILED BY ICNA AS THE LATTER WAS AN AUTHORIZED AGENT OF THE INSURANCE
COMPANY OF NORTH AMERICA (U.K.) ("ICNA UK").
The Company, in consideration of a premium as agreed and subject to the terms and
conditions printed hereon, does insure MSAS Cargo International Limited &/or
(3) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
Associates &/or Subsidiary Companies in behalf of the title holder: - Loss, if any, payable
RULING THAT THERE WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM
to the Assured or Order.
THE ORIGINAL ASSURED MSAS CARGO INTERNATIONAL LIMITED ("MSAS") IN FAVOR
OF THE CONSIGNEE STIP, AND THAT THE SUBROGATION RECEIPT ISSUED BY STIP IN
FAVOR OF ICNA IS VALID NOTWITHSTANDING THE FACT THAT IT HAS NO PROBATIVE The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims
VALUE AND IS MERELY HEARSAY AND A SELF-SERVING DOCUMENT FOR FAILURE OF on behalf of the assured. This is in keeping with Section 57 of the Insurance Code which states:
ICNA TO PRESENT A REPRESENTATIVE OF STIP TO IDENTIFY AND AUTHENTICATE THE
SAME.
A policy may be so framed that it will inure to the benefit of whosoever, during the
continuance of the risk, may become the owner of the interest insured. (Emphasis added)
(4) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT THE EXTENT AND KIND OF DAMAGE SUSTAINED BY THE SUBJECT
Respondent's cause of action is founded on it being subrogated to the rights of the consignee
CARGO WAS CAUSED BY THE FAULT OR NEGLIGENCE OF ABOITIZ.23 (Underscoring
of the damaged shipment. The right of subrogation springs from Article 2207 of the Civil Code,
supplied)
which states:

Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the
Article 2207. If the plaintiff's property has been insured, and he has received indemnity
real party-in-interest that possesses the right of subrogation to claim reimbursement from
from the insurance company for the injury or loss arising out of the wrong or breach of
petitioner Aboitiz? (b) Was there a timely filing of the notice of claim as required under Article 366
contract complained of, the insurance company shall be subrogated to the rights of the
of the Code of Commerce? (c) If so, can petitioner be held liable on the claim for damages?
insured against the wrongdoer or the person who has violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved party
Our Ruling shall be entitled to recover the deficiency from the person causing the loss or injury.
(Emphasis added)
We answer the triple questions in the affirmative.
As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals,28 payment
by the insurer to the assured operates as an equitable assignment of all remedies the assured may
A foreign corporation not licensed to do business in the Philippines is not absolutely
have against the third party who caused the damage. Subrogation is not dependent upon, nor does it
incapacitated from filing a suit in local courts. Only when that foreign corporation is
grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer.29
Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to
subrogation equipped it with a cause of action against petitioner in case of a contractual breach or
negligence.30 This right of subrogation, however, has its limitations. First, both the insurer and the
consignee are bound by the contractual stipulations under the bill of lading. 31 Second, the insurer
can be subrogated only to the rights as the insured may have against the wrongdoer. If by its own
acts after receiving payment from the insurer, the insured releases the wrongdoer who caused the
loss from liability, the insurer loses its claim against the latter. 32
The giving of notice of loss or injury is a condition precedent to the action for loss or injury or
the right to enforce the carrier's liability. Circumstances peculiar to this case lead Us to
conclude that the notice requirement was complied with. As held in the case of Philippine
American General Insurance Co., Inc. v. Sweet Lines, Inc.,33 this notice requirement protects the
carrier by affording it an opportunity to make an investigation of the claim while the matter is still
fresh and easily investigated. It is meant to safeguard the carrier from false and fraudulent claims.
Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from
receipt of the cargo if the damage is not apparent from the outside of the package. For damages that
are visible from the outside of the package, the claim must be made immediately. The law provides:
Article 366. Within twenty four hours following the receipt of the merchandise, the claim
against the carrier for damages or average which may be found therein upon opening the
packages, may be made, provided that the indications of the damage or average which give
rise to the claim cannot be ascertained from the outside part of such packages, in which
case the claim shall be admitted only at the time of receipt.
After the periods mentioned have elapsed, or the transportation charges have been paid,
no claim shall be admitted against the carrier with regard to the condition in which the
goods transported were delivered. (Emphasis supplied)
The periods above, as well as the manner of giving notice may be modified in the terms of the bill of
lading, which is the contract between the parties. Notably, neither of the parties in this case
presented the terms for giving notices of claim under the bill of lading issued by petitioner for the
goods.
The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the
damage was dated August 15, 1993, that letter, together with the notice of claim, was received by
petitioner only on September 21, 1993. But petitioner admits that even before it received the
written notice of claim, Mr. Mayo B. Perez, Claims Head of the company, was informed by telephone
sometime in August 13, 1993. Mr. Perez then immediately went to the warehouse and to the
delivery site to inspect the goods in behalf of petitioner. 34
In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage
Corporation,35 the notice was allegedly made by the consignee through telephone. The claim for
damages was denied. This Court ruled that such a notice did not comply with the notice
requirement under the law. There was no evidence presented that the notice was timely given.
Neither was there evidence presented that the notice was relayed to the responsible authority of the
carrier.
As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule
differently from the PCIC case, albeit this ruling is being made pro hac vice, not to be made a
precedent for other cases.
Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of
recovery from a carrier must be given a reasonable and practical construction, adapted to the
circumstances of the case under adjudication, and their application is limited to cases falling fairly
within their object and purpose.36
Bernhard Willig, the representative of consignee who received the shipment, relayed the
information that the delivered goods were discovered to have sustained water damage to no less
than the Claims Head of petitioner, Mayo B. Perez. Immediately, Perez was able to investigate the
claims himself and he confirmed that the goods were, indeed, already corroded.
Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given
a reasonable and practical, rather than a strict construction. 37 We give due consideration to the fact
that the final destination of the damaged cargo was a school institution where authorities are bound
by rules and regulations governing their actions. Understandably, when the goods were delivered,
the necessary clearance had to be made before the package was opened. Upon opening and
discovery of the damaged condition of the goods, a report to this effect had to pass through the
proper channels before it could be finalized and endorsed by the institution to the claims
department of the shipping company.
The call to petitioner was made two days from delivery, a reasonable period considering that the
goods could not have corroded instantly overnight such that it could only have sustained the
damage during transit. Moreover, petitioner was able to immediately inspect the damage while the
matter was still fresh. In so doing, the main objective of the prescribed time period was fulfilled.
Thus, there was substantial compliance with the notice requirement in this case.
To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in
interest to institute the claim for damages against petitioner; and pro hac vice, that a valid notice of
claim was made by respondent.
We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated
in Article 1735 of the Civil Code is that in cases where the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence required by
law.38 Extraordinary diligence is that extreme measure of care and caution which persons of
unusual prudence and circumspection use for securing and preserving their own property
rights.39 This standard is intended to grant favor to the shipper who is at the mercy of the common
carrier once the goods have been entrusted to the latter for shipment. 40
Here, the shipment delivered to the consignee sustained water damage. We agree with the findings
of the CA that petitioner failed to overturn this presumption:
x x x upon delivery of the cargo to the consignee Don Bosco Technical High School by a
representative from Trabajo Arrastre, and the crates opened, it was discovered that the
workbenches and work tools suffered damage due to "wettage" although by then they
were already physically dry. Appellee carrier having failed to discharge the burden of
proving that it exercised extraordinary diligence in the vigilance over such goods it
contracted for carriage, the presumption of fault or negligence on its part from the time the
goods were unconditionally placed in its possession (July 26, 1993) up to the time the same
were delivered to the consignee (August 11, 1993), therefore stands. The presumption that
 the carrier was at fault or that it acted negligently was not overcome by any WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.
countervailing evidence. x x x41 (Emphasis added)
SO ORDERED.
The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26,
1993. On the same day, it was stripped from the container van. Five days later, on July 31, 1993, it
was re-stuffed inside another container van. On August 1, 1993, it was loaded onto another vessel
bound for Cebu. During the period between July 26 to 31, 1993, the shipment was outside a
container van and kept in storage by petitioner.

The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside
warehouse," suggesting that from July 26 to 31, the goods were kept outside the warehouse. And
since evidence showed that rain fell over Manila during the same period, We can conclude that this
was when the shipment sustained water damage.

To prove the exercise of extraordinary diligence, petitioner must do more than merely show the
possibility that some other party could be responsible for the damage. It must prove that it used "all
reasonable means to ascertain the nature and characteristic of the goods tendered for transport and
that it exercised due care in handling them.42 Extraordinary diligence must include safeguarding the
shipment from damage coming from natural elements such as rainfall.

Aside from denying that the "grounded outside warehouse" notation referred not to the crate for
shipment but only to the carrier van, petitioner failed to mention where exactly the goods were
stored during the period in question. It failed to show that the crate was properly stored indoors
during the time when it exercised custody before shipment to Cebu. As amply explained by the CA:

On the other hand, the supplemental report submitted by the surveyor has confirmed
that it was rainwater that seeped into the cargo based on official data from the PAGASA
that there was, indeed, rainfall in the Port Area of Manila from July 26 to 31, 1993. The
Surveyor specifically noted that the subject cargo was under the custody of appellee
carrier from the time it was delivered by the shipper on July 26, 1993 until it was stuffed
inside Container No. ACCU-213798-4 on July 31, 1993. No other inevitable conclusion can
be deduced from the foregoing established facts that damage from "wettage" suffered by the
subject cargo was caused by the negligence of appellee carrier in grounding the shipment
outside causing rainwater to seep into the cargoes.

Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to
the subject goods by claiming that the notation "GROUNDED OUTSIDE WHSE." actually
refers to the container and not the contents thereof or the cargoes. And yet it presented no
evidence to explain where did they place or store the subject goods from the time it accepted
the same for shipment on July 26, 1993 up to the time the goods were stripped or
transferred from the container van to another container and loaded into the vessel M/V
Supercon Carrier I on August 1, 1993 and left Manila for Cebu City on August 2, 1993. x x x If
the subject cargo was not grounded outside prior to shipment to Cebu City, appellee
provided no explanation as to where said cargo was stored from July 26, 1993 to July 31,
1993. What the records showed is that the subject cargo was stripped from the container
van of the shipper and transferred to the container on August 1, 1993 and finally loaded
into the appellee's vessel bound for Cebu City on August 2, 1993. The Stuffing/Stripping
Report (Exhibit "D") at the Manila port did not indicate any such defect or damage, but
when the container was stripped upon arrival in Cebu City port after being discharged
from appellee's vessel, it was noted that only one (1) slab was slightly broken at the
bottom allegedly hit by a forklift blade (Exhibit "F"). 43 (Emphasis added)

Petitioner is thus liable for the water damage sustained by the goods due to its failure to
satisfactorily prove that it exercised the extraordinary diligence required of common carriers.
G.R. No. 150094 August 18, 2004 first shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight
No. 0071-28NRT and was immediately stored at [Cargohaus Inc.'s] warehouse. While the
second, consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in
FEDERAL EXPRESS CORPORATION, petitioner,
Flight No. 0071-30NRT which was likewise immediately stored at Cargohaus' warehouse.
vs.
Prior to the arrival of the cargoes, Federal Express informed GETC Cargo International
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
Corporation, the customs broker hired by the consignee to facilitate the release of its
INC., respondents.
cargoes from the Bureau of Customs, of the impending arrival of its client's cargoes.

"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the
cargoes arrived in Manila, a non-licensed custom's broker who was assigned by GETC to
facilitate the release of the subject cargoes, found out, while he was about to cause the
DECISION release of the said cargoes, that the same [were] stored only in a room with two (2) air
conditioners running, to cool the place instead of a refrigerator. When he asked an
employee of Cargohaus why the cargoes were stored in the 'cool room' only, the latter
told him that the cartons where the vaccines were contained specifically indicated
therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA,
upon instructions from GETC, did not proceed with the withdrawal of the vaccines and
PANGANIBAN, J.: instead, samples of the same were taken and brought to the Bureau of Animal Industry of
the Department of Agriculture in the Philippines by SMITHKLINE for examination
wherein it was discovered that the 'ELISA reading of vaccinates sera are below the
Basic is the requirement that before suing to recover loss of or damage to transported goods, the
positive reference serum.'
plaintiff must give the carrier notice of the loss or damage, within the period prescribed by the
Warsaw Convention and/or the airway bill.
"As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE
abandoned the shipment and, declaring 'total loss' for the unusable shipment, filed a
The Case
claim with AHAC through its representative in the Philippines, the Philam Insurance Co.,
Inc. ('PHILAM') which recompensed SMITHKLINE for the whole insured amount of
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4, 2001 THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00).
Decision2 and the September 21, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. Thereafter, [respondents] filed an action for damages against the [petitioner] imputing
58208. The assailed Decision disposed as follows: negligence on either or both of them in the handling of the cargo.

"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of "Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being
merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati City held solidarily liable for the loss as follows:
in Civil Case No. 95-1219, entitled 'American Home Assurance Co. and PHILAM Insurance
Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-
'WHEREFORE, judgment is hereby rendered in favor of [respondents] and
WAREHOUSE, INC.),' is hereby AFFIRMED and REITERATED.
[petitioner and its Co-Defendant Cargohaus] are directed to pay [respondents],
jointly and severally, the following:
"Costs against the [petitioner and Cargohaus, Inc.]."4
1. Actual damages in the amount of the peso equivalent of
The assailed Resolution denied petitioner's Motion for Reconsideration. US$39,339.00 with interest from the time of the filing of the
complaint to the time the same is fully paid.
The Facts
2. Attorney's fees in the amount of P50,000.00 and
The antecedent facts are summarized by the appellate court as follows:
3. Costs of suit.
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA
delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal 'SO ORDERED.'
Express Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to
consignee SMITHKLINE and French Overseas Company in Makati City, Metro Manila. The
"Aggrieved, [petitioner] appealed to [the CA]."5
shipment was covered by Burlington Airway Bill No. 11263825 with the words,
'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face.
That same day, Burlington insured the cargoes in the amount of $39,339.00 with Ruling of the Court of Appeals
American Home Assurance Company (AHAC). The following day, Burlington turned over
the custody of said cargoes to Federal Express which transported the same to Manila. The
The Test Report issued by the United States Department of Agriculture (Animal and Plant Health
Inspection Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the
appellate court held that the shipping Receipts were a prima facie proof that the goods had indeed
been delivered to the carrier in good condition. We quote from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the goods were
delivered to the carrier in good condition [i.e., the shipping receipts], and that the carrier
delivered the goods in a damaged condition, a presumption is raised that the damage
occurred through the fault or negligence of the carrier, and this casts upon the carrier the
burden of showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the carrier from
absolute liability. This the [petitioner] failed to discharge. x x x." 6
Found devoid of merit was petitioner's claim that respondents had no personality to sue. This
argument was supposedly not raised in the Answer or during trial.
Hence, this Petition.7
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.
Are the decision and resolution of the Honorable Court of Appeals proper subject for
review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals – petitioner's claim that respondents
have no personality to sue because the payment was made by the respondents to
Smithkline when the insured under the policy is Burlington Air Express is devoid of merit
– correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in good
condition, correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own
admission that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?" 8
Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court?
(2) Is Federal Express liable for damage to or loss of the insured goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a
question of law cognizable by the Supreme Court.9
In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the
conclusions drawn from such facts. Hence, this case is a proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it
-- because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance10 ("Certificate") that both opposing parties cite
in support of their respective positions. They differ only in their interpretation of what their rights
are under its terms. The determination of those rights involves a question of law, not a question of
fact. "As distinguished from a question of law which exists 'when the doubt or difference arises as to
what the law is on a certain state of facts' -- 'there is a question of fact when the doubt or difference
arises as to the truth or the falsehood of alleged facts'; or when the 'query necessarily invites
calibration of the whole evidence considering mainly the credibility of witnesses, existence and
relevancy of specific surrounding circumstance, their relation to each other and to the whole and
the probabilities of the situation.'"11
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x upon
surrender of this Certificate." Such wording conveys the right of collecting on any such damage or
loss, as fully as if the property were covered by a special policy in the name of the holder itself. At
the back of the Certificate appears the signature of the representative of Burlington. This document
has thus been duly indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of
being indemnified for loss of or damage to the insured shipment, as fully as if the property were
covered by a special policy in the name of the holder. Hence, being the holder of the Certificate and
having an insurable interest in the goods, Smithkline was the proper payee of the insurance
proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation 12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air
Receipt12 in favor of respondents. The latter were thus authorized "to file claims and begin suit waybill was used, or to the first carrier or to the last carrier or to the carrier who
against any such carrier, vessel, person, corporation or government." Undeniably, the consignee had performed the transportation during which the loss, damage or delay took place."17
a legal right to receive the goods in the same condition it was delivered for transport to petitioner. If
that right was violated, the consignee would have a cause of action against the person responsible
Article 26 of the Warsaw Convention, on the other hand, provides:
therefor.

"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the
complaint shall be prima facie evidence that the same have been delivered in good
insurer's entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a cause
condition and in accordance with the document of transportation.
of action in case of a contractual breach or negligence. 13 "Further, the insurer's subrogatory right to
sue for recovery under the bill of lading in case of loss of or damage to the cargo is jurisprudentially
upheld."14 (2) In case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within 3 days from the date
of receipt in the case of baggage and 7 days from the date of receipt in the case of goods.
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all
In case of delay the complaint must be made at the latest within 14 days from the date on
intents and purposes, it stands in the place and in substitution of the consignee. A fortiori, both the
which the baggage or goods have been placed at his disposal.
insurer and the consignee are bound by the contractual stipulations under the bill of lading. 15

(3) Every complaint must be made in writing upon the document of transportation or by
Prescription of Claim
separate notice in writing dispatched within the times aforesaid.

From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out
(4) Failing complaint within the times aforesaid, no action shall lie against the carrier,
that respondents' claim and right of action are already barred. The latter, and even the consignee,
save in the case of fraud on his part."18
never filed with the carrier any written notice or complaint regarding its claim for damage of or loss
to the subject cargo within the period required by the Warsaw Convention and/or in the airway bill.
Indeed, this fact has never been denied by respondents and is plainly evident from the records. Condition Precedent

Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of the shipment
unless a written notice, sufficiently describing the goods concerned, the approximate date
of the damage or loss, and the details of the claim, is presented by shipper or consignee to
an office of Burlington within (14) days from the date the goods are placed at the disposal
of the person entitled to delivery, or in the case of total loss (including non-delivery)
unless presented within (120) days from the date of issue of the [Airway Bill]." 16
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the carrier in writing
in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the damage and at
the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of
the goods;
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually
constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or
damage to the goods.19 The shipper or consignee must allege and prove the fulfillment of the
condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former.
The aforementioned requirement is a reasonable condition precedent; it does not constitute a
limitation of action.20
The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been
damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to
examine the nature and extent of the injury. "This protects the carrier by affording it an opportunity
to make an investigation of a claim while the matter is fresh and easily investigated so as to
safeguard itself from false and fraudulent claims."21
When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a
notice of claim for loss of or damage to goods shipped and the stipulation is not complied with, its
enforcement can be prevented and the liability cannot be imposed on the carrier. To stress, notice is
a condition precedent, and the carrier is not liable if notice is not given in accordance with the
stipulation.22 Failure to comply with such a stipulation bars recovery for the loss or damage
suffered.23

Being a condition precedent, the notice must precede a suit for enforcement. 24 In the present case,
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal;
there is neither an allegation nor a showing of respondents' compliance with this requirement
and
within the prescribed period. While respondents may have had a cause of action then, they cannot
now enforce it for their failure to comply with the aforesaid condition precedent.
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the
date of the issue of the air waybill.
In view of the foregoing, we find no more necessity to pass upon the other issues raised by
petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in
respondents' Complaint below -- has been adjudged by the trial court as liable for, inter alia, "actual
damages in the amount of the peso equivalent of US $39,339."25 This judgment was affirmed by the
Court of Appeals and is already final and executory.26

WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains
to Petitioner Federal Express Corporation. No pronouncement as to costs.

SO ORDERED.

[G.R. No. L-16271. October 31, 1961.]
ATLANTIC MUTUAL INSURANCE CO., Plaintiff-Appellant, v. MANILA PORT SERVICE and/or
MANILA RAILROAD COMPANY, Defendants-Appellees.
William H. Quasha & Associates, for Plaintiff-Appellant.
D.F. Macaranas and Fernando V. Reyes for Defendants-Appellees.
of the shipment aforementioned by virtue of a delivery permit, incorporating thereto, by reference,
the provisions of said management contract, particularly paragraph 15 thereof, the gist of which
was set forth in the permit, the consignee became bound by said provisions, and because it could
have avoided the application of said maximum limit of P500.00 per package by stating the true
value thereof in its claim for delivery of the goods in question, which admittedly, the consignee
failed to do (Tomas Grocery v. Delgado Brothers, Inc., G.R. No. L-11154 [April 20, 1959]; Jose
Bernabe & Co. v. Delgado Brothers, Inc., G.R. No. L-14360 [February 29, 1960]; Northern Motors,
Inc., v. Prince Line Et. Al., G.R. No. L-13884 [February 29, 1960]; Jose Bernabe & Co. v. Delgado
Brothers, Inc., G.R. No. L-12058 [April 27, 1960]).

WHEREFORE, the decision appealed from is hereby affirmed, with costs against plaintiff Atlantic
SYLLABUS Mutual Insurance Company. It is so ordered.

Bengzon C.J., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Paredes, Dizon, and De Leon, JJ.,
1. ARRASTRE; MANAGEMENT CONTRACT BETWEEN MANILA PORT SERVICE AND BUREAU OF concur.
CUSTOMS; CONSIGNEE BOUND BY ITS PROVISIONS. — A consignee who takes delivery of a
shipment by virtue of a delivery permit, which incorporates thereto, by reference, the provisions of Barrera J., took no part.
the management contract between the Manila Port Service and the Bureau of Customs, particularly
paragraph 15 thereof, pursuant to which the liability of the arrastre service operator, for each
package not delivered to the consignee, shall not exceed P500, unless the value of the missing
package is "otherwise specified or manifested", the gist of which is set forth in the permit, is,
although not a party to the said contract, bound by its provisions.

DECISION

CONCEPCION, J.:

Appeal by plaintiff Atlantic Mutual Insurance Company from a decision of the Court of First Instance
of Manila sentencing defendants Manila Port Service and the Manila Railroad Company to pay
P1,500.00 to said plaintiff, without pronouncement as to costs. The appeal is before us the case
having been submitted for decision, in the lower court, upon a stipulation of facts and the only issue
raised by appellant being one of law.

In April, 1952, the South Seas Trading Corporation of New York City shipped, on board the "SS
Tudor", several bundles, cartons, bales and cases of assorted goods consigned to the South Seas
Trading Corporation of Manila. The shipment was insured by the shipper with plaintiff herein. The
"SS Tudor" arrived at the port of Manila on May 13, 1957, and the aforementioned shipment was
unloaded into the custody of defendant Manila Port Service — a subsidiary of its codefendant
Manila Railroad Company, and the arrastre service operator of said port — and, subsequently,
delivered to the consignee, except, according to the latter, three (3) bales of cotton piece goods
allegedly valued P5,020.89. The consignee likewise, claimed that one (1) of the cases delivered
thereto was in bad order and had suffered damages in the sum of P109.25, but this is not involved in
the appeal.

The only question therein raised is whether plaintiff — which, upon claim filed by the consignee,
paid thereto the aforementioned sums of P5,020.89 and P109.25 — is entitled to recover said sum
of P5,020.89 from defendants herein, or is subject to the provisions of paragraph 15 of the
management contract by and between the Manila Port Service and the Bureau of Customs, pursuant
to which paragraph the liability of the arrastre service operator, for each package not delivered to
the consignee, shall not exceed P500, unless the value of the missing package is "otherwise specified
or manifested", which was not done in the case at bar. Plaintiff maintains that, not being a party to
the management contract, the consignee — into whose shoes plaintiff had stepped in consequence
of said payment — is not subject to the provisions of said stipulation, and that the same is
furthermore invalid. The lower court correctly rejected this pretense because, having taken delivery
G.R. Nos. 180880-81 September 18, 2012

KEPPEL CEBU SHIPYARD, INC., Petitioner,

vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

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

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,

vs.
KEPPEL CEBU SHIPYARD, INC., Respondent.

BERSAMIN,*

VILLARAMA,**

RESOLUTION

its full satisfaction. The arbitration costs shall be borne by both parties on at pro rata basis. 54

A final point. As both ECSI and WG&A are equally responsible for the loss of Superferry 3, questions
arises should the liability of Pioneer to WG&A be proportionately limited? Is Pioneer entitled to any
refund? Whether or not Pioneer is entitled to the restitution of any excess payment is a question
that cannot be adjudicated in this case. The Court cannot make a final finding or pronouncement on
the matter because WG&A is not a party In this case. WG&A should be heard in this regard as it may
have defenses to fend off the possible claim for refund by Pioneer. It should be stressed that their
relationship is governed by their contract of insurance, where their respective rights and
obligations are defined, and by their subsequent settlement or arrangement, if any. Due process
dictates that these should be threshed out in a separate action. Deedless to state, this decision is
without prejudice to such action.

WHEREFORE, the September 25, 2009 Decision of the Third Division is hereby MODIFIED.
Accordingly, Keppel Cebu Shipyard, Inc. is ordered to pay Pioneer Insurance and Surety Corporation
the amount of ₱ 50,000,000.00 plus interest at the rate of 6% per annum from the filing of the case
until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per
annum. From the date the award becomes final and executory until its fall satisfaction.

The arbitration costs shall be borne by both parties on a pro rata basis.

SO ORDERED.
G.R. No. 132607 May 5, 1999 7. Limit of Liability

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner, The limit of liability under this insurance, in respect of any one accident or
vs. series of accidents, arising out of one occurrence, shall be [P10 million],
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, including liability for costs and expense which are either:
INC., respondents.
(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured.3

PURISIMA, J.:
On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a Lapulapu City for annual dry-docking and repair.
reversal of the decision of the Court of Appeal1 which affirmed the decision of the trial court of
origin finding the petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent
On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc.
and liable for damages to the private respondent, William Lines, Inc., and to the insurer, Prudential
and CSEW to discuss the work to be undertaken on the M/V Manila City.
Guarantee Assurance Company, Inc.

The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:
The antecedent facts that matter are as follows:

10. The Contractor shall replace at its own work and at its own cost any work
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the
or material which can be shown to be defective and which is communicated in
business of dry-docking and repairing of marine vessels while the private respondent, Prudential
writing within one (1) month of redelivery of the vessel or if the vessel was not
Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in the non-life insurance
in the Contractor's Possession, the withdrawal of the Contractor's workmen, or
business.
at its option to pay a sum equal to the cost of such replacement at its own
works. These conditions shall apply to any such replacements.
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City, a
luxury passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time of the
11. Save as provided in Clause 10, the Contractor shall not be under any
unfortunate occurrence sued upon, subject vessel was insured with Prudential for P45,000,000.00
liability to the Customer either in contract or for delict or quasi-delict or
pesos for hull and machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
otherwise except for negligence and such liability shall itself be subject to the
covering loss of or damage to the vessel through the negligence of, among others, ship repairmen.
following overriding limitations and exceptions, namely:
The Policy provided as follows:

(a) The total liability of the Contractor to the Customer

Subject to the conditions of this Policy, this insurance also covers loss of or
(over and above the liability to replace under Clause 10)
damage to Vessel directly caused by the following:
or of any sub-contractor shall be limited in respect of any
defect or event (and a series of accidents arising out of
xxx xxx xxx the same defect or event shall constitute one defect or
event) to the sum of Pesos Philippine Currency One
Million only.
Negligence of Charterers and/or Repairers, provided such Charterers and/or
Repairers are not an Assured hereunder.
(b) In no circumstance whatsoever shall the liability of
the Contractor or any Sub-Contractor include any sum in
xxx xxx xxx
respect of loss of profit or loss of use of the vessel or
damages consequential on such loss of use
provided such loss or damage has not resulted from want of due diligence by
the Assured, the Owners or Managers of the Vessel, of any of them Masters,
xxx xxx xxx
Officers, Crew or Pilots are not to be considered Owners within the meaning of
this Clause should they hold shares in the Vessel. 2
20. The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect. 4
Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's Legal
Liability Insurance Policy. The policy was for P10 million only, under the limited liability clause, to
wit: While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW,
the master, officers and crew of M/V Manila City stayed in the vessel using their cabins as living
quarters. Other employees hired by William Lines to do repairs and maintenance work on the vessel
were also present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and
sank, resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that
the fire which broke out in M/V Manila City was caused by CSEW's negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the
latter had paid William Lines, Inc. the value of the hull and machinery insurance on the M/V Manila
City. As a result of such payment Prudential was subrogated to the claim of P45 million,
representing the value of the said insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendant, ordering the latter.
1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee,
the amount of Forty-five Million (P45 million) Pesos, with interest at the legal
rate until full payment is made.
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million
Seven Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of
income of M/V MANILA CITY, with interest at the legal rate until full payment
is made.
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11
million) as payment, in addition to what it received from the insurance
company to fully cover the injury or loss, in order to replace the M/V MANILA
CITY, with interest at the legal rate until full payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-
Seven Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub
(sic) oil on board the vessel when she was completely gutted by fire at
defendant, Cebu Shipyard's quay, with interest at the legal rate until full
payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos
(P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full
payment is made;
6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand
(P500,000 00) Pesos in moral damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the
pendency of the appeal, CSEW and William Lines presented a "Joint Motion for Partial Dismissal"
with prejudice, on the basis of the amicable settlement inked between Cebu Shipyard and William
Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and
William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling
thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu
Shipyard and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee
and Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the
legal rate until full payment is made, as contained in the decision of Civil Case
No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated February
13, 1998, CSEW found its way to this court via the present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING
THAT CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF THE
M/V MANILA CITY AT THE TIME THE FIRE BROKE OUT.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING
THE DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.
III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND
THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED
FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
CSEW'S EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN
INSURED.
VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF
SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE OF
ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS. THE CONTRACTUAL
PROVISIONS LIMITING CSEW'S LIABILITY FOR NEGLIGENCE TO A MAXIMUM
OF P 1 MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE RULINGS OF
THIS HONORABLE COURT.
Petitioner's version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila City
at its grave dock. It was then transferred to the docking quay of CSEW where
the remaining repair to be done was the replating of the top of Water Ballast
Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB
 General Services. Tank Top No. 12 was at the rear section of the vessel, on level
with the flooring of the crew cabins located on the vessel's second deck.
At around seven o'clock in the morning of February 16, 1991, the JNB workers
trimmed and cleaned the tank framing which involved minor hotworks
(welding/cutting works). The said work was completed at about 10:00 a.m.
The JNB workers then proceeded to rig the steel plates, after which they had
their lunch break. The rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed
smoke coming from the passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to ascertain the origin of the
smoke, he noticed that smoke was gathering on the ceiling of the passageway
but did not see any fire as the crew cabins on either side of the passageway
were locked. He immediately sought out the proprietor of JNB, Mr. Buenavista,
and the Safety officer CSEW, Mr. Aves, who sounded the fire alarm. CSEW's fire
brigade immediately responded as well as the other fire fighting units in Metro
Cebu. However, there were no WLI representative, officer or crew to guide the
firemen inside the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire
Department, Mandaue Fire Cordova Fire Department, Emergency Rescue Unit
Foundation, and fire brigade of CSEW, the fire was not controlled until 2:00
a.m., of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames
on the vessel and fire again broke out. Then the huge amounts of water
pumped into the vessel, coupled with the strong current, caused the vessel to
tilt until it capsized and sank.
When M/V Manila City capsized, steel and angle bars were noticed to have
been newly welded along the port side of the hull of the vessel, at the level of
the crew cabins. William Lines did not previously apply for a permit to do
hotworks on the said portion of the ship as it should have done pursuant to its
work order with CSEW.5
Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner:
At around eleven o'clock in the morning of February 16, 1991, the Chief Mate
of M/V Manila City was inspecting the various works being done by CSEW on
the vessel, when he saw that some workers of CSEW were cropping out steel
plates Tank Top No. 12 using acetylene, oxygen and welding torch. He also
observed that the rubber insulation wire coming out of the air-conditioning
unit was already burning, prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from
Tank No. 12. The vessel's reeferman reported such occurence to the Chief Mate
who immediately assembled the crew members to put out the fire. When it
was too hot for them to stay on board and seeing that the fire cannot be
controlled, the vessel's crew were forced to withdraw from CSEW's docking
quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive
loss, and after a thorough investigation of the surrounding circumstances of
the tragedy, Prudential Guaranteed found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P 45
million pesos representing the total value of M/V Manila City's hull and
machinery insurance.6
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for the
respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioner's
submission that the finding of negligence by the Court of Appeals is not supported by the evidence
on record, and contrary to what the Court of Appeals found, petitioner did not have management
and control over M/V Manila City. Although it was brought to the premises of CSEW for annual
repair, William Lines, Inc. retained control over the vessel as the ship captain remained in command
and the ship's crew were still present. While it imposed certain rules and regulations on William
Lines, it was in the exercise of due diligence and not an indication of CSEW's exclusive control over
subject vessel. Thus, CSEW maintains that it did not have exclusive control over the M/V Manila City
and the trial court and the Court of Appeals erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that factual findings by
the Court of Appeals are conclusive on the parties and are not reviewable by this Court. They are
entitled to great weight and respect, even finality, especially when, as in this case, the Court of
Appeals affirmed the factual findings arrived at by the trial court. 7 When supported by sufficient
evidence, findings of fact by the Court of Appeals affirming those of the trial court, are not to be
disturbed on appeal. The rationale behind this doctrine is that review of the findings of fact of the
Court of Appeals is not a function that the Supreme Court normally undertakes. 8
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which
caused the total loss of subject M/V Manila City was due to the negligence of the employees and
workers of CSEW. Both courts found that the M/V Manila City was under the custody and control of
petitioner CSEW, when the ill-fated vessel caught fire. The decisions of both the lower court and the
Court of Appeals set forth clearly the evidence sustaining their finding of actionable negligence on
the part of CSEW. This factual finding is conclusive on the parties. The court discerns no basis for
disturbing such finding firmly anchored on enough evidence. As held in the case of Roblett Industrial
Construction Corporation vs. Court of Appeals, "in the absence of any showing that the trial court
failed to appreciate facts and circumstances of weight and substance that would have altered its
conclusion, no compelling reason exists for the Court to impinge upon matters more appropriately
within its province.9
Furthermore, in petitions for review on certiorari, only questions of law may be put into issue.
Questions of fact cannot be entertained. The finding of negligence by the Court of Appeals is a
question which this Court cannot look into as it would entail going into factual matters on which the
finding of negligence was based. Such an approach cannot be allowed by this Court in the absence of
clear showing that the case falls under any of the exceptions 10 to the well-established principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by
reason of the negligence of the workers of CSEW, when the said vessel was under the exclusive
custody and control of CSEW is accordingly upheld. Under the circumstances of the case, the
doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a given situation,
the following conditions must concur (1) the accident was of a kind which does not ordinarily occur
unless someone is negligent; and (2) that the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence.
The facts and evidence on record reveal the concurrence of said conditions in the case under
scrutiny. First, the fire that occurred and consumed M/V Manila City would not have happened in
the ordinary course of things if reasonable care and diligence had been exercised. In other words,
some negligence must have occurred. Second, the agency charged with negligence, as found by the
trial court and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu
Shipyard and Engineering Works, Inc., which had control over subject vessel when it was docketed
for annual repairs. So also, as found by the regional trial court, "other responsible causes, including
the conduct of the plaintiff, and third persons, are sufficiently eliminated by the evidence. 11
What is more, in the present case the trial court found direct evidence to prove that the workers
and/or employees of CSEW were remiss in their duty of exercising due diligence in the care of
subject vessel. The direct evidence substantiates the conclusion that CSEW was really negligent.
Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct evidence on
record, the ineluctable conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc.,
was negligent and consequently liable for damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled
on the inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and
origin of the fire. Petitioner maintains that the Court of Appeals erred in disregarding the
testimonies of the fire experts, Messrs. David Grey and Gregory Michael Southeard, who testified on
the probable origin of the fire in M/V Manila City. Petitioner avers that since the said fire experts
were one in their opinion that the fire did not originate in the area of Tank Top No. 12 where the
JNB workers were doing hotworks but on the crew accommodation cabins on the portside No. 2
deck, the trial court and the Court of Appeals should have given weight to such finding based on the
testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they may have probative
value, reception in evidence of expert testimonies is within the discretion of the court. Section 49,
Rule 130 of the Revised Rules of Court, provides:
Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter
requiring special knowledge, skill, experience or training which he is shown to
possess, may be received in evidence.
The word "may" signifies that the use of opinion of an expert witness as evidence is a
prerogative of the courts. It is never mandatory for judges to give substantial weight to
expert testimonies. If from the facts and evidence on record, a conclusion is readily
ascertainable, there is no need for the judge to resort to expert opinion evidence. In the
case under consideration, the testimonies of the fire experts were not the only available
evidence on the probable cause and origin of the fire. There were witnesses who were
actually on board the vessel when the fire occurred. Between the testimonies of the fire
experts who merely based their findings and opinions on interviews and the testimonies
of those present during the fire, the latter are of more probative value. Verily, the trial
court and the Court of Appeals did not err in giving more weight to said testimonies.
To repeat, the issue of who between the parties was negligent has already been resolved against
Cebu Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to William Lines,
Inc. the former was subrogated to the right of the latter to indemnification from CSEW. As aptly
ruled by the Court of Appeals, the law on the manner is succinct and clear, to wit:
Art. 2207. If the plaintiffs 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. If the amount paid by the insurance company
does not fully cover the injury or loss the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury. 12
Thus, when Prudential, after due verification of the merit and validity of the insurance claim of
William Lines, Inc., paid the latter the total amount covered by its insurance policy, it was
subrogated to the right of the latter to recover the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured
under the subject insurance policy. To buttress its stance that it is a co-assured, petitioner placed
reliance on Clause 20 of the Work Order which states:
20 The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect. 13
According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume
the risk of loss of the vessel while under dry-dock or repair and to such extent, it is
benefited and effectively constituted as a co-assured under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is
clear in the sense that it requires William Lines to maintain insurance on the vessel during the
period of dry-docking or repair. Concededly, such a stipulation works to the benefit of CSEW as the
ship repairer. However, the fact that CSEW benefits from the said stipulation does not automatically
make it as a co-assured of William Lines. The intention of the parties to make each other a co-
assured under an insurance policy is to be gleaned principally from the insurance contract or policy
itself and not from any other contract or agreement because the insurance policy denominates the
assured and the beneficiaries of the insurance. The hull and machinery insurance procured by
William Lines, Inc. from Prudential named only "William Lines, Inc." as the assured. There was no
manifestation of any intention of William Lines, Inc. to constitute CSEW as a co-assured under
subject policy. It is axiomatic that when the terms of a contract are clear its stipulations
control. 14 Thus, when the insurance policy involved named only William Lines, Inc. as the assured
thereunder, the claim of CSEW that it is a co-assured is unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to Subject to the conditions of this Policy, this insurance also covers loss of or
the rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an damage to vessel directly caused by the following:
excluded risk and (2) it is a co-assured under the Marine Hull Insurance Policy.
xxx xxx xxx
It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly
excluded from the coverage of the insurance because the same resulted from "want of due diligence
Negligence of Charterers and/or Repairers, provided such Charterers and/or
by the Assured, Owners or Managers" which is not included in the risks insured against. Again, this
Repairers are not an Assured hereunder 15 (emphasis supplied).
theory of petitioner is bereft of any factual or legal basis. It proceeds from a wrong premise that the
fire which gutted subject vessel was caused by the negligence of the employees of William Lines, Inc.
As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the
policy, it would nullify any claim of William Lines, Inc. from Prudential for any loss or damage
caused by the negligence of CSEW. Certainly, no shipowner would agree to make a shiprepairer a co-
assured under such insurance policy; otherwise, any claim for loss or damage under the policy
would be invalidated. Such result could not have been intended by William Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines
Inc., by stipulation in the Contract or Work Order its liability is limited to One Million
(P1,000,000.00) Pesos only, and Prudential a mere subrogee of William Lines, Inc., should only be
entitled to collect the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as
binding as an ordinary contract, the Court recognizes instances when reliance on such contracts
cannot be favored especially where the facts and circumstances warrant that subject stipulations be
disregarded. 16 Thus, in ruling on the validity and applicability of the stipulation limiting the liability
of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-
vis the nature of the provision sought to be enforced should be considered, bearing in mind the
principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity and sustainability of the claim of William Lines,
Inc., for a total loss, Prudential conducted its own inquiry. Upon thorough investigation by its hull
surveyor, M/V Manila City was found to be beyond economical salvage and repair. 17 The evaluation
of the average adjuster also reported a constructive total loss. 18The said claim of William Lines, Inc.,
was then found to be valid and compensable such that Prudential paid the latter the total value of its
insurance claim. Furthermore, it was ascertained that the replacement cost of the vessel (the price
of a vessel similar to M/V Manila City), amounts to Fifty Million (P 50,000,000.00) Pesos.19

Considering the aforestated circumstances, let alone the fact that negligence on the part of
petitioner has been sufficiently proven, it would indeed be unfair and inequitable to limit the
liability of petitioner to One Million Pesos only. As aptly held by the trial court, "it is rather
unconscionable if not overstrained." To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid for by Prudential
amounted to Forty Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree of
diligence short of what is ordinarily required because, then, it would not be difficult for petitioner to
escape liability by the simple expedient of paying an amount very much lower than the actual
damage or loss suffered by William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3,
1997, and Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No
pronouncement as to costs.1âwphi1.nêt

SO ORDERED.

[G.R. No. L-36413. September 26, 1988.]
MALAYAN INSURANCE CO., INC., Petitioner, v. THE HON. COURT OF APPEALS (THIRD
DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN
TRANSPORTATION CO., INC., Respondents.
Freqillana, Jr. for Petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LIABILITY OF OWNER OF A VEHICLE INVOLVED IN
A MOTOR VEHICLE MISHAP AND EMPLOYER OF THE DRIVER DRIVING THE VEHICLE, JOINT AND
SEVERAL. — The owner of a vehicle involved in a motor vehicle mishap is solidarily liable with the
employer of the driver driving the vehicle, the former under Article 2184 of the New Civil Code and
the latter pursuant to Article 2180 of the New Civil Code, both being responsible for a quasi delict
under Article 2194 of the Civil Code.
2. ID.; ID.; SUABILITY OF INSURER BY THIRD PERSONS UNDER INDEMNITY CONTRACT EXCLUDES
SOLIDARY LIABILITY WITH THE INSURED AND/OR OTHER PARTIES AT FAULT. — Although the
insurer maybe held directly liable under indemnity contracts against third party liability, it may not
be held solidarily liable with the insured and/or other parties at fault being in violation of the
principles embodying solidary obligations and insurance contracts.
3. ID.; ID.; INSURANCE CONTRACTS; PRINCIPLE OF SUBROGATION; RIGHT OF SUBROGATION NOT
DEPENDENT UPON ANY PRIVITY OF CONTRACT. — Subrogation being a normal incident of
indemnity insurance, the insurer is entitled to be subrogated pro tanto to any right of action opted
by the insured. That right is not dependent nor does it grow out of, any privity of contract.
4. ID.; ID.; ID.; ID.; RIGHT TO REIMBURSEMENT AS SUBROGEE TO SOLIDARY DEBTOR. — Under
Article 1217 of the Civil Code a solidary debtor who has paid the entire obligation is entitled to be
reimbursed by his co-debtors for the share which corresponds to each. The rule holds true as to an
insurer subrogated to the right of a solidary debtor.
DECISION
PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R,
dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April
1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:chanrob1es virtual 1aw library
On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private
respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April
1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023, Serial No. 351672, and
Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to exceed
P600.00 and "third-party liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about
3:30 o’clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo, an
employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the
respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in
Barrio San Pedro, Rosales Pangasinan, causing damage to the insured vehicle and injuries to the
driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co.,
Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as
Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay him, jointly and
severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses;
P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00,
for attorney’s fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed
and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway
in order to avoid the jeep; and that it had observed the diligence of a good father of a family to
prevent damage, especially in the selection and supervision of its employees and in the maintenance
of its motor vehicles. It prayed that it be absolved from any and all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to
the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner
wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00
for hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he
alleged that the petitioner had issued in his favor a private car comprehensive policy wherein the
insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor
vehicle, as well as for any liability to third persons arising out of any accident during the effectivity
of such insurance contract, which policy was in full force and effect when the vehicular accident
complained of occurred. He prayed that he be reimbursed by the insurance company for the amount
that he may be ordered to pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint
against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the
time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within
the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill,
Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its
employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be
rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the
plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner-for
any sum that it may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:jgc:chanrobles.com.ph
"WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor
of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San
Leon Rice Mill, Inc., as follows:jgc:chanrobles.com.ph
"(a) P4,103 as actual damages;
"(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of
three (3) years;
 presumed that a driver was negligent, if he had been found guilty of reckless driving or violating
"(c) P5,000.00 as moral damages; traffic regulations at least twice within the next preceding two months.

"(d) P2,000.00 as attorney’s fees or the total of P29,103.00, plus costs.
"The above-named parties against whom this judgment is rendered are hereby held jointly and
severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only
P20,000.00.
"As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no
award should be made in its favor. Its counter-claim for attorney’s fees is also dismissed for not
being proved." 1
"If the owner was not in the motor vehicle, the provisions of article 2180 are applicable."cralaw
virtua1aw library
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to
plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the
motor vehicle mishap, is Article 2180 of the Civil Code which reads:jgc:chanrobles.com.ph
"Art. 2180. The obligation imposed by article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, x x x
the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the
damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill,
Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever "Employers shall be liable for the damages caused by their employees and household helpers acting
amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the within the scope of their assigned tasks, even though the former are not engaged in any business or
contract of insurance between Sio Choy and the insurance company. 2 industry.
Hence, the present recourse by petitioner insurance company.
x x x
The petitioner prays for the reversal of the appellate court’s judgment, or, in the alternative, to
order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of
"The responsibility treated in this article shall cease when the persons herein mentioned proved
the entire amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy.
that they observed all the diligence of a good father of a family to prevent damage."cralaw
virtua1aw library
The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the
alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors
other aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already
who are primarily liable to respondent Vallejos. The law states that the responsibility of two or
issue in favor of respondent Martin C. Vallejos against the respondents, without prejudice to the
more persons who are liable for a quasi-delict is solidary. 4
determination of whether or not petitioner shall be entitled to reimbursement by respondent San
Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has
On the other hand, the basis of petitioner’s liability is its insurance contract with respondent Sio
been adjudged to pay respondent Vallejos." 3
Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than
P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to
liability clause included in the private car comprehensive policy ‘existing between petitioner and
petitioner, it is important to determine first the nature or basis of the liability of petitioner to
respondent Sio Choy at the time of the complained vehicular accident.
respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.
In Guingon v. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by
bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the
the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice
heirs of said passenger against the driver and owner of the jeepney at fault as well as against the
Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be
insurance company which insured the latter jeepney against third party liability, the trial court,
reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been
affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and
adjudged to pay respondent Vallejos on its insurance policy.
severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney’s
fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that
was to be applied as partial satisfaction of the judgment rendered against said owner and driver of
petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to
the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault,
respondent Vallejos.
not including the insurance company, who were held solidarily liable to the heirs of the victim.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and
While it is true that where the insurance contract provides for indemnity against liability to third
San Leon Rice Mill, Inc., (to the exclusion of the petitioner) that are solidarily liable to respondent
persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer
Vallejos for the damages awarded to Vallejos.
under indemnity contracts against third party liability does not mean that the insurer can be held
solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated
is based on contract; that of the insured is based on tort.
Willys jeep, pursuant to Article 2184 of the Civil Code which provides:jgc:chanrobles.com.ph
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as
"Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who
incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors,
was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably
namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily
liable with said two (2) respondents by reason of the indemnity contract against third party liability
— under which an insurer can be directly sued by a third party — this will result in a violation of
the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown or
contingent event." 8
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon
Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the
qualification that petitioner’s liability is only up to P20,000.00. In the context of a solidary
obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of
P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be
obliged to pay the entire obligation when the amount stated in its insurance policy with respondent
Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification
made in the decision of the trial court to the effect that petitioner is sentenced to pay up to
P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the
concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of
Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice
Mill, Inc. to respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that
petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that
said respondent is not privy to the contract of insurance existing between petitioner and
respondent Sio Choy. We disagree.
"He who made the payment may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made. If the payment is made before the debt is due,
no interest for the intervening period may be demanded.
x x x"
In accordance with Article 1217, Petitioner, upon payment to respondent Vallejos and thereby
becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent
San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are
solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may
enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is
made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is
compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of
Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of
P14,551.50 (which is 1/2 of P29,103.00).
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of
Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as
to costs.
SO ORDERED.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

". . . Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. v. Moses, 287 U.S.
530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to
any right of action which the insured may have against the third person whose negligence or
wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. v. Scottish
Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).

"The right of subrogation is of the highest equity. The loss in the first instance is that of the insured
but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746,
note 16, citing Newcomb v. Cincinnati Ins. Co., 22 Ohio St. 382).

"Although many policies including policies in the standard form, now provide for subrogation, and
thus determine the rights of the insurer in this respect, the equitable right of subrogation as the
legal effect of payment inures to the insurer without any formal assignment or any express
stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance
company pays for the loss, such payment operates as an equitable assignment to the insurer of the
property and all remedies which the insured may have for the recovery thereof. That right is not
dependent upon, nor does it grow out of, any privity of contract, (Italics supplied) or upon written
assignment of claim, and payment to the insured makes the insurer an assignee in equity (Shambley
v. Jobe-Blackley Plumbing and Heating Co, 264 N.C. 456, 142 SE 2d 18)." 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of not exceeding
P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is
subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217
of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be
reimbursed by his co-debtors for the share which corresponds to each.

"Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.

[G.R. No. L-52756. October 12, 1987.]
MANILA MAHOGANY MANUFACTURING CORPORATION, Petitioner, v. COURT OF APPEALS
AND ZENITH INSURANCE CORPORATION, Respondents.
DECISION
PADILLA, J.:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March
1979, ordering petitioner Manila Mahogany Manufacturing Corporation to pay private respondent
Zenith Insurance Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest
from 18 January 1973, attorney’s fees in the sum of five hundred pesos (P500.00), and costs of suit,
and the resolution of the same Court, dated 8 February 1980, denying petitioner’s motion for
reconsideration of its decision.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a
truck owned by San Miguel Corporation. For the damage caused, respondent company paid
petitioner five thousand pesos (P5,000.00) in amicable settlement. Petitioner’s general manager
executed a Release of Claim, subrogating respondent company to all its right to action against San
Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand
reimbursement from San Miguel Corporation of the amount it had paid petitioner. Insurance
Adjusters, Inc. refused reimbursement, alleging that San Miguel Corporation had already paid
petitioner P4,500.00 for the damages to petitioner’s motor vehicle, as evidenced by a cash voucher
and a Release of Claim executed by the General Manager of petitioner discharging San Miguel
Corporation from "all actions, claims, demands the rights of action that now exist or hereafter [sic]
develop arising out of or as a consequence of the accident."cralaw virtua1aw library
Respondent insurance company thus demanded from petitioner reimbursement of the sum of
P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit
in the City Court of Manila for the recovery of P4,600.00. The City Court ordered petitioner to pay
respondent P4,500.00. On appeal, the Court of First Instance of Manila affirmed the City Court’s
decision in toto, which CFI decision was affirmed by the Court of Appeals, with the modification that
petitioner was to pay respondent the total amount of P5,000.00 that it had earlier received from the
respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent
company as the subrogation in the Release of Claim it executed in favor of respondent was
conditioned on recovery of the total amount of damages petitioner had sustained. Since total
damages were valued by petitioner at P9,486.43 and only P5,000.00 was received by petitioner
from respondent, petitioner argues that it was entitled to go after San Miguel Corporation to claim
the additional P4,500.00 eventually paid to it by the latter, without having to turn over said amount
to Respondent. Respondent of course disputes this allegation and states that there was no
qualification to its right of subrogation under the Release of Claim executed by petitioner, the
contents of said deed having expressed all the intents and purposes of the
parties.chanroblesvirtualawlibrary
To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner
cites Art. 2207 of the Civil Code, which states:jgc:chanrobles.com.ph
"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. If the amount paid by the insurance company does not fully
cover the injury or loss the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury."cralaw virtua1aw library
Petitioner also invokes Art. 1304 of the Civil Code, stating:jgc:chanrobles.com.ph
"A creditor, to whom partial payment has been made, may exercise his right for the remainder, and
he shall be preferred to the person who has been subrogated in his place in virtue of the partial
payment of the same credit."cralaw virtua1aw library
We find petitioner’s arguments to be untenable and without merit. In the absence of any other
evidence to support its allegation that a gentlemen’s agreement existed between it and respondent,
not embodied in the Release of Claim, such Release of Claim must be taken as the best evidence of
the intent and purpose of the parties. Thus, the Court of Appeals rightly
stated:jgc:chanrobles.com.ph
"Petitioner argues that the release claim it executed subrogating private respondent to any right of
action it had against San Miguel Corporation did not preclude Manila Mahogany from filing a
deficiency claim against the wrongdoer. Citing Article 2207 New Civil Code, to the effect that if the
amount paid by an insurance company does not fully cover the loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss, petitioner claims a preferred
right to retain the amount collected from San Miguel Corporation, despite the subrogation in favor
of private Respondent.
"Although petitioner’s right to file a deficiency claim against San Miguel Corporation is with legal
basis, without prejudice to the insurer’s right of subrogation, nevertheless when Manila Mahogany
executed another release claim (Exhibit K) discharging San Miguel Corporation from all actions,
claims, demands and rights of action that now exist or hereafter arising out of or as a consequence
of the accident" after the insurer had paid the proceeds of the policy — the compromise agreement
of P5,000.00 being based on the insurance policy — the insurer is entitled to recover from the
insured the amount of insurance money paid (Metropolitan Casualty Insurance Company of New
York v. Badler, 229 N.Y.S. 61, 132 Misc. 132, cited in Insurance Code and Insolvency Law with
comments and annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts released San
Miguel Corporation, thereby defeating private respondent’s right of subrogation, the right of action
of petitioner against the insurer was also nullified. (Sy Keng & Co. v. Queensland Insurance Co. Ltd.,
54 O.G. 391.) Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier
paid to petitioner." 1
As held in Phil. Air Lines v. Heald Lumber Co., 2
If a property insured and the owner receives the indemnity from the insurer, it is provided in
[Article 2207 of the New Civil Code] that the insurer is deemed subrogated to the rights of the
insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the deficiency. . . . Under this legal provision,
the real party in interest with regard to the portion of the indemnity paid is the insurer and not the
insured. 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company, not the
P4,500 as originally asked for, but P5,000, the amount respondent company paid petitioner as
insurance, is also in accord with law and jurisprudence. In disposing of the issue, the Court of
Appeals held:jgc:chanrobles.com.ph
". . . petitioner is entitled to keep the sum of P4,500 paid by San Miguel Corporation under its clear
right to file a deficiency claim for damages incurred, against the wrongdoer, should the insurance
company not fully pay for the injury caused (Article 2207, New Civil Code). However, when
petitioner’s right to retain the sum of P5,000.00 no longer existed, thereby entitling private
respondent to recover the same. (Emphasis supplied)

As has been observed:jgc:chanrobles.com.ph

"x x x

"The right of subrogation can only exist after the insurer has paid the insured, otherwise the insured
will be deprived of his right to full indemnity. If the insurance proceeds are not sufficient to cover
the damages suffered by the insured, then he may sue the party responsible for the damage for the
[sic] remainder. To the extent of the amount he has already received from the insurer, the insurer
enjoy’s [sic] the right of subrogation.

"Since the insurer can be subrogated to only such rights as the insured may have, should the
insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the
insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover
from the insured whatever it has paid to the latter, unless the release was made with the consent of
the insurer." 4 (Emphasis supplied)

And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still,
the respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid
by the insurer. The Court of Appeals rightly reasoned as follows:jgc:chanrobles.com.ph

"It is to be noted that private respondent, in its complaint, prays for the recovery, not of P5,000.00 it
had paid under the insurance policy but P4,500.00 San Miguel Corporation had paid to petitioner.
On this score, We believe the City Court and Court of First Instance erred in not awarding the proper
relief. Although private respondent prays for the reimbursement of P4,500.00 paid by San Miguel
Corporation, instead of P5,000.00 paid under the insurance policy, the trial court should have
awarded the latter, although not prayed for, under the general prayer in the complaint "for such
further or other relief as may be deemed just or equitable" (Rule 6, Sec. 3, Revised Rules of Court;
Rosales v. Reyes Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios and Tupas,
77 Phil. 120)."cralaw virtua1aw library

WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby
AFFIRMED with costs against petitioner.

SO ORDERED.