G.R. No.

L-15895 November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.

Jose A. Espiritu for appellant.

Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to
recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a
life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.

The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life
Assurance Company of Canada through its office in Manila for a life annuity. Two days later he paid the
sum of P6,000 to the manager of the company's Manila office and was given a receipt reading as
follows:

MANILA, I. F., 26 de septiembre, 1917.

PROVISIONAL RECEIPT Pesos 6,000

Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia
solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central
de la Compañia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On
November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on the
same day the cable was received notice was sent by the Manila office of Herrer that the application had
been accepted, is a disputed point, which will be discussed later.) On December 4, 1917, the policy was
issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to the Manila office of the
company stating that Herrer desired to withdraw his application. The following day the local office
replied to Mr. Torres, stating that the policy had been issued, and called attention to the notification of
November 26, 1917. This letter was received by Mr. Torres on the morning of December 21, 1917. Mr.
Herrer died on December 20, 1917.

As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence of
record.

The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial
testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and
handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on cross-
examination that after preparing the letter and giving it to he manager, he new nothing of what became
of it. The local manager, Mr. White, testified to having received the cablegram accepting the application
of Mr. Herrer from the home office on November 26, 1917. He said that on the same day he signed a
letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after being signed,
were sent to the chief clerk and placed on the mailing desk for transmission. The witness could not tell if
the letter had every actually been placed in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the defense, attorney Manuel Torres testified to
having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his
application for a life annuity, and that he said that the only document relating to the transaction in his
possession was the provisional receipt. Rafael Enriquez, the administrator of the estate, testified that he
had gone through the effects of the deceased and had found no letter of notification from the insurance
company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying
Mr. Herrer that his application had been accepted, was prepared and signed in the local office of the
insurance company, was placed in the ordinary channels for transmission, but as far as we know, was
never actually mailed and thus was never received by the applicant.

Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be
applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be
noticed.

Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the
Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of
Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil Code there
formerly existed and presumably still exist, Chapters II and IV, entitled insurance contracts and life
annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was, however, in force the
Insurance Act. No. 2427. Chapter IV of this Act concerns life and health insurance. The Act expressly
repealed Title VIII of Book II and Section III of Title III of Book III of the code of Commerce. The law of
insurance is consequently now found in the Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in article
1802, not only describes a contact of life annuity markedly similar to the one we are considering, but in
two other articles, gives strong clues as to the proper disposition of the case. For instance, article 16 of
the Civil Code provides that "In matters which are governed by special laws, any deficiency of the latter
shall be supplied by the provisions of this Code." On the supposition, therefore, which is incontestable,
that the special law on the subject of insurance is deficient in enunciating the principles governing
acceptance, the subject-matter of the Civil code, if there be any, would be controlling. In the Civil Code
is found article 1262 providing that "Consent is shown by the concurrence of offer and acceptance with
respect to the thing and the consideration which are to constitute the contract. An acceptance made by
letter shall not bind the person making the offer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered into at the place where the offer was made."
This latter article is in opposition to the provisions of article 54 of the Code of Commerce.

If no mistake has been made in announcing the successive steps by which we reach a conclusion, then
the only duty remaining is for the court to apply the law as it is found. The legislature in its wisdom
having enacted a new law on insurance, and expressly repealed the provisions in the Code of Commerce
on the same subject, and having thus left a void in the commercial law, it would seem logical to make
use of the only pertinent provision of law found in the Civil code, closely related to the chapter
concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from
the date it came to his knowledge, may not be the best expression of modern commercial usage. Still it
must be admitted that its enforcement avoids uncertainty and tends to security. Not only this, but in
order that the principle may not be taken too lightly, let it be noticed that it is identical with the
principles announced by a considerable number of respectable courts in the United States. The courts
who take this view have expressly held that an acceptance of an offer of insurance not actually or
constructively communicated to the proposer does not make a contract. Only the mailing of acceptance,
it has been said, completes the contract of insurance, as the locus poenitentiae is ended when the
acceptance has passed beyond the control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)

In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262
of the Civil Code providing that an acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. The pertinent fact is, that according to the provisional
receipt, three things had to be accomplished by the insurance company before there was a contract: (1)
There had to be a medical examination of the applicant; (2) there had to be approval of the application
by the head office of the company; and (3) this approval had in some way to be communicated by the
company to the applicant. The further admitted facts are that the head office in Montreal did accept the
application, did cable the Manila office to that effect, did actually issue the policy and did, through its
agent in Manila, actually write the letter of notification and place it in the usual channels for
transmission to the addressee. The fact as to the letter of notification thus fails to concur with the
essential elements of the general rule pertaining to the mailing and delivery of mail matter as
announced by the American courts, namely, when a letter or other mail matter is addressed and mailed
with postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as
soon as it could have been transmitted to him in the ordinary course of the mails. But if any one of these
elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will not be presumed
to have been received by the addressee unless it is shown that it was deposited in the post-office,
properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)

We hold that the contract for a life annuity in the case at bar was not perfected because it has not been
proved satisfactorily that the acceptance of the application ever came to the knowledge of the
applicant.lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000
with legal interest from November 20, 1918, until paid, without special finding as to costs in either
instance. So ordered.

Mapa, C.J., Araullo, Avanceña and Villamor, JJ., concur.

Johnson, J., dissents.
G.R. No. 166245 April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the
inaction of the insurer on the insurance application be considered as approval of the application?

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered
into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal
Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased
burial lots from it on installment basis would be insured by Philamlife. The amount of insurance
coverage depended upon the existing balance of the purchased burial lots. The policy was to be
effective for a period of one year, renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.

Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the
Assured for the unpaid balance of his loan with the Assured, and is accepted for Life Insurance coverage
by the Company on its effective date is eligible for insurance under the Policy.

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to P50,000.00. However, a

declaration of good health shall be required for all Lot Purchasers as part of the application. The
Company reserves the right to require further evidence of insurability satisfactory to the Company in
respect of the following:

1. Any amount of insurance in excess of P50,000.00.

2. Any lot purchaser who is more than 55 years of age.

LIFE INSURANCE BENEFIT.

The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance
of his loan (including arrears up to but not exceeding 2 months) as reported by the Assured to the
Company or the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the Assured if
the Lot Purchaser dies while insured under the Policy.

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the
Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by
the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser, and the amounts of the respective unpaid balances of
all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter
dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982. One
of those included in the list as "new business" was a certain John Chuang. His balance of payments was
PhP 100,000. On August 2, 1984, Chuang died.

Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of Death;
(2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of
Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant (with
form attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.

Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was
received by Philamlife on November 15, 1984.

After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on
April 25, 1986.8

In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May 20,
1986,9 a portion of which reads:

The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal Gardens
Memorial Park in October 1982 for the total maximum insurable amount of P100,000.00 each. No
application for Group Insurance was submitted in our office prior to his death on August 2, 1984.

In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence of Insurability provision,
"a declaration of good health shall be required for all Lot Purchasers as party of the application." We cite
further the provision on Effective Date of Coverage under the policy which states that "there shall be no
insurance if the application is not approved by the Company." Since no application had been submitted
by the Insured/Assured, prior to his death, for our approval but was submitted instead on November 15,
1984, after his death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that
Eternal Gardens being the Assured was a party to the Contract and was therefore aware of these
pertinent provisions.

With regard to our acceptance of premiums, these do not connote our approval per se of the insurance
coverage but are held by us in trust for the payor until the prerequisites for insurance coverage shall
have been met. We will however, return all the premiums which have been paid in behalf of John Uy
Chuang.

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money
against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against
Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00,
representing the proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid;
and, to pay the sum of P10,000.00 as attorney’s fees.

SO ORDERED.

The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished before
his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29, 1982,
stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that
due to Philamlife’s inaction from the submission of the requirements of the group insurance on
December 29, 1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s acceptance of the
premiums during the same period, Philamlife was deemed to have approved Chuang’s application. The
RTC said that since the contract is a group life insurance, once proof of death is submitted, payment
must follow.

Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSED and
SET ASIDE, and the complaint is DISMISSED. No costs.

SO ORDERED.11

The CA based its Decision on the factual finding that Chuang’s application was not enclosed in Eternal’s
letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted
application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no
application form, Chuang was not covered by Philamlife’s insurance.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of substance, not therefore determined by this
Honorable Court, or has decided it in a way not in accord with law or with the applicable jurisprudence,
in holding that:

I. The application for insurance was not duly submitted to respondent PhilamLife before the death of
John Chuang;

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.

The Court’s Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the
CA and first level courts, considering their findings of facts are conclusive and binding on this Court.
However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:

(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts
are conflicting; (6) when in making its findings the [CA] went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings [of
the CA] are contrary to the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in the
petitioner’s main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record; and (11)
when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion.12 (Emphasis supplied.)

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review
them.

Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was
apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of
the insurance application which was signed by Chuang himself and executed before his death.

On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance
application.

The evidence on record supports Eternal’s position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such
stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments.
Such receipt is an admission by Philamlife against its own interest.13 The burden of evidence has shifted
to Philamlife, which must prove that the letter did not contain Chuang’s insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have received Chuang’s insurance application.

To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped as
received, the contents of the letter are correct and accounted for.

Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to inconsistencies
is groundless. The trial court is in the best position to determine the reliability and credibility of the
witnesses, because it has the opportunity to observe firsthand the witnesses’ demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court,
unless some facts or circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no

overlooked facts of substance and value.

Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:

Atty. Arevalo:

Q Where is the original of the application form which is required in case of new coverage?

[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two copies of this form and the
original of this is submitted to Philamlife together with the monthly remittances and the second copy is
remained or retained with the marketing department of Eternal Gardens.

Atty. Miranda:

We move to strike out the answer as it is not responsive as counsel is merely asking for the location and
does not [ask] for the number of copy.

Atty. Arevalo:

Q Where is the original?

[Mendoza:]

A As far as I remember I do not know where the original but when I submitted with that payment
together with the new clients all the originals I see to it before I sign the transmittal letter the originals
are attached therein.16

In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.

As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled
out the application form, these are minor inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.17

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecution’s
evidence as a whole or reflect on the witnesses’ honesty. The test is whether the testimonies agree on
essential facts and whether the respective versions corroborate and substantially coincide with each
other so as to make a consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at
issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s
witnesses.

However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the
Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by
the Company.

An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became effective
upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve
the insurance contract before the same can become effective.

It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of resolving
any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A
contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its obligations.19 (Emphasis
supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party which
prepared the contract, the insurer. By reason of the exclusive control of the insurance company over the
terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the
insurer and liberally in favor of the insured, especially to avoid forfeiture.20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a
party’s purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot
purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on
the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation
of the insurance contract. Moreover, the mere inaction of the insurer on the insurance application must
not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract.
The termination of the insurance contract by the insurer must be explicit and unambiguous.

As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance contracts
are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of insurance. As such,
insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of
insurance applicants, insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor the application as a
valid, binding, and effective insurance contract.21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810
is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138
is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of
Chuang;

(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time
of extra-judicial demand by Eternal until Philamlife’s receipt of the May 29, 1996 RTC Decision on June
17, 1996;

(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June
17, 1996 until full payment of this award; and

(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.

No costs.

SO ORDERED.

Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.

G.R. No. 125678 March 18, 2002

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

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical
Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital,
respondent tried to claim the benefits under the health care agreement. However, petitioner denied her
claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment
regarding Ernani’s medical history. Doctors at the MMC 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 expenses herself, amounting to about P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital
where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for
damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case
No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorney’s fees.
After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos,
ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the
amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay 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
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and

5. In consideration of the insurer’s promise, the insured pays a premium.8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest against him, may be insured against. Every
person has an insurable interest in the life and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health:

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

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or
service, of which death or illness might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of 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.17 In this case, no rescission was made. Besides, the cancellation of health care agreements
as in insurance policies require the concurrence of the following conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of
insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract – the insurer.20 By
reason of the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the
insured, especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements. The
phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should
be strictly construed against the provider.22

Anent the incontestability of the membership of 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. 167330 June 12, 2008

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CORONA, J.:

Is a health care agreement in the nature of an insurance contract and therefore subject to the
documentary stamp tax (DST) imposed under Section 185 of Republic Act 8424 (Tax Code of 1997)?

This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in its August 16,
2004 decision1 in CA-G.R. SP No. 70479. Petitioner Philippine Health Care Providers, Inc. believes
otherwise and assails the CA decision in this petition for review under Rule 45 of the Rules of Court.

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and
operate a prepaid group practice health care delivery system or a health maintenance organization to
take care of the sick and disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."2 Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.3

The pertinent part of petitioner's membership or health care agreement4 provides:

VII BENEFITS

Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims for reimbursement] of
this Agreement, Members shall have the following Benefits under this Agreement:

In-Patient Services. In the event that a Member contract[s] sickness or suffers injury which requires
confinement in a participating Hospital[,] the services or benefits stated below shall be provided to the
Member free of charge, but in no case shall [petitioner] be liable to pay more than P75,000.00 in
benefits with respect to anyone sickness, injury or related causes. If a member has exhausted such
maximum benefits with respect to a particular sickness, injury or related causes, all accounts in excess of
P75,000.00 shall be borne by the enrollee. It is[,] however, understood that the payment by [petitioner]
of the said maximum in In-Patient Benefits to any one member shall preclude a subsequent payment of
benefits to such member in respect of an unrelated sickness, injury or related causes happening during
the remainder of his membership term.

(a) Room and Board

(b) Services of physician and/or surgeon or specialist

(c) Use of operating room and recovery room

(d) Standard Nursing Services

(e) Drugs and Medication for use in the hospital except those which are used to dissolve blood clots in
the vascular systems (i.e., trombolytic agents)

(f) Anesthesia and its administration

(g) Dressings, plaster casts and other miscellaneous supplies

(h) Laboratory tests, x-rays and other necessary diagnostic services

(i) Transfusion of blood and other blood elements

Condition for in-Patient Care. The provision of the services or benefits mentioned in the immediately
preceding paragraph shall be subject to the following conditions:

(a) The Hospital Confinement must be approved by [petitioner's] Physician, Participating Physician or
[petitioner's] Medical Coordinator in that Hospital prior to confinement.

(b) The confinement shall be in a Participating Hospital and the accommodation shall be in accordance
with the Member[']s benefit classification.

(c) Professional services shall be provided only by the [petitioner's] Physicians or Participating
Physicians.

(d) If discharge from the Hospital has been authorized by [petitioner's] attending Physician or
Participating Physician and the Member shall fail or refuse to do so, [petitioner] shall not be responsible
for any charges incurred after discharge has been authorized.

Out-Patient Services. A Member is entitled free of charge to the following services or benefits which
shall be rendered or administered either in [petitioner's] Clinic or in a Participating Hospital under the
direction or supervision of [petitioner's] Physician, Participating Physician or [petitioner's] Medical
Coordinator.

(a) Gold Plan Standard Annual Physical Examination on the anniversary date of membership, to be done
at [petitioner's] designated hospital/clinic, to wit:

(i) Taking a medical history

(ii) Physical examination

(iii) Chest x-ray

(iv) Stool examination

(v) Complete Blood Count

(vi) Urinalysis

(vii) Fasting Blood Sugar (FBS)

(viii) SGPT

(ix) Creatinine

(x) Uric Acid

(xi) Resting Electrocardiogram

(xii) Pap Smear (Optional for women 40 years and above)

(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical Examination.

The following tests are to be done as part of the Member[']s Annual check-up program at [petitioner's]
designated clinic, to wit:

1) Routine Physical Examination

2) CBC (Complete Blood Count)

* Hemoglobin * Hematocrit

* Differential * RBC/WBC

3) Chest X-ray

4) Urinalysis

5) Fecalysis

(c) Preventive Health Care, which shall include:

(i) Periodic Monitoring of Health Problems

(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other healthy habits

(iv) Immunization but excluding drugs for vaccines used

(d) Out-Patient Care, which shall include:

(i) Consultation, including specialist evaluation

(ii) Treatment of injury or illness

(iii) Necessary x-ray and laboratory examination

(iv) Emergency medicines needed for the immediate

relief of symptoms

(v) Minor surgery not requiring confinement

Emergency Care. Subject to the conditions and limitations in this Agreement and those specified below,
a Member is entitled to receive emergency care [in case of emergency. For this purpose, all hospitals
and all attending physician(s) in the Emergency Room automatically become accredited. In participating
hospitals, the member shall be entitled to the following services free of charge: (a) doctor's fees, (b)
emergency room fees, (c) medicines used for immediate relief and during treatment, (d) oxygen,
intravenous fluids and whole blood and human blood products, (e) dressings, casts and sutures and (f) x-
rays, laboratory and diagnostic examinations and other medical services related to the emergency
treatment of the patient.]5 Provided, however, that in no case shall the total amount payable by
[petitioner] for said Emergency, inclusive of hospital bill and professional fees, exceed P75,000.00.

If the Member received care in a non-participating hospital, [petitioner] shall reimburse [him]6 80% of
the hospital bill or the amount of P5,000.00[,] whichever is lesser, and 50% of the professional fees of
non-participating physicians based on [petitioner's] schedule of fees provided that the total amount[,]
inclusive of hospital bills and professional fee shall not exceed P5,000.00.

On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a formal demand
letter and the corresponding assessment notices demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18.
The assessment represented the following:

Value Added Tax (VAT) DST

1996 P 45,767,596.23 P 55,746,352.19

1997 54,738,434.03 68,450,258.73

P 100,506,030.26 P 124,196,610.92

The deficiency DST assessment was imposed on petitioner's health care agreement with the members of
its health care program pursuant to Section 185 of the 1997 Tax Code which provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all policies of insurance or
bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any
person, association or company or corporation transacting the business of accident, fidelity,
employer's liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or
recognizances, conditioned for the performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any
bond or other obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any
mercantile credits, which may be made or renewed by any such person, company or corporation, there
shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or
fractional part thereof, of the premium charged. (emphasis supplied)

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on
the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87
inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996
and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE.
Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.8

Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST assessment. He claimed
that petitioner's health care agreement was a contract of insurance subject to DST under Section 185 of
the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision.10 It held that petitioner's health care agreement was
in the nature of a non-life insurance contract subject to DST:

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency

Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20%
interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the
same shall have been fully paid.

SO ORDERED.11

Petitioner moved for reconsideration but the CA denied it. Hence, this petition.

Petitioner essentially argues that its health care agreement is not a contract of insurance but a contract
for the provision on a prepaid basis of medical services, including medical check-up, that are not based
on loss or damage. Petitioner also insists that it is not engaged in the insurance business. It is a health
maintenance organization regulated by the Department of Health, not an insurance company under the
jurisdiction of the Insurance Commission. For these reasons, petitioner asserts that the health care
agreement is not subject to DST.

We do not agree.

The DST is levied on the exercise by persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the execution of specific instruments.12 It
is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the
business.13 In particular, the DST under Section 185 of the 1997 Tax Code is imposed on the privilege of
making or renewing any policy of insurance (except life, marine, inland and fire insurance), bond or
obligation in the nature of indemnity for loss, damage, or liability.

Under the law, a contract of insurance is an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.14 The
event insured against must be designated in the contract and must either be unknown or contingent.15

Petitioner's health care agreement is primarily a contract of indemnity. And in the recent case of Blue
Cross Healthcare, Inc. v. Olivares,16 this Court ruled that a health care agreement is in the nature of a
non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the provision of medical
services. Petitioner does not actually provide medical or hospital services but merely arranges for the
same17 and pays for them up to the stipulated maximum amount of coverage. It is also incorrect to say
that the health care agreement is not based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses
(such as professional fees of physicians). The term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the
member in case of sickness, injury or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which gives rise to liability on the
part of the member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be
incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they are significantly and substantially
more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance.

Petitioner's health care agreement is substantially similar to that involved in Philamcare Health Systems,
Inc. v. CA.18 The health care agreement in that case entitled the subscriber to avail of the hospitalization
benefits, whether ordinary or emergency, listed therein. It also provided for "out-patient benefits" such
as annual physical examinations, preventive health care and other out-patient services. This Court ruled
in Philamcare Health Systems, Inc.:

[T]he insurable interest of [the subscriber] 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. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingency, the health care provider must pay for the same to the
extent agreed upon under the contract.19 (emphasis supplied)

Similarly, the insurable interest of every member of petitioner's health care program in obtaining the
health care agreement is his own health. Under the agreement, petitioner is bound to indemnify any
member who incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingency to the extent agreed upon under the contract.

Petitioner's contention that it is a health maintenance organization and not an insurance company is
irrelevant. Contracts between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts.20

Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity, or
facility offered at exchanges for the transaction of the business.21 It is an excise on the facilities used in
the transaction of the business, separate and apart from the business itself.22
WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court of Appeals in CA-
G.R. SP No. 70479 is AFFIRMED.

Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency

documentary stamp tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20%
interest per annum from January 27, 2000 until full payment thereof.

Costs against petitioner.

SO ORDERED.
G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is
liable under the Money, Security, and Payroll Robbery policy it issued to the private respondent or
whether recovery thereunder is precluded under the general exceptions clause thereof. Both the trial
court and the Court of Appeals held that there should be recovery. The petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private
respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune
Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of
P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to its
head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:

1. The plaintiff was insured by the defendants and an insurance policy was issued, the duplicate original
of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in the sum of P725,000.00
under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head Office at 8737 Paseo
de Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said cash. The robbery took place
while the armored car was traveling along Taft Avenue in Pasay City;

3. The said armored car was driven by Benjamin Magalong Y de Vera, escorted by Security Guard
Saturnino Atiga Y Rosete. Driver Magalong was assigned by PRC Management Systems with the plaintiff
by virtue of an Agreement executed on August 7, 1983, a duplicate original copy of which is hereto
attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with the plaintiff by virtue of
a contract of Security Service executed on October 25, 1982, a duplicate original copy of which is hereto
attached as Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver Magalong and guard Atiga
were charged, together with Edelmer Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with violation
of P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. A copy of the complaint is hereto
attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid persons with the said crime
before Branch 112 of the Regional Trial Court of Pasay City. A copy of the said information is hereto
attached as Exhibit "E." The case is still being tried as of this date;
7. Demands were made by the plaintiff upon the defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of the insurance
policy, attached hereto as Exhibit "A," specifically under page 1 thereof, "General Exceptions" Section
(b), which is marked as Exhibit "A-1," and which reads as follows:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee,
partner, director, trustee or authorized representative of the Insured whether acting alone or in
conjunction with others. . . .

8. The plaintiff opposes the contention of the defendant and contends that Atiga and Magalong are not
its "officer, employee, . . . trustee or authorized representative . . . at the time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion
thereof reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and

(a) orders defendant to pay plaintiff the net amount of P540,000.00 as liability under Policy No. 0207 (as
mitigated by the P40,000.00 special clause deduction and by the recovered sum of P145,000.00), with
interest thereon at the legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00 as and for attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It
Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong and Atiga,
their services as armored car driver and as security guard having been merely offered by PRC
Management and by Unicorn Security and which latter firms assigned them to plaintiff. The wages and
salaries of both Magalong and Atiga are presumably paid by their respective firms, which alone wields
the power to dismiss them. Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to
provide driving services and property protection as such — in a context which does not impress the
Court as translating into plaintiff's power to control the conduct of any assigned driver or security guard,
beyond perhaps entitling plaintiff to request are replacement for such driver guard. The finding is
accordingly compelled that neither Magalong nor Atiga were plaintiff's "employees" in avoidance of
defendant's liability under the policy, particularly the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard Atiga were the
"authorized representatives" of plaintiff. They were merely an assigned armored car driver and security
guard, respectively, for the June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati
Head Office. Quite plainly — it was teller Maribeth Alampay who had "custody" of the P725,000.00 cash
being transferred along a specified money route, and hence plaintiff's then designated "messenger"
adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither
employees nor authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and strictly against
the insurance company (New Life Enterprises vs. Court of Appeals, 207 SCRA 669; Sun Insurance Office,
Ltd. vs. Court of Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to be
construed according to the sense and meaning of the terms which the parties themselves have used. If
such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and
popular sense (New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of Appeals,
195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary and simple.
No other interpretation is necessary. The word "employee" must be taken to mean in the ordinary
sense.

The Labor Code is a special law specifically dealing with/and specifically designed to protect labor and
therefore its definition as to employer-employee relationships insofar as the application/enforcement of
said Code is concerned must necessarily be inapplicable to an insurance contract which defendant-
appellant itself had formulated. Had it intended to apply the Labor Code in defining what the word
"employee" refers to, it must/should have so stated expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee bank because it
has no power to hire or to dismiss said driver and security guard under the contracts (Exhs. 8 and C)
except only to ask for their replacements from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the
Court of Appeals erred in holding it liable under the insurance policy because the loss falls within the
general exceptions clause considering that driver Magalong and security guard Atiga were Producers'
authorized representatives or employees in the transfer of the money and payroll from its branch office
in Pasay City to its head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one
branch to another, they effectively and necessarily became its authorized representatives in the care
and custody of the money. Assuming that they could not be considered authorized representatives, they
were, nevertheless, employees of Producers. It asserts that the existence of an employer-employee
relationship "is determined by law and being such, it cannot be the subject of agreement." Thus, if there
was in reality an employer-employee relationship between Producers, on the one hand, and Magalong
and Atiga, on the other, the provisions in the contracts of Producers with PRC Management System for
Magalong and with Unicorn Security Services for Atiga which state that Producers is not their employer
and that it is absolved from any liability as an employer, would not obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four standards: (1) the
manner of selection and engagement of the putative employee; (2) the mode of payment of wages; (3)
the presence or absence of a power to dismiss; and (4) the presence and absence of a power to control
the putative employee's conduct. Of the four, the right-of-control test has been held to be the decisive
factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and exercised by
Producers. Fortune further insists that PRC Management System and Unicorn Security Services are but
"labor-only" contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the person supplying
workers to an employer does not have substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others, and the workers recruited and placed by such persons are
performing activities which are directly related to the principal business of such employer. In such cases,
the person or intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly employed by
him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the
project and the employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had
nothing to do with their selection and engagement, the payment of their wages, their dismissal, and the
control of their conduct. Producers argued that the rule in International Timber Corp. is not applicable to
all cases but only when it becomes necessary to prevent any violation or circumvention of the Labor
Code, a social legislation whose provisions may set aside contracts entered into by parties in order to
give protection to the working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs.
Clave, 8 to wit:

In determining the existence of employer-employee relationship, the following elements are generally
considered, namely: (1) the selection and engagement of the employee; (2) the payment of wages; (3)
the power of dismissal; and (4) the power to control the employee's conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong
as the driver of Producers' armored car and was responsible for his faithful discharge of his duties and
responsibilities, and since Producers paid the monthly compensation of P1,400.00 per driver to PRC
Management Systems and not to Magalong, it is clear that Magalong was not Producers' employee. As
to Atiga, Producers relies on the provision of its contract with Unicorn Security Services which provides
that the guards of the latter "are in no sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap,
excluding certain types of loss which by law or custom are considered as falling exclusively within the
scope of insurance such as fire or marine. It includes, but is not limited to, employer's liability insurance,
public liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft
insurance, personal accident and health insurance as written by non-life insurance companies, and other
substantially similar kinds of insurance. (emphases supplied)

Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular. These contracts
are, therefore, governed by the general provisions applicable to all types of insurance. Outside of these,
the rights and obligations of the parties must be determined by the terms of their contract, taking into
consideration its purpose and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud
the insurer — the moral hazard — is so great that insurers have found it necessary to fill up their policies
with countless restrictions, many designed to reduce this hazard. Seldom does the insurer assume the
risk of all losses due to the hazards insured against." 10 Persons frequently excluded under such
provisions are those in the insured's service and employment. 11 The purpose of the exception is to
guard against liability should the theft be committed by one having unrestricted access to the
property. 12 In such cases, the terms specifying the excluded classes are to be given their meaning as
understood in common speech. 13 The terms "service" and "employment" are generally associated with
the idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against
the insurer, 15 or it should be construed liberally in favor of the insured and strictly against the
insurer. 16 Limitations of liability should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without
saying then that if the terms of the contract are clear and unambiguous, there is no room for
construction and such terms cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is
settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit
their liability and to impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general exceptions
clause of the policy which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured or any officer, employee,
partner, director, trustee or authorized representative of the Insured whether acting alone or in
conjunction with others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee"
and "authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or
having unrestricted access to Producers' money or payroll. When it used then the term "employee," it
must have had in mind any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of the employer-
employee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of
the Labor Code which considers the employees under a "labor-only" contract as employees of the party
employing them and not of the party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services
are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong.
Notwithstanding such express assumption of PRC Management Systems and Unicorn Security Services
that the drivers and the security guards each shall supply to Producers are not the latter's employees, it
may, in fact, be that it is because the contracts are, indeed, "labor-only" contracts. Whether they are is,
in the light of the criteria provided for in Article 106 of the Labor Code, a question of fact. Since the
parties opted to submit the case for judgment on the basis of their stipulation of facts which are strictly
limited to the insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the City Fiscal
of Pasay City, there is a paucity of evidence as to whether the contracts between Producers and PRC
Management Systems and Unicorn Security Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and
PRC Management Systems and Unicorn Security Services were truly independent contractors, we are
satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay
City branch to its head office in Makati, its "authorized representatives" who served as such with its
teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to
safely transfer the money to its head office, with Alampay to be responsible for its custody in transit;
Magalong to drive the armored vehicle which would carry the money; and Atiga to provide the needed
security for the money, the vehicle, and his two other companions. In short, for these particular tasks,
the three acted as agents of Producers. A "representative" is defined as one who represents or stands in
the place of another; one who represents others or another in a special capacity, as an agent, and is
interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R.
CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati in
Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 92383 July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of
P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his wife
Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed that there
was no suicide. It argued, however that there was no accident either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at
about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim was in a
happy mood (but not drunk) and was playing with his handgun, from which he had previously removed
the magazine. As she watched television, he stood in front of her and pointed the gun at her. She
pushed it aside and said it might he loaded. He assured her it was not and then pointed it to his temple.
The next moment there was an explosion and Lim slumped to the floor. He was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The
petitioner was sentenced to pay her P200,000.00, representing the face value of the policy, with interest
at the legal rate; P10,000.00 as moral damages; P5,000.00 as exemplary damages; P5,000.00 as actual
and compensatory damages; and P5,000.00 as attorney's fees, plus the costs of the suit. This decision
was affirmed on appeal, and the motion for reconsideration was denied. 3 The petitioner then came to
this Court to fault the Court of Appeals for approving the payment of the claim and the award of
damages.

The term "accident" has been defined as follows:

The words "accident" and "accidental" have never acquired any technical signification in law, and when
used in an insurance contract are to be construed and considered according to the ordinary
understanding and common usage and speech of people generally. In-substance, the courts are
practically agreed that the words "accident" and "accidental" mean that which happens by chance or
fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The
definition that has usually been adopted by the courts is that 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 case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human
agency, an event which, under the circumstances, is unusual to and not expected by the person to
whom it happens. It has also been defined as an injury which happens by reason of some violence or
casualty to the injured without his design, consent, or voluntary co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was
indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that "there
is no accident when a deliberate act is performed unless some additional, unexpected, independent and
unforeseen happening occurs which produces or brings about their injury or death." There was such a
happening. This was the firing of the gun, which was the additional unexpected and independent and
unforeseen occurrence that led to the insured person's death.

The petitioner also cites one of the four exceptions provided for in the insurance contract and contends
that the private petitioner's claim is barred by such provision. It is there stated:

Exceptions —

The company shall not be liable in respect of

1. Bodily injury

xxx xxx xxx

b. consequent upon

i) The insured person attempting to commit suicide or willfully exposing himself to needless peril except
in an attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that
the insured willfully exposed himself to needless peril and thus removed himself from the coverage of
the insurance policy.

It should be noted at the outset that suicide and willful exposure to needless peril are in pari
materia because they both signify a disregard for one's life. The only difference is in degree, as suicide
imports a positive act of ending such life whereas the second act indicates a reckless risking of it that is
almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters above the
ground and without any safety device may not actually be intending to commit suicide, but his act is
nonetheless suicidal. He would thus be considered as "willfully exposing himself to needless peril" within
the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully
exposed himself to needless peril and so came under the exception. The theory is that a gun is per
se dangerous and should therefore be handled cautiously in every case.

That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the
magazine from the gun and believed it was no longer dangerous. He expressly assured her that the gun
was not loaded. It is submitted that Lim did not willfully expose himself to needless peril when he
pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was
precisely intended to assure Nalagon that the gun was indeed harmless.

The contrary view is expressed by the petitioner thus:

Accident insurance policies were never intended to reward the insured for his tendency to show off or
for his miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate and
jump from the Quezon Bridge into the Pasig River in the belief that I can overcome the current, I have
wilfully exposed myself to peril and must accept the consequences of my act. If I drown I cannot go to
the insurance company to ask them to compensate me for my failure to swim as well as I thought I
could. The insured in the case at bar deliberately put the gun to his head and pulled the trigger. He
wilfully exposed himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask for
compensation. That might frighten the insurance people to death. We also agree that under the
circumstances narrated, his beneficiary would not be able to collect on the insurance policy for it is clear
that when he braved the currents below, he deliberately exposed himself to a known peril.

The private respondent maintains that Lim did not. That is where she says the analogy fails. The
petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below
were dangerous. By contrast, Lim did not know that the gun he put to his head was loaded.

Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent
his widow from recovering from the insurance policy he obtained precisely against accident. There is
nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if
the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by
negligence. There are only four exceptions expressly made in the contract to relieve the insurer from
liability, and none of these exceptions is applicable in the case at bar. **

It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the
assured. There is no reason to deviate from this rule, especially in view of the circumstances of this case
as above analyzed.

On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue
raised in this case is, as the petitioner correctly observed, one of first impression. It is evident that the
petitioner was acting in good faith then it resisted the private respondent's claim on the ground that the
death of the insured was covered by the exception. The issue was indeed debatable and was clearly not
raised only for the purpose of evading a legitimate obligation. We hold therefore that the award of
moral and exemplary damages and of attorney's fees is unjust and so must be disapproved.

In order that a person may be made liable to the payment of moral damages, the law requires that his
act be wrongful. The adverse result of an action does not per se make the act wrongful and subject the
act or to the payment of moral damages. The law could not have meant to impose a penalty on the right
to litigate; such right is so precious that moral damages may not be charged on those who may exercise
it erroneously. For these the law taxes costs. 7

The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the
action wrongful because in most cases one party will lose; we would be imposing an unjust condition or
limitation on the right to litigate. We hold that the award of moral damages in the case at bar is not
justified by the facts had circumstances as well as the law.

If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the
fact of winning alone that entitles him to recover such damages of the exceptional circumstances
enumerated in Art. 2208. Otherwise, every time a defendant wins, automatically the plaintiff must pay
attorney's fees thereby putting a premium on the right to litigate which should not be so. For those
expenses, the law deems the award of costs as sufficient. 8
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the
petitioner liable to the private respondent in the sum of P200,000.00 representing the face value of the
insurance contract, with interest at the legal rate from the date of the filing of the complaint until the
full amount is paid, but MODIFIED with the deletion of all awards for damages, including attorney's fees,
except the costs of the suit.

SO ORDERED.
G.R. No. 138060 September 1, 2004

WILLIAM TIU, doing business under the name and style of "D’ Rough Riders," and VIRGILIO TE LAS
PIÑAS petitioners,
vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX SURETY
AND INSURANCE, INC., respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision1 of the
Court of Appeals in CA-G.R. CV No. 54354 affirming with modification the Decision2 of the Regional Trial
Court, 7th Judicial Region, Cebu City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of
carriage, damages and attorney’s fees, and the Resolution dated February 26, 1999 denying the motion
for reconsideration thereof.

The following facts are undisputed:

At about 10:00 p.m. of March 15, 1987, the cargo truck marked "Condor Hollow Blocks and General
Merchandise" bearing plate number GBP-675 was loaded with firewood in Bogo, Cebu and left for Cebu
City. Upon reaching Sitio Aggies, Poblacion, Compostela, Cebu, just as the truck passed over a bridge,
one of its rear tires exploded. The driver, Sergio Pedrano, then parked along the right side of the
national highway and removed the damaged tire to have it vulcanized at a nearby shop, about 700
meters away.3 Pedrano left his helper, Jose Mitante, Jr. to keep watch over the stalled vehicle, and
instructed the latter to place a spare tire six fathoms away4 behind the stalled truck to serve as a
warning for oncoming vehicles. The truck’s tail lights were also left on. It was about 12:00 a.m., March
16, 1987.

At about 4:45 a.m., D’ Rough Riders passenger bus with plate number PBP-724 driven by Virgilio Te
Laspiñas was cruising along the national highway of Sitio Aggies, Poblacion, Compostela, Cebu. The
passenger bus was also bound for Cebu City, and had come from Maya, Daanbantayan, Cebu. Among its
passengers were the Spouses Pedro A. Arriesgado and Felisa Pepito Arriesgado, who were seated at the
right side of the bus, about three (3) or four (4) places from the front seat.

As the bus was approaching the bridge, Laspiñas saw the stalled truck, which was then about 25 meters
away.5 He applied the breaks and tried to swerve to the left to avoid hitting the truck. But it was too
late; the bus rammed into the truck’s left rear. The impact damaged the right side of the bus and left
several passengers injured. Pedro Arriesgado lost consciousness and suffered a fracture in his right
colles.6 His wife, Felisa, was brought to the Danao City Hospital. She was later transferred to the
Southern Island Medical Center where she died shortly thereafter.7

Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of carriage, damages and
attorney’s fees before the Regional Trial Court of Cebu City, Branch 20, against the petitioners, D’ Rough
Riders bus operator William Tiu and his driver, Virgilio Te Laspiñas on May 27, 1987. The respondent
alleged that the passenger bus in question was cruising at a fast and high speed along the national road,
and that petitioner Laspiñas did not take precautionary measures to avoid the accident.8 Thus:
6. That the accident resulted to the death of the plaintiff’s wife, Felisa Pepito Arriesgado, as evidenced
by a Certificate of Death, a xerox copy of which is hereto attached as integral part hereof and marked as
ANNEX – "A", and physical injuries to several of its passengers, including plaintiff himself who suffered a
"COLLES FRACTURE RIGHT," per Medical Certificate, a xerox copy of which is hereto attached as integral
part hereof and marked as ANNEX – "B" hereof.

7. That due to the reckless and imprudent driving by defendant Virgilio Te Laspiñas of the said Rough
Riders passenger bus, plaintiff and his wife, Felisa Pepito Arriesgado, failed to safely reach their
destination which was Cebu City, the proximate cause of which was defendant-driver’s failure to
observe utmost diligence required of a very cautious person under all circumstances.

8. That defendant William Tiu, being the owner and operator of the said Rough Riders passenger bus
which figured in the said accident, wherein plaintiff and his wife were riding at the time of the accident,
is therefore directly liable for the breach of contract of carriage for his failure to transport plaintiff and
his wife safely to their place of destination which was Cebu City, and which failure in his obligation to
transport safely his passengers was due to and in consequence of his failure to exercise the diligence of
a good father of the family in the selection and supervision of his employees, particularly defendant-
driver Virgilio Te Laspiñas.9

The respondent prayed that judgment be rendered in his favor and that the petitioners be condemned
to pay the following damages:

1). To pay to plaintiff, jointly and severally, the amount of ₱30,000.00 for the death and untimely demise
of plaintiff’s wife, Felisa Pepito Arriesgado;

2). To pay to plaintiff, jointly and severally, the amount of ₱38,441.50, representing actual expenses
incurred by the plaintiff in connection with the death/burial of plaintiff’s wife;

3). To pay to plaintiff, jointly and severally, the amount of ₱1,113.80, representing
medical/hospitalization expenses incurred by plaintiff for the injuries sustained by him;

4). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 for moral damages;

5). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 by way of exemplary damages;

6). To pay to plaintiff, jointly and severally, the amount of ₱20,000.00 for attorney’s fees;

7). To pay to plaintiff, jointly and severally, the amount of ₱5,000.00 for litigation expenses.

PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES IN LAW AND EQUITY.10

The petitioners, for their part, filed a Third-Party Complaint11 on August 21, 1987 against the following:
respondent Philippine Phoenix Surety and Insurance, Inc. (PPSII), petitioner Tiu’s insurer; respondent
Benjamin Condor, the registered owner of the cargo truck; and respondent Sergio Pedrano, the driver of
the truck. They alleged that petitioner Laspiñas was negotiating the uphill climb along the national
highway of Sitio Aggies, Poblacion, Compostela, in a moderate and normal speed. It was further alleged
that the truck was parked in a slanted manner, its rear portion almost in the middle of the highway, and
that no early warning device was displayed. Petitioner Laspiñas promptly applied the brakes and
swerved to the left to avoid hitting the truck head-on, but despite his efforts to avoid damage to
property and physical injuries on the passengers, the right side portion of the bus hit the cargo truck’s
left rear. The petitioners further alleged, thus:

5. That the cargo truck mentioned in the aforequoted paragraph is owned and registered in the name of
the third-party defendant Benjamin Condor and was left unattended by its driver Sergio Pedrano, one of
the third-party defendants, at the time of the incident;

6. That third-party defendant Sergio Pedrano, as driver of the cargo truck with marked (sic) "Condor
Hollow Blocks & General Merchandise," with Plate No. GBP-675 which was recklessly and imprudently
parked along the national highway of Compostela, Cebu during the vehicular accident in question, and
third-party defendant Benjamin Condor, as the registered owner of the cargo truck who failed to
exercise due diligence in the selection and supervision of third-party defendant Sergio Pedrano, are
jointly and severally liable to the third-party plaintiffs for whatever liability that may be adjudged against
said third-party plaintiffs or are directly liable of (sic) the alleged death of plaintiff’s wife;

7. That in addition to all that are stated above and in the answer which are intended to show reckless
imprudence on the part of the third-party defendants, the third-party plaintiffs hereby declare that
during the vehicular accident in question, third-party defendant was clearly violating Section 34, par. (g)
of the Land Transportation and Traffic Code…

10. That the aforesaid passenger bus, owned and operated by third-party plaintiff William Tiu, is covered
by a common carrier liability insurance with Certificate of Cover No. 054940 issued by Philippine Phoenix
Surety and Insurance, Inc., Cebu City Branch, in favor of third-party plaintiff William Tiu which covers the
period from July 22, 1986 to July 22, 1987 and that the said insurance coverage was valid, binding and
subsisting during the time of the aforementioned incident (Annex "A" as part hereof);

11. That after the aforesaid alleged incident, third-party plaintiff notified third-party defendant
Philippine Phoenix Surety and Insurance, Inc., of the alleged incident hereto mentioned, but to no avail;

12. That granting, et arguendo et arguendi, if herein third-party plaintiffs will be adversely adjudged,
they stand to pay damages sought by the plaintiff and therefore could also look up to the Philippine
Phoenix Surety and Insurance, Inc., for contribution, indemnification and/or reimbursement of any
liability or obligation that they might [be] adjudged per insurance coverage duly entered into by and
between third-party plaintiff William Tiu and third-party defendant Philippine Phoenix Surety and
Insurance, Inc.;…12

The respondent PPSII, for its part, admitted that it had an existing contract with petitioner Tiu, but
averred that it had already attended to and settled the claims of those who were injured during the
incident.13 It could not accede to the claim of respondent Arriesgado, as such claim was way beyond the
scheduled indemnity as contained in the contract of insurance.14

After the parties presented their respective evidence, the trial court ruled in favor of respondent
Arriesgado. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff as against
defendant William Tiu ordering the latter to pay the plaintiff the following amounts:
1 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as moral damages;

2 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as exemplary damages;

3 - The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-ONE PESOS (₱38,441.00) as actual
damages;

4 - The sum of TWENTY THOUSAND PESOS (₱20,000.00) as attorney’s fees;

5 - The sum of FIVE THOUSAND PESOS (₱5,000.00) as costs of suit;

SO ORDERED.15

According to the trial court, there was no dispute that petitioner William Tiu was engaged in business as
a common carrier, in view of his admission that D’ Rough Rider passenger bus which figured in the
accident was owned by him; that he had been engaged in the transportation business for 25 years with
a sole proprietorship; and that he owned 34 buses. The trial court ruled that if petitioner Laspiñas had
not been driving at a fast pace, he could have easily swerved to the left to avoid hitting the truck, thus,
averting the unfortunate incident. It then concluded that petitioner Laspiñas was negligent.

The trial court also ruled that the absence of an early warning device near the place where the truck was
parked was not sufficient to impute negligence on the part of respondent Pedrano, since the tail lights
of the truck were fully on, and the vicinity was well lighted by street lamps.16 It also found that the
testimony of petitioner Tiu, that he based the selection of his driver Laspiñas on efficiency and in-service
training, and that the latter had been so far an efficient and good driver for the past six years of his
employment, was insufficient to prove that he observed the diligence of a good father of a family in the
selection and supervision of his employees.

After the petitioner’s motion for reconsideration of the said decision was denied, the petitioners
elevated the case to the Court of Appeals on the following issues:

I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS RECKLESS AND IMPRUDENT WHEN HE
PARKED THE CARGO TRUCK IN AN OBLIQUE MANNER;

II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND SEVERALLY LIABLE DIRECTLY TO
PLAINTIFF-APPELLEE OR TO DEFENDANTS-APPELLANTS FOR WHATEVER LIABILITY THAT MAY BE
ADJUDGED TO THE SAID DEFENDANTS-APPELLANTS;

III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIÑAS WAS GUILTY OF GROSS NEGLIGENCE;

IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD EXERCISED THE DUE DILIGENCE OF A GOOD
FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF HIS DRIVERS;

V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-APPELLANT WILLIAM TIU IS LIABLE TO
PLAINTIFF-APPELLEE, WHETHER THERE IS LEGAL AND FACTUAL BASIS IN AWARDING EXCESSIVE MORAL
DAMAGES, EX[E]MPLARY DAMAGES, ATTORNEY’S FEES AND LITIGATION EXPENSES TO PLAINTIFF-
APPELLEE;

VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX SURETY AND INSURANCE, INC. IS LIABLE TO
DEFENDANT- APPELLANT WILLIAM TIU.17
The appellate court rendered judgment affirming the trial court’s decision with the modification that the
awards for moral and exemplary damages were reduced to ₱25,000. The dispositive portion reads:

WHEREFORE, the appealed Decision dated November 6, 1995 is hereby MODIFIED such that the awards
for moral and exemplary damages are each reduced to ₱25,000.00 or a total of ₱50,000.00 for both. The
judgment is AFFIRMED in all other respects.

SO ORDERED.18

According to the appellate court, the action of respondent Arriesgado was based not on quasi-delict but
on breach of contract of carriage. As a common carrier, it was incumbent upon petitioner Tiu to prove
that extraordinary diligence was observed in ensuring the safety of passengers during transportation.
Since the latter failed to do so, he should be held liable for respondent Arriesgado’s claim. The CA also
ruled that no evidence was presented against the respondent PPSII, and as such, it could not be held
liable for respondent Arriesgado’s claim, nor for contribution, indemnification and/or reimbursement in
case the petitioners were adjudged liable.

The petitioners now come to this Court and ascribe the following errors committed by the appellate
court:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING RESPONDENTS BENJAMIN CONDOR
AND SERGIO PEDRANO GUILTY OF NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A.
ARRIESGADO OR TO PETITIONERS FOR WHATEVER LIABILITY THAT MAY BE ADJUDGED AGAINST THEM.

II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS GUILTY OF NEGLIGENCE AND
HENCE, LIABLE TO RESPONDENT PEDRO A. ARRIESGADO.

III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONER WILLIAM TIU LIABLE FOR
EXEMPLARY DAMAGES, ATTORNEY’S FEES AND LITIGATION EXPENSES.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC. LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR TO PETITIONER
WILLIAM TIU.19

According to the petitioners, the appellate court erred in failing to appreciate the absence of an early
warning device and/or built-in reflectors at the front and back of the cargo truck, in clear violation of
Section 34, par. (g) of the Land Transportation and Traffic Code. They aver that such violation is only a
proof of respondent Pedrano’s negligence, as provided under Article 2185 of the New Civil Code. They
also question the appellate court’s failure to take into account that the truck was parked in an oblique
manner, its rear portion almost at the center of the road. As such, the proximate cause of the incident
was the gross recklessness and imprudence of respondent Pedrano, creating the presumption of
negligence on the part of respondent Condor in supervising his employees, which presumption was not
rebutted. The petitioners then contend that respondents Condor and Pedrano should be held jointly and
severally liable to respondent Arriesgado for the payment of the latter’s claim.

The petitioners, likewise, aver that expert evidence should have been presented to prove that petitioner
Laspiñas was driving at a very fast speed, and that the CA could not reach such conclusion by merely
considering the damages on the cargo truck. It was also pointed out that petitioner Tiu presented
evidence that he had exercised the diligence of a good father of a family in the selection and supervision
of his drivers.

The petitioners further allege that there is no legal and factual basis to require petitioner Tiu to pay
exemplary damages as no evidence was presented to show that the latter acted in a fraudulent, reckless
and oppressive manner, or that he had an active participation in the negligent act of petitioner Laspiñas.

Finally, the petitioners contend that respondent PPSII admitted in its answer that while it had attended
to and settled the claims of the other injured passengers, respondent Arriesgado’s claim remained
unsettled as it was beyond the scheduled indemnity under the insurance contract. The petitioners argue
that said respondent PPSII should have settled the said claim in accordance with the scheduled
indemnity instead of just denying the same.

On the other hand, respondent Arriesgado argues that two of the issues raised by the petitioners
involved questions of fact, not reviewable by the Supreme Court: the finding of negligence on the part of
the petitioners and their liability to him; and the award of exemplary damages, attorney’s fees and
litigation expenses in his favor. Invoking the principle of equity and justice, respondent Arriesgado
pointed out that if there was an error to be reviewed in the CA decision, it should be geared towards the
restoration of the moral and exemplary damages to ₱50,000 each, or a total of ₱100,000 which was
reduced by the Court of Appeals to ₱25,000 each, or a total of only ₱50,000.

Respondent Arriesgado also alleged that respondents Condor and Pedrano, and respondent Phoenix
Surety, are parties with whom he had no contract of carriage, and had no cause of action against. It was
pointed out that only the petitioners needed to be sued, as driver and operator of the ill-fated bus, on
account of their failure to bring the Arriesgado Spouses to their place of destination as agreed upon in
the contract of carriage, using the utmost diligence of very cautious persons with due regard for all
circumstances.

Respondents Condor and Pedrano point out that, as correctly ruled by the Court of Appeals, the
proximate cause of the unfortunate incident was the fast speed at which petitioner Laspiñas was driving
the bus owned by petitioner Tiu. According to the respondents, the allegation that the truck was not
equipped with an early warning device could not in any way have prevented the incident from
happening. It was also pointed out that respondent Condor had always exercised the due diligence
required in the selection and supervision of his employees, and that he was not a party to the contract
of carriage between the petitioners and respondent Arriesgado.

Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu, it settled all the
claims of those injured in accordance with the insurance contract. It further avers that it did not deny
respondent Arriesgado’s claim, and emphasizes that its liability should be within the scheduled limits of
indemnity under the said contract. The respondent concludes that while it is true that insurance
contracts are contracts of indemnity, the measure of the insurer’s liability is determined by the insured’s
compliance with the terms thereof.

The Court’s Ruling

At the outset, it must be stressed that this Court is not a trier of facts.20 Factual findings of the Court of
Appeals are final and may not be reviewed on appeal by this Court, except when the lower court and the
CA arrived at diverse factual findings.21 The petitioners in this case assail the finding of both the trial and
the appellate courts that petitioner Laspiñas was driving at a very fast speed before the bus owned by
petitioner Tiu collided with respondent Condor’s stalled truck. This is clearly one of fact, not reviewable
by the Court in a petition for review under Rule 45.22

On this ground alone, the petition is destined to fail.

However, considering that novel questions of law are likewise involved, the Court resolves to examine
and rule on the merits of the case.

Petitioner Laspiñas
Was negligent in driving
The Ill-fated bus

In his testimony before the trial court, petitioner Laspiñas claimed that he was traversing the two-lane
road at Compostela, Cebu at a speed of only forty (40) to fifty (50) kilometers per hour before the
incident occurred.23 He also admitted that he saw the truck which was parked in an "oblique position" at
about 25 meters before impact,24 and tried to avoid hitting it by swerving to the left. However, even in
the absence of expert evidence, the damage sustained by the truck25 itself supports the finding of both
the trial court and the appellate court, that the D’ Rough Rider bus driven by petitioner Laspiñas was
traveling at a fast pace. Since he saw the stalled truck at a distance of 25 meters, petitioner Laspiñas had
more than enough time to swerve to his left to avoid hitting it; that is, if the speed of the bus was only
40 to 50 kilometers per hour as he claimed. As found by the Court of Appeals, it is easier to believe that
petitioner Laspiñas was driving at a very fast speed, since at 4:45 a.m., the hour of the accident, there
were no oncoming vehicles at the opposite direction. Petitioner Laspiñas could have swerved to the left
lane with proper clearance, and, thus, could have avoided the truck.26 Instinct, at the very least, would
have prompted him to apply the breaks to avert the impending disaster which he must have foreseen
when he caught sight of the stalled truck. As we had occasion to reiterate:

A man must use common sense, and exercise due reflection in all his acts; it is his duty to be cautious,
careful and prudent, if not from instinct, then through fear of recurring punishment. He is responsible
for such results as anyone might foresee and for acts which no one would have performed except
through culpable abandon. Otherwise, his own person, rights and property, and those of his fellow
beings, would ever be exposed to all manner of danger and injury.27

We agree with the following findings of the trial court, which were affirmed by the CA on appeal:

A close study and evaluation of the testimonies and the documentary proofs submitted by the parties
which have direct bearing on the issue of negligence, this Court as shown by preponderance of evidence
that defendant Virgilio Te Laspiñas failed to observe extraordinary diligence as a driver of the common
carrier in this case. It is quite hard to accept his version of the incident that he did not see at a
reasonable distance ahead the cargo truck that was parked when the Rough Rider [Bus] just came out of
the bridge which is on an (sic) [more] elevated position than the place where the cargo truck was
parked. With its headlights fully on, defendant driver of the Rough Rider was in a vantage position to see
the cargo truck ahead which was parked and he could just easily have avoided hitting and bumping the
same by maneuvering to the left without hitting the said cargo truck. Besides, it is (sic) shown that there
was still much room or space for the Rough Rider to pass at the left lane of the said national highway
even if the cargo truck had occupied the entire right lane thereof. It is not true that if the Rough Rider
would proceed to pass through the left lane it would fall into a canal considering that there was much
space for it to pass without hitting and bumping the cargo truck at the left lane of said national highway.
The records, further, showed that there was no incoming vehicle at the opposite lane of the national
highway which would have prevented the Rough Rider from not swerving to its left in order to avoid
hitting and bumping the parked cargo truck. But the evidence showed that the Rough Rider instead of
swerving to the still spacious left lane of the national highway plowed directly into the parked cargo
truck hitting the latter at its rear portion; and thus, the (sic) causing damages not only to herein plaintiff
but to the cargo truck as well.28

Indeed, petitioner Laspiñas’ negligence in driving the bus is apparent in the records. By his own
admission, he had just passed a bridge and was traversing the highway of Compostela, Cebu at a speed
of 40 to 50 kilometers per hour before the collision occurred. The maximum speed allowed by law on a
bridge is only 30 kilometers per hour.29 And, as correctly pointed out by the trial court, petitioner
Laspiñas also violated Section 35 of the Land Transportation and Traffic Code, Republic Act No. 4136, as
amended:1avvphil.net

Sec. 35. Restriction as to speed. – (a) Any person driving a motor vehicle on a highway shall drive the
same at a careful and prudent speed, not greater nor less than is reasonable and proper, having due
regard for the traffic, the width of the highway, and or any other condition then and there existing; and
no person shall drive any motor vehicle upon a highway at such speed as to endanger the life, limb and
property of any person, nor at a speed greater than will permit him to bring the vehicle to a stop within
the assured clear distance ahead.30

Under Article 2185 of the Civil Code, a person driving a vehicle is presumed negligent if at the time of
the mishap, he was violating any traffic regulation.31

Petitioner Tiu failed to

Overcome the presumption
Of negligence against him as
One engaged in the business
Of common carriage

The rules which common carriers should observe as to the safety of their passengers are set forth in the
Civil Code, Articles 1733,32 175533 and 1756.34 In this case, respondent Arriesgado and his deceased wife
contracted with petitioner Tiu, as owner and operator of D’ Rough Riders bus service, for transportation
from Maya, Daanbantayan, Cebu, to Cebu City for the price of ₱18.00.35 It is undisputed that the
respondent and his wife were not safely transported to the destination agreed upon. In actions for
breach of contract, only the existence of such contract, and the fact that the obligor, in this case the
common carrier, failed to transport his passenger safely to his destination are the matters that need to
be proved.36 This is because under the said contract of carriage, the petitioners assumed the express
obligation to transport the respondent and his wife to their destination safely and to observe
extraordinary diligence with due regard for all circumstances.37 Any injury suffered by the passengers in
the course thereof is immediately attributable to the negligence of the carrier.38 Upon the happening of
the accident, the presumption of negligence at once arises, and it becomes the duty of a common
carrier to prove that he observed extraordinary diligence in the care of his passengers.39 It must be
stressed that in requiring the highest possible degree of diligence from common carriers and in creating
a presumption of negligence against them, the law compels them to curb the recklessness of their
drivers.40

While evidence may be submitted to overcome such presumption of negligence, it must be shown that
the carrier observed the required extraordinary diligence, which means that the carrier must show the
utmost diligence of very cautious persons as far as human care and foresight can provide, or that the
accident was caused by fortuitous event.41 As correctly found by the trial court, petitioner Tiu failed to
conclusively rebut such presumption. The negligence of petitioner Laspiñas as driver of the passenger
bus is, thus, binding against petitioner Tiu, as the owner of the passenger bus engaged as a common
carrier.42

The Doctrine of
Last Clear Chance
Is Inapplicable in the
Case at Bar

Contrary to the petitioner’s contention, the principle of last clear chance is inapplicable in the instant
case, as it only applies in a suit between the owners and drivers of two colliding vehicles. It does not
arise where a passenger demands responsibility from the carrier to enforce its contractual obligations,
for it would be inequitable to exempt the negligent driver and its owner on the ground that the other
driver was likewise guilty of negligence.43 The common law notion of last clear chance permitted courts
to grant recovery to a plaintiff who has also been negligent provided that the defendant had the last
clear chance to avoid the casualty and failed to do so. Accordingly, it is difficult to see what role, if any,
the common law of last clear chance doctrine has to play in a jurisdiction where the common law
concept of contributory negligence as an absolute bar to recovery by the plaintiff, has itself been
rejected, as it has been in Article 2179 of the Civil Code.44

Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgado’s wife due to the
negligence of petitioner Laspiñas, his employee, on this score.

Respondents Pedrano and

Condor were likewise
Negligent

In Phoenix Construction, Inc. v. Intermediate Appellate Court,45 where therein respondent Dionisio
sustained injuries when his vehicle rammed against a dump truck parked askew, the Court ruled that the
improper parking of a dump truck without any warning lights or reflector devices created an
unreasonable risk for anyone driving within the vicinity, and for having created such risk, the truck driver
must be held responsible. In ruling against the petitioner therein, the Court elucidated, thus:

… In our view, Dionisio’s negligence, although later in point of time than the truck driver’s negligence,
and therefore closer to the accident, was not an efficient intervening or independent cause. What the
petitioners describe as an "intervening cause" was no more than a foreseeable consequence of the risk
created by the negligent manner in which the truck driver had parked the dump truck. In other words,
the petitioner truck driver owed a duty to private respondent Dionisio and others similarly situated not
to impose upon them the very risk the truck driver had created. Dionisio’s negligence was not that of an
independent and overpowering nature as to cut, as it were, the chain of causation in fact between the
improper parking of the dump truck and the accident, nor to sever the juris vinculum of liability. …

We hold that private respondent Dionisio’s negligence was "only contributory," that the "immediate and
proximate cause" of the injury remained the truck driver’s "lack of due care."…46

In this case, both the trial and the appellate courts failed to consider that respondent Pedrano was also
negligent in leaving the truck parked askew without any warning lights or reflector devices to alert
oncoming vehicles, and that such failure created the presumption of negligence on the part of his
employer, respondent Condor, in supervising his employees properly and adequately. As we ruled in
Poblete v. Fabros:47

It is such a firmly established principle, as to have virtually formed part of the law itself, that the
negligence of the employee gives rise to the presumption of negligence on the part of the employer.
This is the presumed negligence in the selection and supervision of employee. The theory of presumed
negligence, in contrast with the American doctrine of respondeat superior, where the negligence of the
employee is conclusively presumed to be the negligence of the employer, is clearly deducible from the
last paragraph of Article 2180 of the Civil Code which provides that the responsibility therein mentioned
shall cease if the employers prove that they observed all the diligence of a good father of a family to
prevent damages. …48

The petitioners were correct in invoking respondent Pedrano’s failure to observe Article IV, Section 34(g)
of the Rep. Act No. 4136, which provides:1avvphil.net

(g) Lights when parked or disabled. – Appropriate parking lights or flares visible one hundred meters
away shall be displayed at a corner of the vehicle whenever such vehicle is parked on highways or in
places that are not well-lighted or is placed in such manner as to endanger passing traffic.

The manner in which the truck was parked clearly endangered oncoming traffic on both sides,
considering that the tire blowout which stalled the truck in the first place occurred in the wee hours of
the morning. The Court can only now surmise that the unfortunate incident could have been averted
had respondent Condor, the owner of the truck, equipped the said vehicle with lights, flares, or, at the
very least, an early warning device.49 Hence, we cannot subscribe to respondents Condor and Pedrano’s
claim that they should be absolved from liability because, as found by the trial and appellate courts, the
proximate cause of the collision was the fast speed at which petitioner Laspiñas drove the bus. To
accept this proposition would be to come too close to wiping out the fundamental principle of law that a
man must respond for the foreseeable consequences of his own negligent act or omission. Indeed, our
law on quasi-delicts seeks to reduce the risks and burdens of living in society and to allocate them
among its members. To accept this proposition would be to weaken the very bonds of society.50

The Liability of
Respondent PPSII
as Insurer

The trial court in this case did not rule on the liability of respondent PPSII, while the appellate court
ruled that, as no evidence was presented against it, the insurance company is not liable.
A perusal of the records will show that when the petitioners filed the Third-Party Complaint against
respondent PPSII, they failed to attach a copy of the terms of the insurance contract itself. Only
Certificate of Cover No. 05494051 issued in favor of "Mr. William Tiu, Lahug, Cebu City" signed by Cosme
H. Boniel was appended to the third-party complaint. The date of issuance, July 22, 1986, the period of
insurance, from July 22, 1986 to July 22, 1987, as well as the following items, were also indicated
therein:

SCHEDULED VEHICLE

MODEL MAKE TYPE OF COLOR BLT FILE NO.

Isuzu Forward BODY blue mixed
Bus

PLATE SERIAL/CHASSIS MOTOR NO. AUTHORIZED UNLADEN

NO. NO. 677836 CAPACITY WEIGHT
PBP-724 SER450-1584124 50 6 Cyls. Kgs.

SECTION 1/11 *LIMITS OF LIABILITY PREMIUMS PAID

₱50,000.00 ₱540.0052
A. THIRD PARTY LIABILITY

B. PASSENGER LIABILITY Per Person Per Accident

₱12,000.00 ₱50,000

In its Answer53 to the Third-Party Complaint, the respondent PPSII admitted the existence of the
contract of insurance, in view of its failure to specifically deny the same as required under then Section
8(a), Rule 8 of the Rules of Court,54 which reads:

Sec. 8. How to contest genuineness of such documents. When an action or defense is founded upon a
written instrument copied in or attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but
the requirement of an oath does not apply when the adverse party does not appear to be a party to the
instrument or when compliance with an order for inspection of the original instrument is refused.

In fact, respondent PPSII did not dispute the existence of such contract, and admitted that it was liable
thereon. It claimed, however, that it had attended to and settled the claims of those injured during the
incident, and set up the following as special affirmative defenses:

Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates and incorporates
by way of reference the preceding paragraphs and further states THAT:-

8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and Neptali Palces who sustained
injuries during the incident in question. In fact, it settled financially their claims per vouchers duly signed
by them and they duly executed Affidavit[s] of Desistance to that effect, xerox copies of which are
hereto attached as Annexes 1, 2, 3, 4, 5, and 6 respectively;

9. With respect to the claim of plaintiff, herein answering third party defendant through its authorized
insurance adjuster attended to said claim. In fact, there were negotiations to that effect. Only that it
cannot accede to the demand of said claimant considering that the claim was way beyond the scheduled
indemnity as per contract entered into with third party plaintiff William Tiu and third party defendant
(Philippine Phoenix Surety and Insurance, Inc.). Third party Plaintiff William Tiu knew all along the
limitation as earlier stated, he being an old hand in the transportation business;55…

Considering the admissions made by respondent PPSII, the existence of the insurance contract and the
salient terms thereof cannot be dispatched. It must be noted that after filing its answer, respondent
PPSII no longer objected to the presentation of evidence by respondent Arriesgado and the insured
petitioner Tiu. Even in its Memorandum56 before the Court, respondent PPSII admitted the existence of
the contract, but averred as follows:

Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification and/or
reimbursement. This has no basis under the contract. Under the contract, PPSII will pay all sums
necessary to discharge liability of the insured subject to the limits of liability but not to exceed the limits
of liability as so stated in the contract. Also, it is stated in the contract that in the event of accident
involving indemnity to more than one person, the limits of liability shall not exceed the aggregate
amount so specified by law to all persons to be indemnified.57

As can be gleaned from the Certificate of Cover, such insurance contract was issued pursuant to the
Compulsory Motor Vehicle Liability Insurance Law. It was expressly provided therein that the limit of the
insurer’s liability for each person was ₱12,000, while the limit per accident was pegged at ₱50,000. An
insurer in an indemnity contract for third party liability is directly liable to the injured party up to the
extent specified in the agreement but it cannot be held solidarily liable beyond that amount.58 The
respondent PPSII could not then just deny petitioner Tiu’s claim; it should have paid ₱12,000 for the
death of Felisa Arriesgado,59 and respondent Arriesgado’s hospitalization expenses of ₱1,113.80, which
the trial court found to have been duly supported by receipts. The total amount of the claims, even
when added to that of the other injured passengers which the respondent PPSII claimed to have
settled,60 would not exceed the ₱50,000 limit under the insurance agreement.

Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended
to provide compensation for the death or bodily injuries suffered by innocent third parties or passengers
as a result of the negligent operation and use of motor vehicles. The victims and/or their dependents
are assured of immediate financial assistance, regardless of the financial capacity of motor vehicle
owners.61 As the Court, speaking through Associate Justice Leonardo A. Quisumbing, explained in
Government Service Insurance System v. Court of Appeals:62

However, although the victim may proceed directly against the insurer for indemnity, the third party
liability is only up to the extent of the insurance policy and those required by law. While it is true that
where the insurance contract provides for indemnity against liability to third persons, and such persons
can directly sue the insurer, the direct liability of the insurer under indemnity contracts against third
party liability does not mean that the insurer can be held liable in solidum with the insured and/or the
other parties found at fault. For the liability of the insurer is based on contract; that of the insured
carrier or vehicle owner is based on tort. …

Obviously, the insurer could be held liable only up to the extent of what was provided for by the
contract of insurance, in accordance with the CMVLI law. At the time of the incident, the schedule of
indemnities for death and bodily injuries, professional fees and other charges payable under a CMVLI
coverage was provided for under the Insurance Memorandum Circular (IMC) No. 5-78 which was
approved on November 10, 1978. As therein provided, the maximum indemnity for death was twelve
thousand (₱12,000.00) pesos per victim. The schedules for medical expenses were also provided by said
IMC, specifically in paragraphs (C) to (G).63

Damages to be
Awarded

The trial court correctly awarded moral damages in the amount of ₱50,000 in favor of respondent
Arriesgado. The award of exemplary damages by way of example or correction of the public good,64 is
likewise in order. As the Court ratiocinated in Kapalaran Bus Line v. Coronado:65

…While the immediate beneficiaries of the standard of extraordinary diligence are, of course, the
passengers and owners of cargo carried by a common carrier, they are not the only persons that the law
seeks to benefit. For if common carriers carefully observed the statutory standard of extraordinary
diligence in respect of their own passengers, they cannot help but simultaneously benefit pedestrians
and the passengers of other vehicles who are equally entitled to the safe and convenient use of our
roads and highways. The law seeks to stop and prevent the slaughter and maiming of people (whether
passengers or not) on our highways and buses, the very size and power of which seem to inflame the
minds of their drivers. Article 2231 of the Civil Code explicitly authorizes the imposition of exemplary
damages in cases of quasi-delicts "if the defendant acted with gross negligence."…66

The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa Arriesgado, is entitled to
indemnity in the amount of ₱50,000.00.67

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and
severally liable for said amount, conformably with the following pronouncement of the Court in Fabre,
Jr. vs. Court of Appeals:68

The same rule of liability was applied in situations where the negligence of the driver of the bus on
which plaintiff was riding concurred with the negligence of a third party who was the driver of another
vehicle, thus causing an accident. In Anuran v. Buño, Batangas Laguna Tayabas Bus Co. v. Intermediate
Appellate Court, and Metro Manila Transit Corporation v. Court of Appeals, the bus company, its driver,
the operator of the other vehicle and the driver of the vehicle were jointly and severally held liable to
the injured passenger or the latter’s heirs. The basis of this allocation of liability was explained in Viluan
v. Court of Appeals, thus:

"Nor should it make difference that the liability of petitioner [bus owner] springs from contract while
that of respondents [owner and driver of other vehicle] arises from quasi-delict. As early as 1913, we
already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case of injury to a passenger due to the
negligence of the driver of the bus on which he was riding and of the driver of another vehicle, the
drivers as well as the owners of the two vehicles are jointly and severally liable for damages. Some
members of the Court, though, are of the view that under the circumstances they are liable on quasi-
delict."69

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court of
Appeals is AFFIRMED with MODIFICATIONS:

(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner William Tiu are ORDERED to
pay, jointly and severally, respondent Pedro A. Arriesgado the total amount of ₱13,113.80;

(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are ORDERED to pay,
jointly and severally, respondent Pedro A. Arriesgado ₱50,000.00 as indemnity; ₱26,441.50 as actual
damages; ₱50,000.00 as moral damages; ₱50,000.00 as exemplary damages; and ₱20,000.00 as
attorney’s fees.

SO ORDERED.
G.R. No. 60506 August 6, 1992

FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, LEONILA M. MALLARI,

GILDA ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA, herein
represented by their mother, FIGURACION VDA. DE MAGLANA, petitioners,
vs.
HONORABLE FRANCISCO Z. CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO
INSURANCE CORPORATION, respondents.

Jose B. Guyo for petitioners.

Angel E. Fernandez for private respondent.

ROMERO, J.:

The nature of the liability of an insurer sued together with the insured/operator-owner of a common
carrier which figured in an accident causing the death of a third person is sought to be defined in this
petition for certiorari.

The facts as found by the trial court are as follows:

. . . Lope Maglana was an employee of the Bureau of Customs whose work station was at Lasa, here in
Davao City. On December 20, 1978, early morning, Lope Maglana was on his way to his work station,
driving a motorcycle owned by the Bureau of Customs. At Km. 7, Lanang, he met an accident that
resulted in his death. He died on the spot. The PUJ jeep that bumped the deceased was driven by Pepito
Into, operated and owned by defendant Destrajo. From the investigation conducted by the traffic
investigator, the PUJ jeep was overtaking another passenger jeep that was going towards the city
poblacion. While overtaking, the PUJ jeep of defendant Destrajo running abreast with the overtaken
jeep, bumped the motorcycle driven by the deceased who was going towards the direction of Lasa,
Davao City. The point of impact was on the lane of the motorcycle and the deceased was thrown from
the road and met his untimely death. 1

Consequently, the heirs of Lope Maglana, Sr., here petitioners, filed an action for damages and
attorney's fees against operator Patricio Destrajo and the Afisco Insurance Corporation (AFISCO for
brevity) before the then Court of First Instance of Davao, Branch II. An information for homicide thru
reckless imprudence was also filed against Pepito Into.

During the pendency of the civil case, Into was sentenced to suffer an indeterminate penalty of one (1)
year, eight (8) months and one (1) day of prision correccional, as minimum, to four (4) years, nine (9)
months and eleven (11) days of prision correccional, as maximum, with all the accessory penalties
provided by law, and to indemnify the heirs of Lope Maglana, Sr. in the amount of twelve thousand
pesos (P12,000.00) with subsidiary imprisonment in case of insolvency, plus five thousand pesos
(P5,000.00) in the concept of moral and exemplary damages with costs. No appeal was interposed by
accused who later applied for probation. 2

On December 14, 1981, the lower court rendered a decision finding that Destrajo had not exercised
sufficient diligence as the operator of the jeepney. The dispositive portion of the decision reads:
WHEREFORE, the Court finds judgment in favor of the plaintiffs against defendant Destrajo, ordering
him to pay plaintiffs the sum of P28,000.00 for loss of income; to pay plaintiffs the sum of P12,000.00
which amount shall be deducted in the event judgment in Criminal Case No. 3527-D against the driver,
accused Into, shall have been enforced; to pay plaintiffs the sum of P5,901.70 representing funeral and
burial expenses of the deceased; to pay plaintiffs the sum of P5,000.00 as moral damages which shall be
deducted in the event judgment (sic) in Criminal Case No. 3527-D against the driver, accused Into; to pay
plaintiffs the sum of P3,000.00 as attorney's fees and to pay the costs of suit.

The defendant insurance company is ordered to reimburse defendant Destrajo whatever amounts the
latter shall have paid only up to the extent of its insurance coverage.

SO ORDERED. 3

Petitioners filed a motion for the reconsideration of the second paragraph of the dispositive portion of
the decision contending that AFISCO should not merely be held secondarily liable because the Insurance
Code provides that the insurer's liability is "direct and primary and/or jointly and severally with the
operator of the vehicle, although only up to the extent of the insurance coverage." 4 Hence, they argued
that the P20,000.00 coverage of the insurance policy issued by AFISCO, should have been awarded in
their favor.

In its comment on the motion for reconsideration, AFISCO argued that since the Insurance Code does
not expressly provide for a solidary obligation, the presumption is that the obligation is joint.

In its Order of February 9, 1982, the lower court denied the motion for reconsideration ruling that since
the insurance contract "is in the nature of suretyship, then the liability of the insurer is secondary only
up to the extent of the insurance coverage." 5

Petitioners filed a second motion for reconsideration reiterating that the liability of the insurer is direct,
primary and solidary with the jeepney operator because the petitioners became direct beneficiaries
under the provision of the policy which, in effect, is a stipulation pour autrui. 6 This motion was likewise
denied for lack of merit.

Hence, petitioners filed the instant petition for certiorari which, although it does not seek the reversal of
the lower court's decision in its entirety, prays for the setting aside or modification of the second
paragraph of the dispositive portion of said decision. Petitioners reassert their position that the
insurance company is directly and solidarily liable with the negligent operator up to the extent of its
insurance coverage.

We grant the petition.

The particular provision of the insurance policy on which petitioners base their claim is as follows:

Sec. 1 — LIABILITY TO THE PUBLIC

1. The Company will, subject to the Limits of Liability, pay all sums necessary to discharge liability of the
insured in respect of

(a) death of or bodily injury to any THIRD PARTY

(b) . . . .

2. . . . .

3. In the event of the death of any person entitled to indemnity under this Policy, the Company will, in
respect of the liability incurred to such person indemnify his personal representatives in terms of, and
subject to the terms and conditions hereof. 7

The above-quoted provision leads to no other conclusion but that AFISCO can be held directly liable by
petitioners. As this Court ruled in Shafer vs. Judge, RTC of Olongapo City, Br. 75, "[w]here an insurance
policy insures directly against liability, the insurer's liability accrues immediately upon the occurrence of
the injury or even upon which the liability depends, and does not depend on the recovery of judgment
by the injured party against the insured." 8 The underlying reason behind the third party liability (TPL) of
the Compulsory Motor Vehicle Liability Insurance is "to protect injured persons against the insolvency of
the insured who causes such injury, and to give such injured person a certain beneficial interest in the
proceeds of the policy . . ." 9 Since petitioners had received from AFISCO the sum of P5,000.00 under the
no-fault clause, AFISCO's liability is now limited to P15,000.00.

However, we cannot agree that AFISCO is likewise solidarily liable with Destrajo. In Malayan Insurance
Co., Inc. v. Court of Appeals, 10 this Court had the opportunity to resolve the issue as to the nature of the
liability of the insurer and the insured vis-a-vis the third party injured in an accident. We categorically
ruled thus:

While it is true that where the insurance contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, however, the direct liability of the insurer 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 is based on
contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos (the injured third
party), but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two
principal tortfeasors, 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. (emphasis supplied)

The Court then proceeded to distinguish the extent of the liability and manner of enforcing the same in
ordinary contracts from that of insurance contracts. While in solidary obligations, the creditor may
enforce the entire obligation against one of the solidary debtors, in an insurance contract, the insurer
undertakes for a consideration to indemnify the insured against loss, damage or liability arising from an
unknown or contingent event. 11 Thus, petitioner therein, which, under the insurance contract is liable
only up to P20,000.00, can not be made solidarily liable with the insured for the entire obligation of
P29,013.00 otherwise there would result "an evident breach of the concept of solidary obligation."

Similarly, petitioners herein cannot validly claim that AFISCO, whose liability under the insurance policy
is also P20,000.00, can be held solidarily liable with Destrajo for the total amount of P53,901.70 in
accordance with the decision of the lower court. Since under both the law and the insurance policy,
AFISCO's liability is only up to P20,000.00, the second paragraph of the dispositive portion of the
decision in question may have unwittingly sown confusion among the petitioners and their counsel.
What should have been clearly stressed as to leave no room for doubt was the liability of AFISCO under
the explicit terms of the insurance contract.

In fine, we conclude that the liability of AFISCO based on the insurance contract is direct, but not
solidary with that of Destrajo which is based on Article 2180 of the Civil Code. 12 As such, petitioners
have the option either to claim the P15,000 from AFISCO and the balance from Destrajo or enforce the
entire judgment from Destrajo subject to reimbursement from AFISCO to the extent of the insurance
coverage.

While the petition seeks a definitive ruling only on the nature of AFISCO's liability, we noticed that the
lower court erred in the computation of the probable loss of income. Using the formula: 2/3 of (80-56) x
P12,000.00, it awarded P28,800.00. 13 Upon recomputation, the correct amount is P192,000.00. Being a
"plain error," we opt to correct the same. 14 Furthermore, in accordance with prevailing jurisprudence,
the death indemnity is hereby increased to P50,000.00. 15

WHEREFORE, premises considered, the present petition is hereby GRANTED. The award of P28,800.00
representing loss of income is INCREASED to P192,000.00 and the death indemnity of P12,000.00 to
P50,000.00.

SO ORDERED.
G.R. No. L-54171 October 28, 1980

JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner,

vs.
THE INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents.

TEEHANKEE, Acting C.J.:

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and holds
that where the insured's car is wrongfully taken without the insured's consent from the car service and
repair shop to whom it had been entrusted for check-up and repairs (assuming that such taking was for
a joy ride, in the course of which it was totally smashed in an accident), respondent insurer is liable and
must pay insured for the total loss of the insured vehicle under the theft clause of the policy.

The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent
insurance commission are as follows:

Complainant [petitioner] was the owner of a Colt Lancer, Model 1976, insured with respondent
company under Private Car Policy No. MBI/PC-0704 for P35,000.00 — Own Damage; P30,000.00 —
Theft; and P30,000.00 — Third Party Liability, effective May 16, 1977 to May 16, 1978. On May 9, 1978,
the vehicle was brought to the Sunday Machine Works, Inc., for general check-up and repairs. On May
11, 1978, while it was in the custody of the Sunday Machine Works, the car was allegedly taken by six (6)
persons and driven out to Montalban, Rizal. While travelling along Mabini St., Sitio Palyasan, Barrio
Burgos, going North at Montalban, Rizal, the car figured in an accident, hitting and bumping a gravel and
sand truck parked at the right side of the road going south. As a consequence, the gravel and sand truck
veered to the right side of the pavement going south and the car veered to the right side of the
pavement going north. The driver, Benito Mabasa, and one of the passengers died and the other four
sustained physical injuries. The car, as well, suffered extensive damage. Complainant, thereafter, filed a
claim for total loss with the respondent company but claim was denied. Hence, complainant, was
compelled to institute the present action.

The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire Insurance
Company admittedly undertook to indemnify the petitioner-insured against loss or damage to the car (a)
by accidental collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear; (b) by fire, external explosion, self-ignition or lightning
or burglary, housebreaking or theft; and (c) by malicious act.

Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the total
loss of the vehicle against private respondent, sustaining respondent insurer's contention that the
accident did not fall within the provisions of the policy either for the Own Damage or Theft coverage,
invoking the policy provision on "Authorized Driver" clause.1

Respondent commission upheld private respondent's contention on the "Authorized Driver" clause in
this wise: "It must be observed that under the above-quoted provisions, the policy limits the use of the
insured vehicle to two (2) persons only, namely: the insured himself or any person on his (insured's)
permission. Under the second category, it is to be noted that the words "any person' is qualified by the
phrase

... on the insured's order or with his permission.' It is therefore clear that if the person driving is other
than the insured, he must have been duly authorized by the insured, to drive the vehicle to make the
insurance company liable for the driver's negligence. Complainant admitted that she did not know the
person who drove her vehicle at the time of the accident, much less consented to the use of the same
(par. 5 of the complaint). Her husband likewise admitted that he neither knew this driver Benito Mabasa
(Exhibit '4'). With these declarations of complainant and her husband, we hold that the person who
drove the vehicle, in the person of Benito Mabasa, is not an authorized driver of the complainant.
Apparently, this is a violation of the 'Authorized Driver' clause of the policy.

Respondent commission likewise upheld private respondent's assertion that the car was not stolen and
therefore not covered by the Theft clause, ruling that "The element of 'taking' in Article 308 of the
Revised Penal Code means that the act of depriving another of the possession and dominion of a
movable thing is coupled ... with the intention. at the time of the 'taking', of withholding it with the
character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been
shown a felonious intent upon the part of the taker of the car, and the intent must be an intent
permanently to deprive the insured of his car," and that "Such was not the case in this instance. The fact
that the car was taken by one of the residents of the Sunday Machine Works, and the withholding of the
same, for a joy ride should not be construed to mean 'taking' under Art. 308 of the Revised Penal Code.
If at all there was a 'taking', the same was merely temporary in nature. A temporary taking is held not a
taking insured against (48 A LR 2d., page 15)."

The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence and
the law.

First, respondent commission's ruling that the person who drove the vehicle in the person of Benito
Mabasa, who, according to its finding, was one of the residents of the Sunday Machine Works, Inc. to
whom the car had been entrusted for general check-up and repairs was not an "authorized driver" of
petitioner-complainant is too restrictive and contrary to the established principle that insurance
contracts, being contracts of adhesion where the only participation of the other party is the signing of
his signature or his "adhesion" thereto, "obviously call for greater strictness and vigilance on the part of
courts of justice with a view of protecting the weaker party from abuse and imposition, and prevent
their becoming traps for the unwary.2

The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a person
other than the insured owner, who drives the car on the insured's order, such as his regular driver, or
with his permission, such as a friend or member of the family or the employees of a car service or repair
shop must be duly licensed drivers and have no disqualification to drive a motor vehicle.

A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his
car key to the shop owner and employees who are presumed to have the insured's permission to drive
the car for legitimate purposes of checking or road-testing the car. The mere happenstance that the
employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized purpose in
violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized
driver" clause has been violated such as to bar recovery, provided that such employee is duly qualified
to drive under a valid driver's license.

The situation is no different from the regular or family driver, who instead of carrying out the owner's
order to fetch the children from school takes out his girl friend instead for a joy ride and instead wrecks
the car. There is no question of his being an "authorized driver" which allows recovery of the loss
although his trip was for a personal or illicit purpose without the owner's authorization.

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause,
not the "authorized driver" clause, that applies), where a car is admittedly as in this case unlawfully and
wrongfully taken by some people, be they employees of the car shop or not to whom it had been
entrusted, and taken on a long trip to Montalban without the owner's consent or knowledge, such
taking constitutes or partakes of the nature of theft as defined in Article 308 of the Revised Penal Code,
viz. "Who are liable for theft. — Theft is committed by any person who, with intent to gain but without
violence against or intimidation of persons nor force upon things, shall take personal property of
another without the latter's consent," for purposes of recovering the loss under the policy in question.

The Court rejects respondent commission's premise that there must be an intent on the part of the
taker of the car "permanently to deprive the insured of his car" and that since the taking here was for a
"joy ride" and "merely temporary in nature," a "temporary taking is held not a taking insured against."

The evidence does not warrant respondent commission's findings that it was a mere "joy ride". From the
very investigator's report cited in its comment, 3 the police found from the waist of the car driver Benito
Mabasa Bartolome who smashed the car and was found dead right after the incident "one cal. 45 Colt.
and one apple type grenade," hardly the materials one would bring along on a "joy ride". Then, again, it
is equally evident that the taking proved to be quite permanent rather than temporary, for the car was
totally smashed in the fatal accident and was never returned in serviceable and useful condition to
petitioner-owner.

Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy ride",
the Court sustains as the better view that which holds that when a person, either with the object of
going to a certain place, or learning how to drive, or enjoying a free ride, takes possession of a vehicle
belonging to another, without the consent of its owner, he is guilty of theft because by taking
possession of the personal property belonging to another and using it, his intent to gain is evident since
he derives therefrom utility, satisfaction, enjoyment and pleasure. Justice Ramon C. Aquino cites in his
work Groizard who holds that the use of a thing constitutes gain and Cuello Calon who calls it "hurt de
uso. " 4

The insurer must therefore indemnify the petitioner-owner for the total loss of the insured car in the
sum of P35,000.00 under the theft clause of the policy, subject to the filing of such claim for
reimbursement or payment as it may have as subrogee against the Sunday Machine Works, Inc.

ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing private
respondent to pay petitioner the sum of P35,000.00 with legal interest from the filing of the complaint
until full payment is made and to pay the costs of suit.

SO ORDERED.
G.R. No. L-36480 May 31, 1988

ANDREW PALERMO, plaintiff-appellee,

vs.
PYRAMID INSURANCE CO., INC., defendant- appellant.

GRIÑO-AQUINO, J:

The Court of Appeals certified this case to Us for proper disposition as the only question involved is the
interpretation of the provision of the insurance contract regarding the "authorized driver" of the insured
motor vehicle.

On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the Court of First Instance
of Negros Occidental against Pyramid Insurance Co., Inc., for payment of his claim under a Private Car
Comprehensive Policy MV-1251 issued by the defendant (Exh. A).

In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed the claim because at
the time of the accident, the insured was driving his car with an expired driver's license.

After the trial, the court a quo rendered judgment on October 29, 1969 ordering the defendant "to pay
the plaintiff the sum of P20,000.00, value of the insurance of the motor vehicle in question and to pay
the costs."

On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending Appeal." It was
opposed by the defendant, but was granted by the trial court on December 15, 1969.

The trial court found the following facts to be undisputed:

On October 12,1968, after having purchased a brand new Nissan Cedric de Luxe Sedan car bearing
Motor No. 087797 from the Ng Sam Bok Motors Co. in Bacolod City, plaintiff insured the same with the
defendant insurance company against any loss or damage for P 20,000.00 and against third party
liability for P 10,000.00. Plaintiff paid the defendant P 361.34 premium for one year, March 12, 1968 to
March 12, 1969, for which defendant issued Private Car Comprehensive Policy No. MV-1251, marked
Exhibit "A."

The automobile was, however, mortgaged by the plaintiff with the vendor, Ng Sam Bok Motors Co., to
secure the payment of the balance of the purchase price, which explains why the registration certificate
in the name of the plaintiff remains in the hands of the mortgagee, Ng Sam Bok Motors Co.

On April 17, 1968, while driving the automobile in question, the plaintiff met a violent accident. The La
Carlota City fire engine crashed head on, and as a consequence, the plaintiff sustained physical injuries,
his father, Cesar Palermo, who was with am in the car at the time was likewise seriously injured and died
shortly thereafter, and the car in question was totally wrecked.

The defendant was immediately notified of the occurrence, and upon its orders, the damaged car was
towed from the scene of the accident to the compound of Ng Sam Bok Motors in Bacolod City where it
remains deposited up to the present time.
The insurance policy, Exhibit "A," grants an option unto the defendant, in case of accident either to
indemnify the plaintiff for loss or damage to the car in cash or to replace the damaged car. The
defendant, however, refused to take either of the above-mentioned alternatives for the reason as
alleged, that the insured himself had violated the terms of the policy when he drove the car in question
with an expired driver's license. (Decision, Oct. 29, 1969, p. 68, Record on Appeal.)

Appellant alleges that the trial court erred in interpreting the following provision of the Private Car
Comprehensive Policy MV-1251:

AUTHORIZED DRIVER:

Any of the following:

(a) The Insured.

(b) Any person driving on the Insured's order or with his permission. Provided that the person driving is
permitted in accordance with the licensing or other laws or regulations to drive the Motor Vehicle and is
not disqualified from driving such motor vehicle by order of a Court of law or by reason of any
enactment or regulation in that behalf. (Exh. "A.")

There is no merit in the appellant's allegation that the plaintiff was not authorized to drive the insured
motor vehicle because his driver's license had expired. The driver of the insured motor vehicle at the
time of the accident was, the insured himself, hence an "authorized driver" under the policy.

While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway without
a license or with an expired license, an infraction of the Motor Vehicle Law on the part of the insured, is
not a bar to recovery under the insurance contract. It however renders him subject to the penal
sanctions of the Motor Vehicle Law.

The requirement that the driver be "permitted in accordance with the licensing or other laws or
regulations to drive the Motor Vehicle and is not disqualified from driving such motor vehicle by order of
a Court of Law or by reason of any enactment or regulation in that behalf," applies only when the driver"
is driving on the insured's order or with his permission." It does not apply when the person driving is the
insured himself.

This view may be inferred from the decision of this Court in Villacorta vs. Insurance Commission, 100
SCRA 467, where it was held that:

The main purpose of the "authorized driver" clause, as may be seen from its text, is that a person other
than the insured owner, who drives the car on the insured's order, such as his regular driver, or with his
permission, such as a friend or member of the family or the employees of a car service or repair shop,
must be duly licensed drivers and have no disqualification to drive a motor vehicle.

In an American case, where the insured herself was personally operating her automobile but without a
license to operate it, her license having expired prior to the issuance of the policy, the Supreme Court of
Massachusetts was more explicit:

... Operating an automobile on a public highway without a license, which act is a statutory crime is not
precluded by public policy from enforcing a policy indemnifying her against liability for bodily injuries
The inflicted by use of the automobile." (Drew C. Drewfield McMahon vs. Hannah Pearlman, et al., 242
Mass. 367, 136 N.E. 154, 23 A.L.R. 1467.)

WHEREFORE, the appealed decision is affirmed with costs against the defendant-appellant.

SO ORDERED.
G.R. No. L-2294 May 25, 1951

FILIPINAS COMPAÑIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.

Ramirez and Ortigas for petitioner.

Ewald Huenefeld for respondent.

PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in
the sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street,
Binondo Manila. On February 27, 1942, or during the Japanese military occupation, the building and
insured merchandise were burned. In due time the respondent submitted to the petitioner its claim
under the policy. The salvage goods were sold at public auction and, after deducting their value, the
total loss suffered by the respondent was fixed at P92,650. The petitioner refused to pay the claim on
the ground that the policy in favor of the respondent had ceased to be in force on the date the United
States declared war against Germany, the respondent Corporation (though organized under and by
virtue of the laws of the Philippines) being controlled by the German subjects and the petitioner being a
company under American jurisdiction when said policy was issued on October 1, 1941. The petitioner,
however, in pursuance of the order of the Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose
of recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is
that the insured merchandise were burned up after the policy issued in 1941 in favor of the respondent
corporation has ceased to be effective because of the outbreak of the war between the United States
and Germany on December 10, 1941, and that the payment made by the petitioner to the respondent
corporation during the Japanese military occupation was under pressure. After trial, the Court of First
Instance of Manila dismissed the action without pronouncement as to costs. Upon appeal to the Court
of Appeals, the judgment of the Court of First Instance of Manila was affirmed, with costs. The case is
now before us on appeal by certiorari from the decision of the Court of Appeals.

The Court of Appeals overruled the contention of the petitioner that the respondent corporation
became an enemy when the United States declared war against Germany, relying on English and
American cases which held that a corporation is a citizen of the country or state by and under the laws
of which it was created or organized. It rejected the theory that nationality of private corporation is
determine by the character or citizenship of its controlling stockholders.

There is no question that majority of the stockholders of the respondent corporation were German
subjects. This being so, we have to rule that said respondent became an enemy corporation upon the
outbreak of the war between the United States and Germany. The English and American cases relied
upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme Court of
the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed.
Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the Second International Conference of the Legal
Profession held at the Hague (Netherlands) in August. 1948 the following enlightening passages appear:

Since World War I, the determination of enemy nationality of corporations has been discussion in many
countries, belligerent and neutral. A corporation was subject to enemy legislation when it was
controlled by enemies, namely managed under the influence of individuals or corporations, themselves
considered as enemies. It was the English courts which first the Daimler case applied this new concept of
"piercing the corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.

The United States of America did not adopt the control test during the First World War. Courts refused
to recognized the concept whereby American-registered corporations could be considered as enemies
and thus subject to domestic legislation and administrative measures regarding enemy property.

World War II revived the problem again. It was known that German and other enemy interests were
cloaked by domestic corporation structure. It was not only by legal ownership of shares that a material
influence could be exercised on the management of the corporation but also by long term loans and
other factual situations. For that reason, legislation on enemy property enacted in various countries
during World War II adopted by statutory provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic corporation.

The United States did not, in the amendments of the Trading with the Enemy Act during the last war,
include as did other legislations the applications of the control test and again, as in World War I, courts
refused to apply this concept whereby the enemy character of an American or neutral-registered
corporation is determined by the enemy nationality of the controlling stockholders.

Measures of blocking foreign funds, the so called freezing regulations, and other administrative practice
in the treatment of foreign-owned property in the United States allowed to large degree the
determination of enemy interest in domestic corporations and thus the application of the control test.
Court decisions sanctioned such administrative practice enacted under the First War Powers Act of
1941, and more recently, on December 8, 1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the Court: "The property of all foreign interest was
placed within the reach of the vesting power (of the Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy interest which masqueraded under those innocent fronts. .
. . The power of seizure and vesting was extended to all property of any foreign country or national so
that no innocent appearing device could become a Trojan horse."

It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed
decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9)
299, we already held that China Banking Corporation came within the meaning of the word "enemy" as
used in the Trading with the Enemy Acts of civilized countries not only because it was incorporated
under the laws of an enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a
public enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.

Effect of war, generally. — All intercourse between citizens of belligerent powers which is inconsistent
with a state of war is prohibited by the law of nations. Such prohibition includes all negotiations,
commerce, or trading with the enemy; all acts which will increase, or tend to increase, its income or
resources; all acts of voluntary submission to it; or receiving its protection; also all acts concerning the
transmission of money or goods; and all contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in service
with the enemy; this for the reason that the subjects of one country cannot be permitted to lend their
assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do
anything detrimental too their country's interest. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent that one country should destroy its enemy's
property and repay in insurance the value of what has been so destroyed, or that it should in such
manner increase the resources of the enemy, or render it aid, and the commencement of war
determines, for like reasons, all trading intercourse with the enemy, which prior thereto may have been
lawful. All individuals therefore, who compose the belligerent powers, exist, as to each other, in a state
of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)

In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified
term it is plain that when the parties become alien enemies, the contractual tie is broken and the
contractual rights of the parties, so far as not vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)

The respondent having become an enemy corporation on December 10, 1941, the insurance policy
issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid
and enforcible, and since the insured goods were burned after December 10, 1941, and during the war,
the respondent was not entitled to any indemnity under said policy from the petitioner. However,
elementary rules of justice (in the absence of specific provision in the Insurance Law) require that the
premium paid by the respondent for the period covered by its policy from December 11, 1941, should
be returned by the petitioner.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether
the policy in question became null and void upon the declaration of war between the United States and
Germany on December 10, 1941, and its judgment in favor of the respondent corporation was
predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals necessarily
assumed that, even if the payment by the petitioner to the respondent was involuntary, its action is not
tenable in view of the ruling on the validity of the policy. As a matter of fact, the Court of Appeals held
that "any intimidation resorted to by the appellee was not unjust but the exercise of its lawful right to
claim for and received the payment of the insurance policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was entitled to payment from the appellant was, well
founded." Factually, there can be no doubt that the Director of the Bureau of Financing, in ordering the
petitioner to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In view of the findings and conclusion of this office
contained in its decision on Administrative Case dated February 9, 1943 copy of which was sent to your
office and the concurrence therein of the Financial Department of the Japanese Military Administration,
and following the instruction of said authority, you are hereby ordered to pay the claim of Messrs.
Christern, Huenefeld & Co., Inc. The payment of said claim, however, should be made by means of
crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover what paid to the respondent under the circumstances
on this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines
currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.

Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay
to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in
Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in
question, beginning December 11, 1941. Without costs. So ordered.

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.
G.R. No. 156167 May 16, 2005

GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

DECISION

PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner
assails the appellate court decision1 which dismissed its two appeals and affirmed the judgment of the
trial court.

For review are the warring interpretations of petitioner and respondent on the scope of the insurance
company’s liability for earthquake damage to petitioner’s properties. Petitioner avers that, pursuant to
its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the
properties within its resort caused by earthquake. Respondent contends that the rider limits its liability
for loss to the two swimming pools of petitioner.

The facts as established by the court a quo, and affirmed by the appellate court are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort
insured originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance
policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and
"F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock was extended
only to plaintiff’s two swimming pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1,"
and "E" and two (2) swimming pools only (Exhs. "C-1"; ‘D-1", "E" and "F-1"). "Item 5" in those policies
referred to the two (2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently
AHAC(AIU) issued in 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 deleted and the entry under
Endorsements/Warranties at the time of issue read that plaintiff renewed its policy with AHAC (AIU) for
the period of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. "H") which
carried the entry under "Endorsement/Warranties at Time of Issue", which read "Endorsement to
Include Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 and paid P42,658.14 (Exhs. "6-A"
and "6-B") as premium thereof, computed as follows:

Item - P7,691,000.00 - on the Clubhouse only

@ .392%;

- 1,500,000.00 - on the furniture, etc. contained in the building above-

mentioned@ .490%;

- 393,000.00 - on the two swimming pools, only (against the peril of

earthquake shock only) @ 0.100%
 - 116,600.00 other buildings include as follows:

a) Tilter House - P19,800.00 - 0.551%

b) Power House - P41,000.00 - 0.551%

c) House Shed - P55,000.00 - 0.540%

P100,000.00 - for furniture, fixtures, lines air-con and operating

equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 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 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 the policy in question,
contained on the right-hand upper portion of page 7 thereof, the following:

Rate-Various

Premium – P37,420.60 F/L

– 2,061.52 – Typhoon

– 1,030.76 – EC

– 393.00 – ES

Doc. Stamps 3,068.10

F.S.T. 776.89

Prem. Tax 409.05

TOTAL 45,159.92;

that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the
premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B"
and "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D",
"E", "F", "G" and "H") and in Policy No. 31944 issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the sum included additional premium
the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the
contrary, that this insurance covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D"
and "7-C");
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that on July 16,
1990 an earthquake struck Central Luzon and Northern Luzon and plaintiff’s properties covered by
Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were
damaged.2

After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim,
then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and
Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster, requested petitioner to submit
various documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc.,
through its Vice-President A.R. de Leon,4 rendered a preliminary report5 finding extensive damage
caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that
"except for the swimming pools, all affected items have no coverage for earthquake shocks."6 On August
11, 1990, petitioner filed its formal demand7 for settlement of the 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 complaint10 with the regional trial court of Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest
thereon, as computed under par. 29 of the policy (Annex "B") until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account
of 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 PREMIUM

xxx

3 393,000.00 0.100%-E/S 393.0022]

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 ½ % OF THE NET PREMIUM x x x
POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO
PAY THE PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .

additional premium the Company agrees, notwithstanding what is stated in the printed conditions of
this Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to
any of the property insured by this Policy occasioned by or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply
also to loss or damage occasioned by or through or in consequence of Earthquake.24

Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured
properties.

It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.25 All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on
the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and
riders, taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. Thus,
an insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and

5. In consideration of the insurer's promise, the insured pays a premium.26 (Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.27 In fire, casualty, and marine insurance, the premium payable becomes a debt
as soon as the risk attaches.28 In the subject policy, no premium payments were made with regard to
earthquake shock coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is consistent with the
history of 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?

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a
provision here that it was only for item 5.

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools
only?

A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26

Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?

A. Yes, sir.

Q. Did you also do this through your insurance agency?

A. If you are referring to Forte Insurance Agency, yes.

Q. Is Forte Insurance Agency a department or division of your company?

A. No, sir. They are our insurance agency.

Q. And they are independent of your company insofar as operations are concerned?

A. Yes, sir, they are separate entity.

Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to
your instruction, is that not correct?

A. Yes, sir. The final action is still with us although they can recommend what insurance to take.

Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give
written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must
extend to all properties of Agoo Playa Resort in La Union?

A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect
of extending the coverage on (sic) the other properties of the company.

Q. And that instruction, according to you, was very important because in April 1987 there was an
earthquake tremor in La Union?

A. Yes, sir.

Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?

A. Yes, sir.

Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to
your instructions that all properties must be covered again by earthquake shock endorsement?

A. Are you referring to the insurance policy issued by American Home Assurance Company marked
Exhibit "G"?

Atty. Mejia: Yes.

Witness:

A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no
more limitation referring to the two swimming pools only, I was contented already that the previous
limitation pertaining to the two swimming pools was already removed.

Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA
Warranty & Annual Payment Agreement on Long Term Policies"29 to the insurance policy as proof of
the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the
policy is subject, as required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage
to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by
the testimony of Juan Baranda III, underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA 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?

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?

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?

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?

A. I told him that the insurance that they will have to get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.

Q. You are referring to Exhibit "H" of course?

A. Yes, sir, to Exhibit "H".

Q. So, all the provisions here will be the same except that of the premium rates?

A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging
will be limited to this one. I (sic) can even be lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 12-14
Atty. Mejia:

Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits "I" and "H" sometime in the third week of March, 1990 or thereabout?

A. Yes, sir, about that time.

Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as
scope of coverage of Exhibits "I" and "H" respectively?

A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy
wordings and rates were copied from the insurance policy I sent them but it was only when this case
erupted that we discovered some discrepancies.

Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit "I" and those indicated in Exhibit "H" respectively?

A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which I
understood before that this provision will have to be placed here because this particular provision under
the peril of earthquake shock only is requested because this is an insurance policy and therefore cannot
be insured against fire, so this has to be placed.

The verbal assurances allegedly given by 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?

A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake
shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in
the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have
coverage for earthquake shock.

xxx

Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the
swimming pools all affected items have no coverage for earthquake shock?

xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that
under Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock only), and secondly, when I examined the summary
of premium payment only Item 3 which refers to the swimming pools have a computation for premium
payment for earthquake shock and all the other items have no computation for payment of premiums.

In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it.31 A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while
the other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts
have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as
traps for the weaker party whom the courts of justice must protect.32 Consequently, any ambiguity
therein is resolved against the insurer, or construed liberally in favor of the insured.33

The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.34 Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of
the claims of contending parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,35 the parties, who were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.

We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it
did not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner,
is reflective of 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?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had
with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the PCIC policy?

A. Yes, sir.

Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him
that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-
9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically
in the replacement cost endorsement, but the principal provisions of the policy remained essentially
similar to AHAC-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 VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.

SO ORDERED.
G.R. No. 154514. July 28, 2005

WHITE GOLD MARINE SERVICES, INC., Petitioners,

vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., Respondents.

DECISION

QUISUMBING, J.:

This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP
No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No.
RD-277. Both decisions held that there was no violation of the Insurance Code and the respondents do
not need license as insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its
vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual)
through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a
Certificate of Entry and Acceptance.3 Pioneer also issued receipts evidencing payments for the coverage.
When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover
the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the Insurance
Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code,
while Pioneer violated Sections 299,6 3007 and 3018 in relation to Sections 302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need for Steamship
Mutual to secure a license because it was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain
another license as insurance agent and/or a broker for Steamship Mutual because Steamship Mutual
was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate
license solely as agent/broker of Steamship Mutual was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate
court distinguished between P & I Clubs vis-à-vis conventional insurance. The appellate court also held
that Pioneer merely acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN
THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT
AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE
BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE
WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT
REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance
business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship
Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a
license to do business in the Philippines although Pioneer is its resident agent. This relationship is
reflected in the certifications issued by the Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress
its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as
"an association composed of shipowners in general who band together for the specific purpose of
providing insurance cover on a mutual basis against liabilities incidental to shipowning that the
members incur in favor of third parties." It stresses that as a P & I Club, Steamship Mutual’s primary
purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged
the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance
business in the Philippines. It is merely an association of vessel owners who have come together to
provide mutual protection against liabilities incidental to shipowning.11 Respondents aver Hyopsung is
inapplicable in this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or
"transacting an insurance business". These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting
the doing of an insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.

...
The same provision also provides, the fact that no profit is derived from the making of insurance
contracts, agreements or transactions, or that no separate or direct consideration is received therefor,
shall not preclude the existence of an insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the nature of the
promise, the act required to be performed, and the exact nature of the agreement in the light of the
occurrence, contingency, or circumstances under which the performance becomes requisite. It is not by
what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the
losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the coverage of
marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the
insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to the
creation of a fund from which all losses and liabilities are paid, and where the profits are divided among
themselves, in proportion to their interest.17 Additionally, mutual insurance associations, or clubs,
provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.18

A P & I Club is "a form of insurance against third party liability, where the third party is anyone other
than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club is a mutual
insurance association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite
certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident agent
in the Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship
Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to
continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license
from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no
insurer or insurance company is allowed to engage in the insurance business without a license or a
certificate of authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration22 issued
by the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the
certificate of authority23 issued by the same agency. However, a Certification from the Commission
states that Pioneer does not have a separate license to be an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as
insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of
applications for insurance, or receive for services in obtaining insurance, any commission or other
compensation from any insurance company doing business in the Philippines or any agent thereof,
without first procuring a license so to act from the Commissioner, which must be renewed annually on
the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its directors and
officers. Regrettably, we are not the forum for these issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of
Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED
AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance
and Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to do
business as insurer and insurance agent, respectively. The petitioner’s prayer for the revocation of
Pioneer’s Certificate of Authority and removal of its directors and officers, is DENIED. Costs against
respondents.

SO ORDERED.
G.R. No. 113899 October 13, 1999

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,

vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.

QUISUMBING, J.:

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

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

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

A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP).
Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP.

On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:

7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer,
diabetes, lung; kidney or stomach disorder or any other physical impairment?

Answer: No. If so give details _____________.

8. Are you now, to the best of your knowledge, in good health?

Answer: [x] Yes [ ] NO. 4

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio,
to the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred
(P86,200.00) pesos.1âwphi1.nêt

On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP
submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not
physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted
that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific
Performance with Damages." 5 During the trial, Dr. Hernando Mejia, who issued the death certificate,
was called to testify. Dr. Mejia's findings, based partly from the information given by the respondent
widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The
inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not
ruled out.

On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present
petition. Petitioners interposed the following assigned errors:

1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE DEVELOPMENT BANK
OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT
[Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.

2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF JURISDICTION OVER THE
SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON OF THE DEFENDANT.

3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP THE AMOUNT OF
P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT
PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-
APPELLANT.

4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE
GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE CLAIM ARISING
FROM THE DEATH OF WILFREDO LEUTERIO. 6

Synthesized below are the assigned errors for our resolution:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life
insurance contract from a complaint filed by the widow of the decedent/mortgagor?

2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the insurance contract?

3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand,
two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage payable by the
mortgagor to DBP.

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

Sec. 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance in his own name providing
that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the
insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the
original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will
have the same effect, although the property is in the hands of the mortgagee, but any act which, under
the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee
therein named, with the same effect as if it had been performed by the mortgagor.

The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: "In the event of the debtor's death before his indebtedness with the Creditor
[DBP] shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to
the creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor." 10 When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter,
DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the
residential lot of private respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. 12 we
held:

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

And in volume 33, page 82, of the same work, we read the following:

Insured may be regarded as the real party in interest, although he has assigned the policy for the
purpose of collection, or has assigned as collateral security any judgment he may obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered, 14 the widow of the decedent Dr. Leuterio may file the suit against the insurer,
Grepalife.

The second assigned error refers to an alleged concealment that the petitioner interposed as its defense
to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had
knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same. 15

Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported
by the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia's technical
diagnosis of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the
widow's declaration that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.

On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy
on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of
Dr. Leuterio's any previous hospital confinement. 16 Dr. Leuterio's death certificate stated that
hypertension was only "the possible cause of death." The private respondent's statement, as to the
medical history of her husband, was due to her unreliable recollection of events. Hence, the statement
of the physician was properly considered by the trial court as hearsay.

The question of whether there was concealment was aptly answered by the appellate court, thus:

The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and that
he had not consulted a doctor or any of the enumerated ailments, including hypertension; when he died
the attending physician had certified in the death certificate that the former died of cerebral
hemorrhage, probably secondary to hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured had concealed the fact that he
had hypertension.

Contrary to appellant's allegations, there was no sufficient proof that the insured had suffered from
hypertension. Aside from the statement of the insured's widow who was not even sure if the medicines
taken by Dr. Leuterio were for hypertension, the appellant had not proven nor produced any witness
who could attest to Dr. Leuterio's medical history . . .

xxx xxx xxx

Appellant insurance company had failed to establish that there was concealment made by the insured,
hence, it cannot refuse payment of the claim. 17

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and
the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In
the case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.1âwphi1.nêt
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's failure to establish the same, the action for specific
performance should be dismissed. Petitioner's claim is without merit. A life insurance policy is a valued
policy. 20 Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his insurance, which states that:

The policy states that upon receipt of due proof of the Debtor's death during the terms of this insurance,
a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtor's death before his indebtedness with the creditor shall have been fully paid,
an amount to pay the outstanding indebtedness shall first be paid to the Creditor and the balance of the
Sum Assured, if there is any shall then be paid to the beneficiary/ies designated by the
debtor." 22 (Emphasis omitted)

However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private
respondent's memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction
of mortgagor's outstanding loan. Considering this supervening event, the insurance proceeds shall inure
to the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should
not unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it
cannot collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now
rightly belong to Dr. Leuterio's heirs represented by his widow, herein private respondent Medarda
Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-
G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance
proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured,
Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's
indebtedness to Development Bank of the Philippines. Costs against petitioner.1âwphi1.nêt

SO ORDERED.
G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner,

vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision1 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-
146222 for P100,000.00. The period of the policy was from 22 December 1989 to 22 December 1990 and
covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and
women wear and other usual to assured's business."

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

Zenco Sales, Inc. P55,698.00

F. Legaspi Gen. Merchandise 86,432.50

Cebu Tesing Textiles 250,000.00 (on credit)

—————

P392,130.50

The policy contained the following condition:

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

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

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may
appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F
24758.4

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

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

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

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

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

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

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued
by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken
in the name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART (MR.
ARMANDO GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only the mortgagee of
the goods.

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

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

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

xxx xxx xxx

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

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

xxx xxx xxx

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

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

A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-

JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION
IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE
DURING THE HEARING OR TRIAL; AND

C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE
RESPONDENT.

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

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

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

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His
letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to
the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not know about the
prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy
No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law.
Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a]
policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of
an immaterial provision does not avoid the policy." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is
commonly known as the additional or "other insurance" clause and has been upheld as valid and as a
warranty that no other insurance exists. Its violation would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject
matter, the same interest therein, and the same risk.17

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

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

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

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

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

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

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

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

The insured shall give notice to the company of any insurance or insurances already effected, or which
may subsequently be effected covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on
behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall
be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to add or
insert it in the policy, without which such policy shall be null and void, and the insured will not be
entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622 does
not absolutely declare void any violation thereof. It expressly provides that the condition "shall not
apply when the total insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00."

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

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

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

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

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

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.
G.R. No. L-7667 November 28, 1955

CHERIE PALILEO, plaintiff-appellee,

vs.
BEATRIZ COSIO, defendant-appellant.

Claro M. Recto for appellant.

Bengson, Villegas, Jr. and Villar for appellee.

BAUTISTA ANGELO, J.:

Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the
transaction entered into between them on December 18, 1951 be declared as one of loan, and the
document executed covering the transaction as one of equitable mortgage to secure the payment of
said loan; (2) the defendant be ordered to credit to the plaintiff with the necessary amount from the
sum received by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the same
to the payment of plaintiff's obligation thus considering it as fully paid; and (3) the defendant be
ordered to pay to plaintiff the difference between the alleged indebtedness of plaintiff and the sum
received by defendant from the aforementioned insurance company, plus the sum allegedly paid to
defendant as interest on the alleged indebtedness.

On December 19, 1952, defendant filed her answer setting up as special defense that the transaction
entered into between the plaintiff and defendant is one of sale with option to repurchase but that the
period for repurchase had expired without plaintiff having returned the price agreed upon as a result of
which the ownership of the property had become consolidated in the defendant. Defendant also set up
certain counterclaims which involve a total amount of P4,900.

On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked
by the parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the
defendant nor her counsel appeared, even if the latter had been notified of the postponement almost a
month earlier, and so the court received the evidence of the plaintiff. On January 18, 1954, the court,
having in view the evidence presented, rendered judgment granting the relief prayed for in the
complaint.

On February 2, 1954, the original counsel for the defendant was substituted and the new counsel
immediately moved that the judgment be set aside on the ground that, due to mistake or excusable
negligence, defendant was unable to present her evidence and the decision was contrary to law, and
this motion having been denied, defendant took the present appeal.

The important issue to be determined in this appeal is whether the lower court committed a grave
abuse of discretion in not reopening the case to give defendant an opportunity to present her evidence
considering that the failure of her original counsel to appear was due to mistake or execusable
negligence which ordinary prudence could not have guarded against.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said
counsel showed interest in the early disposal of this case by moving the court to have it set for trial. The
first date set was April 7, 1953, but no hearing was had on that date because plaintiff had moved to
postpone it. The case was next set for hearing on April 28, 1953, but on motion again of plaintiff, the
hearing was transferred to November 6, 1953. Then, upon petition of defendant, the trial had to be
moved to December 15, 1953, and because Atty. Guerrero could not appear on said date because of a
case he had in Cebu City, the hearing was postponed to January 18, 1954.

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was
appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden
and unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or
make any preparation at all. It is averred that "The days that followed his appointment were very busy
days for defendant's former counsel. There was an immediate need for clearing the backlog of official
business, including the reorganization of the Department of Foreign Affairs and our Foreign Service, and
more importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national
importance like the Japanese reparations, and the revision of the trade agreement with the United
States, that, Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all these
unavoidable confusion that followed in the wake of Atty. Guerrero's sudden and unexpected
appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and
consequently, Atty. Guerrero and the defendant were unable to appear when the case was called for
trial." These reasons, — it is intimated, — constitute excusable negligence which ordinary prudence
could not have guarded against and should have been considered by the trial court as sufficient
justification to grant the petition of defendant for a rehearing.

It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of
mistake or excusable negligence is addressed to the sound discretion of the court (see
Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of
such discretion is ordinarily not to be disturbed unless it is shown that the court has gravely abused such
discretion. (See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil.,
203; Manzanares vs. Moreta, 38 Phil., 821; Salva vs. Palacio and Leuterio, 90 Phil., 731.) In denying the
motion for reopening the trial court said: "After going over the same arguments, this Court is of the
opinion, and so holds that the decision of this Court of January 18, 1954 should not be disturbed."
Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he was
given almost one month notice before the date set for trial, we are persuaded to conclude that the trial
court did not abuse its discretion in refusing to reconsider its decision.

Coming now to the merits of the case, we note that the lower court made the following findings: On
December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the
following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month;
(b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting
to P4,550, plus the sum of P250 as interest for the first month; and (c) that after making the above
deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.

Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more
than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant
required plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to
convey to defendant, with right to repurchase, a two-story building of strong materials belonging to
plaintiff. This document did not express the true intention of the parties which was merely to place said
property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the
Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued
in the name of defendant. The building was partly destroyed by fire and, after proper demand,
defendant collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from
defendant that she be credited with the necessary amount to pay her obligation out of the insurance
proceeds but defendant refused to do so. And on the strength of these facts, the court rendered
decision the dispositive part of which reads as follows:

Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant,
as shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by
the defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the
defendant from the Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the
sum of P12,000.00 as stated in the complaint, thus considering the agreement of December 18, 1951
between the herein plaintiff and defendant completely paid and leaving still a balance in the sum of
P1,107 from the insurance collected by defendant; that as plaintiff had paid to the defendant the sum of
P2,250.00 for nine months as interest on the sum of P12,000 loaned to plaintiff and the legal interest
allowed by law in this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one
year, so the herein plaintiff and overpaid the sum of P810 to the defendant, which this Court hereby
likewise orders the said defendant to refund to herein plaintiff, plus the balance of P1,107 representing
the difference of the sum loan of P12,000 and the collected insurance of P13,107 from the insurance
company abovementioned to which the herein plaintiff is entitled to receive, and to pay the costs.

The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of
P1,107 representing the difference of the loan of P12,000 and the sum of P13,107 collected by said
defendant from the insurance company notwithstanding the fact that it was not proven that the
insurance was taken for the benefit of the mortgagor?

Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an
insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee,
independently of the mortgagor, insures the mortgaged property in his own name and for his own
interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to
retain his claim against the mortgagor, but is passed by subrogation to the insurer to the extent of the
money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure
his interest in the property independently of the mortgagor. In that event, upon the destruction of the
property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and
the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed
to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of
the insurance money paid." (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by
this Court in a case that arose in this jurisdiction. In the case mentioned, an insurance contract was
taken out by the mortgagee upon his own interest, it being stipulated that the proceeds would be paid
to him only and when the case came up for decision, this Court held that the mortgagee, in case of loss,
may only recover upon the policy to the extent of his credit at the time of the loss. It was declared that
the mortgaged had no right of action against the mortgagee on the policy. (San Miguel Brewery vs. Law
Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate
interest at his own expense and for his own benefit, without any agreement with the mortgagor with
respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance
proceeds applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the
mortgagee "has still a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co.,
7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6
Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506;
Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority
view (See case note, 3 Lawyers' Report Annotated, new series, p. 79). "The general rule and the weight
of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the
mortgage. This is put upon the analogy of the situation of the insurer to that of a surety." (Jones on
Mortgages, Vol. I, pp. 671-672.)

Considering the foregoing rules, it would appear that the lower court erred in declaring that the
proceeds of the insurance taken out by the defendant on the property mortgaged inured to the benefit
of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference between her
indebtedness and the amount of insurance received by the defendant, for, in the light of the majority
rule we have above enunciated, the correct solution should be that the proceeds of the insurance
should be delivered to the defendant but that her claim against the plaintiff should be considered
assigned to the insurance company who is deemed subrogated to the rights of the defendant to the
extent of the money paid as indemnity.

Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as
follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an
equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the
insurance amounting to P13,107.00 was properly collected by defendant who is not required to account
for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have
compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its
payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing
the overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs.