January 28, 2019

G.R. No. 212107

KEIHIN-EVERETT FORWARDING CO., INC., Petitioner

vs.
TOKIO MARINE MALAYAN INSURANCE CO., INC.* AND SUNFREIGHT FORWARDERS &
CUSTOMS BROKERAGE, INC., Respondents

DECISION

REYES, J. JR., J.:

The Case

Keihin-Everett Forwarding Co., Inc. (Keihin-Everett) appealed from the April 8, 2014 Decision1 of the
Court of Appeals (CA) in CA-G.R. CV No. 98672 which held it liable to pay Tokio Marine Malayan
Insurance Co., Inc.'s (Tokio Marine's) claim of ₱1,589,556.60 with right of reimbursement from
Sunfreight Forwarders & Customs Brokerage, Inc. (Sunfreight Forwarders).

The Facts

The facts, as summarized by the CA,2 are clear and undisputed.

In 2005, Honda Trading Phils. Ecozone Corporation (Honda Trading) ordered 80 bundles of
Aluminum Alloy Ingots from PT Molten Aluminum Producer Indonesia (PT Molten).3 PT Molten
loaded the goods in two container vans with Serial Nos. TEXU 389360-5 and GATU 040516-3 which
were, in turn, received in Jakarta, Indonesia by Nippon Express Co., Ltd. for shipment to Manila.4

Aside from insuring the entire shipment with Tokio Marine & Nichido Fire Insurance Co., Inc.
(TMNFIC) under Policy No. 83-00143689, Honda Trading also engaged the services of petitioner
Keihin-Everett to clear and withdraw the cargo from the pier and to transport and deliver the same to
its warehouse at the Laguna Technopark in Biñan, Laguna.5 Meanwhile, petitioner Keihin-Everett
had an Accreditation Agreement with respondent Sunfreight Forwarders whereby the latter
undertook to render common carrier services for the former and to transport inland goods within the
Philippines.6

The shipment arrived in Manila on November 3, 2005 and was, accordingly, offloaded from the
ocean liner and temporarily stored at the CY Area of the Manila International Port pending release
by the Customs Authority.7 On November 8, 2005, the shipment was caused to be released from the
pier by petitioner Keihin-Everett and turned over to respondent Sunfreight Forwarders for delivery to
Honda Trading.8 En route to the latter's warehouse, the truck carrying the containers was hijacked
and the container van with Serial No. TEXU 389360-5 was reportedly taken away.9 Although said
container van was subsequently found in the vicinity of the Manila North Cemetery and later towed
to the compound of the Metro Manila Development Authority (MMDA), it appears that the contents
thereof were no longer retrieved.10 Only the container van with Serial No. GATU 040516-3 reached
the warehouse. As a consequence, Honda Trading suffered losses in the total amount of
₱2,121,917.04, representing the value of the lost 40 bundles of Aluminum Alloy Ingots.11

Claiming to have paid Honda Trading's insurance claim for the loss it suffered, respondent Tokio
Marine commenced the instant suit on October 10, 2006 with the filing of its complaint for damages
against petitioner Keihin-Everett. Respondent Tokio Marine maintained that it had been subrogated
to all the rights and causes of action pertaining to Honda Trading.

Served with summons, petitioner Keihin-Everett denied liability for the lost shipment on the ground
that the loss thereof occurred while the same was in the possession of respondent Sunfreight
Forwarders.12 Hence, petitioner Keihin-Everett filed a third-party complaint against the latter, who, in
turn, denied liability on the ground that it was not privy to the contract between Keihin-Everett and
Honda Trading. If at all, respondent Sunfreight Forwarders claimed that its liability cannot exceed the
₱500,000.00 fixed in its Accreditation Agreement with petitioner Keihin-Everett.13

Ruling of the RTC

On October 27, 2011, the RTC rendered a Decision finding petitioner Keihin-Everett and respondent
Sunfreight Forwarders jointly and severally liable to pay respondent Tokio Marine's claim in the sum
of ₱1,589,556.60, together with the legal interest due thereon and attorney's fees amounting to
₱100,000.00. The RTC found the driver of Sunfreight Forwarders as the cause of the evil caused.
Under Article 2180 of the Civil Code, it provides: "Employers shall be liable for the damages caused
by their employees and household helpers acting within the scope of their assigned tasks, even
though the former are not engaged in any business or industry." Thus, Sunfreight Forwarders is
hereby held liable for the loss of the subject cargoes with Keihin-Everett, being a common carrier. In
case, Keihin-Everett pays for the amount, it has a right of reimbursement from Sunfreight
Forwarders. It ruled:

In the event of loss, destruction or deterioration of the insured goods, common carriers are
responsible, unless they can prove that the loss, destruction or deterioration was brought about by
the causes specified in Article 1734 of the Civil Code. In all other cases, they are presumed to have
been at fault or to have acted negligently, unless they prove that they observed extraordinary
diligence (Aboitiz Shipping Corporation v. [New] India Assurance Company, Ltd., G.R. No. 156978,
August 24, 2007). And, hijacking of [a] carrier's truck is not one of those included as exempting
circumstance under Art. 1374 (De Guzman v. Court of Appeals, 168 SCRA 612). Thus, [Keihin-
Everett] and [Sunfreight Forwarders] are crystal clear liable for the loss of the subject cargo.14

Keihin-Everett moved for reconsideration of the foregoing RTC Decision. However, its motion was
denied for lack of merit by the RTC in its Order dated March 8, 2012. Hence, Keihin-Everett filed an
appeal with the CA.

Ruling of the CA

In the now appealed Decision dated April 8, 2014, the CA modified the ruling of the RTC insofar as
the solidary liability of Keihin-Everett and Sunfreight Forwarders is concerned. The CA went to rule
that solidarity is never presumed. There is solidary liability when the obligation so states, or when the
law or the nature of the obligation requires the same. Thus, because of the lack of privity between
Honda Trading and Sunfreight Forwarders, the latter cannot simply be held jointly and severally
liable with Keihin-Everett for Tokio Marine's claim as subrogee. In view of the Accreditation
Agreement between Keihin-Everett and Sunfreight Forwarders, the former possesses a right of
reimbursement against the latter for so much of what Keihin-Everett has paid to Tokio Marine. The
dispositive portion of the CA Decision reads as follows:

WHEREFORE, premises considered, the appealed October 27, 2011 Decision is MODIFIED to hold
Keihin-Everett liable for Tokio Marine's claim in the sum of ₱1,589,556.60, with right of
reimbursement from Sunfreight Forwarders. Keihin-Everett is likewise found solely liable for the
attorney's fees the RTC awarded in favor of Tokio Marine. The rest is AFFIRMED in toto.
SO ORDERED.15

Dissatisfied with the CA Decision, petitioner Keihin-Everett filed the instant petition with this Court.

The Issue

The main issue for consideration is whether or not the CA erred in affirming with modification the
Decision of the RTC dated October 27, 2011 holding petitioner Keihin-Everett liable to respondent
Tokio Marine.

Petitioner Keihin-Everett ascribed errors on the part of the CA (a) in considering the documents
presented at the trial even if the same were not attached and made integral parts of the complaint in
violation of Section 7, Rule 8 of the Rules of Court; (b) in upholding the RTC's failure to dismiss the
complaint albeit the plaintiff is not the real party in interest and has no capacity to sue; (c) in ruling
that there was legal subrogation; and (d) in affirming the petitioner's liability despite overwhelming
evidence showing that the damaged cargoes were in the custody of Sunfreight Forwarders at the
time they were lost.16

Ruling

Keihin-Everett's arguments will be resolved in seriatim.

First. Keihin-Everett argued that the case should have been dismissed for failure of Tokio Marine to
attach or state in the Complaint the actionable document or the insurance policy between the insurer
and the insured, in clear violation of Section 7, Rule 8 of the 1997 Rules of Court, which states:

SEC. 7. Action or defense based on document. — Whenever an action or defense is based upon a
written instrument or document, the substance of such instrument or document shall be set forth in
the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which
shall be deemed to be a part of the pleading, or said copy may with like effect be set forth in the
pleading.

It bears to stress that failure of Tokio Marine to attach in the Complaint the contract of insurance
between the insurer (Tokio Marine) and the insured (Honda Trading) is not fatal to its cause of
action.

True, in the case of Malayan Insurance Co., Inc. v. Regis Brokerage Corp.17 relied upon by Keihin-
Everett, the Court makes it imperative for the plaintiff (whose action is predicated upon his right as a
subrogee) to attach the insurance contract in the complaint in accordance with Section 7, Rule 8 of
the 1997 Rules of Court, just so in order to establish the legal basis of the right to subrogation. The
Court ratiocinated:

Malayan's right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability
of the respondent to ABB Koppel, even though such liability will necessarily have to be established
at the trial for Malayan to recover. Because Malayan's right to recovery derives from contractual
subrogation as an incident to an insurance relationship, and not from any proximate injury to it
inflicted by the respondents, it is critical that Malayan establish the legal basis of such right to
subrogation by presenting the contract constitutive of the insurance relationship between it and ABB
Koppel. Without such legal basis, its cause of action cannot survive.
Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance
Policy. Ideally, this should have been accomplished from the moment it filed the complaint. Since the
Marine Insurance Policy was constitutive of the insurer-insured relationship from which Malayan
draws its right to subrogation, such document should have been attached to the complaint itself, as
provided for in Section 7, Rule 8 of the 1997 Rules of Civil Procedure.18

However, in the aforesaid case, the Court did not suggest an outright dismissal of a complaint in
case of failure to attach the insurance contract in the complaint. Promoting a reasonable
construction of the rules so as not to work injustice, the Court makes it clear that failure to comply
with the rules does not preclude the plaintiff to offer it as evidence. Thus:

It may be that there is no specific provision in the Rules of Court which prohibits the admission in
evidence of an actionable document in the event a party fails to comply with the requirement of the
rule on actionable documents under Section 7, Rule 8.19

Unfortunately, in the Malayan case cited by Keihin-Everett, Malayan not only failed to attach or set
forth in the complaint the insurance policy, it likewise did not present the same as evidence before
the trial court or even in the CA. As the Court metaphorically described, the very insurance contract
emerges as the white elephant in the room — an obdurate presence which everybody reacts to, yet
legally invisible as a matter of evidence since no attempt had been made to prove its corporeal
existence in the court of law.20 Hence, there was sufficient reason for the Court to dismiss the case
for it has no legal basis from which to consider the pre-existence of an insurance contract between
Malayan and ABB Koppel and the former's right of subrogation.

The instant case cannot be dismissed just like that. Unlike in the Malayan case, Tokio Marine
presented as evidence, not only the Honda Trading Insurance Policy, but also the Subrogation
Receipt evidencing that it paid Honda Trading the sum of US$38,855.83 in full settlement of the
latter's claim under Policy No. 83-00143689. During the trial, Keihin-Everett even had the opportunity
to examine the said documents and conducted a cross-examination of the said Contract of
Insurance.21 By presenting the insurance policy constitutive of the insurance relationship of the
parties, Tokio Marine was able to confirm its legal right to recover as subrogee of Honda Trading.

Second. Keihin-Everett insisted that Tokio Marine is not the insurer but TMNFIC, hence, it argued
that Tokio Marine has no right to institute the present action. As it pointed out, the Insurance Policy
shows in its face that Honda Trading procured the insurance from TMNFIC and not from Tokio
Marine.

While this assertion is true, Insurance Policy No. 83-00143689 itself expressly made Tokio Marine
as the party liable to pay the insurance claim of Honda Trading pursuant to the Agency Agreement
entered into by and between Tokio Marine and TMNFIC. As properly appreciated by both the RTC
and the CA, the Agency Agreement shows that TMNFIC had subsequently changed its name to that
of Tokio Marine.22 By agreeing to this stipulation in the Insurance Policy, Honda Trading binds itself
to file its claim from Tokio Marine and thereafter to accept payment from it.

At any rate, even if we consider Tokio Marine as a third person who voluntarily paid the insurance
claims of Honda Trading, it is still entitled to be reimbursed of what it had paid. As held by this Court
in the case of Pan Malayan Insurance Corp. v. Court of Appeals,23 the insurer who may have no
rights of subrogation due to "voluntary" payment may nevertheless recover from the third party
responsible for the damage to the insured property under Article 123624 of the Civil Code. Under this
circumstance, Tokio Marine's right to sue is based on the fact that it voluntarily made payment in
favor of Honda Trading and it could go after the third party responsible for the loss (Keihin-Everett) in
the exercise of its legal right of subrogation.
Setting aside this assumption, Tokio Marine nonetheless was able to prove by the following
documentary evidence, such as Insurance Policy, Agency Agreement and Subrogation Receipt, their
right to institute this action as subrogee of the insured. Keihin-Everett, on the other hand, did not
present any evidence to contradict Tokio Marine's case.

Third. Since the insurance claim for the loss sustained by the insured shipment was paid by Tokio
Marine as proven by the Subrogation Receipt – showing the amount paid and the acceptance made
by Honda Trading, it is inevitable that it is entitled, as a matter of course, to exercise its legal right to
subrogation as provided under Article 2207 of the Civil Code as follows:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury.

It must be stressed that the Subrogation Receipt only proves the fact of payment. This fact of
payment grants Tokio Marine subrogatory right which enables it to exercise legal remedies that
would otherwise be available to Honda Trading as owner of the hijacked cargoes as against the
common carrier (Keihin-Everett). In other words, the right of subrogation accrues simply upon
payment by the insurance company of the insurance claim.25 As the Court held:

The payment by the insurer to the insured operates as an equitable assignment to the insurer of all
the remedies which the insured may have against the third party whose negligence or wrongful act
caused the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity
of contract or upon payment by the insurance company of the insurance claim. It accrues simply
upon payment by the insurance company of the insurance claim.26

Indeed, the right of subrogation has its roots in equity.27 It is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who, in
justice and good conscience, ought to pay.28 Consequently, the payment made by Tokio Marine to
Honda Trading operates as an equitable assignment to the former of all the remedies which the
latter may have against Keihin-Everett.

Finally. Keihin-Everett maintained that at the time when the cargoes were lost, it was already in the
custody of Sunfreight Forwarders. Notwithstanding that the cargoes were in the possession of
Sunfreight Forwarders when they were hijacked, Keihin-Everett is not absolved from its liability as a
common carrier. Keihin-Everett seems to have overlooked that it was the one whose services were
engaged by Honda Trading to clear and withdraw the cargoes from the pier and to transport and
deliver the same to its warehouse. In turn, Keihin-Everett accredited Sunfreight Forwarders to render
common carrier service for it by transporting inland goods. As correctly held by the CA, there was no
privity of contract between Honda Trading (to whose rights Tokio Marine was subrogated) and
Sunfreight Forwarders. Hence, Keihin-Everett, as the common carrier, remained responsible to
Honda Trading for the lost cargoes.

In this light, Keihin-Everett, as a common carrier, is mandated to observe, under Article 1733 of the
Civil Code, extraordinary diligence in the vigilance over the goods it transports according to all the
circumstances of each case. In the event that the goods are lost, destroyed or deteriorated, it is
presumed to have been at fault or to have acted negligently, unless it proves that it observed
extraordinary diligence.29 To be sure, under Article 1736 of the Civil Code, a common carrier's
extraordinary responsibility over the shipper's goods lasts from the time these goods are
unconditionally placed in the possession of, and received by, the carrier for transportation, until they
are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a
right to receive them. Hence, at the time Keihin-Everett turned over the custody of the cargoes to
Sunfreight Forwarders for inland transportation, it is still required to observe extraordinary diligence
in the vigilance of the goods. Failure to successfully establish this carries with it the presumption of
fault or negligence, thus, rendering Keihin-Everett liable to Honda Trading for breach of contract.

It bears to stress that the hijacking of the goods is not considered a fortuitous event or a force
majeure.30 Nevertheless, a common carrier may absolve itself of liability for a resulting loss caused
by robbery or hijacked if it is proven that the robbery or hijacking was attended by grave or
irresistible threat, violence or force.31 In this case, Keihin-Everett failed to prove the existence of the
aforementioned instances.

We likewise agree with the CA that the liability of Keihin-Everett and Sunfreight Forwarders are not
solidary. There is solidary liability only when the obligation expressly so states, when the law so
provides, or when the nature of the obligation so requires.32 Thus, under Article 2194 of the Civil
Code, liability of two or more persons is solidary in quasi-delicts. But in this case, Keihin-Everett's
liability to Honda Trading (to which Tokio Marine had been subrogated as an insurer) stemmed not
from quasi-delict, but from its breach of contract of carriage. Sunfreight Forwarders was only
impleaded in the case when Keihin-Everett filed a third-party complaint against it. As mentioned
earlier, there was no direct contractual relationship between Sunfreight Forwarders and Honda
Trading. Accordingly, there was no basis to directly hold Sunfreight Forwarders liable to Honda
Trading for breach of contract. If at all, Honda Trading can hold Sunfreight Forwarders for quasi-
delict,33 which is not the action filed in the instant case.

It is not expected however that Keihin-Everett must shoulder the entire loss. The case of Torres-
Madrid Brokerage, Inc. v. FEB Mitsui Marine Insurance Co., Inc.34 is instructive. The said case
involves a similar set of facts as that of the instant case such that the shipper (Sony) engaged the
services of common carrier (TMBI), to facilitate the release of its shipment and deliver the goods to
its warehouse, who, in turn, subcontracted a portion of its obligation to another common carrier
(BMT). The Court ruled:

We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to BMT,
TMBI entered into its own contract of carriage with a fellow common carrier.

The cargo was lost after its transfer to BMT's custody based on its contract of carriage with TMBI.
Following Article 1735, BMT is presumed to be at fault. Since BMT failed to prove that it
observed extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI for
breach of their contract of carriage.

In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of carriage.
In turn, TMBI is entitled to reimbursement from BMT due to the latter's own breach of its contract of
carriage with TMBI. x x x35

In the same manner, Keihin-Everett has a right to be reimbursed based on its Accreditation
Agreement with Sunfreight Forwarders. By accrediting Sunfreight Forwarders to render common
carrier services to it, Keihin-Everett in effect entered into a contract of carriage with a fellow common
carrier, Sunfreight Forwarders.

It is undisputed that the cargoes were lost when they were in the custody of Sunfreight Forwarders.
Hence, under Article 173536 of the Civil Code, the presumption of fault on the part of Sunfreight
Forwarders (as common carrier) arose. Since Sunfreight Forwarders failed to prove that it observed
extraordinary diligence in the performance of its obligation to Keihin-Everett, it is liable to the latter
for breach of contract. Consequently, Keihin-Everett is entitled to be reimbursed by Sunfreight
Forwarders due to the latter's own breach occasioned by the loss and damage to the cargoes under
its care and custody. As with the cited Torres-Madrid Brokerage case, Sunfreight Forwarders, too,
has the option to absorb the loss or to proceed after its missing driver, the suspect in the hijacking
incident.37

As to the award of attorney's fees, the same is likewise in order as Tokio Marine was clearly
compelled to litigate to protect its interest.38 Attorney's fees are allowed in the discretion of the court
after considering several factors which are discernible from the facts brought out during the trial.39 In
this case, Tokio Marine was compelled to litigate brought about by Keihin-Everett's obstinate refusal
to pay the former's valid claim.

WHEREFORE, the Decision dated April 8, 2014 of the Court of Appeals in CA-G.R. No. CV No.
98672 is AFFIRMED.

SO ORDERED.
 G.R. No. 207526, October 03, 2018

THE INSULAR ASSURANCE CO., LTD., Petitioner, v. THE HEIRS OF JOSE H. ALVAREZ, Respondents.

G.R. No. 210156, October 3, 2018

UNION BANK OF THE PHILIPPINES, Petitioner, v. HEIRS OF JOSE H. ALVAREZ, Respondents.

DECISION

LEONEN, J.:

The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to concealment, but
not so in cases of rescission due to false representations. When an abundance of available documentary
evidence can be referenced to demonstrate a design to defraud, presenting a singular document with an
erroneous entry does not qualify as clear and convincing proof of fraudulent intent. Neither does belatedly
invoking just one other document, which was not even authored by the alleged miscreant.

This resolves the consolidated Petitions for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil
Procedure. The first, docketed as G.R. No. 207526,1 was brought by The Insular Life Assurance Co., Ltd.
(Insular Life). The second, docketed as G.R. No. 210156,2 was brought by Union Bank of the Philippines
(UnionBank). These consolidated petitions seek the reversal of the assailed Court of Appeals May 21, 2013
Decision3 and November 6, 2013 Resolution4 in CA-G.R. CV No. 91820.

The assailed Court of Appeals May 21, 2013 Decision denied Insular Life's and UnionBank's separate appeals
and affirmed the January 29, 2007 Decision5 of Branch 148, Regional Trial Court, Makati City. The Regional
Trial Court ruled in favor of Jose H. Alvarez's (Alvarez) heirs6 (the Heirs of Alvarez) in their action for specific
performance against Insular Life and UnionBank. It ordered compliance with the insurance undertaking on
the Group Mortgage Redemption Insurance covering a loan obtained by Alvarez from UnionBank by applying
its proceeds as payment for that loan. It also nullified the extrajudicial foreclosure ensuing from the non-
payment of Alvarez's loan, and required UnionBank to reconvey title and ownership over the foreclosed
property to Alvarez's estate. Lastly, it ordered Insular Life's and UnionBank's payment of attorney's fees and
costs of suit.7

The assailed Court of Appeals November 6, 2013 Resolution denied UnionBank's Motion for Reconsideration.8

Alvarez and his wife, Adelina, owned a residential lot with improvements covered by Transfer Certificate of
Title (TCT) No. C-315023 and registered in the Caloocan City Registry of Deeds.9

On June 18, 1997, Alvarez applied for and was granted a housing loan by UnionBank in the amount of
P648,000.00. This loan was secured by a promissory note,10 a real estate mortgage over the lot,11 and a
mortgage redemption insurance taken on the life of Alvarez with UnionBank as beneficiary. Alvarez was
among the mortgagors included in the list of qualified debtors covered by the Group Mortgage Redemption
Insurance that UnionBank had with Insular Life.12

Alvarez passed away on April 17, 1998.13 In May 1998, UnionBank filed with Insular Life a death claim under
Alvarez's name pursuant to the Group Mortgage Redemption Insurance. In line with Insular Life's standard
procedures, UnionBank was required to submit documents to support the claim. These included: (1)
Alvarez's birth, marriage, and death certificates; (2) the attending physician's statement; (3) the claimant's
statement; and (4) Alvarez's statement of account.14

Insular Life denied the claim after determining that Alvarez was not eligible for coverage as he was
supposedly more than 60 years old at the time of his loan's approval.15

With the claim's denial, the monthly amortizations of the loan stood unpaid. UnionBank sent the Heirs of
Alvarez a demand letter,16 giving them 10 days to vacate the lot. Subsequently, on October 4, 1999, the lot
was foreclosed and sold at a public auction with UnionBank as the highest bidder.17
On February 14, 2001, the Heirs of Alvarez filed a Complaint18 for Declaration of Nullity of Contract and
Damages against UnionBank, a certain Alfonso P. Miranda (Miranda), who supposedly benefitted from the
loan, and the insurer which was identified only as John Doe.19 The Heirs of Alvarez denied knowledge of any
loan obtained by Alvarez.20

The Heirs of Alvarez claimed that after Alvarez's death, they came upon a document captioned "Letter of
Undertaking," which appeared to have been sent by UnionBank to Miranda. In this document, UnionBank
bound itself to deliver to Miranda P466,000.00 of the approved P648,000.00 housing loan, provided that
Miranda would deliver to it TCT No. C-315023, "free from any liens and/or encumbrances."21

The Complaint was later amended and converted into one for specific performance22 to include a demand
against Insular Life to fulfill its obligation as an insurer under the Group Mortgage Redemption Insurance.23

In its defense, UnionBank asserted that the Heirs of Alvarez could not feign ignorance over the existence of
the loan and mortgage considering the Special Power of Attorney24 executed by Adelina in favor of her late
husband, which authorized him to apply for a housing loan with UnionBank.25

For its part, Insular Life maintained that based on the documents submitted by UnionBank, Alvarez was no
longer eligible under the Group Mortgage Redemption Insurance since he was more than 60 years old when
his loan was approved.26

In its January 29, 2007 Decision,27 the Regional Trial Court ruled in favor of the Heirs of Alvarez. It found no
indication that Alvarez had any fraudulent intent when he gave UnionBank information about his age and
date of birth. It explained that UnionBank initiated and negotiated the Group Mortgage Redemption
Insurance with Insular Life, and that "ordinary customers will not know about [insurance policies such as
this] unless it is brought to their knowledge by the bank."28 It noted that if UnionBank's personnel were
mindful of their duties and if Alvarez appeared to be disqualified for the insurance, they should have
immediately informed him of his disqualification. It emphasized that in evaluating Alvarez's worthiness for
the loan, UnionBank had been in possession of materials sufficient to inform itself of Alvarez's personal
circumstances. It added that if Insular Life had any doubt on the information that UnionBank had provided,
it should have inquired further instead of relying solely on the information readily available to it and
immediately refusing to pay.29

The dispositive portion of the Regional Trial Court's January 29, 2007 Decision read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against
defendants order (sic):

1. Defendants to comply with the insurance undertaking under Mortgage Redemption Insurance Policy No.
G-098496 by paying its proceeds to be applied as payment of the outstanding loan obligation of deceased
Jose H. Alvarez with defendant Union Bank;

2. The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 a
nullity and without legal force and effect and to release the mortgage encumbrance thereon;

3. Defendant Union Bank to reconvey the title and ownership over TCT No. C-315023 to the Estate of the
deceased Jose H. Alvarez for the benefit of his heirs and successors-in-interest;

4. Defendants jointly and severally to pay the plaintiffs the sum of P50,000.00 as and for attorney's fees;

5. Defendants jointly and severally to pay the costs of the suit.

SO ORDERED.30

UnionBank31 and Insular Life32 filed separate appeals before the Court of Appeals.
In its assailed May 21, 2013 Decision,33 the Court of Appeals affirmed the Regional Trial Court's ruling. It
noted that the errors assigned by Insular Life and UnionBank to the Regional Trial Court boiled down to the
issue of whether or not Alvarez was guilty of fraudulent misrepresentation as to warrant the rescission of the
Group Mortgage Redemption Insurance obtained by UnionBank on Alvarez's life. It explained that fraud is
never presumed and fraudulent misrepresentation as a defense of the insurer to avoid liability must be
established by convincing evidence. Insular Life, in this case, failed to establish this defense. It only relied
on Alvarez's Health Statement Form where he wrote "1942" as his birth year. However, this form alone was
insufficient to prove that he fraudulently intended to misrepresent his age. It noted that aside from the
Health Statement Form, Alvarez had to fill out an application for insurance. This application would have
supported the conclusion that he consistently wrote "1942" in all the documents that he had submitted to
UnionBank. However, the records made no reference to this document.34

The Court of Appeals added that assuming that fraudulent misrepresentation entitled Insular Life to rescind
the contract, it should have first complied with certain conditions before it could exercise its right to rescind.
The conditions were:

(1) prior notice of cancellation to [the] insured; (2) notice must be based on the occurrence after effective
date of the policy of one or more grounds mentioned; (3) must be in writing, mailed or delivered to the
insured at the address shown in the policy; and (4) must state the grounds relied upon provided in Section
64 of the Insurance Code and upon [the] request of [the] insured, to furnish facts on which cancellation is
based.35

None of these conditions were fulfilled. Finally, the letter of denial dated April 8, 1999 was furnished only to
UnionBank.36

Insular Life opted to directly appeal before this Court. Its appeal was docketed as G.R. No.
207526.37 UnionBank, on the other hand, filed its Motion for Reconsideration (of the Decision dated May 21,
2013),38 which the Court of Appeals denied in its November 6, 2013 Resolution.39 UnionBank then filed
before this Court its Petition, docketed as G.R. No. 210156.40

In its March 12, 2014 Resolution, this Court consolidated Insular Life's and UnionBank's Petitions.41

In response to the Court of Appeals' reasoning that intent to defraud must be established, Insular Life
pinpoints concealment, rather than fraudulent misrepresentation, as the key to the validity of its rescission.
It asserts that Alvarez's concealment of his age, whether intentional or unintentional, entitles it to rescind
the insurance contract.42 It claims that proof of fraudulent intent is not necessary for the insurer to rescind
the contract on account of concealment.43 It adds that it did not rely solely on Alvarez's Health Statement
Form but also on his representations during the background check conducted by UnionBank where he said
that he was only 55 years old at the time of application. As an insurance contract is a contract uberrima
fides, it claims that it has every right to rely on Alvarez's good faith in its dealing with him.44

UnionBank claims that the real estate mortgage is not affected by the status of the Group Mortgage
Redemption Insurance as they are two (2) different contracts. Thus, any concealment made by Alvarez
should not result in the invalidation of the foreclosure.45

For this Court's resolution are the following issues:

First, whether or not petitioner The Insular Life Assurance Co., Ltd. is obliged to pay Union Bank of the
Philippines the balance of Jose H. Alvarez's loan given the claim that he lied about his age at the time of the
approval of his loan; and

Second, whether or not petitioner Union Bank of the Philippines was correct in proceeding with the
foreclosure following Insular Life Assurance Co., Ltd.'s refusal to pay.

I.A

Fraud is not to be presumed, for "otherwise, courts would be indulging in speculations and
surmises."46 Moreover, it is not to be established lightly. Rather, "[i]t must be established by clear and
convincing evidence . . . [; a] mere preponderance of evidence is not even adequate to prove
fraud."47 These precepts hold true when allegations of fraud are raised as grounds justifying the invalidation
of contracts, as the fraud committed by a party tends to vitiate the other party's consent.48

Citing Section 27 of the Insurance Code, however, Insular Life asserts that in cases of rescission due to
concealment, i.e., when a party "neglect[s] to communicate that which [he or she] knows and ought to
communicate,"49 proof of fraudulent intent is not necessary.50

Section 27 reads:

Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a
contract of insurance. (Emphasis supplied)

The statutory text is unequivocal. Insular Life correctly notes that proof of fraudulent intent is unnecessary
for the rescission of an insurance contract on account of concealment.

This is neither because intent to defraud is intrinsically irrelevant in concealment, nor because concealment
has nothing to do with fraud. To the contrary, it is because in insurance contracts, concealing material
facts51 is inherently fraudulent: "if a material fact is actually known to the [insured], its concealment must of
itself necessarily be a fraud."52 When one knows a material fact and conceals it, "it is difficult to see how the
inference of a fraudulent intent or intentional concealment can be avoided."53 Thus, a concealment,
regardless of actual intent to defraud, "is equivalent to a false representation."54

This Court has long settled this equivalence. Argente v. West Coast Life Insurance,55 quoting heavily from
Joyce's The Law of Insurance, explained how concealment of material facts in insurance contracts is
tantamount to causal fraud,56 deceptively inducing an insurer into "accepting the risk, or accepting it at the
rate of premium agreed upon."57Argente explained:

One ground for the rescission of a contract of insurance under the Insurance Act is "a concealment," which
in section 25 is defined as "A neglect to communicate that which a party knows and ought to communicate."
Appellant argues that the alleged concealment was immaterial and insufficient to avoid the policy. We
cannot agree. . . . If the policy was procured by fraudulent representations, the contract of insurance
apparently set forth therein was never legally existent. It can fairly be assumed that had the true facts been
disclosed by the assured, the insurance would never have been granted.

In Joyce, The Law of Insurance, second edition, volume 3, Chapter LV, is found the following:

Concealment exists where the assured has knowledge of a fact material to the risk, and honesty, good faith,
and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally
withholds the same.

Another rule is that if the assured undertakes to state all the circumstances affecting the risk, a full and fair
statement of all is required.

It is also held that the concealment must, in the absence of inquiries, be not only material, but fraudulent,
or the fact must have been intentionally withheld; so it is held under English law that if no inquiries are
made and no fraud or design to conceal enters into the concealment the contract is not avoided. And it is
determined that even though silence may constitute misrepresentation or concealment it is not of itself
necessarily so as it is a question of fact. Nor is there a concealment justifying a forfeiture where the fact of
insanity is not disclosed no questions being asked concerning the same. . . .

But it would seem that if a material fact is actually known to the assured, its concealment must of itself
necessarily be a fraud, and if the fact is one which the assured ought to know, or is presumed to know, the
presumption of knowledge ought to place the assured in the same position as in the former case with
relation to material facts; and if the jury in such cases find the fact material, and one tending to increase the
risk, it is difficult to see how the inference of a fraudulent intent or intentional concealment can be avoided.
And it is declared that if a material fact is concealed by assured it is equivalent to a false representation that
it does not exist and that the essentials are the truth of the representations whether they were intended to
mislead and did insurer accept them as true and act upon them to his prejudice. So it is decided that under
a stipulation voiding the policy for concealment or misrepresentation of any material fact or if his interest is
not truly stated or is other than the sole and unconditional ownership the facts are unimportant that insured
did not intend to deceive or withhold information as to encumbrances even though no questions were asked.
And if insured while being examined for life insurance and knowing that she had heart disease, falsely stated
that she was in good health, and though she could not read the application, it was explained to her and the
questions asked through an interpreter, and the application like the policy contained a provision that no
liability should be incurred unless the policy was delivered while the insured was in good health, the court
properly directed a verdict for the insurer, though a witness who was present at the examination testified
that the insured was not asked whether she had heart disease.

....

The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer
into accepting the risk, or accepting it at the rate of premium agreed upon; The insurer, relying upon the
belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled
into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk
upon a false basis that it does not exist. The principal question, therefore, must be, Was the assurer misled
or deceived into entering a contract obligation or in fixing the premium of insurance by a withholding of
material information or facts within the assured's knowledge or presumed knowledge?

It therefore follows that the assurer in assuming a risk is entitled to know every material fact of which the
assured has exclusive or peculiar knowledge, as well as all material facts which directly tend to increase the
hazard or risk which are known by the assured, or which ought to be or are presumed to be known by him.
And a concealment of such facts vitiates the policy. "It does not seem to be necessary . . . that the . . .
suppression of the truth should have been willful." If it were but an inadvertent omission, yet if it were
material to the risk and such as the plaintiff should have known to be so, it would render the policy void. But
it is held that if untrue or false answers are given in response to inquiries and they relate to material facts
the policy is avoided without regard to the knowledge or fraud of assured, although under the statute
statements are representations which must be fraudulent to avoid the policy. So under certain codes the
important inquiries are whether the concealment was willful and related to a matter material to the
risk.58 (Emphasis supplied)

Echoing Argente, Saturnino v. Philippine American Life Insurance Co.59 stated:

In this jurisdiction, a concealment, whether intentional or unintentional, entitles the insurer to rescind the
contract of insurance, concealment being defined as "negligence to communicate that which a party knows
and ought to communicate" (Sections 25 & 26, Act No. 2427). In the case of Argente vs. West Coast Life
Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law of Insurance, 2nd ed. Vol. 3:

The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer
into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the
belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled
into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk
upon a false basis that it does not exist.60

In Vda. de Canilang v. Court of Appeals,61 this Court considered an alternative version of Section 27, i.e.,
prior to the Insurance Code's amendment by Batas Pambansa Blg. 874, which omitted the qualifier "whether
intentional or unintentional." Vda. de Canilang clarified that even without this qualifier, Section 27 still
covers '"any concealment' without regard to whether such concealment is intentional or
unintentional,"62 thus:

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to
the insurer was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering
from minor ailment like a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974
up to 1985, that is, throughout the time range material for present purposes, provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract
of insurance.

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P. Blg. 874. This subsequent
statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract
of insurance.

The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase
"intentional or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874)
intended to limit the kinds of concealment which generate a right to rescind on the part of the injured party
to "intentional concealments." This argument is not persuasive. As a simple matter of grammar, it may be
noted that "intentional" and "unintentional" cancel each other out. The net result therefore of the phrase
"whether intentional or unintentional" is precisely to leave unqualified the term "concealment." Thus, Section
27 of the Insurance Code of 1978 is properly read as referring to "any concealment" without regard to
whether such concealment is intentional or unintentional. The phrase "whether intentional or unintentional"
was in fact superfluous. The deletion of the phrase "whether intentional or unintentional" could not have had
the effect of imposing an affirmative requirement that a concealment must be intentional if it is to entitle the
injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase
"whether intentional or unintentional" merely underscored the fact that all throughout (from 1914 to 1985),
the statute did not require proof that concealment must be "intentional" in order to authorize rescission by
the injured party.63 (Emphasis supplied)

Following Vda. de Canilang, this Court was categorical in Sunlife Assurance Co. of Canada v. Court of
Appeals:64 '"good faith' is no defense in concealment."65

I.B

It does not escape this Court's attention that there have been decisions that maintained that in cases of
concealment, "fraudulent intent on the part of the insured must be established to entitle the insurer to
rescind the contract."66 However, these decisions proceed from an inordinately segregated reading
of Argente and have not been heedful of plain statutory text. While focusing on the equivalence between
concealment and false representation, they fail to account for the manifest textual peculiarity whereby the
negation of distinctions between intentional and unintentional acts is found only in Section 27, the provision
concerning rescission due to concealment, but not in the counterpart provision concerning false
representations.67

Ng Gan Zee v. Asian Crusader Life,68 decided in 1983, stated:

Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party to a contract of insurance must communicate to the other, in good faith, all facts within
his knowledge which are material to the contract, and which the other has not the means of ascertaining,
and as to which he makes no warranty.

Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and honesty,
good faith, and fair dealing requires that he should communicate it to the assurer, but he designedly and
intentionally withholds the same."

It has also been held "that the concealment must, in the absence of inquiries, be not only material, but
fraudulent, or the fact must have been intentionally withheld."

Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of the
Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of the insured be
established to entitle the insurer to rescind the contract. And as correctly observed by the lower court,
"misrepresentation as a defense of the insurer to avoid liability is an 'affirmative' defense. The duty to
establish such a defense by satisfactory and convincing evidence rests upon the defendant. The evidence
before the Court does not clearly and satisfactorily establish that defense."69 (Emphasis supplied)

Ng Gan Zee makes a fundamental error in interpretation.

Ng Gan Zee's fourth footnote purports that the phrase quoted in the italicized paragraph was
from Argente.70 While the phrase indeed appears in Argente, it is not Argente itself which stated the quoted
phrase; rather, it was Joyce's The Law of Insurance.

In any case, Ng Gan Zee limited itself to a brief quote from Joyce. It discarded much of the discussion
that Argente lifted from Joyce. Most notably, it discarded the portion where Joyce explained that
concealment is necessarily fraudulent when the matter that was concealed is "a material fact . . . actually
known to the [insured]."71 Thus, Ng Gan Zee omitted the discussion explaining and accounting for why proof
of actual fraudulent intent may be dispensed with in cases of concealment, i.e., that concealment of material
facts is fraudulent in and of itself. Contrast this with Saturnino which, though also quoting only briefly
from Argente and Joyce, did not cursorily focus on the equivalence between concealment and false
representations, but rather on the underlying reason for this equivalence. Ng Gan Zee focused on the result,
i.e., equivalence, without accounting for the cause.

In like manner as Ng Gan Zee, Great Pacific Life v. Court of Appeals72 stated:

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.

....

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the
duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. In the case at
bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the
proceeds of the insurance.73 (Emphasis supplied)

So too, Philamcare Health Systems, Inc. v. Court of Appeals74 stated:

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance
contract. 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.75 (Emphasis supplied)

Great Pacific Life and Philamcare perpetuate Ng Gan Zee's unfortunate error.

Of the two (2) paragraphs this Court quoted from Great Pacific Life, the first cites Argente.76 Much like Ng
Gan Zee, it quotes an isolated portion of Joyce but fails to account for that part of Joyce's discussion that
explains how fraud inheres in concealment. The last sentence in this first quoted paragraph merely
reproduces the first paragraph that Argente lifted from Joyce. The second quoted paragraph cites Ng Gan
Zee77 and confounds concealment with misrepresentation.

The first sentence of the quoted paragraph from Philamcare cites Great Pacific Life and Ng Gan Zee.78 At this
juncture, a contagion of Ng Gan Zee's error can be observed.

More than misreading Argente and Joyce, Ng Gan Zee, Great Pacific Life, and Philamcare contradict Section
27's plain text. The statute's clear and unmistakable text must prevail. For purposes of rescission, Section
27 of the Insurance Code unequivocally negates any distinction between intentional and unintentional
concealments. Pronouncements in jurisprudence cannot undermine this explicit legislative intent.
 I.C

While Insular Life correctly reads Section 27 as making no distinction between intentional and unintentional
concealment, it erroneously pleads Section 27 as the proper statutory anchor of this case.

The Insurance Code distinguishes representations from concealments. Chapter 1, Title 4 is on concealments.
It spans Sections 26 to 35 of the Insurance Code;79 it is where Section 27 is found. Chapter 1, Title 5 is on
representations. It spans Sections 36 to 48 of the Insurance Code.80

Section 26 defines concealment as "[a] neglect to communicate that which a party knows and ought to
communicate." However, Alvarez did not withhold information on or neglect to state his age. He made an
actual declaration and assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance Code
states, "A representation is to be deemed false when the facts fail to correspond with its assertions or
stipulations." If indeed Alvarez misdeclared his age such that his assertion fails to correspond with his
factual age, he made a false representation, not a concealment.

At no point does Chapter 1, Title 5 of the Insurance Code replicate Section 27's language negating the
distinction between intentional and unintentional concealment. Section 45 is Chapter 1, Title 5's counterpart
provision to Section 27, and concerns rescission due to false representations. It reads:

Section 45. If a representation is false in a material point, whether affirmative or promissory, the injured
party is entitled to rescind the contract from the time when the representation becomes false.

Not being similarly qualified as rescission under Section 27, rescission under Section 45 remains subject to
the basic precept of fraud having to be proven by clear and convincing evidence. In this respect, Ng Gan
Zee's and similar cases' pronouncements on the need for proof of fraudulent intent in cases of
misrepresentation are logically sound, albeit the specific reference to Argente as ultimate authority is
misplaced. Thus, while Great Pacific Life confounded concealment with misrepresentation by its citation
of Ng Gan Zee, it nevertheless acceptably stated that:

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the
duty to establish such defense by satisfactory and convincing evidence rests upon the insurer.81

Conformably, subsequent fraud cases citing Great Pacific Life which do not exclusively concern concealment
rightly maintain that "[f]raudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract."82 To illustrate, Manila Bankers Life Insurance Corp. v. Aban83 was correct in
explaining:

With the above crucial finding of fact — that it was Sotero who obtained the insurance for herself —
petitioner's case is severely weakened, if not totally disproved. Allegations of fraud, which are predicated on
respondent's alleged posing as Sotero and forgery of her signature in the insurance application, are at once
belied by the trial and appellate courts' finding that Sotero herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract." In the absence of proof of such fraudulent intent, no right to rescind arises.84

Concealment applies only with respect to material facts. That is, those facts which by their nature would
clearly, unequivocally, and logically be known by the insured as necessary for the insurer to calculate the
proper risks.

The absence of the requirement of intention definitely increases the onus on the insured. Between the
insured and the insurer, it is true that the latter may have more resources to evaluate risks. Insurance
companies are imbued with public trust in the sense that they have the obligation to ensure that they will be
able to provide succor to those that enter into contracts with them by being both frugal and, at the same
time, diligent in their assessment of the risk which they take with every insurance contract. However, even
with their tremendous resources, a material fact concealed by the insured cannot simply be considered by
the insurance company. The insurance company may have huge resources, but the law does not require it to
be omniscient.

On the other hand, when the insured makes a representation, it is incumbent on them to assure themselves
that a representation on a material fact is not false; and if it is false, that it is not a fraudulent
misrepresentation of a material fact. This returns the burden to insurance companies, which, in general,
have more resources than the insured to check the veracity of the insured's beliefs as to a statement of fact.
Consciousness in defraudation is imperative and it is for the insurer to show this.

There may be a mistaken impression, on the part of the insured, on the extent to which precision on one's
age may alter the calculation of risks with definitiveness. Deliberation attendant to an apparently inaccurate
declaration is vital to ascertaining fraud.

I.D

Spouses Manalo v. Roldan-Confesor85 explained what qualifies as clear and convincing proof:

Clear and convincing proof is ". . . more than mere preponderance, but not to extent of such certainty as is
required beyond reasonable doubt as in criminal cases . . ."while substantial evidence ". . . consists of more
than a mere scintilla of evidence but may be somewhat less than a preponderance . . ." Consequently, in the
hierarchy of evidentiary values, We find proof beyond reasonable doubt at the highest level, followed by
clear and convincing evidence, preponderance of evidence, and substantial evidence, in that order.86

The assailed Court of Appeals May 21, 2013 Decision discussed the evidentiary deficiency in Insular Life's
cause, i.e., how it relied on nothing but a single piece of evidence to prove fraudulent intent:

At bar, Insular Life basically relied on the Health Statement form personally accomplished by Jose Alvarez
wherein he wrote that his birth year was 1942. However, such form alone is not sufficient absent any other
indications that he purposely wrote 1942 as his birth year. It should be pointed out that, apart from a health
statement form, an application for insurance is required first and foremost to be answered and filled-up.
However, the records are deficient of this application which would eventually depict to Us Jose Alvarez's
fraudulent intent to misrepresent his age. For, if he continually written (sic) 1942 in all the documents he
submitted with UBP and Insular Life then there is really a clear precursor of his fraudulent intent. Otherwise,
a mere Health Statement form bearing a wrong birth year should not be relied at.

As aptly pointed out by the court a quo:

....

If the defendant Insular Life had any doubt about the information, particularly the data which are material to
the risk, such as the age of the insured, which defendant Union Bank provided, it is not justified for the
insurer to rely solely therefrom, but it is obligated under the circumstances to make further inquiry. . . .87

The Court of Appeals' observations are well-taken. Consistent with the requirement of clear and convincing
evidence, it was Insular Life's burden to establish the merits of its own case. Relative strength as against
respondents' evidence does not suffice.

A single piece of evidence hardly qualifies as clear and convincing. Its contents could just as easily have
been an isolated mistake.

Alvarez must have accomplished and submitted many other documents when he applied for the housing
loan and executed supporting instruments like the promissory note, real estate mortgage, and Group
Mortgage Redemption Insurance. A design to defraud would have demanded his consistency. He needed to
maintain appearances across all documents. Otherwise, he would doom his own ruse.

He needed to have been consistent, not only before Insular Life, but even before UnionBank. Even as it was
only Insular Life's approval that was at stake with the Group Mortgage Redemption Insurance, Alvarez must
have realized that as it was an accessory agreement to his housing loan with UnionBank. Insular Life was
well in a position to verify information, whether through simple cross referencing or through concerted
queries with UnionBank.

Despite these circumstances, the best that Insular Life could come up with before the Regional Trial Court
and the Court of Appeals was a single document. The Court of Appeals was straightforward, i.e., the most
basic document that Alvarez accomplished in relation to Insular Life must have been an insurance
application form. Strangely, Insular Life failed to adduce even this document—a piece of evidence that was
not only commonsensical, but also one which has always been in its possession and disposal.

Even now, before this Court, Insular Life has been unable to address the importuning for it to account for
Alvarez's insurance application form. Given the basic presumption under our rules on evidence "[t]hat
evidence willfully suppressed would be adverse if produced,"88 this raises doubts, perhaps not entirely on
Insular Life's good faith, but, at the very least, on the certainty and confidence it has in its own evidence.

Rather than demonstrate Alvarez's consistent fraudulent design, Insular Life comes before this Court
pleading nothing but just one other instance when Alvarez supposedly declared himself to have been 55
years old. It claims that it did not rely solely on Alvarez's Health Statement Form but also on his Background
Checking Report.89

Reliance on this report is problematic. It was not prepared by Alvarez himself. Rather, it was accomplished
by a UnionBank employee following the conduct of credit investigation. Insular Life notes a statement by
UnionBank's Josefina Barte that all information in the Background Checking Report was supplied by
Alvarez.90 But this is a self-serving statement, wholly reliant on the assumption of that employee's flawless
performance of her duty to record findings. Precisely, it is a claim that needed to be vetted. It had to be
tested under the crucible of a court trial, that is, through the rigors of presentation and authentication of
evidence, cross-examination, and personal perusal by a judge. Yet, Insular Life would now have this Court
sustain its appreciation, solely on the strength of its own representations.

An erroneous statement's dual occurrence in the Health Statement Form and the Background Checking
Report concededly reduces the likelihood of honest mistakes or overlooked inaccuracies. However, in the
context of so many other documents being available to ascertain the error, a mere dual occurrence does not
definitively establish a fraudulent scheme. This is especially so when the errors could not be directly and
exclusively attributed to a single author.

Pleading just one (1) additional document still fails to establish the consistent fraudulent design that was
Insular Life's burden to prove by clear and convincing evidence. Insular Life had all the opportunity to
demonstrate Alvarez's pattern of consistently indicating erroneous entries for his age. All it needed to do
was to inventory the documents submitted by Alvarez and note the statements he made concerning his age.
This was not a cumbersome task, yet it failed at it. Its failure to discharge its burden of proving must thwart
its plea for relief from this Court.

II

Having settled Insular Life's continuing liability under the Group Mortgage Redemption Insurance, this Court
proceeds to the matter of the propriety of UnionBank's foreclosure.

UnionBank insists that the real estate mortgage is a contract separate and distinct from the Group Mortgage
Redemption Insurance; thus, it should not be affected by the validity or invalidity of Insular Life's
rescission.91 It also cites Great Pacific Life, which it claims involves a similar set of facts as this case, and
underscores how this Court in that case did not nullify the foreclosure despite a finding that the rescission
was improper, but instead considered the foreclosure as a supervening event.92

Great Pacific Life similarly involved an insurer's rescission of a mortgage redemption insurance on account of
a supposed concealment. This Court sustained the lower courts' conclusions holding the rescission invalid
and maintaining the insurer's liability to pay the mortgage. However, this Court considered the foreclosure,
which in the interim had been completed, as a supervening event. Ruling on the basis of equity, this Court
concluded that the insurance proceeds, which should have been paid to the mortgagee, were now due to the
heirs of the insured:
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.93

Maglaque v. Planters Development Bank94 sustained a mortgagor's right to foreclose in the event of a
mortgagee's death:

[T]he rule is that a secured creditor holding a real estate mortgage has three (3) options in case of death of
the debtor. These are:

(1) to waive the mortgage and claim the entire debt from the estate of
the mortgagor as an ordinary claim;

(2) to foreclose the mortgage judicially and prove any deficiency as an

ordinary claim; and

(3) to rely on the mortgage exclusively, foreclosing the same at anytime

before it is barred by prescription, without right to file a claim for any
deficiency.95

This is in keeping with Rule 86, Section 7 of the Rules of Court, which states:

Section 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by
mortgage or other collateral security, may abandon the security and prosecute his claim in the manner
provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose
his mortgage or realize upon his security, by action in court, making the executor or administrator a party
defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the
property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his
deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or
other security alone, and foreclose the same at any time within the period of the statute of limitations, and
in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the
other assets of the estate; but nothing herein contained shall prohibit the executor or administrator from
redeeming the property mortgaged or pledged, by paying the debt for which it is held as security, under the
direction of the court, if the court shall adjudge it to be for the best interest of the estate that such
redemption shall be made.

While the mortgagee's right to proceed with foreclosure is settled, this Court finds the debacle at the heart
of this case to have been borne in large, if not equal measure, by UnionBank's oversight. UnionBank
contributed to setting in motion a course of events that culminated in the unjust foreclosure of Alvarez's
mortgaged lot. As such a contributor, its profiting from the wrongful foreclosure cannot be condoned.

The Regional Trial Court explained how UnionBank was remiss:

If at the time of the application, Jose H. Alvarez appears disqualified, and the personnel of the bank is
mindful of his duties, then the personnel of the bank will immediately tell the late Jose H. Alvarez [that] he
is not qualified. As it would appear in this case, there is nothing to show nor indicate that the late Jose H.
Alvarez exhibited any fraudulent intent when the bank was given certain data such as his age and date of
birth. The bank is already in its possession sufficient materials to inform itself regarding the true and actual
age, civil status and other personal circumstances of Jose Alvarez to merit approval of the loan applied for.
It was the same informative materials from which the defendant Union Bank lifted the data it provided the
defendant Insular Life for the consummation of the insurance contract, without which, the bank would not
have favorably approved the loan.96

These observations are well-taken.

Great Pacific Life, in considering the insurable interest involved in a mortgage redemption insurance,
discussed:

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. 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.97 (Emphasis supplied)

The Regional Trial Court was correct in emphasizing that Alvarez entered into the Group Mortgage
Redemption Insurance entirely upon UnionBank's prodding. Bank clients are generally unaware of insurance
policies such as a mortgage redemption insurance unless brought to their knowledge by a bank. The
processing of a mortgage redemption insurance was within UnionBank's regular course of business. It knew
the import of truthfully and carefully accomplished applications. To facilitate the principal contract of the
loan and its accessory obligations such as the real estate mortgage and the mortgage redemption insurance,
UnionBank completed credit appraisals and background checks. Thus, the Regional Trial Court was correct in
noting that UnionBank had been in possession of materials sufficient to inform itself of Alvarez's personal
circumstances.98

UnionBank was the indispensable nexus between Alvarez and Insular Life. Not only was it well in a position
to address any erroneous information transmitted to Insular Life, it was also in its best interest to do so.
After all, payments by the insurer relieve it of the otherwise burdensome ordeal of foreclosing a mortgage.

This is not to say that UnionBank was the consummate guardian of the veracity and accuracy of Alvarez's
representations. It is merely to say that given the circumstances, considering Insular Life's protestation over
supposedly false declarations, UnionBank was in a position to facilitate the inquiry on whether or not a
fraudulent design had been effected. However, rather than actively engaging in an effort to verify, it appears
that UnionBank stood idly by, hardly bothering to ascertain if other pieces of evidence in its custody would
attest to or belie a fraudulent scheme.

UnionBank approved Alvarez's loan and real estate mortgage, and endorsed the mortgage redemption
insurance to Insular Life. Fully aware of considerations that could have disqualified Alvarez, it nevertheless
acted as though nothing was irregular. It itself acted as if, and therefore represented that, Alvarez was
qualified. Yet, when confronted with Insular Life's challenge, it readily abandoned the stance that it had
earlier maintained and capitulated to Insular Life's assertion of fraud.

UnionBank's headlong succumbing casts doubt on its own confidence in the information in its possession.
This, in turn, raises questions on the soundness of the credit investigation and background checks it had
conducted prior to approving Alvarez' loan.

In Poole-Blunden v. Union Bank of the Philippines,99 this Court emphasized that the high degree of diligence
required of banks "equally holds true in their dealing with mortgaged real properties, and subsequently
acquired through foreclosure."100 It specifically drew attention to this requisite high degree of diligence in
relation to "[c]redit investigations [which] are standard practice for banks before approving loans."101

The foreclosure here may well be a completed intervening occurrence, but Great Pacific Life's leaning to an
irremediable supervening event cannot avail. What is involved here is not the mortgagor's medical history,
as in Great Pacific Life, which the mortgagee bank was otherwise incapable of perfectly ascertaining. Rather,
it is merely the mortgagor's age. This information was easily available from and verifiable on several
documents. UnionBank's passivity and indifference, even when it was in a prime position to enable a more
conscientious consideration, were not just a cause of Insular Life's rescission bereft of clear and convincing
proof of a design to defraud, but also, ultimately, of the unjust seizure of Alvarez's property. By this
complicity, UnionBank cannot be allowed to profit. Its foreclosure must be annulled.

WHEREFORE, the Petitions are DENIED. The assailed Court of Appeals May 21, 2013 Decision and
November 6, 2013 Resolution in CA G.R. CV No. 91820 are AFFIRMED.

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to comply with
the insurance undertaking under Mortgage Redemption Insurance Policy No. G-098496 by applying its
proceeds as payment of the outstanding loan obligation of deceased Jose H. Alvarez with respondent Union
Bank of the Philippines;

The extrajudicial foreclosure of the real estate mortgage over Jose H. Alvarez's TCT No. C-315023 is
declared null and without legal force and effect;

Petitioner Union Bank of the Philippines is ordered to reconvey the title and ownership over the lot covered
by TCT No. C-315023 to the Estate of the deceased Jose H. Alvarez for the benefit of his heirs and
successors-in-interest; and

Petitioners Union Bank of the Philippines and The Insular Life Assurance Co., Ltd. are ordered to jointly and
severally pay respondents the Heirs of Jose H. Alvarez attorney's fees and the costs of suit.

SO ORDERED.
 [ G.R. No. 194126, October 17, 2018 ]
INDUSTRIAL PERSONNEL AND MANAGEMENT SERVICES,
INC., PETITIONER, V. COUNTRY BANKERS INSURANCE
CORPORATION, RESPONDENT.

DECISION

CAGUIOA, J:

Before this Court is a Petition for Review on Certiorari[1] (Petition) under Rule 45 of
the Rules of Court filed by petitioner Industrial Personnel and Management
Services, Inc. (IPAMS) assailing the Decision[2] dated October 14, 2010 (assailed
Decision) of the Court of Appeals (CA) Eleventh Division in CA-G.R. SP No. 114683,
which reversed and set aside the following rulings:

1. the Resolution[3] dated June 26, 2007 and Order[4] dated December 4, 2007
issued by the Insurance Commission (IC);

2. the Decision[5] dated September 17, 2008 and Resolution[6] dated April 29,
2009 issued by the Department of Finance (DOF); and

3. the Decision[7] dated January 8, 2010 and Resolution[8] dated June 1, 2010
issued by the Office of the President (OP).

These issuances upheld the ruling of the IC that respondent Country Bankers
Corporation (Country Bankers) shall be subjected to disciplinary action pursuant to
Section 241 (now Section 247) and Section 247 (now Section 254) of the Insurance
Code, as amended,[9] if respondent Country Bankers does not settle the subject
claims presented by petitioner IPAMS.

The Facts and Antecedent Proceedings

As narrated by the CA in its assailed Decision, the essential facts and antecedent
proceedings of the instant case are as follows:

In 2000, Industrial Personnel and Management Services, Inc. (IPAMS) began

recruiting registered nurses for work deployment in the United States of America
(U.S.). It takes eighteen (18) to twenty four (24) months for the entire immigration
process to complete. As the process requires huge amounts of money, such
amounts are advanced [to] the nurse applicants.

By reason of the advances made to the nurse applicants, the latter were required to
post surety bond. The purpose of the bond is to guarantee the following during its
validity period: (a) that they will comply with the entire immigration process, (b)
that they will complete the documents required, and (c) that they will pass all the
qualifying examinations for the issuance of immigration visa. The Country Bankers
Insurance Corporation (Country Bankers for brevity) and IPAMS agreed to provide
bonds for the said nurses. [Under the agreement of IPAMS and Country Bankers,
the latter will provide surety bonds and the premiums therefor were paid by IPAMS
on behalf of the nurse applicants.[10]]

[The surety bonds issued specifically state that the liability of the surety
company, i.e., respondent Country Bankers, "shall be limited only to actual
damages arising from Breach of Contract by the applicant."[11]]

A Memorandum of Agreement (MOA) was executed by the said parties on February

1, 2002 [which stipulated the various requirements for collecting claims from
Country Bankers, namely:

B. REQUIREMENTS FOR CLAIM

Requirements are as follows:

SURETY BOND:

A. 1st demand letter requiring his/her to submit complete

documents.
B. 2nd Demand letter (follow up of above).
C. Affidavit stating reason of any violation to be executed by
responsible officer of Recruitment Agency;
D. Statement of Account (detailed expenses).
E. Transmittal Claim Letter.[12] (Emphasis and underscoring in the
original)]

[On the basis of the MOA, IPAMS submitted its claims under the surety bonds
issued by Country Bankers. For its part, Country Bankers, upon receipt of the
documents enumerated under the MOA, paid the claims to IPAMS.[13]] According to
IPAMS, starting 2004, some of its claims were not anymore settled by Country
Bankers.

[In 2004, Country Bankers was not able to pay six (6) claims of IPAMS. The claims
were not denied by Country Bankers, which instead asked for time within which to
pay the claims, as it alleged to be cash strapped at that time. Thereafter, the
number of unpaid claims increased. By February 16, 2007, the total amount of
unpaid claims was P11,309,411.56.

IPAMS took the matter up with the General Manager of Country Bankers, Mr.
Ignacio Ong (Ong). In response, Country Bankers, through its letter[14] dated
November 14, 2005 signed by Mr. Ong, acknowledged the obligations of Country
Bankers, apologized for the delay in the payment of claims, and proposed to
amortize the settlement of claims by paying a semi-monthly amount of
P850,000.00. In addition, Country Bankers promised to pay future claims within a
ninety (90)-day period. That commitment made by Country Bankers was not
fulfilled and IPAMS had to deal with Country Bankers' new General Manager, Ms.
Tess Valeriano (Valeriano). Ms. Valeriano assured IPAMS that the obligations of
Country Bankers would be paid promptly.

However, the counsel of Country Bankers, Atty. Marisol Caleja, started to oppose
the payment of claims and insisted on the production of official receipts of IPAMS
on the expenses it incurred for the application of nurses. IPAMS opposed this,
saying that the Country Bankers' insistence on the production of official receipts
was contrary to, and not contemplated in, the MOA and was an impossible condition
considering that the U.S. authorities did not issue official receipts. In lieu of official
receipts, IPAMS submitted statements of accounts, as provided in the MOA.[15]]

Then, [in a letter[16] dated August 22, 2006,] Country Bankers limited the authority
of its agent [assigned to the accounts of IPAMS,] Mr. Jaime C. Lacaba [(Lacaba),]
to transact business with IPAMS.

[Due to the unwillingness of Country Bankers to settle the claims of IPAMS, the
latter sought the intervention of the IC, through a letter-complaint dated February
9, 2007.[17] ]

Country Bankers on the other hand alleged that until the third quarter of 2006, it
never received any complaint from IPAMS. Due to remarkable high loss ratio of
IPAMS, the latter's accounts were evaluated and audited by the Country Bankers.
The IPAMS was informed of the same problem. Instead of complying with the
requirements for claim processes, IPAMS insisted that the supporting documents
cannot be produced.

[The] [c]ontending parties went to a series of conferences to settle the differences

but to no avail. The [IC] therefore ordered the parties to submit [their] respective
Position Papers.[18] On June 26, 2007, the Claims Division of the [IC] [issued] a
[R]esolution[19] declaring the following:

"IN VIEW OF THE FOREGOING, this Commission believes and so holds that there
is no ground for the refusal of CBIC to pay the claims of IPAMS. Its failure to settle
the claim after having entered into an Agreement with the complainant, IPAMS,
demonstrates respondent's bad faith in the fulfillment of their obligation, to the
prejudice of the complainant.

Accordingly, we find the insurance company liable to settle the subject claim
otherwise, this Commission shall be constrained to take disciplinary action pursuant
to Sections 241 and 247 of the Insurance Code, as amended." (Underscoring
supplied)

The move by Country Bankers to reconsider the above resolution was denied by the
[IC] in an [O]rder[20] dated December 4, 2007.
Country Bankers made an appeal before the [DOF]. The [DOF] decided to affirm the
assailed orders of the [IC]. The dispositive portion of the said [D]ecision[21] [dated
September 30, 2008] reads:

"WHEREFORE, foregoing premises considered, the questioned Resolution of the

Commission dated June 26, 2007, as reiterated in its Order dated December 7,
2007, is hereby AFFIRMED and that the same be implemented in accordance with
Sec. 241, in relation to Sec. 247 of the Insurance Code and other pertinent rules
and regulations on the matter."

A motion to reconsider the x x x aforementioned decision was filed but was denied
[by the DOF in its Resolution[22] dated] April 29, 2009.

On appeal to the [OP], the ruling of the [DOF] was affirmed in a

[D]ecision[23] docketed as O.P. Case No. 09-E-190 and dated January 8, 2010[:

WHEREFORE, herein appeal is DISMISSED for lack of merit. The Decision of the
Secretary of Finance dated September 17, 2008 and its Resolution dated April 29,
2009 are hereby AFFIRMED.][24]

A subsequent motion to reconsider the same was denied by the said office in its
[R]esolution[25] dated June 1, 2010.

Hence, [the] instant [P]etition [for Review filed by respondent Country Bankers
before the CA under Rule 43 of the Rules of Court.][26]

The Ruling of the CA

In its assailed Decision, the CA granted the Rule 43 Petition filed by respondent
Country Bankers, reversing and setting aside the rulings of the IC, DOF, and OP,
the dispositive portion of which states:

WHEREFORE, premises considered, the petition is GRANTED and the following

issuances are hereby REVERSED and SET ASIDE:

1. June 1, 2010 decision of the Office of the President in O.P. Case No.
09-E-190;
2. January 8, 2010 decision of the Office of the President in O.P. Case No.
09-E-190;
3. Department of Finance resolution dated April 29, 2009;
4. Department of Finance decision dated September 17, 2008;
5. Insurance Commission order dated December 4, 2007; and the
6. Insurance Commission resolution dated June 26, 2007.

SO ORDERED.[27] (Emphasis in the original)

The CA held that respondent Country Bankers was justified in delaying the payment
of the claims to petitioner IPAMS because of the purported lack of submission by
petitioner IPAMS of official receipts and other "competent proof[28] on the expenses
incurred by petitioner IPAMS in its recruitment of nurse applicants. The CA held that
Section 241 (now Section 247) of the Insurance Code, which defines an unfair claim
settlement practice, and Section 247 (now Section 254), which provides for the
suspension or revocation of the insurer's authority to conduct business, should not
be made to apply to respondent Country Bankers because of the failure of
petitioner IPAMS to provide competent proof of its claims.

Instead of filing a motion for reconsideration, petitioner IPAMS decided to directly

file the instant Petition[29] dated November 2, 2010 on November 4, 2010 before
the Court.

On April 4, 2011, respondent Country Bankers filed its Comment (To Petition for
Review on Certiorari dated November 2, 2010).[30] On August 18, 2011, petitioner
IPAMS filed its Reply.[31]

Issue

Stripped to its core, the present Petition asks the Court to resolve whether the CA
erred in issuing its assailed Decision which reversed and set aside the rulings of the
IC, DOF, and OP, which found that respondent Country Bankers has no ground to
refuse the payment of petitioner IPAMS' claims and shall accordingly be subjected
to disciplinary action pursuant to Sections 241 (now Section 247) and 247 (now
Section 254) of the Insurance Code if the latter does not settle the subject claims of
petitioner IPAMS.

The Court's Ruling

The appeal is partly meritorious.

In reversing and setting aside the rulings of the IC, DOF, and OP, the CA, in the
main, found that as provisions of applicable law are deemed written into contracts,
Article 2199 of the Civil Code[32] should be applied regarding the MOA between
petitioner IPAMS and respondent Country Bankers. The CA reasoned that since
"[c]ompetent proof x x x must be presented to justify award for actual
damages,"[33] respondent Country Bankers was correct in not paying the subject
claims of petitioner IPAMS because the latter failed to present official receipts and
other "competent" evidence establishing the actual costs and expenses incurred by
petitioner IPAMS.

Apparently, the CA concurred with the reason posited by respondent Country

Bankers for not paying the claims presented by petitioner IPAMS, i.e., the failure of
petitioner IPAMS to present official receipts of expenses it incurred. Consequently,
the CA found that mere Statements of Accounts with detailed expenses, without
accompanying official receipts or any other "competent" evidence, cannot prove
actual expenses. Hence, respondent Country Bankers was supposedly justified in
not paying the claims of petitioner IPAMS.

Autonomy of Contracts

At the onset, it is important to note that according to the autonomy characteristic of

contracts, the contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.[34]

The stipulation of the MOA at issue is the provision enumerating requirements

(Requirements for Claim Clause) that must be presented by petitioner IPAMS in
order to make a valid claim against the surety bond. To reiterate, the Requirements
for Claim Clause provides:

B. REQUIREMENTS FOR CLAIM

Requirements are as follows:

SURETY BOND:

F. 1st demand letter requiring his/her to submit complete documents.

G. 2nd Demand letter (follow up of above).
H. Affidavit stating reason of any violation to be executed by responsible office of
Recruitment Agency;
I. Statement of Account (detailed expenses).
J. Transmittal Claim Letter.[35] (Emphasis and underscoring in the original)

Petitioner IPAMS and respondent Country Bankers in essence made a stipulation to

the effect that mere demand letters, affidavits, and statements of accounts are
enough proof of actual damages — that more direct and concrete proofs of
expenditures by the petitioner such as official receipts have been dispensed with in
order to prove actual losses.

As to why the parties agreed on the sufficiency of the listed requirements under the
MOA goes into the motives of the parties, which is not hard to understand,
considering that the covered transactions, i.e., the processing of applications of
nurses in the U.S., are generally not subject to the issuance of official receipts by
the U.S. government and its agencies.[36]

Considering the foregoing, the question is crystallized: Can the parties stipulate on
the requirements that must be presented in order to claim against a surety bond?
And the answer is a definite YES, pursuant to the autonomy characteristic of
contracts, they can. In an insurance contract, founded on the autonomy of
contracts, the parties are generally not prevented from imposing the terms and
conditions that determine the contract's obligatory force.[37]
Thus, the view posited by the CA that the Requirements for Claim Clause is
contrary to law because it is incongruent with Article 2199 of the Civil Code and,
therefore, an exception to the rule on autonomy of contracts is erroneous. A more
thorough examination of Article 2199 does not support the CA's view.

Article 2199 of the Civil Code states:

Article 2199. Except as provided by law or by stipulation, one is entitled to an

adequate compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory damages.
(Emphasis and underscoring supplied)

The law is clear and unequivocal when it states that one is entitled to adequate
compensation for pecuniary loss only for such losses as he has duly
proved EXCEPT: (1) when the law provides otherwise, or (2) by stipulation
of the parties. Otherwise stated, the amount of actual damages is limited to losses
that were actually incurred and proven, except when the law provides otherwise, or
when the parties stipulate that actual damages are not limited to the actual losses
incurred or that actual damages are to be proven by specific documents agreed
upon.

The submission of official receipts and other

pieces of evidence as a prerequisite for the
payment of claims is excused by stipulation of
the parties; and in lieu thereof, the
presentation of statement of accounts with
detailed expenses, demand letters, and
affidavits is, by express stipulation, sufficient
evidence for the payment of claims.

To reiterate, Article 2199 of the Civil Code explicitly provides that the prerequisite
of proof for the recovery of actual damages is not absolute. This was illustrated
in People of the Philippines v. Jonjie Eso y Hungoy, et al.,[38] wherein this Court held
that the requirement of providing actual proof found under Article 2199 for the
recovery of actual and compensatory damages (in that case, funeral expenses)
may. be dispensed with, considering that there was a stipulation to that effect
made by the parties.

In the instant case, it is not disputed by any party that in the MOA entered into by
the petitioner IPAMS and respondent Country Bankers, the parties expressly agreed
upon a list of requirements to be fulfilled by the petitioner in order to claim from
respondent Country Bankers under the surety bond.

Hence, it is crystal clear that the petitioner IPAMS and respondent Country Bankers,
by express stipulation, agreed that in order for the former to have a valid claim
under the surety bond, the only requirements that need to be submitted are the
two demand letters, an Affidavit stating reason of any violation to be executed by
responsible officer of the Recruitment Agency, a Statement of Account detailing the
expenses incurred, and the Transmittal Claim Letter. Evidently, the parties did
not include as preconditions for the payment of claims the submission of
official receipts or any other more direct or concrete piece of evidence to
substantiate the expenditures of petitioner IPAMS. If the parties truly had the
intention of treating the submission of official receipts as a requirement for the
payment of claims, they would have included such requirement in the MOA. But
they did not.

It is elementary that when the terms of an agreement have been reduced to

writing, it is considered as containing all the terms agreed upon and there can be
no evidence on such terms other than the contents of the written
agreement.[39] Further, when the terms of the contract are clear and leave no doubt
upon the intention of the contracting parties, the stipulations of the parties are
controlling.[40]

In the case at hand, respondent Country Banker failed to present any compelling
evidence that convinces the Court that the parties had the intention of adding
requirements other than the five requirements for payment of claims enumerated in
the Requirements for Claim Clause. On the contrary, several circumstances show
that the submission of official receipts was really NOT intended by the parties to be
a precondition for the payment of claims.

As found by the OP in its Decision dated January 8, 2010, respondent Country

Bankers "knew as a matter of IPAMS' regular course of business that these covered
transactions are generally not issued official receipts by US government and its
agencies and the US based professional organizations and institutions involved to
complete the requirements for the issuance of an immigrant visa."[41]

Further, as found by the IC in its Resolution dated June 26, 2007, which the CA did
not controvert in its assailed Decision, respondent Country Bankers had previously
admitted liability and promised to make payment on similar claims under the surety
agreement even without the submission of official receipts.[42] In fact, respondent
Country Bankers had previously paid similar claims made by petitioner IPAMS on
the basis of the same set of documents, even without the submission of official
receipts and other pieces of evidence.

As the contemporaneous and subsequent acts of the contracting parties shall be

principally considered in determining the intention of the parties,[43] and that, by
virtue of estoppel, an admission or representation is rendered conclusive upon the
person making it and cannot be denied or disproved as against the person relying
thereon,[44] the prior actuations of respondent Country Bankers clearly establish
that it did not intend the submission of official receipts to be a prerequisite for the
payment of claims. Respondent Country Bankers is therefore estopped from
claiming that the submission of official receipts and other "competent proof” is a
further requirement for the payment of claims.
Hence, the Court finds that, by stipulation of petitioner IPAMS and respondent
Country Bankers in their MOA, the parties waived the requirement of actually
proving the expenses incurred by petitioner IPAMS through the submission of
official receipts and other documentary evidence. Thus, respondent Country
Bankers was not justified in denying the payment of claims presented by petitioner
IPAMS based on the lack of official receipts.

Under the Insurance Code, all defects in the

proof of loss, which the insured might remedy,
are waived as grounds for objection when the
insurer omits to specify to him without
unnecessary delay.

While placing utmost concentration on Article 2199 of the Civil Code in ruling that
competent proof is required for the payment of the subject claims, the assailed
Decision of the CA failed to take into consideration the applicable provisions of the
Insurance Code.

The subject agreement of the parties indubitably contemplates a surety

agreement,[45] which is governed mainly by the Insurance Code, considering that a
contract of suretyship shall be deemed an insurance contract within the
contemplation of the Insurance Code if made by a surety which is doing an
insurance business.[46] In this case, the surety, i.e., respondent Country Bankers, is
admittedly an insurance company engaged in the business of insurance. In fact, the
CA itself in its assailed Decision mentioned that a contract of suretyship is defined
and covered by the Insurance Code.[47]

Moreover, the Insurance Code[48] specifically provides applicable provisions on

suretyship, stating that pertinent provisions of the Civil Code shall only
apply suppletorily whenever necessary in interpreting the provisions of a contract of
suretyship.[49] Jurisprudence also holds that a specific law should prevail over a law
of general character.[50]

Hence, in the resolution of the instant case, the CA erred in not considering the
applicable provisions under the Insurance Code on the required proof of loss and
when such requirement is waivable.

Therefore, Section 92[51] of the Insurance Code must be taken into consideration.
The said provision states that all defects in the proof of loss, which the insured
might remedy, are waived as grounds for objection when the insurer omits to
specify to him without unnecessary delay. It is the duty of the insurer to indicate
the defects on the proofs of loss given, so that the deficiencies may be supplied by
the insured. When the insurer recognizes his liability to pay the claim, there is
waiver by the insurer of any defect in the proof of loss.[52]

In the instant case, it must be emphasized that respondent Country Bankers,

through its General Manager, Mr. Ong, issued a letter dated November 14, 2005
which readily acknowledged the obligations of Country Bankers under the surety
agreement, apologized for the delay in the payment of claims, and proposed to
amortize the settlement of claims by paying a semi-monthly amount of
P850,000.00.[53] In addition, Country Bankers promised to pay future claims within
a 90-day period:

First of all, allow us to apologize for the delay in our response to you considering
that we still had to do some reconciliation of our records with that of Mr. Lacaba.
After evaluating the total number of claims filed by IPAMS, we have come up with
the final figure of P20,575,492.25.

In this regard, we wish to propose to amortize the settlement of the said amount by
paying you the semi-monthly amount of P850,000.00 until the entire amount of
P20,575,492.25 is fully paid. With respect to future claims (after the cut-off date,
October 28, 2005), we shall see to it that they are settled within the 90 days time
frame allowed us.[54]

It bears stressing that respondent Country Bankers, after undergoing an evaluation

of the total number of claims of petitioner IPAMS, undertook the settlement of such
claims even WITHOUT the submission of official receipts.

In fact, respondent Country Bankers raised up the issue on the missing official
receipts and other evidence to prove the expenses incurred by petitioner IPAMS
only when the latter requested the intervention of the IC in 2007. If respondent
Country Bankers truly believed that the submission of official receipts was critical in
providing proof as to petitioner IPAMS' claims, then it would have raised the issue
on the lack of official receipts at the earliest possible opportunity. This only shows
that the argument of respondent Country Bankers on the lack of official receipts
was a mere afterthought to evade its obligation to pay the claims presented by
petitioner IPAMS.

While not denying the existence of the said letter, respondent Country Bankers
attempts to downplay it by arguing that the claims covered by the letter and the
claims raised by petitioner IPAMS before the IC are different and distinct from each
other. Such argument deserves scant consideration.

While the claims in the said letter may be different from the specific claims
presented before the IC, both sets of claims were similarly made under the
same suretyship agreement between the parties. Thus, the fact still remains
that respondent Country Bankers had previously acknowledged the validity of a set
of claims under a surety bond within the purview of the Requirements for Claim
Clause despite the lack of official receipts and other pieces of evidence aside from
the required documents enumerated in the MOA. To be sure, it must also be
pointed out that the representations of respondent Country Bankers in the said
letter likewise refer to future and similar claims of petitioner IPAMS. Hence,
respondent Country Bankers' attempt to downplay the ramifications of its letter
dated November 14, 2005 is puerile.
Also, it must be emphasized that the IC, after holding a series of conferences
between the parties and after the assessment of the respective position papers and
evidence from both parties, made the factual finding in its Resolution dated June
26, 2007 that respondent Country Bankers committed certain acts constituting a
waiver of its right to require the presentation of additional documents to prove the
expenses incurred by petitioner IPAMS, such as the issuance of the letter dated
November 14, 2005 and the acceptance by respondent Country Bankers of
reimbursement from the nurse applicants of petitioner IPAMS on the basis of the
Statements of Accounts presented, even without any official receipt attached.[55] In
fact, the records show that respondent Country Bankers does not deny the
fact that it accepted the reimbursements from the nurse applicants based
on the Statements of Accounts of petitioner IPAMS.[56]

Furthermore, the DOF likewise factually determined that respondent Country

Bankers, through its new General Manager, Ms. Valeriano, had assured IPAMS that
the obligations of Country Bankers would be paid promptly, again, even without the
submission of official receipts and other pieces of evidence.[57] The DOF similarly
found that the proposal by respondent Country Bankers to amortize the settlement
of petitioner IPAMS' claims by paying the latter the semi-monthly amount of
P850,000.00 and respondent Country Bankers' acceptance of reimbursements from
the nurse applicants based on the mere Statements of Accounts submitted by
petitioner IPAMS are tantamount to an acknowledgment on the part of respondent
Country Bankers of its liability for claims under the surety bonds.

Moreover, the OP also factually found that respondent Country Bankers "knew as a
matter of IPAMS' regular course of business that these covered transactions are
generally not issued official receipts by US government and its agencies and the US
based professional organizations and institutions involved to complete the
requirements for the issuance of an immigrant visa."[58]

These factual findings of three separate administrative agencies, which were not
at all reversed or refuted by the CA in its assailed Decision, should not be
perturbed by the Court without any compelling countervailing reason. The Court
has continuously adopted the policy of respecting the findings of facts of specialized
administrative agencies.

In Villafor v. Court of Appeals,[59] the Court held that the findings of fact of an
administrative agency must be respected as long as they are supported by
substantial evidence, even if such evidence might not be overwhelming or even
preponderant, because it is not the task of an appellate court to weigh once more
the evidence submitted before the administrative body and to substitute its own
judgment for that of the administrative agency in respect of sufficiency of
evidence.[60]

Hence, considering that the IC, through the Insurance Commissioner, is particularly
tasked by the Insurance Code to issue such rulings, instructions, circulars, orders
and decisions as may be deemed necessary to secure the enforcement of the
provisions of the law, to ensure the efficient regulation of the insurance industry,
and considering that there are no compelling reasons provided by respondent
Country Bankers to overthrow the IC's factual findings, the Court upholds the
findings of the IC, as concurred in by both the DOF and OP, that respondent
Country Bankers committed certain acts constituting a waiver of its right to require
the presentation of additional documents to prove the expenses incurred by
petitioner IPAMS.

Accordingly, under Section 92 of the Insurance Code, the failure to attach official
receipts and other documents evidencing the expenses incurred by petitioner
IPAMS, even assuming that it can be considered a defect on the required proof of
loss, is therefore considered waived as ground for objecting the claims of petitioner
IPAMS.

For the foregoing reasons, the ruling of the CA, which sets aside the rulings of the
IC, DOF, and OP, which found that respondent Country Bankers has no ground to
refuse the payment of petitioner IPAMS' claims and shall accordingly be subjected
to disciplinary action pursuant to Sections 241 (now Section 247) and 247 (now
Section 254) of the Insurance Code if the latter does not settle the subject claims of
petitioner IPAMS, should be reversed.

Be that as it may, despite the reversal of the CA's assailed Decision, petitioner
IPAMS' prayers for (1) the suspension/revocation of the license of respondent
Country Bankers due to its commission of an unfair claim settlement practice for
unreasonable delay in paying petitioner IPAMS' claim for the total amount of
P21,230,643.19; (2) awarding of a total amount of P21,230,643.19 and 20%
thereof; and (3) awarding of moral and exemplary damages, as well as attorney's
fees and judicial costs, are denied.

It must be stressed that the instant case resolved by the Court is not a claims
adjudication case. The subject Resolution and Order of the IC that was concurred in
by the DOF and OP, which the Court now reinstates, were issued in the IC's
capacity as a regulator and not as an adjudicator of claims, as admitted by the IC
itself.[61] Hence, while the Court herein reinstates the IC's Resolution finding that
disciplinary action is warranted in the eventuality that respondent Country Bankers
continues to delay settling the claims of petitioner IPAMS, the matter should be
referred back to the IC so that it could determine the remaining amount and extent
of the liability that should be settled by respondent Country Bankers in order to
avoid the IC's disciplinary action.

WHEREFORE, in view of the foregoing, the appeal is hereby PARTIALLY

GRANTED. The Decision dated October 14, 2010 issued by the Court of Appeals in
CA-G.R. SP No. 114683 is REVERSED AND SET ASIDE. The Resolution dated June
26, 2007 and Order dated December 4, 2007 issued by the Insurance Commission,
the Decision dated September 17, 2008 and Resolution dated April 29, 2009 issued
by the Department of Finance, and the Decision dated January 8, 2010 and
Resolution dated June 1, 2010 issued by the Office of the President
are REINSTATED and AFFIRMED.
 [ G.R. No. 189526, August 09, 2017 ]
FGU INSURANCE CORPORATION, PETITIONER, V. SPOUSES
FLORO ROXAS AND EUFEMIA ROXAS, RESPONDENTS.

[G.R. No. 189656, August 9, 2017]

SPOUSES FLORO ROXAS AND EUFEMIA ROXAS,

PETITIONERS, V. ROSENDO P. DOMINGUEZ, JR., PHILIPPINE
TRUST COMPANY, AND FGU INSURANCE CORPORATION,
RESPONDENTS.

DECISION

LEONEN, J.:

The liability of a surety is determined strictly in accordance with the actual terms of
the performance bond it issued. It may, however, set up compensation against the
amount owed by the creditor to the principal.

The Petitions for Review in G.R. Nos. 189526[1] and 189656[2] seek to reverse and
set aside the May 26, 2009 Decision[3] and the September 14, 2009 Resolution[4] of
the Court of Appeals in CA-G.R. CV No. 30340. The May 26, 2009 Decision modified
the Regional Trial Court September 4, 1990 Decision,[5] while the September 14,
2009 Resolution denied the motions for reconsideration separately filed by FGU
Insurance Corporation (FGU), Spouses Floro and Eufemia Roxas (the Spouses
Roxas), and Philippine Trust Company (Philtrust Bank).

The Spouses Roxas entered into a Contract of Building Construction[6] dated May
22, 1979 with Rosendo P. Dominguez, Jr. (Dominguez) and Philtrust Bank to
complete the construction of their housing project known as "Vista Del Mar
Executive Houses."[7] The project was located at Cabcaben, Mariveles, Bataan and
was estimated to cost P1,200,000.00

From the terms of the Contract, Philtrust Bank would finance the cost of materials
and supplies to the extent of P 900,000.00, while Dominguez would undertake the
construction works for P300,000.00.[8]

It was also stipulated that Philtrust Bank may only release the funds for materials
upon Dominguez's request and with the Spouses Roxas' conformity. Invoices
covering materials previously purchased should also be submitted to Philtrust Bank
before any subsequent releases of funds were made.[9]
The P300,000.00 cost of labor would be shouldered by the Spouses Roxas, but the
Contract stated that:

[W]hether or not the [Spouses Roxas] could provide/supply the funds to finance the
labor costs as aforesaid, the Contractor binds himself to finish and complete the
construction of the project within the stipulated period of One Hundred Fifty (150)
working days [from April 25, 1979].[10]

Finally, it was provided that in case of Dominguez's non-compliance of the terms

and conditions of the Contract, he would pay Philtrust Bank and/or the Spouses
Roxas liquidated damages of P1,000.00 per day until he has complied with his
obligation.[11]

On May 24, 1979, the Spouses Roxas and Dominguez entered into another
Agreement,[12] which provided for the terms of payment of the P300,000.00 "cost of
labor, supervision and engineering services"[13] as follows:

a) first cash payment of P30,000.00 - 45 working days from April 25, 1979, the start of the
work on the project;

b) second cash payment of P30,000.00 - 30 working days from the first cash payment;

c) third cash payment of P 30,000.00 - 30 working days from the second cash payment; and

d) last and final payment of P210,000.00 in the form of real properties, consisting of a 3,000-
square-meter parcel of land in Mariveles, Bataan under Transfer Certificate of Title (TCT)
Nos. 71591 and 77270 to 77273, and a 2,000-square-meter parcel of land in Limay, Bataan
under TCT No. 2140, upon completion and acceptance of the project.[14]

It was also stipulated that an interest of 14% per annum would be paid by the
Spouses Roxas in the event of non-payment of the amounts due to Dominguez.[15]

Also on May 24, 1979, pursuant to the Contract of Building Construction,

Dominguez secured a performance bond, FIC Bond No. G(23) 5954[16] (Surety
Bond), with face amount of P450,000.00, from FGU. FGU and Dominguez bound
themselves to jointly and severally pay Floro Roxas (Floro) and Philtrust Bank the
agreed amount in the event of Dominguez's non-performance of his obligation
under the Contract.[17]

Dominguez averred that on September 20, 1979, he requested an upward

adjustment of the contract price from the Spouses Roxas due to the rising costs of
materials and supplies. But the Spouses Roxas did not heed his request.[18]

He added that the Spouses Roxas also failed to make the three (3) payments of
P30,000.00 each as agreed upon. Thus, on October 22, 1979, he formally
demanded that they pay the amounts due plus the stipulated interest of 14% per
annum,[19] with a warning that he would stop further work and withdraw his
workers unless payment was received on or before October 31, 1979.[20]

On November 9, 1979, Dominguez sent another demand letter to the Spouses

Roxas, this time, for the payment of P73,136.75,[21] which they allegedly borrowed
from the funds allotted for the project for their personal use and benefit. The
Spouses Roxas were required to pay the amount within seven (7) days from receipt
of the letter. However, they refused to pay.[22]

Dominguez also asked Philtrust Bank to release the remaining balance of

P24,000.00 but to no avail.[23]

On March 28, 1980, Dominguez filed a Complaint against the Spouses Roxas and
Philtrust Bank before Branch 40, Court of First Instance of Manila. This was
docketed as Civil Case No. 130783. In addition to the amounts claimed, he also
sought the following: the annulment of the "Whereas Clause" providing for the
completion of the construction project within 150 working days; the
rescission/annulment of the Contract of Building Construction dated May 22, 1979
and the Agreement dated May 24, 1979; and the declaration of the FGU Surety
Bond as unenforceable.[24]

In its Answer with Compulsory Counterclaim dated June 30, 1980,[25] Philtrust Bank
claimed that it did not release the P24,000.00 because Dominguez failed to submit
an accounting of the previous releases made. Philtrust Bank added that Dominguez
failed to complete even 60% of the project despite its release of P876,000.00. As
such, it asked Dominguez to pay P1,000.00 per day of delay as liquidated damages
until fulfillment of his obligation.[26] Lastly, Philtrust Bank averred that it sent
several demand letters[27] to FGU to pay P450,000.00 for non-performance of its
principal, but the latter re/fused to pay. Hence, Philtrust Bank sought to implead
FGU for non-payment of P450,000.00 under its Surety Bond.[28]

For their part, the Spouses Roxas claimed that:

a) "the upward adjustment of the stipulated contract price demanded by Dominguez, Jr. was
without any legal or contractual basis";

b) "under the terms of the contract, he bound himself to finish and complete the construction of
the project within 150 working days from April 25, 1979 'whether or not the [Spouses Roxas]
could provide/supply the funds to finance the labor costs";

c) "of the amounts released by Philtrust [Bank], they only conformed to the release of
[P]450,000.00"; and

d) FGU failed to pay the P450,000.00 amount "stipulated in the [Surety] [B]ond."[29]
The Spouses Roxas further averred that Philtrust Bank's unjustified release of the
funds to Dominguez had resulted in the non-completion of the housing project and
consequent unrealized rental income from prospective lessees and delay in their
amortization payments to Philtrust Bank.[30]

Hence, the Spouses Roxas "prayed for the reimbursement of the amount of
P422,000.00 unjustifiably released by [Philtrust Bank]" and damages of P48,000.00
monthly beginning October 1979, representing unearned rentals from the non-
completion of the project.[31]

Philtrust Bank countered that all the funds released to Dominguez "were with the
conformity of the [S]pouses [Roxas;] ... the non-completion of the housing project
was due to the failure of the [S]pouses [Roxas] to release the [P]300,000,00 . . .
[for the] costs of labor and other engineering services" and claimed that the
Spouses Roxas had an unpaid loan of "[P]3,053,739.50."[32] Hence, Philtrust Bank
additionally prayed that the Spouses Roxas be ordered to pay their indebtedness in
the total amount of “P3,053,738.50 plus 19% yearly interest" from April 1, 1980
until fully paid and "P245,720.00 stipulated in the various promissory notes as and
for attorney's fees."[33] In default of these payments, Philtrust Bank prayed that the
real estate mortgages be foreclosed.[34]

FGU argued that the Surety Bond was issued in favor of Floro and Philtrust Bank
only, Eufemia Roxas (Eufemia) excluded; and recovery from this Surety Bond may
be allowed to Floro only to the extent of one-half (1/2) of its face value. It prayed
for reimbursement against Dominguez for any amount it may be adjudged to pay to
the Spouses Roxas. It also filed a fourth-party complaint against Dominguez, Gloria
Dominguez, Dominador Caiyod, Felicisima Caiyod, Rufino Andal, and Amada Caiyod
under their May 29, 1979 Agreement of Counterguaranty "to secure the obligation
of FGU [Insurance Corporation] under the surety bond."[35]

FGU later moved to strike the fourth-party complaint but it was denied by the trial
court.[36]

Branch 40, Regional Trial Court, Manila found that the Spouses Roxas breached
their obligation to Dominguez under the Contract of Building Construction and the
May 24, 1979 Agreement. Likewise, it ruled that Dominguez's non-completion of
the project within the stipulated period was justified because of the rising prices of
materials and labor. Finally, it held that Dominguez was made to accept the
construction contract due to the deceit and misrepresentation of the Spouses Roxas
and Philtrust Bank. Hence, it rendered judgment in favor of Dominguez as follows:

WHEREFORE, viewed in the light of the foregoing circumstances, this court hereby
renders judgment in favor of plaintiff Rosendo Dominguez[, Jr.] as follows:

(a) Declaring the "Whereas Clause" paragraph 7 of the Contract Building Construction dated
May 22, 1979 as voided and cancelled, as well as the agreement dated May 24, 1979
between the plaintiffs and defendant Roxas spouses;
(b) Ordering the cancellation of the Performance Bond of the FGU Insurance Corporation for
P450,000.00 of no further force and effect;

(c) Ordering the defendants Roxas spouses to pay Rosendo Dominguez[, Jr.] the sum of
P90,000.00 with 14% yearly interest from due date until fully paid;

(d) Ordering the defendants Roxas spouses to pay P73,146.75 with legal rate thereon from
October 27, 1971 until fully paid;

(e) Ordering the defendants Roxas spouses to pay Rosendo Dominguez[, Jr.] moral and
exemplary damages in the amount of P50,000.00 and ordering them to pay [a]ttorney's fees
in the amount of P50,000;

(f) Denying other claims and counterclaims for lack of sufficient proof;

This is without prejudice to the filing of the proper case for collection by the Philippine Trust
Company against defendant Roxas spouses for their indebtedness to the Bank;

(g) Defendant spouses Roxases (sic) are ordered to pay the cost of this suit.[37]

The Court of Appeals modified the Decision of the Regional Trial Court. It held that
the "Whereas Clause" of the Contract of Building Construction dated May 22, 1979
and the Agreement dated May 24, 1979 were valid. According to the Court of
Appeals, the Spouses Roxas' non-payment of the stipulated P90,000.00 in three (3)
equal installments and their offering of properties different from those stipulated in
the May 24, 1979 Agreement did not constitute the kind of fraud that would give
rise to the annulment of the contracts. It held that the parcels of land were not
even mentioned in the May 22, 1979 Contract and that Dominguez agreed to finish
the project within the 150-day period whether or not the Spouses Roxas could
supply the funds to finance the labor costs.[38]

The Court of Appeals also found no basis for the upward adjustment of the contract
price claimed by Dominguez. It held that no proof was presented by Dominguez to
establish extraordinary inflation during the intervening period. In addition, the
precedent conditions for the recovery of additional construction costs under Article
1724[39] of the Civil Code were not complied with.[40]

On the liability of the Spouses Roxas to Philtrust Bank, the Court of Appeals held
that Philtrust Bank failed to prove that the requests for the release of the sum of
P422,000.00 to Dominguez were with the conformity of the Spouses Roxas. Hence,
Philtrust Bank had no one else to blame but itself.[41]

The Court of Appeals also reversed the Regional Trial Court decision to cancel the
Surety Bond. It held that FGU, as surety under FGUIC Bond No. G(23) 5994 dated
May 24,1979, was obligated to pay the Spouses Roxas and Philtrust Bank the
amount of P450,000.00 for Dominguez's non-completion of the construction project
within the stipulated period.[42]

Finally, the Court of Appeals found the award of damages in favor of Dominguez to
be improper. It held that Dominguez failed to prove bad faith, fraud, or ill motive
on the part of the Spouses Roxas that would justify the award of moral damages.
Furthermore, without the award of moral damages, exemplary damages and
attorney's fees could likewise not be awarded.[43]

On the other hand, it ruled that "the unjustified stoppage and abandonment of the
construction works by Dominguez, Jr. constitute a breach of his contractual
obligation characterized by bad faith."[44] Hence, the Court of Appeals adjudged
Dominguez liable to the Spouses Roxas for P100,000.00 as moral damages,
PI00,000.00 as exemplary damages, and P50,000.00 as attorney's fees.[45]

The Court of Appeals May 26, 2009 Decision disposed as follows:

WHEREFORE, in view of all the foregoing, the appeal is partially GRANTED,

Accordingly, the assailed decision of the Regional Trial Court of Manila dated
September 4, 1990 is MODIFIED as follows:

1. Declaring the "Whereas Clause" in paragraph 7 of the Contract of Building

Construction dated May 22, 1979 as well as the Agreement dated May 24, 1979
valid;

2. Declaring the FGU Insurance Corporation FIC Bond No. G(23) 5994 to be in full
force and effect. Thus, FGUIC is solidarily liable with Rosendo Dominguez, Jr. to
spouses Roxas to the extent of P450,000.00;

3. Ordering spouses Roxas to pay Dominguez, Jr. the sum of P90,000 with the
stipulated 14% annual interest from due date until fully paid;

4. Ordering spouses Roxas to pay Dominguez, Jr. the amount of P73,136.75 with
legal rate of interest from November 16, 1979 until fully paid;

5. Ordering Dominguez, Jr. to pay P100,000.00 as moral damages; P100,000.00 as

exemplary damages; and P50,000.00 as attorney's fees; and

6. Remanding the case to the trial court for the reception of evidence and proper
computation of the other claims of Philtrust against spouses Roxas.

SO ORDERED.[46]

The separate motions for reconsideration of FGU, the Spouses Roxas, and Philtrust
Bank were denied in the Court of Appeals September 14, 2009 Resolution.
FGU and the Spouses Roxas filed their separate Petitions for Review before this
Court, docketed as G.R. Nos. 189526[47] and 189656,[48] respectively.

On November 26, 2009, the Spouses Roxas, through their counsel, filed a
Manifestation and Motion to Dispense with Service upon Atty. Tomas Matic, Jr.
(Atty. Matic) informing this Court that no appearance was made either by
Dominguez or his counsel Atty. Matic before the Court of Appeals despite notice.
Moreover, the counsel of the Spouses Roxas knew that Atty. Matic had already
passed away.[49]

On March 17, 2010,[50] this Court resolved to consolidate these two (2) cases.

On February 23, 2011, this Court deemed as waived Dominguez's filing of his
comment on the petitions for review as copies of this Court's resolutions requiring
him to file comment, which were served on Dominguez's last known address, were
returned unserved with notation "moved out."[51]

The issues for this Court's resolution are as follows: First, whether or not the Court
of Appeals erred in holding FGU Insurance Corporation liable for the full amount of
P450,000.00 of its Surety Bond rather than the cost overrun on account of Rosendo
P. Dominguez, Jr.'s non-completion of the project;

Second, whether or not the Spouses Floro and Eufemia Roxas are entitled to
liquidated damages under the Contract for Building Construction; Third, whether or
not there is factual basis for the award of P90,000.00 with 14% stipulated interest
and P 73,146.75 with legal interest in favor of Rosendo P. Dominguez, Jr.;

Fourth, whether or not the liabilities of the Spouses Floro and Eufemia Roxas to
Rosendo P. Dominguez, Jr. may be set off against any liability of FGU Insurance
Corporation pursuant to Articles 1280[52] and 1283[53] of the Civil Code; and

Fifth, whether or not the Court of Appeals erred in remanding the case to the trial
court for the reception of evidence and computation of the other claims of the
Philippine Trust Company against the Spouses Floro and Eufemia Roxas.

Finally, whether or not Philtrust Bank should be held liable for the unauthorized
release of the remaining construction funds.

FGU questions the Court of Appeals Decision, which held it liable to the Spouses
Roxas for the full amount of the Surety Bond.

First, it argues that the face amount of P450,000.00 only indicates its maximum
potential liability in case Dominguez does not comply with its obligation under the
Contract of Building Construction. FGU submits that it should only be liable for the
actual damages that may have been sustained by the Spouses Roxas or the cost
that may have been incurred by them to finish the contracted work. Since the
Spouses Roxas failed to prove the added cost to them to finish the construction,
FGU argues that their claim for damages cannot be granted.[54]

Second, FGU contends that under Article 2054 of the Civil Code, its liability cannot
be greater than the liability of the principal. Thus, it was erroneous for the Court of
Appeals to adjudge it liable for actual damages but without adjudging any liability
upon Dominguez.[55]

Third, FGU submits that the Spouses Roxas may only claim up to one-half (1/2) of
the face amount because Philtrust Bank is a joint creditor under the Surety Bond.

The Spouses Roxas counter that under the Contract of Building Construction,
Dominguez's liability in case of non-completion of the project is not limited to the
additional cost that the Spouses Roxas would have incurred to finish the project.
They hold that his liability includes liquidated damages of P1,000.00 per day until
the contractor shall have complied with his obligation. They add that the face
amount of P450,000.00 would even be "grossly inadequate since the project
remained uncompleted."[56]

The Spouses Roxas further contend that the Contract of Building Construction refer
to "the Bank and/or owner," which means that payment under the Surety Bond
could be made either to both of them or to any of them.[57] Considering that
Philtrust Bank was aptly found by the Court of Appeals to be at fault in releasing
the funds to the contractor without their conformity and the supporting invoices,
the Spouses Roxas maintain that they alone should be entitled to the entire
proceeds of the Surety Bond.[58]

In its Reply,[59] FGU argues that the stipulation in the Contract of Building
Construction providing for liquidated damages contemplates delay in construction,
not abandonment of the project.[60] Hence, what applies is Article 1167 of the Civil
Code, which states: "If a person obliged to do something fails to do it, the same
shall be executed at his cost." Consequently, the liability of Dominguez "should be
based on the additional cost to complete the project."[61]

FGU adds that contrary to the Spouses Roxas' claims, Philtrust Bank could file a
claim to the extent of one-half (1/2) of the amount of the Surety Bond,[62] under
which FGU bound itself in favor of "Floro Roxas and Philippine Trust Company," as
joint, and not solidary, creditors.[63]

Under Section 175 of Presidential Decree No. 612 or the Insurance Code, a contract
of suretyship is defined as an agreement where "a party called the surety
guarantees the performance by another party called the principal or obligor of an
obligation or undertaking in favor of a third party called the obligee."

A performance bond is a kind of suretyship agreement. It is "designed to afford the

project owner security that the . . . contractor, will faithfully comply with the
requirements of the contract . . . and make good [on the] damages sustained by
the project owner in case of the contractor's failure to so perform."[64]

A surety's liability is joint and several with the principal.[65] "Article 2047 of the Civil
Code provides that suretyship arises upon the solidary binding of a person deemed
the surety with the principal debtor for the purpose of fulfilling an obligation."[66]

Although the surety's obligation is merely secondary or collateral to the obligation

contracted by the principal, this Court has nevertheless characterized the surety's
liability to the creditor of the principal as "direct, primary, and absolute[;] [i]n other
words, the surety is directly and equally bound with the principal."[67]

Moreover, Article 1216 in relation to Article 2047[68] of the Civil Code provides:

The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long
as the debt has not been fully collected.

Pursuant to the foregoing provisions, FGU, as surety, may be sued by the creditor
separately or together with Dominguez as principal, in view of the solidary nature of
its liability.[69]

I.A

Liability under a surety bond is "limited to the amount of the bond" and is
determined strictly in accordance with the particular terms and conditions set out in
this bond.[70] It is, thus, necessary to look into the actual terms of the peformance
bond.

FGUIC Bond No. G(23) 5954 states:

That we, ROSENDO P. DOMINGUEZ, JR. as PRINCIPAL, and THE FGU INSURANCE
CORPORATION ... as SURETY, are held and firmly bound unto the FLORO ROXAS
AND PHILIPINE TRUST COMPANY, as the OBLIGEE, in the sum of FOUR HUNDRED
FIFTY THOUSAND PESOS ONLY (P450,000.00), Philippine Currency, for the
payment of which well and truly to be made, we bind ourselves .. . jointly and
severally firmly by these presents.

THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:

WHEREAS, the above bounden Principal . . . entered into a contact/agreement with

the said OBLIGEE to fully and faithfully perform and fulfill all the undertakings,
covenants, terms, conditions and agreement stipulated in said contract, for the
supply of necessary labor, materials, supervision and other engineering service
related for the completion and ready for occupancy of the proposed Vista Del Mar-
Executive Houses at Cabcaben, Mariveles, Bataan;
....

NOW, THEREFORE, if the PRINCIPAL shall well and trully perform and fulfill all the
undertakings, covenants, terms, conditions, and agreements stipulated in said
contract/agreement, then this obligation shall be null and void; otherwise, it shall
remain in full force and effect.[71]

The FGU Surety Bond is conditioned upon the full and faithful performance by
Dominguez of his obligations under the Contract of Building Construction. Under the
terms of this bond, FGU guaranteed to pay the amount of P450,000.00 should
Dominguez be unable to faithfully comply with the contract for the completion of
the Spouses Roxas' housing project. FGU's obligation to pay is solidary with
Dominguez and is realized once the latter fails to perform his obligation under the
Contract of Building Construction.

FGU's contention that the P450,000.00 face amount simply indicates its maximum
potential liability and that it should only be liable for actual damages or the cost
overrun as a result, of the non-completion of the project is untenable. The terms of
the bond were clear; hence, the literal meaning of its stipulation should control.

The specific condition in the FGU Surety Bond did not clearly state the limitation of
FGU's liability. From the terms of this bond, FGU guaranteed to pay the amount of
P450,000.00 in the event of Dominguez's breach of his contractual undertaking.
Hence, FGU was bound to pay the stipulated indemnity upon proof of Dominguez's
default without the necessity of proof on the measure of damages caused by the
breach. A stipulation not contrary to law, morals, or public order is binding upon the
obligor.[72]

If FGU's intention was to limit its liability to the cost overrun or additional cost to
the Spouses Roxas to complete the project up to the extent of P450,000.00, then it
should have included in the Surety Bond specific words indicating this intention. Its
failure to do so must be construed against it.

A suretyship agreement is a contract of adhesion ordinarily prepared by the surety

or insurance company. Therefore, its provisions are interpreted liberally in favor of
the insured and strictly against the Insurer who, as the drafter of the bond, had the
opportunity to state plainly the terms of its obligation.[73]

It was undisputed that Dominguez failed to finish the construction work within the
agreed time frame, triggering FGU's liability under the Surety Bond. Dominguez's
breach of the Contract of Building Construction gave the Spouses Roxas and/or
Philtrust Bank the immediate right to pursue FGU on the surety bond. Thus, FGU is
duty-bound to perform what it has guaranteed—to pay P450,000.00 upon notice of
Dominguez's default.

FGU, on the other hand, has the right to be indemnified for any payments made,
both under the law and the indemnity agreement. In Escaño v. Ortigas, Jr.,[74] this
Court explained this right to full reimbursement by a surety:
[E]ven as the surety is solidarity bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full amount paid, and
not just any proportional share, from the principal debtor or debtors. Such right to
full reimbursement falls within the other rights, actions and benefits which pertain
to the surety by reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the surety? We find the
right under Article 2066 of the Civil Code, which assures that "[t]he guarantor who
pays for a debtor must be indemnified by the latter," such indemnity comprising of,
among others, "the total amount of the debt." Further, Article 2067 of the Civil
Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor."

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that
the provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr. Tolentino's observation
that "[t]he reference in the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable provisions
governing guaranty." For if that were not the implication, there would be no
material difference between the surety as defined under Article 2047 and the joint
and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and

granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047.[75]

I.B

This Court disagrees with FGU's contention that it should only be liable to the
Spouses Roxas for one-half (1/2) of the face amount of the Surety Bond.

Under the Surety Bond, FGU guaranteed Dominguez's fulfilment of the

undertakings, terms, and conditions stipulated in the Contract of Building
Construction. A copy of the contract was attached to and made a part of the Surety
Bond.[76]

FGU's undertaking under the Surety Bond was that of a surety to the obligation of
Dominguez, who is the principal under the construction contract. This bond
expressly incorporated the Contract of Building Construction. Hence, in enforcing
this bond, its provisions must be read together with the Contract of Building
Construction.

Jurisprudence refers to this rule as the "complementary-contracts-construed-

together" doctrine, which mandates that the stipulations, terms, and conditions of
both the principal and accessory contracts must be construed together in order to
arrive at the true intention of the parties.[77]

This doctrine is consistent with Article 1374 of the Civil Code, which states:

Article 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them taken
jointly.

While FGU's Surety Bond indicates "Floro Roxas and Philippine Trust Company" as
obligees, the Contract of Building Construction clearly refers to Philtrust Bank and
the Spouses Roxas as solidary creditors of Dominguez, as can be gleaned from the
following provisions:

6. In the event the Contractor fails to comply with its obligation under any of the
aforementioned premises and the herein terms and conditions of this Contract, the
Contractor shall pay to the Bank and/or Owners the sum of One Thousand Pesos
(P1,000.00), Philippine Currency, daily, as liquidated damages, until it shall have
complied with its obligation;

7. To insure and guarantee the faithful performance of its obligation under this
Contract, the Contractor binds himself to post and file a Performance Bond of
P450,000.00 and a Contractor's All Risk Bond of P1,200,000.00 in favor of the Bank
and/or Owners to be issued by a reputable insurance/surety firm approved by the
Bank[.][78] (Emphasis supplied)

Consequently, FGU is bound to pay the Spouses Roxas and Philtrust Bank as
solidary creditors and not joint creditors.

II

Dominguez is liable to pay liquidated damages to the Spouses Roxas under the
Contract of Building Construction from scheduled date of completion until the time
he effectively abandoned the project.

The Contract of Building Construction contains the following stipulation for

liquidated damages:

6. In the event the Contractor fails to comply with its obligation under any of the
aforementioned premises and the herein terms and conditions of this Contract, the
Contractor shall pay to the Bank and/or Owners the sum of One Thousand Pesos
(P1,000.00), Philippine Currency, daily, as liquidated damages, until it shall have
complied with its obligation.[79]

Under the Contract, the liability for liquidated damages would start accruing daily
from the stipulated date of completion until the date of the actual completion of the
project.
However, FGU contends that this provision applies only where there is delay in the
completion of the project and does not contemplate situations where the contractor
abandoned the project.

This Court is not persuaded.

The parties have agreed and articulated on the payment of liquidated damages in
case of breach. What is decisive for the recovery of liquidated damages in this case
is the fact of delay in the completion of the works.

The law allows parties to stipulate on liquidated damages.[80] A clause on liquidated

damages is normally added to construction contracts not only to provide indemnity
for damages but also to ensure performance of the contractor "by the threat of
greater responsibility in the event of breach."[81] In Philippine Economic Zone
Authority v. Pilhino Sales Corp.,[82] this Court said:

By definition, liquidated damages are a penalty, meant to impress upon defaulting

obligors the graver consequences of their own culpability. Liquidated damages must
necessarily make non-compliance more cumbersome than compliance. Otherwise,
contracts might as well make no threat of a penalty at all:

Liquidated damages are those that the parties agree to be paid in case of a breach.
As worded, the amount agreed upon answers for damages suffered by the owner
due to delays in the completion of the project. Under Philippine laws, these
damages take the nature of penalties. A penal clause is an accessory undertaking
to assume greater liability in case of a breach. It is attached to an obligation in
order to ensure performance.[83] (Emphasis in the original)

If this Court goes by FGU's reasoning that the liquidated-damages clause does not
apply in case of abandonment, then, in effect, this Court diminishes or disregards
altogether the coercive force of this stipulation. Moreover, it is contrary to the
intention of the parties because it was clearly provided that liquidated damages are
recoverable for delay in the completion of the project; hence, there is more reason
in case of non-completion.

Thus, this Court holds that Dominguez is bound to pay liquidated damages from
September 23, 1979, the scheduled date of completion, until October 31,
1979,[84] when he effectively abandoned the project. FGU cannot be held liable for it
because it is not a party to the Contract of Building Construction. Neither does the
Surety Bond contain any stipulation for liquidated damages on top of FGU's liability
to pay the face amount in case of Dominguez' s non-performance.

III

The Spouses Roxas ask this Court to review the records of the case and re-examine
the evidence presented before the trial court. They contend that there was no
factual basis for ordering them to pay Dominguez the sums of P90,000.00 and
P73,136.75 with interests.[85]
FGU counters that the liability of the Spouses Roxas to pay Dominguez these
amounts were sufficiently proven by the Agreement dated May 24, 1979, the
checks and cash vouchers evidencing the loan, and the testimony and admissions
of Eufemia.[86] The foregoing amounts, together with accrued interest, should be set
off against FGU's liability, if any, under the Surety Bond.[87]

As a rule, only questions of law may be appealed to this Court in a petition for
review. This Court is not a trier of facts; its jurisdiction being limited to errors of
law. Moreover, factual findings of the trial court, particularly when affirmed by the
Court of Appeals, are generally binding on this Court.[88]

The Regional Trial Court held:

This court has gone over the evidence presented in this case which
included the testimonial and documentary exhibits . . . The evidence do not
show that the defendants spouses complied with the agreement with
Rosendo Dominguez with regards to the three (3) payments for
P30,000.00 each. The parcels of land mentioned in the agreement were different
from what was later shown the plaintiff. It should be noted that Mrs. Eufemia Roxas
did not rebutt this. This court believes that the defendant spouses reneged in their
obligations . . . Moreover, the defendant spouses borrowed sums of money
which should be used for the project but instead, were diverted to their
personal benefits ... This court has assessed the sincerity of Rosendo
Doming[u]ez to make good his commitment but there was no rec[i]procity with
regards to the spouses Roxases. There was no attempt to comply with their
agreement and moreover, they got money from Rosendo Dominguez for
their personal benefit. The failure of the defendant Philipine Trust Company to
release the balance of P24,000 to Rosendo Dominguez was because of his failure to
submit the invoices and receipts of the previous releases other than the
P450,000.00. However, there is no proof that the subsequent releases were
diverted from the use they were intended. Only the amount of P73,136.75 went
to the spouses Roxases. To require Rosendo Dominguez to return these amounts
to the [Philtrust] Bank would be unfair to the plaintiff in the absence of proof that
he spent the amount for other purposes. The indebtedness of the spouses Roxases
to the Philippine Trust Company was not refuted.[89]

The Regional Trial Court categorically ruled that the cash installments were not
given to Dominguez. Aside from this, the real properties promised were also
different from those shown to him. It also found sufficient evidence showing the
Spouses Roxas' debt to Dominguez in the amount of P73,136.75.

In this case, the factual findings of the trial court, which were affirmed by the Court
of Appeals, were based on substantial evidence and were not refuted with contrary
proof by the Spouses Roxas. Therefore, this Court finds no cogent reason to disturb
the consistent factual findings of the trial court and of the Court of Appeals.

IV
On the issue of judicial compensation, this Court finds for FGU.

Article 1280 of the Civil Code provides:

Article 1280. Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the principal
debtor.

While Article 1280 specifically pertains to a guarantor, the provision nonetheless

applies to a surety.[90] Contracts of guaranty and surety are closely related in the
sense that In both, "there is a promise to answer for the debt or default of
another."[91] The difference lies in that "a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the
principal does not pay."[92]

Hence, FGU could offset its liability under the Surety Bond against Dominguez's
collectibles from the Spouses Roxas. His collectibles include the unpaid contractor's
fee of P 90,000.00 plus 14% interest per annum from October 31, 1979 until fully
paid. Additionally, his collectibles cover the Spouses Roxas' advances from the
construction funds in the amount of P73,136.75 plus 6% legal interest from
November 16, 1979 until fully paid.

In the event of compensation, the Spouses Roxas shall be liable to Philtrust Bank
for the latter's share in the obligation.[93]

Philtrust Bank, for its part, assails the Court of Appeals Decision and submits that
there is no need to remand the case to the trial court because it has already
presented several pieces of evidence to prove its other claims against the Spouses
Roxas.[94] Philtrust Bank adds that during the proceedings in the trial court, the
Spouses Roxas did not deny the existence of their loan obligations and the
mortgage of several of their properties to secure these loan obligations.[95]

Philtrust Bank further disputes the Court of Appeals' findings that the release of the
construction funds was without the conformity of the Spouses Roxas. Philtrust Bank
points to two (2) promissory notes executed by the Spouses Roxas dated April 11,
1979 and July 16, 1979 for P450,000.00 each, which the Spouses Roxas allegedly
admitted in their Answer. They also referred to the testimony of Penafrancia Gabriel
(Gabriel), the Senior Loan Clerk of Philtrust Bank-Limay Branch in charge of the
Spouses Roxas' account. These promissory notes and Gabriel's testimony explained
that "Philtrust [Bank] released the proceeds of the loan as the need arose and
[these] releases were reflected in a record to keep track of the account."[96]

Finally, Philtrust Bank avers that the claim of the Spouses Roxas for unrealized
rentals has not been proven and is "highly speculative."[97]
Philtrust Bank prays for the following reliefs:

1. To include Philtrust as one of the parties-obligees to whom FGU [Insurance

Corporation] and Mr. Dominguez are solidarity liable under FIC Bond No.
G(23)5994.

2. To order Mr. Dominguez to pay Philtrust liquidated damages in the amount of

P1,000.00 per day from the time he was supposed to finish the contract, i.e.,
22 September 1979, until the project is fully completed.

3. To order Spouses Roxas to pay Philtrust [Bank] their loan obligations, plus
interest, penalty and attorney[']s fees until fully paid, which as of 15 March
1990 amounts to P13,761,400.56.

4. In default of such payments, the mortgaged real properties be ordered sold

and the proceeds thereof applied to the payment of the various sums due
Philtrust [Bank]; that Spouses Roxas and all persons and/or entities holding
claims under them subsequent to the execution of the mortgages, either as
purchasers, encumbrances, or otherwise, be barred and foreclosed forever of
all rights, claims and equity of redemption in said mortgaged properties; and
that Philtrust [Bank] may have execution against Spouses Roxas for any
deficiency which may remain unpaid after applying the proceeds of the sale
of said properties to the satisfaction of said judgment.[98]

The Regional Trial Court dismissed without prejudice the counterclaims of Philtrust
Bank. However, this was effectively reversed by the Court of Appeals when it
ordered the remand of the case to the trial court for reception of evidence and
proper computation of the other claims of Philtrust Bank.

This Court agrees with Philtrust Bank that remand is improper and unnecessary
because it has already presented its evidence to prove the loans it extended to the
Spouses Roxas.

Eufemia admitted the consolidation of their previous credit accommodations from

Philtrust Bank to P2,000,000.00 on February 22, 1978[99] and the due execution of
the mortgages executed by them in favor of Philtrust Bank.[100] She also admitted
that their loan accommodation was further increased to P2,523,200.00 on July 17,
1979.[101] She likewise admitted that out of the P2,000,000.00 credit
accommodation, Philtrust Bank was able to release P1,557,200.00, covered by
promissory notes, which they were not able to pay on their maturity dates.[102] The
details of the promissory notes are as follows:

Promissory Note No. Promissory Note Date Amount (P)

253 March 3, 1978 100,000.00
255 March 6, 1978 625,000.00
257 March 10, 1978 175,000.00
277 March 22, 1978 20,000.00
 294 March 31, 1978 35,000.00
315 April 18, 1978 45,000.00
356 May 19, 1978 25,000.00
371 June 16, 1978 100,000.00
392 July 13,1978 40,800.00
414 July 27, 1978 86,400.00
445 August 24, 1978 10,000.00
505 November 15, 1978 228,000.00
536 December 19, 1978 12,500.00
586 January 17, 1979 25,000.00
591 January 23, 1979 10,000.00
610 February 15, 1979 17,000.00
615 February 19, 1979 2,500.00
TOTAL 1,557,200.00[103]

It is stipulated in the promissory notes that the principal amount would be subject
to interest at the rate of 19% per annum payable in advance. While the Spouses
Roxas averred that the advance interests were immediately deducted from the
releases of the proceeds on the note,[104] they did not present any supporting proof.
It is a rule that the party who alleges a fact, in this case, the prepayment of
interest, has the burden of proving it.[105] This Court cannot accept their affirmative
defense for failure to present any evidence to prove such payment.

Furthermore, the Spouses Roxas' contention on prepaid interest was belied by

Eufemia's admission that a total sum of P1,557,200.00 was released to them.
Hence, this Court rules that the stipulated interest on the principal amounts has not
yet been paid.

Under the terms of the promissory notes, in case of non-payment at maturity, the
Spouses Roxas further bound themselves to pay:

1) 19% on the outstanding obligation until fully paid as penalty for delinquency; and
2) 30% of the promissory note amount as attorney's fees and expenses of collection.

The Spouses Roxas do not dispute the validity of these penalty charges and
attorney's fees. Therefore, these stipulations in the promissory notes must be
upheld as the law between the parties, and are, thus, binding on them.[106]

The amounts due on each promissory note including the stipulated 19% interest, as
of June 30, 1980, the date of Philtrust Bank's Answer with Counterclaim, are as
follows:
 PN No. PN Date Date Due No. of Principal Accrued Total (P)
Days (P) Interest
(P)[107]
253 3-Mar-78 30-Jun-80 850 100,000.00 44,246.58 144,246.58
255 6-Mar-78 30-Jun-80 847 625,000.00 275,565.07 900,565.07
257 10-Mar-78 30-Jun-80 843 175,000.00 76,793.84 251,793.84
277 22-Mar-78 30-Jun-80 831 20,000.00 8,651.51 28,651.51
294 31-Mar-78 30-Jun-80 822 35,000.00 14,976.16 49,976.16
315 18-Apr-78 30-Jun-80 804 45,000.00 18,833.42 63,833.42
356 19-May-78 30-Jun-80 773 25,000.00 10,059.59 35,059.59
371 16-Jun-78 30-Jun-80 745 100,000.00 38,780.82 138,780.82
392 13-Jul-78 30-Jun-80 718 40,800.00 15,249.14 56,049.14
414 27-Jul-78 30-Jun-80 704 86,400.00 33,662.64 118,062.64
445 24-Aug-78 30-Jun-80 676 10,000.00 3,518.90 13,518.90
505 15-Nov-78 30-Jun-80 593 228,000.00 70,380.16 298,380.16
536 19-Dec-78 30-Jun-80 559 12,500.00 3,637.33 16,137.33
586 17-Jan-79 30-Jun-80 530 25,000.00 6,897.26 31,897.26
591 23-Jan-79 30-Jun-80 524 10,000.00 2,727.67 12,727.67
610 15-Feb-79 30-Jun-80 501 17,000.00 4,433.51 21,433.51
615 19-Feb-79 30-Jun-80 497 2,500.00 646.78 3,146.78
1,557,200.00 62,7060.38 2,184,269.38

The total amount of P2,184,260.38 shall further be subject to 19% penalty interest
from June 30, 1980 until fully paid in accordance with the stipulations of the
parties. The Spouses Roxas would also be liable to attorney's fees equivalent to
10% of the principal amount of their obligation.

With respect to the P900,000.00 loan subject of the Contract of Building

Construction, the Court of Appeals found that of the P876,000.00 construction
funds released by Philtrust Bank, the release of P426,000.00[108] to Dominguez was
not approved by the Spouses Roxas. Despite this, the trial court found no evidence
showing that these unauthorized releases were diverted to other uses.[109] Thus,
this Court holds the Spouses Roxas liable for the loaned amount of P876,000.00,
with payment of stipulated interest of 19% from judicial demand until fully paid.

VI

The Spouses Roxas contend that Philtrust Bank's unauthorized releases to

Dominguez of the construction funds paved the way for the latter's diversion of the
funds,[110] which resulted in the non-completion of the project.[111] Thus, they add
that the rental payments, which they should have earned from the houses had they
been completed, should be offset against their liability to Philtrust Bank.[112]

The Spouses Roxas' contention is untenable.

For one, the Regional Trial Court found no evidence to prove the alleged diversion
of funds.[113] If at all, it was only the amount of P73,136.75 that was advanced to
the Spouses Roxas for their personal use and benefit.

On Philtrust Bank's liability under the Contract of Building Construction for the
unauthorized release of P426,000.00 construction fund, this Court takes judicial
notice of the facts in a related case involving Philtrust Bank and the Spouses Roxas,
docketed as G.R. No. 171897.[114] That case involved the execution of the final and
executory December 26, 1988 Decision of the Regional Trial Court of Bataan, with
the dispositive portion as follows:

WHEREFORE, the Court hereby renders judgment (a) Ordering the issuance of a
writ of permanent injunction perpetually enjoining defendant Philippine Trust
Company and defendant provincial sheriff of Bataan or any of his deputies from
foreclosing extrajudicially the real estate mortgage(s) executed in its favor by
plaintiffs covering the real properties subject of this action;

(b) Condemning said defendant bank to pay to plaintiffs: (1) Ordinary

damages for breach of the provisions of the contract of building
construction (Exits. "B" & "26"), in the sum of One Hundred Thousand
Pesos (P100,000.00); (2) Moral damages for the improvident extrajudicial
foreclosure of plaintiffs' mortgage(s) after it had elected judicial foreclosure thereof,
in the amount of Three Hundred Thousand Pesos (P300,000.00) for both plaintiffs;
(3) Exemplary damages by way of example or correction for the public good in the
sum of Fifty Thousand Pesos (P50,000.00); (4) Attorney's fees in the amount of
Fifty Thousand Pesos (P50,000.00); and (5) Double costs of suit[ ].

SO ORDERED.[115]

It appears from the narration of facts in GR. No. 171897 that while this case was
pending in the trial court, Philtrust Bank sought to extra-judicially foreclose the
mortgaged properties of the Spouses Roxas. Consequently, the Spouses Roxas filed
a complaint against Philtrust Bank for damages with preliminary injunction in the
Regional Trial Court of Bataan docketed as Civil Case No. 4809. The Regional Trial
Court of Bataan eventually ruled in favor of the Spouses Roxas. Upon the finality of
the decision, the Spouses Roxas sought and were granted a writ of execution.
Philtrust Bank opposed the issuance of the writ all the way up to this Court in G.R.
No. 171897 mainly setting up the defense of legal compensation to offset the
judgment debt due to the Spouses Roxas against the latter's loan obligation to
Philtrust Bank. This Court rejected Philtrust Bank's contention on several grounds.
This Court ruled that this defense of legal compensation to offset Philtrust Bank's
judgment debt against the Spouses Roxas' loan obligation was belatedly raised.
Additionally, legal compensation could not take place because the amount and
demandibility of the loan obligation are still being disputed, and hence, could not be
considered liquidated. Finally, this Court found Philtrust Bank guilty of forum
shopping.
The question of Philtrust Bank's liability for unauthorized release of the funds has
already been settled in Civil Case No. 4809, Philtrust Bank has been adjudged liable
by the Regional Trial Court of Bataan to the Spouses Roxas for damages of
P100,000.00 for breach of the provisions of the Contract of Building Construction in
a decision that has already attained finality. The principle of res judicata bars the
relitigation in a subsequent case of the same facts and issues actually and directly
resolved in a former case between the same parties.[116] Hence, this Court shall no
longer pass upon the issue of the liability of Philtrust Bank with regard to the
unauthorized release of the remaining construction funds.

WHEREFORE, the Petitions are PARTIALLY GRANTED. The May 26, 2009
Decision of the Court of Appeals in CA-G.R. CV. No. 30340 is AFFIRMED WITH
MODIFICATION as follows:

1. Ordering Rosendo P. Dominguez, Jr. and FGU Insurance Corporation to

jointly and severally pay the Spouses Floro and Eufemia Roxas and/or
Philippine Trust Company the amount of P450,000.00 with 12% legal interest
from March 6, 1980, the date of Philippine Trust Company's extrajudicial
demand, until June 30, 2013 and six percent (6%) legal interest from July 1,
2013 until fully paid, pursuant to this Court's ruling in Nacar v. Gallery
Frames;[117]

2. Ordering Rosendo P. Dominguez, Jr. to pay the Spouses Floro and Eufemia
Roxas and/or Philippine Trust Company:

a. liquidated damages in the total amount of P38,000.00 (P1,000.00 x 38

days [September 23, 1979 to October 31, 1979]);

b. P100,000.00 as moral damages; P100,000.00 as exemplary damages;

and P50,000.00 as attorney's fees.

The foregoing amounts shall earn interest at the legal rate of six percent
(6%) from finality of this Decision until fully paid;

3. Ordering the Spouses Floro and Eufemia Roxas to pay Rosendo P.

Dominguez, Jr. the amounts of:

a. P90,000,00 with the stipulated fourteen percent (14%) annual interest

from October 31, 1979 until fully paid;

b. P73,136.75 with interest at the legal rate of 12% per annum from
November 16, 1979 up to June 30, 2013 and six percent (6%) per
annum from July 1, 2013 until full payment.

FGU Insurance Corporation shall be allowed to offset its liability against the
foregoing amounts.
The Spouses Floro and Eufemia Roxas, in turn, are liable to Philippine Trust
Company for the latter's share in the obligation.

4. Ordering the Spouses Floro and Eufemia Roxas to pay Philippine Trust
Company the amounts of:

a. P876,000.00 with stipulated nineteen percent (19%) annual interest

from June 30, 1980 until fully paid;

b. P2,184,260.38 with nineteen percent (19%) annual interest as penalty

for delinquency from June 30, 1980 until fully paid; and

c. Attorney's fees of P243,320.00.

5. In default of such payments, the mortgaged real properties shall be sold at a

public auction to pay off the various sums due the Philippine Trust Company.
The latter may have execution against the Spouses Floro and Eufemia Roxas
for any deficiency which may remain unpaid after applying the proceeds of
the sale of said properties to the satisfaction of this Decision;

6. This case is remanded to the Regional Trial Court for execution.

SO ORDERED.
 February 27, 2017

G.R. No. 190702

JAIME T. GAISANO, Petitioner

vs.
DEVELOPMENT INSURANCE AND SURETY CORPORATION, Respondent

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11,
2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the
September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The
RTC granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the comprehensive
commercial vehicle policy issued by Development Insurance and Surety Corporation
(respondent), viz.:

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-
appellant ordered to pay the plaintiff-appellee the sum of ₱55,620.60 with interest at 6 percent per
annum from the date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with
plate number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the
insurance business.6 On September 27, 1996, respondent issued a comprehensive commercial
vehicle policy7 to petitioner in the amount of ₱1,500,000.00 over the vehicle for a period of one year
commencing on September 27, 1996 up to September 27, 1997.8 Respondent also issued two other
commercial vehicle policies to petitioner covering two other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific
Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's
Ark Merchandising (Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far
East Bank check dated September 27, 1996 payable to Trans-Pacific on the same day.11 The check
bearing the amount of ₱140,893.50 represents payment for the three insurance policies, with
₱55,620.60 for the premium and other charges over the vehicle.12 However, nobody from Trans-
Pacific picked up the check that day (September 27) because its president and general manager,
Rolando Herradura, was celebrating his birthday. Trans-Pacific informed Noah's Ark that its
messenger would get the check the next day, September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the
vicinity of SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine
National Police Traffic Management Command at Camp Crame in Quezon City.14 Despite search and
retrieval efforts, the vehicle was not recovered.15
Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an
official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of
₱55,620.60 for the premium and other charges over the vehicle.16 The check issued to Trans-Pacific
for ₱140,893.50 was deposited with Metrobank for encashment on October 1, 1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner
reported the loss and filed a claim with respondent for the insurance proceeds of
₱1,500,000.00.18 After investigation, respondent denied petitioner's claim on the ground that there
was no insurance contract.19 Petitioner, through counsel, sent a final demand on July 7,
1997.20 Respondent, however, refused to pay the insurance proceeds or return the premium paid on
the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21 with
the RTC where it sought . to collect the insurance proceeds from respondent. In its
Answer,22 respondent asserted that the non-payment of the premium rendered the policy ineffective.
The premium was received by the respondent only on October 2, 1996, and there was no known
loss covered by the policy to which the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the
premium paid as of September 27, even if the check was received only on September 28 because
(1) respondent's agent, Trans-Pacific, acknowledged payment of the premium on that date,
September 27, and (2) the check that petitioner issued was honored by respondent in
acknowledgment of the authority of the agent to receive it.25 Instead of returning the premium,
respondent sent a checklist of requirements to petitioner and assigned an underwriter to investigate
the claim.26 The RTC ruled that it would be unjust and inequitable not to allow a recovery on the
policy while allowing respondent to retain the premium paid.27 Thus, petitioner was awarded an
indemnity of ₱l,500,000.00 and attorney's fees of ₱50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records were
forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance
contract becomes valid and binding only after the premium is paid pursuant to Section 77 of the
Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found
that the premium was not yet paid at the time of the loss on September 27, but only a day after or on
September 28, 1996, when the check was picked up by Trans-Pacific.34 It also found that none of the
exceptions to Section 77 obtains in this case.35 Nevertheless, the CA ordered respondent to return
the premium it received in the amount of ₱55,620.60, with interest at the rate of 6% per annum from
the date of the denial of the claim on October 9, 1996 until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract
between him and respondent.37 He submits that it comes within the exceptions to the rule in Section
77 of the Insurance Code that no contract of insurance becomes binding unless and until the
premium thereof has been paid. The prohibitive tenor of Section 77 does not apply because the
parties stipulated for the payment of premiums.38 The parties intended the contract of insurance to be
immediately effective upon issuance, despite non-payment of the premium, because respondent
trusted petitioner.39 He adds that respondent waived its right to a pre-payment in full of the terms of
the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the
return of the premiums paid, then he should be able to recover the full amount of ₱140,893.50, and
not merely ₱55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was
merely to disregard the contract for only the lost vehicle.42 According to petitioner, the principle of
mutuality of contracts is violated, at his expense, if respondent is allowed to be excused from
performance on the insurance contract only for one vehicle, but not as to the two others, just
because no loss is suffered as to the two. To allow this "would be to place exclusively in the hands of
one of the contracting parties the right to decide whether the contract should stand or not x x x. "43

For failure of respondent to file its comment to the petition, we declared respondent to have waived
its right to file a comment in our June 15, 2011 Resolution.44

The lone issue here is whether there is a binding insurance contract between petitioner and
respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event.45 Just like any other contract, it
requires a cause or consideration. The consideration is the premium, which must be paid at the time
and in the way and manner specified in the policy.46 If not so paid, the policy will lapse and be
forfeited by its own terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the
insurance policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time
of the issuance of the policy, provides:

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies.

In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an
insurance contract, both the insured and insurer undertake risks. On one hand, there is the insured,
a member of a group exposed to a particular peril, who contributes premiums under the risk of
receiving nothing in return in case the contingency does not happen; on the other, there is the
insurer, who undertakes to pay the entire sum agreed upon in case the contingency happens. This
risk-distributing mechanism operates under a system where, by prompt payment of the premiums,
the insurer is able to meet its legal obligation to maintain a legal reserve fund needed to meet its
contingent obligations to the public. The premium, therefore, is the elixir vitae or source of life of the
insurance business:

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk-distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are
paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes
a risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire
sum agreed upon, and the insured, that of parting with the amount required as premium. without
receiving anything therefor in case the contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. It should be understood that the integrity of this fund cannot be secured
and maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to the contrary. For
what could prevent the insurance applicant from deliberately or willfully holding back full premium
payment and wait for the risk insured against to transpire and then conveniently pass on the balance
of the premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to
the public, hence, the imperative need for its prompt payment and full satisfaction. It must be
emphasized here that all actuarial calculations and various tabulations of probabilities of losses
under the risks insured against are based on the sound hypothesis of prompt payment of premiums.
Upon this bedrock insurance firms are enabled to offer the assurance of security to the public at
favorable rates. x x x50 (Citations omitted.)

Here, there is no dispute that the check was delivered to and was accepted by respondent's agent,
Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made at the time
of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was
informed that the check was ready for pick-up on September 27, 1996, the notice of the availability
of the check, by itself, does not produce the effect of payment of the premium. Trans-Pacific could
not be considered in delay in accepting the check because when it informed petitioner that it will only
be able to pick-up the check the next day, petitioner did not protest to this, but instead allowed
Trans-Pacific to do so. Thus, at the time of loss, there was no payment of premium yet to make the
insurance policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless premium
is paid. In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said:

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals, wherein we ruled that Section 77 may not apply if the parties have agreed to the payment
in installments of the premium and partial payment has been made at the time of loss. We said
therein, thus:

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

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

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

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term
for the payment of the premium and loss occurs before the expiration of the tem1, recovery on the
policy should be allowed even though the premium is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth
exception to Section 77.52 (Citations omitted.)

In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or
industrial life policy, whenever the grace period provision applies, as expressly provided by Section
77 itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt
of premium, even if premium has not been actually paid, as expressly provided by Section 78 itself;
(3) where the parties agreed that premium payment shall be in installments and partial payment has
been made at the time of loss, as held in Makati Tuscany Condominium Corp. v. Court of
Appeals;53(4) where the insurer granted the insured a credit term for the payment of the premium,
and loss occurs before the expiration of the term, as held in Makati Tuscany Condominium
Corp.; and (5) where the insurer is in estoppel as when it has consistently granted a 60 to 90-day
credit term for the payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in UCPB
General Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not
contain an acknowledgment of the receipt of premium but merely a statement of account on its
face;54 and (3) no payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties
intended the contract of insurance to be immediately effective upon issuance, despite non-payment
of the premium. This waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the
insurers have consistently granted the insured a credit extension or term for the payment of the
premium. Here, however, petitioner failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent. While there was mention of a credit
agreement between Trans-Pacific and respondent, such arrangement was not proven and was
internal between agent and principal.55 Under the principle of relativity of contracts, contracts bind the
parties who entered into it. It cannot favor or prejudice a third person, even if he is aware of the
contract and has acted with knowledge.56

We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite nonpayment of the premiums. Even if there is a waiver
1âwphi1

of pre-payment of premiums, that in itself does not become an exception to Section 77, unless the
insured clearly gave a credit term or extension. This is the clear import of the fourth exception in
the UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the requirement in
Section 77 that "[n]otwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been
paid, x x x." Moreover, the policy itself states:

WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the
basis of this Contract and deemed incorporated herein, has applied to the company for the
insurance hereinafter contained, subject to the payment of the Premium as consideration for such
insurance.57 (Emphasis supplied.)

The policy states that the insured's application for the insurance is subject to the payment of the
premium. There is no waiver of pre-payment, in full or in installment, of the premiums under the
1âw phi 1

policy. Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy
became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium paid for
the vehicle in the amount of ₱55,620.60 under the principle of unjust enrichment. There is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience.58 Petitioner cannot claim the full amount of ₱140,893.50, which includes the payment of
premiums for the two other vehicles. These two policies are not affected by our ruling on the policy
subject of this case because they were issued as separate and independent contracts of
insurance.59 We, however, find that the award shall earn legal interest of 6% from the time of extra
judicial demand on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009
and the Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that
respondent should return the amount of P55,620.60 with the legal interest computed at the rate of
6% per annum reckoned from July 7, 1997 until finality of this judgment. Thereafter, the total amount
shall earn interest at the rate of 6% per annum from the finality of this judgment until its full
satisfaction.

SO ORDERED.
G.R. No. 183272 October 15, 2014

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,

vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.

DECISION

DEL CASTILLO, J.:

The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium refund is the
only matter in question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in CA-GR. CV
No. 86923, which, among others, imposed a 12% per annum rate of interest reckoned from the time
of death of the insured until fully paid, on the premium to be reimbursed by petitioner Sun Life of
Canada (Philippines), Inc. (petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the
Estate of the Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is the
CA's June 12, 2008 Resolution3 denying petitioner's Motion for Reconsideration of the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose
application for a life insurance policy,4 with face value of ₱300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or within the two-year contestability period,5 Norberto died
of disseminated gastric carcinoma.6 Consequently, respondent Tan Kit filed a claim under the subject
policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of
Norberto’s failure to fully and faithfully disclose in his insurance application certain material and
relevant information about his health and smoking history. Specifically, Norberto answered "No" to
the question inquiring whether he had smoked cigarettes or cigars within the last 12 months prior to
filling out said application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the
several physicians that Norberto consulted for his illness, reveals that he was a smoker and had only
stopped smoking in August 1999. According to petitioner, its underwriters would not have approved
Norberto’s application for life insurance had they been given the correct information. Believing that
the policy is null and void, petitioner opined that its liability is limited to the refund of all the premiums
paid. Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the premium
refund.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted
on the payment of the insurance proceeds.

On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance Contract before the
Regional Trial Court (RTC) of Makati City.

Ruling of the Regional Trial Court

In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. Charity Salvador
(Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy
E. Javelosa (Javelosa), answered "NO" to the question "Are you aware of anything about the life to
be insured’s lifestyle, hazardous sports, habits, medical history, or any risk factor that would have an
adverse effect on insurability?" in her Agent’s Report. Javelosa also already knew Norberto two
years prior to the approval of the latter’s application for insurance. The RTC concluded that
petitioner, through the above-mentioned circumstances, had already cleared Norberto of any
misrepresentation that he may have committed. The RTC also opined that the affidavit of Dr. Chua,
presented as part of petitioner’s evidence and which confirmed the fact that the insured was a
smoker and only stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in
court. Further, since Norberto had a subsisting insurance policy with petitioner during his application
for insurance subject of this case, it was incumbent upon petitioner to ascertain the health condition
of Norberto considering the additional burden that it was assuming. Lastly, petitioner did not comply
with the requirements for rescission of insurance contract as held in Philamcare Health Systems,
Inc. v. Court of Appeals.12 Thus, the dispositive portion of the RTC Decision:

WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the
[respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay the
[respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(₱300,000.00), representing the face value of the insurance policy with interest at six percent (6%)
per annum from October 4, 2002 until fully paid.

Cost de oficio.

SO ORDERED.13

Petitioner moved for reconsideration,14 but was denied in an Order15 dated February 15, 2006.

Hence, petitioner appealed to the CA.

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17,
2007.

From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr.
Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom
he confided that he had stopped smoking only in 1999. At the time therefore that he applied for
insurance policy on October 28, 1999, there is no truth to his claim that he did not smoke cigarettes
within 12 months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the insurance policy. This
gave petitioner the right to rescind the insurance contract which it properly exercised in this case.

In addition, the CA held that the content of Norberto’s medical records are deemed admitted by
respondents since they failed to deny the same despite having received from petitioner a Request
for Admission pursuant to Rule 26 of the Rules of Court.17 And since an admission is in the nature of
evidence the legal effects of which form part of the records, the CA discredited the RTC’s ruling that
the subject medical records and the affidavits executed by Norberto’s physicians attesting to the
truth of the same were hearsay.

The dispositive portion of the CA Decision reads:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed
Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered
GRANTING the complaint a quo.

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from the time of the
death of the insured until fully paid.

SO ORDERED.18

The parties filed their separate motions for reconsideration.19 While respondents questioned the
factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the imposition of
interest on the premium ordered refunded to respondents.

However, the appellate court denied the motions in its June 12, 2008 Resolution,20 viz:

WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the
[petitioner] and the [respondents] are hereby DENIED.

SO ORDERED.21

Only petitioner appealed to this Court through the present Petition for Review on Certiorari.

Issue

The sole issue in this case is whether petitioner is liable to pay interest on the premium to be
refunded to respondents.

The Parties’ Arguments

Petitioner argues that no interest should have been imposed on the premium to be refunded
because the CA Decision does not provide any legal or factual basis therefor; that petitioner directly
and timely tendered to respondents an amount representing the premium refund but they rejected it
since they opted to pursue their claim for the proceeds of the insurance policy; that respondents
should bear the consequence of their unsound decision of rejecting the refund tendered to them;
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it liable for
interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals,22 no interest can be
assessed against petitioner.

Respondents, on the other hand, contend that the reimbursement of premium is clearly a money
obligation or one that arises from forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they admit that they refused the tender
of payment of the premium refund, they aver that they only did so because they did not want to
abandon their claim for the proceeds of the insurance policy. In any case, what petitioner should
have done under the circumstances was to consign the amount of payment in court during the
pendency of the case.

Our Ruling

Tio Khe Chio is not applicable in this case.

Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue of
payment of interest. There, the Court pointed to Sections 243 and 244 of the Insurance Code which
1âwphi 1

explicitly provide for payment of interest when there is unjustified refusal or withholding of payment
of the claim by the insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for
payment of interest when the debtor is in delay.

The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of
interest on the insurance proceeds in which the claim therefor was either unreasonably denied or
withheld or the insurer incurred delay in the payment thereof. In this case, what is involved is an
order for petitioner to refund to respondents the insurance premium paid by Norberto as a
consequence of the rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not unreasonably deny or
withhold the insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.

Nature of interest imposed by the CA

There are two kinds of interest – monetary and compensatory.

"Monetary interest refers to the compensation set by the parties for the use or forbearance of
money."25 No such interest shall be due unless it has been expressly stipulated in writing.26 "On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law or
by the courts."27 The interest mentioned in Articles 2209 and 221228of the Civil Code applies to
compensatory interest.29

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this
case, the subject interest was not one which was agreed upon by the parties in writing. This being
the case and judging from the tenor of the CA, to wit:

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from time of death of
the insured until fully paid.30

there can be no other conclusion than that the interest imposed by the appellate court is in the
nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned from the time of
death of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to have failed to
comply with his obligation.31

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching to
the said notice a check representing the amount of refund. However, respondents refused to accept
the same since they were seeking for the release of the proceeds of the policy. Because of this
discord, petitioner filed for judicial rescission of the contract. Petitioner, after receiving an adverse
judgment from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance contract and
consequently decreed the obligation of petitioner to return to respondents the premium paid by
Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.
Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within the
said period, then the amount shall be deemed equivalent to a forbearance of credit.32 In such a case,
the rate of interest shall be 6% per annum.33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse
to respondents Sandra Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of
~13,080.93 representing the premium paid by the insured within fifteen (15) days from date of finality
of this Decision. If the amount is not reimbursed within said period, the same shall earn interest of
6% per annum until fully paid.

SO ORDERED.
 January 16, 2017

G.R. No. 207277

MALAYAN INSURANCE CO., INC., YVONNE S. YUCHENGCO, ATTY. EMMANUEL G.

VILLANUEVA, SONNY RUBIN,1 ENGR. FRANCISCO MONDELO, and MICHAEL
REQUIJO,2 Petitioners.
vs.
EMMA CONCEPCION L. LIN,3 Respondent.

DECISION

DEL CASTILLO, J.:

Assailed in this Petition for Review on Certiorari4 are the December 21, 2012 Decision5 of the Court
of Appeals (CA) and its May 22, 2013 Resolution6 in CA-GR. SP No. 118894, both of which found no
grave abuse of discretion in the twin Orders issued by the Regional Trial Court (RTC) of Manila,
Branch 52, on September 29, 20107 and on January 25, 20118 in Civil Case No. 10-122738.

Factual Antecedents

On January 4, 2010, Emma Concepcion L. Lin (Lin) filed a Complaint9 for Collection of Sum of
Money with Damages against Malayan Insurance Co., Inc. (Malayan), Yvonne Yuchengco (Yvonne),
Atty. Emmanuel Villanueva, Sonny Rubin, Engr. Francisco Mondelo, Michael Angelo Requijo
(collectively, the petitioners), and the Rizal Commercial and Banking Corporation (RCBC). This was
docketed as Civil Case No. 10-122738 of Branch 52 of the Manila RTC.

Lin alleged that she obtained various loans from RCBC secured by six clustered warehouses located
at Plaridel, Bulacan; that the five warehouses were insured with Malayan against fire for ₱56 million
while the remaining warehouse was insured for ₱2 million; that on February 24, 2008, the five
warehouses were gutted by fire; that on April 8, 2008 the Bureau of Fire Protection (BFP) issued a
Fire Clearance Certification to her (April 8, 2008 FCC) after having determined that the cause of fire
was accidental; that despite the foregoing, her demand for payment of her insurance claim was
denied since the forensic investigators hired by Malayan claimed that the cause of the fire was arson
and not accidental; that she sought assistance from the Insurance Commission (IC) which, after a
meeting among the parties and a conduct of reinvestigation into the cause/s of the fire,
recommended that Malayan pay Lin's insurance claim and/or accord great weight to the BFP's
findings; that in defiance thereof, Malayan still denied or refused to pay her insurance claim; and that
for these reasons, Malayan's corporate officers should also be held liable for acquiescing to
Malayan's unjustified refusal to pay her insurance claim.

As against RCBC, Lin averred that notwithstanding the loss of the mortgaged properties, the bank
refused to go after Malayan and instead insisted that she herself must pay the loans to RCBC,
otherwise, foreclosure proceedings would ensue; and that to add insult to injury, RCBC has been
compounding the interest on her loans, despite RCBC's failure or refusal to go after Malayan.

Lin thus prayed in Civil Case No. 10-122738 that judgment be rendered ordering petitioners to pay
her insurance claim plus interest on the amounts due or owing her; that her loans and mortgage to
RCBC be deemed extinguished as of February 2008; that RCBC be enjoined from foreclosing the
mortgage on the properties put up as collaterals; and that petitioners he ordered to pay her
₱l,217,928.88 in the concept of filing foes, costs of suit,₱l million as exemplary damages, and
₱500,000.00 as attorney’s fees.
Some five months later, or on June 17, 2010, Lin filed before the IC an administrative case 10 against
Malayan, represented this time by Yvonne. This was docketed as Administrative Case No. 431.

In this administrative case, Lin claimed that since it had been conclusively found that the cause of
the fire was "accidental," the only issue left to be resolved is whether Malayan should be held liable
for unfair claim settlement practice under Section 241 in relation to Section 247 of the Insurance
Code due to its unjustified refusal to settle her claim; and that in consequence of the foregoing
failings, Malayan's license to operate as a non-life insurance company should be revoked or
suspended, until such time that it fully complies with the IC Resolution ordering it to accord more
weight to the BFP's findings.

On August 17, 2010, Malayan filed a motion to dismiss Civil Case No. 10-122738 based on forum
shopping. It argued that the administrative case was instituted to prompt or incite IC into ordering
Malayan to pay her insurance claim; that the elements of forum shopping are present in these two
cases because there exists identity of parties since Malayan's individual officers who were
impleaded in the civil case are also involved in the administrative case; that the same interests are
shared and represented in both the civil and administrative cases; that there is identity of causes of
action and reliefs sought in the two cases since the administrative case is merely disguised as an
unfair claim settlement charge, although its real purpose is to allow Lin to recover her insurance
claim from Malayan; that Lin sought to obtain the same reliefs in the administrative case as in the
civil case; that Lin did not comply with her sworn undertaking in the Certification on Non-Forum
Shopping which she attached to the civil case, because she deliberately failed to notify the RTC
about the pending administrative case within five days from the filing thereof.

This motion to dismiss drew a Comment/Opposition, 11 which Lin filed on August 31, 2010.

Ruling of the Regional Trial Court

In its Order of September 29, 2010,12 the RTC denied the Motion to Dismiss, thus:

WHEREFORE, the MOTION TO DISMISS filed by [petitioners] is hereby DENIED for lack of merit.

Furnish the parties through their respective [counsels] with a copy each [of] the Order.

SO ORDERED.13

The RTC held that in the administrative case, Lin was seeking a relief clearly distinct from that
sought in the civil case; that while in the administrative case Lin prayed for the suspension or
revocation of Malayan's license to operate as a non-life insurance company, in the civil case Lin
prayed for the collection of a sum of money with damages; that it is abundantly clear that any
judgment that would be obtained in either case would not be res judicata to the other, hence, there is
no forum shopping to speak of.

In its Order of January 25, 2011, 14 the RTC likewise denied, for lack of merit, petitioners' Motion for
Reconsideration.

Ruling of the Court of Appeals

Petitioners thereafter sued out a Petition for Certiorari and Prohibition15 before the CA. However, in a
Decision 16 dated December 21, 2012, the CA upheld the RTC, and disposed as follows:
WHEREFORE absent grave abuse of discretion on the part of respondent Judge, the Petition
for Certiorari and Prohibition (with Temporary Restraining Order and Preliminary Injunction) is
DISMISSED.

SO ORDERED.17

The CA, as did the RTC, found that Lin did not commit forum shopping chiefly for the reason that the
issues raised and the reliefs prayed for in the civil case were essentially different from those in the
administrative case, hence Lin had no duty at all to inform the RTC about the institution or pendency
of the administrative case.

The CA ruled that forum shopping exists where the elements of litis pendentia concurred, and where
a final judgment in one case will amount to res judicata in the other. The CA held that of the three
elements of forum shopping viz., (l) identity of parties, or at least such parties as would represent the
same interest in both actions, (2) identity of rights asserted and reliefs prayed for, the relief being
founded on the same facts, and (3) identity of the two proceedings such that any judgment rendered
in one action will, regardless of which party is successful, amount to res judicata in the other action
under consideration, only the first element may be deemed present in the instant case. The CA held
that there is here identity of parties in the civil and administrative cases because Lin is the
complainant in both the civil and administrative cases, and these actions were filed against the same
petitioners, the same RCBC and the same Malayan, represented by Yvonne, respectively. It held
that there is however no identity of rights asserted and reliefs prayed for because in the civil case, it
was Lin's assertion that petitioners had violated her rights to recover the full amount of her insurance
claim, which is why she prayed/demanded that petitioners pay her insurance claim plus damages;
whereas in the administrative case, Lin's assertion was that petitioners were guilty of unfair claim
settlement practice, for which reason she prayed that Malayan's license to operate as an insurance
company be revoked or suspended; that the judgment in the civil case, regardless of which party is
successful, would not amount to res judicata in the administrative case in view of the different issues
involved, the dissimilarity in the quantum of evidence required, and the distinct mode or procedure to
be observed in each case.

Petitioners moved for reconsideration 18 of the CA's Decision, but this motion was denied by the CA
in its Resolution of May 22, 2013.19

Issues

Before this Court, petitioners instituted the present Petition,20 which raises the following issues:

The [CA] not only decided questions of substance contrary to law and the applicable decisions of
this Honorable Court, it also sanctioned a flagrant departure from the accepted and usual course of
judicial proceedings.

A.

The [CA] erred in not dismissing the Civil Case on the ground of willful and deliberate [forum
shopping] despite the fact that the civil case and the administrative case both seek the payment of
the same fire insurance claim.

B.
The [CA] erred in not dismissing the civil case for failure on the part of [Lin] to comply with her
undertaking in her verification and certification of non-forum shopping appended to the civil
complaint.21

Petitioners' Arguments

In praying for the reversal of the CA Decision, petitioners argue that regardless of nomenclature, it is
Lin and no one else who filed the administrative case, and that she is not a mere complaining
witness therein; that it is settled that only substantial identity of parties is required for res judicata to
apply; that the sharing of the same interest is sufficient to constitute identity of parties; that Lin has
not denied that the subject of both the administrative case and the civil case involved the same fire
insurance claim; that there is here identity of causes of action, too, because the ultimate objective of
both the civil case and the administrative case is to compel Malayan to pay Lin's fire insurance claim;
that although the reliefs sought in the civil case and those in the administrative case are worded
differently, Lin was actually asking for the payment of her insurance claim in both cases; that it is
well-entrenched that a party cannot escape the operation of the principle in res judicata that a cause
of action cannot be litigated twice just by varying the form of action or the method of presenting the
case; that Go v. Office of the Ombudsman22is inapplicable because the issue in that case was
whether there was unreasonable delay in withholding the insured's claims, which would warrant the
revocation or suspension of the insurers' licenses, and not whether the insurers should pay the
insured's insurance claim; that Almendras Mining Corporation v. Office of the Insurance
Commission23does not apply to this case either, because the parties in said case agreed to submit
the case for resolution on the sole issue of whether the revocation or suspension of the insurer's
license was justified; and that petitioners will suffer irreparable injury as a consequence of having to
defend themselves in a case which should have been dismissed on the ground of forum shopping.

Respondents Arguments

Lin counters that as stressed in Go v. Office of the Ombudsman, 24 an administrative case for unfair
claim settlement practice may proceed simultaneously with, or independently of, the civil case for
collection of the insurance proceeds filed by the same claimant since a judgment in one will not
amount to res judicata to the other, and vice versa, due to the variance or differences in the issues,
in the quantum of evidence, and in the procedure to be followed in prosecuting the cases; that in this
case the CA cited the teaching in Go v. Office of the Ombudsman that there was no grave abuse of
discretion in the RTC's dismissal of petitioners' motion to dismiss; that the CA correctly held that the
RTC did not commit grave abuse of discretion in denying petitioners' motion to dismiss because the
elements of forum shopping were absent; that there is here no identity of parties because while she
(respondent) is the plaintiff in the civil case, she is only a complaining witness in the administrative
case since it is the IC that is the real party in interest in the administrative case; that the cause of
action in the civil case consists of Malayan's failure or refusal to pay her insurance claim, whereas in
the administrative case, it consists of Malayan's unfair claim settlement practice; that the issue in the
civil case is whether Malayan is liable to pay Lin's insurance claim, while the issue in the
administrative case is whether Malayan's license to operate should be revoked or suspended for
engaging in unfair claim settlement practice; and that the relief sought in the civil case consists in the
payment of a sum of money plus damages, while the relief in the administrative case consists of the
revocation or suspension of Malayan's license to operate as an insurance company. According to
Lin, although in the administrative case she prayed that the IC Resolution ordering Malayan to
accord weight to the BFP's findings be declared final, this did not mean that she was therein seeking
payment of her insurance claim, but rather that the IC can now impose the appropriate
administrative sanctions upon Malayan; that if Malayan felt compelled to pay Lin's insurance claim
for fear that its license to operate as an insurance firm might be suspended or revoked, then this is
just a logical result of its failure or refusal to pay the insurance claim; that the judgment in the civil
case will not amount to res judicata in the administrative case, and vice versa, pursuant to the case
law ruling in Go v. Office of the Ombudsman25and in Almendras v. Office of the Insurance
Commission, 26 both of which categorically allowed the insurance clain1ants therein to file both a civil
and an administrative case against insurers; that the rule against forum shopping was designed to
serve a noble purpose, viz., to be an instrument of justice, hence, it can in no way be interpreted to
subvert such a noble purpose.

Our Ruling

We deny this Petition. We hold that the case law rulings in the Go and Almendras cases27 control and
govern the case at bench.

First off, it is elementary that "an order denying a motion to dismiss is merely interlocutory and,
therefore, not appealable, x x x to x x x avoid undue inconvenience to the appealing party by having
to assail orders as they are promulgated by the court, when all such orders may be contested in a
single appeal."28

Secondly, petitioners herein utterly failed to prove that the RTC, in issuing the assailed Orders, acted
with grave abuse of discretion amounting to lack or excess of jurisdiction. "It is well-settled that an
act of a court or tribunal may only be considered to have been done in grave abuse of discretion
when the same was performed in a capricious or whimsical exercise of judgment which is equivalent
to lack or excess of jurisdiction."29 "[F]or grave abuse of discretion to exist, the abuse of discretion
must be patent and gross so as to amount to an evasion of a positive duty or a virtual refusal to
perform a duty enjoined by law, or to act at all in contemplation of law."30

In the present case, petitioners basically insist that Lin committed willful and deliberate forum
shopping which warrants the dismissal of her civil case because it is not much different from the
administrative case in terms of the parties involved, the causes of action pleaded, and the reliefs
prayed for. Petitioners also posit that another ground warranting the dismissal of the civil case was
Lin's failure to notify the RTC about the pendency of the administrative case within five days from the
filing thereof.

These arguments will not avail. The proscription against forum shopping is found in Section 5, Rule
7 of the Rules of Court, which provides:

SEC. 5. Certification against forum shopping. --The plaintiff or principal party shall certify under oath
in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification
annexed thereto and simultaneously filed therewith; (a) that he has not theretofore commenced any
action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and,
to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such
other pending action or claim, a complete statement of the present status thereof; and (c) if he
should thereafter learn that the same or similar action or claim has been filed or is pending, he shall
report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or initiatory
pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false
certification or non-compliance with any of the undertakings therein shall constitute indirect contempt
of court, without prejudice to the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum shopping, the same shall be
ground for summary dismissal with prejudice and shall constitute direct contempt, as well as a cause
for administrative sanctions. (n)
The above-stated rule covers the very essence of forum shopping itself, and the constitutive
elements thereof viz., the cognate concepts of litis pendentia and res judicata -

x x x [T]he essence of forum shopping is the filing of multiple suits involving the same parties for the
same cause of action, either simultaneously or successively, for the purpose of obtaining a favorable
judgment. It exists where the elements of litis pendentia are present or where a final judgment in one
case will amount to res judicata in another. On the other hand, for litis pendentia to be a ground for
the dismissal of an action, the following requisites must concur: (a) identity of parties, or at least
such parties who represent the same interests in both actions; (b) identity of rights asserted and
relief prayed for, the relief being founded on the same facts; and (c) the identity with respect to the
two preceding particulars in the two cases is such that any judgment that may be rendered in the
pending case, regardless of which party is successful, would amount to res judicata in the other
case.31

Res judicata, in turn, has the following requisites: "(1) the former judgment must be final; (2) it must
have been rendered by a court having jurisdiction over the subject matter and over the parties; (3) it
must be a judgment on the merits; and (4) there must be, between the first and second actions, (a)
identity of parties, (b) identity of subject matter, and (c) identity of cause of action."32

"The settled rule is that criminal and civil cases are altogether different from administrative matters,
such that the disposition in the first two will not inevitably govern the third and vice versa."33In the
context of the case at bar, matters handled by the IC are delineated as either regulatory or
adjudicatory, both of which have distinct characteristics, as postulated in Almendras Mining
Corporation v. Office of the Insurance Commission:34

The provisions of the Insurance Code (Presidential Decree [P.D.] No. 1460), as amended, clearly
indicate that the Office of the [IC] is an administrative agency vested with regulatory power as well
as with adjudicatory authority. Among the several regulatory or non-quasi-judicial duties of the
Insurance Commissioner under the Insurance Code is the authority to issue, or refuse issuance of, a
Certificate of Authority to a person or entity desirous of engaging in insurance business in the
Philippines, and to revoke or suspend such Certificate of Authority upon a finding of the existence of
statutory grounds for such revocation or suspension. The grounds for revocation or suspension of an
insurer's Certificate of Authority are set out in Section 241 and in Section 247 of the Insurance Code
as amended. The general regulatory authority of the Insurance Commissioner is described in
Section 414 of the Insurance Code, as amended, in the following terms:

'Section 414. The Insurance Commissioner shall have the duty to see that all laws relating to
insurance, insurance companies and other insurance matters, mutual benefit associations, and
trusts for charitable uses are faithfully executed and to perform the duties imposed upon him by this
Code, and shall, notwithstanding any existing laws to the contrary, have sole and exclusive authority
to regulate the issuance and sale of variable contracts as defined in section two hundred thirty-two
and to provide for the licensing of persons selling such contracts, and to issue such reasonable rules
and regulations governing the same.

The Commissioner may issue such rulings, instructions, circulars, orders[,] and decisions as he may
deem necessary to secure the enforcement of the provisions of this Code, subject to the approval of
the Secretary of Finance [DOF Secretary]. Except as otherwise specified, decisions made by the
Commissioner shall be appealable to the [DOF Secretary].' (Italics supplied)

which Section also specifies the authority to which a decision of the Insurance Commissioner
rendered in the exercise of its regulatory function may be appealed.
The adjudicatory authority of the Insurance Commissioner is generally described in Section 416 of
the Insurance Code, as amended, which reads as follows:

'Sec. 416. The Commissioner shall have the power to adjudicate claims and complaints involving
any loss, damage or liability for which an insurer may be answerable under any kind of policy or
contract of insurance, or for which such insurer may be liable under a contract of suretyship, or for
which a reinsurer may be sued under any contract or reinsurance it may have entered into, or for
which a mutual benefit association may be held liable under the membership certificates it has
issued to its members, where the amount of any such loss, damage or liability, excluding interests,
cost and attorney’s fees, being claimed or sued upon any kind of insurance, bond, reinsurance
contract, or membership certificate does not exceed in any single claim one hundred thousand
pesos.

xxxx

The authority to adjudicate granted to the Commissioner under this section shall be concurrent with
that of the civil courts, but the filing of a complaint with the Commissioner shall preclude the civil
courts from taking cognizance of a suit involving the same subject matter.' (Italics supplied)

Continuing, Section 416 (as amended by Batas Pambansa (B.P.) Blg. 874) also specifies the
authority to which appeal may be taken from a final order or decision of the Commissioner given in
the exercise of his adjudicatory or quasi-judicial power:

'Any decision, order or ruling rendered by the Commissioner after a hearing shall have the force and
effect of a judgment. Any party may appeal from a final order, ruling or decision of the Commissioner
by filing with the Commissioner within thirty days from receipt of copy of such order, ruling or
decision a notice of appeal to the Intermediate Appellate Court (now the Court of Appeals) in the
manner provided for in the Rules of Court for appeals from the Regional Trial Court to the
Intermediate Appellate Court (now the Court of Appeals)

x x x x'

It may be noted that under Section 9 (3) of B.P. Big. 129, appeals from a final decision of the
Insurance Commissioner rendered in the exercise of his adjudicatory authority now fall within
the exclusive appellate jurisdiction of the Court of Appeals.35

Go v. Office of the Ombudsman36reiterated the above-stated distinctions vis-a-vis the principles

enunciating that a civil case before the trial court involving recovery of payment of the insured's
insurance claim plus damages, can proceed simultaneously with an administrative case before the
IC.37 Expounding on the foregoing points, this Court said -

**The findings of the trial court will not necessarily foreclose the administrative case before the [IC],
or [vice versa]. True, the parties are the same, and both actions are predicated on the same set of
facts, and will require identical evidence. But the issues to be resolved, the quantum of evidence, the
procedure to be followed[,] and the reliefs to be adjudged by these two bodies are different.

Petitioner's causes of action in Civil Case No. Q-95-23135 are predicated on the insurers' refusal to
pay her fire insurance claims despite notice, proofs of losses and other supporting documents. Thus,
petitioner prays in her complaint that the insurers be ordered to pay the full-insured value of the
losses, as embodied in their respective policies. Petitioner also sought payment of interests and
damages in her favor caused by the alleged delay and refusal of the insurers to pay her claims. The
principal issue then that must be resolved by the trial court is whether or not petitioner is entitled to
the payment of her insurance claims and damages. The matter of whether or not there is
unreasonable delay or denial of the claims is merely an incident to be resolved by the trial court,
necessary to ascertain petitioner's right to claim damages, as prescribed by Section 244 of the
Insurance Code.

On the other hand, the core, if not the sole bone of contention in Adm. Case No. RD-156, is the
issue of whether or not there was unreasonable delay or denial of the claims of petitioner, and if in
the affirmative, whether or not that would justify the suspension or revocation of the insurers'
licenses.

Moreover, in Civil Case No. Q-95-23135, petitioner must establish her case by a preponderance of
evidence, or simply put, such evidence that is of greater weight, or more convincing than that which
is offered in opposition to it. In Adm. Case No. RD-156, the degree of proof required of petitioner to
establish her claim is substantial evidence, which has been defined as that amount of relevant
evidence that a reasonable mind might accept as adequate to justify the conclusion.

In addition, the procedure to be followed by the trial court is governed by the Rules of Court, while
the [IC] has its own set of rules and it is not bound by the rigidities of technical rules of procedure.
These two bodies conduct independent means of ascertaining the ultimate facts of their respective
cases that will serve as basis for their respective decisions. 1âwphi1

If, for example, the trial court finds that there was no unreasonable delay or denial of her claims, it
does not automatically mean that there was in fact no such unreasonable delay or denial that would
justify the revocation or suspension of the licenses of the concerned insurance companies. It only
means that petitioner failed to prove by preponderance of evidence that she is entitled to damages.
Such finding would not restrain the [IC], in the exercise of its regulatory power, from making its own
finding of unreasonable delay or denial as long as it is supported by substantial evidence.

While the possibility that these two bodies will come up with conflicting resolutions on the same
issue is not far-fetched, the finding or conclusion of one would not necessarily be binding on the
other given the difference in the issues involved, the quantum of evidence required and the
procedure to be followed.

Moreover, public interest and public policy demand the speedy and inexpensive disposition of
administrative cases.

Hence, Adm. Case No. RD-156 may proceed alongside Civil Case No. Q-95-23135.38

As the aforecited cases are analogous in many aspects to the present case, both in respect to their
factual backdrop and in their jurisprudential teachings, the case law ruling in the Almendras and in
the Go cases must apply with implacable force to the present case. Consistency alone demands -
because justice cannot be inconsistent - that the final authoritative mandate in the cited cases must
produce an end result not much different from the present case.

All told, we find that the CA did not err in holding that the petitioners utterly failed to prove that the
RTC exhibited grave abuse of discretion, amounting to lack or excess of jurisdiction, which would
justify the issuance of the extraordinary writ of certiorari.39

WHEREFORE, the Petition is DENIED. The December 21, 2012 Decision and the May 22, 2013
Resolution of the Court of Appeals in CA-GR. SP No. 118894 are hereby AFFIRMED.
Costs against petitioners.

SO ORDERED.
G.R. No. 181132 June 5, 2009

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN

MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.

DECISION

NACHURA, J.:

This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No.
85948, dismissing petitioners’ appeal for lack of jurisdiction.

The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch 29,
for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer
for a temporary restraining order (TRO) and a writ of preliminary injunction.

The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto Maramag
(Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de Guzman Maramag (Eva)
was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive
any proceeds from his insurance policies from Insular Life Assurance Company, Ltd. (Insular)4 and
Great Pacific Life Assurance Corporation (Grepalife);5 (3) the illegitimate children of Loreto—
Odessa, Karl Brian, and Trisha Angelie—were entitled only to one-half of the legitime of the
legitimate children, thus, the proceeds released to Odessa and those to be released to Karl Brian
and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could not be deprived
of their legitimes, which should be satisfied first.

In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among others,
that part of the insurance proceeds had already been released in favor of Odessa, while the rest of
the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the
appointment of their legal guardian. Petitioners also prayed for the total amount of ₱320,000.00 as
actual litigation expenses and attorney’s fees.

In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl
Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the insurance
proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto,
it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha
Angelie, as the remaining designated beneficiaries; and that it released Odessa’s share as she was
of age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending
submission of letters of guardianship. Insular alleged that the complaint or petition failed to state a
cause of action insofar as it sought to declare as void the designation of Eva as beneficiary, because
Loreto revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy
No. A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian,
and Trisha Angelie, considering that no settlement of Loreto’s estate had been filed nor had the
respective shares of the heirs been determined. Insular further claimed that it was bound to honor
the insurance policies designating the children of Loreto with Eva as beneficiaries pursuant to
Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated as
an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were
denied because Loreto was ineligible for insurance due to a misrepresentation in his application form
that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the legitimate family of
Loreto; and that the law on succession does not apply where the designation of insurance
beneficiaries is clear.

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their
answer. Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated
May 7, 2004.

During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial court ordered petitioners to comment within 15 days.

In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal –
whether the complaint itself was proper or not – and that the designation of a beneficiary is an act of
liberality or a donation and, therefore, subject to the provisions of Articles 7528 and 7729 of the Civil
Code.

In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally
married to Vicenta Pangilinan Maramag.

On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads –

WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The action
shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life and Grepalife.

SO ORDERED.10

In so ruling, the trial court ratiocinated thus –

Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic) special
laws. Matters not expressly provided for in such special laws shall be regulated by this Code. The
principal law on insurance is the Insurance Code, as amended. Only in case of deficiency in the
Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life Assurance Co., 41
Phil. 269.)

The Insurance Code, as amended, contains a provision regarding to whom the insurance proceeds
shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be applied
exclusively to the proper interest of the person in whose name or for whose benefit it is made, unless
otherwise specified in the policy. Since the defendants are the ones named as the primary
beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the insurance proceeds
shall exclusively be paid to them. This is because the beneficiary has a vested right to the indemnity,
unless the insured reserves the right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of
Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance indemnity. The
beneficiary in a contract of insurance is not the donee spoken in the law of donation. The rules on
testamentary succession cannot apply here, for the insurance indemnity does not partake of a
donation. As such, the insurance indemnity cannot be considered as an advance of the inheritance
which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon
Employees’ Association v. Juanita Golpeo, et al., the Honorable Supreme Court made the following
pronouncements[:]

"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs exclusively
to the defendant as his individual and separate property, we agree that the proceeds of an insurance
policy belong exclusively to the beneficiary and not to the estate of the person whose life was
insured, and that such proceeds are the separate and individual property of the beneficiary and not
of the heirs of the person whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of Section 428 of the Code of Commerce x x x."

In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient
cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the
reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the
insurances (sic) of the late Loreto C. Maramag.

However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De
Guzman. Any person who is forbidden from receiving any donation under Article 739 cannot be
named beneficiary of a life insurance policy of the person who cannot make any donation to him,
according to said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed
that the insurance contract will still remain valid, but the indemnity must go to the legal heirs and not
to the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the improper
beneficiary. In such case, the action for the declaration of nullity may be brought by the spouse of
the donor or donee, and the guilt of the donor and donee may be proved by preponderance of
evidence in the same action (Comment of Edgardo L. Paras, Civil Code of the Philippines, page
897). Since the designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil
Code, the insurance indemnity that should be paid to her must go to the legal heirs of the deceased
which this court may properly take cognizance as the action for the declaration for the nullity of a
void donation falls within the general jurisdiction of this Court.11

Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main, that
the petition failed to state a cause of action. Insular further averred that the proceeds were divided
among the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged
that the premiums paid had already been refunded.

Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on the
basis of the allegations in the complaint, such that the defenses of Insular and Grepalife would be
better threshed out during trial.1avv phi1

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by
defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case
against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the
case against them is hereby ordered DISMISSED.

SO ORDERED.14

In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the
allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to the
illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is
only in cases where there are no beneficiaries designated, or when the only designated beneficiary
is disqualified, that the proceeds should be paid to the estate of the insured. As to the claim that the
proceeds to be paid to Loreto’s illegitimate children should be reduced based on the rules on
legitime, the trial court held that the distribution of the insurance proceeds is governed primarily by
the Insurance Code, and the provisions of the Civil Code are irrelevant and inapplicable. With
respect to the Grepalife policy, the trial court noted that Eva was never designated as a beneficiary,
but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the
illegitimate children. It further held that the matter of Loreto’s misrepresentation was premature; the
appropriate action may be filed only upon denial of the claim of the named beneficiaries for the
insurance proceeds by Grepalife.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a
cause of action involved a pure question of law. The appellate court also noted that petitioners did
not file within the reglementary period a motion for reconsideration of the trial court’s Resolution,
dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha
Angelie; thus, the said Resolution had already attained finality.

Hence, this petition raising the following issues:

a. In determining the merits of a motion to dismiss for failure to state a cause of action, may
the Court consider matters which were not alleged in the Complaint, particularly the defenses
put up by the defendants in their Answer?

b. In granting a motion for reconsideration of a motion to dismiss for failure to state a cause
of action, did not the Regional Trial Court engage in the examination and determination of
what were the facts and their probative value, or the truth thereof, when it premised the
dismissal on allegations of the defendants in their answer – which had not been proven?

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

In essence, petitioners posit that their petition before the trial court should not have been dismissed
for failure to state a cause of action because the finding that Eva was either disqualified as a
beneficiary by the insurance companies or that her designation was revoked by Loreto,
hypothetically admitted as true, was raised only in the answers and motions for reconsideration of
both Insular and Grepalife. They argue that for a motion to dismiss to prosper on that ground, only
the allegations in the complaint should be considered. They further contend that, even assuming
Insular disqualified Eva as a beneficiary, her share should not have been distributed to her children
with Loreto but, instead, awarded to them, being the legitimate heirs of the insured deceased, in
accordance with law and jurisprudence.

The petition should be denied.

The grant of the motion to dismiss was based on the trial court’s finding that the petition failed to
state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads –

SECTION 1. Grounds. – Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:

xxxx

(g) That the pleading asserting the claim states no cause of action.

A cause of action is the act or omission by which a party violates a right of another.16 A complaint
states a cause of action when it contains the three (3) elements of a cause of action—(1) the legal
right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the
defendant in violation of the legal right. If any of these elements is absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause of action.17

When a motion to dismiss is premised on this ground, the ruling thereon should be based only on
the facts alleged in the complaint. The court must resolve the issue on the strength of such
allegations, assuming them to be true. The test of sufficiency of a cause of action rests on whether,
hypothetically admitting the facts alleged in the complaint to be true, the court can render a valid
judgment upon the same, in accordance with the prayer in the complaint. This is the general rule.

However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:

1. the falsity of the allegations is subject to judicial notice;

2. such allegations are legally impossible;

3. the allegations refer to facts which are inadmissible in evidence;

4. by the record or document in the pleading, the allegations appear unfounded; or

5. there is evidence which has been presented to the court by stipulation of the parties or in
the course of the hearings related to the case.18

In this case, it is clear from the petition filed before the trial court that, although petitioners are the
legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies issued by
Insular and Grepalife. The basis of petitioners’ claim is that Eva, being a concubine of Loreto and a
suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies,
and that Eva’s children with Loreto, being illegitimate children, are entitled to a lesser share of the
proceeds of the policies. They also argued that pursuant to Section 12 of the Insurance
Code,19 Eva’s share in the proceeds should be forfeited in their favor, the former having brought
about the death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of
Loreto’s illegitimate children should be awarded to them, being the legitimate heirs of Loreto entitled
to their respective legitimes.

It is evident from the face of the complaint that petitioners are not entitled to a favorable judgment in
light of Article 2011 of the Civil Code which expressly provides that insurance contracts shall be
governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states—
SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the policy.

Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are
either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the
maturation of the policy.20 The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of favorable stipulations
or indemnity. In such a case, third parties may directly sue and claim from the insurer.21

Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not
entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal
obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary
in one policy and her disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loreto’s insurance policies remains valid.
Because no legal proscription exists in naming as beneficiaries the children of illicit relationships by
the insured,22 the shares of Eva in the insurance proceeds, whether forfeited by the court in view of
the prohibition on donations under Article 739 of the Civil Code or by the insurers themselves for
reasons based on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has not
designated any beneficiary,23 or when the designated beneficiary is disqualified by law to receive the
proceeds,24 that the insurance policy proceeds shall redound to the benefit of the estate of the
insured.

In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the same
light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate court
had no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of action is
a question of law and not of fact, there being no findings of fact in the first place.25

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.

SO ORDERED.
G.R. No. 185964 June 16, 2014

ASIAN TERMINALS, INC., Petitioner,

vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.

DECISION

REYES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and
set aside the Decision2 dated October 10, 2008 of the Court of Appeals (CA) in CA-G.R. SP No.
99021 which adjudged petitioner Asian Terminals, Inc. (ATI) liable to pay the money claims of
respondent First Lepanto-Taisho Insurance Corporation (FIRST LEPANTO).

The Undisputed Facts

On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags
complete and in good condition were loaded and received on board M/V "Da Feng" owned by China
Ocean Shipping Co. (COSCO) in favor of consignee, Grand Asian Sales, Inc. (GASI). Based on a
Certificate of Insurance4 dated August 24, 1995, it appears that the shipment was insured against all
risks by GASI with FIRST LEPANTO for ₱7,959,550.50 under Marine Open Policy No. 0123.

The shipment arrived in Manila on July 18, 1996 and was discharged into the possession and
custody of ATI, a domestic corporation engaged in arrastre business. The shipment remained for
quite some time at ATI’s storage area until it was withdrawn by broker, Proven Customs Brokerage
Corporation (PROVEN), on August 8 and 9, 1996 for delivery to the consignee. Upon receipt of the
shipment,5 GASI subjected the same to inspection and found that the delivered goods incurred
shortages of 8,600 kilograms and spillage of 3,315 kg for a total of11,915 kg of loss/damage valued
at ₱166,772.41.

GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping Lines, Inc.
(SMITH BELL),6 ATI7 and PROVEN8 but was denied. Hence, it pursued indemnification from the
shipment’s insurer.9

After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the amount of
₱165,772.40 as insurance indemnity.10

Thereafter, GASI executed a Release of Claim11 discharging FIRST LEPANTO from any and all
liabilities pertaining to the lost/damaged shipment and subrogating it to all the rights of recovery and
claims the former may have against any person or corporation in relation to the lost/damaged
shipment.

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in the
Philippines, SMITH BELL, PROVEN and ATI, reimbursement of the amount it paid to GASI. When
FIRST LEPANTO’s demands were not heeded, it filed on May 29, 1997 a Complaint12 for sum of
money before the Metropolitan Trial Court (MeTC) of Manila, Branch 3. FIRST LEPANTO sought
that it be reimbursed the amount of 166,772.41, twenty-five percent (25%) thereof as attorney’s fees,
and costs of suit.
ATI denied liability for the lost/damaged shipment and claimed that it exercised due diligence and
care in handling the same.13 ATI averred that upon arrival of the shipment, SMITH BELL requested
for its inspection14 and it was discovered that one jumbo bag thereof sustained loss/damage while in
the custody of COSCO as evidenced by Turn Over Survey of Bad Order Cargo No. 47890 dated
August 6, 199615 jointly executed by the respective representatives of ATI and COSCO. During the
withdrawal of the shipment by PROVEN from ATI’s warehouse, the entire shipment was re-
examined and it was found to be exactly in the same condition as when it was turned over to ATI
such that one jumbo bag was damaged. To bolster this claim, ATI submitted Request for Bad Order
Survey No. 40622 dated August 9, 199616 jointly executed by the respective representatives of ATI
and PROVEN. ATI also submitted various Cargo Gate Passes17 showing that PROVEN was able to
completely withdraw all the shipment from ATI’s warehouse in good order condition except for that
one damaged jumbo bag.

In the alternative, ATI asserted that even if it is found liable for the lost/damaged portion of the
shipment, its contract for cargo handling services limits its liability to not more than ₱5,000.00 per
package. ATI interposed a counterclaim of ₱20,000.00 against FIRST LEPANTO as and for
attorney’s fees. It also filed a cross-claim against its co-defendants COSCO and SMITH BELL in the
event that it is made liable to FIRST LEPANTO.18

PROVEN denied any liability for the lost/damaged shipment and averred that the complaint alleged
no specific acts or omissions that makes it liable for damages. PROVEN claimed that the damages
in the shipment were sustained before they were withdrawn from ATI’s custody under which the
shipment was left in an open area exposed to the elements, thieves and vandals. PROVEN
contended that it exercised due diligence and prudence in handling the shipment. PROVEN also
filed a counterclaim for attorney’s fees and damages.19

Despite receipt of summons on December 4, 1996,20 COSCO and SMITH BELL failed to file an
answer to the complaint. FIRST LEPANTO thus moved that they be declared in default21 but the
motion was denied by the MeTC on the ground that under Rule 9, Section 3 of the Rules of Civil
Procedure, "when a pleading asserting a claim states a common cause of action against several
defending parties, some of whom answer and the other fail to do so, the Court shall try the case
against all upon the answers thus filed, and render judgment upon the evidence presented."22

Ruling of the MeTC

In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any liability and
instead found COSCO to be the party at fault and hence liable for the loss/damage sustained by the
subject shipment. However, the MeTC ruled it has no jurisdiction over COSCO because it is a
foreign corporation. Also, it cannot enforce judgment upon SMITH BELL because no evidence was
presented establishing that it is indeed the Philippine agent of COSCO. There is also no evidence
attributing any fault to SMITH BELL. Consequently, the complaint was dismissed in this wise:

WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING the instant case
for failure of [FIRST LEPANTO] to sufficiently establish its cause o faction against [ATI, COSCO,
SMITH BELL, and PROVEN].

The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal basis.

No pronouncement as to cost.

SO ORDERED.24
 Ruling of the Regional Trial Court

On appeal, the Regional Trial Court (RTC) reversed the MeTC’s findings. In its Decision25 dated
January 26, 2007, the RTC of Manila, Branch 21, in Civil Case No. 06-116237, rejected the
contentions of ATI upon its observation that the same is belied by its very own documentary
evidence. The RTC remarked that, if, as alleged by ATI, one jumbo bag was already in bad order
condition upon its receipt of the shipment from COSCO on July 18, 1996, then how come that the
Request for Bad Order Survey and the Turn Over Survey of Bad Order Cargo were prepared only
weeks thereafter or on August 9, 1996 and August 6, 1996, respectively. ATI was adjudged unable
to prove that it exercised due diligence while in custody of the shipment and hence, negligent and
should be held liable for the damages caused to GASI which, in turn, is subrogated by FIRST
LEPANTO.

The RTC rejected ATI’s contention that its liability is limited only to ₱5,000.00 per package because
its Management Contract with the Philippine Ports Authority (PPA) purportedly containing the same
was not presented as evidence. More importantly, FIRST LEPANTO or GASI cannot be deemed
bound thereby because they were not parties thereto. Lastly, the RTC did not give merit to ATI’s
defense that any claim against it has already prescribed because GASI failed to file any claim within
the 15-day period stated in the gate pass issued by ATI to GASI’s broker, PROVEN. Accordingly, the
RTC disposed thus:

WHEREFORE, in light of the foregoing, the judgment on appeal is hereby REVERSED.

[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40 with legal
interest until fully paid, to pay [FIRST LEPANTO] 10% of the amount due the latter as and for
attorney’s fees plus the costs of suit.

The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack of evidence
against them. The counterclaim and cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.

SO ORDERED.26

Ruling of the CA

ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO was validly
subrogated to the rights of GASI with respect to the lost/damaged shipment. ATI argued that there
was no valid subrogation because FIRSTLEPANTO failed to present a valid, existing and
enforceable Marine Open Policy or insurance contract. ATI reasoned that the Certificate of
Insurance or Marine Cover Note submitted by FIRST LEPANTO as evidence is not the same as an
actual insurance contract.

In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that the Release of
Claim and the Certificate of Insurance presented by FIRST LEPANTO sufficiently established its
relationship with the consignee and that upon proof of payment of the latter’s claim for damages,
FIRST LEPANTO was subrogated to its rights against those liable for the lost/damaged shipment.

The CA also affirmed the ruling of the RTC that the subject shipment was damaged while in the
custody of ATI. Thus, the CA disposed as follows:

WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and the instant
petition is DENIED for lack of merit.
SO ORDERED.28

ATI moved for reconsideration but the motion was denied in the CA Resolution29 dated January 12,
2009. Hence, this petition arguing that:

(a) The presentation of the insurance policy is indispensable in proving the right of FIRST LEPANTO
to be subrogated to the right of the consignee pursuant to the ruling in Wallem Philippines Shipping,
Inc. v. Prudential Guarantee and Assurance Inc.;30

(b) ATI cannot be barred from invoking the defense of prescription as provided for in the gate passes
in consonance with the ruling in International Container Terminal Services, Inc. v. Prudential
Guarantee and Assurance Co, Inc.31

Ruling of the Court

The Court denies the petition.

ATI failed to prove that it exercised

due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.

It must be emphasized that factual questions pertaining to ATI’s liability for the loss/damage
sustained by GASI has already been settled in the uniform factual findings of the RTC and the CA
that: ATI failed to prove by preponderance of evidence that it exercised due diligence in handling the
shipment.

Such findings are binding and conclusive upon this Court since a review thereof is proscribed by the
nature of the present petition. Only questions of law are allowed in petitions for review on certiorari
under Rule 45 of the Rules of Court. It is not the Court’s duty to review, examine, and evaluate or
weigh all over again the probative value of the evidence presented, especially where the findings of
the RTC are affirmed by the CA, as in this case.32

There are only specific instances when the Court deviates from the rule and conducts a review of the
courts a quo’s factual findings, such as when: (1) the inference made is manifestly mistaken, absurd
or impossible; (2) there is grave abuse of discretion;(3) the findings are grounded entirely on
speculations, surmises or conjectures; (4) the judgment of the CA is based on misapprehension of
facts; (5) the CA, in making its findings, went beyond the issues of the case and the same is contrary
to the admissions of both appellant and appellee; (6) the findings of fact are conclusions without
citation of specific evidence on which they are based; (7) the CA manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would justify a different
conclusion; and (8) the findings of fact of the CA are premised on the absence of evidence and are
contradicted by the evidence on record.33

None of these instances, however, are present in this case. Moreover, it is unmistakable that ATI
has already conceded to the factual findings of RTC and CA adjudging it liable for the shipment’s
loss/damage considering the absence of arguments pertaining to such issue in the petition at bar.

These notwithstanding, the Court scrutinized the records of the case and found that indeed, ATI is
liable as the arrastre operator for the lost/damaged portion of the shipment.
The relationship between the consignee and the arrastre operator is akin to that existing between
the consignee and/or the owner of the shipped goods and the common carrier, or that between a
depositor and a warehouseman. Hence, in the performance of its obligations, an arrastre operator
should observe the same degree of diligence as that required of a common carrier and a
warehouseman. Being the custodian of the goods discharged from a vessel, an arrastre operator’s
duty is to take good care of the goods and to turn them over to the party entitled to their
possession.34

In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance
with the obligation to deliver the goods to the appropriate party devolves upon the arrastre operator.
Since the safekeeping of the goods is its responsibility, it must prove that the losses were not due to
its negligence or to that of its employees. To avoid liability, the arrastre operator must prove that it
exercised diligence and due care in handling the shipment.35

ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the
basis of the Request for Bad Order Survey dated August 9, 1996 purportedly showing that when ATI
received the shipment, one jumbo bag thereof was already in damaged condition.

The RTC and CA were both correct in concluding that ATI’s contention was improbable and illogical.
As judiciously discerned by the courts a quo, the date of the document was too distant from the date
when the shipment was actually received by ATI from COSCO on July 18, 1996. In fact, what the
document established is that when the loss/damage was discovered, the shipment has been in ATI’s
custody for at least two weeks. This circumstance, coupled with the undisputed declaration of
PROVEN’s witnesses that while the shipment was in ATI’s custody, it was left in an open area
exposed to the elements, thieves and vandals,36 all generate the conclusion that ATI failed to
exercise due care and diligence while the subject shipment was under its custody, control and
possession as arrastre operator.

To prove the exercise of diligence in handling the subject cargoes, an arrastre operator must do
more than merely show the possibility that some other party could be responsible for the loss or the
damage.37 It must prove that it used all reasonable means to handle and store the shipment with due
care and diligence including safeguarding it from weather elements, thieves or vandals.

Non-presentation of the insurance

contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.

It is conspicuous from the records that ATI put in issue the submission of the insurance contract for
the first time before the CA. Despite opportunity to study FIRST LEPANTO’s complaint before the
MeTC, ATI failed to allege in its answer the necessity of the insurance contract. Neither was the
same considered during pre-trial as one of the decisive matters in the case. Further, ATI never
challenged the relevancy or materiality of the Certificate of Insurance presented by FIRST
LEPANTO as evidence during trial as proof of its right to be subrogated in the consignee’s stead.
Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will have to prove its
subrogation rights by presenting a copy of the insurance contract, ATI is barred from pleading the
absence of such contract in its appeal. It is imperative for the parties to disclose during pre-trial all
issues they intend to raise during the trial because, they are bound by the delimitation of such
issues. The determination of issues during the pre-trial conference bars the consideration of other
questions, whether during trial or on appeal.38
A faithful adherence to the rule by litigants is ensured by the equally settled principle that a party
cannot change his theory on appeal as such act violates the basic rudiments of fair play and due
process. As stressed in Jose v. Alfuerto:39

[A] party cannot change his theory ofthe case or his cause of action on appeal. Points of law,
theories, issues and arguments not brought to the attention of the lower court will not be considered
by the reviewing court. The defenses not pleaded in the answer cannot, on appeal, change
fundamentally the nature of the issue in the case. To do so would be unfair to the adverse party, who
had no opportunity to present evidence in connection with the new theory; this would offend the
basic rules of due process and fair play.40 (Citation omitted)

While the Court may adopt a liberal stance and relax the rule, no reasonable explanation, however,
was introduced to justify ATI’s failure to timely question the basis of FIRST LEPANTO’s rights as a
subrogee.

The fact that the CA took cognizance of and resolved the said issue did not cure or ratify ATI’s faux
pas. "[A] judgment that goes beyond the issues and purports to adjudicate something on which the
court did not hear the parties, is not only irregular but also extrajudicial and invalid."41 Thus, for
resolving an issue not framed during the pre-trial and on which the parties were not heard during the
trial, that portion of the CA’s judgment discussing the necessity of presenting an insurance contract
was erroneous.

At any rate, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s right to
collect reimbursement as the subrogee of GASI.

"Subrogation is the substitution of one person in the place of another with reference to a lawful claim
or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities."42 The right of subrogation springs from Article 2207 of the Civil
Code which states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrong-doer or
the person who has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the
person causing the loss or injury.

As a general rule, the marine insurance policy needs to be presented in evidence before the insurer
may recover the insured value of the lost/damaged cargo in the exercise of its subrogatory right. In
Malayan Insurance Co., Inc. [Link] Brokerage Corp.,43 the Court stated that the presentation of the
contract constitutive of the insurance relationship between the consignee and insurer is critical
because it is the legal basis of the latter’s right to subrogation.44

In Home Insurance Corporation v. CA,45 the Court also held that the insurance contract was
necessary to prove that it covered the hauling portion of the shipment and was not limited to the
transport of the cargo while at sea. The shipment in that case passed through six stages with
different parties involved in each stage until it reached the consignee. The insurance contract, which
was not presented in evidence, was necessary to determine the scope of the insurer’s liability, if any,
since no evidence was adduced indicating at what stage in the handling process the damage to the
cargo was sustained.46
An analogous disposition was arrived at in the Wallem47 case cited by ATI wherein the Court held
that the insurance contract must be presented in evidence in order to determine the extent of its
coverage. It was further ruled therein that the liability of the carrier from whom reimbursement was
demanded was not established with certainty because the alleged shortage incurred by the cargoes
was not definitively determined.48

Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted exceptions by
declaring that a marine insurance policy is dispensable evidence in reimbursement claims instituted
by the insurer.

In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. Hence, presentation in evidence of
the marine insurance policy is not indispensable before the insurer may recover from the common
carrier the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation
receipt, by itself, was held sufficient to establish not only the relationship between the insurer and
consignee, but also the amount paid to settle the insurance claim. The presentation of the insurance
contract was deemed not fatal to the insurer’s cause of action because the loss of the cargo
undoubtedly occurred while on board the petitioner’s vessel.50

The same rationale was the basis of the judgment in International Container Terminal Services, Inc.
v. FGU Insurance Corporation,51 wherein the arrastre operator was found liable for the lost shipment
despite the failure of the insurance company to offer in evidence the insurance contract or policy. As
in Delsan, it was certain that the loss of the cargo occurred while in the petitioner’s custody.52

Based on the attendant facts of the instant case, the application of the exception is warranted. As
1âw phi 1

discussed above, it is already settled that the loss/damage to the GASI’s shipment occurred while
they were in ATI’s custody, possession and control as arrastre operator. Verily, the Certificate of
Insurance53 and the Release of Claim54 presented as evidence sufficiently established FIRST
LEPANTO’s right to collect reimbursement as the subrogee of the consignee, GASI.

With ATI’s liability having been positively established, to strictly require the presentation of the
insurance contract will run counter to the principle of equity upon which the doctrine of subrogation is
premised. Subrogation is designed to promote and to accomplish justice and is the mode which
equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good
conscience ought to pay.55

The payment by the insurer to the insured operates as an equitable assignment to the insurer of all
the remedies which the insured may have against the third party whose negligence or wrongful act
caused the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity
of contract or upon payment by the insurance company of the insurance claim. It accrues simply
upon payment by the insurance company of the insurance claim.56

ATI cannot invoke prescription

ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from seeking payment for
the lost/damaged shipment because the claim letter of GASI to ATI was served only on September
27, 1996 or more than one month from the date the shipment was delivered to the consignee’s
warehouse on August 9, 1996. The claim of GASI was thus filed beyond the 15-day period stated in
ATI’s Management Contract with PPA which in turn was reproduced in the gate passes issued to the
consignee’s broker, PROVEN, as follows:
Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the goods as
described above in good order and condition unless an accompanying x x x certificates duly issued
and noted on the face of this Gate Pass appeals. [sic]

This Gate pass is subject to all terms and conditions defined in the Management Contract between
the Philippine Port[s] Authority and Asian Terminals, Inc. and amendment thereto and alterations
thereof particularly but not limited to the [A]rticle VI thereof, limiting the contractor’s liability to
[P]5,000.00 per package unless the importation is otherwise specified or manifested or
communicated in writing together with the invoice value and supported by a certified packing list to
the contractor by the interested party or parties before the discharge of the goods and corresponding
arrastre charges have been paid providing exception or restrictions from liability releasing the
contractor from liability among others unless a formal claim with the required annexes shall have
been filed with the contractor within fifteen (15) days from date of issuance by the contractors or
certificate of loss, damages, injury, or Certificate of non-delivery.57

The contention is bereft of merit. As clarified in Insurance Company of North America v. Asian
Terminals, Inc.,58 substantial compliance with the 15-day time limitation is allowed provided that the
consignee has made a provisional claim thru a request for bad order survey or examination report,
viz:

Although the formal claim was filed beyond the 15-day period from the issuance of the examination
report on the request for bad order survey, the purpose of the time limitations for the filing of claims
had already been fully satisfied by the request of the consignee’s broker for a bad order survey and
by the examination report of the arrastre operator on the result thereof, as the arrastre operator had
become aware of and had verified the facts giving rise to its liability. Hence, the arrastre operator
suffered no prejudice by the lack of strict compliance with the 15-day limitation to file the formal
complaint.59 (Citations omitted)

In the present case, ATI was notified of the loss/damage to the subject shipment as early as August
9, 1996 thru a Request for Bad Order Survey60 jointly prepared by the consignee’s broker, PROVEN,
and the representatives of ATI. For having submitted a provisional claim, GASI is thus deemed to
have substantially complied with the notice requirement to the arrastre operator notwithstanding that
a formal claim was sent to the latter only on September 27, 1996. ATI was not deprived the best
opportunity to probe immediately the veracity of such claims. Verily then, GASI, thru its subrogee
FIRST LEPANTO, is not barred by filing the herein action in court.

ATI cannot rely on the ruling in Prudentiat61 because the consignee therein made no provisional
claim thru request for bad order survey and instead filed a claim for the first time after four months
from receipt of the shipment.

Attorney's fees and interests

All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40 representing the
insurance indemnity paid by the latter to GASI. Pursuant to Nacar v. Gallery Frames,62 the said
amount shall earn a legal interest at the rate of six percent (6%) per annum from the date of finality
of this judgment until its full satisfaction.

As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment award is
reasonable as and for attorney's fees considering the length of time that has passed in prosecuting
the claim.63
WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated October
10, 2008 of the Court of Appeals in CA-G.R. SP No. 99021 is hereby AFFIRMED insofar as it
adjudged liable and ordered Asian Terminals, Inc., to pay First Lepanto-Taisho Insurance Corp., the
amount of ₱165,772.40, ten percent (10%) thereof as and for attorney's fees, plus costs of suit. The
said amount shall earn legal interest at the rate of six percent ( 6%) per annum from the date of
finality of this judgment until its full satisfaction.

SO ORDERED.
G.R. No. 152334 September 24, 2014

H.H. HOLLERO CONSTRUCTION, INC., Petitioner,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF MACHINERY
INSURERS, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated March 13, 2001 and the
Resolution3 dated February 21, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175, which
set aside and reversed the Judgment4 dated February 3, 1999 of the Regional Trial Court of Quezon
City, Branch 220 (RTC) in Civil Case No. 91-10144, and dismissed petitioner H.H. Hollero
Construction, Inc.' s (petitioner) Complaint for Sum of Money and Damages under the insurance
policies issued by public respondent, the Government Service Insurance System (GSIS), on the
ground of prescription.

The Facts

On April 26, 1988, the GSIS and petitioner entered into a Project Agreement (Agreement) whereby
the latter undertook the development of a GSIS housing project known as Modesta Village Section B
(Project).5 Petitioner obligated itself to insurethe Project, including all the improvements, upon the
execution of the Agreement under a Contractors’ All Risks (CAR) Insurance with the GSIS General
Insurance Department for an amount equal to its cost or sound value, which shall not be subject to
any automatic annual reduction.6

Pursuant to its undertaking, petitioner secured CAR Policy No. 88/0857 in the amount of
₱1,000,000.00 for land development, which was later increased to ₱10,000,000.00,8 effective from
May 2, 1988 to May 2, 1989.9 Petitioner likewise secured CAR Policy No. 88/08610 in the amount of
₱1,000,000.00 for the construction of twenty (20) housing units, which amount was later increased to
₱17,750,000.0011 to cover the construction of another 355 new units, effective from May 2, 1988
toJune 1, 1989.12 In turn, the GSIS reinsured CAR Policy No. 88/085 with respondent Pool of
Machinery Insurers (Pool).13

Under both policies, it was provided that: (a) there must be prior notice of claim for loss, damage or
liability within fourteen (14) days from the occurrence of the loss or damage;14 (b) all benefits
thereunder shall be forfeited if no action is instituted within twelve(12) months after the rejection of
the claim for loss, damage or liability;15 and (c) if the sum insured is found to be less than the amount
required to be insured, the amount recoverable shall be reduced tosuch proportion before taking into
account the deductibles stated in the schedule (average clause provision).16

During the construction, three (3) typhoons hit the country, namely, Typhoon Biring from June 1 to
June 4, 1988, Typhoon Huaning on July 29, 1988, and Typhoon Saling on October 11, 1989, which
caused considerable damage to the Project.17 Accordingly, petitioner filed several claims for
indemnity with the GSIS on June 30, 1988,18 August 25, 1988,19 and October 18, 1989,20 respectively.

In a letter21 dated April 26, 1990, the GSIS rejected petitioner’s indemnity claims for the damages
wrought by Typhoons Biring and Huaning, finding that no amount is recoverable pursuant to the
average clause provision under the policies.22 In a letter23 dated June 21, 1990, the GSIS similarly
rejected petitioner’s indemnity claim for damages wrought by Typhoon Saling on a "no loss" basis,
itappearing from its records that the policies were not renewed before the onset of the said typhoon.24

In a letter25 dated April 18, 1991, petitioner impugned the rejection of its claims for damages/loss on
accountof Typhoon Saling, and reiterated its demand for the settlement of its claims.

On September 27, 1991, petitioner filed a Complaint26 for Sum of Money and Damages before the
RTC, docketed as Civil Case No. 91-10144,27 which was opposed by the GSIS through a Motion to
Dismiss28 dated October 25, 1991 on the ground that the causes of action stated therein are barred
by the twelve-month limitation provided under the policies, i.e., the complaint was filed more than
one(1) year from the rejection of the indemnity claims. The RTC, in an Order29 dated May 13, 1993,
denied the said motion; hence, the GSIS filed its answer30 with counterclaims for litigation expenses,
attorney’s fees, and exemplary damages. Subsequently, the GSIS filed a Third Party Complaint31 for
indemnification against Pool, the reinsurer.

The RTC Ruling

In a Judgment32 dated February 3, 1999, the RTC granted petitioner’s indemnity claims. It held that:
(a) the average clauseprovision in the policies which did not contain the assentor signature of the
petitioner cannot limit the GSIS’ liability, for being inefficacious and contrary to public policy;33 (b)
petitioner has established that the damages it sustained were due to the peril insured against;34 and
(c) CAR Policy No. 88/086 was deemed renewed when the GSIS withheld the amount of 35,855.00
corresponding to the premium payable,35 from the retentions it released to petitioner.36 The RTC
thereby declared the GSIS liable for petitioner’s indemnity claims for the damages brought about by
the said typhoons, less the stipulated deductions under the policies,plus 6% legal interest from the
dates of extrajudicial demand, as well as for attorney’s fees and costs of suit. It further dismissed for
lack of merit GSIS’s counterclaim and third party complaint.37

Dissatisfied, the GSIS elevated the matter to the CA. The CA Ruling In a Decision38 dated March 13,
2001, the CAset aside and reversed the RTC Judgment, thereby dismissing the complaint. It ruled
that the complaint filed on September 27, 1991 was barred by prescription, having been commenced
beyond the twelve-month limitation provided under the policies, reckoned from the final rejection of
the indemnity claims on April 26, 1990 and June 21, 1990. The Issue Before the Court

The essential issue for the Court’s resolution is whether or not the CA committed reversible error in
dismissing the complaint onthe ground of prescription.

The Court’s Ruling

The petition lacks merit.

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.39

Section 1040 of the General Conditions of the subject CAR Policies commonly read:

10. If a claim is in any respect fraudulent, or if any false declaration is made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his behalf
to obtain any benefit under this Policy, or if a claim is made and rejected and no action or suit is
commenced within twelve months after such rejectionor, in case of arbitration taking place as
provided herein, within twelve months after the Arbitrator or Arbitrators or Umpire have made their
award, all benefit under this Policy shall be forfeited. (Emphases supplied)

In this relation, case law illumines that the prescriptive period for the insured’s action for indemnity
should bereckoned from the "final rejection" of the claim.41

Here, petitioner insists that the GSIS’s letters dated April 26, 1990 and June 21, 1990 did not
amount to a "final rejection" ofits claims, arguing that they were mere tentative resolutions pending
further action on petitioner’s part or submission of proof in refutation of the reasons for
rejection.42 Hence, its causes of action for indemnity did not accrue on those dates.

The Court does not agree.

A perusal of the letter43 dated April 26, 1990 shows that the GSIS denied petitioner’s indemnity
claims wrought by Typhoons Biring and Huaning, it appearing that no amount was recoverable
under the policies. While the GSIS gave petitioner the opportunity to dispute its findings, neither of
the parties pursued any further action on the matter; this logically shows that they deemed the said
letter as a rejection of the claims. Lest it cause any confusion, the statement in that letter pertaining
to any queries petitioner may have on the denial should be construed, at best, as a form of notice to
the former that it had the opportunity to seek reconsideration of the GSIS’s rejection. Surely,
petitioner cannot construe the said letter to be a mere "tentative resolution." In fact, despite its
disavowals, petitioner admitted in its pleadings44 that the GSIS indeed denied its claim through the
aforementioned letter, buttarried in commencing the necessary action in court.

The same conclusion obtains for the letter45 dated June 21, 1990 denying petitioner’s indemnity claim
caused by Typhoon Saling on a "no loss" basis due to the non-renewal of the policies therefor before
the onset of the said typhoon. The fact that petitioner filed a letter46 of reconsideration therefrom
dated April 18, 1991, considering too the inaction of the GSIS on the same similarly shows that the
June 21, 1990 letter was also a final rejection of petitioner’s indemnity claim.

As correctly observed by the CA, "final rejection" simply means denial by the insurer of the claims of
the insured and not the rejection or denial by the insurer of the insured’s motion or request for
reconsideration.47 The rejection referred to should be construed as the rejection in the first
instance,48 as in the two instances above-discussed.

Comparable to the foregoing is the Court’s action in the case of Sun Insurance Office, Ltd. v.
CA49 wherein it debunked "[t]he contention of the respondents [therein] that the one-year prescriptive
period does not start to run until the petition for reconsideration had been resolved by the insurer,"
holding that such view "runs counter to the declared purpose for requiring that an action or suit be
filed in the Insurance Commission or in a court of competent jurisdiction from the denial of the
claim."50 In this regard, the Court rationalized that "uphold[ing]respondents' contention would
contradict and defeat the very principle which this Court had laid down. Moreover, it can easily be
used by insured persons as a scheme or device to waste time until any evidence which may be
considered against them is destroyed."51 Expounding on the matter, the Court had this to say:

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent’s view, two rulings of this Court have been cited, namely, the case
of Eagle Star Insurance [Link] Yu ([supra note 41]), where the Court held:

The right of the insured to the payment of his loss accrues from the happening of the loss. However,
the cause of action in an insurance contract does not accrue until the insured’s claim is finally
rejected by the insurer. This is because before such final rejection there is no real necessity for
bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a
correlated obligation of the defendant in violation of the said legal right, the cause of action does not
accrue until the party obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this
case to pay the amount of the bond)."

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured' s
cause of action or his right to file a claim either in the Insurance Commission or in a court of
competent jurisdiction [as in this case] commences from the time of the denial of his claim by the
Insurer, either expressly or impliedly. 1âw phi1

But as pointed out by the petitioner insurance company, the rejection referred to should be
construed as the rejection, in the first instance, for if what is being referred to is a reiterated rejection
conveyed in a resolution of a yetition for reconsideration, such should have been expressly
stipulated.52

In light of the foregoing, it is thus clear that petitioner's causes of action for indemnity respectively
accrued from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS
rejected its claims in the first instance. Consequently, given that it allowed more than twelve (12)
months to lapse before filing the necessary complaint before the R TC on September 27, 1991, its
causes of action had already prescribed.

WHEREFORE, the petition is DENIED. The Decision dated March 13, 2001 and the Resolution
dated February 21, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175 are hereby
AFFIRMED.

SO ORDERED.
G.R. No. 183272 October 15, 2014

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,

vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.

DECISION

DEL CASTILLO, J.:

The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium refund is the
only matter in question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in CA-GR. CV
No. 86923, which, among others, imposed a 12% per annum rate of interest reckoned from the time
of death of the insured until fully paid, on the premium to be reimbursed by petitioner Sun Life of
Canada (Philippines), Inc. (petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the
Estate of the Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is the
CA's June 12, 2008 Resolution3 denying petitioner's Motion for Reconsideration of the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose
application for a life insurance policy,4 with face value of ₱300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or within the two-year contestability period,5 Norberto died
of disseminated gastric carcinoma.6 Consequently, respondent Tan Kit filed a claim under the subject
policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of
Norberto’s failure to fully and faithfully disclose in his insurance application certain material and
relevant information about his health and smoking history. Specifically, Norberto answered "No" to
the question inquiring whether he had smoked cigarettes or cigars within the last 12 months prior to
filling out said application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the
several physicians that Norberto consulted for his illness, reveals that he was a smoker and had only
stopped smoking in August 1999. According to petitioner, its underwriters would not have approved
Norberto’s application for life insurance had they been given the correct information. Believing that
the policy is null and void, petitioner opined that its liability is limited to the refund of all the premiums
paid. Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the premium
refund.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted
on the payment of the insurance proceeds.

On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance Contract before the
Regional Trial Court (RTC) of Makati City.

Ruling of the Regional Trial Court

In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. Charity Salvador
(Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy
E. Javelosa (Javelosa), answered "NO" to the question "Are you aware of anything about the life to
be insured’s lifestyle, hazardous sports, habits, medical history, or any risk factor that would have an
adverse effect on insurability?" in her Agent’s Report. Javelosa also already knew Norberto two
years prior to the approval of the latter’s application for insurance. The RTC concluded that
petitioner, through the above-mentioned circumstances, had already cleared Norberto of any
misrepresentation that he may have committed. The RTC also opined that the affidavit of Dr. Chua,
presented as part of petitioner’s evidence and which confirmed the fact that the insured was a
smoker and only stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in
court. Further, since Norberto had a subsisting insurance policy with petitioner during his application
for insurance subject of this case, it was incumbent upon petitioner to ascertain the health condition
of Norberto considering the additional burden that it was assuming. Lastly, petitioner did not comply
with the requirements for rescission of insurance contract as held in Philamcare Health Systems,
Inc. v. Court of Appeals.12 Thus, the dispositive portion of the RTC Decision:

WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the
[respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay the
[respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(₱300,000.00), representing the face value of the insurance policy with interest at six percent (6%)
per annum from October 4, 2002 until fully paid.

Cost de oficio.

SO ORDERED.13

Petitioner moved for reconsideration,14 but was denied in an Order15 dated February 15, 2006.

Hence, petitioner appealed to the CA.

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17,
2007.

From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr.
Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom
he confided that he had stopped smoking only in 1999. At the time therefore that he applied for
insurance policy on October 28, 1999, there is no truth to his claim that he did not smoke cigarettes
within 12 months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the insurance policy. This
gave petitioner the right to rescind the insurance contract which it properly exercised in this case.

In addition, the CA held that the content of Norberto’s medical records are deemed admitted by
respondents since they failed to deny the same despite having received from petitioner a Request
for Admission pursuant to Rule 26 of the Rules of Court.17 And since an admission is in the nature of
evidence the legal effects of which form part of the records, the CA discredited the RTC’s ruling that
the subject medical records and the affidavits executed by Norberto’s physicians attesting to the
truth of the same were hearsay.

The dispositive portion of the CA Decision reads:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed
Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered
GRANTING the complaint a quo.

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from the time of the
death of the insured until fully paid.

SO ORDERED.18

The parties filed their separate motions for reconsideration.19 While respondents questioned the
factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the imposition of
interest on the premium ordered refunded to respondents.

However, the appellate court denied the motions in its June 12, 2008 Resolution,20 viz:

WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the
[petitioner] and the [respondents] are hereby DENIED.

SO ORDERED.21

Only petitioner appealed to this Court through the present Petition for Review on Certiorari.

Issue

The sole issue in this case is whether petitioner is liable to pay interest on the premium to be
refunded to respondents.

The Parties’ Arguments

Petitioner argues that no interest should have been imposed on the premium to be refunded
because the CA Decision does not provide any legal or factual basis therefor; that petitioner directly
and timely tendered to respondents an amount representing the premium refund but they rejected it
since they opted to pursue their claim for the proceeds of the insurance policy; that respondents
should bear the consequence of their unsound decision of rejecting the refund tendered to them;
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it liable for
interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals,22 no interest can be
assessed against petitioner.

Respondents, on the other hand, contend that the reimbursement of premium is clearly a money
obligation or one that arises from forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they admit that they refused the tender
of payment of the premium refund, they aver that they only did so because they did not want to
abandon their claim for the proceeds of the insurance policy. In any case, what petitioner should
have done under the circumstances was to consign the amount of payment in court during the
pendency of the case.

Our Ruling

Tio Khe Chio is not applicable in this case.

Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue of
payment of interest. There, the Court pointed to Sections 243 and 244 of the Insurance Code which
1âwphi 1

explicitly provide for payment of interest when there is unjustified refusal or withholding of payment
of the claim by the insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for
payment of interest when the debtor is in delay.

The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of
interest on the insurance proceeds in which the claim therefor was either unreasonably denied or
withheld or the insurer incurred delay in the payment thereof. In this case, what is involved is an
order for petitioner to refund to respondents the insurance premium paid by Norberto as a
consequence of the rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not unreasonably deny or
withhold the insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.

Nature of interest imposed by the CA

There are two kinds of interest – monetary and compensatory.

"Monetary interest refers to the compensation set by the parties for the use or forbearance of
money."25 No such interest shall be due unless it has been expressly stipulated in writing.26 "On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law or
by the courts."27 The interest mentioned in Articles 2209 and 221228of the Civil Code applies to
compensatory interest.29

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this
case, the subject interest was not one which was agreed upon by the parties in writing. This being
the case and judging from the tenor of the CA, to wit:

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from time of death of
the insured until fully paid.30

there can be no other conclusion than that the interest imposed by the appellate court is in the
nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned from the time of
death of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to have failed to
comply with his obligation.31

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching to
the said notice a check representing the amount of refund. However, respondents refused to accept
the same since they were seeking for the release of the proceeds of the policy. Because of this
discord, petitioner filed for judicial rescission of the contract. Petitioner, after receiving an adverse
judgment from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance contract and
consequently decreed the obligation of petitioner to return to respondents the premium paid by
Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.
Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within the
said period, then the amount shall be deemed equivalent to a forbearance of credit.32 In such a case,
the rate of interest shall be 6% per annum.33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse
to respondents Sandra Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of
~13,080.93 representing the premium paid by the insured within fifteen (15) days from date of finality
of this Decision. If the amount is not reimbursed within said period, the same shall earn interest of
6% per annum until fully paid.

SO ORDERED.
G.R. No. 198174 September 2, 2013

ALPHA INSURANCE AND SURETY CO., PETITIONER,

vs.
ARSENIA SONIA CASTOR, RESPONDENT.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and Resolution2 dated August 10, 2011 of the Court of Appeals (CA)
in CA-G.R. CV No. 93027.

The facts follow.

On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The contract
of insurance obligates the petitioner to pay the respondent the amount of Six Hundred Thirty
Thousand Pesos (₱630,000.00) in case of loss or damage to said vehicle during the period covered,
which is from February 26, 2007 to February 26, 2008.

On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar Lanuza
(Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-up. However,
Lanuza no longer returned the motor vehicle to respondent and despite diligent efforts to locate the
same, said efforts proved futile. Resultantly, respondent promptly reported the incident to the police
and concomitantly notified petitioner of the said loss and demanded payment of the insurance
proceeds in the total sum of ₱630,000.00.

In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among
others, thus:

Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which
states that the culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you
on the provision of the Policy under Exceptions to Section-III, which we quote:

1.) The Company shall not be liable for:

xxxx

(4) Any malicious damage caused by the Insured, any member of his family or by "A PERSON IN
THE INSURED’S SERVICE."

In view [of] the foregoing, we regret that we cannot act favorably on your claim.

In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued that
the exception refers to damage of the motor vehicle and not to its loss. However, petitioner’s denial
of respondent’s insured claim remains firm.

Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner before
the Regional Trial Court (RTC) of Quezon City on September 10, 2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in this
wise:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the latter as follows:

To pay plaintiff the amount of ₱466,000.00 plus legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;

To pay attorney’s fees in the sum of ₱65,000.00; and

To pay the costs of suit.

All other claims not granted are hereby denied for lack of legal and factual basis.3

Aggrieved, petitioner filed an appeal with the CA.

On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon City’s decision.
The fallo reads:

WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision, dated
December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in Civil Case No. Q-
07-61099, is hereby AFFIRMED in toto.

SO ORDERED.4

Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a
Resolution dated August 10, 2011.

Hence, the present petition wherein petitioner raises the following grounds for the allowance of its
petition:

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND GROSSLY
OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF THE PRIVATE
RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT EXCEPTION DOES NOT
COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF THE INSURANCE POLICY ARE
[AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT THE PARTIES THEMSELVES
DISAGREE ABOUT THE MEANING OF PARTICULAR PROVISIONS, THE POLICY WILL BE
CONSTRUED BY THE COURTS LIBERALLY IN FAVOR OF THE ASSURED AND STRICTLY
AGAINST THE INSURER.

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND

COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT
OF THE TRIAL COURT.5

Simply, the core issue boils down to whether or not the loss of respondent’s vehicle is excluded
under the insurance policy.

We rule in the negative.

Significant portions of Section III of the Insurance Policy states:

SECTION III – LOSS OR DAMAGE

The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage
to the Schedule Vehicle and its accessories and spare parts whilst thereon:

(a)

by accidental collision or overturning, or collision or overturning consequent upon mechanical

breakdown or consequent upon wear and tear;

(b)

by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;

(c)

by malicious act;

(d)

whilst in transit (including the processes of loading and unloading) incidental to such transit by road,
rail, inland waterway, lift or elevator.

xxxx

EXCEPTIONS TO SECTION III

The Company shall not be liable to pay for:

Loss or Damage in respect of any claim or series of claims arising out of one event, the first amount
of each and every loss for each and every vehicle insured by this Policy, such amount being equal to
one percent (1.00%) of the Insured’s estimate of Fair Market Value as shown in the Policy Schedule
with a minimum deductible amount of Php3,000.00;

Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or
breakages;

Damage to tires, unless the Schedule Vehicle is damaged at the same time;

Any malicious damage caused by the Insured, any member of his family or by a person in the
Insured’s service.6

In denying respondent’s claim, petitioner takes exception by arguing that the word "damage," under
paragraph 4 of "Exceptions to Section III," means loss due to injury or harm to person, property or
reputation, and should be construed to cover malicious "loss" as in "theft." Thus, it asserts that the
loss of respondent’s vehicle as a result of it being stolen by the latter’s driver is excluded from the
policy.

We do not agree.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft perpetrated
by the driver of the insured is not an exception to the coverage from the insurance policy, since
Section III thereof did not qualify as to who would commit the theft. Thus:

Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance
policy subject of this case. This is evident from the very provision of Section III – "Loss or Damage."
The insurance company, subject to the limits of liability, is obligated to indemnify the insured against
theft. Said provision does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of exception, the same
must be covered. As correctly pointed out by the plaintiff, "(A)n insurance contract should be
interpreted as to carry out the purpose for which the parties entered into the contract which is to
insure against risks of loss or damage to the goods. Such interpretation should result from the
natural and reasonable meaning of language in the policy. Where restrictive provisions are open to
two interpretations, that which is most favorable to the insured is adopted." The defendant would
argue that if the person employed by the insured would commit the theft and the insurer would be
held liable, then this would result to an absurd situation where the insurer would also be held liable if
the insured would commit the theft. This argument is certainly flawed. Of course, if the theft would be
committed by the insured himself, the same would be an exception to the coverage since in that
case there would be fraud on the part of the insured or breach of material warranty under Section 69
of the Insurance Code.7

Moreover, 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.8 Accordingly, in interpreting the exclusions in an insurance contract, the terms used
specifying the excluded classes therein are to be given their meaning as understood in common
speech.9

Adverse to petitioner’s claim, the words "loss" and "damage" mean different things in common
ordinary usage. The word "loss" refers to the act or fact of losing, or failure to keep possession, while
the word "damage" means deterioration or injury to property. 1âwphi1

Therefore, petitioner cannot exclude the loss of respondent’s vehicle under the insurance policy
under paragraph 4 of "Exceptions to Section III," since the same refers only to "malicious damage,"
or more specifically, "injury" to the motor vehicle caused by a person under the insured’s service.
Paragraph 4 clearly does not contemplate "loss of property," as what happened in the instant case.

Further, the CA aptly ruled that "malicious damage," as provided for in the subject policy as one of
the exceptions from coverage, is the damage that is the direct result from the deliberate or willful act
of the insured, members of his family, and any person in the insured’s service, whose clear plan or
purpose was to cause damage to the insured vehicle for purposes of defrauding the insurer, viz.:

This interpretation by the Court is bolstered by the observation that the subject policy appears to
clearly delineate between the terms "loss" and "damage" by using both terms throughout the said
policy. x x x

xxxx

If the intention of the defendant-appellant was to include the term "loss" within the term "damage"
then logic dictates that it should have used the term "damage" alone in the entire policy or otherwise
included a clear definition of the said term as part of the provisions of the said insurance contract.
Which is why the Court finds it puzzling that in the said policy’s provision detailing the exceptions to
the policy’s coverage in Section III thereof, which is one of the crucial parts in the insurance contract,
the insurer, after liberally using the words "loss" and "damage" in the entire policy, suddenly went
specific by using the word "damage" only in the policy’s exception regarding "malicious damage."
Now, the defendant-appellant would like this Court to believe that it really intended the word
"damage" in the term "malicious damage" to include the theft of the insured vehicle.

The Court does not find the particular contention to be well taken.

True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties thereto have used. In
the case of property insurance policies, the evident intention of the contracting parties, i.e., the
insurer and the assured, determine the import of the various terms and provisions embodied in the
policy. However, when the terms of the insurance policy are ambiguous, equivocal or uncertain,
such that the parties themselves disagree about the meaning of particular provisions, the policy will
be construed by the courts liberally in favor of the assured and strictly against the insurer.10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the 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. Thus, in Eternal Gardens Memorial Park
Corporation v. Philippine American Life Insurance Company,11 this Court ruled –

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 non-
compliance with its obligations.

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.12

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED.
Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of the Court of
Appeals are hereby AFFIRMED.

SO ORDERED.
G.R. No. L-47593 September 13, 1941

THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,

vs.
SERAFIN D. FELICIANO and ANGEL, FLORENDA, EUGENIO, HERMINIO and LETICIA, all
surnamed FELICIANO, represented by their guardian ad litem SERAFIN D.
FELICIANO, respondents.

Araneta, Zaragosa, Araneta & Bautista for petitioner.

Delfin Joven for respondents.

LAUREL, J.:

One Evaristo Feliciano filed an application for insurance with the herein petitioner upon the
solicitation of one of its agents. Two insurance policies to the aggregate amount of P25,000 were
issued to him. Feliciano died on September 29, 1935. The defendant company refused to pay on the
ground that the policies were fraudulently obtained, the insured having given false answers and
statements in the application as well as in the medical report. The present action was brought to
recover on said policies. The lower court rendered judgment in favor of the plaintiffs. The lower court
found that at the time Feliciano filed his application and at the time he was subjected to physical
examination by the medical examiner of the herein petitioner, he was already suffering from
tuberculosis. This fact appears in the negative both in the application and in the medical report. The
lower court, after an exhaustive examination of the conflicting testimonies, also found that Feliciano
was made to sign the application and the examiner's report in blank, and that afterwards the blank
spaces therein were filled in by the agent and the medical examiner, who made it appear therein that
Feliciano was a fit subject for insurance. The lower court also held that neither the insured nor any
member of his family concealed the real state of health of the insured. That as a matter of fact the
insured, as well as the members of his family, told the agent and the medical examiner that the
applicant had been sick and coughing for sometime and that he had also gone three times to the
Santol Sanatarium. On appeal, this finding of facts of the lower court was sustained by the Court of
Appeals. This concludes the controversy over the facts in so far as this Court is concerned.

The first assignment of error of the petitioner raises the question we are now called upon to decide:

The Court of Appeals erred in holding that an insurance company has no right to avoid a policy
where its agent knowingly and intentionally wrote down the answers in the application differing from
those made by the insured, in disregard of the exception that when the agent, instead of serving the
interests of his principal, acts in his own or another's interest and adversely to that of his principal,
the said principal is not bound by said acts of the agent."

On the proposition thus presented, there are two main avenues of approach indicated: one leading
to the validation of a policy where its agent, without fraud, collusion or bad faith on the part of the
insured, falsified the answers given by the insured; and the other, leading to the avoidance of the
policy under the circumstances. We see no need for an extended discussion of the conflicting
authorities. Whenever courts are given the choice between two conflicting principles, the
determinative fact which should sway them is the conformity of its contemplated course to reason
and to "the common sense of the situation." The life of the law is not only logic but experience.

The phenomenal growth of insurance from almost nothing a hundred years ago to its present
gigantic proportion is not of the outstanding marvels of present-day business life. The demand for
economic security, the growing need for social stability, and the clamor for protection against the
hazards of cruel-crippling calamities and sudden economic shocks, have made insurance one of the
felt necessities of modern life. Insurance is no longer a rich man's monopoly. Upon it are heaped the
assured hopes of many families of modest means. It is woven, as it were, into the very warp and
woof of national economy. It touches the holiest and most sacred ties in the life of man-love of
parents, love of wives and love of children. It is of common knowledge that the selling of insurance
today is subjected to the whilrlwind pressure of modern salesmanship. Insurance companies send
detailed instructions to their agents to solicit and procure applications. These agents are to be found
all over the length and breadth of the land. They are stimulated to more active efforts by contests
and by the keen competition offered by other rival insurance companies. They are supplied with
blank applications and paid large commissions on the policies secured by them. All transactions are
generally done through these agents. They act, in fact and in theory, as the general representatives
of the insurance companies. They supply all the information , prepare and answer the applications,
submit the applications to their companies, conclude the transactions, and otherwise smooth out all
difficulties. The agents, in short, do what the company set them to do.

In the present case, the agent knew all the time the true state of health of the insured. The insurer's
medical examiner approve the application knowing full well that the applicant was sick. The situation
is one in which one of two innocent parties must bear a loss for his reliance upon a third person. In
this case, it was the insurer who gave the agent authority to deal with the applicant. It was the one
who selected the agent, thus implying that the insured could put his trust on him. It was the one who
drafted and accepted the policy and consummated the contract. It seems reasonable that as
between the two of them, the one who employed and gave character to the third person as its agent
should be the one to bear the loss.

The company received the money of the applicant as the price of the risk to be taken by it. If the
policy should be avoided, it must be because it was void from the very beginning, and the result
would be that the insurer, while it received the money, never assumed any risk. The result would be,
in the language of one of the cases, "to place every simple or uneducated person seeking insurance
at the mercy of the insurer who could, through its agent, insert in every application, unknown to the
applicant and over his signature, some false statements which would enable him to avoid all liability
while retaining the price paid for the supposes insurance." (State Insurance Company v. Taylor, 14
Colo. 499, 24 Pac. 333.) The weight of authority is that if an agent of the insurer, after obtaining from
an applicant for insurance a correct and truthful answer to interrogatories contained in the
application for insurance, without knowledge of the applicant fills in false answers, either fraudulently
or otherwise, the insurer cannot assert the falsity of such answers as a defense to liability on the
policy, and this is true generally without regard to the subject matter of the answers or the nature of
the agent's duties or limitations on his authority, at least if not brought to the attention of the
applicant.

The fact that the insured did not read the application which he signed, is not indicative of bad faith. It
has been held that it is not negligence for the insured to sign an application without first reading it if
the insurer by its conduct in appointing the agent influenced the insured to place trust and
confidence in the agent. (Den Hartog v. Home Nat. Ins. Asso., 197 Iowa, 143 196 N. W. 944.) As the
court said in the case of Germania L. Ins. Co. v. Lunkebiemer, 127 Ind. 538, 26 N. E. 1082, "Nor can
it be said that the assured, who has fully, frankly, truthfully, and in good faith answered all the
required questions, is guilty of negligence in signing, without reading, the application which is
thereupon prepared by the agent. He is justified in assuming that the agent has, with equal good
faith, truthfully recorded the answers given him. He may well say to the company: "You accredited
this man to me as your representative and I signed the application thus prepared by him, relying
upon the character which you gave him when you commissioned him to come to me as your agent.
If he acted dishonestly in the matter, you and not I must suffer the consequences.' ..." In the instant
case, it has been proved that the insured could not read English, the language in which the
application was written, and that after the contract was signed, it was kept by his mother. As a
consequence, the insured had no opportunity to read or correct any misstatement therein. (Bill of
Exceptions, pp. 60-61.)

We have not been insensible to the appeal that the course we have followed may lead to fraud and
work hardship on insurance companies, for it would be easy for insurance agents and applicants to
insert false answers in their applicants to insert false answers in their applications for insurance. This
means that it is to the particular interest of these companies to exercise greater care in the selection
of their agents and examiners. Their protection is still in their own hands and which may be achieved
by other means. Withal, the attainment of a common good may involve impairment and even
sacrifice of beneficial interests of a particular group, but in life, compromise is inevitable until the
hour of doom strikes.

The petition is hereby dismissed and the judgment sought to be reviewed is affirmed with costs
against the petitioner. So ordered.

Abad Santos, Diaz, and Horrilleno, JJ., concur.

Separate Opinions

OZAETA, J., with whom concur AVANCEÑA, C.J., and MORAN, J., dissenting:

Altho a dissenting opinion is but a voice in the wilderness, we have to write it because the
Constitution so requires.

The material facts are not disputed in this instance, but they are not adequately stated in the majority
opinion, and we apprehend that the significance of those not stated therein may have been
overlooked by the majority of the Court.

This is a suit on two life insurance policies issued by the petitioner (hereinafter referred to as the
Company) to Evaristo Feliciano as of October 1 and November 1, 1934, for P20,000 and P5,000,
respectively. The application for the first policy was signed on October 12, and that for the second
policy, on October 28, 1934. On those dates Feliciano "had an advanced disease of the lungs ... He
was breathless, having difficulty in breathing, and he had the appearance of one with high fever." As
a matter of fact, on October 12, 1934, the very day the insured signed the first applications, after the
last X-ray examination of his lungs had been made at the Santol Sanatorium by Doctor Trepp, the
latter informed the respondent Serafin D. Feliciano, brother of the insured, of the result of the X-ray
examination and told him that in his opinion his brother "was already in a very serious and practically
hopeless condition." (Trial court's decision, P.27, B. of E.) After the first application for insurance of
P20,000 had been approved and the corresponding policy issued, the insured applied on October
28, 1934, for another insurance of P5,000, and the policy therefor was issued as of November 1,
1934. Less than one year later, to wit, on September 29, 1935, the insured died of the same malady
he had been suffering-pulmonary tuberculosis.

The Court of Appeals found in effect that the Company's soliciting agent Romulo M. David, in
conclusion with the medical examiner Dr. Gregorio Valdez, knowingly wrote false answers to the
question contained in the applications and in the medical examiner's reports — which they had made
the applicant sign in blank — in order to secure the Company's approval thereof and have the
corresponding policies credited to the agent in connection with the interprovincial contest which the
Company was then holding among its soliciting agents to boost the sales of its policies. The Court of
Appeals intimates that Agent David bribed Medical Examiner Valdez with money which the former
borrowed from the applicant's mother by way of advanced payment on the premium. In this
connection, it may be mentioned that the premium paid on the first policy was P1,111.20, and that
on the second policy, P277.80, or a total of P1,389, which the Company offers to refund.

The Court of Appeals also found that before the insured signed the first application and medical
examiner's report, he and the members of his family told the agent and the medical examiner that he
had been sick and coughing for some time and that he had gone three times to the Santol
Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such information the agent
and the medical examiner told them that the applicant was a fit subject for insurance.

Each of the policies sued upon contains the following stipulations:

This policy and the application therefor constitute the entire contract between the parties
hereto. ... Only the President, or the Manager, acting jointly with the Secretary of Assistant
Secretary (and then only in writing signed by them) have power in behalf of the Company to
issue permits or to modify this or any contract, or to extend the time for making any premium
payment, and the Company shall not be bound by any promise or representation heretofore
or hereafter given by any person other than the above-named officials, and by them only in
writing and signed conjointly as stated.

The application referred to in and made a part of the policy contains, among others, the following
statements:

18. — I [the applicant] hereby declare that all the above statements and answers as well as
those that I may make to the Company's Medical Examiner in continuation of this application,
to be complete, true and correct to the best of my knowledge and belief, and I hereby agree
as follows:

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

xxx xxx xxx

3. That the said policy shall not take effect until the first premium has been paid and the
policy has been delivered to and accepted by me, while I am in good health.

4. That the agent taking this application has no authority to make, modify or discharge
contracts, or to waive any of the company's rights or requirements.

xxx xxx xxx

Upon the facts above set forth, we are of the opinion that respondents are not entitled to recover the
amounts of the policies in question but only the premiums paid thereon, for the following reasons:

1. Under the very terms of the policies sued upon there is no valid contract of insurance here. The
policies were issued on the basis of the statement subscribed to by the applicant to the effect that he
was and had been in good health. The basis being false, there was no real meeting of the minds of
the parties. The agents had no authority to bind the company thru oral representations, and less so
when such representations were false and fraudulent.
2. The insured and the members of his family who are the respondents herein were not entirely
innocent of bad faith. They were not candid, unsophisticated rustics. They were well to do and well
educated. They were not ignorant of the practices in the life insurance business. In 1924, the insured
had taken an insurance policy of P10,000 from the Sun Life Insurance Company, which, however,
he allowed to lapse. The insured was a "proprietor and agriculturist" (see policy Exhibit E). The
respondent Serafin D. Feliciano, brother of the insured, is a physician who for some years had
worked in the Santol Sanatorium with Doctor Trepp (Exhibit B, p. 16). The most charitable view that
one could take of the insured's part in the transaction is that he, with the approval of his relatives,
particularly his mother who furnished the money with which to pay the premiums and who was
named beneficiary to the extent of P12,000, allowed himself to be used as instrument in the wrongful
issuance of the policies in question by the Company to defraud the latter. It is difficult to believe that
in so doing he and his relatives were not actuated by the desire for lucre. They knew that a person in
bad health — let alone one who was "in a very serious and practically hopeless condition" — was
not insurable. So they must also have known, or at least they had good reason to suspect, that
Agent David and Medical Examiner Valdez were not acting in good faith when they made the
applicant sign the application in blank and told him (the hopelessly sick man) that he was fit of
insurance. If the applicant and his relatives were acting in good faith, they would have been curious
enough to scrutinize the application and the medical examiner's report contained in the first policy
upon receipt of it, to see whether the medical examiner had correctly stated therein the state of the
applicant's health. It is significant that shortly after they had received the first policy of P20,000, the
insured applied for and secured another policy of P5,000. As held by the Supreme Court of the
United States in the analogous case on New York Life Insurance company v. Fletcher, 117 U. S.
519: "He could not hold the policy without approving the action of the agents and thus becoming a
participant in the fraud committed. The retention of the policy was an approval of the application and
of its statements. The consequences of that approval cannot after his death be avoided."

3. Life insurance is a savings institution; it is not a gambling scheme. The premiums paid by the
insured, plus a participation in the profits realized by the life insurance company from the investment
of those premiums, are returned to him if he survives the policy. If, contrary to the life expectancy of
the insured, he dies before the policy matures, the full amount of the insurance is paid to his
beneficiary. The insured is not expected to lose, but neither is he supposed to expect a windfall or an
inordinate gain. That is elemental in every sound business. The life insurance business is a co-
operative enterprise in the sense that the policy-holders as well as the company are interested in
making profits and in avoiding unnecessary or bad losses. The company is, to a certain extent, a
trustee of the funds paid to it by its policyholders. No insurance company which would issue policies
indiscriminately could expect to survive or, for that matter, be licensed by the Government to do
business. That is fundamental. Every fraud perpetrated upon the company affects the policy-holders
because their share in the profits is thereby unduly minimized. That is why the Government, thru the
Insurance Commissioner, closely supervises the insurance business (see section 169 et seq., The
Insurance Act). We think it is bad law to hold valid a policy procured thru fraud on the life of a person
who was almost on the brink of his grave. Avaricious persons, with the connivance of unscrupulous
agents of insurance companies, could make money on the lives of their relatives who were expected
to die soon, by fraudulently insuring them, and could get away with it, as in the instant case. The real
or ultimate victim is not the company alone but also its numerous policyholders who have put their
savings in it.

It is suggested that the remedy is for the insurance companies to exercise greater care in the
selection of their agents and examiners. As a matter of fact, under the law no one may act as
soliciting agent of an insurance company without authority or license from the Insurance
Commissioner(section 189, The Insurance Act); and the Insurance Commissioner makes a careful,
confidential investigation of the conduct and reputation of the applicant for such license before
issuing the same. But no amount of care taken by both the company and the Insurance
Commissioner in the selection of soliciting agents and medical examiners can insure the company
against bad faithly and the cupidity of the evil-minded. The company would have to exact a huge
bond of every one of its numerous agents and medical examiners to guarantee his fidelity, and that
would be too expensive to make the insurance business profitable. In other words, the suggested
remedy is, we believe, impracticable. The only safe and sound policy is, not to condone but to
condemn fraud under any and all circumstances.

4. If we are to be guided and persuaded by cases adjudicated in other jurisdictions as the Court of
Appeals was in deciding this case, we should follow that decided by the Supreme Court of the
United States upon facts similar or analogous to those obtaining in the instant case, instead of
adopting doctrines laid down by the state supreme courts and inferior federal courts in cases the
facts of which bear little or no anology to those of the case at bar. The case squarely in point, but
which the Court of Appeals rejected, is New York Life Insurance Company v. Fletcher, supra. In that
case it was stated in the application for insurance that the applicant never had a disease of the
kidneys or any serious disease, and had never been seriously ill, and had no regular medical
attendant, whereas he had been afflicted with diabetes, which is a serious disease of the kidneys,
and had been under medical treatment for it, and he actually died of that disease. The plaintiff
therein, however, alleged, and adduced evidence to show:

. . . That two agents of the company at St. Louis, who were personally acquainted with the assured
and knew his past and then physical condition, had solicited him on different occasions to take out a
policy in the company; that he told each of them on those occasions that he did not believe he was
insurable; that they knew he had been in bad health and had been under medical treatment for
diabetes, though he thought he was then well; that they assured him that he was insurable, that the
fact that he had the disease made no difference, and that if he would take out a policy and pay the
premiums required he would have no trouble; that finally, about the 18th of December, 1877, he
consented to take a policy; that they then told him it would be necessary for him to answer certain
questions as a matter of form; that one of them thereupon read to him certain questions from a
printed blank, and as he answered them the other pretended to take down and write in the blank the
substance of the answers as given, not reading over to the assured what he had written, nor
consulting him about it, nor informing him what it was, but saying that what he did was a mere
formality; that when he was asked with respect to his having any disease of the kidneys he replied
that his condition was well known to the agents, who were aware that he had been sick and under
treatment by Doctor Brokaw for diabetes, and that the doctor's office was opposite, and they could
go there and find out everything they wanted to know; that the assured had faithfully answered all
the questions, but the agents inserted in the blanks false answers; that he had no reason to suppose
that the answers were taken down differently from those given; that after answering all their question
he was asked to sign his name to the paper to identify him as the party for whose benefit the policy
was to be issued, and for that purpose he signed the paper twice, without reading it or the written
answers; that the agents did not read to him any part of the application except the questions, and did
not read the clause set forth in the defendant's answer, nor call the attention to the fact that his
signatures were intended as an acceptance or assent to that clause; that when the policy was
delivered to him he neither read it nor the copy of the application attached to it, that the agent who
delivered it informed him that it was right, and he was insured, and he gave no further attention to
the matter; that the annual premiums, as they fell due, were paid to said agent, who received them
with full knowledge of all the facts; and that, therefore, the company was estopped form pretending
that any of the answers as written rendered the policy void." (117 U.S. 521-523.)

In reversing the judgment rendered by the trial court in favor of the plaintiff, the Federal Supreme
Court held "that the agent had no authority from the company to falsify the answers," and that "the
assured could acquire no right by virtue of his falsified answers." The Court further said:

. . . Both he and the company were deceived by the fraudulent conduct of the agent. The
assured was placed in the position of making false representations in order to secure a
 valuable contract which, upon a truthful report of his condition, could not have been obtained.
By them the company was imposed upon and induced to enter into the contract. In such a
case, assuming that both parties acted in good faith, justice would require that the contract
be cancelled and the premiums returned. As the present action is not for such a cancellation,
the only recovery which the plaintiff could properly have upon the facts he asserts, taken in
connection with the limitation upon the powers of the agent, is for the amount of the
premiums paid, and to that only would he be entitled by virtue of the statute of Missouri.

But the case as presented by the record is by no means as favorable to him as we have
assumed. It was his duty to read the application he signed. He knew that upon it the policy
would be issued, if issued at all. It would introduce great uncertainty in all business
transactions, if a party making written proposals for a contract, with representations to induce
its execution, should be allowed to show, after it had been obtained, that he did not know the
contents of his proposals, and to enforce it, notwithstanding their falsity as to matters
essential to its obligation and validity. Contracts could not be made, or business fairly
conducted, if such a rule should prevail; and there is no reason why it should be applied
merely to contract of insurance. There is nothing in their nature which distinguishes them in
this particular from others. But here the right is asserted to prove not only that the assured
did not make the statements contained in his answers, but that he never read the application,
and to recover upon a contract obtained by representations admitted to be false, just as
though they were true. If he had read even the printed lines of his application, he would have
seen that it stipulated that the rights of the company could in no respect be affected by his
verbal statements, or by those of its agents, unless the same were reduced to writing and
forwarded with his application to the home office. The company, like any other principal,
could limit the authority of its agents, and thus bind all parties dealing with them with
knowledge of the limitation. It must be presumed that he read the application, and was
cognizant of the limitations thereon expressed.

xxx xxx xxx

There is another view of this case equally fatal to a recovery. Assuming that the answers of
the assured were falsified, as alleged, the fact would be at once disclosed by the copy of the
application, annexed to the policy, to which his attention was called. He would have
discovered by inspection that a fraud had been perpetrated, not only upon himself but upon
the company, and it would have been his duty to make the fact known to the company. He
could not hold the policy without approving the action of the agents and thus becoming a
participant in the fraud committed. The retention of the policy was an approval of the
application and of its statements. The consequences of that approval cannot after his death
be avoided.

. . . No one can claim the benefit of an executory contract fraudulently obtained, after the
discovery of the fraud, without approving and sanctioning it. (117 U. S. 529-530, 534, 535.)

Our attention has been called to al later case — Continental Life Insurance
Company v. Chamberlain, 132 U. S. 304 — in which the court held the company liable upon a policy
of insurance of the life of one Richard Stevens issued under the following circumstances, as stated
in the decision:

The application for insurance was taken in Iowa by one Boak, a district agent of the company
in certain named counties of the States, fourteen in number, having written authority "to
prosecute the business of soliciting and procuring applications for life insurance policies
within and throughout said territory."
 Among the numerous questions propounded in the application was the following: "Has the
said party [the applicant] any other insurance on his life; if so, where and for what amounts?"
The answer, as it appears in the application, is: "No other." That answer, as were all the
answers to questions propounded to the applicant, was written by the company's agent,
Boak. In reference to the above question and answer, the latter testified: "I asked him
[Stevens] the question if he had any other insurance, as printed in the application and as we
ask every applicant, and he told me he had certain certificates of membership with certain
cooperative societies, and he enumerated different ones, and said he did not know whether I
would consider them insurance or not. I told him emphatically that I did not consider them
insurance and we had considerable conversation about it. He wanted to know my authority
for saying I did not consider them insurance. I gave him my authority — give him my reasons
— and he agreed with me that these cooperative societies were in no sense insurance
companies, and in that light I answered the question "No" after he had stated the facts? — A.
I did. Q. Who wrote the answer in there? — A. I did."

xxx xxx xxx

It was admitted on the trial that at the date of Stevens' application he had insurance in
cooperative companies to the amount of $12,000. (132 U. S. 306, 308.)

The court, after quoting the pertinent provision of the statute of Iowa, observed that "by force of the
statute, he was the agent of the company in soliciting and procuring the application. He could not, by
any of his, shake of the character of agent for the company. Nor could the company by any provision
in the application or policy convert him into an agent of the assured." Referring to the incorrectness
propounded by him to the applicant in relation to the stipulation in the policy that the terms thereof
could not be varied except in writing signed by the president or the secretary of the company, the
court said:

. . . The purport of the word "insurance" in the question, "Has the said party any other
insurance on his life?" is not so absolutely certain as, in an action upon the policy, to
preclude proof as to what kind of life insurance the contracting parties had in mind when that
question was answered. Such proof does not necessarily contradict the written contract.
Consequently, the above clause, printed on the back of the policy, is to be interpreted in the
light of the statute and of the understanding reached between the assured and the company
by its agent when the application was completed, namely, that the particular kind of
insurance inquired about did not include insurance in cooperative societies. In view of the
statute and of that understanding, upon the faith of which the assured made his application,
paid the first premium, and accepted the policy, the company is estopped, by every principle
of justice, from saying that its question embraced insurance in cooperative associations. The
answer of "No other" having been written by its own agent, invested with authority to solicit
and procure applications, to deliver policies, and, under certain limitations, to receive
premiums, should be held as properly interpreting both the question and the answer as to
other insurance. (132 U. S. 311-312.)

There is no conflict between the two cases. They were decided differently because the facts were
different. Suffice it for us to say that the facts of the instant case are analogous to those of the
Fletcher case and different from those of the Chamberlain case.

We have examined the three cases cited in the majority opinion, from the supreme courts of
Colorado, Iowa, and Indiana, respectively, and we find that the facts of each and everyone of them
bear no analogy to those of the present case.
5. The majority opinion says: "The situation is one in which one of two innocent parties must bear a
loss for his reliance upon a third person." We cannot subscribe to this proposition (1) because, as we
have pointed out above, the insured and his relatives, the herein respondents, were not innocent of
bad faith and (2) because, even if the policies in question should be held invalid, the respondents
would not suffer any loss since the Company has offered to return the premiums paid, and it could
be ordered to make such refund with legal interest. By such judgment neither party would be
permitted to enrich himself at the expense of the other. This, we feel, is urged by justice, reason, and
"the common sense of the situation."
G.R. No. L-1669 August 31, 1950

PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

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

G.R. No. L-1670 August 31, 1950

AGUSTINA PERALTA, plaintiff-appellant,

vs.
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

Mariano Lozada for appellant Constantino.

Cachero and Madarang for appellant Peralta.
Dewitt, Perkins and Ponce Enrile for appellee.
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.

BENGZON, J.:

These two cases, appealed from the Court of First Instance of Manila, call for decision of the
question whether the beneficiary in a life insurance policy may recover the amount thereof although
the insured died after repeatedly failing to pay the stipulated premiums, such failure having been
caused by the last war in the Pacific.

The facts are these:

First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life
Insurance Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued
on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio
Constantino for a term of twenty years. The first premium covered the period up to September 26,
1942. The plaintiff Paz Lopez de Constantino was regularly appointed beneficiary. The policy
contained these stipulations, among others:

This POLICY OF INSURANCE is issued in consideration of the written and printed

application here for a copy of which is attached hereto and is hereby made a part hereof
made a part hereof, and of the payment in advance during the lifetime and good health of the
Insured of the annual premium of One Hundred fifty-eight and 4/100 pesos Philippine
currency1 and of the payment of a like amount upon each twenty-seventh day of September
hereafter during the term of Twenty years or until the prior death of the Insured. (Emphasis
supplied.)

xxx xxx xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of 31 days.)

After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in
Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.

Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of
the spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium
stipulated in the policy was regularly paid from August 1, 1938, up to and including September 30,
1941. Effective August 1, 1941, the mode of payment of premiums was changed from annual to
quarterly, so that quarterly premiums were paid, the last having been delivered on November 18,
1941, said payment covering the period up to January 31, 1942. No further payments were handed
to the insurer. Upon the Japanese occupation, the insured and the insurer became separated by the
lines of war, and it was impossible and illegal for them to deal with each other. Because the insured
had borrowed on the policy an mount of P234.00 in January, 1941, the cash surrender value of the
policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died
on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met
with defendant's refusal, grounded on non-payment of the premiums.

The policy provides in part:

This POLICY OF INSURANCE is issued in consideration of the written and printed

application herefor, a copy of which is attached hereto and is hereby made apart hereof, and
of the payment in advance during the life time and good health of the Insured of the annual
premium of Two hundred and 43/100 pesos Philippine currency and of the payment of a like
amount upon each first day of August hereafter during the term of Twenty years or until the
prior death of either of the Insured. (Emphasis supplied.)

xxx xxx xxx

All premium payments are due in advance and any unpunctuality in making any such
payment shall cause this policy to lapse unless and except as kept in force by the Grace
Period condition or under Option 4 below. (Grace of days.) . . .

Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies
minus all sums due for premiums in arrears. They allege that non-payment of the premiums was
caused by the closing of defendant's offices in Manila during the Japanese occupation and the
impossible circumstances created by war.

Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.

The lower court absolved the defendant. Hence this appeal.

The controversial point has never been decided in this jurisdiction. Fortunately, this court has had
the benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has
received careful consideration, inasmuch as it affects the interest of thousands of policy-holders and
the obligations of many insurance companies operating in this country.

Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and
the Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California.3 And this court
has heretofore announced its intention to supplement the statutory laws with general principles
prevailing on the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are
contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right
to impose such reasonable conditions at the time of the making of the contract as they may deem
wise and necessary. The rate of premium is measured by the character of the risk assumed. The
insurance company, for a comparatively small consideration, undertakes to guarantee the insured
against loss or damage, upon the terms and conditions agreed upon, and upon no other, and when
called upon to pay, in case of loss, the insurer, therefore, may justly insists upon a fulfillment of
these terms. If the insured cannot bring himself within the conditions of the policy, he is not entitled
for the loss. The terms of the policy constitute the measure of the insurer's liability, and in order to
recover the insured must show himself within those terms; and if it appears that the contract has
been terminated by a violation, on the part of the insured, of its conditions, then there can be no right
of recovery. The compliance of the insured with the terms of the contract is a condition precedent to
the right of recovery."

Recall of the above pronouncements is appropriate because the policies in question stipulate that
"all premium payments are due in advance and any unpunctuality in making any such payment shall
cause this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the
policy, non-payment of premium produces its avoidance.

The conditions of contracts of Insurance, when plainly expressed in a policy, are binding
upon the parties and should be enforced by the courts, if the evidence brings the case clearly
within their meaning and intent. It tends to bring the law itself into disrepute when, by astute
and subtle distinctions, a plain case is attempted to be taken without the operation of a clear,
reasonable and material obligation of the contract. Mack vs. Rochester German Ins. Co., 106
N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)

In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided
because the premium had not been paid within the time fixed, since by its express terms, non-
payment of any premium when due or within the thirty-day period of grace, ipso facto caused the
policy to lapse. This goes to show that although we take the view that insurance policies should be
conserved5 and should not lightly be thrown out, still we do not hesitate to enforce the agreement of
the parties.

Forfeitures of insurance policies are not favored, but courts cannot for that reason alone
refuse to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)

Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.

Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the American cases may be divided into three
groups, according as they support the so-called Connecticut Rule, the New York Rule, or the United
States Rule.

The first holds the view that "there are two elements in the consideration for which the annual
premium is paid — First, the mere protection for the year, and second, the privilege of renewing the
contract for each succeeding year by paying the premium for that year at the time agreed upon.
According to this view of the contract, the payment of premiums is a condition precedent, the non-
performance would be illegal necessarily defeats the right to renew the contract."

The second rule, apparently followed by the greater number of decisions, hold that "war between
states in which the parties reside merely suspends the contracts of the life insurance, and that, upon
tender of all premiums due by the insured or his representatives after the war has terminated, the
contract revives and becomes fully operative."

The United States rule declares that the contract is not merely suspended, but is abrogated by
reason of non-payments is peculiarly of the essence of the contract. It additionally holds that it would
be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the
premiums paid over the actual risk carried during the years when the policy had been in force. This
rule was announced in the well-known Statham6 case which, in the opinion of Professor Vance, is
the correct rule.7

The appellants and some amici curiae contend that the New York rule should be applied here. The
appellee and other amici curiae contend that the United States doctrine is the orthodox view.

We have read and re-read the principal cases upholding the different theories. Besides the respect
and high regard we have always entertained for decisions of the Supreme Court of the United
States, we cannot resist the conviction that the reasons expounded in its decision of the Statham
case are logically and judicially sound. Like the instant case, the policy involved in the Statham
decision specifies that non-payment on time shall cause the policy to cease and determine.
Reasoning out that punctual payments were essential, the court said:

. . . it must be conceded that promptness of payment is essential in the business of life

insurance. All the calculations of the insurance company are based on the hypothesis of
prompt payments. They not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are enabled to offer assurance
at the favorable rates they do. Forfeiture for non-payment is an necessary means of
protecting themselves from embarrassment. Unless it were enforceable, the business would
be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other
hazardous undertakings. There must be power to cut-off unprofitable members, or the
success of the whole scheme is endangered. The insured parties are associates in a great
scheme. This associated relation exists whether the company be a mutual one or not. Each
is interested in the engagements of all; for out of the co-existence of many risks arises the
law of average, which underlies the whole business. An essential feature of this scheme is
the mathematical calculations referred to, on which the premiums and amounts assured are
based. And these calculations, again, are based on the assumption of average mortality, and
of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor
redeemed, except at the option of the company. This has always been the understanding
and the practice in this department of business. Some companies, it is true, accord a grace
of thirty days, or other fixed period, within which the premium in arrear may be paid, on
certain conditions of continued good health, etc. But this is a matter of stipulation, or of
discretion, on the part of the particular company. When no stipulation exists, it is the general
understanding that time is material, and that the forfeiture is absolute if the premium be not
paid. The extraordinary and even desperate efforts sometimes made, when an insured
person is in extremes to meet a premium coming due, demonstrates the common view of
this matter.

The case, therefore, is one in which time is material and of the essence and of the essence
of the contract. Non-payment at the day involves absolute forfeiture if such be the terms of
the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties
by introducing equities for the relief of the insured against their own negligence.

In another part of the decision, the United States Supreme Court considers and rejects what is, in
effect, the New York theory in the following words and phrases:
 The truth is, that the doctrine of the revival of contracts suspended during the war is one
based on considerations of equity and justice, and cannot be invoked to revive a contract
which it would be unjust or inequitable to revive.

In the case of Life insurance, besides the materiality of time in the performance of the
contract, another strong reason exists why the policy should not be revived. The parties do
not stand on equal ground in reference to such a revival. It would operate most unjustly
against the company. The business of insurance is founded on the law of average; that of life
insurance eminently so. The average rate of mortality is the basis on which it rests. By
spreading their risks over a large number of cases, the companies calculate on this average
with reasonable certainty and safety. Anything that interferes with it deranges the security of
the business. If every policy lapsed by reason of the war should be revived, and all the back
premiums should be paid, the companies would have the benefit of this average amount of
risk. But the good risks are never heard from; only the bar are sought to be revived, where
the person insured is either dead or dying. Those in health can get the new policies cheaper
than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company
necessarily lose the cases which are desirable, would be manifestly unjust. An insured
person, as before stated, does not stand isolated and alone. His case is connected with and
co-related to the cases of all others insured by the same company. The nature of the
business, as a whole, must be looked at to understand the general equities of the parties.

The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if,
as alleged, the consequences of war should not prejudice the insured, neither should they bear
down on the insurer.

Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the
insured to pay premiums was excused during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such failure.

The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after
the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of
the insurer.

Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation
upon which the insurer can maintain an action against insured; nor is its settlement governed
by the strict rule controlling payments of debts. So, the court in a Kentucky case declares, in
the opinion, that it is not a debt. . . . The fact that it is payable annually or semi-annually, or at
any other stipulated time, does not of itself constitute a promise to pay, either express or
implied. In case of non-payment the policy is forfeited, except so far as the forfeiture may be
saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is
entirely optional, while a debt may be enforced at law, and the fact that the premium is
agreed to be paid is without force, in the absence of an unqualified and absolute agreement
to pay a specified sum at some certain time. In the ordinary policy there is no promise to pay,
but it is optional with the insured whether he will continue the policy or forfeit it. (3 Couch,
Cyc. on Insurance, Sec. 623, p. 1996.)

It is well settled that a contract of insurance is sui generis. While the insured by an
observance of the conditions may hold the insurer to his contract, the latter has not the
power or right to compel the insured to maintain the contract relation with it longer than he
chooses. Whether the insured will continue it or not is optional with him. There being no
obligation to pay for the premium, they did not constitute a debt. (Noble vs. Southern States
M.D. Ins. Co., 157 Ky., 46; 162 S.W., 528.) (Emphasis ours.)
It should be noted that the parties contracted not only for peacetime conditions but also for times of
war, because the policies contained provisions applicable expressly to wartime days. The logical
inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if
armed conflict should ensue.

For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since
the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation
of rules relating to insurance is in direct proportion to the growth of the business. If there were only
100 men, for example, insured by a Company or a mutual Association, the death of one will
distribute the insurance proceeds among the remaining 99 policy-holders. Because the loss which
each survivor will bear will be relatively great, death from certain agreed or specified causes may be
deemed not a compensable loss. But if the policy-holders of the Company or Association should be
1,000,000 individuals, it is clear that the death of one of them will not seriously prejudice each one of
the 999,999 surviving insured. The loss to be borne by each individual will be relatively small."

The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to
100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."

After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such
a vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly
preserved it, by providing that after the policy shall have been in force for two years, it shall become
incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums,
and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress
recently amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the
defense of nonpayment of premiums was preserved. Thus the fundamental character of the
undertaking to pay premiums and the high importance of the defense of non-payment thereof, was
specifically recognized.

In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is
in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that
the first policy had no reserve value, and that the equitable values of the second had been practically
returned to the insured in the form of loan and advance for premium.

For all the foregoing, the lower court's decision absolving the defendant from all liability on the
policies in question, is hereby affirmed, without costs.

Moran, C.J., Ozaeta, Paras, Pablo, Montemayor, Tuason, and Reyes, JJ., concur.
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. L-16163 February 28, 1963

IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF CARLOS
SATURNINO, minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.

Eleazaro A. Samson for plaintiffs-appellants.

Abello & Macias for defendant-appellee.

MAKALINTAL, J.:

Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to recover the sum
of P5,000.00, corresponding to the face value of an insurance policy issued by defendant on the life
of Estefania A. Saturnino, and the sum of P1,500.00 as attorney's fees. Defendant, now appellee,
set up special defenses in its answer, with a counterclaim for damages allegedly sustained as a
result of the unwarranted presentation of this case. Both the complaint and the counterclaim were
dismissed by the trial court; but appellants were declared entitled to the return of the premium
already paid; plus interest at 6% up to January 8, 1959, when a check for the corresponding amount
— P359.65 — was sent to them by appellee.

The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy
dispenses with the medical examination of the applicant usually required in ordinary life policies.
However, detailed information is called for in the application concerning the applicant's health and
medical history. The written application in this case was submitted by Saturnino to appellee on
November 16, 1957, witnessed by appellee's agent Edward A. Santos. The policy was issued on the
same day, upon payment of the first year's premium of P339.25. On September 19, 1958 Saturnino
died of pneumonia, secondary to influenza. Appellants here, who are her surviving husband and
minor child, respectively, demanded payment of the face value of the policy. The claim was rejected
and this suit was subsequently instituted.

It appears that two months prior to the issuance of the policy or on September 9, 1957, Saturnino
was operated on for cancer, involving complete removal of the right breast, including the pectoral
muscles and the glands found in the right armpit. She stayed in the hospital for a period of eight
days, after which she was discharged, although according to the surgeon who operated on her she
could not be considered definitely cured, her ailment being of the malignant type.

Notwithstanding the fact of her operation Estefania A. Saturnino did not make a disclosure thereof in
her application for insurance. On the contrary, she stated therein that she did not have, nor had she
ever had, among other ailments listed in the application, cancer or other tumors; that she had not
consulted any physician, undergone any operation or suffered any injury within the preceding five
years; and that she had never been treated for nor did she ever have any illness or disease peculiar
to her sex, particularly of the breast, ovaries, uterus, and menstrual disorders. The application also
recites that the foregoing declarations constituted "a further basis for the issuance of the policy."

The question at issue is whether or not the insured made such false representations of material facts
as to avoid the policy. There can be no dispute that the information given by her in her application for
insurance was false, namely, that she had never had cancer or tumors, or consulted any physician
or undergone any operation within the preceding period of five years. Are the facts then falsely
represented material? The Insurance Law (Section 30) provides that "materiality is to be determined
not by the event, but solely by the probable and reasonable influence of the facts upon the party to
whom the communication is due, in forming his estimate of the proposed contract, or in making his
inquiries." It seems to be the contention of appellants that the facts subject of the representation
were not material in view of the "non-medical" nature of the insurance applied for, which does away
with the usual requirement of medical examination before the policy is issued. The contention is
without merit. If anything, the waiver of medical examination renders even more material the
information required of the applicant concerning previous condition of health and diseases suffered,
for such information necessarily constitutes an important factor which the insurer takes into
consideration in deciding whether to issue the policy or not. It is logical to assume that if appellee
had been properly apprised of the insured's medical history she would at least have been made to
undergo medical examination in order to determine her insurability.

Appellants argue that due information concerning the insured's previous illness and operation had
been given to appellees agent Edward A. Santos, who filled the application form after it was signed
in blank by Estefania A. Saturnino. This was denied by Santos in his testimony, and the trial court
found such testimony to be true. This is a finding of fact which is binding upon us, this appeal having
been taken upon questions of law alone. We do not deem it necessary, therefore, to consider
appellee's additional argument, which was upheld by the trial court, that in signing the application
form in blank and leaving it to Edward A. Santos to fill (assuming that to be the truth) the insured in
effect made Santos her agent for that purpose and consequently was responsible for the errors in
the entries made by him in that capacity.

In the application for insurance signed by the insured in this case, she agreed to submit to a medical
examination by a duly appointed examiner of appellee if in the latter's opinion such examination was
necessary as further evidence of insurability. In not asking her to submit to a medical examination,
appellants maintain, appellee was guilty of negligence, which precluded it from finding about her
actual state of health. No such negligence can be imputed to appellee. It was precisely because the
insured had given herself a clean bill of health that appellee no longer considered an actual medical
checkup necessary.

Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured
herself did not know, since her doctor never told her, that the disease for which she had been
operated on was cancer. In the first place the concealment of the fact of the operation itself was
fraudulent, as there could not have been any mistake about it, no matter what the ailment. Secondly,
in order to avoid a policy it is not necessary to show actual fraud on the part of the insured. In the
case of Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214, it was held:

Moreover, if it were the law that an insurance company could not depend a policy on the
ground of misrepresentation, unless it could show actual knowledge on the part of the
applicant that the statements were false, then it is plain that it would be impossible for it to
protect itself and its honest policyholders against fraudulent and improper claims. It would be
wholly at the mercy of any one who wished to apply for insurance, as it would be impossible
to show actual fraud except in the extremest cases. It could not rely on an application as
containing information on which it could act. There would be no incentive to an applicant to
tell the truth.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without prejudice to the parties adducing other
evidence to prove their case not covered by this stipulation of facts. 1äw phï1.ñët

In this jurisdiction a concealment, whether intentional or unintentional, entitles the insurer to rescind
the contract of insurance, concealment being defined as "negligence to communicate that which a
party knows and ought to communicate" (Sections 24 & 26, Act No. 2427). In the case of Argente v.
West Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law of
Insurance, 2nd ed., Vol. 3:

"The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed
upon. The insurer, relying upon the belief that the assured will disclose every material fact
within his actual or presumed knowledge, is misled into a belief that the circumstance
withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that
it does not exist."

The judgment appealed from, dismissing the complaint and awarding the return to appellants of the
premium already paid, with interest at 6% up to January 29, 1959, affirmed, with costs against
appellants.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes,
Dizon and Regala, JJ., concur.
G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life
insurance policy of a legally married man claim the proceeds thereof in case of death of the latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd.,
Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same
amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He
to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing
branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the
coverage in the total amount of P11,745.73, representing the face value of the policy in the amount
of P5,882.00 plus the additional benefits for accidental death also in the amount of P5,882.00 and
the refund of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and
interest thereon due for January and February, 1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts
that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T.
Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance
Co., Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April
29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a
pre-trial order was entered reading as follows:ñé+.£ªw ph!1

During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purpose of the pre-trial and make admissions for the
purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was
married to Pascuala Ebrado with whom she has six — (legitimate) namely;
Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2)
that during the lifetime of the deceased, he was insured with Insular Life Assurance
Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum
of P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits A for
plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado;
 3) that during the lifetime of Buenaventura Ebrado, he was living with his common-
wife, Carponia Ebrado, with whom she had 2 children although he was not legally
separated from his legal wife; 4) that Buenaventura in accident on October 21, 1969
as evidenced by the death Exhibit 3 and affidavit of the police report of his death
Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular Life
Assurance Co. which was contested by Pascuala Ebrado who also filed claim for the
proceeds of said policy 6) that in view ofthe adverse claims the insurance company
filed this action against the two herein claimants Carponia and Pascuala Ebrado; 7)
that there is now due from the Insular Life Assurance Co. as proceeds of the policy
P11,745.73; 8) that the beneficiary designated by the insured in the policy is
Carponia Ebrado and the insured made reservation to change the beneficiary but
although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to write
the company that there was reservation to change the designation of the parties
agreed that a decision be rendered based on and stipulation of facts as to who
among the two claimants is entitled to the policy.

Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T.
Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. The trial
court held:ñé+.£ªw ph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T.
Ebrado were living together as husband and wife without being legally married and
that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased there
is no question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds of
the insurance upon the death of the insured.

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the
Appellate Court certified the case to Us as involving only questions of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance
Code (PD No. 612, as amended) does not contain any specific provision grossly resolutory of the
prime question at hand. Section 50 of the Insurance Act which provides that "(t)he insurance shag
be applied exclusively to the proper interest of the person in whose name it is made" 1 cannot be
validly seized upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that
the provision refers only to the "insured" and not to the beneficiary, since a contract of insurance is
personal in character. 2 Otherwise, the prohibitory laws against illicit relationships especially on property
and descent will be rendered nugatory, as the same could easily be circumvented by modes of insurance.
Rather, the general rules of civil law should be applied to resolve this void in the Insurance Law. Article
2011 of the New Civil Code states: "The contract of insurance is governed by special laws. Matters not
expressly provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by the general
rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who is
forbidden from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance
policy by the person who cannot make a donation to him. 4 Common-law spouses are, definitely, barred
from receiving donations from each other. Article 739 of the new Civil Code provides: ñé+.£ªw ph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;

Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by reason

of his office.

In the case referred to in No. 1, the action for declaration of nullity may be brought by
the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.

2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured pays out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739
of the new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012
cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in
the life insurance policy of the person who cannot make the donation. 5 Under American law, a policy
of life insurance is considered as a testament and in construing it, the courts will, so far as possible treat it
as a will and determine the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6

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

If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem);
then there is very reason to apply the same prohibitive policy to persons living
together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid is
correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32
ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the
condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.

It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the frame
of the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it as
what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence
to its avowed objective.

4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons
who were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides: ñé+.£ªw ph!1

In the case referred to in No. 1, the action for declaration of nullity may be brought by
the spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.

The underscored clause neatly conveys that no criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On
the contrary, the law plainly states that the guilt of the party may be proved "in the same acting for
declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt
of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.

In the caw before Us, the requisite proof of common-law relationship between the insured and the
beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial
conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate
children; that during his lifetime, the deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These stipulations are nothing less than judicial
admissions which, as a consequence, no longer require proof and cannot be contradicted. 8 A fortiori,
on the basis of these admissions, a judgment may be validly rendered without going through the rigors of
a trial for the sole purpose of proving the illicit liaison between the insured and the beneficiary. In fact, in
that pretrial, the parties even agreed "that a decision be rendered based on this agreement and
stipulation of facts as to who among the two claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is
hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life
insurance policy. As a consequence, the proceeds of the policy are hereby held payable to the
estate of the deceased insured. Costs against Carponia T. Ebrado.

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñ;oz Palma, Fernandez and Guerrero, JJ., concur. 1äw phï1.ñët
G.R. No. L-34200 September 30, 1982

REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants,

vs.
MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE
OF RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.

K.V. Faylona for petitioners-appellants.

L. L. Reyes for respondents-appellees.

VASQUEZ, J.:

The question of law raised in this case that justified a direct appeal from a decision of the Court of
First Instance Rizal, Branch V, Quezon City, to be taken directly to the Supreme Court is whether or
not the acceptance by the private respondent insurance corporation of the premium and the
issuance of the corresponding certificate of insurance should be deemed a waiver of the
exclusionary condition of overage stated in the said certificate of insurance.

The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with
respondent insurance corporation for insurance coverage against accident and injuries. She filled up
the blank application form given to her and filed the same with the respondent insurance corporation.
In the said application form which was dated April 15, 1969, she gave the date of her birth as July
11, 1904. On the same date, she paid the sum of P20.00 representing the premium for which she
was issued the corresponding receipt signed by an authorized agent of the respondent insurance
corporation. (Rollo, p. 27.) Upon the filing of said application and the payment of the premium on the
policy applied for, the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of
Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.

On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz
died in a vehicular accident in the North Diversion Road.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named
beneficiary in the policy, filed her claim for the proceeds of the insurance, submitting all the
necessary papers and other requisites with the private respondent. Her claim having been denied,
Regina L. Edillon instituted this action in the Court of First Instance of Rizal on August 27, 1969.

In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision
contained in the Certificate of Insurance, excluding its liability to pay claims under the policy in behalf
of "persons who are under the age of sixteen (16) years of age or over the age of sixty (60) years ..."
It is pointed out that the insured being over sixty (60) years of age when she applied for the
insurance coverage, the policy was null and void, and no risk on the part of the respondent
insurance corporation had arisen therefrom.

The trial court sustained the contention of the private respondent and dismissed the complaint;
ordered the petitioner to pay attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in
favor of the private respondent; and ordered the private respondent to return the sum of TWENTY
(P20.00) PESOS received by way of premium on the insurancy policy. It was reasoned out that a
policy of insurance being a contract of adhesion, it was the duty of the insured to know the terms of
the contract he or she is entering into; the insured in this case, upon learning from its terms that she
could not have been qualified under the conditions stated in said contract, what she should have
done is simply to ask for a refund of the premium that she paid. It was further argued by the trial
court that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured
and strictly against the insurer may not be applied in the present case in view of the peculiar facts
and circumstances obtaining therein.

We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not
concealed to the insurance company. Her application for insurance coverage which was on a printed
form furnished by private respondent and which contained very few items of information clearly
indicated her age of the time of filing the same to be almost 65 years of age. Despite such
information which could hardly be overlooked in the application form, considering its prominence
thereon and its materiality to the coverage applied for, the respondent insurance corporation
received her payment of premium and issued the corresponding certificate of insurance without
question. The accident which resulted in the death of the insured, a risk covered by the policy,
occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for.
There was sufficient time for the private respondent to process the application and to notice that the
applicant was over 60 years of age and thereby cancel the policy on that ground if it was minded to
do so. If the private respondent failed to act, it is either because it was willing to waive such
disqualification; or, through the negligence or incompetence of its employees for which it has only
itself to blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is
already deemed in estoppel. It inaction to revoke the policy despite a departure from the
exclusionary condition contained in the said policy constituted a waiver of such condition, as was
held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case
involved a claim on an insurance policy which contained a provision as to the installation of fire
hydrants the number of which depended on the height of the external wan perimeter of the bodega
that was insured. When it was determined that the bodega should have eleven (11) fire hydrants in
the compound as required by the terms of the policy, instead of only two (2) that it had, the claim
under the policy was resisted on that ground. In ruling that the said deviation from the terms of the
policy did not prevent the claim under the same, this Court stated the following:

We are in agreement with the trial Court that the appellant is barred by waiver (or
rather estoppel) to claim violation of the so-called fire hydrants warranty, for the
reason that knowing fully an that the number of hydrants demanded therein never
existed from the very beginning, the appellant nevertheless issued the policies in
question subject to such warranty, and received the corresponding premiums. It
would be perilously close to conniving at fraud upon the insured to allow appellant to
claim now as void ab initio the policies that it had issued to the plaintiff without
warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Que Chee Gan and
two others nearby, owned by the municipality of Tabaco, contrary to the
requirements of the warranty in question. Such fact appears from positive testimony
for the insured that appellant's agents inspected the premises; and the simple denials
of appellant's representative (Jamiczon) can not overcome that proof. That such
inspection was made it moreover rendered probable by its being a prerequisite for
the fixing of the discount on the premium to which the insured was entitled, since the
discount depended on the number of hydrants, and the fire fighting equipment
available (See"'Scale of Allowances" to which the policies were expressly made
subject). The law, supported by a long line of cases, is expressed by American
Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
 It is usually held that where the insurer, at the time of the issuance of
a policy of insurance, has knowledge of existing facts which, if
insisted on, would invalidate the contract from its very inception, such
knowledge constitutes a waiver of conditions in the contract
inconsistent with the known facts, and the insurer is stopped
thereafter from asserting the breach of such conditions. The law is
charitable enough to assume, in the absence of any showing to the
contrary, that an insurance company intends to execute a valid
contract in return for the premium received; and when the policy
contains a condition which renders it voidable at its inception, and this
result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to
have deceived the insured into thinking he is insured when in fact he
is not, and to have taken is money without consideration.' (29 Am.
Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To

allow a company to accept one's money for a policy of insurance
which it then knows to be void and of no effect, though it knows as it
must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely
related to positive fraud, as to be abhorent to fairminded men. It
would be to allow the company to treat the policy as valid long
enough to get the premium on it, and leave it at liberty to repudiate it
the next moment. This cannot be deemed to be the real intention of
the parties. To hold that a literal construction of the policy expressed
the true intention of the company would be to indict it, for fraudulent
purposes and designs which we cannot believe it to be guilty of
(Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).

A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co.,
Inc., 65 SCRA 134, which involved a violation of the provision of the policy requiring the payment of
premiums before the insurance shall become effective. The company issued the policy upon the
execution of a promissory note for the payment of the premium. A check given subsequent by the
insured as partial payment of the premium was dishonored for lack of funds. Despite such deviation
from the terms of the policy, the insurer was held liable.

Significantly, in the case before Us the Capital Insurance accepted the promise of
Plastic Era to pay the insurance premium within thirty (30) days from the effective
date of policy. By so doing, it has impliedly agreed to modify the tenor of the
insurance policy and in effect, waived the provision therein that it would only pay for
the loss or damage in case the same occurs after the payment of the premium.
Considering that the insurance policy is silent as to the mode of payment, Capital
Insurance is deemed to have accepted the promissory note in payment of the
premium. This rendered the policy immediately operative on the date it was
delivered. The view taken in most cases in the United States:

... is that although one of conditions of an insurance policy is that "it

shall not be valid or binding until the first premium is paid", if it is
silent as to the mode of payment, promissory notes received by the
 company must be deemed to have been accepted in payment of the
premium. In other words, a requirement for the payment of the first or
initial premium in advance or actual cash may be waived by
acceptance of a promissory note...

WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof,
the private respondent insurance corporation is hereby ordered to pay to the petitioner the sum of
TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance Certificate No. 128866 with
interest at the legal rate from May 31, 1969 until fully paid, the further sum of TWO THOUSAND
(P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

SO ORDERED.

Teehankee (Chairman), Makasiar, Plana, Relova and Gutierrez, Jr., JJ., concur.

Melencio-Herrera, J., took no part.

G.R. No. L-30685 May 30, 1983

NG GAN ZEE, plaintiff-appellee,

vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant.

Alberto Q. Ubay for plaintiff-appellee.

Santiago F. A lidio for defendant-appellant.

ESCOLIN, J.:

This is an appeal from the judgment of the Court of First Instance of Manila, ordering the appellant
Asian-Crusader Life Assurance Corporation to pay the face value of an insurance policy issued on
the life of Kwong Nam the deceased husband of appellee Ng Gan Zee. Misrepresentation and
concealment of material facts in obtaining the policy were pleaded to avoid the policy. The lower
court rejected the appellant's theory and ordered the latter to pay appellee "the amount of P
20,000.00, with interest at the legal rate from July 24, 1964, the date of the filing of the complaint,
until paid, and the costs. "

The Court of Appeals certified this appeal to Us, as the same involves solely a question of law.

On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the sum of
P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On the same date, appellant, upon
receipt of the required premium from the insured, approved the application and issued the
corresponding policy. On December 6, 1963, Kwong Nam died of cancer of the liver with metastasis.
All premiums had been religiously paid at the time of his death.

On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment
of the face value of the policy. On the same date, she submitted the required proof of death of the
insured. Appellant denied the claim on the ground that the answers given by the insured to the
questions appealing in his application for life insurance were untrue.

Appellee brought the matter to the attention of the Insurance Commissioner, the Hon. Francisco Y.
Mandamus, and the latter, after conducting an investigation, wrote the appellant that he had found
no material concealment on the part of the insured and that, therefore, appellee should be paid the
full face value of the policy. This opinion of the Insurance Commissioner notwithstanding, appellant
refused to settle its obligation.

Appellant alleged that the insured was guilty of misrepresentation when he answered "No" to the
following question appearing in the application for life insurance-

Has any life insurance company ever refused your application for insurance or for
reinstatement of a lapsed policy or offered you a policy different from that applied
for? If, so, name company and date.

In its brief, appellant rationalized its thesis thus:

 ... As pointed out in the foregoing summary of the essential facts in this case, the
insured had in January, 1962, applied for reinstatement of his lapsed life insurance
policy with the Insular Life Insurance Co., Ltd, but this was declined by the insurance
company, although later on approved for reinstatement with a very high premium as
a result of his medical examination. Thus notwithstanding the said insured answered
'No' to the [above] question propounded to him. ... 1

The lower court found the argument bereft of factual basis; and We quote with approval its
disquisition on the matter-

On the first question there is no evidence that the Insular Life Assurance Co., Ltd.
ever refused any application of Kwong Nam for insurance. Neither is there any
evidence that any other insurance company has refused any application of Kwong
Nam for insurance.

... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong
Nam's request for reinstatement and amendment of his lapsed insurance policy on
April 24, 1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes from
said application for reinstatement and amendment, Exh. 'L', that the amount applied
for was P20,000.00 only and not for P50,000.00 as it was in the lapsed policy. The
amount of the reinstated and amended policy was also for P20,000.00. It results,
therefore, that when on May 12, 1962 Kwong Nam answered 'No' to the question
whether any life insurance company ever refused his application for reinstatement of
a lapsed policy he did not misrepresent any fact.

... the evidence shows that the application of Kwong Nam with the Insular Life
Assurance Co., Ltd. was for the reinstatement and amendment of his lapsed
insurance policy-Policy No. 369531 -not an application for a 'new insurance policy.
The Insular Life Assurance Co., Ltd. approved the said application on April 24, 1962.
Policy No. 369531 was reinstated for the amount of P20,000.00 as applied for by
Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the Insular Life
Assurance Co., Ltd. to Kwong Nam in connection with said application for
reinstatement and amendment. Such being the case, the Court finds that there is no
misrepresentation on this matter. 2

Appellant further maintains that when the insured was examined in connection with his application
for life insurance, he gave the appellant's medical examiner false and misleading information as to
his ailment and previous operation. The alleged false statements given by Kwong Nam are as
follows:

Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been
associated with ulcer of stomach. Tumor taken out was hard and of a hen's egg size.
Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now,
claims he is completely recovered.

To demonstrate the insured's misrepresentation, appellant directs Our attention to:

[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General
Hospital on May 22, 1960, i.e., about 2 years before he applied for an insurance policy on May 12,
1962. According to said report, Dr. Fu Sun Yuan had diagnosed the patient's ailment as 'peptic ulcer'
for which, an operation, known as a 'sub-total gastric resection was performed on the patient by Dr.
Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from
the patient's body was 'a portion of the stomach measuring 12 cm. and 19 cm. along the lesser
curvature with a diameter of 15 cm. along the greatest dimension.

On the bases of the above undisputed medical data showing that the insured was operated on for
peptic ulcer", involving the excision of a portion of the stomach, appellant argues that the insured's
statement in his application that a tumor, "hard and of a hen's egg size," was removed during said
operation, constituted material concealment.

The question to be resolved may be propounded thus: Was appellant, because of insured's
aforesaid representation, misled or deceived into entering the contract or in accepting the risk at the
rate of premium agreed upon?

The lower court answered this question in the negative, and We agree.

Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party a contract of insurance must communicate to the other, in good
faith, all facts within his knowledge which are material to the contract, and which the
other has not the means of ascertaining, and as to which he makes no warranty. 3

Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should communicate it to the assurer, but he
designedly and intentionally withholds the same." 4

It has also been held "that the concealment must, in the absence of inquiries, be not only material,
but fraudulent, or the fact must have been intentionally withheld." 5

Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec.
27 of the Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of
the insured be established to entitle the insurer to rescind the contract. And as correctly observed by
the lower court, "misrepresentation as a defense of the insurer to avoid liability is an 'affirmative'
defense. The duty to establish such a defense by satisfactory and convincing evidence rests upon
the defendant. The evidence before the Court does not clearly and satisfactorily establish that
defense."

It bears emphasis that Kwong Nam had informed the appellant's medical examiner that the tumor for
which he was operated on was "associated with ulcer of the stomach." In the absence of evidence
that the insured had sufficient medical knowledge as to enable him to distinguish between "peptic
ulcer" and "a tumor", his statement that said tumor was "associated with ulcer of the stomach, "
should be construed as an expression made in good faith of his belief as to the nature of his ailment
and operation. Indeed, such statement must be presumed to have been made by him without
knowledge of its incorrectness and without any deliberate intent on his part to mislead the appellant.

While it may be conceded that, from the viewpoint of a medical expert, the information
communicated was imperfect, the same was nevertheless sufficient to have induced appellant to
make further inquiries about the ailment and operation of the insured.

Section 32 of Insurance Law [Act No. 24271 provides as follows:

 Section 32. The right to information of material facts maybe waived either by the
terms of insurance or by neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is communicated.

It has been held that where, upon the face of the application, a question appears to be not answered
at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, they
waive the imperfection of the answer and render the omission to answer more fully immaterial. 6

As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had such an important
bearing on the question of whether the defendant would undertake the insurance or not, the court
cannot understand why the defendant or its medical examiner did not make any further inquiries on
such matters from the Chinese General Hospital or require copies of the hospital records from the
appellant before acting on the application for insurance. The fact of the matter is that the defendant
was too eager to accept the application and receive the insured's premium. It would be inequitable
now to allow the defendant to avoid liability under the circumstances."

Finding no reversible error committed by the trial court, the judgment appealed from is hereby
affirmed, with costs against appellant Asian-Crusader life Assurance Corporation.

SO ORDERED.

Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero and De Castro), JJ., concur.

Abad Santos, J., I reserve my vote.

G.R. No. 92492 June 17, 1993

THELMA VDA. DE CANILANG, petitioner,

vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, respondents.

Simeon C. Sato for petitioner.

FELICIANO, J.:

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering
from "sinus tachycardia." The doctor prescribed the following fro him: Trazepam, a tranquilizer;
and Aptin, a beta-blocker drug. Mr. Canilang consulted the same doctor again on 3 August 1982 and
this time was found to have "acute bronchitis."

On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with
respondent Great Pacific Life Assurance Company ("Great Pacific") naming his wife, Thelma
Canilang, as his beneficiary.1 Jaime Canilang was issued ordinary life insurance Policy No. 345163,
with the face value of P19,700, effective as of 9 August 1982.

On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic
anemia."2 Petitioner, widow and beneficiary of the insured, filed a claim with Great Pacific which the
insurer denied on 5 December 1983 upon the ground that the insured had concealed material
information from it.

Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of
the insurance proceeds. During the hearing called by the Insurance Commissioner, petitioner
testified that she was not aware of any serious illness suffered by her late husband3 and that, as far
as she knew, her husband had died because of a kidney disorder.4 A deposition given by Dr.
Wilfredo Claudio was presented by petitioner. There Dr. Claudio stated that he was the family
physician of the deceased Jaime Canilang5 and that he had previously treated him for "sinus
tachycardia" and "acute bronchitis."6 Great Pacific for its part presented Dr. Esperanza Quismorio, a
physician
and a medical underwriter working for Great Pacific.7 She testified that the deceased's insurance
application had been approved on the basis of his medical declaration.8 She explained that as a rule,
medical examinations are required only in cases where the applicant has indicated in his application
for insurance coverage that he has previously undergone medical consultation and hospitalization.9

In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo ordered Great
Pacific to pay P19,700 plus legal interest and P2,000.00 as attorney's fees after holding that:

1. the ailment of Jaime Canilang was not so serious that, even if it had been
disclosed, it would not have affected Great Pacific's decision to insure him;

2. Great Pacific had waived its right to inquire into the health condition of the
applicant by the issuance of the policy despite the lack of answers to "some of the
pertinent questions" in the insurance application;
 3. there was no intentional concealment on the part of the insured Jaime Canilang as
he had thought that he was merely suffering from a minor ailment and simple
cold; 10 and

4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not
concealment was intentionally made, was not applicable to Canilang's case as that
law became effective only on 1 June 1985.

On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the
Insurance Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's
counterclaim. The Court of Appealed found that the use of the word "intentionally" by the Insurance
Commissioner in defining and resolving the issue agreed upon by the parties at pre-trial before the
Insurance Commissioner was not supported by the evidence; that the issue agreed upon by the
parties had been whether the deceased insured, Jaime Canilang, made a material concealment as
the state of his health at the time of the filing of insurance application, justifying respondent's denial
of the claim. The Court of Appeals also found that the failure of Jaime Canilang to disclose previous
medical consultation and treatment constituted material information which should have been
communicated to Great Pacific to enable the latter to make proper inquiries. The Court of Appeals
finally held that the Ng Gan Zee case which had involved misrepresentation was not applicable in
respect of the case at bar which involves concealment.

Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging
that:

1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not
holding that the issue in the case agreed upon between the parties before the
Insurance Commission is whether or not Jaime Canilang "intentionally" made
material concealment in stating his state of health;

2. . . . at any rate, the non-disclosure of certain facts about his previous health
conditions does not amount to fraud and private respondent is deemed to have
waived inquiry thereto. 11

The medical declaration which was set out in the application for insurance executed by Jaime
Canilang read as follows:

MEDICAL DECLARATION

I hereby declare that:

(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any
medical or surgical advice/attention within the last five (5) years.

(2) I have never been treated nor consulted a physician for a heart condition, high
blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other
physical impairment.

(3) I am, to the best of my knowledge, in good health.

EXCEPTIONS:
___________________________________________________________________
_____________

GENERAL DECLARATION

I hereby declare that all the foregoing answers and statements are complete, true
and correct. I hereby agree that if there be any fraud or misrepresentation in the
above statements material to the risk, the INSURANCE COMPANY upon discovery
within two (2) years from the effective date of insurance shall have the right to
declare such insurance null and void. That the liabilities of the Company under the
said Policy/TA/Certificate shall accrue and begin only from the date of
commencement of risk stated in the Policy/TA/Certificate, provided that the first
premium is paid and the Policy/TA/Certificate is delivered to, and accepted by me in
person, when I am in actual good health.

Signed at Manila his 4th day of August, 1992.

I
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1
2

We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of
the medical declaration, he failed to disclose in the appropriate space, under the caption
"Exceptions," that he had twice consulted Dr. Wilfredo B. Claudio who had found him to be suffering
from "sinus tachycardia" and "acute bronchitis."

The relevant statutory provisions as they stood at the time Great Pacific issued the contract of
insurance and at the time Jaime Canilang died, are set out in P.D. No. 1460, also known as the
Insurance Code of 1978, which went into effect on 11 June 1978. These provisions read as follows:

Sec. 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.

xxx xxx xxx

Sec. 28. Each party to a contract of insurance must communicate to the other, in
good faith, all factors within his knowledge which are material to the contract and as
to which he makes no warranty, and which the other has not the means of
ascertaining. (Emphasis supplied)

Under the foregoing provisions, the information concealed must be information which the concealing
party knew and "ought to [have] communicate[d]," that is to say, information which was "material to
the contract." The test of materiality is contained in Section 31 of the Insurance Code of 1978 which
reads:

Sec. 31. Materially is to be determined not by the event, but solely by the probable
and reasonable influence of the facts upon the party to whom the communication is
due, in forming his estimate of the disadvantages of the proposed contract, or in
making his inquiries. (Emphasis supplied)

"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per
minute." 13 The symptoms of this condition include pounding in the chest and sometimes faintness
and weakness of the person affected. The following elaboration was offered by Great Pacific and set
out by the Court of Appeals in its Decision:

Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per
minute. (Harrison' s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is,
among others, a common reaction to heart disease, including myocardial
infarction, and heart failure per se. (Henry J.L. Marriot, M.D., Electrocardiography,
6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio for treatment of
Canilang's ailment on June 18, 1982, indicates the condition that said physician was
trying to manage. Thus, he prescribed Trazepam, (Philippine Index of Medical
Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anti-
convulsant, muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for palpitations
and nervous heart. Such treatment could have been a very material information to
 the insurer in determining the action to be take on Canilang's application for life
insurance coverage. 14

We agree with the Court of Appeals that the information which Jaime Canilang failed to disclose was
material to the ability of Great Pacific to estimate the probable risk he presented as a subject of life
insurance. Had Canilang disclosed his visits to his doctor, the diagnosis made and medicines
prescribed by such doctor, in the insurance application, it may be reasonably assumed that Great
Pacific would have made further inquiries and would have probably refused to issue a non-medical
insurance policy or, at the very least, required a higher premium for the same coverage. 15 The
materiality of the information withheld by Great Pacific did not depend upon the state of mind of
Jaime Canilang. A man's state of mind or subjective belief is not capable of proof in our judicial
process, except through proof of external acts or failure to act from which inferences as to his
subjective belief may be reasonably drawn. Neither does materiality depend upon the actual or
physical events which ensue. Materiality relates rather to the "probable and reasonable influence of
the facts" upon the party to whom the communication should have been made, in assessing the risk
involved in making or omitting to make further inquiries and in accepting the application for
insurance; that "probable and reasonable influence of the facts" concealed must, of course, be
determined objectively, by the judge ultimately.

The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v.
Philippine-American Life Insurance Company, 16 this Court held that:

. . . if anything, the waiver of medical examination [in a non-medical insurance

contract] renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such information
necessarily constitutes an important factor which the insurer takes into consideration
in deciding whether to issue the policy or not . . . . 17 (Emphasis supplied)

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain
information to the insurer was not "intentional" in nature, for the reason that Jaime Canilang believed
that he was suffering from minor ailment like a common cold. Section 27 of the Insurance Code of
1978 as it existed from 1974 up to 1985, that is, throughout the time range material for present
purposes, provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured

party to rescind a contract of insurance. (Emphasis supplied)

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to
read as follows:

Sec. 27. A concealment whether intentional or unintentional entitles the injured party
to rescind a contract of insurance. (Emphasis supplied)

The unspoken theory of the Insurance Commissioner appears to have been that by deleting the
phrase "intentional or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P.
Blg. 874) intended to limit the kinds of concealment which generate a right to rescind on the part of
the injured party to "intentional concealments." This argument is not persuasive. As a simple matter
of grammar, it may be noted that "intentional" and "unintentional" cancel each other out. The net
result therefore of the phrase "whether intentional or unitentional" is precisely to leave unqualified the
term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to
"any concealment" without regard to whether such concealment is intentional or unintentional. The
phrase "whether intentional or unintentional" was in fact superfluous. The deletion of the phrase
"whether intentional or unintentional" could not have had the effect of imposing an affirmative
requirement that a concealment must be intentional if it is to entitle the injured party to rescind a
contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase "whether intentional or
unintentional" merely underscored the fact that all throughout (from 1914 to 1985), the statute
did not require proof that concealment must be "intentional" in order to authorize rescission by the
injured party.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the
failure to communicate must have been intentional rather than merely inadvertent. For Jaime
Canilang could not have been unaware that his heart beat would at times rise to high and alarming
levels and that he had consulted a doctor twice in the two (2) months before applying for non-
medical insurance. Indeed, the last medical consultation took place just the day before the insurance
application was filed. In all probability, Jaime Canilang went to visit his doctor precisely because of
the discomfort and concern brought about by his experiencing "sinus tachycardia."

We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the
concealment by issuing the insurance policy notwithstanding Canilang's failure to set out answers to
some of the questions in the insurance application. Such failure precisely constituted concealment
on the part of Canilang. Petitioner's argument, if accepted, would obviously erase Section 27 from
the Insurance Code of 1978.

It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial
before the Insurance Commission that the relevant issue was whether or not Jaime Canilang
had intentionally concealed material information from the insurer, was supported by the evidence of
record, i.e., the Pre-trial Order itself dated 17 October 1984 and the Minutes of the Pre-trial
Conference dated 15 October 1984, which "readily shows that the word "intentional" does not
appear in the statement or definition of the issue in the said Order and Minutes." 18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of
Appeals dated 16 October 1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No
pronouncement as to the costs.

SO ORDERED.
G.R. No. 105135 June 22, 1995

SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,

vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA
BACANI, respondents.

QUIASON, J.:

This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and
set aside the Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068,
and its Resolution dated April 22, 1992, denying reconsideration thereof.

We grant the petition.

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from
petitioner. He was issued Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in
case of accidental death. The designated beneficiary was his mother, respondent Bernarda Bacani.

On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with
petitioner, seeking the benefits of the insurance policy taken by her son. Petitioner conducted an
investigation and its findings prompted it to reject the claim.

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose
material facts relevant to the issuance of the policy, thus rendering the contract of insurance
voidable. A check representing the total premiums paid in the amount of P10,172.00 was attached to
said letter.

Petitioner claimed that the insured gave false statements in his application when he answered the
following questions:

5. Within the past 5 years have you:

a) consulted any doctor or other health practitioner?

b) submitted to:

EGG?
X-rays?
blood tests?
other tests?

c) attended or been admitted to any hospital or other medical facility?

6. Have you ever had or sought advice for:

xxx xxx xxx

 b) urine, kidney or bladder disorder? (Rollo, p. 53)

The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation
with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for
cough and flu complications. The other questions were answered in the negative (Rollo, p. 53).

Petitioner discovered that two weeks prior to his application for insurance, the insured was examined
and confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During
his confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests.

On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando
Bacani, filed an action for specific performance against petitioner with the Regional Trial Court,
Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer with counterclaim and a list of
exhibits consisting of medical records furnished by the Lung Center of the Philippines.

On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary
Judgment" where they manifested that they "have no evidence to refute the documentary evidence
of concealment/misrepresentation by the decedent of his health condition (Rollo, p. 62).

Petitioner filed its Request for Admissions relative to the authenticity and due execution of several
documents as well as allegations regarding the health of the insured. Private respondents failed to
oppose said request or reply thereto, thereby rendering an admission of the matters alleged.

Petitioner then moved for a summary judgment and the trial court decided in favor of private
respondents. The dispositive portion of the decision is reproduced as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendant, condemning the latter to pay the former the amount of One Hundred
Thousand Pesos (P100,000.00) the face value of insured's Insurance Policy No.
3903766, and the Accidental Death Benefit in the amount of One Hundred Thousand
Pesos (P100,000.00) and further sum of P5,000.00 in the concept of reasonable
attorney's fees and costs of suit.

Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).

In ruling for private respondents, the trial court concluded that the facts concealed by the insured
were made in good faith and under a belief that they need not be disclosed. Moreover, it held that
the health history of the insured was immaterial since the insurance policy was "non-medical".

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The
appellate court ruled that petitioner cannot avoid its obligation by claiming concealment because the
cause of death was unrelated to the facts concealed by the insured. It also sustained the finding of
the trial court that matters relating to the health history of the insured were irrelevant since petitioner
waived the medical examination prior to the approval and issuance of the insurance policy.
Moreover, the appellate court agreed with the trial court that the policy was "non-medical" (Rollo, pp.
4-5).

Petitioner's motion for reconsideration was denied; hence, this petition.

II
We reverse the decision of the Court of Appeals.

The rule that factual findings of the lower court and the appellate court are binding on this Court is
not absolute and admits of exceptions, such as when the judgment is based on a misappreciation of
the facts (Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).

In weighing the evidence presented, the trial court concluded that indeed there was concealment
and misrepresentation, however, the same was made in "good faith" and the facts concealed or
misrepresented were irrelevant since the policy was "non-medical". We disagree.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to

communicate to the other, in good faith, all facts within his knowledge which are material to the
contract and as to which he makes no warranty, and which the other has no means of ascertaining.
Said Section provides:

A neglect to communicate that which a party knows and ought to communicate, is

called concealment.

Materiality is to be determined not by the event, but solely by the probable and reasonable influence
of the facts upon the party to whom communication is due, in forming his estimate of the
disadvantages of the proposed contract or in making his inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the insurer
matters relating to his health.

The information which the insured failed to disclose were material and relevant to the approval and
issuance of the insurance policy. The matters concealed would have definitely affected petitioner's
action on his application, either by approving it with the corresponding adjustment for a higher
premium or rejecting the same. Moreover, a disclosure may have warranted a medical examination
of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the
application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the
information withheld does not depend on the state of mind of the insured. Neither does it depend on
the actual or physical events which ensue.

Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he
was hospitalized for two weeks prior to filing his application for insurance, raises grave doubts about
his bonafides. It appears that such concealment was deliberate on his part.

The argument, that petitioner's waiver of the medical examination of the insured debunks the
materiality of the facts concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine
American Life Insurance Company, 7 SCRA 316 (1963), that " . . . the waiver of a medical
examination [in a non-medical insurance contract] renders even more material the information
required of the applicant concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes into consideration in
deciding whether to issue the policy or not . . . "

Moreover, such argument of private respondents would make Section 27 of the Insurance Code,
which allows the injured party to rescind a contract of insurance where there is concealment,
ineffective (See Vda. de Canilang v. Court of Appeals, supra).
Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is
well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is
sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries (Henson v. The Philippine American Life Insurance
Co., 56 O.G. No. 48 [1960]).

We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by
reason of the concealment employed by the insured. It must be emphasized that rescission was
exercised within the two-year contestability period as recognized in Section 48 of The Insurance
Code.

WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED
and SET ASIDE.

SO ORDERED.

Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

G.R. No. 82036 May 22, 1997

TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.

HERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision 1 of respondent Court of
Appeals 2 affirming in toto the judgment 3 of the Regional Trial Court 4 in an action for damages 5 filed
by private respondent Vicente Mendoza, Jr. as heir of his mother who was killed in a vehicular
accident.

Before the trial court, the complainant lumped the erring taxicab driver, the owner of the taxicab, and
the alleged insurer of the vehicle which featured in the vehicular accident into one complaint. The
erring taxicab was allegedly covered by a third-party liability insurance policy issued by petitioner
Travellers Insurance & Surety Corporation.

The evidence presented before the trial court established the following facts:

At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman by the
name of Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman
Cathedral. While walking along Tayuman corner Gregorio Perfecto Streets, she was
bumped by a taxi that was running fast. Several persons witnessed the accident,
among whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After the
bumping, the old woman was seen sprawled on the pavement. Right away, the good
Samaritan that he was, Mavilla ran towards the old woman and held her on his lap to
inquire from her what had happened, but obviously she was already in shock and
could not talk. At this moment, a private jeep stopped. With the driver of that vehicle,
the two helped board the old woman on the jeep and brought her to the Mary
Johnston Hospital in Tondo.

. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street

from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It was
on his return trip from Rizal Avenue when Lopez saw the plaintiff and his brother who
were crying near the scene of the accident. Upon learning that the two were the sons
of the old woman, Lopez told them what had happened. The Mendoza brothers were
then able to trace their mother at the Mary Johnston Hospital where they were
advised by the attending physician that they should bring the patient to the National
Orthopedic Hospital because of her fractured bones. Instead, the victim was brought
to the U.S.T. Hospital where she expired at 9:00 o'clock that same morning. Death
was caused by "traumatic shock" as a result of the severe injuries she sustained . . .

. . . The evidence shows that at the moment the victim was bumped by the vehicle,
the latter was running fast, so much so that because of the strong impact the old
woman was thrown away and she fell on the pavement. . . . In truth, in that related
criminal case against defendant Dumlao . . . the trial court found as a fact that therein
accused "was driving the subject taxicab in a careless, reckless and imprudent
manner and at a speed greater than what was reasonable and proper without taking
the necessary precaution to avoid accident to persons . . . considering the condition
 of the traffic at the place at the time aforementioned" . . . Moreover, the driver fled
from the scene of the accident and without rendering assistance to the victim. . . .

. . . Three (3) witnesses who were at the scene at the time identified the taxi involved,
though not necessarily the driver thereof. Marvilla saw a lone taxi speeding away just
after the bumping which, when it passed by him, said witness noticed to be a Lady
Love Taxi with Plate No. 438, painted maroon, with baggage bar attached on the
baggage compartment and with an antenae [sic] attached at the right rear side. The
same descriptions were revealed by Ernesto Lopez, who further described the taxi to
have . . . reflectorized decorations on the edges of the glass at the back . . . A third
witness in the person of Eulogio Tabalno . . . made similar descriptions although,
because of the fast speed of the taxi, he was only able to detect the last digit of the
plate number which is "8". . . . [T]he police proceeded to the garage of Lady Love
Taxi and then and there they took possession of such a taxi and later impounded it in
the impounding area of the agency concerned. . . . [T]he eyewitnesses . . . were
unanimous in pointing to that Lady Love Taxi with Plate No. 438, obviously the
vehicle involved herein.

. . . During the investigation, defendant Armando Abellon, the registered owner of

Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact "that the
vehicle was driven last July 20, 1980 by one Rodrigo Dumlao. . ." . . . It was on the
basis of this affidavit of the registered owner that caused the police to apprehend
Rodrigo Dumlao, and consequently to have him prosecuted and eventually convicted
of the offense . . . . . . . [S]aid Dumlao absconded in that criminal case, specially at
the time of the promulgation of the judgment therein so much so that he is now a
fugitive from justice.6

Private respondent filed a complaint for damages against Armando Abellon as the owner of the Lady
Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private
respondent's mother. Subsequently, private respondent amended his complaint to include petitioner
as the compulsory insurer of the said taxicab under Certificate of Cover No. 1447785-3.

After trial, the trial court rendered judgment in favor of private respondent, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more

particularly the "Heirs of the late Feliza Vineza de Mendoza," and against defendants
Rodrigo Dumlao, Armando Abellon and Travellers Insurance and Surety Corporation,
by ordering the latter to pay, jointly and severally, the former the following amounts:

(a) The sum of P2,924.70, as actual and compensatory damages,

with interest thereon at the rate of 12% per annum from October 17,
1980, when the complaint was filed, until the said amount is fully paid;

(b) P30,000.00 as death indemnity;

(c) P25,000.00 as moral damages;

(d) P10,000.00 as by way of corrective or exemplary damages; and

(e) Another P10,000.00 by way of attorney's fees and other litigation

expenses.
 Defendants are further ordered to pay, jointly and severally, the costs of this suit.

SO ORDERED. 7

Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The decision of
the trial court was affirmed by respondent appellate court. Petitioner's Motion for Reconsideration 8 of
September 22, 1987 was denied in a Resolution 9 dated February 9, 1988.

Hence this petition.

Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer of the Lady
Love Taxi and that, assuming arguendo that it had indeed covered said taxicab for third-party liability
insurance, private respondent failed to file a written notice of claim with petitioner as required by
Section 384 of P.D. No. 612, otherwise known as the Insurance Code.

We find the petition to be meritorious.

When private respondent filed his amended complaint to implead petitioner as party defendant and
therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab that fatally
hit private respondent's mother, private respondent did not attach a copy of the insurance contract to
the amended complaint. Private respondent does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue the insurer depends
on whether the contract of insurance is intended to benefit third persons also or only the insured.

[A] policy . . . whereby the insurer agreed to indemnify the insured "against all sums .
. . which the Insured shall become legally liable to pay in respect of: a. death of or
bodily injury to any person . . . is one for indemnity against liability; from the fact then
that the insured is liable to the third person, such third person is entitled to sue the
insurer.

The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third persons
also or on the insured And the test applied has been this: Where the contract
provides for indemnity against liability to third persons, then third persons to whom
the insured is liable can sue the insurer. Where the contract is for indemnity against
actual loss or payment, then third persons cannot proceed against the insurer, the
contract being solely to reimburse the insured for liability actually discharged by him
thru payment to third persons, said third persons' recourse being thus limited to the
insured alone. 10

Since private respondent failed to attach a copy of the insurance contract to his complaint, the trial
court could not have been able to apprise itself of the real nature and pecuniary limits of petitioner's
liability. More importantly, the trial court could not have possibly ascertained the right of private
respondent as third person to sue petitioner as insurer of the Lady Love taxicab because the trial
court never saw nor read the insurance contract and learned of its terms and conditions.

Petitioner, understandably, did not volunteer to present any insurance contract covering the Lady
Love taxicab that fatally hit private respondent's mother, considering that petitioner precisely
presented the defense of lack of insurance coverage before the trial court. Neither did the trial court
issue a subpoena duces tecum to have the insurance contract produced before it under pain of
contempt.

We thus find hardly a basis in the records for the trial court to have validly found petitioner liable
jointly and severally with the owner and the driver of the Lady Love taxicab, for damages accruing to
private respondent.

Apparently, the trial court did not distinguish between the private respondent's cause of action
against the owner and the driver of the Lady Love taxicab and his cause of action against petitioner.
The former is based on torts and quasi-delicts while the latter is based on contract. Confusing these
two sources of obligations as they arise from the same act of the taxicab fatally hitting private
respondent's mother, and in the face of overwhelming evidence of the reckless imprudence of the
driver of the Lady Love taxicab, the trial court brushed aside its ignorance of the terms and
conditions of the insurance contract and forthwith found all three — the driver of the taxicab, the
owner of the taxicab, and the alleged insurer of the taxicab — jointly and severally liable for actual,
moral and exemplary damages as well as attorney's fees and litigation expenses. This is clearly a
misapplication of the law by the trial court, and respondent appellate court grievously erred in not
having reversed the trial court on this ground.

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. 11

Applying this principle underlying solidary obligation and insurance contracts, we ruled in one
case that:

In solidary obligation, the creditor may enforce the entire obligation against one of the
solidary debtors. On the other hand, insurance is defined as "a contract whereby one
undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event."

In the case at bar, the trial court held petitioner together with respondents Sio Choy
and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount
of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00.
In the context of a solidary obligation, petitioner may be compelled by respondent
Vallejos to pay the entire obligation of P29,103.00, notwithstanding the qualification
made by the trial court. But, how can petitioner be obliged to pay the entire obligation
when the amount stated in its insurance policy with respondent Sio Choy for
indemnity against third-party liability is only P20,000.00? Moreover, the qualification
made in the decision of the trial court to the effect that petitioner is sentenced to pay
up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary is an
evident breach of the concept of a solidary obligation. 12

The above principles take on more significance in the light of the counter-allegation of petitioner that,
assuming arguendo that it is the insurer of the Lady Love taxicab in question, its liability is limited to
only P50,000.00, this being its standard amount of coverage in vehicle insurance policies. It bears
repeating that no copy of the insurance contract was ever proffered before the trial court by the
private respondent, notwithstanding knowledge of the fact that the latter's complaint against
petitioner is one under a written contract. Thus, the trial court proceeded to hold petitioner liable for
an award of damages exceeding its limited liability of P50,000.00. This only shows beyond doubt
that the trial court was under the erroneous presumption that petitioner could be found liable absent
proof of the contract and based merely on the proof of reckless imprudence on the part of the driver
of the Lady Love taxicab that fatally hit private respondent's mother.

II

Petitioner did not tire in arguing before the trial court and the respondent appellate court that,
assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private
respondent's cause of action against petitioner did not successfully accrue because he failed to file
with petitioner a written notice of claim within six (6) months from the date of the accident as required
by Section 384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private respondent's mother,
during which time the Insurance Code had not yet been amended by Batas Pambansa (B.P.) Blg.
874, Section 384 provided as follows:

Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a
written notice of claim setting forth the amount of his loss, and/or the nature, extent
and duration of the injuries sustained as certified by a duly licensed physician. Notice
of claim must be filed within six months from date of the accident, otherwise, the
claim shall be deemed waived. Action or suit for recovery of damage due to loss or
injury must be brought in proper cases, with the Commission or the Courts within one
year from date of accident, otherwise the claimant's right of action shall prescribe
[emphasis supplied].

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman, 13 we ruled that the
one year prescription period to bring suit in court against the insurer should be counted from the time
that the insurer rejects the written claim filed therewith by the insured, the beneficiary or the third
person interested under the insurance policy. We explained:

It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these cases
evidently reflect the deliberate efforts of petitioner company to prevent the filing of a
formal action against it. Bearing in mind that if it succeeds in doing so until one year
lapses from the date of the accident it could set up the defense of prescription,
petitioner company made private respondents believe that their claims would be
settled in order that the latter will not find it necessary to immediately bring suit. In
violation of its duties to adopt and implement reasonable standards for the prompt
investigation of claims and to effectuate prompt, fair and equitable settlement of
claims, and with manifest bad faith, petitioner company devised means and ways of
stalling the settlement proceeding . . . [N]o steps were taken to process the claim and
no rejection of said claim was ever made even if private respondent had already
complied with all the requirements. . . .

This Court has made the observation that some insurance companies have been
inventing excuses to avoid their just obligations and it is only the State that can give
the protection which the insuring public needs from possible abuses of the insurers. 14
It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to categorically
provide that "action or suit for recovery of damage due to loss or injury must be brought in proper
cases, with the Commissioner or the Courts within one year from denial of the claim, otherwise the
claimant's right of action shall prescribe" [emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring suit in court under an
insurance policy, begins to run from the date of the insurer's rejection of the claim filed by the
insured, the beneficiary or any person claiming under an insurance contract. This ruling is premised
upon the compliance by the persons suing under an insurance contract, with the indispensable
requirement of having filed the written claim mandated by Section 384 of the insurance Code before
and after its amendment. Absent such written claim filed by the person suing under an insurance
contract, no cause of action accrues under such insurance contract, considering that it is the
rejection of that claim that triggers the running of the one-year prescriptive period to bring suit in
court, and there can be no opportunity for the insurer to even reject a claim if none has been filed in
the first place, as in the instant case.

The one-year period should instead be counted from the date of rejection by the
insurer as this is the time when the cause of action accrues. . . .

In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:

The plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real
necessity for bringing suit.

The philosophy of the above pronouncement was pointed out in the case of ACCFA
vs. Alpha Insurance and Surety Co., viz:

Since a cause of action requires, as essential elements, not only a legal right of the
plaintiff and a correlative obligation of the defendant but also an act or omission of
the defendant in violation of said legal right, the cause of action does not accrue until
the party obligated refuses, expressly or impliedly, to comply with its duty. 16

When petitioner asseverates, thus, that no written claim was filed by private respondent and rejected
by petitioner, and private respondent does not dispute such asseveration through a denial in his
pleadings, we are constrained to rule that respondent appellate court committed reversible error in
finding petitioner liable under an insurance contract the existence of which had not at all been
proven in court. Even if there were such a contract, private respondent's cause of action can not
prevail because he failed to file the written claim mandated by Section 384 of the Insurance Code.
He is deemed, under this legal provision, to have waived his rights as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are
REVERSED and SET ASIDE insofar as Travelers Insurance & Surety Corporation was found jointly
and severally liable to pay actual, moral and exemplary damages, death indemnity, attorney's fees
and litigation expenses in Civil Case No. 135486. The complaint against Travellers Insurance &
Surety Corporation in said case is hereby ordered dismissed.

No pronouncement as to costs.

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. 1âw phi 1.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. 1âwphi 1.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. 137172 April 4, 2001

UCPB GENERAL INSURANCE CO., INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

RESOLUTION

DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the
Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing
Respondent to consign the sum of P225,753.95 as full payment of the premiums for the renewal of
the five insurance policies on Respondent's properties; (b) declaring the replacement-renewal
policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay
Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-
replacement policies. The modification consisted in the (1) deletion of the trial court's declaration that
three of the policies were in force from August 1991 to August 1992; and (2) reduction of the award
of the attorney's fees from 25% to 10% of the total amount due the Respondent.

The material operative facts upon which the appealed judgment was based are summarized by the
Court of Appeals in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance
policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila]
....

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to
4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and
2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered,
and defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of
P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No.
62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana
made its formal demand for indemnification for the burned insured properties. On the same
day, defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8",
Record, p. 192) that it was rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier;
and

c) The properties covered by the said policies were burned in a fire that took place
last June 13, 1992, or before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.

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

26. Renewal Clause. — Unless the company at least forty five days in advance of the end of
the policy period mails or delivers to the assured at the address shown in the policy notice of
its intention not to renew the policy or to condition its renewal upon reduction of limits or
elimination of coverages, the assured shall be entitled to renew the policy upon payment of
the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which
had procured insurance coverage from Petitioner for a number of years, had been granted a 60 to
90-day credit term for the renewal of the policies. Such a practice had existed up to the time the
claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May
7, 1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No.
4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage
from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was
collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487
(Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657
covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium
therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire
Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued
on May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs.
"X" and "X-1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990
to May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover
insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but
premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA"
and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to
January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated
December 10, 1988 but premium therefor was paid only on February 15, 1989 under O.R.
No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was issued on May 22,
1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for insurance
coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance
Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989
under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990
(Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15,
1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance
coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy
No. 26303 was issued on November 22, 1988 but premium therefor was collected only on
March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December 15,
1988 to December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances constitute preponderant
proof that no timely notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from
Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up to
67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice of non-
renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or within 45 days
 from the expiry dates of the policies as provided under Policy Condition No. 26; (2)
Defendant insurer unconditionally accepted, and issued an official receipt for, the premium
payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk
despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated July 17,
1992 (Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies
issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . .
had been extended or renewed by an implied credit arrangement though actual payment of premium
was tendered on a later date and after the occurrence of the (fire) risk insured against." We resolved
this issue in the negative in view of Section 77 of the Insurance Code and our decisions
in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of
Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the
Court of Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own findings of facts, which are not in accord with
those of the trial court and the Court of Appeals. The courts below correctly found that no notice of
non-renewal was made within 45 days before 22 May 1992, or before the expiration date of the fire
insurance policies. Thus, the policies in question were renewed by operation of law and were
effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the
60- to 90-day credit term.

Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly
on the extension of credit or time to pay the premium nor consider a policy binding before actual
payment. It urges the Court to take judicial notice of the fact that despite the express provision of
Section 77 of the Insurance Code, extension of credit terms in premium payment has been the
prevalent practice in the insurance industry. Most insurance companies, including Petitioner, extend
credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely
designed for the protection of the parties to an insurance contract. The Code itself, in Section 78,
authorizes the validity of a policy notwithstanding non-payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of
Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on
the 60- to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days
after the due dates. By extending credit and habitually accepting payments 60 to 90 days from the
effective dates of the policies, it has implicitly agreed to modify the tenor of the insurance policy and
in effect waived the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.

Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the
trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by
ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to
Respondent's broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware
of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows that in
order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on
the effective date of renewal should first be made. Respondent's argument that Section 77 is not a
prohibitive provision finds no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for
reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed
duly established:

1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies
were annually renewed.

2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay
the premiums on the renewed policies.

3. There was no valid notice of non-renewal of the policies in question, as there is no proof at
all that the notice sent by ordinary mail was received by Respondent, and the copy thereof
allegedly sent to Zuellig was ever transmitted to Respondent.

4. The premiums for the policies in question in the aggregate amount of P225,753.95 were
paid by Respondent within the 60- to 90-day credit term and were duly accepted and
received by Petitioner's cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of
1978 (P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of
granting a 60- to 90-day credit term for the payment of premiums.

Section 77 of the Insurance Code of 1978 provides:

SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured
is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on
18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise
known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read:

SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the peril insured against, unless there is clear agreement to grant the insured
credit extension of the premium due. No policy issued by an insurance company is valid and
binding unless and until the premium thereof has been paid. (Italic supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of

premium is conclusive evidence of its payment, so far as to make the policy binding,
 notwithstanding any stipulation therein that it shall not be binding until premium is actually
paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment
in installments of the premium and partial payment has been made at the time of loss. We said
therein, thus:

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

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

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

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

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

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

ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth
exception to Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET
ASIDE, and a new one is hereby entered DENYING the instant petition for failure of
Petitioner to sufficiently show that a reversible error was committed by the Court of Appeals
in its challenged decision, which is hereby AFFIRMED in toto.

No pronouncement as to cost.

SO ORDERED.

Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr.

and Sandoval-Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.

Separate Opinions

VITUG, J .:

An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract

where the rights and obligations of the parties correlate and mutually correspond. The insurer
assumes the risk of loss which an insured might suffer in consideration of premium payments under
a risk-distributing device. Such assumption of risk is a component of a general scheme to distribute
actual losses among a group of persons, bearing similar risks, who make ratable contributions to a
fund from which the losses incurred due to exposures to the peril insured against are assured and
compensated.

It is generally recognized that the business of insurance is one imbued with public interest. 1 For the
general good and mutual protection of all the parties, it is aptly subjected to regulation and control by
the State by virtue of an exercise of its police power. 2 The State may regulate in various respects the
relations between the insurer and the insured, including the internal affairs of an insurance company,
without being violative of due process. 3

A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate
legal reserve in favor of those claiming under their policies. 4 The law generally mandates that
insurance companies should retain an amount sufficient to guarantee the security of its policyholders
in the remote future, as well as the present, and to cover any contingencies that may arise or may be
fairly anticipated. The integrity of this legal reserve is threatened and undermined if a credit
arrangement on the payment of premium were to be sanctioned. Calculations and estimations of
liabilities under the risk insured against are predicated on the basis of the payment of premiums, the
vital element that establishes the juridical relation between the insured and the insurer. By legislative
fiat, any agreement to the contrary notwithstanding, the payment of premium is a condition
precedent to, and essential for, the efficaciousness of the insurance contract, except (a) in case of
life or industrial life insurance where a grace period applies, or (b) in case of a written
acknowledgment by the insurer of the receipt of premium, such as by a deposit receipt, the written
acknowledgment being conclusive evidence of the premium payment so far as to make the policy
binding. 5

Section 77 of the Insurance Code provides:

"SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured
is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies."

This provision amended Section 72 of the then Insurance Act by deleting the phrase, "unless there is
a clear agreement to grant the insured credit extension of the premium due," and adding at the
beginning of the second sentence the phrase, "[n]otwithstanding any agreement to the contrary."
Commenting on the new provision, Dean Hernando B. Perez states:

"Under the former rule, whenever the insured was granted credit extension of the premium
due or given a period of time to pay the premium on the policy issued, such policy was
binding although premiums had not been paid (Section 72, Insurance Act; 6 Couch 2d. 67).
This rule was changed when the present provision eliminated the portion concerning credit
agreement, and added the phrase 'notwithstanding any agreement to the contrary' which
precludes the parties from stipulating that the policy is valid even if premiums are not paid.
Hence, under the present law, the policy is not valid and binding unless and until the
premium is paid (Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer
wants to favor the insured by making the policy binding notwithstanding the non-payment of
premium, a mere credit agreement would not be sufficient. The remedy would be for the
insurer to acknowledge in the policy that premiums were paid although they were not, in
which case the policy becomes binding because such acknowledgment is a conclusive
evidence of payment of premium (Section 78). Thus, the Supreme Court took note that under
the present law, Section 77 of the Insurance Code of 1978 has deleted the clause 'unless
there is a clear agreement to grant the insured credit extension of the premium due' (Velasco
vs. Apostol, 173 SCRA 228)." 6

By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be successfully
invoked to create a primary liability, 8 nor can it give validity to what the law so proscribes as a matter
of public policy. 9 So essential is the premium payment to the creation of the vinculum juris between
the insured and the insurer that it would be doubtful to have that payment validly excused even for a
fortuitous event. 10

The law, however, neither requires for the establishment of the juridical tie, nor measures the
strength of such tie by, any specific amount of premium payment. A part payment of the premium, if
accepted by the insurer, can thus perfect the contract and bring the parties into an obligatory
relation. 11 Such a payment puts the contract into full binding force, not merely pro tanto, thereby
entitling and obligating the parties by their agreement. Hence, in case of loss, full recovery less the
unpaid portion of the premium (by the operative act of legal compensation), can be had by the
insured and, correlatively, if no loss occurs the insurer can demand the payment of the unpaid
balance of the premium. 12
In the instant case, no juridical tie appears to have been established under any of the situations
hereinabove discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

Melo, J ., concurs.

PARDO, J ., dissenting:

The majority resolved to grant respondent's motion for reconsideration of the Court's decision
promulgated on June 15, 1999. By this somersault, petitioner must now pay respondent's claim for
insurance proceeds amounting to P18,645,000.00, exclusive of interests, plus 25% of the amount
due as attorney's fees, P25,000.00 as litigation expenses, and costs of suit, covering its Pasay City
property razed by fire. What an undeserved largess! Indeed, an unjust enrichment at the expense of
petitioner; even the award of attorney's fees is bloated to 25% of the amount due.

We cannot give our concurrence. We beg to dissent. We find respondent's claim to be fraudulent:

First: Respondent Masagana surreptitiously tried to pay the overdue premiums before giving written
notice to petitioner of the occurrence of the fire that razed the subject property. This failure to give
notice of the fire immediately upon its occurrence blatantly showed the fraudulent character of its
claim. The fire totally destroyed the property on June 13, 1992; the written notice of loss was given
only more than a month later, on July 14, 1992, the day after respondent surreptitiously paid the
overdue premiums. Respondent very well knew that the policy was not renewed on time. Hence, the
surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible disregard of the
principle that insurance is a contract uberrima fides, the most abundant good faith. 1 Respondent is
required by law and by express terms of the policy to give immediate written notice of loss. This
must be complied with in the utmost good faith.

Another badge of fraud is that respondent deviated from its previous practice of coursing its premium
payments through its brokers. This time, respondent Masagana went directly to petitioner and paid
through its cashier with manager's checks. Naturally, the cashier routinely accepted the premium
payment because he had no written notice of the occurrence of the fire. Such fact was concealed by
the insured and not revealed to petitioner at the time of payment.

Indeed, if as contended by respondent, there was a clear agreement regarding the grant of a credit
extension, respondent would have given immediate written notice of the fire that razed the property.
This clearly showed respondent's attempt to deceive petitioner into believing that the subject
property still existed and the risk insured against had not happened.

Second: The claim for insurance benefits must fall as well because the failure to give timely written
notice of the fire was a material misrepresentation affecting the risk insured against.

Section 1 of the policy provides:

"All benefits under the policy shall be forfeited if the claim be in any respect fraudulent, or if
any false declaration be made or used in support thereof, or if any false declaration be made
 or used in support thereof, or if any fraudulent means or devices are used by the insured or
any one acting on his behalf to obtain any benefit under the policy." 2

In the factual milieu, the purported practice of giving 60 to 90-day credit extension for payment of
premiums was a disputed fact. But it is a given fact that the written notice of loss was not
immediately given. It was given only the day after the attempt to pay the delayed premiums.

At any rate, the purported credit was a mere verbal understanding of the respondent Masagana of
an agreement between the insurance company (petitioner) and the insurance brokers of respondent
Masagana. The president of respondent Masagana admitted that the insurance policy did
not contain any proviso pertaining to the grant of credit within which to pay the premiums.
Respondent Masagana merely deduced that a credit agreement existed based on previous years'
practice that they had of delayed payments accepted by the insurer as reflected on the face of the
receipts issued by UCPB evidencing the payment of premiums.

"Q: You also claim that you have 60 to 90 days credit arrangement with UCPB; is that
correct?,

A: Yes, ma'am.

Q: I'm showing to you the policy which had previously been marked in evidence as
Exhibit "A", "B", "C", "D", & "E"' for the plaintiff and likewise, marked as exhibits "1", "2", "3",
"4", & "5" for the defendant. Could you show us, Mr. witness where in these policies does it
show that you are actually given 60 to 90 days credit arrangement with UCPB?

A: Well, it's verbal with your company, and Ansons Insurance Brokerage. It is not
written.

Q: It is not written in the policy?

A: Yes.

Q: You merely have verbal agreement with Ansons Insurance Brokerage?

A: Yes; as shown in our mode of payment; in our vouchers and the receipts issued by
the insurance company." 3

It must be stressed that a verbal understanding of respondent Masagana cannot amend an

insurance policy. In insurance practice, amendments or even corrections to a policy are done by
written endorsements or tickets appended to the policy.

However, the date on the face of the receipts does not refer to the date of actual remittance by
respondent Masagana to UCPB of the premium payments, but merely to the date of remittance to
UCPB of the premium payments by the insurance brokers of respondent Masagana.

"Q: You also identified several receipts; here; official receipts issued by UCPB General
Insurance Company, Inc., which has been previously marked as Exhibits "F", "G", "H", "I",
and "J" for the plaintiff; is that correct?

A: Yes.
 Q: And, you would agree with me that the dates indicated in these particular Official
Receipts (O. R.), merely indicated the dates when UCPB General Insurance Company
issued these receipts? Do you admit that, Mr. Witness?

A: That was written in the receipts.

Q: But, you would also agree that this did not necessarily show the dates when you
actually forwarded the checks to your broker, Anson Insurance Agency, for payment to
UCPB General Insurance Co. Inc., isn't it?

A: The actual support of this would be the cash voucher of the company, Masagana
Telamart Inc., the date when they picked up the check from the company.

Q: And are these cash voucher with you?

A: I don't know if it is in the folder or in our folder, now.

Q: So, you are not certain, whether or not you actually delivered the checks covered by
these Official Receipts to UCPB General Insurance, on the dates indicated?

A: I would suppose it is few days earlier, when they picked up the payment in our
office." 4

Hence, what has been established was the grant of credit to the insurance brokers, not to the
assured. The insurance company recognized the payment to the insurance brokers as payment to
itself, though the actual remittance of the premium payments to the principal might be made later.
Once payment of premiums is made to the insurance broker, the assured would be covered by a
valid and binding insurance policy, provided the loss occurred after payment to the broker has been
made.

Assuming arguendo that the 60 to 90 day-credit-term has been agreed between the parties,
respondent could not still invoke estoppel to back up its claim. "Estoppel is unavailing in this
case," 5 thus spoke the Supreme Court through the pen of Justice Hilario G. Davide, Jr., now Chief
Justice. Mutatis mutandi, he may well be speaking of this case. He added that "[E]stoppel can not
give validity to an act that is prohibited by law or against public policy." 6 The actual payment of
premiums is a condition precedent to the validity of an insurance contract other than life insurance
policy. 7 Any agreement to the contrary is void as against the law and public policy. Section 77 of the
Insurance Code provides:

"An insurer is entitled to payment of the premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies." [Emphasis supplied]

An incisive reading of the afore-cited provision would show that the emphasis was on the
conclusiveness of the acknowledgment in the policy of the receipt of premium, notwithstanding the
absence of actual payment of premium, because of estoppel. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. "A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them." 8
This is the only case of estoppel which the law considers a valid exception to the mandatory
requirement of pre-payment of premium. The law recognized that the contracting parties, in entering
a contract of insurance, are free to enter into stipulations and make personal undertakings so long
as they are not contrary to law or public policy. However, the law is clear in providing that the
acknowledgment must be contained in the policy or contract of insurance. Anything short of it would
not fall under the exception so provided in Section 78.

Hence, because of respondent's failure to pay the premiums prior to the occurrence of the fire
insured against, no valid and binding insurance policy was created to cover the loss and destruction
of the property. The fire took place on June 13, 1992, twenty-two (22) days after the expiration of the
policy of fire insurance. The tender of payment of premiums was made only thirty (30) days after the
occurrence of the fire, or on July 13, 1992. Respondent Masagana did not give immediate notice to
petitioner of the fire as it occurred as required in the insurance policy. Respondent Masagana tried to
tender payment of the premiums overdue surreptitiously before giving notice of the occurrence of the
fire. More importantly, the parties themselves expressly stipulated that the insurance policy would
not be binding on the insurer unless the premiums thereon had been paid in full. Section 2 of the
policy provides:

"2. This policy including any renewal and/or endorsement thereon is not in force until the
premium has been fully paid and duly receipted by the Company in the manner provided
therein.

"Any supplementary agreement seeking to amend this condition prepared by agent, broker
or company official, shall be deemed invalid and of no effect.

"No payment in respect of any premium shall be deemed to be payment to the Company
unless a printed form of receipt for the same signed by an Official or duly appointed Agent of
the Company shall have been given to the Insured, except when such printed receipt is not
available at the time of payment and the company or its representative accepts the premium
in which case a temporary receipt other than the printed form may be issued in lieu thereof.
"Except only on those specific cases where corresponding rules and regulations which now
we are or may hereafter be in force provide for the payment of the stipulated premiums in
periodic installments at fixed percentages, it is hereby declared, agreed and warranted that
this policy shall be deemed effective valid and binding upon the Company when the
premiums thereof have actually been paid in full and duly acknowledged in a receipt signed
by any authorized official or representative/agent of the Company in such manner as
provided herein." 9 [emphasis supplied]

Thus, the insurance policy, including any renewal thereof or any endorsements thereon shall not
come in force until the premiums have been fully paid and duly received by the insurance Company.
No payment in respect of any premiums shall be deemed to be payment to the Insurance Company
unless a printed form of receipt for the same signed by an Official or duly appointed Agent of the
Company shall be given to the insured.

The case of Tibay v. Court of Appeals 10 is in point. The issue raised therein was: "May a fire
insurance policy be valid, binding and enforceable upon mere partial payment of premium?" In the
said case, Fortune Life and General Insurance Co., Inc. issued Fire Insurance Policy No. 136171 in
favor of Violeta R. Tibay and/or Nicolas Roraldo, on a two-storey residential building located at 5855
Zobel Street, Makati City, together with all the personal effects therein, The insurance was for
P600,000.00, covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987,
of the total premium of P2,983.50, Violeta Tibay only paid P600.00, thus leaving a substantial
balance unpaid. On March 8, 1987, the insured building was completely destroyed by fire. Two days
later, or on 10 March 1987, Violeta Tibay paid the balance of the premium. On the same day, she
filed with Fortune a claim for the proceeds of the fire insurance policy.

In denying the claim of insurance, the Court ruled that "by express agreement of the parties,
no vinculum juris or bond of law was to be established until full payment was effected prior to the
occurrence of the risk insured against. 11 As expressly stipulated in the contract, full payment must be
made before the risk occurs for the policy to be considered effective and in force. "No vinculum
juris whereby the insurer bound itself to indemnify the assured according to law ever resulted from
the fractional payment of premium." 12

The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of Appeals 13 to support
the contention that the insurance policies subject of the instant case were valid and effective.
However, the factual situation in that case was different from the case at bar.

In Tuscany, the Court held that the insurance policies were valid and binding because there was
partial payment of the premiums and a clear understanding between the parties that they had
intended the insurance policies to be binding and effective notwithstanding the staggered payment of
the premiums. On the basis of equity and fairness, the Court ruled that there was a perfected
contract of insurance upon the partial payment of the premiums, notwithstanding the provisions of
Section 77 to the contrary. The Court would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the lame excuse
that the premiums were not prepaid in full.

There is no dispute that like in any other contract, the parties to a contract of insurance enjoy the
freedom to stipulate on the terms and conditions that will govern their agreement so long as they are
not contrary to law, morals, good customs, public order or public policy. However, the agreement
containing such terms and conditions must be clear and definite.

In the case at bar, there was no clear and definite agreement between petitioner and respondent on
the grant of a credit extension; neither was there partial payment of premiums for petitioner to invoke
the exceptional doctrine in Tuscany.

Hence, the circumstances in the above cited case are totally different from the case at bar, and
consequently, not applicable herein.

Insurance is an aleatory contract whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. 14 The consideration is
the premium, which must be paid at the time and in the manner specified in the policy, and if not so
paid, the policy will lapse and be forfeited by its own terms. 15

With regard to the contention that the absence of notice of non-renewal of the policy resulted to the
automatic renewal of the insurance policy, we find the contention untenable. As above discussed,
the law provides that only upon payment of the insurance premium will the insurance policy bind the
insurer to the peril insured against and hold it liable under the policy in case of loss.

Even in the absence of notice of non-renewal, the assured would be bound by the law that a non life
insurance policy takes effect only on the date payment of the premium was made.

Verily, it is elemental law that the payment of premium is a mandatory requisite to make the policy of
insurance effective. If the premium is not paid in the manner prescribed in the policy as intended by
the parties, the policy is void and ineffective. 16
Basically a contract of indemnity, an insurance contract is the law between the parties. Its terms and
conditions constitute the measure of the insurer's liability and compliance therewith is a condition
precedent to the insured's right to recovery from the insurer. 17

IN VIEW WHEREOF, I vote to DENY the respondent's motion for reconsideration, for lack of merit.

Melo, Puno and Quisumbing, 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. 1âw phi 1.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.

Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

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.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, 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.

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

G.R. No. 156956 October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance

Commissioner, petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:

The securities required by the Insurance Code to be deposited with the Insurance Commissioner are
intended to answer for the claims of all policy holders in the event that the depositing insurance
company becomes insolvent or otherwise unable to satisfy their claims. The security deposit must be
ratably distributed among all the insured who are entitled to their respective shares; it cannot be
garnished or levied upon by a single claimant, to the detriment of the others.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the
January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case No.
Q-97-30412. The RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect contempt
for refusing to comply with the December 18, 2002 Resolution3 of the lower court. The January 16,
2003 Order states in full:

"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T. Malinis of
the Office of the Insurance Commission in Contempt of Court because of his failure and
refusal to obey the lawful order of this court embodied in a Resolution dated December 18,
2002 directing him to allow the withdrawal of the security deposit of Capital Insurance and
Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid to Sheriff Manuel Paguyo in
the satisfaction of the Notice of Garnishment pursuant to a Decision of this Court which has
become final and executory.

"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or his
counsel or his duly authorized representative failed to appear despite notice in utter
disregard of the order of this Court. However, Commissioner Malinis filed on January 15,
2003 a written Comment reiterating the same grounds already passed upon and rejected by
this Court. This Court finds no lawful justification or excuse for Commissioner Malinis' refusal
to implement the lawful orders of this Court.

"Wherefore, premises considered and after due hearing, Commissioner Eduardo T. Malinis
is hereby declared guilty of Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of
the 1997 Rules of Civil Procedure for willfully disobeying and refusing to implement and obey
a lawful order of this Court."4
 The Facts

On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the
defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to pay
Del Monte Motors, Inc., P11,835,375.50 representing the balance of Vilfran Liner's service contracts
with respondent. The trial court further ordered the execution of the Decision against the
counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and Surety
Co., Inc. (CISCO).

On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that the
latter had no record or document regarding the alleged issuance of the counterbond; thus, the bond
was not valid and enforceable.

On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding Writ.
Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to levy on the properties of CISCO. He
also issued a Notice of Garnishment on several depository banks of the insurance company.
Moreover, he served a similar notice on the Insurance Commission, so as to enforce the Writ on the
security deposit filed by CISCO with the Commission in accordance with Section 203 of the
Insurance Code.

On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the Notice of
Garnishment served by Sheriff Paguyo on the insurance commission was valid. The trial court added
that the letter and spirit of the law made the security deposit answerable for contractual obligations
incurred by CISCO under the insurance contracts the latter had entered into. The RTC resolved
thus:

"Furthermore, the Commissioner of the Office of the Insurance Commission is hereby

ordered to comply with its obligations under the Insurance Code by upholding the integrity
and efficacy of bonds validly issued by duly accredited Bonding and Insurance Companies;
and to safeguard the public interest by insuring the faithful performance to enforce
contractual obligations under existing bonds. Accordingly said office is ordered to withdraw
from the security deposit of Capital Insurance & Surety Company, Inc. the amount
of P11,835.50 to be paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice of
Garnishment served on August 16, 2002."5

On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in

contempt of court for his refusal to obey the December 18, 2002 Resolution of the trial court.

Ruling of the Trial Court

The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its Order. It
explained that the commissioner had no legal justification for his refusal to allow the withdrawal of
CISCO's security deposit.

Hence, this Petition.6

Issues

Petitioner raises this sole issue for the Court's consideration:

 "Whether or not the security deposit held by the Insurance Commissioner pursuant to
Section 203 of the Insurance Code may be levied or garnished in favor of only one insured."7

The Court's Ruling

The Petition is meritorious.

Preliminary Issue:
Propriety of Review

Before discussing the principal issue, the Court will first dispose of the question of mootness.

Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of the
Philippines a letter dated March 26, 2003, stating that the former had no objection to the release of
the security deposit to Del Monte Motors. Portions of the fund were consequently released to
respondent in July, October, and December 2003. Thus, the issue arises: whether these
circumstances render the case moot.

Petitioner, however, contends that the partial releases should not be construed as an abandonment
of its stand that security deposits under Section 203 of the Insurance Code are exempt from levy
and garnishment. The Republic claims that the releases were made pursuant to the commissioner's
power of control over the fund, not to the lower court's Order of garnishment. Petitioner further
invokes the jurisdiction of this Court to put to rest the principal issue of whether security deposits
made with the Insurance Commission may be levied and garnished.

The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and the
Insurance Commission has required CISCO to replenish the latter's security deposit. Respondent,
therefore, may one day decide to further garnish the security deposit, once replenished. Moreover,
after the questioned Order of the lower court was issued, similar claims on the security deposits of
various insurance companies have been made before the Insurance Commission. To set aside the
resolution of the issue will only postpone a task that is certain to crop up in the future.

Besides, the business of insurance is imbued with public interest. It is subject to regulation by the
State, with respect not only to the relations between the insurer and the insured, but also to the
internal affairs of insurance companies.8 As this case is undeniably endowed with public interest and
involves a matter of public policy, this Court shall not shirk from its duty to educate the bench and
the bar by formulating guiding and controlling principles, precepts, doctrines and rules.9

Principal Issue:
Exemption of Security Deposit from Levy or Garnishment

Section 203 of the Insurance Code provides as follows:

"Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in
value to twenty-five per centum of the minimum paid-up capital required under section one
hundred eighty-eight, invest its funds only in securities, satisfactory to the Commissioner,
consisting of bonds or other evidences of debt of the Government of the Philippines or its
political subdivisions or instrumentalities, or of government-owned or controlled corporations
and entities, including the Central Bank of the Philippines: Provided, That such investments
shall at all times be maintained free from any lien or encumbrance; and Provided, further,
That such securities shall be deposited with and held by the Commissioner for the faithful
 performance by the depositing insurer of all its obligations under its insurance contracts.
The provisions of section one hundred ninety-two shall, so far as practicable, apply to the
securities deposited under this section.

"Except as otherwise provided in this Code, no judgment creditor or other claimant shall
have the right to levy upon any of the securities of the insurer held on deposit
pursuant to the requirement of the Commissioner." (Emphasis supplied)

Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and
garnishment of the security deposit. It contends that the law requires the deposit, precisely to ensure
faithful performance of all the obligations of the depositing insurer under the latter's various
insurance contracts. Hence, respondent claims that the security deposit should be answerable for
the counterbond issued by CISCO.

The Court is not convinced. As worded, the law expressly and clearly states that the security deposit
shall be (1) answerable for all the obligations of the depositing insurer under its insurance contracts;
(2) at all times free from any liens or encumbrance; and (3) exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its
policy holders have a right under the law to be equally protected by its security deposit. To allow the
garnishment of that deposit would impair the fund by decreasing it to less than the percentage of
paid-up capital that the law requires to be maintained. Further, this move would create, in favor of
respondent, a preference of credit over the other policy holders and beneficiaries.

Our Insurance Code is patterned after that of California.10 Thus, the ruling of the state's Supreme
Court on a similar concept as that of the security deposit is instructive. Engwicht v. Pacific States
Life Assurance Co.11 held that the money required to be deposited by a mutual assessment
insurance company with the state treasurer was "a trust fund to be ratably distributed amongst all the
claimants entitled to share in it. Such a distribution cannot be had except in an action in the nature of
a creditors' bill, upon the hearing of which, and with all the parties interested in the fund before it, the
court may make equitable distribution of the fund, and appoint a receiver to carry that distribution
into effect."12

Basic is the statutory construction rule that provisions of a statute should be construed in
accordance with the purpose for which it was enacted.13 That is, the securities are held as a
contingency fund to answer for the claims against the insurance company by all its policy holders
and their beneficiaries. This step is taken in the event that the company becomes insolvent or
otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay stake on the
securities to the exclusion of all others. The other parties may have their own claims against the
insurance company under other insurance contracts it has entered into.

Respondent's Inchoate Right

The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all
other obligations of the company arising from its insurance contracts. Thus, respondent's interest is
merely inchoate. Being a mere expectancy, it has no attribute of property. At this time, it is
nonexistent and may never exist.14 Hence, it would be premature to make the security deposit
answerable for CISCO's present obligation to Del Monte Motors.

Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be
impossible to establish at this time which claimants are entitled to the security deposit and in what
pro-rated amounts. Only after all other claimants under subsisting policies issued by CISCO have
been heard can respondent's share be determined.

Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatory authority over insurance matters.15

The general regulatory authority of the insurance commissioner is described in Section 414 of the
Code as follows:

"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating to
insurance, insurance companies and other insurance matters, mutual benefit associations,
and trusts for charitable uses are faithfully executed and to perform the duties imposed upon
him by this Code, and shall, notwithstanding any existing laws to the contrary, have sole and
exclusive authority to regulate the issuance and sale of variable contracts as defined in
section two hundred thirty-two and to provide for the licensing of persons selling such
contracts, and to issue such reasonable rules and regulations governing the same.

"The Commissioner may issue such rulings, instructions, circulars, orders and decisions as
he may deem necessary to secure the enforcement of the provisions of this Code, subject to
the approval of the Secretary of Finance. Except as otherwise specified, decisions made by
the Commissioner shall be appealable to the Secretary of Finance." (Emphasis supplied)

Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to
issue) certificates of authority to persons or entities desiring to engage in insurance business in the
Philippines;16 (2) revoke or suspend these certificates of authority upon finding grounds for the
revocation or suspension;17 (3) impose upon insurance companies, their directors and/or officers
and/or agents appropriate penalties -- fines, suspension or removal from office -- for failing to comply
with the Code or with any of the commissioner's orders, instructions, regulations or rulings, or for
otherwise conducting business in an unsafe or unsound manner.18

Included in the above regulatory responsibilities is the duty to hold the security deposits under
Sections 19119 and 203 of the Code, for the benefit and security of all policy holders. In relation to
these provisions, Section 192 of the Insurance Code states:

"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the
benefit and security of all the policyholders of the company depositing the same, but shall as
long as the company is solvent, permit the company to collect the interest or dividends on
the securities so deposited, and, from time to time, with his assent, to withdraw any of such
securities, upon depositing with said Commissioner other like securities, the market value of
which shall be equal to the market value of such as may be withdrawn. In the event of any
company ceasing to do business in the Philippines the securities deposited as aforesaid
shall be returned upon the company's making application therefor and proving to the
satisfaction of the Commissioner that it has no further liability under any of its policies in the
Philippines." (Emphasis supplied)

Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate the
insurance industry so as to protect the insuring public. The law specifically confers custody over the
securities upon the commissioner, with whom these investments are required to be deposited. An
implied trust20 is created by the law for the benefit of all claimants under subsisting insurance
contracts issued by the insurance company.21
As the officer vested with custody of the security deposit, the insurance commissioner is in the best
position to determine if and when it may be released without prejudicing the rights of other policy
holders. Before allowing the withdrawal or the release of the deposit, the commissioner must be
satisfied that the conditions contemplated by the law are met and all policy holders protected.

Commissioner's Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing that
the funds were exempt from execution as provided by law, he sought to protect other policy holders.
His interpretation of the provisions of the law carries great weight and consideration,22 as he is the
head of a specialized body tasked with the regulation of insurance matters and primarily charged
with the implementation of the Insurance Code.

The emergence of the multifarious needs of modern society necessitates the establishment of
diverse administrative agencies. In addressing these needs, the administrative agencies charged
with applying and implementing particular statutes have accumulated experience and specialized
capabilities. Thus, in a long line of cases, this Court has recognized that their construction of a
statute is entitled to great respect and should ordinarily be controlling, unless clearly shown to be in
sharp conflict with the governing statute or the Constitution and other laws.23

Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit of
CISCO. It follows that without the issuance of a valid order, the insurance commissioner could not
have been in contempt of court.24

WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.

SO ORDERED.
G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

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

The factual background of the case is as follows:

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

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

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

xxxx

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

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that
IMC and LSPI filed with respondent their claims under their respective fire insurance policies with
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale
and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held
liable because the property covered by the insurance policies were destroyed due to fortuities event
or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no
breach of contract committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6

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

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

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

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

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

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

With costs against the defendant-appellee.

SO ORDERED.10

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

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April
11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS
IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

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

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

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

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as
creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable
for loss of the ready-made clothing materials since it failed to overcome the presumption of liability
under Article 126516 of the Civil Code; that the fire was caused through petitioner's negligence in
failing to provide stringent measures of caution, care and maintenance on its property because
electric wires do not usually short circuit unless there are defects in their installation or when there is
lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable to respondent for
contracted lawyer's fees, litigation expenses and cost of suit.17

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

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

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

The Court disagrees with petitioner's stand.

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

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

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

The Court is not persuaded.

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

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

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

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss
is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until
full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured has substantial economic
interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same
Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate
interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an interest, it is sufficient that the insured is so situated
with reference to the property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured.29 Anyone has an insurable interest in property who derives a benefit
from its existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other words, so long
as he would suffer by its destruction, as where he has a vendor's lien.31 In this case, the insurable
interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days
after the time of the loss covered by the policies.

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

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

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to make the payment even by
reason of a fortuitous event shall not relieve him of his liability.33 The rationale for this is that the rule
that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only
holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is
pecuniary in nature.34

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

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

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

Petitioner failed to refute respondent's evidence.

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

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt
was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any
right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal
to petitioner's case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 168115 June 8, 2007

VICENTE ONG LIM SING, JR., petitioner,

vs.
FEB LEASING & FINANCE CORPORATION, respondent.

DECISION

NACHURA, J.:

This is a petition for review on certiorari assailing the Decision1 dated March 15, 2005 and the
Resolution2 dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.

The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease3 of equipment
and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr.
(Lim) executed an Individual Guaranty Agreement4 with FEB to guarantee the prompt and faithful
performance of the terms and conditions of the aforesaid lease agreement. Corresponding Lease
Schedules with Delivery and Acceptance Certificates5 over the equipment and motor vehicles formed
part of the agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly
rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (₱170,494.00).

JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears,
including penalty charges and insurance premiums, amounted to Three Million Four Hundred
Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (₱3,414,468.75). On August 23,
2000, FEB sent a letter to JVL demanding payment of the said amount. However, JVL failed to pay.6

On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila, docketed as
Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and John Doe.

In the Amended Answer,8 JVL and Lim admitted the existence of the lease agreement but asserted
that it is in reality a sale of equipment on installment basis, with FEB acting as the financier. JVL and
Lim claimed that this intention was apparent from the fact that they were made to believe that when
full payment was effected, a Deed of Sale will be executed by FEB as vendor in favor of JVL and
Lim as vendees.9 FEB purportedly assured them that documenting the transaction as a lease
agreement is just an industry practice and that the proper documentation would be effected as soon
as full payment for every item was made. They also contended that the lease agreement is a
contract of adhesion and should, therefore, be construed against the party who prepared it, i.e.,
FEB.

In upholding JVL and Lim’s stance, the trial court stressed the contradictory terms it found in the
lease agreement. The pertinent portions of the Decision dated November 22, 2002 read:

A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed
the use of several contradictory terms. To name a few, in Section 9 of the said contract – disclaiming
warranty, it is stated that the lessor is not the manufacturer nor the latter’s agent and therefore does
not guarantee any feature or aspect of the object of the contract as to its merchantability.
Merchantability is a term applied in a contract of sale of goods where conditions and warranties are
made to apply. Article 1547 of the Civil Code provides that unless a contrary intention appears an
implied warranty on the part of the seller that he has the right to sell and to pass ownership of the
object is furnished by law together with an implied warranty that the thing shall be free from hidden
faults or defects or any charge or encumbrance not known to the buyer.

In an adhesion contract which is drafted and printed in advance and parties are not given a real
arms’ length opportunity to transact, the Courts treat this kind of contract strictly against their
architects for the reason that the party entering into this kind of contract has no choice but to accept
the terms and conditions found therein even if he is not in accord therewith and for that matter may
not have understood all the terms and stipulations prescribed thereat. Contracts of this character are
prepared unilaterally by the stronger party with the best legal talents at its disposal. It is upon that
thought that the Courts are called upon to analyze closely said contracts so that the weaker party
could be fully protected.

Another instance is when the alleged lessee was required to insure the thing against loss, damage
or destruction.

In property insurance against loss or other accidental causes, the assured must have an insurable
interest, 32 Corpus Juris 1059.

xxxx

It has also been held that the test of insurable interest in property is whether the assured has a right,
title or interest therein that he will be benefited by its preservation and continued existence or suffer
a direct pecuniary loss from its destruction or injury by the peril insured against. If the defendants
were to be regarded as only a lessee, logically the lessor who asserts ownership will be the one
directly benefited or injured and therefore the lessee is not supposed to be the assured as he has no
insurable interest.

There is also an observation from the records that the actual value of each object of the contract
would be the result after computing the monthly rentals by multiplying the said rentals by the number
of months specified when the rentals ought to be paid.

Still another observation is the existence in the records of a Deed of Absolute Sale by and between
the same parties, plaintiff and defendants which was an exhibit of the defendant where the plaintiff
sold to the same defendants one unit 1995 Mitsubishi L-200 STRADA DC PICK UP and in said
Deed, The Court noticed that the same terms as in the alleged lease were used in respect to
warranty, as well as liability in case of loss and other conditions. This action of the plaintiff
unequivocally exhibited their real intention to execute the corresponding Deed after the defendants
have paid in full and as heretofore discussed and for the sake of emphasis the obscurity in the
written contract cannot favor the party who caused the obscurity.

Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control. If the words
appear to be contrary to the evident intention of the parties, their contemporaneous and subsequent
acts shall be principally considered. If the doubts are cast upon the principal object of the contract in
such a way that it cannot be known what may have been the intention or will of the parties, the
contract shall be null and void.10

Thus, the court concluded with the following disposition:

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

SO ORDERED.11

On December 27, 2002, FEB filed its Notice of Appeal.12 Accordingly, on January 17, 2003, the court
issued an Order13 elevating the entire records of the case to the CA. FEB averred that the trial court
erred:

A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal
properties on installment and not of lease;

B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not R.A.
No. 8556;

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of the units;

D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong Lim,
Jr. to the Plaintiff-Appellant.14

On March 15, 2005, the CA issued its Decision15 declaring the transaction between the parties as a
financial lease agreement under Republic Act (R.A.) No. 8556.16 The fallo of the assailed Decision
reads:

WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002
rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451
is REVERSED and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL
Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty
Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per
annum starting from the date of judicial demand on 06 December 2000, until full payment thereof.
Costs against appellees.

SO ORDERED.17

Lim filed the instant Petition for Review on Certiorari under Rule 45

contending that:

The Honorable Court of Appeals erred when it failed to consider that the undated complaint was filed
by Saturnino J. Galang, Jr., without any authority from respondent’s Board of Directors and/or
Secretary’s Certificate.
 II

The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the 1997
Rules of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).

III

The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent to
file on time its appellant’s brief and to separately rule on the petitioner’s motion to dismiss.

IV

The Honorable Court of Appeals erred in finding that the contract between the parties is one of a
financial lease and not of a contract of sale.

The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the
respondent are "rentals" and not installments paid for the purchase price of the subject motor
vehicles, heavy machines and equipment.

VI

The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the pick-
up vehicle is of no consequence.

VII

The Honorable Court of Appeals failed to take into consideration that the contract of lease, a
contract of adhesion, concealed the true intention of the parties, which is a contract of sale.

VIII

The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable interest
over the subject personal properties.

IX

The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage of
the term merchantability.18

We affirm the ruling of the appellate court.

First, Lim can no longer question Galang’s authority as FEB’s authorized representative in filing the
suit against Lim. Galang was the representative of FEB in the proceedings before the trial court up to
the appellate court. Petitioner never placed in issue the validity of Galang’s representation before the
trial and appellate courts. Issues raised for the first time on appeal are barred by estoppel.
Arguments not raised in the original proceedings cannot be considered on review; otherwise, it
would violate basic principles of fair play.19
Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters
agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of FEB to file
its brief on time, or in not ruling separately on the petitioner’s motion to dismiss.

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful
of the duty to reconcile both the need to speedily put an end to litigation and the parties’ right to due
process. In numerous cases, this Court has allowed liberal construction of the rules when to do so
would serve the demands of substantial justice and equity.20 In Aguam v. Court of Appeals , the
Court explained:

The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power
conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in
accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in
each case." Technicalities, however, must be avoided. The law abhors technicalities that impede the
cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game
of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts." Litigations must be decided on their merits and not on
technicality. Every party litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of
appeals purely on technical grounds is frowned upon where the policy of the court is to encourage
hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid,
technical sense; rules of procedure are used only to help secure, not override substantial justice. It is
a far better and more prudent course of action for the court to excuse a technical lapse and afford
the parties a review of the case on appeal to attain the ends of justice rather than dispose of the
case on technicality and cause a grave injustice to the parties, giving a false impression of speedy
disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21

Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is
not void per se. It is as binding as any ordinary contract. A party who enters into an adhesion
contract is free to reject the stipulations entirely.22 If the terms thereof are accepted without objection,
then the contract serves as the law between the parties.

In Section 23 of the lease contract, it was expressly stated that:

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between
them, and that no representations have been made other than as set forth herein. This Agreement
shall not be amended or altered in any manner, unless such amendment be made in writing and
signed by the parties hereto.

Petitioner’s claim that the real intention of the parties was a contract of sale of personal property on
installment basis is more likely a mere afterthought in order to defeat the rights of the respondent.

The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates
is, in point of fact, a financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines
"financial leasing" as:

[A] mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years during which
the lessee has the right to hold and use the leased property with the right to expense the lease
rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation
thereof, but with no obligation or option on his part to purchase the leased property from the owner-
lessor at the end of the lease contract.

FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic
payment of ₱170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of
the purchase price or acquisition cost of the said movables in accordance with the Lease Schedules
with Delivery and Acceptance Certificates. "The basic purpose of a financial leasing transaction is to
enable the prospective buyer of equipment, who is unable to pay for such equipment in cash in one
lump sum, to lease such equipment in the meantime for his use, at a fixed rental sufficient to
amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the
financial lessor) with the expectation that at the end of the lease period the buyer/financial lessee will
be able to pay any remaining balance of the purchase price."23

The allegation of petitioner that the rent for the use of each movable constitutes the value of the
vehicle or equipment leased is of no moment. The law on financial lease does not prohibit such a
circumstance and this alone does not make the transaction between the parties a sale of personal
property on installment. In fact, the value of the lease, usually constituting the value or amount of the
property involved, is a benefit allowed by law to the lessor for the use of the property by the lessee
for the duration of the lease. It is recognized that the value of these movables depreciates through
wear and tear upon use by the lessee. In Beltran v. PAIC Finance Corporation,24 we stated that:

Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading
company. Neither is it an ordinary leasing company; it does not make its profit by buying equipment
and repeatedly leasing out such equipment to different users thereof. But a financial lease must be
preceded by a purchase and sale contract covering the equipment which becomes the subject
matter of the financial lease. The financial lessor takes the role of the buyer of the equipment leased.
And so the formal or documentary tie between the seller and the real buyer of the equipment, i.e.,
the financial lessee, is apparently severed. In economic reality, however, that relationship remains.
The sale of the equipment by the supplier thereof to the financial lessor and the latter's legal
ownership thereof are intended to secure the repayment over time of the purchase price of the
equipment, plus financing charges, through the payment of lease rentals; that legal title is the upfront
security held by the financial lessor, a security probably superior in some instances to a chattel
mortgagee's lien.25

Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into
the lease contract with full knowledge of its terms and conditions. The contract was in force for more
than four years. Since its inception on March 9, 1995, JVL and Lim never questioned its provisions.
They only attacked the validity of the contract after they were judicially made to answer for their
default in the payment of the agreed rentals.

It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions as
they may want to include in a contract. As long as such agreements are not contrary to law, morals,
good customs, public policy, or public order, they shall have the force of law between the
parties.26 Contracting parties may stipulate on terms and conditions as they may see fit and these
have the force of law between them.27
The stipulation in Section 1428 of the lease contract, that the equipment shall be insured at the cost
and expense of the lessee against loss, damage, or destruction from fire, theft, accident, or other
insurable risk for the full term of the lease, is a binding and valid stipulation. Petitioner, as a lessee,
has an insurable interest in the equipment and motor vehicles leased. Section 17 of the Insurance
Code provides that the measure of an insurable interest in property is the extent to which the insured
might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly damnified in
case of loss, damage, or destruction of any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the
merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is stated as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT IT
HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE ARE NO
WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO
ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS
FITNESS, SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO
WHETHER THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.29

In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of defect of any
kind that will be found by the lessee in any of the equipment, recourse should be made to the
manufacturer. "The financial lessor, being a financing company, i.e., an extender of credit rather than
an ordinary equipment rental company, does not extend a warranty of the fitness of the equipment
for any particular use. Thus, the financial lessee was precisely in a position to enforce such warranty
directly against the supplier of the equipment and not against the financial lessor. We find nothing
contra legem or contrary to public policy in such a contractual arrangement."30

Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a
contract of sale on installment in the same manner that a previous transaction between the parties
over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was initially covered by an agreement
denominated as a lease and eventually became the subject of a Deed of Absolute Sale.

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be
read into the terms of the lease agreement would expand the coverage of the agreement, in violation
of Article 1372 of the New Civil Code. 31 The lease contract subject of the complaint speaks only of a
lease. Any agreement between the parties after the lease contract has ended is a different
transaction altogether and should not be included as part of the lease. Furthermore, it is a cardinal
rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt as to
the intention of the contracting parties, the literal meaning of its stipulations shall control. No amount
of extrinsic aid is necessary in order to determine the parties' intent.32

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in CA-
G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are AFFIRMED.
Costs against petitioner.

SO ORDERED.
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.
G.R. No. 183526 August 25, 2009

VIOLETA R. LALICAN, Petitioner,

vs.
THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY THE
PRESIDENT VICENTE R. AVILON, Respondent.

DECISION

CHICO-NAZARIO, J.:

Challenged in this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court are the
Decision2 dated 30 August 2007 and the Orders dated 10 April 20083 and 3 July 20084 of the
Regional Trial Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its assailed
Decision, the RTC dismissed the claim for death benefits filed by petitioner Violeta R. Lalican
(Violeta) against respondent Insular Life Assurance Company Limited (Insular Life); while in its
questioned Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC declared the finality
of the aforesaid Decision and denied petitioner’s Notice of Appeal.

The factual and procedural antecedents of the case, as culled from the records, are as follows:

Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).

During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997, Insular
Life, through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor of Eulogio
Policy No. 9011992,5 which contained a 20-Year Endowment Variable Income Package Flexi Plan
worth ₱500,000.00,6 with two riders valued at ₱500,000.00 each.7 Thus, the value of the policy
amounted to ₱1,500,000.00. Violeta was named as the primary beneficiary.

Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis in the
amount of ₱8,062.00, payable every 24 April, 24 July, 24 October and 24 January of each year, until
the end of the 20-year period of the policy. According to the Policy Contract, there was a grace
period of 31 days for the payment of each premium subsequent to the first. If any premium was not
paid on or before the due date, the policy would be in default, and if the premium remained unpaid
until the end of the grace period, the policy would automatically lapse and become void.8

Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he failed to pay the
premium due on 24 January 1998, even after the lapse of the grace period of 31 days. Policy No.
9011992, therefore, lapsed and became void.

Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan, on 26 May
1998, an Application for Reinstatement9 of Policy No. 9011992, together with the amount of
₱8,062.00 to pay for the premium due on 24 January 1998. In a letter10 dated 17 July 1998, Insular
Life notified Eulogio that his Application for Reinstatement could not be fully processed because,
although he already deposited ₱8,062.00 as payment for the 24 January 1998 premium, he left
unpaid the overdue interest thereon amounting to ₱322.48. Thus, Insular Life instructed Eulogio to
pay the amount of interest and to file another application for reinstatement. Eulogio was likewise
advised by Malaluan to pay the premiums that subsequently became due on 24 April 1998 and 24
July 1998, plus interest.
On 17 September 1998, Eulogio went to Malaluan’s house and submitted a second Application for
Reinstatement11 of Policy No. 9011992, including the amount of ₱17,500.00, representing payments
for the overdue interest on the premium for 24 January 1998, and the premiums which became due
on 24 April 1998 and 24 July 1998. As Malaluan was away on a business errand, her husband
received Eulogio’s second Application for Reinstatement and issued a receipt for the amount Eulogio
deposited.

A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest
secondary to electrocution.

Without knowing of Eulogio’s death, Malaluan forwarded to the Insular Life Regional Office in the
City of San Fernando, on 18 September 1998, Eulogio’s second Application for Reinstatement of
Policy No. 9011992 and ₱17,500.00 deposit. However, Insular Life no longer acted upon Eulogio’s
second Application for Reinstatement, as the former was informed on 21 September 1998 that
Eulogio had already passed away.

On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds of
Policy No. 9011992.

In a letter12 dated 14 January 1999, Insular Life informed Violeta that her claim could not be granted
since, at the time of Eulogio’s death, Policy No. 9011992 had already lapsed, and Eulogio failed to
reinstate the same. According to the Application for Reinstatement, the policy would only be
considered reinstated upon approval of the application by Insular Life during the applicant’s "lifetime
and good health," and whatever amount the applicant paid in connection thereto was considered to
be a deposit only until approval of said application. Enclosed with the 14 January 1999 letter of
Insular Life to Violeta was DBP Check No. 0000309734, for the amount of ₱25,417.00, drawn in
Violeta’s favor, representing the full refund of the payments made by Eulogio on Policy No. 9011992.

On 12 February 1998, Violeta requested a reconsideration of the disallowance of her claim. In a

letter13 dated 10 March 1999, Insular Life stated that it could not find any reason to reconsider its
decision rejecting Violeta’s claim. Insular Life again tendered to Violeta the above-mentioned check
in the amount of ₱25,417.00.

Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the Cabanatuan
District Office of Insular Life. Violeta’s counsel subsequently sent a letter14 dated 8 July 1999 to
Insular Life, demanding payment of the full proceeds of Policy No. 9011992. On 11 August 1999,
Insular Life responded to the said demand letter by agreeing to conduct a re-evaluation of Violeta’s
claim.

Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC, on 11
October 1999, a Complaint for Death Claim Benefit,15 which was docketed as Civil Case No. 2177.
Violeta alleged that Insular Life engaged in unfair claim settlement practice and deliberately failed to
act with reasonable promptness on her insurance claim. Violeta prayed that Insular Life be ordered
to pay her death claim benefits on Policy No. 9011992, in the amount of ₱1,500,000.00, plus
interests, attorney’s fees, and cost of suit.

Insular Life filed with the RTC an Answer with Counterclaim,16 asserting that Violeta’s Complaint had
no legal or factual bases. Insular Life maintained that Policy No. 9011992, on which Violeta sought
to recover, was rendered void by the non-payment of the 24 January 1998 premium and non-
compliance with the requirements for the reinstatement of the same. By way of counterclaim, Insular
Life prayed that Violeta be ordered to pay attorney’s fees and expenses of litigation incurred by the
former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the
reinstatement of Policy No. 9011992 had been complied with and the defenses put up by Insular Life
were purely invented and illusory.

After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life.

The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to have the same
reinstated:

[The] arguments [of Insular Life] are not without basis. When the premiums for April 24 and July 24,
1998 were not paid by [Eulogio] even after the lapse of the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and conditions of the contract between [Insular Life]
and [Eulogio] which are written in [the] Policy provisions of Policy No. 9011992 x x x.17

The RTC, taking into account the clear provisions of the Policy Contract between Eulogio and Insular
Life and the Application for Reinstatement Eulogio subsequently signed and submitted to Insular
Life, held that Eulogio was not able to fully comply with the requirements for the reinstatement of
Policy No. 9011992:

The well-settled rule is that a contract has the force of law between the parties. In the instant case,
the terms of the insurance contract between [Eulogio] and [Insular Life] were spelled out in the policy
provisions of Insurance Policy No. 9011992. There is likewise no dispute that said insurance
contract is by nature a contract of adhesion[,] which is defined as "one in which one of the
contracting parties imposes a ready-made form of contract which the other party may accept or
reject but cannot modify." (Polotan, Sr. vs. CA, 296 SCRA 247).

xxxx

The New Lexicon Webster’s Dictionary defines ambiguity as the "quality of having more than one
meaning" and "an idea, statement or expression capable of being understood in more than one
sense." In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme Court stated that[:]

"Any ambiguity in a contract, whose terms are susceptible of different interpretations as a result
thereby, must be read and construed against the party who drafted it on the assumption that it could
have been avoided by the exercise of a little care."

In the instant case, the dispute arises from the afore-quoted provisions written on the face of the
second application for reinstatement. Examining the said provisions, the court finds the same clearly
written in terms that are simple enough to admit of only one interpretation. They are clearly not
ambiguous, equivocal or uncertain that would need further construction. The same are written on the
very face of the application just above the space where [Eulogio] signed his name. It is inconceivable
that he signed it without reading and understanding its import.1avv phi1

Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in simple and
clear layman’s language, rendering it free from any ambiguity that would require a legal
interpretation or construction. Thus, the court believes that [Eulogio] was well aware that when he
filed the said application for reinstatement, his lapsed policy was not automatically reinstated and
that its approval was subject to certain conditions. Nowhere in the policy or in the application for
reinstatement was it ever mentioned that the payment of premiums would have the effect of an
automatic and immediate renewal of the lapsed policy. Instead, what was clearly stated in the
application for reinstatement is that pending approval thereof, the premiums paid would be treated
as a "deposit only and shall not bind the company until this application is finally approved during
my/our" lifetime and good health[.]"

Again, the court finds nothing in the aforesaid provisions that would even suggest an ambiguity
either in the words used or in the manner they were written. [Violeta] did not present any proof that
[Eulogio] was not conversant with the English language. Hence, his having personally signed the
application for reinstatement[,] which consisted only of one page, could only mean that he has read
its contents and that he understood them. x x x

Therefore, consistent with the above Supreme Court ruling and finding no ambiguity both in the
policy provisions of Policy No. 9011992 and in the application for reinstatement subject of this case,
the court finds no merit in [Violeta’s] contention that the policy provision stating that [the lapsed
policy of Eulogio] should be reinstated during his lifetime is ambiguous and should be construed in
his favor. It is true that [Eulogio] submitted his application for reinstatement, together with his
premium and interest payments, to [Insular Life] through its agent Josephine Malaluan in the
morning of September 17, 1998. Unfortunately, he died in the afternoon of that same day. It was
only on the following day, September 18, 1998 that Ms. Malaluan brought the said document to [the
regional office of Insular Life] in San Fernando, Pampanga for approval. As correctly pointed out by
[Insular Life] there was no more application to approve because the applicant was already dead and
no insurance company would issue an insurance policy to a dead person.18 (Emphases ours.)

The RTC, in the end, explained that:

While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot express the
same by interpreting the insurance agreement in her favor where there is no need for such
interpretation. It is conceded that [Eulogio’s] payment of overdue premiums and interest was
received by [Insular Life] through its agent Ms. Malaluan. It is also true that [the] application for
reinstatement was filed by [Eulogio] a day before his death. However, there is nothing that would
justify a conclusion that such receipt amounted to an automatic reinstatement of the policy that has
already lapsed. The evidence suggests clearly that no such automatic renewal was contemplated in
the contract between [Eulogio] and [Insular Life]. Neither was it shown that Ms. Malaluan was the
officer authorized to approve the application for reinstatement and that her receipt of the documents
submitted by [Eulogio] amounted to its approval.19 (Emphasis ours.)

The fallo of the RTC Decision thus reads:

WHEREFORE, all the foregoing premises considered and finding that [Violeta] has failed to
establish by preponderance of evidence her cause of action against the defendant, let this case be,
as it is hereby DISMISSED.20

On 14 September 2007, Violeta filed a Motion for Reconsideration21 of the afore-mentioned RTC
Decision. Insular Life opposed22 the said motion, averring that the arguments raised therein were
merely a rehash of the issues already considered and addressed by the RTC. In an Order23 dated 8
November 2007, the RTC denied Violeta’s Motion for Reconsideration, finding no cogent and
compelling reason to disturb its earlier findings. Per the Registry Return Receipt on record, the 8
November 2007 Order of the RTC was received by Violeta on 3 December 2007.

In the interim, on 22 November 2007, Violeta filed with the RTC a Reply24 to the Motion for
Reconsideration, wherein she reiterated the prayer in her Motion for Reconsideration for the setting
aside of the Decision dated 30 August 2007. Despite already receiving on 3 December 2007, a copy
of the RTC Order dated 8 November 2007, which denied her Motion for Reconsideration, Violeta still
filed with the RTC, on 26 February 2008, a Reply Extended Discussion elaborating on the
arguments she had previously made in her Motion for Reconsideration and Reply.

On 10 April 2008, the RTC issued an Order,25 declaring that the Decision dated 30 August 2007 in
Civil Case No. 2177 had already attained finality in view of Violeta’s failure to file the appropriate
notice of appeal within the reglementary period. Thus, any further discussions on the issues raised
by Violeta in her Reply and Reply Extended Discussion would be moot and academic.

Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,26 praying that the Order
dated 10 April 2008 be set aside and that she be allowed to file an appeal with the Court of Appeals.

In an Order27 dated 3 July 2008, the RTC denied Violeta’s Notice of Appeal with Motion given that
the Decision dated 30 August 2007 had long since attained finality.

Violeta directly elevated her case to this Court via the instant Petition for Review on Certiorari,
raising the following issues for consideration:

1. Whether or not the Decision of the court a quo dated August 30, 2007, can still be
reviewed despite having allegedly attained finality and despite the fact that the mode of
appeal that has been availed of by Violeta is erroneous?

2. Whether or not the Regional Trial Court in its original jurisdiction has decided the case on
a question of law not in accord with law and applicable decisions of the Supreme Court?

Violeta insists that her former counsel committed an honest mistake in filing a Reply, instead of a
Notice of Appeal of the RTC Decision dated 30 August 2007; and in the computation of the
reglementary period for appealing the said judgment. Violeta claims that her former counsel suffered
from poor health, which rapidly deteriorated from the first week of July 2008 until the latter’s death
just shortly after the filing of the instant Petition on 8 August 2008. In light of these circumstances,
Violeta entreats this Court to admit and give due course to her appeal even if the same was filed out
of time.

Violeta further posits that the Court should address the question of law arising in this case involving
the interpretation of the second sentence of Section 19 of the Insurance Code, which provides:

Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the insurance
takes effect, but need not exist thereafter or when the loss occurs.

On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life when he
reinstated Policy No. 9011992 just before he passed away on 17 September 1998. The RTC should
have construed the provisions of the Policy Contract and Application for Reinstatement in favor of
the insured Eulogio and against the insurer Insular Life, and considered the special circumstances of
the case, to rule that Eulogio had complied with the requisites for the reinstatement of Policy No.
9011992 prior to his death, and that Violeta is entitled to claim the proceeds of said policy as the
primary beneficiary thereof.

The Petition lacks merit.

At the outset, the Court notes that the elevation of the case to us via the instant Petition for Review
on Certiorari is not justified. Rule 41, Section 1 of the Rules of Court,28 provides that no appeal may
be taken from an order disallowing or dismissing an appeal. In such a case, the aggrieved party may
file a Petition for Certiorari under Rule 65 of the Rules of Court.29

Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long become
final and executory. Violeta filed a Motion for Reconsideration thereof, but the RTC denied the same
in an Order dated 8 November 2007. The records of the case reveal that Violeta received a copy of
the 8 November 2007 Order on 3 December 2007. Thus, Violeta had 15 days30 from said date of
receipt, or until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice of Appeal only on
20 May 2008, more than five months after receipt of the RTC Order dated 8 November 2007 denying
her Motion for Reconsideration.

Violeta’s claim that her former counsel’s failure to file the proper remedy within the reglementary
period was an honest mistake, attributable to the latter’s deteriorating health, is unpersuasive.

Violeta merely made a general averment of her former counsel’s poor health, lacking relevant details
and supporting evidence. By Violeta’s own admission, her former counsel’s health rapidly
deteriorated only by the first week of July 2008. The events pertinent to Violeta’s Notice of Appeal
took place months before July 2008, i.e., a copy of the RTC Order dated 8 November 2007, denying
Violeta’s Motion for Reconsideration of the Decision dated 30 August 2007, was received on 3
December 2007; and Violeta’s Notice of Appeal was filed on 20 May 2008. There is utter lack of
proof to show that Violeta’s former counsel was already suffering from ill health during these times;
or that the illness of Violeta’s former counsel would have affected his judgment and competence as
a lawyer.

Moreover, the failure of her former counsel to file a Notice of Appeal within the reglementary period
binds Violeta, which failure the latter cannot now disown on the basis of her bare allegation and self-
serving pronouncement that the former was ill. A client is bound by his counsel’s mistakes and
negligence.31

The Court, therefore, finds no reversible error on the part of the RTC in denying Violeta’s Notice of
Appeal for being filed beyond the reglementary period. Without an appeal having been timely filed,
the RTC Decision dated 30 August 2007 in Civil Case No. 2177 already became final and executory.

A judgment becomes "final and executory" by operation of law. Finality becomes a fact when the
reglementary period to appeal lapses and no appeal is perfected within such period. As a
consequence, no court (not even this Court) can exercise appellate jurisdiction to review a case or
modify a decision that has become final.32 When a final judgment is executory, it becomes immutable
and unalterable. It may no longer be modified in any respect either by the court, which rendered it or
even by this Court. The doctrine is founded on considerations of public policy and sound practice
that, at the risk of occasional errors, judgments must become final at some definite point in time.33

The only recognized exceptions to the doctrine of immutability and unalterability are the correction of
clerical errors, the so-called nunc pro tunc entries, which cause no prejudice to any party, and void
judgments.34 The instant case does not fall under any of these exceptions.

Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve the
substantive issues raised, the Petition must still fail.

Violeta makes it appear that her present Petition involves a question of law, particularly, whether
Eulogio had an existing insurable interest in his own life until the day of his death.
An insurable interest is one of the most basic and essential requirements in an insurance contract. In
general, an insurable interest is that interest which a person is deemed to have in the subject matter
insured, where he has a relation or connection with or concern in it, such that the person will derive
pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer
pecuniary loss or damage from its destruction, termination, or injury by the happening of the event
insured against.35 The existence of an insurable interest gives a person the legal right to insure the
subject matter of the policy of insurance.36 Section 10 of the Insurance Code indeed provides that
every person has an insurable interest in his own life.37 Section 19 of the same code also states that
an interest in the life or health of a person insured must exist when the insurance takes effect, but
need not exist thereafter or when the loss occurs.38

Upon more extensive study of the Petition, it becomes evident that the matter of insurable interest is
entirely irrelevant in the case at bar. It is actually beyond question that while Eulogio was still alive,
he had an insurable interest in his own life, which he did insure under Policy No. 9011992. The real
point of contention herein is whether Eulogio was able to reinstate the lapsed insurance policy on his
life before his death on 17 September 1998.

The Court rules in the negative.

Before proceeding, the Court must correct the erroneous declaration of the RTC in its 30 August
2007 Decision that Policy No. 9011992 lapsed because of Eulogio’s non-payment of the premiums
which became due on 24 April 1998 and 24 July 1998. Policy No. 9011992 had lapsed and become
void earlier, on 24 February 1998, upon the expiration of the 31-day grace period for payment of the
premium, which fell due on 24 January 1998, without any payment having been made.

That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogio’s filing of his first
Application for Reinstatement with Insular Life, through Malaluan, on 26 May 1998, constitutes an
admission that Policy No. 9011992 had lapsed by then. Insular Life did not act on Eulogio’s first
Application for Reinstatement, since the amount Eulogio simultaneously deposited was sufficient to
cover only the ₱8,062.00 overdue premium for 24 January 1998, but not the ₱322.48 overdue
interests thereon. On 17 September 1998, Eulogio submitted a second Application for
Reinstatement to Insular Life, again through Malaluan, depositing at the same time ₱17,500.00, to
cover payment for the overdue interest on the premium for 24 January 1998, and the premiums that
had also become due on 24 April 1998 and 24 July 1998. On the very same day, Eulogio passed
away.

To reinstate a policy means to restore the same to premium-paying status after it has been permitted
to lapse.39 Both the Policy Contract and the Application for Reinstatement provide for specific
conditions for the reinstatement of a lapsed policy.

The Policy Contract between Eulogio and Insular Life identified the following conditions for
reinstatement should the policy lapse:

10. REINSTATEMENT

You may reinstate this policy at any time within three years after it lapsed if the following conditions
are met: (1) the policy has not been surrendered for its cash value or the period of extension as a
term insurance has not expired; (2) evidence of insurability satisfactory to [Insular Life] is furnished;
(3) overdue premiums are paid with compound interest at a rate not exceeding that which would
have been applicable to said premium and indebtedness in the policy years prior to reinstatement;
and (4) indebtedness which existed at the time of lapsation is paid or renewed.40
Additional conditions for reinstatement of a lapsed policy were stated in the Application for
Reinstatement which Eulogio signed and submitted, to wit:

I/We agree that said Policy shall not be considered reinstated until this application is approved by
the Company during my/our lifetime and good health and until all other Company requirements for
the reinstatement of said Policy are fully satisfied.

I/We further agree that any payment made or to be made in connection with this application shall be
considered as deposit only and shall not bind the Company until this application is finally approved
by the Company during my/our lifetime and good health. If this application is disapproved, I/We also
agree to accept the refund of all payments made in connection herewith, without interest, and to
surrender the receipts for such payment.41 (Emphases ours.)

In the instant case, Eulogio’s death rendered impossible full compliance with the conditions for
reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application
for Reinstatement and deposit the amount for payment of his overdue premiums and interests
thereon with Malaluan; but Policy No. 9011992 could only be considered reinstated after the
Application for Reinstatement had been processed and approved by Insular Life during Eulogio’s
lifetime and good health.

Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life Insurance
Company,42 citing McGuire v. The Manufacturer's Life Insurance Co.43:

"The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written
application does not give the insured absolute right to such reinstatement by the mere filing of an
application. The insurer has the right to deny the reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not pay all overdue premium and all other
indebtedness to the insurer. After the death of the insured the insurance Company cannot be
compelled to entertain an application for reinstatement of the policy because the conditions
precedent to reinstatement can no longer be determined and satisfied." (Emphases ours.)

It does not matter that when he died, Eulogio’s Application for Reinstatement and deposits for the
overdue premiums and interests were already with Malaluan. Insular Life, through the Policy
Contract, expressly limits the power or authority of its insurance agents, thus:

Our agents have no authority to make or modify this contract, to extend the time limit for payment of
premiums, to waive any lapsation, forfeiture or any of our rights or requirements, such powers being
limited to our president, vice-president or persons authorized by the Board of Trustees and only in
writing.44 (Emphasis ours.)

Malaluan did not have the authority to approve Eulogio’s Application for Reinstatement. Malaluan
still had to turn over to Insular Life Eulogio’s Application for Reinstatement and accompanying
deposits, for processing and approval by the latter.

The Court agrees with the RTC that the conditions for reinstatement under the Policy Contract and
Application for Reinstatement were written in clear and simple language, which could not admit of
any meaning or interpretation other than those that they so obviously embody. A construction in
favor of the insured is not called for, as there is no ambiguity in the said provisions in the first place.
The words thereof are clear, unequivocal, and simple enough so as to preclude any mistake in the
appreciation of the same.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import
and meaning of the provisions of his Policy Contract and/or Application for Reinstatement, both of
which he voluntarily signed. While it is a cardinal principle of insurance law that a policy or contract
of insurance is to be construed liberally in favor of the insured and strictly as against the insurer
company, yet, 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.45

Eulogio’s death, just hours after filing his Application for Reinstatement and depositing his payment
for overdue premiums and interests with Malaluan, does not constitute a special circumstance that
can persuade this Court to already consider Policy No. 9011992 reinstated. Said circumstance
cannot override the clear and express provisions of the Policy Contract and Application for
Reinstatement, and operate to remove the prerogative of Insular Life thereunder to approve or
disapprove the Application for Reinstatement. Even though the Court commiserates with Violeta, as
the tragic and fateful turn of events leaves her practically empty-handed, the Court cannot arbitrarily
burden Insular Life with the payment of proceeds on a lapsed insurance policy. Justice and fairness
must equally apply to all parties to a case. Courts are not permitted to make contracts for the parties.
The function and duty of the courts consist simply in enforcing and carrying out the contracts actually
made.46

Policy No. 9011992 remained lapsed and void, not having been reinstated in accordance with the
Policy Contract and Application for Reinstatement before Eulogio’s death. Violeta, therefore, cannot
claim any death benefits from Insular Life on the basis of Policy No. 9011992; but she is entitled to
receive the full refund of the payments made by Eulogio thereon.

WHEREFORE, premises considered, the Court DENIES the instant Petition for Review on Certiorari
under Rule 45 of the Rules of Court. The Court AFFIRMS the Orders dated 10 April 2008 and 3 July
2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177, denying petitioner Violeta R.
Lalican’s Notice of Appeal, on the ground that the Decision dated 30 August 2007 subject thereof,
was already final and executory. No costs.

SO ORDERED.
G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2

We recall the facts of this case, as follows:

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." 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.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] 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
₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (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 xxxx

xxx xxx xxx

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, 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 ₱22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and ₱31,094,163.87 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.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] 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. 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 ₱55,746,352.19 and ₱68,450,258.73 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.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We
held that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioner’s contention that
it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. 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.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental
motion for reconsideration, asserting the following arguments:
 (a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on
a company engaged in the business of fidelity bonds and other insurance policies. Petitioner,
as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect
the CA’s disposition that health care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not
those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health
insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda
on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as
room and board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged
in, that is, to determine whether it is an HMO or an insurance company, as this distinction is
indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of
petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) 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 (₱0.50) on each
four pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every
word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can
apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of
indemnity and (2) the maker should be 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).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent,
frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"

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

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

c) doing any kind of business, including a reinsurance business, specifically recognized as

constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a

manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business is
not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting
the argument that a corporation (such as an HMO, whether or not organized for profit), whose main
object is to provide the members of a group with health services, is not engaged in the insurance
business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health Association should not be considered as engaged
in insurance activities since it was created primarily for the distribution of health care services rather
than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating security against
loss from illness or accident more truly they constitute the quantity purchase of well-rounded,
continuous medical service by its members. xxx The functions of such an organization are not
identical with those of insurance or indemnity companies. The latter are concerned primarily, if
not exclusively, with risk and the consequences of its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by quantity purchasing
and economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is,
in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well
as payment, the substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the indemnification
for cost after the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all
other factors. If attention is focused only on that feature, the line between insurance or indemnity and
other types of legal arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on contingency. But obviously it
was not the purpose of the insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all contracts, particularly
conditional sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on whether that or something else to which it
is related in the particular plan is its principal object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan
of operation as a whole of the corporation, it was service rather than indemnity which stood as its
principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only undertake
to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained
in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide

physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the provider of these
services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of
emergency by non-participating health providers would still be incidental to petitioner’s purpose of
providing and arranging for health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set up a system and the
facilities for the delivery of such medical services. This indubitably shows that indemnification is not
its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases.30 As an HMO, it
is its obligation to maintain the good health of its members. Accordingly, its health care programs
are designed to prevent or to minimize the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and medical
services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for the
purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident
from the fact that it is not supervised by the Insurance Commission but by the Department of
Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the commissioner must be
accorded great weight. It is well-settled that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations pertinent to the meaning and
purpose of the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed judgment, and
the fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of
indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:

It is … 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.37

We reconsider. We shall quote once again the pertinent portion of Section 185:

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),
xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of their
property for the support of the government.39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,
those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of
a health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here.

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 designed 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.41

Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract
contains all the elements of an insurance contract, if its primary purpose is the rendering of service,
it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract by
which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against loss
and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance at a pre-agreed price under the
agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from
a non-participating physician or hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health
care contracts called for the defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court
determined that "the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was
not the focal point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount of premium is
calculated on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can be
construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not
qualify as an insurance contract because petitioner’s objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a
verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any of them shall be written or printed by
any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116,
Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917,
the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40
on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased. 1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was
renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to
the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to
the DST provisions were introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early
as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear
and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe
to say that health care agreements were never, at any time, recognized as insurance contracts or
deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is way beyond its
net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage private
enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to
maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an
entity is another matter and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit the majority of our
people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this
case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST
for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty
under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of
Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final.67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February
17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject matters as
they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73 Indeed,
as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot
successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from
the fact that petitioner’s health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the
same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.
G.R. No. 171468 August 24, 2011

NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner,

vs.
NYK-FILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP
INTERNATIONAL PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC., MARINA
PORT SERVICES, INC., SERBROS CARRIER CORPORATION, and SEABOARD-EASTERN
INSURANCE CO., INC., Respondents.

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

G.R. No. 174241

NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner,

vs.
SEABOARD-EASTERN INSURANCE CO., INC., Respondent.

DECISION

ABAD, J.:

These consolidated petitions involve a cargo owner’s right to recover damages from the loss of
insured goods under the Carriage of Goods by Sea Act and the Insurance Code.

The Facts and the Case

Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT
Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency
generator sets worth US$721,500.00.

DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International,
Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California,
where it was loaded on S/S California Luna V59, owned and operated by NYK Fil-Japan Shipping
Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued a bill of lading,
declaring that it received the goods in good condition.

NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also
owned and operated. On its journey to Manila, however, ACX Ruby encountered typhoon Kadiang
whose captain filed a sea protest on arrival at the Manila South Harbor on October 5, 1993
respecting the loss and damage that the goods on board his vessel suffered.

Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator,
received the shipment on October 7, 1993. Upon inspection of the three container vans separately
carrying the generator sets, two vans bore signs of external damage while the third van appeared
unscathed. The shipment remained at Pier 3’s Container Yard under Marina’s care pending
clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs authorities allowed
petitioner’s customs broker, Serbros Carrier Corporation (Serbros), to withdraw the shipment and
deliver the same to petitioner New World’s job site in Makati City.

An examination of the three generator sets in the presence of petitioner New World’s
representatives, Federal Builders (the project contractor) and surveyors of petitioner New World’s
insurer, Seaboard–Eastern Insurance Company (Seaboard), revealed that all three sets suffered
extensive damage and could no longer be repaired. For these reasons, New World demanded
recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP International
Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged receipt of the
demand, both denied liability for the loss.

Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it a
formal claim dated November 16, 1993. Replying on February 14, 1994, Seaboard required
petitioner New World to submit to it an itemized list of the damaged units, parts, and accessories,
with corresponding values, for the processing of the claim. But petitioner New World did not submit
what was required of it, insisting that the insurance policy did not include the submission of such a
list in connection with an insurance claim. Reacting to this, Seaboard refused to process the claim.

On October 11, 1994 petitioner New World filed an action for specific performance and damages
against all the respondents before the Regional Trial Court (RTC) of Makati City, Branch 62, in Civil
Case 94-2770.

On August 16, 2001 the RTC rendered a decision absolving the various respondents from liability
with the exception of NYK. The RTC found that the generator sets were damaged during transit
while in the care of NYK’s vessel, ACX Ruby. The latter failed, according to the RTC, to exercise the
degree of diligence required of it in the face of a foretold raging typhoon in its path.

The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK
beyond the one year provided under the Carriage of Goods by Sea Act (COGSA). New World filed
its complaint on October 11, 1994 when the deadline for filing the action (on or before October 7,
1994) had already lapsed. The RTC held that the one-year period should be counted from the date
the goods were delivered to the arrastre operator and not from the date they were delivered to
petitioner’s job site.1

As regards petitioner New World’s claim against Seaboard, its insurer, the RTC held that the latter
cannot be faulted for denying the claim against it since New World refused to submit the itemized list
that Seaboard needed for assessing the damage to the shipment. Likewise, the belated filing of the
complaint prejudiced Seaboard’s right to pursue a claim against NYK in the event of subrogation.

On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006,2 affirming the RTC’s
rulings except with respect to Seaboard’s liability. The CA held that petitioner New World can still
recoup its loss from Seaboard’s marine insurance policy, considering a) that the submission of the
itemized listing is an unreasonable imposition and b) that the one-year prescriptive period under the
COGSA did not affect New World’s right under the insurance policy since it was the Insurance Code
that governed the relation between the insurer and the insured.

Although petitioner New World promptly filed a petition for review of the CA decision before the
Court in G.R. 171468, Seaboard chose to file a motion for reconsideration of that decision. On
August 17, 2006 the CA rendered an amended decision, reversing itself as regards the claim against
Seaboard. The CA held that the submission of the itemized listing was a reasonable requirement
that Seaboard asked of New World. Further, the CA held that the one-year prescriptive period for
maritime claims applied to Seaboard, as insurer and subrogee of New World’s right against the
vessel owner. New World’s failure to comply promptly with what was required of it prejudiced such
right.

Instead of filing a motion for reconsideration, petitioner instituted a second petition for review before
the Court in G.R. 174241, assailing the CA’s amended decision.
 The Issues Presented

The issues presented in this case are as follows:

a) In G.R. 171468, whether or not the CA erred in affirming the RTC’s release from liability of
respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who were at one time or
another involved in handling the shipment; and

b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard’s request from
petitioner New World for an itemized list is a reasonable imposition and did not violate the
insurance contract between them; and 2) whether or not the CA erred in failing to rule that
the one-year COGSA prescriptive period for marine claims does not apply to petitioner New
World’s prosecution of its claim against Seaboard, its insurer.

The Court’s Rulings

In G.R. 171468 --

Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina
and Serbros in handling and transporting its shipment from Wisconsin to Manila collectively resulted
in the damage to the same, rendering such respondents solidarily liable with NYK, the vessel owner.

But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a
proper subject of a petition for review on certiorari. And petitioner New World has been unable to
make out an exception to this rule.3 Consequently, the Court will not disturb the finding of the RTC,
affirmed by the CA, that the generator sets were totally damaged during the typhoon which beset the
vessel’s voyage from Hong Kong to Manila and that it was her negligence in continuing with that
journey despite the adverse condition which caused petitioner New World’s loss.

That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil
Code, does not automatically relieve the common carrier of liability. The latter had the burden of
proving that the typhoon was the proximate and only cause of loss and that it exercised due
diligence to prevent or minimize such loss before, during, and after the disastrous typhoon.4 As
found by the RTC and the CA, NYK failed to discharge this burden.

In G.R. 174241 --

One. The Court does not regard as substantial the question of reasonableness of Seaboard’s
additional requirement of an itemized listing of the damage that the generator sets suffered. The
record shows that petitioner New World complied with the documentary requirements evidencing
damage to its generator sets.

The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy
insured against all causes of conceivable loss or damage except when otherwise excluded or when
the loss or damage was due to fraud or intentional misconduct committed by the insured. The policy
covered all losses during the voyage whether or not arising from a marine peril.5

Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in
voyage, or vessels unseaworthiness, among others.6 But Seaboard had been unable to show that
petitioner New World’s loss or damage fell within some or one of the enumerated exceptions.
What is more, Seaboard had been unable to explain how it could not verify the damage that New
World’s goods suffered going by the documents that it already submitted, namely, (1) copy of the
Supplier’s Invoice KL2504; (2) copy of the Packing List; (3) copy of the Bill of Lading
01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy of
Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and Insurance
Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of Received Formal
Claim from the following: a) LEP International Philippines, Inc.; b) Marina Port Services, Inc.; and c)
Serbros Carrier Corporation.7 Notably, Seaboard’s own marine surveyor attended the inspection of
the generator sets.

Seaboard cannot pretend that the above documents are inadequate since they were precisely the
documents listed in its insurance policy.8 Being a contract of adhesion, an insurance policy is
construed strongly against the insurer who prepared it. The Court cannot read a requirement in the
policy that was not there.

Further, it appears from the exchanges of communications between Seaboard and Advatech that
submission of the requested itemized listing was incumbent on the latter as the seller DMT’s local
agent. Petitioner New World should not be made to suffer for Advatech’s shortcomings.

Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the
ship shall be discharged from all liability in case of loss or damage unless the suit is brought within
one year after delivery of the goods or the date when the goods should have been delivered.

But whose fault was it that the suit against NYK, the common carrier, was not brought to court on
time? The last day for filing such a suit fell on October 7, 1994. The record shows that petitioner New
World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had the right to take, as
early as November 16, 1993 or about 11 months before the suit against NYK would have fallen due.

In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would
have been subrogated to petitioner New World’s right to recover from NYK. And it could have then
filed the suit as a subrogee. But, as discussed above, Seaboard made an unreasonable demand on
February 14, 1994 for an itemized list of the damaged units, parts, and accessories, with
corresponding values when it appeared settled that New World’s loss was total and when the
insurance policy did not require the production of such a list in the event of a claim.

Besides, when petitioner New World declined to comply with the demand for the list, Seaboard
against whom a formal claim was pending should not have remained obstinate in refusing to process
that claim. It should have examined the same, found it unsubstantiated by documents if that were
the case, and formally rejected it. That would have at least given petitioner New World a clear signal
that it needed to promptly file its suit directly against NYK and the others. Ultimately, the fault for the
delayed court suit could be brought to Seaboard’s doorstep.

Section 241 of the Insurance Code provides that no insurance company doing business in the
Philippines shall refuse without just cause to pay or settle claims arising under coverages provided
by its policies. And, under Section 243, the insurer has 30 days after proof of loss is received and
ascertainment of the loss or damage within which to pay the claim. If such ascertainment is not had
within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or settle the claim.
And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be
entitled to interest on the proceeds of the policy for the duration of delay at the rate of twice the
ceiling prescribed by the Monetary Board.
Notably, Seaboard already incurred delay when it failed to settle petitioner New World’s claim as
Section 243 required. Under Section 244, a prima facie evidence of unreasonable delay in payment
of the claim is created by the failure of the insurer to pay the claim within the time fixed in Section
243.

Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the
delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary
Board. The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of 12%
per annum provided in Central Bank Circular 416, pursuant to Presidential Decree 116.9 Section 244
of the Insurance Code also provides for an award of attorney’s fees and other expenses incurred by
the assured due to the unreasonable withholding of payment of his claim.

In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,10 the Court regarded
as proper an award of 10% of the insurance proceeds as attorney’s fees. Such amount is fair
considering the length of time that has passed in prosecuting the claim.11 Pursuant to the Court’s
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,12 a 12% interest per annum from the
finality of judgment until full satisfaction of the claim should likewise be imposed, the interim period
equivalent to a forbearance of credit.1avv phi 1

Petitioner New World is entitled to the value stated in the policy which is commensurate to the value
of the three emergency generator sets or US$721,500.00 with double interest plus attorney’s fees as
discussed above.

WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of Appeals
decision of January 31, 2006 insofar as petitioner New World International Development (Phils.), Inc.
is not allowed to recover against respondents DMT Corporation, Advatech Industries, Inc., LEP
International Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and Serbros
Carrier Corporation.

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

SO ORDERED.
G.R. No. 186983 February 22, 2012

MA. LOURDES S. FLORENDO, Petitioner,

vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE, Respondents.

DECISION

ABAD, J.:

This case is about an insured’s alleged concealment in his pension plan application of his true state
of health and its effect on the life insurance portion of that plan in case of death.

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan with
respondent Philam Plans, Inc. (Philam Plans) after some convincing by respondent Perla Abcede.
The plan had a pre-need price of ₱997,050.00, payable in 10 years, and had a maturity value of
₱2,890,000.00 after 20 years.1 Manuel signed the application and left to Perla the task of supplying
the information needed in the application.2 Respondent Ma. Celeste Abcede, Perla’s daughter,
signed the application as sales counselor.3

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

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP430055848 to Manuel, with
petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly
premiums.9

Eleven months later or on September 15, 1998, Manuel died of blood poisoning. Subsequently,
Lourdes filed a claim with Philam Plans for the payment of the benefits under her husband’s
plan.10 Because Manuel died before his pension plan matured and his wife was to get only the
benefits of his life insurance, Philam Plans forwarded her claim to Philam Life.11

On May 3, 1999 Philam Plans wrote Lourdes a letter,12 declining her claim. Philam Life found that
Manuel was on maintenance medicine for his heart and had an implanted pacemaker. Further, he
suffered from diabetes mellitus and was taking insulin. Lourdes renewed her demand for payment
under the plan13 but Philam Plans rejected it,14 prompting her to file the present action against the
pension plan company before the Regional Trial Court (RTC) of Quezon City.15

On March 30, 2006 the RTC rendered judgment,16 ordering Philam Plans, Perla and Ma. Celeste,
solidarily, to pay Lourdes all the benefits from her husband’s pension plan, namely: ₱997,050.00, the
proceeds of his term insurance, and ₱2,890,000.00 lump sum pension benefit upon maturity of his
plan; ₱100,000.00 as moral damages; and to pay the costs of the suit. The RTC ruled that Manuel
was not guilty of concealing the state of his health from his pension plan application.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision,17 holding that
insurance policies are traditionally contracts uberrimae fidae or contracts of utmost good faith. As
such, it required Manuel to disclose to Philam Plans conditions affecting the risk of which he was
aware or material facts that he knew or ought to know.18

Issues Presented

The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he kept
blank and did not answer questions in his pension plan application regarding the ailments he
suffered from;

2. Whether or not the CA erred in holding that Manuel was bound by the failure of
respondents Perla and Ma. Celeste to declare the condition of Manuel’s health in the
pension plan application; and

3. Whether or not the CA erred in finding that Philam Plans’ approval of Manuel’s pension
plan application and acceptance of his premium payments precluded it from denying
Lourdes’ claim.

Rulings of the Court

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

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

Besides, when Manuel signed the pension plan application, he adopted as his own the written
representations and declarations embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes from Philam Plans. The pertinent portion of his
representations and declarations read as follows:

I hereby represent and declare to the best of my knowledge that:

xxxx

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

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

If your answer to any of the statements above reveal otherwise, please give details in the space
provided for:

Date of confinement : ____________________________

Name of Hospital or Clinic : ____________________________

Name of Attending Physician : ____________________________

Findings : ____________________________

Others: (Please specify) : ____________________________

x x x x.20 (Emphasis supplied)

Since Manuel signed the application without filling in the details regarding his continuing treatments
for heart condition and diabetes, the assumption is that he has never been treated for the said
illnesses in the last five years preceding his application. This is implicit from the phrase "If your
answer to any of the statements above (specifically, the statement: I have never been treated for
heart condition or diabetes) reveal otherwise, please give details in the space provided for." But this
is untrue since he had been on "Coumadin," a treatment for venous thrombosis,21 and insulin, a drug
used in the treatment of diabetes mellitus, at that time.22

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

Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he had a
pacemaker implant in the early 70s since this did not fall within the five-year timeframe that the
disclosure contemplated.24 But a pacemaker is an electronic device implanted into the body and
connected to the wall of the heart, designed to provide regular, mild, electric shock that stimulates
the contraction of the heart muscles and restores normalcy to the heartbeat.25 That Manuel still had
his pacemaker when he applied for a pension plan in October 1997 is an admission that he
remained under treatment for irregular heartbeat within five years preceding that application.

Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes
when he submitted his pension plan application. These clearly fell within the five-year period. More,
even if Perla’s knowledge of Manuel’s pacemaker may be applied to Philam Plans under the theory
of imputed knowledge,26 it is not claimed that Perla was aware of his two other afflictions that needed
medical treatments. Pursuant to Section 2727 of the Insurance Code, Manuel’s concealment entitles
Philam Plans to rescind its contract of insurance with him.

Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let Perla
fill in the required details did not make her his agent and bind him to her concealment of his true
state of health. Since there is no evidence of collusion between them, Perla’s fault must be
considered solely her own and cannot prejudice Manuel.28
But Manuel forgot that in signing the pension plan application, he certified that he wrote all the
information stated in it or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described herein in
accordance with the General Provisions set forth in this application and hereby certify that the date
and other information stated herein are written by me or under my direction. x x x.29 (Emphasis
supplied)

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

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

DECLARATIONS AND REPRESENTATIONS

xxxx

I agree that the insurance coverage of this application is based on the truth of the foregoing
representations and is subject to the provisions of the Group Life Insurance Policy issued by THE
PHILIPPINE AMERICAN LIFE INSURANCE CO. to PHILAM PLANS, INC.30 (Emphasis supplied)

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

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

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

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

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

After this Agreement has remained in force for one (1) year, we can no longer contest for health
reasons any claim for insurance under this Agreement, except for the reason that installment has not
been paid (lapsed), or that you are not insurable at the time you bought this pension program by
reason of age. If this Agreement lapses but is reinstated afterwards, the one (1) year contestability
period shall start again on the date of approval of your request for reinstatement.35
1âwphi1

The above incontestability clause precludes the insurer from disowning liability under the policy it
issued on the ground of concealment or misrepresentation regarding the health of the insured after a
year of its issuance.

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

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

SO ORDERED.
G.R. No. 198588 July 11, 2012

UNITED MERCHANTS CORPORATION, Petitioner,

vs.
COUNTRY BANKERS INSURANCE CORPORATION, Respondent.

DECISION

CARPIO, J.:

The Case

This Petition for Review on Certiorari1 seeks to reverse the Court of Appeals’ Decision2 dated 16 June
2011 and its Resolution3 dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals
reversed the Decision4 of the Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim
on the Insurance Policy is void.

The Facts

The facts, as culled from the records, are as follows:

Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling, and
manufacturing Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose
Subdivision, Barrio Manresa, Quezon City, where UMC assembled and stored its products.

On 6 September 1995, UMC’s General Manager Alfredo Tan insured UMC’s stocks in trade of
Christmas lights against fire with defendant Country Bankers Insurance Corporation (CBIC) for
₱15,000,000.00. The Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No.
12959A, valid until 6 September 1996, states:

AMOUNT OF INSURANCE: FIFTEEN

MILLION PESOS
PHILIPPINE
CURRENCY

xxx

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the properties of the
Assured or held by them in trust, on commissions, or on joint account with others and/or for which
they are responsible in the event of loss and/or damage during the currency of this policy, whilst
contained in the building of one lofty storey in height, constructed of concrete and/or hollow blocks
with portion of galvanized iron sheets, under galvanized iron rood, occupied as Christmas lights
storage.5

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to
form part of the Insurance Policy. Endorsement F/96-154 provides that UMC’s stocks in trade were
insured against additional perils, to wit: "typhoon, flood, ext. cover, and full earthquake." The sum
insured was also increased to ₱50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May
1996, CBIC issued Endorsement F/96-157 where the name of the assured was changed from
Alfredo Tan to UMC.
On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment
Corporation (CRM) to investigate and evaluate UMC’s loss by reason of the fire. CBIC’s reinsurer,
Central Surety, likewise requested the National Bureau of Investigation (NBI) to conduct a parallel
investigation. On 6 July 1996, UMC, through CRM, submitted to CBIC its Sworn Statement of
Formal Claim, with proofs of its loss.

On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from
CBIC. On 25 February 1997, UMC received CBIC’s letter, dated 10 January 1997, rejecting UMC’s
claim due to breach of Condition No. 15 of the Insurance Policy. Condition No. 15 states:

If the claim be in any respect fraudulent, or if any false declaration be made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his behalf
to obtain any benefit under this Policy; or if the loss or damage be occasioned by the willful act, or
with the connivance of the Insured, all the benefits under this Policy shall be forfeited.6

On 19 February 1998, UMC filed a Complaint7 against CBIC with the RTC of Manila. UMC anchored
its insurance claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted,
and the Certification dated 24 July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio
J. Garcia of the Bureau of Fire Protection. The Certification dated 24 July 1996 provides that:

This is to certify that according to available records of this office, on or about 6:10 P.M. of July 3,
1996, a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy.
Manresa, Quezon City incurring an estimated damage of Fifty-Five Million Pesos (₱55,000,000.00)
to the building and contents, while the reported insurance coverage amounted to Fifty Million Pesos
(₱50,000,000.00) with Country Bankers Insurance Corporation.

The Bureau further certifies that no evidence was gathered to prove that the establishment was
willfully, feloniously and intentionally set on fire.

That the investigation of the fire incident is already closed being ACCIDENTAL in nature.8

In its Answer with Compulsory Counterclaim9 dated 4 March 1998, CBIC admitted the issuance of the
Insurance Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of
action; (2) that UMC’s claim has already prescribed; and (3) that UMC’s fire claim is tainted with
fraud. CBIC alleged that UMC’s claim was fraudulent because UMC’s Statement of Inventory
showed that it had no stocks in trade as of 31 December 1995, and that UMC’s suspicious
purchases for the year 1996 did not even amount to ₱25,000,000.00. UMC’s GIS and Financial
Reports further revealed that it had insufficient capital, which meant UMC could not afford the
alleged ₱50,000,000.00 worth of stocks in trade.

In its Reply10 dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy.
UMC claimed that it did not make any false declaration because the invoices were genuine and the
Statement of Inventory was for internal revenue purposes only, not for its insurance claim.

During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMC’s
disbursing officer. Ebora testified that UMC’s stocks in trade, at the time of the fire, consisted of: (1)
raw materials for its Christmas lights; (2) Christmas lights already assembled; and (3) Christmas
lights purchased from local suppliers. These stocks in trade were delivered from August 1995 to May
1996. She stated that Straight Cargo Commercial Forwarders delivered the imported materials to the
warehouse, evidenced by delivery receipts. However, for the year 1996, UMC had no importations
and only bought from its local suppliers. Ebora identified the suppliers as Fiber Technology
Corporation from which UMC bought stocks worth ₱1,800,000.00 on 20 May 1996; Fuze Industries
Manufacturer Philippines from which UMC bought stocks worth ₱19,500,000.00 from 20 January
1996 to 23 February 1996; and Tomco Commercial Press from which UMC bought several
Christmas boxes. Ebora testified that all these deliveries were not yet paid. Ebora also presented
UMC’s Balance Sheet, Income Statement and Statement of Cash Flow. Per her testimony, UMC’s
purchases amounted to ₱608,986.00 in 1994; ₱827,670.00 in 1995; and ₱20,000,000.00 in 1996.
Ebora also claimed that UMC had sales only from its fruits business but no sales from its Christmas
lights for the year 1995.

The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers
to assemble and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third
witness, Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez, stated that UMC
opened letters of credit with MBTC for the year 1995 only. The fourth witness presented was Ernesto
Luna (Luna), the delivery checker of Straight Commercial Cargo Forwarders. Luna affirmed the
delivery of UMC’s goods to its warehouse on 13 August 1995, 6 September 1995, 8 September
1995, 24 October 1995, 27 October 1995, 9 November 1995, and 19 December 1995. Lastly, CRM’s
adjuster Dominador Victorio testified that he inspected UMC’s warehouse and prepared preliminary
reports in this connection.

On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a
Securities and Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and
NBI Investigator Arnold Lazaro (Lazaro). Caguindagan testified that he inspected the burned
warehouse on 5 July 1996, took pictures of it and referred the claim to an independent adjuster. The
SEC representative’s testimony was dispensed with, since the parties stipulated on the existence of
certain documents, to wit: (1) UMC’s GIS for 1994-1997; (2) UMC’s Financial Report as of 31
December 1996; (3) SEC Certificate that UMC did not file GIS or Financial Reports for certain years;
and (4) UMC’s Statement of Inventory as of 31 December 1995 filed with the BIR.

Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMC’s claim. On
19 November 1996, they concluded that arson was committed based from their interview
with barangay officials and the pictures showing that blackened surfaces were present at different
parts of the warehouse. On cross-examination, Lazaro admitted that they did not conduct a forensic
investigation of the warehouse, nor did they file a case for arson.

For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of UCPB
General Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner. When
asked to bring documents related to the insurance of Perfect Investment Company, Inc., Batallones
brought the papers of Perpetual Investment, Inc.

The Ruling of the Regional Trial Court

On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering defendant to pay
plaintiff:

a) the sum of ₱43,930,230.00 as indemnity with interest thereon at 6% per annum from
November 2003 until fully paid;

b) the sum of ₱100,000.00 for exemplary damages;

c) the sum of ₱100,000.00 for attorney’s fees; and

 d) the costs of suit.

Defendant’s counterclaim is denied for lack of merit.

SO ORDERED.11

The RTC found no dispute as to UMC’s fire insurance contract with CBIC. Thus, the RTC ruled for
UMC’s entitlement to the insurance proceeds, as follows:

Fraud is never presumed but must be proved by clear and convincing evidence. (see Alonso v. Cebu
Country Club, 417 SCRA 115 [2003]) Defendant failed to establish by clear and convincing evidence
that the documents submitted to the SEC and BIR were true. It is common business practice for
corporations to have 2 sets of reports/statements for tax purposes. The stipulated documents of
plaintiff (Exhs. 2 – 8) may not have been accurate.

The conflicting findings of defendant’s adjuster, CRM Adjustment [with stress] and that made by Atty.
Cabrera & Mr. Lazaro for Central Surety shall be resolved in favor of the former. Definitely the
former’s finding is more credible as it was made soon after the fire while that of the latter was done 4
months later. Certainly it would be a different situation as the site was no longer the same after the
clearing up operation which is normal after a fire incident. The Christmas lights and parts could have
been swept away. Hence the finding of the latter appears to be speculative to benefit the reinsurer
and which defendant wants to adopt to avoid liability.

The CRM Adjustment report found no arson and confirmed substantial stocks in the burned
warehouse (Exhs. QQQ) [underscoring supplied]. This is bolstered by the BFP certification that there
was no proof of arson and the fire was accidental (Exhs. PPP). The certification by a government
agency like BFP is presumed to be a regular performance of official duty. "Absent convincing
evidence to the contrary, the presumption of regularity in the performance of official functions has to
be upheld." (People vs. Lapira, 255 SCRA 85) The report of UCPB General Insurance’s adjuster
also found no arson so that the burned warehouse owner PIC was indemnified.12

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the
Decision reads:

WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and the Decision
of the Regional Trial Court, of the National Judicial Capital Region, Branch 3 of the City of Manila
dated June 16, 2005 in Civil Case No. 98-87370 is REVERSED and SET ASIDE. The plaintiff-
appellee’s claim upon its insurance policy is deemed avoided.

SO ORDERED.13

The CA ruled that UMC’s claim under the Insurance Policy is void. The CA found that the fire was
intentional in origin, considering the array of evidence submitted by CBIC, particularly the pictures
taken and the reports of Cabrera and Lazaro, as opposed to UMC’s failure to explain the details of
the alleged fire accident. In addition, it found that UMC’s claim was overvalued through fraudulent
transactions. The CA ruled:
We have meticulously gone over the entirety of the evidence submitted by the parties and have
come up with a conclusion that the claim of the plaintiff-appellee was indeed overvalued by
transactions which were fraudulently concocted so that the full coverage of the insurance policy will
have to be fully awarded to the plaintiff-appellee.

First, We turn to the backdrop of the plaintiff-appellee’s case, thus, [o]n September 6, 1995 its
stocks-in-trade were insured for Fifteen Million Pesos and on May 7, 1996 the same was increased
to 50 Million Pesos. Two months thereafter, a fire gutted the plaintiff-appellee’s warehouse.

Second, We consider the reported purchases of the plaintiff-appellee as shown in its financial report
dated December 31, 1996 vis-à-vis the testimony of Ms. Ebora thus:

1994 - ₱608,986.00

1995 - ₱827,670.00

1996 - ₱20,000,000.00 (more or less) which were purchased for a period of one month.

Third, We shall also direct our attention to the alleged true and complete purchases of the plaintiff-
appellee as well as the value of all stock-in-trade it had at the time that the fire occurred. Thus:

Amount Dates
Exhibit Source
(pesos) Covered

Exhs. "P"-"DD", Fuze Industries 19,550,400.00 January 20,

inclusive Manufacturer Phils. 1996
January 31,
1996
February 12,
1996
February 20,
1996
February 23,
1996
Exhs. "EE"-"HH", Tomco Commercial 1,712,000.00 December 19,
inclusive Press 1995
January 24,
1996
February 21,
1996
November 24,
1995

Exhs. "II"-"QQ", Precious Belen 2,720,400.00 January 13,

inclusive Trading 1996
January 19,
1996
January 26,
1996
February 3,
1996
 February 13,
1996
February 20,
1996
February 27,
1996

Exhs. "RR"- Wisdom Manpower 361,966.00 April 3, 1996

"EEE", inclusive Services April 12, 1996
April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996

Exhs. "GGG"- Costs of Letters of 15,159,144.71 May 29, 1995

"NNN", inclusive Credit for June 15, 1995
imported raw July 5, 1995
materials September 4,
1995
October 2,
1995
October 27,
1995
January 8,
1996
March 19,
1996

Exhs. "GGG-11" SCCFI statements 384,794.38 June 15, 1995

- "GGG-24", of account June 28, 1995
"HHH-12", "HHH-22", August 1, 1995
"III-11", "III-14", September 4,
"JJJ-13", "KKK-11", 1995
"LLL-5" September 8,
1995
September 11,
1995
October 30,
199[5]
November 10,
1995
December 21,
1995
TOTAL 44,315,024.31
Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly looking through
the pieces of evidence that it adduced during the trial. The latter alleged that fraud is present in the
case at bar as shown by the discrepancy of the alleged purchases from that of the reported
purchases made by plaintiff-appellee. It had also averred that fraud is present when upon verification
of the address of Fuze Industries, its office is nowhere to be found. Also, the defendant-appellant
expressed grave doubts as to the purchases of the plaintiff-appellee sometime in 1996 when such
purchases escalated to a high 19.5 Million Pesos without any contract to back it up.14

On 7 July 2011, UMC filed a Motion for Reconsideration,15 which the CA denied in its Resolution
dated 8 September 2011. Hence, this petition.

The Issues

UMC seeks a reversal and raises the following issues for resolution:

I.

WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW,

APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON
AND FRAUD IN THE ABSENCE OF "MATERIALLY CONVINCING EVIDENCE."

II.

WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW,

APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER
BREACHED ITS WARRANTY.16

The Ruling of the Court

At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court to
review are questions of fact. However, UMC argues that where the findings of the CA are in conflict
with those of the trial court, a review of the facts may be made. On this procedural issue, we find
UMC’s claim meritorious.

A petition for review under Rule 45 of the Rules of Court specifically provides that only questions of
law may be raised. The findings of fact of the CA are final and conclusive and this Court will not
review them on appeal,17 subject to exceptions as when the findings of the appellate court conflict
with the findings of the trial court.18 Clearly, the present case falls under the exception. Since UMC
properly raised the conflicting findings of the lower courts, it is proper for this Court to resolve such
contradiction.

Having settled the procedural issue, we proceed to the primordial issue which boils down to whether
UMC is entitled to claim from CBIC the full coverage of its fire insurance policy.

UMC contends that because it had already established a prima facie case against CBIC which failed
to prove its defense, UMC is entitled to claim the full coverage under the Insurance Policy. On the
other hand, CBIC contends that because arson and fraud attended the claim, UMC is not entitled to
recover under Condition No. 15 of the Insurance Policy.

Burden of proof is the duty of any party to present evidence to establish his claim or defense by the
amount of evidence required by law,19 which is preponderance of evidence in civil cases.20 The party,
whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of proof to
obtain a favorable judgment.21 Particularly, in insurance cases, once an insured makes out a prima
facie case in its favor, the burden of evidence shifts to the insurer to controvert the insured’s prima
facie case.22 In the present case, UMC established a prima facie case against CBIC. CBIC does not
dispute that UMC’s stocks in trade were insured against fire under the Insurance Policy and that the
warehouse, where UMC’s stocks in trade were stored, was gutted by fire on 3 July 1996, within the
duration of the fire insurance. However, since CBIC alleged an excepted risk, then the burden of
evidence shifted to CBIC to prove such exception. 1âwphi1

An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the
burden of establishing that the loss comes within the purview of the exception or limitation.23 If loss is
proved apparently within a contract of insurance, the burden is upon the insurer to establish that the
loss arose from a cause of loss which is excepted or for which it is not liable, or from a cause which
limits its liability.24 In the present case, CBIC failed to discharge its primordial burden of establishing
that the damage or loss was caused by arson, a limitation in the policy.

In prosecutions for arson, proof of the crime charged is complete where the evidence establishes:
(1) the corpus delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants as
the one responsible for the crime.25 Corpus delicti means the substance of the crime, the fact that a
crime has actually been committed.26 This is satisfied by proof of the bare occurrence of the fire and
of its having been intentionally caused.27

In the present case, CBIC’s evidence did not prove that the fire was intentionally caused by the
insured. First, the findings of CBIC’s witnesses, Cabrera and Lazaro, were based on an investigation
conducted more than four months after the fire. The testimonies of Cabrera and Lazaro, as to the
boxes doused with kerosene as told to them by barangay officials, are hearsay because
the barangay officials were not presented in court. Cabrera and Lazaro even admitted that they did
not conduct a forensic investigation of the warehouse nor did they file a case for arson.28 Second, the
Sworn Statement of Formal Claim submitted by UMC, through CRM, states that the cause of the fire
was "faulty electrical wiring/accidental in nature." CBIC is bound by this evidence because in its
Answer, it admitted that it designated CRM to evaluate UMC’s loss. Third, the Certification by the
Bureau of Fire Protection states that the fire was accidental in origin. This Certification enjoys the
presumption of regularity, which CBIC failed to rebut.

Contrary to UMC’s allegation, CBIC’s failure to prove arson does not mean that it also failed to prove
fraud. Qua Chee Gan v. Law Union29 does not apply in the present case. In Qua Chee Gan,30 the
Court dismissed the allegation of fraud based on the dismissal of the arson case against the insured,
because the evidence was identical in both cases, thus:

While the acquittal of the insured in the arson case is not res judicata on the present civil action, the
insurer’s evidence, to judge from the decision in the criminal case, is practically identical in both
cases and must lead to the same result, since the proof to establish the defense of connivance at
the fire in order to defraud the insurer "cannot be materially less convincing than that required in
order to convict the insured of the crime of arson" (Bachrach vs. British American Assurance Co., 17
Phil. 536). 31

In the present case, arson and fraud are two separate grounds based on two different sets of
evidence, either of which can void the insurance claim of UMC. The absence of one does not
necessarily result in the absence of the

other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be
forfeited, if the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, to wit:

15. If the claim be in any respect fraudulent, or if any false declaration be made or used in support
thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his behalf
to obtain any benefit under this Policy; or if the loss or damage be occasioned by the willful act, or
with the connivance of the Insured, all the benefits under this Policy shall be forfeited.

In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,32 the Court held that where a fire insurance
policy provides that "if the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone
acting on his behalf to obtain any benefit under this Policy," and the evidence is conclusive that the
proof of claim which the insured submitted was false and fraudulent both as to the kind, quality and
amount of the goods and their value destroyed by the fire, such a proof of claim is a bar against the
insured from recovering on the policy even for the amount of his actual loss.

In the present case, as proof of its loss of stocks in trade amounting to ₱50,000,000.00, UMC
submitted its Sworn Statement of Formal Claim together with the following documents: (1) letters of
credit and invoices for raw materials, Christmas lights and cartons purchased; (2) charges for
assembling the Christmas lights; and (3) delivery receipts of the raw materials. However, the
charges for assembling the Christmas lights and delivery receipts could not support its insurance
claim. The Insurance Policy provides that CBIC agreed to insure UMC’s stocks in trade. UMC
defined stock in trade as tangible personal property kept for sale or traffic.33 Applying UMC’s
definition, only the letters of credit and invoices for raw materials, Christmas lights and cartons may
be considered.

The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade
purchased for 1996 amounts to ₱20,000,000.00 which were purchased in one month. Thus, UMC
needs to prove purchases amounting to ₱30,000,000.00 worth of stocks in trade for 1995 and prior
years. However, in the Statement of Inventory it submitted to the BIR, which is considered an entry
in official records,34 UMC stated that it had no stocks in trade as of 31 December 1995. In its defense,
UMC alleged that it did not include as stocks in trade the raw materials to be assembled as
Christmas lights, which it had on 31 December 1995. However, as proof of its loss, UMC submitted
invoices for raw materials, knowing that the insurance covers only stocks in trade.

Equally important, the invoices (Exhibits "P"-"DD") from Fuze Industries Manufacturer Phils. were
suspicious. The purchases, based on the invoices and without any supporting contract, amounted to
₱19,550,400.00 worth of Christmas lights from 20 January 1996 to 23 February 1996. The
uncontroverted testimony of Cabrera revealed that there was no Fuze Industries Manufacturer Phils.
located at "55 Mahinhin St., Teacher’s Village, Quezon City," the business address appearing in the
invoices and the records of the Department of Trade & Industry. Cabrera testified that:

A: Then we went personally to the address as I stated a while ago appearing in the record furnished
by the United Merchants Corporation to the adjuster, and the adjuster in turn now, gave us our basis
in conducting investigation, so we went to this place which according to the records, the address of
this company but there was no office of this company.

Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and discover the address
indicated by the United Merchants as the place of business of Fuze Industries Manufacturer, Phils.
was a residential place, what then did you do after determining that it was a residential place?
A: We went to the owner of the alleged company as appearing in the Department of Trade &
Industry record, and as appearing a certain Chinese name Mr. Huang, and the address as appearing
there is somewhere in Binondo. We went personally there together with the NBI Agent and I am with
them when the subpoena was served to them, but a male person approached us and according to
him, there was no Fuze Industries Manufacturer, Phils., company in that building sir.35

In Yu Ban Chuan v. Fieldmen’s Insurance, Co., Inc.,36 the Court ruled that the submission of false
invoices to the adjusters establishes a clear case of fraud and misrepresentation which voids the
insurer’s liability as per condition of the policy. Their falsity is the best evidence of the fraudulent
character of plaintiff’s claim.37 In Verendia v. Court of Appeals,38 where the insured presented a
fraudulent lease contract to support his claim for insurance benefits, the Court held that by its false
declaration, the insured forfeited all benefits under the policy provision similar to Condition No. 15 of
the Insurance Policy in this case.

Furthermore, UMC’s Income Statement indicated that the purchases or costs of sales are
₱827,670.00 for 1995 and ₱1,109,190.00 for 1996 or a total of ₱1,936,860.00.39 To corroborate this
fact, Ebora testified that:

Q: Based on your 1995 purchases, how much were the purchases made in 1995?

A: The purchases made by United Merchants Corporation for the last year 1995 is ₱827,670.[00] sir

Q: And how about in 1994?

A: In 1994, it’s ₱608,986.00 sir.

Q: These purchases were made for the entire year of 1995 and 1994 respectively, am I correct?

A: Yes sir, for the year 1994 and 1995.40 (Emphasis supplied)

In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed during
the 4 December 2002 hearing, it had ₱1,050,862.71 as total assets and ₱167,058.47 as total
liabilities.41

Thus, either amount in UMC’s Income Statement or Financial Reports is twenty-five times the claim
UMC seeks to enforce. The RTC itself recognized that UMC padded its claim when it only allowed
₱43,930,230.00 as insurance claim. UMC supported its claim of ₱50,000,000.00 with the
Certification from the Bureau of Fire Protection stating that "x x x a fire broke out at United
Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an
estimated damage of Fifty- Five Million Pesos (₱55,000,000.00) to the building and contents x x x."
However, this Certification only proved that the estimated damage of ₱55,000,000.00 is shared by
both the building and the stocks in trade.

It has long been settled that a false and material statement made with an intent to deceive or
defraud voids an insurance policy.42 In Yu Cua v. South British Insurance Co.,43 the claim was fourteen
times bigger than the real loss; in Go Lu v. Yorkshire Insurance Co,44 eight times; and in Tuason v.
North China Insurance Co.,45 six times. In the present case, the claim is twenty five times the actual
claim proved.

The most liberal human judgment cannot attribute such difference to mere innocent error in
estimating or counting but to a deliberate intent to demand from insurance companies payment for
indemnity of goods not existing at the time of the fire.46 This constitutes the so-called "fraudulent
claim" which, by express agreement between the insurers and the insured, is a ground for the
exemption of insurers from civil liability.47

In its Reply, UMC admitted the discrepancies when it stated that "discrepancies in its statements
were not covered by the warranty such that any discrepancy in the declaration in other instruments
or documents as to matters that may have some relation to the insurance coverage voids the
policy."48

On UMC’s allegation that it did not breach any warranty, it may be argued that the discrepancies do
not, by themselves, amount to a breach of warranty. However, the Insurance Code provides that "a
policy may declare that a violation of specified provisions thereof shall avoid it."49 Thus, in fire
insurance policies, which contain provisions such as Condition No. 15 of the Insurance Policy, a
fraudulent discrepancy between the actual loss and that claimed in the proof of loss voids the
insurance policy. Mere filing of such a claim will exonerate the insurer.50

Considering that all the circumstances point to the inevitable conclusion that UMC padded its claim
and was guilty of fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited
whatever benefits it may be entitled under the Insurance Policy, including its insurance claim.

While it is a cardinal principle of insurance law that a contract of insurance is to be construed

liberally in favor of the insured and strictly against the insurer company,51 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.52 If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense. Courts are not permitted to make contracts for
the parties; the function and duty of the courts is simply to enforce and carry out the contracts
actually made.53

WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8
September 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 85777.

SO ORDERED.
G.R. No. 173773 November 28, 2012

PARAMOUNT INSURANCE CORPORATION, Petitioner,

vs.
SPOUSES YVES and MARIA TERESA REMONDEULAZ, Respondents.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
reversal and setting aside of the Decision1 dated April 12, 2005 and Resolution2 dated July 20, 2006
of the Court of Appeals in CA-G.R. CV No. 61490.

The undisputed facts follow.

On May 26, 1994, respondents insured with petitioner their 1994

Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for one year.

During the effectivity of said insurance, respondents’ car was unlawfully taken. Hence, they
immediately reported the theft to the Traffic Management Command of the PNP who made them
accomplish a complaint sheet. In said complaint sheet, respondents alleged that a certain Ricardo
Sales (Sales) took possession of the subject vehicle to add accessories and improvements thereon,
however, Sales failed to return the subject vehicle within the agreed three-day period.

As a result, respondents notified petitioner to claim for the reimbursement of their lost vehicle.
However, petitioner refused to pay.

Accordingly, respondents lodged a complaint for a sum of money against petitioner before the
Regional Trial Court of Makati City (trial court) praying for the payment of the insured value of their
car plus damages on April 21, 1995.

After presentation of respondents’ evidence, petitioner filed a Demurrer to Evidence.

Acting thereon, the trial court dismissed the complaint filed by respondents. The full text of said
Order3 reads:

Before the Court is an action filed by the plaintiffs, spouses Yves and Maria Teresa Remondeulaz
against the defendant, Paramount Insurance Corporation, to recover from the defendant the insured
value of the motor vehicle.

It appears that on 26 May 1994, plaintiffs insured their vehicle, a 1994 Toyota Corolla XL with
chassis number EE-100-9524505, with defendant under Private Car Policy No. PC-37396 for Own
Damage, Theft, Third-Party Property Damage and Third-Party Personal Injury, for the period
commencing 26 May 1994 to 26 May 1995. Then on 1 December 1994, defendants received from
plaintiff a demand letter asking for the payment of the proceeds in the amount of PhP409,000.00
under their policy. They alleged the loss of the vehicle and claimed the same to be covered by the
policy’s provision on "Theft." Defendant disagreed and refused to pay.
It appears, however, that plaintiff had successfully prosecuted and had been awarded the amount
claimed in this action, in another action (Civil Case No. 95-1524 entitled Sps. Yves and Maria Teresa
Remondeulaz versus Standard Insurance Company, Inc.), which involved the loss of the same
vehicle under the same circumstances although under a different policy and insurance company.
This, considered with the principle that an insured may not recover more than its interest in any
property subject of an insurance, leads the court to dismiss this action.

SO ORDERED.4

Not in conformity with the trial court’s Order, respondents interposed an appeal to the Court of
Appeals (appellate court).

In its Decision dated April 12, 2005, the appellate court reversed and set aside the Order issued by
the trial court, to wit:

Indeed, the trial court erred when it dismissed the action on the ground of double recovery since it is
clear that the subject car is different from the one insured with another insurance company, the
Standard Insurance Company. In this case, defendant-appellee herein petitioner denied the
reimbursement for the lost vehicle on the ground that the said loss could not fall within the concept of
the "theft clause" under the insurance policy x x x

xxxx

WHEREFORE, the October 7, 1998 Order of the Regional Trial Court of Makati City, Branch 63, is
hereby REVERSED and SET ASIDE

x x x.

SO ORDERED.5

Petitioner, thereafter, filed a motion for reconsideration against said Decision, but the same was
denied by the appellate court in a Resolution dated July 20, 2006.

Consequently, petitioner filed a petition for review on certiorari before this Court praying that the
appellate court’s Decision and Resolution be reversed and set aside.

In its petition, petitioner raises this issue for our resolution:

Whether or not the Court of Appeals decided the case a quo in a way not in accord with law and/or
applicable jurisprudence when it promulgated in favor of the respondents Remondeulaz, making
Paramount liable for the alleged "theft" of respondents’ vehicle.6

Essentially, the issue is whether or not petitioner is liable under the insurance policy for the loss of
respondents’ vehicle.

Petitioner argues that the loss of respondents’ vehicle is not a peril covered by the policy. It
maintains that it is not liable for the loss, since the car cannot be classified as stolen as respondents
entrusted the possession thereof to another person.

We do not agree.
Adverse to petitioner’s claim, respondents’ policy clearly undertook to indemnify the insured against
loss of or damage to the scheduled vehicle when caused by theft, to wit:

SECTION III – LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: –

(a) by accidental collision or overturning, or collision or overturning consequent upon

mechanical breakdown or consequent upon wear and tear;

(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;

(c) by malicious act;

(d) whilst in transit (including the process of loading and unloading) incidental to such transit
by road, rail, inland waterway, lift or elevator.7

Apropos, we now resolve the issue of whether the loss of respondents’ vehicle falls within the
concept of the "theft clause" under the insurance policy.

In People v. Bustinera,8 this Court had the occasion to interpret the "theft clause" of an insurance
policy. In this case, the Court explained that when one takes the motor vehicle of another without the
latter’s consent even if the motor vehicle is later returned, there is theft – there being intent to gain
as the use of the thing unlawfully taken constitutes gain.

Also, in Malayan Insurance Co., Inc. v. Court of Appeals,9 this Court held that the taking of a vehicle
by another person without the permission or authority from the owner thereof is sufficient to place it
within the ambit of the word theft as contemplated in the policy, and is therefore, compensable.

Moreover, the case of Santos v. People10 is worthy of note. Similarly in Santos, the owner of a car
entrusted his vehicle to therein petitioner Lauro Santos who owns a repair shop for carburetor repair
and repainting. However, when the owner tried to retrieve her car, she was not able to do so since
Santos had abandoned his shop. In the said case, the crime that was actually committed was
Qualified Theft. However, the Court held that because of the fact that it was not alleged in the
information that the object of the crime was a car, which is a qualifying circumstance, the Court
found that Santos was only guilty of the crime of Theft and merely considered the qualifying
circumstance as an aggravating circumstance in the imposition of the appropriate penalty. The Court
therein clarified the distinction between the crime of Estafa and Theft, to wit:

x x x The principal distinction between the two crimes is that in theft the thing is taken while in estafa
the accused receives the property and converts it to his own use or benefit. However, there may be
theft even if the accused has possession of the property. If he was entrusted only with the material
or physical (natural) or de facto possession of the thing, his misappropriation of the same constitutes
theft, but if he has the juridical possession of the thing his conversion of the same constitutes
embezzlement or estafa.11

In the instant case, Sales did not have juridical possession over the vehicle. Hence, it is apparent
that the taking of repondents’ vehicle by Sales is without any consent or authority from the former.
Records would show that respondents entrusted possession of their vehicle only to the extent that
Sales will introduce repairs and improvements thereon, and not to permanently deprive them of
possession thereof. Since, Theft can also be committed through misappropriation, the fact that Sales
failed to return the subject vehicle to respondents constitutes Qualified Theft. Hence, since
repondents’ car is undeniably covered by a Comprehensive Motor Vehicle Insurance Policy that
allows for recovery in cases of theft, petitioner is liable under the policy for the loss of respondents’
vehicle under the "theft clause."

All told, Sales’ act of depriving respondents of their motor vehicle at, or soon after the transfer of
physical possession of the movable property, constitutes theft under the insurance policy, which is
compensable.12

WHEREFORE, the instant petition is DENIED. The Decision dated April 12, 2005 and Resolution
dated July 20, 2006 of the Court of Appeals are hereby AFFIRMED in toto.

SO ORDERED.
G.R. No. 184300 July 11, 2012

MALAYAN INSURANCE CO., INC., Petitioner,

vs.
PHILIPPINES FIRST INSURANCE CO., INC. and REPUTABLE FORWARDER SERVICES,
INC., Respondents.

DECISION

REYES, J.:

Before the Court is a petitiOn for review on certiorari filed by petitioner Malayan Insurance Co., lnc.
(Malayan) assailing the Decision1 dated February 29, 2008 and Resolution2 dated August 28, 2008 of
the Court of Appeals (CA) in CA-G.R. CV No. 71204 which affirmed with modification the decision of
the Regional Trial Court (RTC), Branch 38 of Manila.

Antecedent Facts

Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable Forwarder Services, Inc.
(Reputable) had been annually executing a contract of carriage, whereby the latter undertook to
transport and deliver the former’s products to its customers, dealers or salesmen.3

On November 18, 1993, Wyeth procured Marine Policy No. MAR 13797 (Marine Policy) from
respondent Philippines First Insurance Co., Inc. (Philippines First) to secure its interest over its own
products. Philippines First thereby insured Wyeth’s nutritional, pharmaceutical and other products
usual or incidental to the insured’s business while the same were being transported or shipped in the
Philippines. The policy covers all risks of direct physical loss or damage from any external cause, if
by land, and provides a limit of P6,000,000.00 per any one land vehicle.

On December 1, 1993, Wyeth executed its annual contract of carriage with Reputable. It turned out,
however, that the contract was not signed by Wyeth’s representative/s.4 Nevertheless, it was
admittedly signed by Reputable’s representatives, the terms thereof faithfully observed by the parties
and, as previously stated, the same contract of carriage had been annually executed by the parties
every year since 1989.5

Under the contract, Reputable undertook to answer for "all risks with respect to the goods and shall
be liable to the COMPANY (Wyeth), for the loss, destruction, or damage of the goods/products due
to any and all causes whatsoever, including theft, robbery, flood, storm, earthquakes, lightning, and
other force majeure while the goods/products are in transit and until actual delivery to the customers,
salesmen, and dealers of the COMPANY".6

The contract also required Reputable to secure an insurance policy on Wyeth’s goods.7 Thus, on
February 11, 1994, Reputable signed a Special Risk Insurance Policy (SR Policy) with petitioner
Malayan for the amount of P1,000,000.00.

On October 6, 1994, during the effectivity of the Marine Policy and SR Policy, Reputable received
from Wyeth 1,000 boxes of Promil infant formula worth P2,357,582.70 to be delivered by Reputable
to Mercury Drug Corporation in Libis, Quezon City. Unfortunately, on the same date, the truck
carrying Wyeth’s products was hijacked by about 10 armed men. They threatened to kill the truck
driver and two of his helpers should they refuse to turn over the truck and its contents to the said
highway robbers. The hijacked truck was recovered two weeks later without its cargo.
On March 8, 1995, Philippines First, after due investigation and adjustment, and pursuant to the
Marine Policy, paid Wyeth P2,133,257.00 as indemnity. Philippines First then demanded
reimbursement from Reputable, having been subrogated to the rights of Wyeth by virtue of the
payment. The latter, however, ignored the demand.

Consequently, Philippines First instituted an action for sum of money against Reputable on August
12, 1996.8 In its complaint, Philippines First stated that Reputable is a "private corporation engaged
in the business of a common carrier." In its answer,9 Reputable claimed that it is a private carrier. It
also claimed that it cannot be made liable under the contract of carriage with Wyeth since the
contract was not signed by Wyeth’s representative and that the cause of the loss was force majeure,
i.e., the hijacking incident.

Subsequently, Reputable impleaded Malayan as third-party defendant in an effort to collect the

amount covered in the SR Policy. According to Reputable, "it was validly insured with Malayan for
P1,000,000.00 with respect to the lost products under the latter’s Insurance Policy No. SR-0001-
02577 effective February 1, 1994 to February 1, 1995" and that the SR Policy covered the risk of
robbery or hijacking.10

Disclaiming any liability, Malayan argued, among others, that under Section 5 of the SR Policy, the
insurance does not cover any loss or damage to property which at the time of the happening of such
loss or damage is insured by any marine policy and that the SR Policy expressly excluded third-party
liability.

After trial, the RTC rendered its Decision11 finding Reputable liable to Philippines First for the amount
of indemnity it paid to Wyeth, among others. In turn, Malayan was found by the RTC to be liable to
Reputable to the extent of the policy coverage. The dispositive portion of the RTC decision provides:

WHEREFORE, on the main Complaint, judgment is hereby rendered finding [Reputable] liable for
the loss of the Wyeth products and orders it to pay Philippines First the following:

1. the amount of P2,133,257.00 representing the amount paid by Philippines First to Wyeth
for the loss of the products in question;

2. the amount of P15,650.00 representing the adjustment fees paid by Philippines First to
hired adjusters/surveyors;

3. the amount of P50,000.00 as attorney’s fees; and

4. the costs of suit.

On the third-party Complaint, judgment is hereby rendered finding

Malayan liable to indemnify [Reputable] the following:

1. the amount of P1,000,000.00 representing the proceeds of the insurance policy;

2. the amount of P50,000.00 as attorney’s fees; and

3. the costs of suit.

SO ORDERED.12
Dissatisfied, both Reputable and Malayan filed their respective appeals from the RTC decision.

Reputable asserted that the RTC erred in holding that its contract of carriage with Wyeth was
binding despite Wyeth’s failure to sign the same. Reputable further contended that the provisions of
the contract are unreasonable, unjust, and contrary to law and public policy.

For its part, Malayan invoked Section 5 of its SR Policy, which provides:

Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does not cover any loss or
damage to property which at the time of the happening of such loss or damage is insured by or
would but for the existence of this policy, be insured by any Fire or Marine policy or policies except in
respect of any excess beyond the amount which would have been payable under the Fire or Marine
policy or policies had this insurance not been effected.

Malayan argued that inasmuch as there was already a marine policy issued by Philippines First
securing the same subject matter against loss and that since the monetary coverage/value of the
Marine Policy is more than enough to indemnify the hijacked cargo, Philippines First alone must bear
the loss.

Malayan sought the dismissal of the third-party complaint against it. In the alternative, it prayed that
it be held liable for no more than P468,766.70, its alleged pro-rata share of the loss based on the
amount covered by the policy, subject to the provision of Section 12 of the SR Policy, which states:

12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage happening to any property
hereby insured, there be any other subsisting insurance or insurances, whether effected by the
insured or by any other person or persons, covering the same property, the company shall not be
liable to pay or contribute more than its ratable proportion of such loss or damage.

On February 29, 2008, the CA rendered the assailed decision sustaining the ruling of the RTC, the
decretal portion of which reads:

WHEREFORE, in view of the foregoing, the assailed Decision dated 29 September 2000, as
modified in the Order dated 21 July 2001, is AFFIRMED with MODIFICATION in that the award of
attorney’s fees in favor of Reputable is DELETED.

SO ORDERED.13

The CA ruled, among others, that: (1) Reputable is estopped from assailing the validity of the
contract of carriage on the ground of lack of signature of Wyeth’s representative/s; (2) Reputable is
liable under the contract for the value of the goods even if the same was lost due to fortuitous event;
and (3) Section 12 of the SR Policy prevails over Section 5, it being the latter provision; however,
since the ratable proportion provision of Section 12 applies only in case of double insurance, which
is not present, then it should not be applied and Malayan should be held liable for the full amount of
the policy coverage, that is, P1,000,000.00.14

On March 14, 2008, Malayan moved for reconsideration of the assailed decision but it was denied by
the CA in its Resolution dated August 28, 2008.15

Hence, this petition.

Malayan insists that the CA failed to properly resolve the issue on the "statutory limitations on the
liability of common carriers" and the "difference between an ‘other insurance clause’ and an ‘over
insurance clause’."

Malayan also contends that the CA erred when it held that Reputable is a private carrier and should
be bound by the contractual stipulations in the contract of carriage. This argument is based on its
assertion that Philippines First judicially admitted in its complaint that Reputable is a common carrier
and as such, Reputable should not be held liable pursuant to Article 1745(6) of the Civil
Code.16 Necessarily, if Reputable is not liable for the loss, then there is no reason to hold Malayan
liable to Reputable.

Further, Malayan posits that there resulted in an impairment of contract when the CA failed to apply
the express provisions of Section 5 (referred to by Malayan as over insurance clause) and Section
12 (referred to by Malayan as other insurance clause) of its SR Policy as these provisions could
have been read together there being no actual conflict between them.

Reputable, meanwhile, contends that it is exempt from liability for acts committed by thieves/robbers
who act with grave or irresistible threat whether it is a common carrier or a private/special carrier. It,
however, maintains the correctness of the CA ruling that Malayan is liable to Philippines First for the
full amount of its policy coverage and not merely a ratable portion thereof under Section 12 of the
SR Policy.

Finally, Philippines First contends that the factual finding that Reputable is a private carrier should be
accorded the highest degree of respect and must be considered conclusive between the parties, and
that a review of such finding by the Court is not warranted under the circumstances. As to its alleged
judicial admission that Reputable is a common carrier, Philippines First proffered the declaration
made by Reputable that it is a private carrier. Said declaration was allegedly reiterated by Reputable
in its third party complaint, which in turn was duly admitted by Malayan in its answer to the said third-
party complaint. In addition, Reputable even presented evidence to prove that it is a private carrier.

As to the applicability of Sections 5 and 12 in the SR Policy, Philippines First reiterated the ruling of
the CA. Philippines First, however, prayed for a slight modification of the assailed decision, praying
that Reputable and Malayan be rendered solidarily liable to it in the amount of P998,000.00, which
represents the balance from the P1,000.000.00 coverage of the SR Policy after deducting P2,000.00
under Section 10 of the said SR Policy.17

Issues

The liability of Malayan under the SR Policy hinges on the following issues for resolution:

1) Whether Reputable is a private carrier;

2) Whether Reputable is strictly bound by the stipulations in its contract of carriage with
Wyeth, such that it should be liable for any risk of loss or damage, for any cause whatsoever,
including that due to theft or robbery and other force majeure;

3) Whether the RTC and CA erred in rendering "nugatory" Sections 5 and Section 12 of the
SR Policy; and

4) Whether Reputable should be held solidarily liable with Malayan for the amount of
P998,000.00 due to Philippines First.
 The Court’s Ruling

On the first issue – Reputable is a private carrier.

The Court agrees with the RTC and CA that Reputable is a private carrier. Well-entrenched in
jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the
appellate court, are accorded the highest degree of respect and considered conclusive between the
parties, save for certain exceptional and meritorious circumstances, none of which are present in this
case.18

Malayan relies on the alleged judicial admission of Philippines First in its complaint that Reputable is
a common carrier.19 Invoking Section 4, Rule 129 of the Rules on Evidence that "an admission verbal
or written, made by a party in the course of the proceeding in the same case, does not require
proof," it is Malayan’s position that the RTC and CA should have ruled that

Reputable is a common carrier. Consequently, pursuant to Article 1745(6) of the Civil Code, the
liability of Reputable for the loss of Wyeth’s goods should be dispensed with, or at least diminished.

It is true that judicial admissions, such as matters alleged in the pleadings do not require proof, and
need not be offered to be considered by the court. "The court, for the proper decision of the case,
may and should consider, without the introduction of evidence, the facts admitted by the
parties."20 The rule on judicial admission, however, also states that such allegation, statement, or
admission is conclusive as against the pleader,21 and that the facts alleged in the complaint are
deemed admissions of the plaintiff and binding upon him.22 In this case, the pleader or the plaintiff
who alleged that Reputable is a common carrier was Philippines First. It cannot, by any stretch of
imagination, be made conclusive as against Reputable whose nature of business is in question.

It should be stressed that Philippines First is not privy to the SR Policy between Wyeth and
Reputable; rather, it is a mere subrogee to the right of Wyeth to collect from Reputable under the
terms of the contract of carriage. Philippines First is not in any position to make any admission,
much more a definitive pronouncement, as to the nature of Reputable’s business and there appears
no other connection between Philippines First and Reputable which suggests mutual familiarity
between them.

Moreover, records show that the alleged judicial admission of Philippines First was essentially
disputed by Reputable when it stated in paragraphs 2, 4, and 11 of its answer that it is actually a
private or special carrier.23 In addition, Reputable stated in paragraph 2 of its third-party complaint
that it is "a private carrier engaged in the carriage of goods."24 Such allegation was, in turn, admitted
by Malayan in paragraph 2 of its answer to the third-party complaint.25 There is also nothing in the
records which show that Philippines First persistently maintained its stance that Reputable is a
common carrier or that it even contested or proved otherwise Reputable’s position that it is a private
or special carrier.

Hence, in the face of Reputable’s contrary admission as to the nature of its own business, what was
stated by Philippines First in its complaint is reduced to nothing more than mere allegation, which
must be proved for it to be given any weight or value. The settled rule is that mere allegation is not
proof.26

More importantly, the finding of the RTC and CA that Reputable is a special or private carrier is
warranted by the evidence on record, primarily, the unrebutted testimony of Reputable’s Vice
President and General Manager, Mr. William Ang Lian Suan, who expressly stated in open court that
Reputable serves only one customer, Wyeth.27
Under Article 1732 of the Civil Code, common carriers are persons, corporations, firms, or
associations engaged in the business of carrying or transporting passenger or goods, or both by
land, water or air for compensation, offering their services to the public. On the other hand, a private
carrier is one wherein the carriage is generally undertaken by special agreement and it does not hold
itself out to carry goods for the general public.28 A common carrier becomes a private carrier when it
undertakes to carry a special cargo or chartered to a special person only.29 For all intents and
purposes, therefore, Reputable operated as a private/special carrier with regard to its contract of
carriage with Wyeth.

On the second issue – Reputable is bound by the terms of the contract of carriage.

The extent of a private carrier’s obligation is dictated by the stipulations of a contract it entered into,
provided its stipulations, clauses, terms and conditions are not contrary to law, morals, good
customs, public order, or public policy. "The Civil Code provisions on common carriers should not be
applied where the carrier is not acting as such but as a private carrier. Public policy governing
common carriers has no force where the public at large is not involved."30

Thus, being a private carrier, the extent of Reputable’s liability is fully governed by the stipulations of
the contract of carriage, one of which is that it shall be liable to Wyeth for the loss of the
goods/products due to any and all causes whatsoever, including theft, robbery and other force
majeure while the goods/products are in transit and until actual delivery to Wyeth’s customers,
salesmen and dealers.31

On the third issue – other insurance vis-à-vis over insurance.

Malayan refers to Section 5 of its SR Policy as an "over insurance clause" and to Section 12 as a
"modified ‘other insurance’ clause".32 In rendering inapplicable said provisions in the SR Policy, the
CA ruled in this wise:

Since Sec. 5 calls for Malayan’s complete absolution in case the other insurance would be sufficient
to cover the entire amount of the loss, it is in direct conflict with Sec. 12 which provides only for a
pro-rated contribution between the two insurers. Being the later provision, and pursuant to the rules
on interpretation of contracts, Sec. 12 should therefore prevail.

xxxx

x x x The intention of both Reputable and Malayan should be given effect as against the wordings of
Sec. 12 of their contract, as it was intended by the parties to operate only in case of double
insurance, or where the benefits of the policies of both plaintiff-appellee and Malayan should pertain
to Reputable alone. But since the court a quo correctly ruled that there is no double insurance in this
case inasmuch as Reputable was not privy thereto, and therefore did not stand to benefit from the
policy issued by plaintiff-appellee in favor of Wyeth, then Malayan’s stand should be rejected.

To rule that Sec. 12 operates even in the absence of double insurance would work injustice to
Reputable which, despite paying premiums for a P1,000,000.00 insurance coverage, would not be
entitled to recover said amount for the simple reason that the same property is covered by another
insurance policy, a policy to which it was not a party to and much less, from which it did not stand to
benefit. Plainly, this unfair situation could not have been the intention of both Reputable and
Malayan in signing the insurance contract in question.33

In questioning said ruling, Malayan posits that Sections 5 and 12 are separate provisions applicable
under distinct circumstances. Malayan argues that "it will not be completely absolved under Section
5 of its policy if it were the assured itself who obtained additional insurance coverage on the same
property and the loss incurred by Wyeth’s cargo was more than that insured by Philippines First’s
marine policy. On the other hand, Section 12 will not completely absolve Malayan if additional
insurance coverage on the same cargo were obtained by someone besides Reputable, in which
case Malayan’s SR policy will contribute or share ratable proportion of a covered cargo loss."34

Malayan’s position cannot be countenanced.

Section 5 is actually the other insurance clause (also called "additional insurance" and "double
insurance"), one akin to Condition No. 3 in issue in Geagonia v. CA,35 which validity was upheld by
the Court as a warranty that no other insurance exists. The Court ruled that Condition No. 336 is a
condition which is not proscribed by law as its incorporation in the policy is allowed by Section 75 of
the Insurance Code. It was also the Court’s finding that unlike the other insurance clauses, Condition
No. 3 does not absolutely declare void any violation thereof but 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."

In this case, similar to Condition No. 3 in Geagonia, Section 5 does not provide for the nullity of the
SR Policy but simply limits the liability of Malayan only up to the excess of the amount that was not
covered by the other insurance policy. In interpreting the "other insurance clause" in Geagonia, the
Court ruled that the prohibition applies only in case of double insurance. The Court ruled that in
order to constitute a violation of the clause, the other insurance must be upon same subject matter,
the same interest therein, and the same risk. Thus, even though the multiple insurance policies
involved were all issued in the name of the same assured, over the same subject matter and
covering the same risk, it was ruled that there was no violation of the "other insurance clause" since
there was no double insurance.

Section 12 of the SR Policy, on the other hand, is the over insurance clause. More particularly, it
covers the situation where there is over insurance due to double insurance. In such case, Section 15
provides that Malayan shall "not be liable to pay or contribute more than its ratable proportion of
such loss or damage." This is in accord with the principle of contribution provided under Section
94(e) of the Insurance Code,37 which states that "where the insured is over insured by double
insurance, each insurer is bound, as between himself and the other insurers, to contribute ratably to
the loss in proportion to the amount for which he is liable under his contract."

Clearly, both Sections 5 and 12 presuppose the existence of a double insurance. The pivotal
question that now arises is whether there is double insurance in this case such that either Section 5
or Section 12 of the SR Policy may be applied.

By the express provision of Section 93 of the Insurance Code, double insurance exists where the
same person is insured by several insurers separately in respect to the same subject and interest.
The requisites in order for double insurance to arise are as follows:38

1. The person insured is the same;

2. Two or more insurers insuring separately;

3. There is identity of subject matter;

4. There is identity of interest insured; and

 5. There is identity of the risk or peril insured against.

In the present case, while it is true that the Marine Policy and the SR Policy were both issued over
the same subject matter, i.e. goods belonging to Wyeth, and both covered the same peril insured
against, it is, however, beyond cavil that the said policies were issued to two different persons or
entities. It is undisputed that Wyeth is the recognized insured of Philippines First under its Marine
Policy, while Reputable is the recognized insured of Malayan under the SR Policy. The fact that
Reputable procured Malayan’s SR Policy over the goods of Wyeth pursuant merely to the stipulated
requirement under its contract of carriage with the latter does not make Reputable a mere agent of
Wyeth in obtaining the said SR Policy.

The interest of Wyeth over the property subject matter of both insurance contracts is also different
and distinct from that of Reputable’s. The policy issued by Philippines First was in consideration of
the legal and/or equitable interest of Wyeth over its own goods. On the other hand, what was issued
by Malayan to Reputable was over the latter’s insurable interest over the safety of the goods, which
may become the basis of the latter’s liability in case of loss or damage to the property and falls within
the contemplation of Section 15 of the Insurance Code.39

Therefore, even though the two concerned insurance policies were issued over the same goods and
cover the same risk, there arises no double insurance since they were issued to two different
persons/entities having distinct insurable interests. Necessarily, over insurance by double insurance
cannot likewise exist. Hence, as correctly ruled by the RTC and CA, neither Section 5 nor Section 12
of the SR Policy can be applied.

Apart from the foregoing, the Court is also wont to strictly construe the controversial provisions of the
SR Policy against Malayan. This is in keeping with the rule that:
1âw phi1

"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."40

Moreover, the CA correctly ruled that:

To rule that Sec. 12 operates even in the absence of double insurance would work injustice to
Reputable which, despite paying premiums for a P1,000,000.00 insurance coverage, would not be
entitled to recover said amount for the simple reason that the same property is covered by another
insurance policy, a policy to which it was not a party to and much less, from which it did not stand to
benefit. x x x41

On the fourth issue – Reputable is not solidarily liable with Malayan.

There is solidary liability only when the obligation expressly so states, when the law so provides or
when the nature of the obligation so requires.

In Heirs of George Y. Poe v. Malayan lnsurance Company., lnc.,42 the Court ruled that:
Where the insurance contract provides for indemnity against liability to third persons, the liability of
the insurer is direct and such third persons can directly sue the insurer. The direct liability of the
insurer under indemnity contracts against third party[- ]liability does not mean, however, that the
insurer can be held solidarily liable with the insured and/or the other parties found at fault, since they
are being held liable under different obligations. The liability of the insured carrier or vehicle owner is
based on tort, in accordance with the provisions of the Civil Code; while that of the insurer arises
from contract, particularly, the insurance policy:43 (Citation omitted and emphasis supplied)

Suffice it to say that Malayan's and Reputable's respective liabilities arose from different obligations-
Malayan's is based on the SR Policy while Reputable's is based on the contract of carriage.

All told, the Court finds no reversible error in the judgment sought to be reviewed.

WHEREFORE, premises considered, the petition is DENIED. The Decision dated February 29, 2008
and Resolution dated August 28, 2008 of the Court of Appeals in CA-G.R. CV No. 71204 are hereby
AFFIRMED.

Cost against petitioner Malayan Insurance Co., Inc.

SO ORDERED.
G.R. No. 175773 June 17, 2013

MITSUBISHI MOTORS PHILIPPINES SALARIED EMPLOYEES UNION (MMPSEU), Petitioner,

vs.
MITSUBISHI MOTORS PHILIPPINES CORPORATION, Respondent.

DECISION

DEL CASTILLO, J.:

The Collective Bargaining Agreement (CBA) of the parties in this case provides that the company
shoulder the hospitalization expenses of the dependents of covered employees subject to certain
limitations and restrictions. Accordingly, covered employees pay part of the hospitalization insurance
premium through monthly salary deduction while the company, upon hospitalization of the covered
employees' dependents, shall pay the hospitalization expenses incurred for the same. The conflict
arose when a portion of the hospitalization expenses of the covered employees' dependents were
paid/shouldered by the dependent's own health insurance. While the company refused to pay the
portion of the hospital expenses already shouldered by the dependents' own health insurance, the
union insists that the covered employees are entitled to the whole and undiminished amount of said
hospital expenses.

By this Petition for Review on Certiorari,1 petitioner Mitsubishi Motors Philippines Salaried
Employees Union (MMPSEU) assails the March 31, 2006 Decision2 and December 5, 2006
Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 75630, which reversed and set aside
the Voluntary Arbitrator’s December 3, 2002 Decision4 and declared respondent Mitsubishi Motors
Philippines Corporation (MMPC) to be under no legal obligation to pay its covered employees’
dependents’ hospitalization expenses which were already shouldered by other health insurance
companies.

Factual Antecedents

The parties’ CBA5 covering the period August 1, 1996 to July 31, 1999 provides for the
hospitalization insurance benefits for the covered dependents, thus:

SECTION 4. DEPENDENTS’ GROUP HOSPITALIZATION INSURANCE – The COMPANY shall

obtain group hospitalization insurance coverage or assume under a self-insurance basis
hospitalization for the dependents of regular employees up to a maximum amount of forty thousand
pesos (₱40,000.00) per confinement subject to the following:

a. The room and board must not exceed three hundred pesos (₱300.00) per day up to a
maximum of thirty-one (31) days. Similarly, Doctor’s Call fees must not exceed three
hundred pesos (₱300.00) per day for a maximum of thirty-one (31) days. Any excess of this
amount shall be borne by the employee.

b. Confinement must be in a hospital designated by the COMPANY. For this purpose, the
COMPANY shall designate hospitals in different convenient places to be availed of by the
dependents of employees. In cases of emergency where the dependent is confined without
the recommendation of the company doctor or in a hospital not designated by the
COMPANY, the COMPANY shall look into the circumstances of such confinement and
arrange for the payment of the amount to the extent of the hospitalization benefit.
 c. The limitations and restrictions listed in Annex "B" must be observed.

d. Payment shall be direct to the hospital and doctor and must be covered by actual billings.

Each employee shall pay one hundred pesos (₱100.00) per month through salary deduction as his
share in the payment of the insurance premium for the above coverage with the balance of the
premium to be paid by the COMPANY. If the COMPANY is self-insured the one hundred pesos
(₱100.00) per employee monthly contribution shall be given to the COMPANY which shall shoulder
the expenses subject to the above level of benefits and subject to the same limitations and
restrictions provided for in Annex "B" hereof.

The hospitalization expenses must be covered by actual hospital and doctor’s bills and any amount
in excess of the above mentioned level of benefits will be for the account of the employee.

For purposes of this provision, eligible dependents are the covered employees’ natural parents, legal
spouse and legitimate or legally adopted or step children who are unmarried, unemployed who have
not attained twenty-one (21) years of age and wholly dependent upon the employee for support.

This provision applies only in cases of actual confinement in the hospital for at least six (6) hours.

Maternity cases are not covered by this section but will be under the next succeeding section on
maternity benefits.6

When the CBA expired on July 31, 1999, the parties executed another CBA7 effective August 1,
1999 to July 31, 2002 incorporating the same provisions on dependents’ hospitalization insurance
benefits but in the increased amount of ₱50,000.00. The room and board expenses, as well as the
doctor’s call fees, were also increased to ₱375.00.

On separate occasions, three members of MMPSEU, namely, Ernesto Calida (Calida), Hermie Juan
Oabel (Oabel) and Jocelyn Martin (Martin), filed claims for reimbursement of hospitalization
expenses of their dependents.

MMPC paid only a portion of their hospitalization insurance claims, not the full amount. In the case of
Calida, his wife, Lanie, was confined at Sto. Tomas University Hospital from September 4 to 9, 1998
due to Thyroidectomy. The medical expenses incurred totalled ₱29,967.10. Of this amount,
₱9,000.00 representing professional fees was paid by MEDICard Philippines, Inc. (MEDICard) which
provides health maintenance to Lanie.8 MMPC only paid ₱12,148.63.9 It did not pay the ₱9,000.00
already paid by MEDICard and the ₱6,278.47 not covered by official receipts. It refused to give to
Calida the difference between the amount of medical expenses of ₱27,427.1010 which he claimed to
be entitled to under the CBA and the ₱12,148.63 which MMPC directly paid to the hospital.

In the case of Martin, his father, Jose, was admitted at The Medical City from March 26 to 27, 2000
due to Acid Peptic Disease and incurred medical expenses amounting to ₱9,101.30.14 MEDICard
paid ₱8,496.00.15 Consequently, MMPC only paid ₱288.40,16 after deducting from the total medical
expenses the amount paid by MEDICard and the ₱316.90 discount given by the hospital.

Claiming that under the CBA, they are entitled to hospital benefits amounting to ₱27,427.10,
₱6,769.35 and ₱8,123.80, respectively, which should not be reduced by the amounts paid by
MEDICard and by Prosper, Calida, Oabel and Martin asked for reimbursement from MMPC.
However, MMPC denied the claims contending that double insurance would result if the said
employees would receive from the company the full amount of hospitalization expenses despite
having already received payment of portions thereof from other health insurance providers.

This prompted the MMPSEU President to write the MMPC President17 demanding full payment of the
hospitalization benefits. Alleging discrimination against MMPSEU union members, she pointed out
that full reimbursement was given in a similar claim filed by Luisito Cruz (Cruz), a member of the
Hourly Union. In a letter-reply,18 MMPC, through its Vice-President for Industrial Relations Division,
clarified that the claims of the said MMPSEU members have already been paid on the basis of
official receipts submitted. It also denied the charge of discrimination and explained that the case of
Cruz involved an entirely different matter since it concerned the admissibility of certified true copies
of documents for reimbursement purposes, which case had been settled through voluntary
arbitration.

On August 28, 2000, MMPSEU referred the dispute to the National Conciliation and Mediation Board
and requested for preventive mediation.19

Proceedings before the Voluntary Arbitrator

On October 3, 2000, the case was referred to Voluntary Arbitrator Rolando Capocyan for resolution
of the issue involving the interpretation of the subject CBA provision.20

MMPSEU alleged that there is nothing in the CBA which prohibits an employee from obtaining other
insurance or declares that medical expenses can be reimbursed only upon presentation of original
official receipts. It stressed that the hospitalization benefits should be computed based on the
formula indicated in the CBA without deducting the benefits derived from other insurance providers.
Besides, if reduction is permitted, MMPC would be unjustly benefited from the monthly premium
contributed by the employees through salary deduction. MMPSEU added that its members had
legitimate claims under the CBA and that any doubt as to any of its provisions should be resolved in
favor of its members. Moreover, any ambiguity should be resolved in favor of labor.21

On the other hand, MMPC argued that the reimbursement of the entire amounts being claimed by
the covered employees, including those already paid by other insurance companies, would
constitute double indemnity or double insurance, which is circumscribed under the Insurance Code.
Moreover, a contract of insurance is a contract of indemnity and the employees cannot be allowed to
profit from their dependents’ loss.22

Meanwhile, the parties separately sought for a legal opinion from the Insurance Commission relative
to the issue at hand. In its letter23 to the Insurance Commission, MMPC requested for confirmation of
its position that the covered employees cannot claim insurance benefits for a loss that had already
been covered or paid by another insurance company. However, the Office of the Insurance
Commission opted not to render an opinion on the matter as the same may become the subject of a
formal complaint before it.24 On the other hand, when queried by MMPSEU,25 the Insurance
Commission, through Atty. Richard David C. Funk II (Atty. Funk) of the Claims Adjudication Division,
rendered an opinion contained in a letter,26 viz:

Ms. Cecilia L. ParasPresident

Mitsubishi Motors Phils.

[Salaried] Employees Union

Ortigas Avenue Extension,
Cainta, Rizal
Madam:

We acknowledge receipt of your letter which, to our impression, basically poses the question of
whether or not recovery of medical expenses from a Health Maintenance Organization bars recovery
of the same reimbursable amount of medical expenses under a contract of health or medical
insurance.

We wish to opine that in cases of claims for reimbursement of medical expenses where there are
two contracts providing benefits to that effect, recovery may be had on both simultaneously. In the
absence of an Other Insurance provision in these coverages, the courts have uniformly held that an
insured is entitled to receive the insurance benefits without regard to the amount of total benefits
provided by other insurance. (INSURANCE LAW, A Guide to Fundamental Principles, Legal
Doctrines, and Commercial Practices; Robert E. Keeton, Alau I. Widiss, p. 261). The result is
consistent with the public policy underlying the collateral source rule – that is, x x x the courts have
usually concluded that the liability of a health or accident insurer is not reduced by other possible
sources of indemnification or compensation. (ibid).

Very truly yours,

RICHARD DAVID C. FUNK II

Officer-in-Charge
Claims Adjudication Division

(SGD.)
Attorney IV

On December 3, 2002, the Voluntary Arbitrator rendered a Decision27 finding MMPC liable to pay or
reimburse the amount of hospitalization expenses already paid by other health insurance
companies. The Voluntary Arbitrator held that the employees may demand simultaneous payment
from both the CBA and their dependents’ separate health insurance without resulting to double
insurance, since separate premiums were paid for each contract. He also noted that the CBA does
not prohibit reimbursement in case there are other health insurers.

Proceedings before the Court of Appeals

MMPC filed a Petition for Review with Prayer for the Issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction28 before the CA. It claimed that the Voluntary Arbitrator
committed grave abuse of discretion in not finding that recovery under both insurance policies
constitutes double insurance as both had the same subject matter, interest insured and risk or peril
insured against; in relying solely on the unauthorized legal opinion of Atty. Funk; and in not finding
that the employees will be benefited twice for the same loss. In its Comment,29 MMPSEU countered
that MMPC will unjustly enrich itself and profit from the monthly premiums paid if full reimbursement
is not made.

On March 31, 2006, the CA found merit in MMPC’s Petition. It ruled that despite the lack of a
provision which bars recovery in case of payment by other insurers, the wordings of the subject
provision of the CBA showed that the parties intended to make MMPC liable only for expenses
actually incurred by an employee’s qualified dependent. In particular, the provision stipulates that
payment should be made directly to the hospital and that the claim should be supported by actual
hospital and doctor’s bills. These mean that the employees shall only be paid amounts not covered
by other health insurance and is more in keeping with the principle of indemnity in insurance
contracts. Besides, a contrary interpretation would "allow unscrupulous employees to unduly profit
from the x x x benefits" and shall "open the floodgates to questionable claims x x x."30

The dispositive portion of the CA Decision31 reads:

WHEREFORE, the instant petition is GRANTED. The decision of the voluntary arbitrator dated
December 3, 2002 is REVERSED and SET ASIDE and judgment is rendered declaring that under
Art. XI, Sec. 4 of the Collective Bargaining Agreement between petitioner and respondent effective
August 1, 1999 to July 31, 2002, the former’s obligation to reimburse the Union members for the
hospitalization expenses incurred by their dependents is exclusive of those paid by the Union
members to the hospital.

SO ORDERED.32

In its Motion for Reconsideration,33 MMPSEU pointed out that the alleged oppression that may be
committed by abusive employees is a mere possibility whereas the resulting losses to the
employees are real. MMPSEU cited Samsel v. Allstate Insurance Co.,34 wherein the Arizona
Supreme Court explicitly ruled that an insured may recover from separate health insurance
providers, regardless of whether one of them has already paid the medical expenses incurred. On
the other hand, MMPC argued in its Comment35 that the cited foreign case involves a different set of
facts.

The CA, in its Resolution36 dated December 5, 2006, denied MMPSEU’s motion.

Hence, this Petition.

Issues

MMPSEU presented the following grounds in support of its Petition:

A.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT REVERSED THE DECISION DATED
03 [DECEMBER] 2002 OF THE VOLUNTARY ARBITRATOR BELOW WHEN THE SAME WAS
SUPPORTED BY SUBSTANTIAL EVIDENCE, INCLUDING THE OPINION OF THE INSURANCE
COMMISSION THAT RECOVERY FROM BOTH THE CBA AND SEPARATE HEALTH CARDS IS
NOT PROHIBITED IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE CBA.

B.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN OVERTURNING THE

DECISION OF THE VOLUNTARY ARBITRATOR WITHOUT EVEN GIVING ANY LEGAL OR
JUSTIFIABLE BASIS FOR SUCH REVERSAL.

C.

THE COURT OF APPEALS COMMITTED GRAVE ERROR IN REFUSING TO CONSIDER OR

EVEN MENTION ANYTHING ABOUT THE AMERICAN AUTHORITIES CITED IN THE RECORDS
THAT DO NOT PROHIBIT, BUT IN FACT ALLOW, RECOVERY FROM TWO SEPARATE HEALTH
PLANS.
D.

THE COURT OF APPEALS GRAVELY ERRED IN GIVING MORE IMPORTANCE TO A POSSIBLE,

HENCE MERELY SPECULATIVE, ABUSE BY EMPLOYEES OF THE BENEFITS IF DOUBLE
RECOVERY WERE ALLOWED INSTEAD OF THE REAL INJURY TO THE EMPLOYEES WHO
ARE PAYING FOR THE CBA HOSPITALIZATION BENEFITS THROUGH MONTHLY SALARY
DEDUCTIONS BUT WHO MAY NOT BE ABLE TO AVAIL OF THE SAME IF THEY OR THEIR
DEPENDENTS HAVE OTHER HEALTH INSURANCE.37

MMPSEU avers that the Decision of the Voluntary Arbitrator deserves utmost respect and finality
because it is supported by substantial evidence and is in accordance with the opinion rendered by
the Insurance Commission, an agency equipped with vast knowledge concerning insurance
contracts. It maintains that under the CBA, member-employees are entitled to full reimbursement of
medical expenses incurred by their dependents regardless of any amounts paid by the latter’s health
insurance provider. Otherwise, non-recovery will constitute unjust enrichment on the part of MMPC.
It avers that recovery from both the CBA and other insurance companies is allowed under their CBA
and not prohibited by law nor by jurisprudence.

Our Ruling

The Petition has no merit.

Atty. Funk erred in applying the

collateral source rule.

The Voluntary Arbitrator based his ruling on the opinion of Atty. Funk that the employees may
recover benefits from different insurance providers without regard to the amount of benefits paid by
each. According to him, this view is consistent with the theory of the collateral source rule.

As part of American personal injury law, the collateral source rule was originally applied to tort cases
wherein the defendant is prevented from benefiting from the plaintiff’s receipt of money from other
sources.38 Under this rule, if an injured person receives compensation for his injuries from a source
wholly independent of the tortfeasor, the payment should not be deducted from the damages which
he would otherwise collect from the tortfeasor.39 In a recent Decision40 by the Illinois Supreme Court,
the rule has been described as "an established exception to the general rule that damages in
negligence actions must be compensatory." The Court went on to explain that although the rule
appears to allow a double recovery, the collateral source will have a lien or subrogation right to
prevent such a double recovery.41 In Mitchell v. Haldar,42 the collateral source rule was rationalized
by the Supreme Court of Delaware:

The collateral source rule is ‘predicated on the theory that a tortfeasor has no interest in, and
therefore no right to benefit from monies received by the injured person from sources unconnected
with the defendant’. According to the collateral source rule, ‘a tortfeasor has no right to any
mitigation of damages because of payments or compensation received by the injured person from
an independent source.’ The rationale for the collateral source rule is based upon the quasi-punitive
nature of tort law liability. It has been explained as follows:

The collateral source rule is designed to strike a balance between two competing principles of tort
law: (1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a
defendant is liable for all damages that proximately result from his wrong. A plaintiff who receives a
double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part,
liability for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the
other, it favors the victim of the wrong rather than the wrongdoer.

Thus, the tortfeasor is required to bear the cost for the full value of his or her negligent conduct even
if it results in a windfall for the innocent plaintiff. (Citations omitted)

As seen, the collateral source rule applies in order to place the responsibility for losses on the party
causing them.43 Its application is justified so that "'the wrongdoer should not benefit from the
expenditures made by the injured party or take advantage of contracts or other relations that may
exist between the injured party and third persons."44 Thus, it finds no application to cases involving
no-fault insurances under which the insured is indemnified for losses by insurance companies,
regardless of who was at fault in the incident generating the losses.45 Here, it is clear that MMPC is a
no-fault insurer. Hence, it cannot be obliged to pay the hospitalization expenses of the dependents
of its employees which had already been paid by separate health insurance providers of said
dependents.

The Voluntary Arbitrator therefore erred in adopting Atty. Funk’s view that the covered employees
are entitled to full payment of the hospital expenses incurred by their dependents, including the
amounts already paid by other health insurance companies based on the theory of collateral source
rule.

The conditions set forth in the CBA provision indicate an intention to limit MMPC’s liability only to
actual expenses incurred by the employees’ dependents, that is, excluding the amounts paid by
dependents’ other health insurance providers.

The Voluntary Arbitrator ruled that the CBA has no express provision barring claims for
hospitalization expenses already paid by other insurers. Hence, the covered employees can recover
from both. The CA did not agree, saying that the conditions set forth in the CBA implied an intention
of the parties to limit MMPC’s liability only to the extent of the expenses actually incurred by their
dependents which excludes the amounts shouldered by other health insurance companies.

We agree with the CA. The condition that payment should be direct to the hospital and doctor
implies that MMPC is only liable to pay medical expenses actually shouldered by the employees’
dependents. It follows that MMPC’s liability is limited, that is, it does not include the amounts paid by
other health insurance providers. This condition is obviously intended to thwart not only fraudulent
claims but also double claims for the same loss of the dependents of covered employees.

It is well to note at this point that the CBA constitutes a contract between the parties and as such, it
should be strictly construed for the purpose of limiting the amount of the employer’s liability.46 The
terms of the subject provision are clear and provide no room for any other interpretation. As there is
no ambiguity, the terms must be taken in their plain, ordinary and popular sense.47 Consequently,
MMPSEU cannot rely on the rule that a contract of insurance is to be liberally construed in favor of
the insured. Neither can it rely on the theory that any doubt must be resolved in favor of labor.

Samsel v. Allstate Insurance Co. is not

on all fours with the case at bar.

MMPSEU cannot rely on Samsel v. Allstate Insurance Co. where the Supreme Court of Arizona
allowed the insured to enjoy medical benefits under an automobile policy insurance despite being
able to also recover from a separate health insurer. In that case, the Allstate automobile policy does
not contain any clause restricting medical payment coverage to expenses actually paid by the
insured nor does it specifically provide for reduction of medical payments benefits by a coordination
of benefits.48 However, in the case before us, the dependents’ group hospitalization insurance
provision in the CBA specifically contains a condition which limits MMPC’s liability only up to the
extent of the expenses that should be paid by the covered employee’s dependent to the hospital and
doctor. This is evident from the portion which states that "payment by MMPC shall be direct to the
hospital and doctor."49 In contrast, the Allstate automobile policy expressly gives Allstate the
authority to pay directly to the insured person or on the latter’s behalf all reasonable expenses
actually incurred. Therefore, reliance on Samsel is unavailing because the facts therein are different
and not decisive of the issues in the present case.

To allow reimbursement of amounts paid

under other insurance policies shall
constitute double recovery which is not
sanctioned by law.

MMPSEU insists that MMPC is also liable for the amounts covered under other insurance policies;
otherwise, MMPC will unjustly profit from the premiums the employees contribute through monthly
salary deductions.

This contention is unmeritorious.

To constitute unjust enrichment, it must be shown that a party was unjustly enriched in the sense
that the term unjustly could mean illegally or unlawfully.50 A claim for unjust enrichment fails when
the person who will benefit has a valid claim to such benefit.51

The CBA has provided for MMPC’s limited liability which extends only up to the amount to be paid to
the hospital and doctor by the employees’ dependents, excluding those paid by other insurers.
Consequently, the covered employees will not receive more than what is due them; neither is MMPC
under any obligation to give more than what is due under the CBA.

Moreover, since the subject CBA provision is an insurance contract, the rights and obligations of the
parties must be determined in accordance with the general principles of insurance law.52 Being in the
nature of a non-life insurance contract and essentially a contract of indemnity, the CBA provision
obligates MMPC to indemnify the covered employees’ medical expenses incurred by their
dependents but only up to the extent of the expenses actually incurred.53 This is consistent with the
principle of indemnity which proscribes the insured from recovering greater than the loss.54 Indeed,
to profit from a loss will lead to unjust enrichment and therefore should not be countenanced. As
aptly ruled by the CA, to grant the claims of MMPSEU will permit possible abuse by employees.

WHEREFORE, the Petition is DENIED. The Decision dated March 31, 2006 and Resolution dated
December 5, 2006 of the Court of Appeals in CA-G.R. SP No. 75630, are AFFIRMED.

SO ORDERED.
G.R. No. 175666 July 29, 2013

MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.

vs.
CRESENCIA P. ABAN, Respondent.

DECISION

DEL CASTILLO, J.:

The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from
or provide insurance coverage only to legitimate and bona fide clients, by requiring them to
thoroughly investigate those they insure within two years from effectivity of the policy and while the
insured is still alive. If they do not, they will be obligated to honor claims on the policies they issue,
regardless of fraud, concealment or misrepresentation. The law assumes that they will do just that
and not sit on their laurels, indiscriminately soliciting and accepting insurance business from any
Tom, Dick and Harry.

Assailed in this Petition for Review on Certiorari1 are the September 28, 2005 Decision2 of the Court
of Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution3 denying the
petitioner’s Motion for Reconsideration.4

Factual Antecedents

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her
niece,5 as her beneficiary.

Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of ₱100,000.00, in
Sotero’s favor on August 30, 1993, after the requisite medical examination and payment of the
insurance premium.6

On April 10, 1996,7 when the insurance policy had been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner
conducted an investigation into the claim,8 and came out with the following findings:

1. Sotero did not personally apply for insurance coverage, as she was illiterate;

2. Sotero was sickly since 1990;

3. Sotero did not have the financial capability to pay the insurance premiums on Insurance
Policy No. 747411;

4. Sotero did not sign the July 3, 1993 application for insurance;9 and

5. Respondent was the one who filed the insurance application, and x x x designated herself
as the beneficiary.10

For the above reasons, petitioner denied respondent’s claim on April 16, 1997 and refunded the
premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which
was docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial
Court. The main thesis of the Complaint was that the policy was obtained by fraud, concealment
and/or misrepresentation under the Insurance Code,12 which thus renders it voidable under Article
139013 of the Civil Code.

Respondent filed a Motion to Dismiss14 claiming that petitioner’s cause of action was barred by
prescription pursuant to Section 48 of the Insurance Code, which provides as follows:

Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have been in force
during the lifetime of the insured for a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of
the fraudulent concealment or misrepresentation of the insured or his agent.

During the proceedings on the Motion to Dismiss, petitioner’s investigator testified in court, stating
among others that the insurance underwriter who solicited the insurance is a cousin of respondent’s
husband, Dindo Aban,15 and that it was the respondent who paid the annual premiums on the
policy.16

Ruling of the Regional Trial Court

On December 9, 1997, the trial court issued an Order17 granting respondent’s Motion to Dismiss,
thus:

WHEREFORE, defendant CRESENCIA P. ABAN’s Motion to Dismiss is hereby granted. Civil Case
No. 97-867 is hereby dismissed.

SO ORDERED.18

In dismissing the case, the trial court found that Sotero, and not respondent, was the one who
procured the insurance; thus, Sotero could legally take out insurance on her own life and validly
designate – as she did – respondent as the beneficiary. It held further that under Section 48,
petitioner had only two years from the effectivity of the policy to question the same; since the policy
had been in force for more than two years, petitioner is now barred from contesting the same or
seeking a rescission or annulment thereof.

Petitioner moved for reconsideration, but in another Order19 dated October 20, 1998, the trial court
stood its ground.

Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner
questioned the dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying
Section 48 and declaring that prescription has set in. It contended that since it was respondent – and
not Sotero – who obtained the insurance, the policy issued was rendered void ab initio for want of
insurable interest.

Ruling of the Court of Appeals

On September 28, 2005, the CA issued the assailed Decision, which contained the following
decretal portion:

WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit.

SO ORDERED.20

The CA thus sustained the trial court. Applying Section 48 to petitioner’s case, the CA held that
petitioner may no longer prove that the subject policy was void ab initio or rescindible by reason of
fraudulent concealment or misrepresentation after the lapse of more than two years from its
issuance. It ratiocinated that petitioner was equipped with ample means to determine, within the first
two years of the policy, whether fraud, concealment or misrepresentation was present when the
insurance coverage was obtained. If it failed to do so within the statutory two-year period, then the
insured must be protected and allowed to claim upon the policy.

Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition.

Issues

Petitioner raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.

II

WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE

INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.

III

WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION FOR

RECONSIDERATION.23

Petitioner’s Arguments

In praying that the CA Decision be reversed and that the case be remanded to the trial court for the
conduct of further proceedings, petitioner argues in its Petition and Reply24 that Section 48 cannot
apply to a case where the beneficiary under the insurance contract posed as the insured and
obtained the policy under fraudulent circumstances. It adds that respondent, who was merely
Sotero’s niece, had no insurable interest in the life of her aunt.

Relying on the results of the investigation that it conducted after the claim for the insurance proceeds
was filed, petitioner insists that respondent’s claim was spurious, as it appeared that Sotero did not
actually apply for insurance coverage, was unlettered, sickly, and had no visible source of income to
pay for the insurance premiums; and that respondent was an impostor, posing as Sotero and
fraudulently obtaining insurance in the latter’s name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given rise to
rights and obligations; as such, the action for the declaration of its nullity or inexistence does not
prescribe.25

Respondent’s Arguments

Respondent, on the other hand, essentially argues in her Comment26 that the CA is correct in
applying Section 48. She adds that petitioner’s new allegation in its Petition that the policy is void ab
initio merits no attention, having failed to raise the same below, as it had claimed originally that the
policy was merely voidable.

On the issue of insurable interest, respondent echoes the CA’s pronouncement that since it was
Sotero who obtained the insurance, insurable interest was present. Under Section 10 of the
Insurance Code, Sotero had insurable interest in her own life, and could validly designate anyone as
her beneficiary. Respondent submits that the CA’s findings of fact leading to such conclusion should
be respected.

Our Ruling

The Court denies the Petition.

The Court will not depart from the trial and appellate courts’ finding that it was Sotero who obtained
the insurance for herself, designating respondent as her beneficiary. Both courts are in accord in this
respect, and the Court is loath to disturb this. While petitioner insists that its independent
investigation on the claim reveals that it was respondent, posing as Sotero, who obtained the
insurance, this claim is no longer feasible in the wake of the courts’ finding that it was Sotero who
obtained the insurance for herself. This finding of fact binds the Court.

With the above crucial finding of fact – that it was Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not totally disproved. Allegations of fraud, which are
predicated on respondent’s alleged posing as Sotero and forgery of her signature in the insurance
application, are at once belied by the trial and appellate courts’ finding that Sotero herself took out
the insurance for herself. "Fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract."27 In the absence of proof of such fraudulent intent, no right to
rescind arises.

Moreover, the results and conclusions arrived at during the investigation conducted unilaterally by
petitioner after the claim was filed may simply be dismissed as self-serving and may not form the
basis of a cause of action given the existence and application of Section 48, as will be discussed at
length below.

Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years – from the effectivity of a life insurance contract
and while the insured is alive – to discover or prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-
year period lapses, or when the insured dies within the period, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This is not
to say that insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately
solicit and obtain business must be penalized, for such recklessness and lack of discrimination
ultimately work to the detriment of bona fide takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives
insurers enough time to inquire whether the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at
insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious
enterprise. At the same time, legitimate policy holders are absolutely protected from unwarranted
denial of their claims or delay in the collection of insurance proceeds occasioned by allegations of
fraud, concealment, or misrepresentation by insurers, claims which may no longer be set up after the
two-year period expires as ordained under the law.

Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the insured
are given the assurance that any dishonest scheme to obtain life insurance would be exposed, and
attempts at unduly denying a claim would be struck down. Life insurance policies that pass the
statutory two-year period are essentially treated as legitimate and beyond question, and the
individuals who wield them are made secure by the thought that they will be paid promptly upon
claim. In this manner, Section 48 contributes to the stability of the insurance industry.

Section 48 prevents a situation where the insurer knowingly continues to accept annual premium
payments on life insurance, only to later on deny a claim on the policy on specious claims of
fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus,
instead of conducting at the first instance an investigation into the circumstances surrounding the
issuance of Insurance Policy No. 747411 which would have timely exposed the supposed flaws and
irregularities attending it as it now professes, petitioner appears to have turned a blind eye and opted
instead to continue collecting the premiums on the policy. For nearly three years, petitioner collected
the premiums and devoted the same to its own profit. It cannot now deny the claim when it is called
to account. Section 48 must be applied to it with full force and effect.

The Court therefore agrees fully with the appellate court’s pronouncement that –

the "incontestability clause" is a provision in law that after a policy of life insurance made payable on
the death of the insured shall have been in force during the lifetime of the insured for a period of two
(2) years from the date of its issue or of its last reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindible by reason of fraudulent concealment or misrepresentation of
the insured or his agent.

The purpose of the law is to give protection to the insured or his beneficiary by limiting the rescinding
of the contract of insurance on the ground of fraudulent concealment or misrepresentation to a
period of only two (2) years from the issuance of the policy or its last reinstatement.

The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums
as long as the insured is still alive, only to raise the issue of fraudulent concealment or
misrepresentation when the insured dies in order to defeat the right of the beneficiary to recover
under the policy.

At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given
the stability to recover under the policy when the insured dies. The provision also makes clear when
the two-year period should commence in case the policy should lapse and is reinstated, that is, from
the date of the last reinstatement.

After two years, the defenses of concealment or misrepresentation, no matter how patent or well-
founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance companies to
avoid liability.

The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are
concerned if the insurance has been in force for at least two years during the insured’s lifetime. The
phrase "during the lifetime" found in Section 48 simply means that the policy is no longer considered
in force after the insured has died. The key phrase in the second paragraph of Section 48 is "for a
period of two years."

As borne by the records, the policy was issued on August 30, 1993, the insured died on April 10,
1996, and the claim was denied on April 16, 1997. The insurance policy was thus in force for a
period of 3 years, 7 months, and 24 days. Considering that the insured died after the two-year
period, the plaintiff-appellant is, therefore, barred from proving that the policy is void ab initio by
reason of the insured’s fraudulent concealment or misrepresentation or want of insurable interest on
the part of the beneficiary, herein defendant-appellee.

Well-settled is the rule that it is the plaintiff-appellant’s burden to show that the factual findings of the
trial court are not based on substantial evidence or that its conclusions are contrary to applicable law
and jurisprudence. The plaintiff-appellant failed to discharge that burden.28

Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the
cousin of respondent’s husband, and thus insinuates that both connived to commit insurance fraud.
If this were truly the case, then petitioner would have discovered the scheme earlier if it had in
earnest conducted an investigation into the circumstances surrounding the Sotero policy. But
because it did not and it investigated the Sotero account only after a claim was filed thereon more
than two years later, naturally it was unable to detect the scheme. For its negligence and inaction,
the Court cannot sympathize with its plight. Instead, its case precisely provides the strong argument
for requiring insurers to diligently conduct investigations on each policy they issue within the two-
year period mandated under Section 48, and not after claims for insurance proceeds are filed with
them.

Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen
and the insurance policies they issue, then they should cease doing business. If they could not
properly screen their agents or salesmen before taking them in to market their products, or if they do
not thoroughly investigate the insurance contracts they enter into with their clients, then they have
only themselves to blame. Otherwise said, insurers cannot be allowed to collect premiums on
insurance policies, use these amounts collected and invest the same through the years, generating
profits and returns therefrom for their own benefit, and thereafter conveniently deny insurance claims
by questioning the authority or integrity of their own agents or the insurance policies they issued to
their premium-paying clients. This is exactly one of the schemes which Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping
that the inevitable may be put off for years – or even decades – by the pendency of these
unnecessary court cases. In the meantime, they benefit from collecting the interest and/or returns on
both the premiums previously paid by the insured and the insurance proceeds which should
otherwise go to their beneficiaries. The business of insurance is a highly regulated commercial
activity in the country,29 and is imbued with public interest.30 "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 former’s interest."31
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the
November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.

SO ORDERED.
G.R. No. 128833 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.

G.R. No. 128834 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, petitioners,

vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

G.R. No. 128866 April 20, 1998

MALAYAN INSURANCE INC., petitioners,

vs.
GOYU & SONS, INC. respondent.

MELO, J.:

The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of
respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in
connection with the mortgage contracts entered into by and between Rizal Commercial Banking
Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58,
plus 37% interest per annum commending July 27, 1992. RCBC was ordered to pay actual and
compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable
to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorney's fees. GOYU's
obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges,
and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues
involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due
evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao,
recommended GOYU's application for approval by RCBC's executive committee. A credit facility in
the amount of P30 million was initially granted. Upon GOYU's application and Uy's and Lao's
recommendation, RCBC's executive committee increased GOYU's credit facility to P50 million, then
to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two
chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to
insure the mortgaged property with an insurance company approved by RCBC, and subsequently, to
endorse and deliver the insurance polices to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester
Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies,
issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-
Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently,
GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the
claim on the ground that the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the insurance proceeds were also
claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU
filed a complaint for specific performance and damages which was docketed at the Regional Trial
Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now
subject of the present G.R. No. 128833 and 128866.

RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied
GOYU's claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of
Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian,
and Philippine Trust Company obtained their respective writs of attachments from various courts,
covering an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten
insurance policies be deposited with the said court minus the aforementioned P14,938,080.23.
Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of
the Manila RTC.

In the meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan").

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking
Corporation, ordering the latter as follows:

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

a. To pay the plaintiff its fire loss claims in the total

amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by was of interest for

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

1) P50,000,000.00 — from July 27,

1992 up to the time said amount was
deposited with this Court on January
7, 1994;
 2) P24,040,518.58 — from July 27,
1992 up to the time when the writs of
attachments were received by
defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory

damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the

following amounts:

1) P1,000,000.00 as exemplary
damages;

2) P1,000,000.00 as, and for,

attorney's fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to

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

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

(Record, pp. 478-479.)

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

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

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total

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

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING

CORPORATION;

a) To pay the plaintiff actual and compensatory

damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL

COMMERCIAL BANKING CORPORATION, UY CHUN BING AND
ELI D. LAO:

a) To pay the plaintiff jointly and severally the

following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorney's fees.

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons,

Inc. to pay its loan obligation with RCBC in the amount of
P68,785,069.04 as of April 27, 1992 without any interest, surcharges
and penalties.

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

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review
and consequent reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which
case, by virtue of the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A.
G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBC's right to
intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where
the subject insurance policies were attached in favor of Sebastian.

After a careful reviews of the material facts as found by the two courts below in relation to the
pertinent and applicable laws, we find merit in the submission of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which are
now submitted in the petitions before us. This Court, however, discerns one primary and central
issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies
taken by GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter
executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these
mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance
companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an
insurance company acceptable to RCBC. Bases on their stipulations in the mortgage contracts,
GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC.
Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject
insurance policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9-Malayan"; also Exh.
"51-RCBC" to "59-RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However,
because these endorsements do not bear the signature of any officer of GOYU, the trial court, as
well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the
same mortgaged property, such that each one of them may insure the same property for his own
sole benefit. There is no question that GOYU could insure the mortgaged property for its own
exclusive benefit. In the present case, although it appears that GOYU obtained the subject insurance
policies naming itself as the sole payee, the intentions of the parties as shown by their
contemporaneous acts, must be given due consideration in order to better serve the interest of
justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC.
The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific
insurance policy in favor of any particular beneficiary or payee other than the insured had not such
named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that
GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC,
and not just from any other insurance company. Alchester would not have found out that the subject
pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by
GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of
obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with
RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so
directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in
favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine
National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit:

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

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she
prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine
insurance policies in favor of RCBC. The original copies of each of these nine endorsement
documents were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth
copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has not denied having
received from Alchester the originals of these documents.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to
the stipulation in the mortgage contracts. We find such reliance to be justified under the
circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or
persons who prepared such endorsements. Over and above this, GOYU continued, in the meantime,
to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss
insure against, it was too late for GOYU to disown the endorsements for any imagined or contrived
lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually
an implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at
the very least estopped from assailing their operative effects. To permit GOYU to capitalize on its
non-confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities
of RCBC which believed in good faith that there was due endorsement pursuant to their mortgage
contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice.
Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in
this case, the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if
not for the actual endorsement of the policies, at least on the basis of the equitable principle of
estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds
of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit
it is made. The peculiarity of the circumstances obtaining in the instant case presents a justification
to take exception to the strict application of said provision, it having been sufficiently established that
it was the intention of the parties to designate RCBC as the party for whose benefit the insurance
policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered
into between RCBC and GOYU in consideration of and for securing GOYU's credit facilities from
RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor,
undertook to have the mortgaged property properly covered against any loss by an insurance
company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no
less than a sister company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency,

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

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

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

Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged
property is expressed in Article 2127 of the Civil Code which states:

Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with
the declarations, amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands of a third
person.

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

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None

Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

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

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54

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

Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43

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

Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

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

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76

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

Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00
 g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00

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

Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00

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

Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20

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

Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's
witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement
for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit "5-
Malayan", refers to a certain insurance policy number ACIA-F-07066, which is not among the
insurance policies involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
excessively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we
already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can
not be attached by GOYU's other creditors up to the extent of the GOYU's outstanding obligation in
RCBC's favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it
was made. In this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the
subject policies had been transferred to RCBC effective as of the time of the endorsement. These
policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the
present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and
academic in view of the results reached herein. Only the two other policies amounting to
P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's other creditors. To
the extent of GOYU's outstanding obligation with RCBC, all the rest of the other insurance policies
above-listed which were endorsed to RCBC, are, therefore, to be released from attachment,
garnishment, and levy by the other creditors of GOYU.

This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation
with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put
differently, the actual amount of GOYU's liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total
obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's
exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory
Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their execution is
highly questionable for not only are these dated after the fire, but also because the signatures of
either GOYU or any its representative are conspicuously absent. Accordingly, the Court of Appeals
speculated thusly:

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

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the
documents are spurious, for it is presumed that the ordinary course of business had been followed
(Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor
and not the holder of the negotiable instrument has the burden of proof of showing that he no longer
owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan
amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the
testimony of Go Song Hiap when he answered the queries of the trial court.

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you

received all the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-

RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I
asked which is correct, Your Honor.

COURT

Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC

is correct?
 A Yes, Your Honor.

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

Furthermore, aside from its judicial admission of having received all the proceeds of the 29
promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC that is
obligation be fixed at P116,301,992.60 as shown in its letter date March 9, 1993, which pertinently
reads:

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

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory
notes are dated after the fire. It failed to consider that said notes had for their origin transactions
consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes
No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-91, loans
already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The
proceeds of the loan represented by these promissory notes were admittedly received by GOYU.
There is ample factual and legal basis for giving GOYU's judicial admission of liability in the amount
of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the
other insurers of the mortgage property will, nonetheless, have to be applied as payment against
GOYU's obligation. But, contrary to the lower courts' findings, payments effected by GOYU prior to
January 21, 1993 should no longer be deducted. Such payments had obviously been duly
considered by GOYU, in its aforequoted letter date March 9, 1993, wherein it admitted that its past
due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21,
1993, to wit:

Total Obligation as admitted by GOYU

as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32
FDU 27,548,025.17
 ____________
Total 108,083,971.49 8,218,021.11 2

LESS:

1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81

2) Proceeds from
Equitable Insurance
Company 2,756,373.00

3) Payment from
foreign department
negotiation: 203,584.89
___________

9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90

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

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted
the payment of additional interest, penalties, and charges, in this manner:

Regarding defendant RCBC's commitment not to charge additional interest, penalties

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

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from
that of surcharges and penalties. What may justify a court in not allowing the creditor to charge
surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally
justify non-payment of interest. The charging of interest for loans forms a very essential and
fundamental element of the banking business, which may truly be considered to be at the very core
of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any
interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment of
interest as agreed upon in the respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down
by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply,
to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

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

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

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

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

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

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

(pp. 95-97).

There being written stipulations as to the rate of interest owing on each specific promissory note as
summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed
interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation
must be taken into account. We do not agree, however, that payment of any amount as surcharges
and penalties should altogether be deleted. Even assuming that RCBC, through its responsible
officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance
to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts' finding that
RCBC had thereby ipso facto effectively waived collection of any additional interests, surcharges,
and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional
interests, surcharges, and penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227
thereof provides:

Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be

equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should be stressed that the Court will not make any
sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans
extended by them are generally iniquitous and unconscionable. What may be iniquitous and
unconscionable in one case, may be totally just and equitable in another. This provision of law will
have to be applied to the established facts of any given case. Given the circumstance under which
GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and
unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the
light of GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit
"BB"), which RCBC refused, we find it more in keeping with justice and equity for RCBC not to
charge additional interest, surcharges, and penalties from that time onward.

Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for
denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies,
RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the fire.
Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith
Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally agreed, however, that an
insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly,
the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless
the evidence and circumstances show that such refusal was willful and without reasonable cause as
the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F
[2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307;
Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not
show that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the
determination of who is the actual beneficiary of the insurance policies, aggravated by the claim of
various creditors who wanted to partake of the insurance proceeds, not to mention the importance of
the endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO
in withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail
itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific
performance and the other for foreclosure. In doing so, said the appellate court, the second action is
deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of
Appeals was too accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R. CV No. 46247,
the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-
empted the resolution of said foreclosure case which is not before it. This is plain reversible error if
not grave abuse of discretion.

As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):

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

(pp. 701-702.)

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

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

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

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

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

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

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

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV
48376 is DISMISSED for being moot and academic in view of the results herein arrived at.
Respondent Sebastian's right as attaching creditor must yield to the preferential rights of Rizal
Commercial Banking Corporation over the Malayan insurance policies as first mortgagee.

SO ORDERED.