FIRST DIVISION

[G.R. No. 138941. October 8, 2001.] AMERICAN HOME ASSURANCE COMPANY, petitioner, vs. TA NTUCO ENTERPRISES, INC., respondent.

Redentor A. Salonga for petitioner. Gilbert D. Camaligan for private respondent.

SYNOPSIS Respondent insured against fire its two oil mills with the petitioner. The first oil mill was covered by Fire Insurance Policy No. 306-7432324-3 for the period March 1, 1991 to 1992 while the second oil mill, which commonly referred to as the new oil mill was covered by Policy No. 306-7432321-9 also for the same term. Unfortunately, on September 30, 1991, the new oil mill was destroyed by fire. Respondent claimed for the insurance proceeds from the petitioner but it was rejected by the latter for the reason that the burned oil mill was not covered by any insurance policy. According to petitioner, the oil mill gutted by the fire was not the one described by the specific boundaries in the contested policy. In further attempt to avoid liability, petitioner claimed that respondent forfeited the renewal policy for its failure to pay the full amount of the premium and breached the Fire Extinguishing Appliances Warranty. Hence, respondent filed a complaint for specific performance and damages with the Regional Trial Court of Lucena City. After trial, the court rendered judgment in favor of respondent. On appeal, the Court of Appeals upheld the decision of the RTC. Hence, this petition for review on certiorari. In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be. Notwithstanding,

therefore, the misdescription in the policy in this case, it is beyond dispute, that what the parties manifestly intended to insure was the new oil mill. If the parties really intended to protect the first oil mill, then there is no need to specify it as new. Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave uncovered its second one. The first oil mill is already covered under the policy issued by the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter ought to know that a second agreement over that same realty results in its overinsurance. On the supposed respondent's insufficient premium payment, the Court found that the said issue was never raised at the pre-trial proceedings. Nor did the petitioner present during the trial any witness to testify that respondent indeed failed to pay the full amount of the premium. As to the alleged breach of the warranty, the Court found that the respondent was able to comply with the warranty. Petition dismissed. SYLLABUS 1.COMMERCIAL LAW; INSURANCE; FIRE INSURANCE; MISDESCRIPTION IN THE POLICY OF THE BUILDING INSURED; INSURANCE POLICY COVERS ANY BUILDING WHICH THE PARTIES MANIFESTLY INTENDED TO INSURE, HOWEVER INACCURATE THE DESCRIPTION MAY BE; CASE AT BAR. In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be. Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties manifestly intended to insure was the new oil mill. This is obvious from the categorical statement embodied in the policy, extending its protection: "On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra, copra cake and copra mills whilst contained in the new oil mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED." If the parties really intended to protect the first oil mill, then there is no need to specify it as new. Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave uncovered its second one. As mentioned earlier, the first oil mill is already

covered under Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter ought to know that a second agreement over that same realty results in its overinsurance.
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2.ID.; ID.; ID.; ID.; CONTRACTUAL INTENTION; PURPOSE AND OBJECT OF THE CONTRACT WILL BE CONSIDERED BY THE COURT IN THE DETERMINATION THEREOF; DOUBT TO BE RESOLVED AGAINST INSURER; CASE AT BAR. Anent petitioner's argument that the respondent is barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, we find that the same proceeds from a wrong assumption. Evidence on record reveals that respondent's operating manager, Mr. Edison Tantuco, notified Mr. Borja (the petitioner's agent with whom respondent negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that the use of the adjective new will distinguish the insured property. The assuranceconvinced respondent that, despite the impreciseness in the specification of the boundaries, the insurance will cover the new oil mill. We again stress that the object of the court in construing a contract is to ascertain the intent of the parties to the contract and to enforce the agreement which the parties have entered into. In determining what the parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining the intent of the parties to the contract, the courts will consider the purpose and object of the contract. 3.ID.; ID.; ID.; PREMIUM; ISSUE AS TO INADEQUATE PAYMENT THEREOF WAS NEVER RAISED BY PETITIONER IN THE PRE-TRIAL PROCEEDING. It is true that the asseverations petitioner made in paragraph 24 of its Answer ostensibly spoke of the policy's condition for payment of the renewal premium on time and respondent's non-compliance with it. Yet, it did not contain any specific and definite allegation that respondent did not pay the premium, or that it did not pay the full amount, or that it did not pay the amount on time. Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the supposed inadequate payment was never raised. Most significant to point, petitioner fatally neglected to present, during the whole course of the trial, any witness to testify that respondent indeed failed to pay the full amount of the premium. The thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of proving this fact. Though it briefly touched on the alleged deficiency, such was made in the course of discussing a discount or rebate, which the agent apparently gave the

respondent. Certainly, the whole tenor of Mr. Borja's testimony, both during direct and cross examinations, implicitly assumed a valid and subsisting insurance policy. It must be remembered that he was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building. 4.ID.; ID.; ID.; FIRE EXTINGUISHING APPLIANCES WARRANTY; NOT VIOLATED BY RESPONDENT IN CASE AT BAR; WARRANTY; NOT ONLY STRICTLY CONSTRUED AGAINST THE INSURER BUT SHOULD BE REASONABLY INTERPRETED. Petitioner contends that respondent violated the express terms of the Fire Extinguishing Appliances Warranty. Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified therein. The breach occurred when the respondent failed to install internal fire hydrants inside the burned building as warranted. This fact was admitted by the oil mill's expeller operator, Gerardo Zarsuela. Again, the argument lacks merit. We agree with the appellate court's conclusion that the aforementioned warranty did not require respondent to provide for all the fire extinguishing appliances enumerated therein. Additionally, we find that neither did it require that the appliances are restricted to those mentioned in the warranty. In other words, what the warranty mandates is that respondent should maintain in efficient working condition within the premises of the insured property, fire fighting equipments such as, but not limited to, those identified in the list, which will serve as the oil mill's first line of defense in case any part of it bursts into flame. To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the following devices: numerous portable fire extinguishers, two fire hoses, fire hydrant, and an emergency fire engine. All of these equipments were in efficient working order when the fire occurred. It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by themselves be reasonably interpreted. That reasonableness is to be ascertained in light of the factual conditions prevailing in each case. Here, we find that there is no more need for an internal hydrant considering that inside the burned building were: (1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a connection to one of the external hydrants.

5.REMEDIAL LAW; EVIDENCE; ADMISSIBILITY; PAROLE EVIDENCE RULE; EXCEPTIONS; APPLICABLE TO CASE AT BAR; EVIDENCE ALIUNDE; MAY BE ADMITTED TO EXPLAIN THE IMPERFECTION IN THE DESCRIPTION OF THE PROPERTY INSURED AND TO CLARIFY THE INTENT OF THE PARTIES. The imperfection in the description of the insured oil mill's boundaries can be

attributed to a misunderstanding between the petitioner's general agent, Mr. Alfredo Borja, and its policy issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the policy to be issued for the new one. As testified to by Mr. Borja: . . . . It is thus clear that the source of the discrepancy happened during the preparation of the written contract. These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto. Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus, while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on the policy concededly pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting evidence aliunde, which will explain the imperfection and clarify the intent of the parties. DECISION PUNO, J :
p

Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals in CA-G.R. CV No. 52221 promulgated on January 14, 1999, which affirmed in toto the Decision of the Regional Trial Court, Branch 53, Lucena City in Civil Case No. 92-51 dated October 16, 1995. Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns two oil mills. Both are located at factory compound at Iyam, Lucena City. It appears that respondent commenced its business operations with only one oil mill. In 1988, it started operating its second oil mill. The latter came to be commonly referred to as the new oil mill. The two oil mills were separately covered by fire insurance policies issued by petitioner American Home Assurance Co., Philippine Branch. 1 The first oil mill was insured for three million pesos (P3,000,000.00) under Policy No. 3067432324-3 for the period March 1, 1991 to 1992. 2 The new oil mill was insured for six million pesos (P6,000,000.00) under Policy No. 306-7432321-9 for the same term. 3 Official receipts indicating payment for the full amount of the premium were issued by the petitioner's agent. 4

A fire that broke out in the early morning of September 30, 1991 gutted and consumed the new oil mill. Respondent immediately notified the petitioner of the incident. The latter then sent its appraisers who inspected the burned premises and the properties destroyed. Thereafter, in a letter dated October 15, 1991, petitioner rejected respondent's claim for the insurance proceeds on the ground that no policy was issued by it covering the burned oil mill. It stated that the description of the insured establishment referred to another building thus: "Our policy nos. 306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend insurance coverage to your oil mill under Building No. 5, whilst the affected oil mill was under Building No. 14. " 5
TAIDHa

A complaint for specific performance and damages was consequently instituted by the respondent with the RTC, Branch 53 of Lucena City. On October 16, 1995, after trial, the lower court rendered a Decision finding the petitioner liable on the insurance policy thus:
"WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay plaintiff: (a)P4,406,536.40 representing damages for loss by fire of its insured property with interest at the legal rate; (b)P80,000.00 for litigation expenses; (c)P300,000.00 for and as attorney's fees; and (d)Pay the costs. SO ORDERED."
6

Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld the same in a Decision promulgated on January 14, 1999, the pertinent portion of which states:
"WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial court's Decision dated October 16, 1995 is hereby AFFIRMED in toto. SO ORDERED."
7

Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a Resolution promulgated on June 10, 1999.

Hence, the present course of action, where petitioner ascribes to the appellate court the following errors:
"(1)The Court of Appeals erred in its conclusion that the issue of nonpayment of the premium was beyond its jurisdiction because it was raised for the first time on appeal." 8 "(2)The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances Warranty' of the policy." 9 "(3) With due respect, the conclusion of the Court of Appeals giving no regard to the parole evidence rule and the principle of estoppel is erroneous." 10

The petition is devoid of merit. The primary reason advanced by the petitioner in resisting the claim of the respondent is that the burned oil mill is not covered by any insurance policy. According to it, the oil mill insured is specifically described in the policy by its boundaries in the following manner:
"Front: by a driveway thence at 18 meters distance by Bldg. No. 2. Right: by an open space thence by Bldg. No. 4. Left: Adjoining thence an imperfect wall by Bldg. No. 4. Rear: by an open space thence at 8 meters distance."

However, it argues that this specific boundary description clearly pertains, not to the burned oil mill, but to the other mill. In other words, the oil mill gutted by fire was not the one described by the specific boundaries in the contested policy. What exacerbates respondent's predicament, petitioner posits, is that it did not have the supposed wrong description or mistake corrected. Despite the fact that the policy in question was issued way back in 1988, or about three years before the fire, and despite the "Important Notice" in the policy that "Please read and

examine the policy and if incorrect, return it immediately for alteration," respondent apparently did not call petitioner's attention with respect
to the misdescription.

By way of conclusion, petitioner argues that respondent is "barred by the parole evidence rule from presenting evidence (other than the policy in question) of its

self-serving intention (sic) that it intended really to insure the burned oil mill," just as it is "barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, because it retained the policy without having the same corrected before the fire by an endorsement in accordance with its Condition No. 28." These contentions can not pass judicial muster. In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. 11 In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be. 12 Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties manifestly intended to insure was the new oil mill. This is obvious from the categorical statement embodied in the policy, extending its protection:
"On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra, copra cake and copra mills whilst contained in the new oil mill building, situate (sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.'' 13 (emphasis supplied.)

If the parties really intended to protect the first oil mill, then there is no need

to specify it as new.

Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave uncovered its second one. As mentioned earlier, the first oil mill is already covered under Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter ought to know that a second agreement over that same realty results in its overinsurance. The imperfection in the description of the insured oil mill's boundaries can be attributed to a misunderstanding between the petitioner's general agent, Mr. Alfredo Borja, and its policy issuing clerk, who made the error of copying the boundaries of the first oil mill when typing the policy to be issued for the new one. As testified to by Mr. Borja:
DHSEcI

"Atty. G. Camaligan: Q:What did you do when you received the report? A:I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to cover the new oil mill that is why when I presented the existing policy of the old policy, the policy issuing clerk just merely (sic) copied the wording from the old policy and what she typed is that the description of the boundaries from the

old policy was copied but she inserted covering the new oil mill and to me at that time the important thing is that it covered the new oil mill because it is just within one compound and there are only two oil mill[s] and so just enough, I had the policy prepared.
In fact, two policies were prepared having the same date one for the old one and the other for the new oil mill and exactly the same policy period, sir." 14 (emphasis supplied)

It is thus clear that the source of the discrepancy happened during the preparation of the written contract.

These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto. 15 Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus, while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on the policy concededly pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting evidence aliunde, which will explain the imperfection and clarify the intent of the parties. Anent petitioner's argument that the respondent is barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, we find that the same proceeds from a wrong assumption. Evidence on record reveals that respondent's operating manager, Mr. Edison Tantuco, notified Mr. Borja (the petitioner's agent with whom respondent negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that the use of the adjective new will distinguish the insured property. The assurance convinced respondent, despite the impreciseness in the

specification of the boundaries, the insurance will cover the new oil mill. This can be seen from the testimony on cross of Mr. Tantuco: "ATTY. SALONGA:
Q:You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the policy contents. (sic) Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly the boundaries of the property insured by the insurance policy Exhibit A, will you tell us as the manager of the company whether the boundaries stated in Exhibit A-2 are the boundaries of the old (sic) mill that was burned or not. A:It was not, I called up Mr. Borja regarding this matter and he told me that what is important is the word new oil mill. Mr. Borja said, as a matter of fact, you can never insured (sic) one property with two (2) policies, you will only do that if you will make to increase the amount and it is by indorsement not by another policy, sir. " 16

We again stress that the object of the court in construing a contract is to ascertain the intent of the parties to the contract and to enforce the agreement which the parties have entered into. In determining what the parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining the intent of the parties to the contract, the courts will consider the purpose and object of the contract. 17 In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal policy for its failure to pay the full amount of the premium and breach of the Fire Extinguishing Appliances Warranty. The amount of the premium stated on the face of the policy was P89,770.20. From the admission of respondent's own witness, Mr. Borja, which the petitioner cited, the former only paid it P75,147.00, leaving a difference of P14,623.20. The deficiency, petitioner argues, suffices to invalidate the policy, in accordance with Section 77 of the Insurance Code. 18 The Court of Appeals refused to consider this contention of the petitioner. It held that this issue was raised for the first time on appeal, hence, beyond its jurisdiction to resolve, pursuant to Rule 46, Section 18 of the Rules of Court. 19

Petitioner, however, contests this finding of the appellate court. It insists that the issue was raised in paragraph 24 of its Answer, viz.:
"24.Plaintiff has not complied with the condition of the policy and renewal certificate that the renewal premium should be paid on or before renewal date."

Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who acknowledged that the paid amount was lacking by P14,623.20 by reason of a discount or rebate, which rebate under Sec. 361 of the Insurance Code is illegal. The argument fails to impress. It is true that the asseverations petitioner made in paragraph 24 of its Answer ostensibly spoke of the policy's condition for payment of the renewal premium on time and respondent's non-compliance with it. Yet, it did not contain any specific and definite allegation that respondent did not pay the premium, or that it did not pay the full amount, or that it did not pay the amount on time. Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the supposed inadequate payment was never raised. Most significant to point, petitioner fatally neglected to present, during the whole course of the trial, any witness to testify that respondent indeed failed to pay the full amount of the premium. The thrust of the crossexamination of Mr. Borja, on the other hand, was not for the purpose of proving this fact. Though it briefly touched on the alleged deficiency, such was made in the course of discussing a discount or rebate, which the agent apparently gave the respondent. Certainly, the whole tenor of Mr. Borja's testimony, both during direct and cross examinations, implicitly assumed a valid and subsisting insurance policy. It must be remembered that he was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building. Finally, petitioner contends that respondent violated the express terms of the Fire Extinguishing Appliances Warranty. The said warranty provides:
"WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as mentioned below shall be maintained in efficient working order on the premises to which insurance applies: -PORTABLE EXTINGUISHERS

-INTERNAL HYDRANTS -EXTERNAL HYDRANTS -FIRE PUMP -24-HOUR SECURITY SERVICES BREACH of this warranty shall render this policy null and void and the Company shall no longer be liable for any loss which may occur."

20

Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified therein. The breach occurred when the respondent failed to install internal fire hydrants inside the burned building as warranted. This fact was admitted by the oil mill's expeller operator, Gerardo Zarsuela. Again, the argument lacks merit. We agree with the appellate court's conclusion that the aforementioned warranty did not require respondent to provide for all the fire extinguishing appliances enumerated therein. Additionally, we find that neither did it require that the appliances are restricted to those mentioned in the warranty. In other words, what the warranty mandates is that respondent should maintain in efficient working condition within the premises of the insured property, fire fighting equipments such as, but not limited to, those identified in the list, which will serve as the oil mill's first line of defense in case any part of it bursts into flame. To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the following devices: numerous portable fire extinguishers, two fire hoses, 21 fire hydrant, 22 and an emergency fire engine. 23 All of these equipments were in efficient working order when the fire occurred. It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by themselves be reasonably interpreted. 24That reasonableness is to be ascertained in light of the factual conditions prevailing in each case. Here, we find that there is no more need for an internal hydrant considering that inside the burned building were: (1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a connection to one of the external hydrants. IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant petition is hereby DISMISSED

SO ORDERED.

Davide Jr., C.J., Pardo and Ynares-Santiago, JJ., concur. Kapunan, J., is on official leave.

EN BANC
[G.R. No. 33637. December 31, 1931.] ANG GIOK CHIP, doing business under the name and style of Hua Bee Kong Si, plaintiff-appellee, vs. SPRINGFIELD FIRE & MARINE INSURANCE COMPANY, defendant-appellant.

C. A. Sobral, for appellant. Paredes & Buencamino, for appellee. Gibbs & McDonough and Roman Ozaeta as amici curiae.
SYLLABUS 1.INSURANCE; SECTION 65, INSURANCE ACT, ACT NO. 2427, AS AMENDED, CONSTRUED; VALIDITY OF A WARRANTY IN THE FORM OF A RIDER TO AN INSURANCE POLICY. A warranty referred to in the policy as forming part of the contract of insurance and in the form of a rider to the insurance policy is valid and sufficient under section 65 of the Insurance Act. 2.ID.; ID.; ID. A rider attached to the policy of insurance is a part of the contract, to the same extent and with like effect as if actually embodied therein. 3.ID.; ID.; ID. An express warranty must appear upon the face of the policy of insurance, or be clearly incorporated therein and made a part thereof by explicit reference, or by words clearly evidencing such intention. 4.ID.; ID.; ID.; ACCEPTANCE OF POLICY. The receipt of a policy of insurance by the insured without objection binds the acceptor and the insured to the terms thereof.

5.STATUTES; CONSTRUCTION OF STATUTES ADOPTED FROM OTHER STATES. The Philippine law on insurance was taken verbatim from the law of California. Accordingly, the courts of the Philippines should follow in fundamental points at least, the construction placed by California courts on a California law. DECISION MALCOLM, J :
p

An important question in the law of insurance, not heretofore considered in this jurisdiction and, according to our information, not directly resolved in California from which State the Philippine Insurance Act was taken, must be decided on this appeal for the future guidance of trial courts and of insurance companies doing business in the Philippine Islands. This question, flatly stated, is whether a warranty referred to in the policy as forming part of the contract of insurance and in the form of a rider to the insurance policy, is null and void because not complying with the Philippine Insurance Act. The court has had the benefit of instructive briefs and memoranda from the parties and has also been assisted by a well prepared brief submitted on behalf of amici curiae. The admitted facts are these: Ang Giok Chip doing business under the name and style of Hua Bee Kong Si was formerly the owner of a warehouse situated at No. 643 Calle Reina Regente, City of Manila. The contents of the warehouse were insured with three insurance companies for the total sum of P60,000. One insurance policy, in the amount of P10,000, was taken out with the Springfield Fire & Marine Insurance Company. The warehouse was destroyed by fire on January 11, 1928, while the policy issued by the latter company was in force. Predicated on this policy the plaintiff instituted action in the Court of First Instance of Manila against the defendant to recover a proportional part of the loss coming to P8,170.59. Four special defenses were interposed on behalf of the insurance company, one being planted on a violation of warranty F fixing the amount of hazardous goods which might be stored in the insured building. The trial judge in his decision found against the insurance company on all points, and gave judgment in favor of the plaintiff for the sum of P8,188.74. From this judgment the insurance company has

appealed, and it is to the first and fourth errors assigned that we would address particular attention. Considering the result at which we arrived, it is unnecessary for us to discuss three of the four special defenses which were made by the insurance company. We think, however, that it would be a reasonable deduction to conclude that more than 3 per cent of the total value of the merchandise contained in the warehouse constituted hazardous goods, and that this per cent reached as high as 39. We place reliance on the consular invoices and on the testimony of the adjuster, Herridge. Having thus swept to one side all intervening obstacles, the legal question recurs, as stated in the beginning of this decision, of whether or not warranty F was null and void. To place this question in its proper light, we turn to the policy issued by the Springfield Fire & Marine Insurance Company in favor of the plaintiff. The description of the risk in this policy is as follows:
"Ten thousand pesos Philippine Currency. On general nonhazardous merchandise, chiefly consisting of chucherias, also produce,

Cacao, Flour, all the property of the Insured, or held by them in trust, on commission or on joint account with others, or for which he is responsible, while contained during the currency of this policy in the godown, situate No. 643 Calle Reina Regente. . . . "This policy is subject to the hereon attached 'Ordinary Short Period Rate Scale' Warranties A & F, Co-insurances Clause 'and Three Fourths Loss Clause,'which are forming part of same. Co-insurance declared: "P20,000. Sun Insurance Office Ltd. (K & S)." (Italics inserted.) Securely pasted on the left hand margin of the face of the policy are five warranties and special clauses. One of them is warranty F, specifically referred to on the face of the policy, reading in part as follows:

"WARRANTY F
"It is hereby declared and agreed that during the currency of this policy no hazardous goods be stored in the Building to which this insurance applies or in any building communicating therewith, provided, always, however, that the Insured be permitted to store a small quantity of the hazardous goods specified below, but not exceeding in all 3 per cent of the total value of the whole of the goods or merchandise contained in said warehouse, viz;. . . "

The applicable law is found in the Insurance Act, Act No. 2427, as amended, section 65 reading: "Every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another instrument signed by the

insured and referred to in the policy, as making a part of it." As the Philippine law was taken verbatim from the law of California, in accordance with well settled canons of statutory construction, the court should follow in fundamental points, at least, the construction placed by California courts on a California law. Unfortunately the researches of counsel reveal no authority coming from the courts of California which is exactly on all fours with the case before us. However, there are certain considerations lying at the basis of California law and certain indications in the California decisions which point the way for the decision in this case. Section 65 of the Philippine Insurance Act corresponds to section 2605 of the Civil Code of California. The comments of the Code Examiners of California disclose that the language of section 2605 was quite different from that under the Code as adopted in 1872. That language was found too harsh as to insurance companies. The Code Examiners' notes state: "The amendment restores the law as it existed previous to the Code: See Parsons on Maritime Law, 106, and Phillips on Insurance, sec. 756." The passage referred to in Phillips on Insurance, was worded by the author as follows: "Any express warranty or condition is always a part of the policy, but, like any other part of an express contract, may be written in the margin, or contained in proposals or documents expressly referred to in the policy, and so made a part of it." The annotator of the Civil Code of California, after setting forth these facts, adds:
". . . The section as it now reads is in harmony with the rule that a warranty may be contained in another instrument than the policy when expressly referred to in the policy as forming a part thereof: . . ."

What we have above stated has been paraphrased from the decision of the California Court of Appeals in the case of Isaac Upham Co. vs. United States Fidelity & Guaranty Co. ([1922], 211 Pac., 809), and thus discloses the attitude of the California courts. Likewise in the Federal courts, in the case of Conner vs. Manchester Assur. Co. ([1904], 130 Fed., 743), section 2605 of the Civil Code of California came under observation, and it was said that it "is in effect an affirmance of the generally accepted doctrine applicable to such contracts." We, therefore, think it wrong to hold that the California law represents a radical departure from the basic principles governing the law of insurance. We are more inclined to believe that the codification of the law of California had exactly the opposite purpose, and that in the language of the Federal court it was but an affirmance of the generally accepted doctrine applicable to such contracts. This being true, we turn to two of such well recognized

doctrines. In the first place, it is well settled that a rider attached to a policy is a part of the contract, to the same extent and with like effect as if actually embodied therein. (I Couch, Cyclopedia of Insurance Law, sec. 159.) In the second place, it is equally well settled that an express warranty must appear upon the face of the policy, or be clearly incorporated therein and made a part thereof by explicit reference, or by words clearly evidencing such intention. (4 Couch, Cyclopedia of Insurance Law, sec. 862.) Section 65 of the Insurance Act and its counterpart, section 2605 of the Civil Code of California, will bear analysis as tested by reason and authority. The law says that every express warranty must be "contained in the policy itself." The word "contained," according to the dictionaries, means "included," "inclosed," "embraced," "comprehend," etc. When, therefore, the courts speak of a rider attached to the policy, and thus "embodied" therein, or of a warranty "incorporated" in the policy, it is believed that the phrase "contained in the policy itself" must necessarily include such rider and warranty. As to the alternative relating to "another instrument," "instrument" as here used could not mean a mere slip of paper like a rider, but something akin to the policy itself, which in section 48 of the Insurance Act is defined as "The written instrument, in which a contract of insurance is set forth." In California, every paper writing is not necessarily an "instrument" within the statutory meaning of the term. The word "instrument" has a well defined definition in California, and as used in the Codes invariably means some written paper or instrument signed and delivered by one person to another, transferring the title to, or giving a lien, on property, or giving a right to debt or duty. (Hoag vs. Howard [1880], 55 Cal., 564; People vs. Fraser [1913], 137 Pac., 276.) In other words, the rider, warranty F, is contained in the policy itself, because by the contract of insurance agreed to by the parties it is made to form a part of the same, but is not another instrument signed by the insured and referred to in the policy as forming a part of it. Again, referring to the jurisprudence of California, another rule of insurance adopted in that State is in point. It is admitted that the policy before us was accepted by the plaintiff. The receipt of this policy by the insured without objection binds both the acceptor and the insured to the terms thereof. The insured may not therafter be heard to say that he did not read the policy or know its terms, since it is his duty to read his policy and it will be assumed that he did so. In California Jurisprudence, vol. 14, p. 427, from which these statements are taken with citations to California decisions, it is added that it has been held that where the holder of a policy discovers a mistake made by himself and the local agent in attaching the wrong rider to

his application, elects to retain the policy issued to him, and neither requests the issuance of a different one nor offers to pay the premium requisite to insure against the risk which he believed the rider to cover, he thereby accepts the policy. We are given to understand, and there is no indication to the contrary, that we have here a standard insurance policy. We are further given to understand, and there is no indication to the contrary, that the issuance of the policy in this case with its attached rider conforms to well established practice in the Philippines and elsewhere. We are further given to understand, and there is no indication to the contrary, that there are no less than sixtynine insurance companies doing business in the Philippine Islands with outstanding policies more or less similar to the one involved in this case, and that to nullify such policies would place an unnecessary hindrance in the transactions of insurance business in the Philippines. These are matters of public policy. We cannot believe that it was ever the legislative intention to insert in the Philippine Law on Insurance an oddity, an incongruity, entirely out of harmony with the law as found in other jurisdictions, and destructive of good business practice. We have studied this case carefully and having done so have reached the definite conclusion that warranty F, a rider attached to the face of the insurance policy, and referred to in the contract of insurance, is valid and sufficient under section 65 of the Insurance Act. Accordingly, sustaining the first and fourth errors assigned, and it being unnecessary to discuss the remaining errors, the result will be to reverse the judgment appealed from and to order the dismissal of the complaint, without special pronouncement as to costs in either instance.

Street, Villamor, Ostrand and Romualdez, JJ., concur.

Separate Opinions
VILLA-REAL, J., dissenting: I fully concur in the dissenting opinion penned by Justice Imperial, and further say that a rider or slip attached to an insurance policy, though referred to therein as making a part of it, is not one of the forms prescribed by section 65 of the Insurance Law in which an express warranty may be made to appear validly so as to be binding between the insurer and the insured. There are two, and only two forms provided in said section by which an express warranty may be made to appear validly, to wit: by embodiment

either in the insurance policy itself or in another instrument signed by the insured and referred to in the policy as making a part of it. Now the question arises as to whether the rider or slip containing said warranty F attached to the policy in question and referred to therein as making a part thereof is one of the two forms provided in said section 65 of the Insurance Law. It is admitted that it is not the second form, because not being signed by the insured it does not constitute an instrument. (Hoag vs. Howard [1880], 55 Cal., 564; People vs. Fraser [1913], 137 Pac., 276.) Is it the first form required by law, that is, is it contained in the policy itself? It is so contended in the majority opinion and authorities are cited in support of such contention. In 1 Couch, Cyclopedia of Insurance Law, par. 159, it is said that "as a general rule, a rider or slip attached to a policy or certificate of insurance is, prima facie at least, a part of the contract to the same extent, and with like effect, as if actually embodied therein, provided, of course, that it does not violate any statutory inhibition, and has been lawfully, and sufficiently attached, . . ." (See also 32 Corpus Juris, 1159, par. 270). Does the attachment of a rider or slip containing an express warranty contravene the provisions of section 65 of the Insurance Law? When the law, in order to protect the insured, requires that an express warranty be contained in the policy or in another instrument referred to therein as making a part thereof, it could not have been its intention to permit that such express warranty be contained in a piece of paper not signed by the insured although it is attached to the policy and referred to therein as making a part thereof, because it would be contrary to the requirement that such express warranty be contained in an instrument signed by the insured. It is a general rule of statutory construction that a law should not be so construed as to produce an absurd result. It would certainly be an absurdity if section 65 of the Insurance Law were construed as requiring that an express warranty be contained only in the policy or in another instrument signed by the insured and referred to therein as making a part thereof for the protection of such insured, and at the same time permitting that such express warranty be contained in a piece of paper not signed by the insured but simply attached to the policy and referred to therein as making a part thereof, thus opening the door to fraud, it being easy to detach such rider or slip and change it with another, which is precisely what the law is trying to prevent. It will thus be seen that the attachment of a rider or slip containing an express warranty to a policy,

although referred to therein as making a part thereof, is contrary to the evident intent and purpose of section 65 of the Insurance Law. In the case of Isaac Upham Co. vs. United States Fidelity & Guaranty Co. (211 Pac., 809), cited in the majority opinion, the question was whether a warranty contained in an application for insurance, which was not referred to in the policy as making a part thereof, incorporated said warranty in the said policy and was valid. The Supreme Court of California held that it was not, for lack of such reference. Of course an application for insurance is a document therein if referred to in the policy as making a part thereof, will be considered as contained therein in accordance with law. In the case of Conner vs. Manchester Assur. Co. (130 Fed., 743), also cited in the majority opinion, the question was whether an open policy was a warranty and the Circuit Court of Appeals for the Northern District of California held that it was not, and further said that "section 2605 of the Civil Code of California (from which section 65 of the Insurance Law was taken) was evidently intended to express in statutory form the rule that no express warranty made by the insured shall affect the contract of insurance, unless it be contained in the policy or in the application, or some other instrument signed by the insured and made a part of the contract, and is in effect an affirmance of the generally accepted doctrine applicable to such contracts." It will be seen from this statement that the court in enumerating the forms in which an express warranty may be expressed or made to appear does not mention any paper which is not signed by the insured. The fact that for many years it has been the practice of the insurance companies to use riders or slips of papers containing express warranties without the signature of the insured in violation of the law is no reason why such practice should be permitted to continue when its legality is questioned. In view of the foregoing consideration, I am constrained to dissent from the opinion of the majority. IMPERIAL, J., dissenting: The decision of this case depended principally, but wholly, on the validity of the warranty F, Exhibit A-2. This instrument consists of a slip of paper pasted on the margin of a page of the fire insurance policy. It contains the stipulation that the insured is permitted to store in the building concerned the hazardous goods specified, to an amount not exceeding three per cent of the total value of the merchandise stored. The policy makes reference to this rider as follows: "This policy is subject to the hereon attached 'Ordinary Short Period Rate Scale,' Warranties A and F, Co-insurances clause and 'Three

Fourths Loss Clause' which are forming part of the same"; but the rider is not signed by the insured. Section 65 of Act No. 2427 (Insurance Law) reads as follows:
"Every express warranty, made at or before the execution of the policy, must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy, as making a part of it."

An express warranty, then, made at or before the execution of the policy, like warranty F, is valid only if it is contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as forming a part thereof. Examining warranty F, it may be seen that it does not form an integral part of the policy but appeals on another slip of paper pasted on the policy; it is therefore an instrument other than the policy and comes under the second paragraph provided for in section 65. And, according to this provision, warranty F cannot be valid or binding, for the simple reason that it is not signed by the insured, and has no weight, notwithstanding the fact that reference is made to it in a general way in the body of the policy. This reference is not equivalent to including it in the policy, for the simple reason, as we have said, that it was made in a general way. It is mentioned simply as warranty Fa, without giving any idea of its contents. The term of the rider might be changed and the heading "Warranty F" retained, and, following the appellant's line of reasoning, it might, with equal plausibility, be defended as the express warranty agreed upon, because it was headed "Warranty F." It is just such alterations as this that the law seeks to prevent in requiring that all warranties of the kind are to be signed by the insured and referred to in the policy. Setting aside for the moment the legal question of the validity of the warranty, and assuming warranty F to be valid, we have to consider another circumstance which indicates that the insured did not violate it. The trial court found that at the time of the fire, the inflammable goods in the warehouses or building of the insured did not exceed the amount permitted by the insurance company, that is, three per cent of the total value of the merchandise stored. This finding is borne out by the evidence, and there is no reason for changing it and making another.

Avancea, C.J., concur.

EN BANC
[G.R. No. 9370. March 31, 1915.] K. S. YOUNG, plaintiff-appellee, vs. THE MIDLAND TEXTILE INSURANCE COMPANY, defendant-appellant.

Bruce, Lawrence, Ross & Block for appellant Thos. D. Aitken for appellee.
SYLLABUS 1.INSURANCE; EFFECT OF VIOLATION OF CONTRACT OF. Contracts of insurance are contracts of indemnity, Upon the terms and conditions specified therein. Parties have a right to impose such reasonable conditions at the time of the making of the contract as they deem wise and necessary. The rate of premium is measured by the character of the risk assumed. The insurer, 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. When the insurer is called upon to pay, in case of loss, he may justly insist upon a fulfillment of the terms of the contract. If the insured cannot bring himself within the terms and conditions of the contract, he is not entitled to recover for any loss suffered. The terms of the contract constitute the measure of the insurer's liability. If the contract has been terminated, by a violation of its terms on the part of the insured, there can be no recovery. Compliance with the terms of the contract is a condition precedent to the right of recovery. Courts cannot make contracts for the parties. While contracts of insurance are construed most favorably to the insured yet they must be construed according to the sense and meaning of the terms which the parties themselves have used. Astute and subtle distinctions should not be permitted, when the language of the contract is plain and unambiguous. Such distinctions tend to bring the law itself into disrepute. 2.ID.; "STORED;" STORING. The word "stored" has been defined to be a deposit in a store or warehouse for preservation or safe keeping; to put away for future use, especially for future consumption; to place in a warehouse or other place of deposit for safe keeping. Said definition does not include a deposit in a store, in small quantities, for daily use. "Daily use"

precludes the idea of deposit for preservation or safe keeping, as well as a deposit for future consumption or safe keeping. 3.ID.; VIOLATION OF TERMS OF CONTRACT WHICH DOES NOT CONTRIBUTE TO LOSS OR INJURY. A violation of the terms of a contract of insurance, by either party, will constitute the basis for a termination of the contractual relations, at the election of the other. The right to terminate the contractual relations exists even though the violation was not the direct cause of the loss. In the present case, the deposit of the "hazardous goods," in the building insured, was a violation of the terms of the contract. Although the hazardous goods did not contribute to the loss, the insurer, at his election, was relieved from liability Said deposit created a new risk, not included in the terms of the contract. The insurer had neither been paid, nor had he entered into a contract, to cover the increased risk. DECISION JOHNSON, J :
p

The purpose of the present action is to recover the sum of P3,000 upon an insurance policy. The lower court rendered a judgment in favor of the plaintiff and against the defendant for the sum of P2,708.78, and costs. From that judgment the defendant appealed to this court. The undisputed facts upon which said action is based are as follows: 1.The plaintiff conducted a candy and fruit store on the Escolta, in the city of Manila, and occupied a building at '321 Calle Claveria, as a residence andbodega (storehouse). 2.On the 29th of May, 1912, the defendant, in consideration of the payment of a premium of P60, entered into a contract of insurance with the plaintiff (policy No. 509105) by the terms of which the defendant company, upon certain conditions, promised to pay to the plaintiff the sum of P3,000, in case said residence and bodega and contents should be destroyed by fire. 3.One of the conditions of said contract of insurance is found in "warranty B" and is as follows: "Warranty B. It is hereby declared and agreed that during the pendency of this policy no hazardous goods be stored or kept for sale, and no hazardous trade or process be carried on, in the building to which this insurance applies, or in any building connected therewith."

4.On the 4th or 5th of February, 1913, the plaintiff placed in said residence and bodega three boxes, 18 by 18 by 20 inches measurement, which belonged to him and which were filled with fireworks. 5.On the 18th day of March, 1913, said residence and bodega and the contents thereof were partially destroyed 6.Said fireworks had been given to the plaintiff by the former owner of the Luneta Candy Store; that the plaintiff intended to use the same in the celebration of the Chinese new year; that the authorities of the city of Manila had prohibited the use of fireworks on said occasion, and that the plaintiff then placed the same in said bodega, where they remained from the 4th or 5th of February, 1913, until after the fire of the 18th of March, 1913. 7.Both of the parties agree that said fireworks come within the phrase "hazardous goods," mentioned in said "warranty B" of the policy. 8.That said fireworks were found in a part of the building not destroyed by the fire; that they in no way contributed to the fire, or to the loss occasioned thereby. The only question presented by the parties is whether or not the placing of said fireworks in the building insured, under the conditions above enumerated, they being "hazardous goods," is a violation of the terms of the contract of insurance and especially of "warranty B." "Warranty B" provides that "no hazardous goods be stored" in the building insured. It is admitted by both parties that the fireworks are "hazardous goods." The defendant alleged that they were "stored." The plaintiff contends that under all the facts and circumstances of the case, they were not "stored" in said building, and that the placing of them in the building was not a violation of the terms of the contract. Both the plaintiff and defendant agree that if they were "hazardous goods," and if they were "stored," then the act of the plaintiff was a violation of the terms of the contract of insurance and the defendant was justified in repudiating its liability thereunder. This leads us to a consideration of the meaning of the word "stored" as used in said "warranty B." While the word "stored" has been variously defined by authors, as well as by courts, we have found no case exactly analogous to the present. The plaintiff says that he placed said fire- works in the bodega after he had been notified that he could not use them on the Chinese new year, in order that he might later send them to a friend in the provinces. Whether a particular article is "stored" or not must, in some degree depend upon the intention of the parties. The interpretation of the word "stored" is quite difficult, in view of the many decisions upon the various conditions presented. Nearly all of the cases cited by the lower court are

cases where the article was being put to some reasonable and actual use, which might easily have been permitted by the terms of the policy, and within the intention of the parties and excepted from the operation of the warranty, like the present. Said decisions are upon cases like: 1.Where merchants have had or kept the "hazardous" articles in small quantities, and for actual daily use, for sale, .such as gasoline, gunpowder, etc.; 2.Where such articles have been brought on the premises for actual use thereon, and in small quantities, such as oil, paints, etc; and 3.Where such articles or goods were used for lighting purposes, and in small quantities. The author of the Century Dictionary defines the word "store" to be a deposit in a store or warehouse for preservation or safe keeping; to put away for future use, especially for future consumption; to place in a warehouse or other place of deposit for safe keeping. See also the definitions given by the Standard Dictionary, to the same effect. Said definitions, of course, do not include a deposit in a store, in small quantities, for daily use. "Daily use" precludes the idea of a deposit for preservation or safe keeping, as well as a deposit for future consumption, or safe keeping. In the present case no claim is made that the "hazardous goods" were placed in the bodega for present or daily use. It is admitted that they were placed in the bodega "for future use," or for future consumption, or for safe keeping. The plaintiff makes no claim that he deposited them there with any other idea than "for future use" for future consumption. It seems clear to us that the "hazardous goods" in question were "stored" in the bodega, as that word is generally defined. That being true, suppose the defendant had made an examination of the premises, even in the absence of a fire, and had found the "hazardous goods" there, under the conditions above described, would it not have been justified, then and there, in declaring the policy null and of no effect by reason of a violation of its terms on the part of the plaintiff ? If it might, then may it not repudiate its liability, even after the fire? If the "warranty" is a term of the contract, will not its violation cause a breach and justify noncompliance or a repudiation? 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 insist upon a fulfillment of these terms. If the insured cannot bring himself within the conditions of the policy, he is not entitled to recover 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. If the insured has violated or failed to

perform the conditions of the contract, and such a violation or want of performance has not been waived by the insurer, then the insured cannot recover. 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. While it is true, as a general rule, that contracts of insurance are construed most favorably to the insured, 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. (Imperial Fire Ins. Co. vs. County of Coos, 151 U. S., 452; Kyte vs. Commercial Union Assurance Co., 149 Mass., 116, 122.) 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.) The appellant argues, however, that in view of the fact that the "storing" of the fireworks on the premises of the insured did not contribute in any way to the damage occasioned by the fire, he should be permitted to recover that the "storing" of the "hazardous goods" in no way caused injury to the defendant company. That argument, however, is beside the question, if the "storing" was a violation of the terms of the contract. The violation of the terms of the contract, by virtue of the provisions of the policy itself, terminated, at the election of either party, the contractual relations. (Kyte vs. Commercial Union Assurance Co., 149 Mass., 116, 122.) The plaintiff paid a premium based upon the risk at the time the policy was issued.

Certainly it cannot be denied that the placing of the firecrackers in the building insured increased the risk. The plaintiff had not paid a premium based upon the increased risk, neither had the defendant issued a policy upon the theory of a different risk. The plaintiff was enjoying, if his contention may be allowed, the benefits of an insurance policy upon one risk, whereas, as a matter of fact, it was issued upon an entirely different risk. The defendant had neither been paid nor had issued a policy to cover the increased risk. An increase of risk which is substantial and which is continued for a considerable period of time, is a direct and certain injury to the insurer, and changes the basis upon which the contract of insurance rests. (Kyte vs. Commercial Union Assurance Co. (supra); Frost's Detroit Lumber Works vs. Millers' Mutual Ins. Co., 37 Minn., 300, 302; Moore vs. Phoenix Ins. Co., 62 N. H., 240; Ferree vs. Oxford Fire & Life Ins. Co., 67 Pa. State, 373.) Therefore and for the foregoing reasons, the judgment of the lower court is hereby revoked and the defendant is hereby relieved from any responsibility under said complaint, and, without any finding as to costs, it is so ordered.

Arellano, C.J., Torres, Carson, Trent and Araullo, JJ., concur. Moreland, J., concurs in the result.

FIRST DIVISION
[G.R. No. L-4611. December 17, 1955.] QUA CHEE GAN, plaintiff-appellee, vs. LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO., LTD., defendant-appellant.

Delgado, Flores & Macapagal for appellant. Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras for appellee.
SYLLABUS 1.INSURANCE; BREACH OF WARRANTY; WHEN INSURER BARRED FROM CLAIMING POLICIES VOID "AB INITIO." The insurer is barred by

estoppel to claim violation of the so-called fire hydrant warranty where, knowing fully well that the number of hydrants demanded in the warranty never existed from the very beginning, it nevertheless issued the policies subject to such warranty, and received the corresponding premiums. 2.ID.; ID.; EVIDENCE; PAROL EVIDENCE RULE NOT APPLICABLE. The parol evidence rule is not applicable to the present case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable contract shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured. 3.ID.; AMBIGUITIES IN THE TERMS OF THE CONTRACT, HOW CONSTRUED. The contract of insurance is one of perfect good faith (uberrimae fidei) not for the insured alone, but equally so for the insurer; in fact, it is more so for the latter, since its dominant bargaining position carries with it stricter responsibility. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, the ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 11661175; 29 Am. Jur. 180). 4.ID.; ID.; WARRANTY AGAINST STORAGE OF GASOLINE. In the present case, gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The clause relied upon by the insurer speaks of "oils" and is decidedly ambiguous and uncertain; for in ordinary parlance, "oils" mean "lubricants" and not gasoline or kerosene. Besides, the gasoline kept by the insured was only incidental to his business, being no more than a customary 2 days supply for the five or six motor vehicles used for transporting of the stored merchandise, and it is well settled rule that the keeping of inflammable oils on the premises, through prohibited by the policy, does not void it if such keeping is incidental to the business. (Bachrach vs. British American Ass. Co., 17 Phil. 555, 660.) 5.ID.; FALSE CLAIMS THAT AVOIDS THE POLICY. The rule is that to avoid a policy, the claim filed by the insured must contain false and fraudulent statements with intent to defraud the insurer. 6.CRIMINAL PROCEDURE; ACQUITTAL OF INSURED IN ARSON CASE EFFECT ON CIVIL ACTION. While the acquittal of the insured in the arson 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 if 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). DECISION REYES, J. B. L., J :
p

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., through its agent, Warner, Barnes & Co., Ltd., upon certain bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:
"Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former (a)Under the first cause of action, the sum of P146,394.48; (b)Under the second cause of action, the sum of P150,000; (c)Under the third cause of action, the sum of P5,000; (d)Under the fourth cause of action, the sum of P15,000; and (e)Under the fifth cause of action, the sum of P40,000; all of which shall bear interest at the rate of 80% per annum in accordance with Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with costs against the defendant. The complaint in intervention of the Philippine National Bank is dismissed without costs." (Record on Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court. The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealt extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable to the Philippine National Bank as mortgage of the

hemp and copra, to the extent of its interest. On June, 1940, the insurance stood as follows:
Policy No.Property Insured Amount 2637164 (Exhibit "LL")Bodega No. 1 (Building)P15,000.00 2637165 (Exhibit "JJ")Bodega No. 2 (Building)10,000.00 Bodega No. 3 (Building)25,000.00 Bodega No. 4 (Building)10,000.00 Hemp Press moved by steam engine 5,000.00 2637345 (Exhibit "X")Merchandise contents (copra and empty sacks of Bodega No. 1)150,000.00 2637346 (Exhibit "Y")Merchandise contents (hemp) of Bodega No. 3150,000.00 2637067 (Exhibit "GG")Merchandise contents (loose hemp) of Bodega No. 4 5,000.00 ______________ TotalP370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 3 and 4, with the merchandise stored therein. Plaintiffappellee informed the insurer by telegram on the same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other persons in connivance with him. With counsel for the insurance company acting as private prosecutor, Qua Chee Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money

proceeded to its trial and termination in the Court below, with the result noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendency of the suit, and despite the fire losses. In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:
extinction of fire being kept on the premises insured hereby, and it being declared and understood that there is an ample end constant water supply with sufficient pressure available at all seasons for the same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium chargeable under this policy. 150 feet of external wall measurement of buildings, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the hydrants being supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the rate of not less than 200 gallons of water per minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men to work the same.'"

"Memo. of Warranty. The undernoted Appliances for the

Hydrants in the compound, not less in number than one for each

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of Tabaco. We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so- called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the very beginning, the appellant 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 claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of Tabaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which the policies were expressly made subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
"It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, each 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 his money without consideration." (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

"The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorrent 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, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after the insured had incurred the expense of installing the two hydrants, the company collected the premiums and issued him a policy so worded that it gave the insured a discount much smaller than that he was normally entitled to. According to the "Scale of Allowances," a policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount of 7 1/2 per cent of the premium; while the existence of "hydrants, in compound" (regardless of number) reduced the allowance on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in the particular case now before us, so worded the policies that while exacting the greater number of fire hydrants and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double benefit. No reason is shown why appellant's premises, that had been insured with appellant for several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's own scale of allowances. Such abnormal treatment of the insured strongly points at an abuse of the insurance company's selection of the words and terms of the contract, over which it had absolute control. These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured.
"Receipt of Premiums or Assessments after Cause for Forfeiture Other than Nonpayment. It is a well settled rule of law that an insurer

which with knowledge of facts entitling it to treat a policy as no longer in force, receives and accepts a premium on the policy, estopped to take advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an action to recover for a loss thereafter occurring and at the same time treat it as valid for the purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.) "It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered the policy void and then to accept and retain premiums under such a void policy. Neither law nor good morals would justify such conduct and the doctrine of

equitable estoppel is peculiarly applicable to the situation." (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted against the party that caused them, 1 the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called for in the insured premises, since its initial expression, "the undernoted appliances for the extinction of fire being kept on the premises insured hereby, . . . it is hereby warranted . . . ", admits of interpretation as an admission of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply. The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the appellant's argument thereon is based on the assumption that the insured was bound to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement appellant is estopped from enforcing. The supposed breach of the water pressure condition is made to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused and professed inability to estimate the rate of discharge of the water, and only gave the "5gallon per 3-second" rate because the insistence of appellant's counsel forced the witness to hazard a guess. Obviously, the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof lay on appellant. As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which the warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for his compound alone a fire fighting force that many municipalities in the Islands do not even possess. There is no merit in appellant's claim that subordinate membership of the business manager (Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee, renders the testimony improbable. A business manager is not necessarily adept at fire fighting, the qualities required being different for both activities. Under the second assignment of error, appellant insurance company avers that the insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee admitted that there were 36 cans (latas) of gasoline in the building designed as

"Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is not specifically mentioned among the prohibited articles listed in the so- called "hemp warranty." The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300 Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or kerosene. And how many insured, it may well be wondered, are in a position to understand or determine "flash point below 003 Fahrenheit. Here, again, by reason of the exclusive control of the insurance company over the terms and phraseology of the contract, the ambiguity must be held strictly against the insurer and liberally in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).
"Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts who know and can anticipate the bearing and possible complications of every contingency. So long as insurance companies insist upon the use of ambiguous, intricate and technical provisions, which conceal rather than frankly disclose, their own intentions, the courts must, in fairness to those who purchase insurance, construe every ambiguity in favor of the insured." (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.) "An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for which the policy was procured" (Moorevs. Aetna Life Insurance Co., LRA 1915D, 264).

We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly and unmistakably, in the language and terms that the general public can readily understand, without resort to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):
"If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy."

This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared "agreements" that the weaker party may not change one whit, his participation in the "agreement" being reduced to the alternative to take it or leave it" labelled since Raymond Baloilles "contracts

by adherence" (con tracts d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwarry (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942).
"Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser tenido en cuenta que al seguro es, praticamente un contrato de los llamados de adhesion y por consiguiente en caso de duda sobre la significacion de las clausulas generales de una poliza redactada por las compafiias sin la intervencion alguna de sus clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa aseguradora, que debia haberse explicado mas claramante." (Dec. Trib. Sup. of Spain 13 Dec. 1934).

The contract of insurance is one of perfect good faith (ufferrimal fidei) not for the insured alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominant bargaining position carries with it stricter responsibility. Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental to his business, being no more than a customary 2 day's supply for the five or six motor vehicles used for transporting of the stored merchandise (t.s.n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the premises, though prohibited by the policy, does not void it if such keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to the weight of authority, even though there are printed prohibitions against keeping certain articles on the insured premises the policy will not be avoided by a violation of these prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the "Hemp Warranty" forbade storage only "in the building to which this insurance applies and/or in any building communicating therewith", and it is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned and where the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers, etc. demanded by them was found unsubstantiated by the trial Court, and no reason has been shown to alter this finding. The insured gave the insurance examiner all the data he asked for (Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the examined books in his possession. What does appear to have been rejected by the insured was the demand that he should submit "a list of all books, vouchers, receipts and other records" (Page 4, Exhibit 9-c); but the refusal of the insured in this instance was well justified, since the demand for a list of all the vouchers (which were not in use by the insured) and receipts was positively unreasonable, considering that such listing was superfluous because the insurer was not denied access to the records, that the volume of Qua Chee Gan's business ran into millions, and that the demand was made just after the fire when everything was in turmoil. That the representatives of the insurance company were able to secure all the data they needed is proved by the fact that the adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from that submitted by the insured (Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW). How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision of the arson case (Exhibit WW) acquitting Qua Choc Gan, appellee in the present proceedings. The decision states (Exhibit WW, p. 11):
"Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su existencia de copra y abaca en las bodegas al tiempo del incendio durante el periodo comprendido desde el 1. de enero al 21 de junio de 1940 y ha encontrado que Qua Choc Gan ha sufrido una perdida de P1,750.76 en su negocio en Tabaco. Segun Stewart al llegar a este conclusion el ha tenido en cuenta el balance de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que no estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue preparado por al mismo testigo."

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer, the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter reached a different result from the other two. Not only that, but Ramos reported two different

valuations that could be reached according to the methods employed (Exhibit WW, p. 35):
"La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promover el comercio y la finanza, pero en el caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado las mismas partidas y los mismos libros dichos contadores hayan de llegara dos conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes dependiendo del metodo que se emplea."

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer attempted to bolster its case with alleged photographs of certain pages of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B) and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained unconvinced of the authenticity of those photographs, and rejected them, because they were not mentioned nor introduced in the criminal case; and considering the evident importance of said exhibits in establishing the motive of the insured in committing the arson charged, and the absence of adequate explanation for their omission in the criminal case, we cannot say that their rejection in the civil case constituted reversible error. The next two defenses pleaded by the insurer, that the insured connived at the loss and that he fraudulently inflated the quantity of the insured stock in the burnt bodegas, are closely related to each other. Both defenses are predicted on the assumption that the insured was in financial difficulties and set the fire to defraud the insurance company, presumably in order to pay off the Philippine National Bank, to which most of the insured hemp and copra was pledged. Both defenses are fatally undermined by the established fact that, notwithstanding the insurer's refusal to pay the value of the policies the extensive resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time; and if he was able to do so, no motive appears for attempt to defraud the insurer. While the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurer's evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that required in order to

convict the insured of the crime of arson" (Bachrach vs. British American Assurance Co., 17 Phil. 536). As to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the premises during and after the fire. His testimony, however, was based on inferences from the photographs and traces found after the fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan Department of the National Bank's Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these witnesses, and the appellant insurer has failed to substantiate its charges against their character. In fact, the insurer's repeated accusations that these witnesses were later "suspended for fraudulent transactions" without giving any details, is a plain attempt to create prejudice against them, without the least support in fact. Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to accept its inferences from the remains shown in the photographs of the burned premises. It appears, likewise, that the adjuster's calculations of the maximum contents of the destroyed warehouses rested on the assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine the space occupied by definite amounts of sacked copra. The error in the estimates thus arrived at proceeds from the fact that a large amount of the insured's stocks were in loose form, occupying less space than when kept in sacks; and from Stewart's obvious failure to give due allowance for the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock, as shown by engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself admitted that this was the first copra fire he had investigated); but it is clear that such errors render valueless Stewart's computations. These were in fact twice passed upon and twice rejected by different judges (in the criminal and civil cases) and their concordant opinion is practically conclusive. The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the opinions stated therein were based on ex parteinvestigations made at the back of the insured; and the appellant did not

present at the trial the original testimony and documents from which the conclusions in the report were drawn. Appellant insurance company also contends that the claims filed by the insured contained false and fraudulent statements that avoided the insurance policy. But the trial Court found that the discrepancies were a result of the insured's erroneous interpretation of the provisions of the insurance policies and claim forms, caused by his imperfect knowledge of English, and that the misstatements were innocently made and without intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting these conclusions of the Court below. For example, the occurrence of previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these claims were submitted to the same agent, and that this same agent had paid the loss caused by the 1939 fire, we find no error in the trial Court's acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would pass unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the hemp stock, was explained by the insured as caused by his belief that he was entitled to include in the claim his expected profit on the 70 per cent of the hemp, because the same was already contracted for and sold to other parties before the fire occurred. Compared with other cases of over-valuation recorded in our judicial annals, the 20 per cent excess in the case of the insured is not by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuasonvs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods insured were inventoried at P13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar, duly explained by him to the Court a quo, appears puny by comparison, and can not be regarded as "more than misstatement, more than inadvertence of mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the overcharge of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his copra, hemp and buildings in the same proportion. This also applies to the alleged fraudulent claim for burned empty sacks, that was

likewise explained to our satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing must be willful and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not authorize the collection of the expected profit under the terms of the policies, and the trial Court correctly deducted the same from its award. We find no reversible error in the judgment appealed from, wherefore the same is hereby affirmed. Costs against the appellant. So ordered.

Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador and Concepcion, JJ., concur.

FIRST DIVISION
[G.R. No. L-5715. December 20, 1910.] E. M. BACHRACH, plaintiff-appellee, vs. BRITISH AMERICAN ASSURANCE COMPANY, a corporation, defendant-appellant.

Haussermann, Ortigas, Cohn & Fisher, for appellant. Kincaid & Hurd and Thomas L. Hartigan, for appellee.
SYLLABUS 1.FIRE INSURANCE; CONDITIONS RELIED UPON MUST BE EXPRESSED IN POLICY. When property is insured any condition upon which the insurer wishes to rely, in order to avoid liability in case of a loss, must be expressed in the policy. 2.ID.; ALIENATION; EXECUTION OF A CHATTEL MORTGAGE UPON INSURED PROPERTY. Interest in property insured does not pass by the mere execution of a chattel mortgage, and, while the chattel mortgage is a conditional sale, there is no alienation, within the meaning of the insurance law, until the mortgagee acquires a right to take possession by default under the terms of the mortgage. 3.ID.; SUFFICIENCY OF EVIDENCE IN A CIVIL SUIT FOLLOWING A CRIMINAL PROSECUTION. The evidence in a civil suit, following an unsuccessful criminal prosecution involving the same subject matter, should not be materially less convincing than that required to convict the accused of the alleged crime. 4.ID.; NOTICE OF LOSS; WAIVER OF NOTICE BY INSURERS. Where the terms of an insurance policy require that notice of loss be given, a denial of liability by the insurers under the policy operates as a waiver of notice of loss because if the policy is null and void the furnishing of such notice would be vain and useless. Immediate notice means within a reasonable time. DECISION

JOHNSON, J :
p

On the 13th of July, 1908, the plaintiff commenced an action against the defendant to recover the sum of P9,841.50, the amount due, deducting the salvage, upon the following fire insurance policy issued by the defendant to the plaintiff:
"[Fire policy No. 3007499.] "This policy of insurance witnesseth, that E. M. Bachrach, esq., Manila (hereinafter called the insured), having paid to the undersigned, as authorized agent of the British American Assurance Company (hereinafter called the company), the sum of two thousand pesos Philippine currency, for insuring against loss or damage by fire, as hereinafter mentioned, the property hereinafter described in the sum of several sums following, viz:

"Ten thousand pesos Philippine currency, on goods, belonging to a general furniture store, such as iron and brass bedsteads, toilet tables, chairs, ice boxes, bureaus, washstands, mirrors, and sea-grass furniture (in accordance with warranty 'D' of the tariff attached hereto) the property of the assured, in trust, on commission or for which he is responsible, whilst stored in the ground floor and first story of house and dwelling No. 16 Calle Martinez, district 3, block 70, Manila, built, ground floor of stone and or brick, first story of hard wood and roofed with galvanized iron bounded in the front by the said calle, on one side by Calle David and on the other two sides by buildings of similar construction and occupation.
"Co-insurances allowed, particulars of which to be declared in the event of loss or claim. "The company hereby agrees with the insured (but subject to the conditions on the back hereof, which are to be taken as a part of this policy) that if the property above described, or any part thereof, shall be destroyed or damaged by fire, at any time between the 21st day of February, 1908, and 4 o'clock in the afternoon of the 21st day of February, 1909, or (in case of the renewal of this policy) at any time afterwards, so long as, and during the period in respect of which the insured shall have paid to the company, and they shall have accepted, the sum required for the renewal of this policy, the company will, out of their capital stock, and funds, pay or make good to the insured the value of the property so destroyed, or the amount of such damage thereto, to any amount not exceeding, in respect of each or any of the several matters above specified, the sum set opposite thereto, respectively, and not exceeding in the whole the sum of ten thousand pesos, and also not

exceeding, in any case, the amount of the insurable interest therein of the insured at the time of the happening of such fire. "In witness whereof, the British American Assurance Company has caused these presents to be signed this 21st day of February, in the year of our Lord 1908. "For the company. "W. F. STEVENSON & CO., LTD., "By________________,

"Manager Agents."

And indorsed on the back the following:

"The within policy covers and includes a 'Calalac' automobile to the extent of (1,250) twelve hundred and fifty pesos Philippine currency. "Memo: Permission is hereby granted for the use of gasoline not to exceed 10 gallons for the above automobile, but only whilst contained in the reservoir of the car. It is further warranted that the car be neither filled nor emptied in the within-described building or this policy be null and void. "Manila, 27th February, 1908. "W. F. STEVENSON & CO., LTD., "By ______________,

"Manager Agents."

The defendant answered the complaint, admitting some of the facts alleged by the plaintiff and denying others. The defendant also alleged certain facts under which it claimed that it was released from all obligations whatever under said policy. These special facts are as follows: First.That the plaintiff maintained a paint and varnish shop in the said building where the goods which were insured were stored. Second.That the plaintiff transferred his interest in and to the property covered by the policy to H. W. Peabody & Co. to secure certain indebtedness due and owing to said company, and also that the plaintiff had transferred his interest in certain of the goods covered by the said policy to one Macke, to secure certain obligations assumed by the said Macke for and on behalf of the insured. That the sanction of the said defendant had not been obtained by the plaintiff, as required by the said policy. Third.That the plaintiff, on the 18th of April, 1908, and immediately preceding the outbreak of the alleged fire, willfully placed a gasoline can containing 10 gallons of gasoline in the upper story of said building in close

proximity to a portion of said goods, wares, and merchandise, which can was so placed by the plaintiff as to permit the gasoline to run on the floor of said second story, and after so placing said gasoline, he, the plaintiff, placed in close proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire. Fourth.That the plaintiff made no proof of the loss within the time required by condition five of said policy, nor did the insured file a statement with the municipal or any other judge or court of the goods alleged to have been in said building at the time of the alleged fire, nor of the goods saved, nor the loss suffered. The plaintiff, after denying nearly all of the facts set out in the special answer of the defendant, alleged: First.That he had been acquitted in a criminal action against him, after a trial duly and regularly had, upon a charge of arson, based upon the same alleged facts set out in the answer of the defendant. Second.That he had made no proof of the loss set up in his complaint for the reason that immediately after the had, on the 20th of April, 1908, given the defendant due notice in writing of said loss, the defendant, on the 21st of April, 1908, and thereafter on other occasions, had waived all right to require proof of said loss by denying all liability under the policy and by declaring said policy to be null and void. After hearing the evidence adduced during the trial of the cause, the lower court found that the defendant was liable to the plaintiff and rendered a judgment against the defendant for the sum of P9,841.50, with interest for a period of one year at 6 per cent, making a total of P10,431.99, with costs. From that decision the defendant appealed and made the following assignments of error: 1.The court erred in failing to hold that the use of the building, No. 16 Calle Martinez, as a paint and varnish shop annulled the policy of insurance. 2.The court erred in failing to hold that the execution of the chattel mortgages without the knowledge and consent of the insurance company and without receiving the sanction of said company annulled the policy of insurance. 3.The court erred in holding that the keeping of gasoline and alcohol not in bottles in the building No. 16 Calle Martinez was not such a violation of the conditions of the policy as to render the same null and void. 4.The court erred in failing to find as a fact that E. M. Bachrach, the insured, willfully placed a gasoline can containing about 10 gallons of gasoline

in the upper story of said building, No. 16 Calle Martinez, in close proximity to a portion of the goods, wares, and merchandise stored therein, and that said can was so placed by said Bachrach as to permit the gasoline to run on the floor of said second story. 5.The court erred in failing to find as a fact that E. M. Bachrach, after placing said gasoline can in close proximity to the goods, wares, and merchandise covered by the policy of insurance, that he (Bachrach) placed in close proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire. 6.The court erred in holding that the policy of insurance was in force at the time of said fire, and that the acts or omissions on the part of the insured which caused, or tended to cause, the forfeiture of the policy, were waived by the defendant. 7.The court erred in holding the defendant liable for the loss under the policy. 8.The court erred in refusing to deduct from the loss sustained by Bachrach the value of the automobile, which was saved without damage. 9.The court erred in refusing to grant the motion for a new trial. 10.The court erred in refusing to enter judgment in favor of the defendant and against the plaintiff. With reference to the first above assignment of error, the lower court in its decision said:
"It is claimed that either gasoline or alcohol was kept in violation of the policy in the bodega containing the insured property. The testimony on this point is somewhat conflicting, but conceding all of the defendant's claims, the construction given to this claim by American courts would not justify the forfeiture of the policy on that ground. The property insured consisted mainly of household furniture kept for the purpose of sale. The preservation of the furniture in a salable condition by retouching or otherwise was incidental to the business. The evidence offered by the plaintiff is to the effect that alcohol was used in preparing varnish for the purpose of retouching, though he also says that the alcohol was kept in the store and not in the bodega where the furniture was. It is well settled that the keeping of inflammable oils on the premises, though prohibited by the policy, does not void it if such keeping is incidental to the business. Thus, where a furniture factory keeps benzine for the purposes of operation (Davis vs. Pioneer Furniture Company, 78 N. W. Rep., 596; Faust vs. American Fire Insurance

Company, 91 Wis., 158), or where it is used for cleaning machinery (Mears vs. Humboldt Insurance Company, 92 Pa. St., 15; 37 Am. Rep., 647), the insurer can not on that ground avoid payment of a loss, though the keeping of the benzine on the premises is expressly prohibited. These authorities also appear sufficient to answer the objection that the insured automobile contained gasoline and that the plaintiff on one occasion was seen in thebodega with a lighted lamp. The first was incidental to the use of the insured article and the second being a single instance falls within the doctrine of the case last cited."

It may be added that there was no provision in the policy prohibiting the keeping of paints and varnishes upon the premises where the insured property was stored. If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy. With reference to the second above assignment of error, the defendant and appellant contends that the lower court erred in failing to hold that the execution of the said chattel mortgage, without the knowledge and consent of the insurance company and without receiving the sanction of said company, annulled the said policy of insurance. With reference to this assignment of error, upon reading the policy of insurance issued by the defendant to the plaintiff, it will be noted that there is no provision in said policy prohibiting the plaintiff from placing a mortgage upon the property insured, but, admitting that such a provision was intended, we think the lower court has completely answered this contention of the defendant. He said, in passing upon this question as it was presented:
"It is claimed that the execution of a chattel mortgage on the insured property violated what is known as the 'alienation clause,' which is now found in most policies, and which is expressed in the policies involved in cases 6496 and 6497 by a phrase imposing forfeiture if the interest in the property pass from the insured. (Cases 6496 and 6497, in which are involved other actions against other insurance companies for the same loss as in the present action.) "This clause has been the subject of a vast number of judicial decisions (13 Am. & Eng. Encyc. of Law, 2d ed., pp. 239 et seq.), and it is held by the great weight of authority that the interest in property insured does not pass by the mere execution of a chattel mortgage and that while a chattel mortgage is a conditional sale, there is no alienation within the meaning of the insurance law until the mortgagee acquires a right to take possession by default under the terms of the mortgage. No such right is claimed to have accrued in the case at bar, and the alienation clause is therefore inapplicable."

With reference to the third assignment of error above noted, upon a reading of the decision of the lower court it will be found that there is nothing in the decision of the lower court reacting to the facts stated in this assignment of error, neither is there any provision in the policy relating to the facts alleged in said assignment of error. Assignments of error numbers 4 and 6 above noted may be considered together. The record discloses that some time prior to the commencement of this present action, a criminal action was commenced against the plaintiff herein in the Court of First Instance of the city of Manila, in which he was charged with willfully and maliciously burning the property covered by the policy in the present case. At the conclusion of the criminal action and after hearing the evidence adduced during the trial, the lower court, with the assistance of two assessors, found that the evidence was insufficient to show beyond peradventure of doubt that the defendant was guilty of the crime. The evidence adduced during the trial of the criminal cause was introduced as evidence in the present cause. While the evidence shows some very peculiar and in view of the apparent conflict in the testimony, we can not find that there is a preponderance of evidence showing that the plaintiff did actually set fire or cause fire to be set to the goods in question. The lower court, in discussing this question, said:
"As to the claim that the loss occurred through the voluntary act of the insured, we consider it unnecessary to review the evidence in detail. That was done by another branch of this court in disposing of the criminal prosecution brought against the insured, on the same ground, based mainly on the same evidence. And regardless of whether or not the judgment in that proceeding is res adjudicata as to anything here, we are at least of the opinion that the evidence to establish this defense should not be materially less convincing than that required in order to convict the insured of the crime of arson. (Turtell vs. Beamount, 25 Rev. Rep., 644.) In order to find that the defense of incendiarism was established here, we would be obliged, therefore, in effect to set aside the findings of the judge and assessors in the criminal cause, and this we would be loath to do even though the evidence now produced were much stronger than it is."

and suspicious circumstances concerning the burning of the goods covered by the said policy, yet, nevertheless, in view of the findings of the lower court

With reference to the sixth assignment of error above noted, to wit: That the court erred in holding that the policy of insurance was in force at the time of said fire and that the acts or omissions on the part of the insured

which caused or tended to cause a forfeiture of the policy were waived by the defendant, the lower court, in discussing this question, said:
"Regardless of the question whether the plaintiff's letter of April 20 (Exhibit B) was a sufficient compliance with the requirement that he furnish notice of loss, the fact remains that on the following day the insurers replied by a letter (Exhibit C) declaring that the 'policies were null and void,' and in effect denying liability. It is well settled by a preponderance of authorities that such a denial is a waiver of notice of loss, because if the 'policies are null and void,' the furnishing of such notice would be vain and useless. (13 Am. & Eng. Encyc. of Law, 347, 348, 349.) Besides, 'immediate notice' is construed to mean only within a reasonable time. "Much the same may be said as to the objection that the insured failed to furnish to the insurers his books and papers or to present a detailed statement to the 'juez municipal,' in accordance with article 404 of the Code of Commerce. The last-named provision is similar to one appearing in many American policies requiring a certificate from a magistrate nearest the loss regarding the circumstances thereof. A denial of liability on other grounds waives this requirement (O'Neil vs. Buffalo Fire Insurance Company, 3 N. Y., 122; Peoria Marine Ins. Co. vs. Whitehill, 25 Ill., 382), as well as that relating to the production of books and papers (Ga. Home Ins. Co. vs. Goode & Co., 95 Va., 751; 66 Jur. Civ., 16). Besides, the insured might have had difficulty in attempting to comply with this clause, for there is no longer an official here with the title of 'juez municipal.'"

Besides the foregoing reasons, it may be added that there was no requirement in the policy in question that such notice be given. With reference to the assignments of error numbers 7, 9, and 10, they are too general in their character to merit consideration. With reference to the eighth assignment of error above noted, the defendant and appellant contends that he was entitled to have the amount of his responsibility reduced by the full value (P1,250) of the said automobile. It does not positively appear of record that the automobile in question was not included in the other policies. It does appear that the automobile was saved and was considered as a part of the salvage. It is alleged that the salvage amounted to P4,000, including the automobile. This amount (P4,000) was distributed among the different insurers and the amount of their responsibility was proportionately reduced. The defendant and appellant in the present case made no objection at any time in the lower court to that distribution of the salvage. The claim is now made for the first time. No reason is given why the objection was not made at the time of the

distribution of the salvage, including the automobile, among all of the insurers. The lower court had no opportunity to pass upon the question now presented for the first time. The defendant stood by and allowed the other insurers to share in the salvage, which he claims now wholly belonged to him. We think it is now too late to raise the question. For all of the foregoing reasons, we are of the opinion that the judgment of the lower court should be affirmed, and it is hereby ordered that judgment be entered against the defendant and in favor of the plaintiff for the sum of P9,841.50, with interest at the rate of 6 per cent from the 13th of July, 1908, with costs. So ordered.

Arellano, C.J., and Torres, J., concur. Trent, J., concurs in the result. Moreland, J., dissents.

FIRST DIVISION
[G.R. No. 114427. February 6, 1995.] ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS an d COUNTRY BANKERS INSURANCE CORPORATION, respondents. SYLLABUS 1.COMMERCIAL LAW; INSURANCE; "OTHER INSURANCE" CLAUSE AS A CONDITION; ALLOWED TO PREVENT AN INCREASE IN THE MORAL HAZARD. The Insurance Commission found that the petitioner had no knowledge of the previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are conclusive and binding upon this Court. We agree with the Court of Appeals that the petitioner

knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F24792. Condition 3 of the private respondent's Policy No. F-14622 is a condition which is nor proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance Code which provides that "[a] policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or "other insurance" clause and has been upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the policy. However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same interest therein, and the same risk. 2.ID.; ID.; ID.; CONCEPT; GENERAL INSURANCE AND SURETY CORP. v. NG HUA (106 PHIL. 1117); NOT APPLICABLE IN CASE AT BAR. It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. v. Ng Hua (106 Phil. 1117 [1960]) or in Pioneer Insurance & Surety Corp. vs. Yap, (61 SCRA 426 [1974]) which read: "The insured shall give notice to the company of any insurance already effected, or which may subsequently be effected covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited." or in the 1930 case ofSanta Ana vs. Commercial Union Assurance Co. (55 Phil 329, 334 [1930]) which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured must be declared by the insured in writing and he must cause the company to add or insert it in the policy, without which such policy shall be null and void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It expressly provides that the condition "shall not apply when the total insurance or insurances in force at the time of the loss damage is not more than P200,000.00."

3.ID.; ID.; CONTRACT THEREOF MUST BE LIBERALLY CONSTRUED. It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. Stated differently, provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance policies should be construed most strictly against those for whose benefits they are inserted, and most favorably toward those against whom they are intended to operate. The reason for this is that, except for riders which may later be inserted, the insured sees the contract already in its final form and has had no voice in the selection or arrangement of the words employed therein. On the other hand, the language of the contract was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of the insurers and the technical language employed therein is rarely understood by ordinary laymen. 4.ID.; ID.; INSURABLE INTEREST; EXTENT THEREOF BY MORTGAGEE AND MORTGAGOR; RULE. As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be covered by one policy, or each may take out a separate policy covering his interest, either at the same or at separate times. The mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property. The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property. Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee. 5.ID.; ID.; RULE WHEN A MORTGAGOR OBTAINED THEREOF FOR THE BENEFIT OF THE MORTGAGEE. A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be

attached; or a "standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may be attached; or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds. In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. This kind of policy covers only such interest as the mortgagee has at the issuing of the policy. On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by which the mortgagor is to pay the premiums upon such insurance. It has been noted, however, that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and obtains a policy on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 6.ID.; ID.; DOUBLE INSURANCE; DOES NOT EXIST WHEN TWO (2) POLICIES DO NOT COVER THE SAME INTEREST; CASE AT BAR. We are of the opinion that Condition 3 of the subject policy is not totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies obtained. The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC do not cover the same interest as that covered by the policy of the private respondent, no double insurance exists. The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy. Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not exceeding to P200,000.00. What it had in mind was to discourage over-

insurance. Indeed, the rationale behind the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner obtains insurance from two or more insurers in a total amount that exceeds the property's value, the insured may have an inducement to destroy the property for the purpose of collecting the insurance. The public as well as the insurer is interested in preventing a situation in which a fire would be profitable to the insured.

DECISION DAVIDE, JR., J :

p

For our review under Rule 45 of the Rules of Court is the decision1 of the Court of Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against private respondent Country Bankers Insurance Corporation. The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private respondent fire insurance policy No. F-146222 for P100,000.00. The period of the policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and women wear and other usual to assured's business."
cdasia

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:
Zenco Sales, Inc.P55,698.00 F. Legaspi Gen. Merchandise86,432.50 Cebu Tesing Textiles250,000.00 (on credit) ======== P392,130.50

The policy contained the following condition:

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

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. The petitioner's insured stocks-in-trade were completely destroyed prompting him to file with the private respondent a claim under the policy. On 28 December 1990, the private respondent denied the claim because it found that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart (Mr. ArmandoGeagonia, Prop.)" with a mortgage clause reading:
"MORTGAGEE:Loss, if any, shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. Phils. First CEB/F-24758" 4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy. The petitioner then filed a complaint5 against the private respondent with the Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation. He attached as Annex "M" 6 thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the said letter that at the time he obtained the private respondent's fire insurance policy

he knew that the two policies issued by the PFIC were already in existence; however, he had no knowledge of the provision in the private respondent's policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the private respondent's agent; and had it been so mentioned, he would not have withheld such information. He further asserted that the total of the amounts claimed under the three policies was below the actual value of his stocks at the time of loss, which was P1,000,000.00 In its answer,7 the private respondent specifically denied the allegations in the complaint and set up as its principal defense the violation of Condition 3 of the policy. In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner did not violate Condition 3 as he had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These findings were based on the petitioner's testimony that he came to know of the PFIC policies only when he filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid for their premiums without informing him thereof. The Insurance Commission then decreed:
cdasia

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

Its motion for the reconsideration of the decision9 having been denied by the Insurance Commission in its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a petition for review. The petition was docketed as CA-G.R. SP No. 31916. In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance Commission because it found that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:

"It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the name of private respondent [petitioner herein]. The policy states that 'DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)' was assured and that 'TESING TEXTILES' [was] only the mortgagee of the goods. In addition, the premiums on both policies were paid for by private respondent, not by the Tesing Textiles which is alleged to have taken out the other insurances without the knowledge of private respondent. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be only the mortgagee of the goods insured but the party to which they were issued were the 'DISCOUNT MART (MR. ARMANDO GEAGONIA).' It is clear that it was the private respondent [petitioner herein] who took out the policies on the same property subject of the insurance with petitioner. Hence, in failing to disclose the existence of these insurances private respondent violated Condition No. 3 of Fire Policy No. 14622. . . . Indeed private respondent's allegation of lack of knowledge of the previous insurances is belied by his letter to petitioner [of 18 January 1991. The body of the letter reads as follows:]
cdasia

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

Sir, I am only an ordinary businessman interested in protecting my investments. The actual value of my stocks damaged by the fire was estimated by the Police Department to be P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income Statement as of December 31, 1989 or five months before the fire, shows my merchandise inventory was already some P595,455,75. . . . These will support my claim that the amount under the three policies are much below the value of my stocks lost. xxx xxx xxx The letter contradicts private respondent's pretension that he did not know that there were other insurances taken on the stock-in-trade and seriously puts in question his credibility."

cdasia

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack of excess of jurisdiction:
"A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS; B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE RESPONDENT."

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

reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus should not have been considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's complaint in I.C. Case No. 3340 as Annex "M" thereof and made an integral part of the complaint. 12 It has attained the status of a judicial admission and since its due execution and authenticity was not denied by the other party, the petitioner is bound by it even if it were not introduced as an independent evidence. 13 As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two policies. The Court ofAppeals disagreed and found otherwise in view of the explicit admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under Rule 45, only questions of law are involved and findings of fact by the Court of Appealsare conclusive and binding upon this Court. 14 We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792.
cdasia

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides that "[a] policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or "other insurance" clause and has been

upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the policy. 16 However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same interest therein, and the same risk. 17 As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be covered by one policy, or each may take out a separate policy covering his interest, either at the same or at separate times. 18 The mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property. 19 The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only the amount of the debt, not exceeding the value of the mortgaged property.20 Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee. A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may be attached; or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds. 21 In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee.22 This kind of policy covers only such interest as the mortgagee has at the issuing of the policy. 23 On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by

which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted, however, that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and obtains a policy on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 25 The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which reads:
cdasia

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

This is clearly a simple loss payable clause, not a standard mortgage clause. It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. vs. Ng Hua26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:
"The insured shall give notice to the company of any insurance or insurances already effected, or which may subsequently be effected covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited."

or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured must be declared by the insured in writing and he must cause the company to add or insert it in the policy, without which such policy shall be null and void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622 does not absolutely declare void any violation thereof. It expressly provides that the condition "shall not apply when the total insurance or insurances in force at the time of the loss or damage is not more than P200,000.00."
cdasia

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently, provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance policies should be construed most strictly against those for whose benefits they are inserted, and most favorably toward those against whom they are intended to operate. 30 The reason for this is that, except for riders which may later be inserted, the insured sees the contract already in its final form and has had no voice in the selection or arrangement of the words employed therein. On the other hand, the language of the contract was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of the insurers and the technical language employed therein is rarely understood by ordinary laymen. 31 With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies obtained. The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE that the coinsurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC do not cover the same interest as that covered by the policy of the private respondent, no double

insurance exists. The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy.
cdasia

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner obtains insurance policies from two or more insurers in a total amount that exceeds the property's value, the insured may have an inducement to destroy the property for the purpose of collecting the insurance. The public as well as the insurer is interested in preventing a situation in which a fire would be profitable to the insured. 32 WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED. Costs against private respondent Country Bankers Insurance Corporation. SO ORDERED.

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

SECOND DIVISION
[G.R. No. L-28501. September 30, 1982.] PEDRO ARCE, plaintiffappellee, vs. THE CAPITAL INSURANCE & SURETY CO., INC., defendant-appellant.

Rodolfo M. dela Rosa for plaintiff-appellee. Anchacoso, Ocampo & Simbulan for defendant-appellant.
SYNOPSIS The appellee owned a residential house which was insured with the appellant COMPANY since 1961. In November 1965, the COMPANY sent to the INSURED a Renewal Certificate to cover the period from December 5, 1965 to December 5,1966, and requested payment of the corresponding premium. Anticipating that the premium could not be paid on time, the INSURED asked for an extension which was granted by the COMPANY. After the lapse of the requested extension, INSURED still failed to pay the premium. Thereafter, the house of the INSURED was totally destroyed by fire. Upon INSURED's presentation of claim for indemnity, he was told that no indemnity was due because the premium was not paid. The INSURED sued the COMPANY for indemnity. The trial court held the COMPANY liable to indemnify the INSURED on the ground that since the COMPANY could have demanded payment of the premium, mutuality of obligation required that it should be liable on the policy. Hence, this appeal by the COMPANY on question of law. The Supreme Court reversed the decision of the trial court. It held that Section 72 of the Insurance Act as amended by R.A.. 3540 states that "no policy issued by aninsurance company is valid and binding unless and until the premium thereof has been paid." SYLLABUS 1.COMMERCIAL LAW; INSURANCE; PAYMENT OF PREMIUMS, NECESSARY FOR EFFECTIVITY OF POLICY; CASE AT BAR. It is obvious from both theInsurance Act, as amended, and the stipulation of the parties that time is of

the essence in respect to the payment of the insurance premium so that if it is not paid the contract does not take effect unless there is still another stipulation to the contrary. In the instant case, the INSURED was given a grace period to pay the premium but the period having expired with no payment made, he cannot insist that the COMPANY is nonetheless obligated to him. 2 ID.; ID.; ID.; DELGADO CASE DECIDED PRIOR TO AMENDMENT OF INSURANCE ACT. It is to be noted that Delgado (L-18567, September 30, 1963, 9 SCRA 177) was decided in the light of the Insurance Act before Sec. 72 was amended by R.A. No. 3590 Prior to the amendment, an insurance contract was effective even if the premium had not been paid so that an insurer was obligated to pay indemnity in case of loss and correlatively he had also the right to sue for payment of the premium But the amendment to Sec. 72 has radically changed the legal regime in that unless the premium is paid there is no insurance. DECISION ABAD SANTOS, J :
p

In Civil Case No. 66466 of the Court of First Instance of Manila, the Capital Insurance and Surety Co., Inc., (COMPANY) was ordered to pay Pedro Arce (INSURED) the proceeds of a fire insurance policy. Not satisfied with the decision, the company appealed to this Court on questions of law. The INSURED was the owner of a residential house in Tondo, Manila, which had been insured with the COMPANY since 1961 under Fire Policy No. 24204. On November 27, 1965, the COMPANY sent to the INSURED Renewal Certificate No. 47302 to cover the period December 5, 1965 to December 5, 1966. The COMPANY also requested payment of the corresponding premium in the amount of P38.10. Anticipating that the premium could not be paid on time, the INSURED, thru his wife, promised to pay it on January 4, 1966. The COMPANY accepted the promise but the premium was not paid on January 4, 1966. On January 8, 1966, the house of the INSURED was totally destroyed by fire. On January 10, 1966, INSURED's wife presented a claim for indemnity to the COMPANY. She was told that no indemnity was due because the premium on the

policy was not paid. Nonetheless the COMPANY tendered a check for P300.00 as financial aid which was received by the INSURED's daughter, Evelina R. Arce. The voucher for the check which Evelina signed stated that it was "in full settlement (ex gratia) of the fire loss under Claim No. F-554 Policy No. F-24202." Thereafter the INSURED and his wife went to the office of the COMPANY to have his signature on the check identified preparatory to encashment. At that time the COMPANY reiterated that the check was given "not as an obligation, but as a concession" because the renewal premium had not been paid. The INSURED cashed the check but then sued the COMPANY on the policy.
LexLib

The court a quo held that since the COMPANY could have demanded payment of the premium, mutuality of obligation requires that it should also be liable on its policy. The court a quo also held that the INSURED was not bound by the signature of Evelina on the check voucher because he did not authorize her to sign the waiver. The appeal is impressed with merit. The trial court cited Capital Insurance and Surety Co., Inc. vs. Delgado, L-18567, Sept. 30, 1963, 9 SCRA 177, to support its first proposition. In that case, this Court said:
"On the other hand, the preponderance of the evidence shows that appellee issued fire insurance policy No. C-1137 in favor of appellants covering a certain property belonging to the latter located in Cebu City; that appellants failed to pay a balance of P583.95 on the premium charges due, notwithstanding demands made upon them. As with the issuance of the policy to appellants the same became effective and binding upon the contracting parties, the latter can not avoid the obligation of paying the premiums agreed upon. In fact, appellant Mario Delgado, in a letter marked in the record as Exhibit G, expressly admitted his unpaid account for premiums and asked for an extension of time to pay the same. It is clear from the foregoing that appellants are under obligation to pay the amount sued upon." (At p. 180.)

Upon the other hand, Sec. 72 of the Insurance Act, as amended by R.A. No. 3540 reads:
"SEC. 72.An insurer is entitled to payment of premium as soon as the thing insured is exposed to the perils insured against, unless there is clear agreement to grant credit extension for the premium due. No

policy issued by an insurance company is valid and binding unless and

until the premium thereof has been paid." (Emphasis supplied.) (p. 11,
Appellant's Brief.)

Morever, the parties in this case had stipulated:

LLphil

"IT IS HEREBY DECLARED AND AGREED that notwithstanding anything to the contrary contained in the within policy, this insurance will be deemed valid and binding upon the Company only when the premium and documentary stamps therefor have actually been paid in full and duly acknowledged in an official receipt signed by an authorized official/representative of the Company." (pp. 45-46, Record on Appeal.)

It is obvious from both the Insurance Act, as amended, and the stipulation of the parties that time is of the essence in respect of the payment of the insurancepremium so that if it is not paid the contract does not take effect unless there is still another stipulation to the contrary. In the instant case, the INSURED was given a grace period to pay the premium but the period having expired with no payment made, he cannot insist that the COMPANY is nonetheless obligated to him. It is to be noted that Delgado was decided in the light of the Insurance Act before Sec. 72 was amended by the addition of the underscored portion, supra. Prior to the amendment, an insurance contract was effective even if the premium had not been paid so that an insurer was obligated to pay indemnity in case of loss and correlatively he had also the right to sue for payment of the premium. But the amendment to Sec. 72 has radically changed the legal regime in that unless the premium is paid there is no insurance. With the foregoing, it is not necessary to dwell at length on the trial court's second proposition that the INSURED had not authorized his daughter Evelina to make a waiver because the INSURED had nothing to waive; his policy ceased to have effect when he failed to pay the premium. We commiserate with the INSURED. We are well aware that many insurance companies have fallen into the condemnable practice of collecting premiums promptly but resort to all kinds of excuses to deny or delay payment of just claims. Unhappily the instant case is one where the insurer has the law on its side. WHEREFORE, the decision of the court a quo is reversed; the appellee's complaint is dismissed. No special pronouncement as to costs.

SO ORDERED.

Barredo, Aquino, Concepcion, Jr., Guerrero, De Castro and Escolin, JJ., concur.

FIRST DIVISION
[G.R. No. 56718. January 17, 1985.] ACME SHOE RUBBER & PLASTIC CORPORATION, petitioner, vs. THE COURT OF APPEALS and DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES, respondents.

N. J. Quisumbing & Associates for petitioner. Pelaez, Adriano & Gregorio Law Office for private respondent.
SYLLABUS 1.MERCANTILE LAW; INSURANCE; FIRE INSURANCE; FAILURE TO PAY PREMIUM WITHIN STIPULATED PERIOD; POLICY HELD AUTOMATICALLY CANCELLED. Upon the facts, the evidence, and the law, we sustain the Appellate Court. By the express terms of the Promissory Note signed by its President, ACME was fully aware that the policy would be automatically cancelled on August 13, 1964, the 90th day from March 14, 1964, if it did not pay the premium before the former date. There is also evidence to the effect that various reminders by the INSURER for payment remained unheeded (Exhibit "10"). Not having paid the 1964-1965 premium within the extension granted, and pursuant to R.A. No. 3540, the policy was automatically cancelled and there was no insurance coverage to speak of as of the date of the fire on October 13, 1964. 2.ID.; ID.; ID.; REPUBLIC ACT NO. 3540; PROVISION REQUIRING PAYMENT OF PREMIUMS FOR EFFICACY OF INSURANCE; NO RETROACTIVE APPLICATION. Since Republic Act No. 3540 was approved only on June 20, 1963 and was put into effect only beginning October 1, 1963, it could not retroactively affect the renewal of the insurance policy on May 15, 1963, or prior to the Act's effective date. If, in the past, ACME had been granted credit extensions, the Promissory Note it had signed did away with such credit arrangement. Moreover, it was prior

to the advent of Republic Act No. 3540 when renewal receipts that the INSURER had issued did not contain the "Receipt of Payment" and "Credit Agreement" clauses. By 1964, however, the situation had changed by the passage of said Act by the express provision of which no policy could be valid and binding unless and until the premium thereof had been paid. It is axiomatic that laws have no retroactive effect unless the contrary is provided (Article 4, Civil Code; Manila Trading & Supply Company vs. Santos, et al., 66 Phil. 237 [1938]). What became automatically cancelled by R.A. No. 3540 was the 1964-1965 policy for ACME's failure to pay the premium within the 90-day extension granted, and in accordance with the express terms of the Promissory Note that it had signed. DECISION MELENCIO-HERRERA, J :
p

On hand is a Petition for Review on Certiorari of the Decision of the then Court of Appeals (CA-G. R. No. 58917-R), denying recovery on an insurance policy, thereby reversing the judgment of the Court of First Instance of Rizal, Branch XII, at Caloocan City, which had allowed such recovery. Since 1946, petitioner ACME Shoe Rubber and Plastic Corporation (ACME, for brevity) had been insuring yearly against fire its building, machines and general merchandise, located at Caloocan City, with respondent Domestic Insurance Company of the Philippines (the INSURER, for short). On May 14, 1962, ACME continued to insure its properties with the INSURER and was issued Policy No. 24887 in the amount of P200,000.00 for the period May 15, 1962 up to May 15, 1963. On May 14, 1963, the INSURER issued Renewal Receipt No. 22989 to cover the period May 15, 1963 to May 15, 1964 (Exhibit "D"). On January 8, 1964, ACME paid P3,331.26 as premium. The INSURER applied the payment as renewal premium for the period May 15, 1963 to May 15, 1964.
cdrep

On May 15, 1964, the INSURER issued Renewal Receipt No. 30127 (Exhibit "E") for the renewal premium of P3,331.26 for the period May 15, 1964 to May 15, 1965. Stamped on it was the
"Note: Subject to 'Receipt of Payment Clause' and 'Credit Agreement' attached hereto and forming part hereof."

The clauses mentioned, which were attached as riders to Renewal Receipt No. 30127, respectively read as follows:
"RECEIPT OF PAYMENT CLAUSE "IT IS HEREBY DECLARED AND AGREED that notwithstanding anything to the contrary contained in the within policy, this insurance will be deemed valid and binding upon the Company only when the premium and documentary stamps therefor have actually been paid in full and duly acknowledged in an official receipt signed by an authorized official/representative of the Company" (Exhibit 'E-1') "CREDIT AGREEMENT "The premium corresponding to the first ninety days of the term of this policy or any renewal thereof is hereby considered paid for the purpose only of making this Policy valid and binding during said portion of the term. Thereafter, this Policy shall automatically become void and ineffective (without prejudice to the obligation of the Insured to pay the corresponding short period premium for the said 90 days) unless prior to the expiration of said period the Insured shall have actually paid to the Company the total premium and the documentary stamps stipulated in this Policy." (Exhibit 'E-2')

On May 26, 1964, ACME, through its President, signed the following
"PROMISSORY NOTE 18th May, 1964 "Received RR #30127 to be applied on Policy No. 24887 for which I/we promise to pay DOMESTIC INSURANCE CO. OF THE PHILIPPINES or order, withinninety days from the effective date of this policy, 15th May, 1964, the premium and documentary stamps in the sum of P3,331.26. Should I/we fail to pay this promissory note when due, I/we agree that the said policy should stand automatically cancelled, without further notice by the Company or election on my/our part, and I/we shall then be liable to pay only the short period premium corresponding to 90 days. ACME SHOE RUBBER & PLASTIC CORP. (Signed)" (Exhibit 'H')

ACME's properties were completely destroyed by fire on October 13, 1964. ACME filed its insurance claim but the INSURER disclaimed liability on the ground that as of the date of loss, the properties burned were not covered by insurance. On March 20, 1965, ACME sued on the policy before the Court of First Instance of Rizal Branch XII, Caloocan City, for the collection of the insurance proceeds and for damages in the form of lost profits by reason of the delay in payment. The Trial Court found the INSURER liable in the amount of P200,000.00, representing the insurance coverage with legal interest thereon, plus P57,500.00 as consequential damages, "and the sum of P7,500.00 and 25% of whatever amount may be recovered as attorney's fees plus costs." The Trial Court opined that there was a clear intention on the INSURER's part to grant ACME a credit extension for the payment of the premium due; and that to allow the INSURER to apply the premium ACME paid on January 8, 1964 to a policy which had become automatically cancelled according to the INSURER's own theory, would be to allow it to unjustly enrich itself at ACME's expense. On appeal, respondent Appellate Court reversed the Trial Court and dismissed the suit on the ground that, as of the moment of loss, ACME's properties were not insured and the INSURER could not be held liable for any indemnity as a result of the loss.
LLjur

ACME then filed the present Petition contending that:

I "The Court of Appeals erred in failing to resolve the issue of unjust enrichment. II "The Court of Appeals erred in ruling that there was no insurance contract since respondent insurer accepted a one-year premium on January 8, 1964. III "The Court of Appeals erred in ruling that petitioner and the lower court gave Republic Act 3540 retroactive application. IV

"The Court of Appeals erred in deciding this case on the issue of intention express or implied since the issue is one of effect of the new law whose policy is superior to the intention of the parties."

Upon the facts, the evidence, and the law, we sustain the Appellate Court. By the express terms of the Promissory Note signed by its President, ACME was fully aware that the policy would be automatically cancelled on August 13, 1964, the 90th day from March 14, 1964, if it did not pay the premium before the former date. There is also evidence to the effect that various reminders by the INSURER for payment remained unheeded (Exhibit "10"). Not having paid the 1964-1965 premium within the extension granted, and pursuant to R.A. No. 3540, the policy was automatically cancelled and there was no insurance coverage to speak of as of the date of the fire on October 13, 1964. ACME contends, however, that the INSURER 'accepted (the) one-year premium on January 8, 1964 and it had no right to apply it to the payment of a period of coverage prior thereto when under Republic Act 3540 the policy was void and respondent insurer could have validly disclaimed liability for loss had one occurred then". The pertinent provision of Republic Act No. 3540, approved on June 20, 1963, and put into effect by the Office of the Insurance Commissioner beginning October 1, 1963 (Exhibit "11"), reads:
"Sec. 72.An insurer is entitled to payment of the 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."

Since Republic Act No. 3540 was approved only on June 20, 1963 and was put into effect only beginning October 1, 1963, it could not retroactively affect the renewal of the insurance policy on May 15, 1963, or prior to the Act's effective date. ACME's premium payment of January 8, 1964, therefore, was properly applied to the 1963-1964 premium. The Trial Court's opinion that there was a clear agreement to grant ACME credit extension for 1964-1965 is negated by ACME's Promissory Note binding itself to pay "within ninety days from the effective date of this policy, 15th May, 1964 . . . the premium and documentary stamps in the sum of P3,331.26 . . . Indubitably, the credit extension granted ACME was only for 90 days.

If, in the past, ACME had been granted credit extensions, the Promissory Note it had signed did away with such credit arrangement. Moreover, it was prior to the advent of Republic Act No. 3540 when renewal receipts that the INSURER had issued did not contain the "Receipt of Payment" and "Credit Agreement" clauses. By 1964, however, the situation had changed by the passage of said Act by the express provision of which no policy could be valid and binding unless and until the premium thereof had been paid.
LLpr

ACME's claim that the INSURER would unjustly enrich itself if it were to be allowed to apply the one-year premium it received to a past period when the policy was void and the INSURER had incurred no risk, is flawed for the reason already stated that Renewal Receipt No. 22989 for 1963-1964 had been issued on May 14, 1963 before R.A. No. 3540 was approved on June 20, 1963 and implemented on October 1, 1963 (Exhibit "11"). It is axiomatic that laws have no retroactive effect unless the contrary is provided (Article 4, Civil Code; Manila Trading & Supply Company vs. Santos, et al., 66 Phil. 237 [1938]). What became automatically cancelled by R.A. No. 3540 was the 1964-1965 policy for ACME's failure to pay the premium within the 90-day extension granted, and in accordance with the express terms of the Promissory Note that it had signed. WHEREFORE, the judgment under review is hereby affirmed. Without pronouncement as to costs. SO ORDERED. Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur. Teehankee, J., took no part.

THIRD DIVISION
[G.R. No. 83122. October 19, 1990.] ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, petitioners, vs. THE HONORABLE COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E. PARNELL,

CARLOS K. CATOLICO and THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.,respondents.

Albino B. Achas for petitioners. Angara, Abello, Concepcion, Regala & Cruz for private respondents.
DECISION GUTIERREZ, JR., J :
p

This is a petition for review of the January 29, 1988 decision of the Court of Appeals and the April 27, 1988 resolution denying the petitioners' motion for reconsideration, which decision and resolution reversed the decision dated June 23, 1986 of the Court of First Instance of Manila, Branch 34 in Civil Case No. 121126 upholding the petitioners' causes of action and granting all the reliefs prayed for in their complaint against private respondents.
cdphil

The antecedent facts of the case are as follows: Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private respondent Philippine American General Insurance Company, Inc. (Philamgen for short) since 1965. As such, he was authorized to solicit and sell in behalf of Philamgen all kinds of non-life insurance, and in consideration of services rendered was entitled to receive the full agent's commission of 32.5% from Philamgen under the scheduled commission rates (Exhibits "A" and "1"). From 1973 to 1975, Valenzuela solicited marine insurance from one of his clients, the Delta Motors, Inc. (Division of Electronics Airconditioning and Refrigeration) in the amount of P4.4 Million from which he was entitled to a commission of 32% (Exhibit "B"). However, Valenzuela did not receive his full commission which amounted to P1.6 Million from the P4.4 Million insurance coverage of the Delta Motors. During the period 1976 to 1978, premium payments amounting to P1,946,886.00 were paid directly to Philamgen and Valenzuela's commission to which he is entitled amounted to P632,737.00. In 1977, Philamgen started to become interested in and expressed its intent to share in the commission due Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela refused (Exhibit "D").

On February 8, 1978 Philamgen and its President, Bienvenido M. Aragon insisted on the sharing of the commission with Valenzuela (Exhibit E). This was followed by another sharing proposal dated June 1, 1978. On June 16, 1978, Valenzuela firmly reiterated his objection to the proposals of respondents stating that: "It is with great reluctance that I have to decline upon request to signify my conformity to your alternative proposal regarding the payment of the commission due me. However, I have no choice for to do otherwise would be violative of the Agency Agreement executed between our goodselves." (Exhibit B-1) Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido Aragon, Carlos Catolico and Robert E. Parnell took drastic action against Valenzuela. They: (a) reversed the commission due him by not crediting in his account the commission earned from the Delta Motors, Inc. insurance (Exhibit "J" and "2"); (b) placed agency transactions on a cash-and-carry basis; (c) threatened the cancellation of policies issued by his agency (Exhibits "H" to "H-2"); and (d) started to leak out news that Valenzuela has a substantial account with Philamgen. All of these acts resulted in the decline of his business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on December 27, 1978, Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3, Decision Trial Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition). The petitioners sought relief by filing the complaint against the private respondents in the court a quo (Complaint of January 24, 1979, Annex "F" Petition). After due proceedings, the trial court found:
xxx xxx xxx "Defendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent by making it appear that plaintiff Arturo P. Valenzuela has a substantial account with defendant PHILAMGEN, particularly Delta Motors, Inc.'s Account, thereby prejudicing defendant PHILAMGEN's interest (Exhibits 6, '11,' '11- ,' '12-A' and '13-A'). "Defendants also invoked the provisions of the Civil Code of the Philippines (Article 1868) and the provisions of the General Agency Agreement as their basis for terminating plaintiff Arturo P. Valenzuela as one of their General Agents. "That defendants' position could have been justified had the termination of plaintiff Arturo P. Valenzuela was (sic) based solely on the provisions of the Civil Code and the conditions of the General Agency Agreement.

But the records will show that the principal cause of the termination of the plaintiff as General Agent of defendant PHILAMGEN was his refusal to share his Delta commission. "That it should be noted that there were several attempts made by defendant Bienvenido M. Aragon to share with the Delta commission of plaintiff Arturo P. Valenzuela. He had persistently pursued the sharing scheme to the point of terminating plaintiff Arturo P. Valenzuela, and to make matters worse, defendants made it appear that plaintiff Arturo P. Valenzuela had substantial accounts with defendant PHILAMGEN. "Not only that, defendants have also started (a) to treat separately the Delta Commission of plaintiff Arturo P. Valenzuela, (b) to reverse the Delta commission due plaintiff Arturo P. Valenzuela by not crediting or applying said commission earned to the account of plaintiff Arturo P. Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's agency transactions on a 'cash-and-carry' basis, (d) sending threats to cancel existing policies issued by plaintiff Arturo P. Valenzuela's agency, (e) to divert plaintiff Arturo P. Valenzuela's insurance business to other agencies, and (f) to spread wild and malicious rumors that plaintiff Arturo P. Valenzuela has substantial account with defendant PHILAMGEN to force plaintiff Arturo P. Valenzuela into agreeing with the sharing of his Delta commission." (pp. 9-10, Decision, Annex 1, Petition). xxx xxx xxx "These acts of harassment done by defendants on plaintiff Arturo P. Valenzuela to force him to agree to the sharing of his Delta commission, which culminated in the termination of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent, do not justify said termination of the General Agency Agreement entered into by defendant PHILAMGEN and plaintiff Arturo P. Valenzuela. "That since defendants are not justified in the termination of plaintiff Arturo P. Valenzuela as one of their General Agents, defendants shall be liable for the resulting damage and loss of business of plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the Philippines). (Ibid, p. 11)

The court accordingly rendered judgment, the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against defendants ordering the latter to reinstate plaintiff Arturo P.

Valenzuela as its General Agent, and to pay plaintiffs, jointly and severally, the following: "1.The amount of five hundred twenty-one thousand nine hundred sixty four and 16/100 pesos (P521,964.16) representing plaintiff Arturo P. Valenzuela's Delta Commission with interest at the legal rate from the time of the filing of the complaint, which amount shall be adjusted in accordance with Article 1250 of the Civil Code of the Philippines; "2.The amount of seventy-five thousand pesos (P75,000.00) per month as compensatory damages from 1980 until such time that defendant Philamgen shall reinstate plaintiff Arturo P. Valenzuela as one of its general agents; 3.The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff as moral damages; 4.The amount of seventy-five thousand pesos (P75,000.00) as and for attorney's fees; 5.Costs of the suit.' (Ibid., p. 12)

From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell, Carlos K. Catolico and PHILAMGEN respondents herein, and defendantsappellants below, interposed an appeal on the following:
LLpr

ASSIGNMENT OF ERRORS I THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA HAD NO OUTSTANDING ACCOUNT WITH DEFENDANT PHILAMGEN AT THE TIME OF THE TERMINATION OF THE AGENCY. II THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA IS ENTITLED TO THE FULL COMMISSION OF 32.5% ON THE DELTA ACCOUNT. III THE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF PLAINTIFF ARTURO P. VALENZUELA WAS NOT JUSTIFIED AND THAT

CONSEQUENTLY DEFENDANTS ARE LIABLE FOR ACTUAL AND MORAL DAMAGES, ATTORNEY'S FEES AND COSTS. IV ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST DEFENDANT PHILAMGEN WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES EVEN AGAINST THE INDIVIDUAL DEFENDANTS WHO ARE MERE CORPORATE AGENTS ACTING WITHIN THE SCOPE OF THEIR AUTHORITY. V ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF PLAINTIFF ARTURO P. VALENZUELA WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES IN FAVOR OF HOSPITALITA VALENZUELA, WHO, NOT BEING THE REAL PARTY IN INTEREST IS NOT TO OBTAIN RELIEF.

On January 29, 1988, respondent Court of Appeals promulgated its decision in the appealed case. The dispositive portion of the decision reads:
"WHEREFORE, the decision appealed from is hereby modified accordingly and judgment is hereby rendered ordering: 1.Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one million nine hundred thirty two thousand five hundred thirtytwo pesos and seventeen centavos (P1,932,532.17), with legal interest thereon from the date of finality of this judgment until fully paid. 2.Both plaintiff-appellees to pay jointly and severally defendantsappellants the sum of fifty thousand pesos (P50,000.00) as and by way of attorney's fees.

No pronouncement is made as to costs." (p. 44, Rollo)

There is in this instance irreconcilable divergence in the findings and conclusions of the Court of Appeals, vis-a-vis those of the trial court particularly on the pivotal issue whether or not Philamgen and/or its officers can be held liable for damages due to the termination of the General Agency Agreement it entered into with the petitioners. In its questioned decision the Court of Appeals observed that:

"In any event the principal's power to revoke an agency at will is so pervasive, that the Supreme Court has consistently held that termination may be effected even if the principal acts in bad faith, subject only to the principal's liability for damages (Danon v. Antonio A. Brimo & Co., 42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158 and Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V, Civil Code of the Philippines Annotated [1986] 696). "The lower court, however, thought the termination of Valenzuela as General Agent improper because the record will show the principal cause of the termination of the plaintiff as General Agent of defendant Philamgen was his refusal to share his Delta commission" (Decision, p. 9; p. 13, Rollo, 41).

Because of the conflicting conclusions, this Court deemed it necessary in the interest of substantial justice to scrutinize the evidence and records of the cases. While it is an established principle that the factual findings of the Court of Appeals are final and may not be reviewed on appeal to this Court, there are however certain exceptions to the rule which this Court has recognized and accepted, among which, are when the judgment is based on a misapprehension of facts and when the findings of the appellate court, are contrary to those of the trial court (Manlapaz v. Court of Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the findings of the Court of Appeals and the trial court are contrary to each other, this Court may scrutinize the evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v. Court of Appeals, 156 SCRA 597 [1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the conclusion of the Court of Appeals is grounded entirely on speculation, surmises or conjectures, or when the inference made is manifestly mistaken, absurd or impossible, or when there is grave abuse of discretion, or when the judgment is based on a misapprehension of facts, and when the findings of facts are conflicting the exception also applies (Malaysian Airline System Bernad v. Court of Appeals, 156 SCRA 321 [1987]). After a painstaking review of the entire records of the case and the findings of facts of both the court a quo and respondent appellate court, we are constrained to affirm the trial court's findings and rule for the petitioners. We agree with the court a quo that the principal cause of the termination of Valenzuela as General Agent of Philamgen arose from his refusal to share his Delta commission. The records sustain the conclusions of the trial court on the apparent bad faith of the private respondents in terminating the General Agency Agreement of petitioners. It is axiomatic that the findings of fact of a trial judge

are entitled to great weight (People v. Atanacio, 128 SCRA 22 [1984]) and should not be disturbed on appeal unless for strong and cogent reasons because the trial court is in a better position to examine the evidence as well as to observe the demeanor of the witnesses while testifying (Chase v. Buencamino, Sr., 136 SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag Trans., Inc. v. Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the findings and conclusions of the trial court are supported by substantial evidence and there appears to be no cogent reason to disturb them (Mendoza v. Court of Appeals, 156 SCRA 597 [1987]).
LibLex

As early as September 30, 1977, Philamgen told the petitioners of its desire to share the Delta Commission with them. It stated that should Delta back out from the agreement, the petitioners would be charged interests through a reduced commission after full payment by Delta. On January 23, 1978 Philamgen proposed reducing the petitioners' commissions by 50% thus giving them an agent's commission of 16.25%. On February 8, 1978, Philamgen insisted on the reduction scheme followed on June 1, 1978 by still another insistence on reducing commissions and proposing two alternative schemes for reduction. There were other pressures. Demands to settle accounts, to confer and thresh out differences regarding the petitioners' income and the threat to terminate the agency followed. The petitioners were told that the Delta commissions would not be credited to their account (Exhibit "J"). They were informed that the Valenzuela agency would be placed on a cash and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26, 1979, pp. 54-57). Existing policies were threatened to be cancelled (Exhibits "H" and "14"; TSN., March 26, 1979, pp. 29-30). The Valenzuela business was threatened with diversion to other agencies. (Exhibit "NNN"). Rumors were also spread about alleged accounts of the Valenzuela agency (TSN., January 25, 1980, p. 41). The petitioners consistently opposed the pressures to hand over the agency or half of their commissions and for a treatment of the Delta account distinct from other accounts. The pressures and demands, however, continued until the agency agreement itself was finally terminated. It is also evident from the records that the agency involving petitioner and private respondent is one "coupled with an interest," and, therefore, should not be freely revocable at the unilateral will of the latter. In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter much embarrassment,

difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. In the case of Valenzuela, he was able to build up an agency from scratch in 1965 to a highly productive enterprise with gross billings of about Two Million Five Hundred Thousand Pesos (P2,500,000.00) premiums per annum. The records sustain the finding that the private respondent started to covet a share of the insurance business that Valenzuela had built up, developed and nurtured to profitability through over thirteen (13) years of patient work and perseverance. When Valenzuela refused to share his commission in the Delta account, the boom suddenly fell on him. The private respondents by the simple expedient of terminating the General Agency Agreement appropriated the entire insurance business of Valenzuela. With the termination of the General Agency Agreement, Valenzuela would no longer be entitled to commission on the renewal of insurance policies of clients sourced from his agency. Worse, despite the termination of the agency, Philamgen continued to hold Valenzuela jointly and severally liable with the insured for unpaid premiums. Under these circumstances, it is clear that Valenzuela had an interest in the continuation of the agency when it was unceremoniously terminated not only because of the commissions he should continue to receive from the insurance business he has solicited and procured but also for the fact that by the very acts of the respondents, he was made liable to Philamgen in the event the insured fail to pay the premiums due. They are estopped by their own positive averments and claims for damages. Therefore, the respondents cannot state that the agency relationship between Valenzuela and Philamgen is not coupled with interest. "There may be cases in which an agent has been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or liability" (See MEC 569 p. 406). Furthermore, there is an exception to the principle that an agency is revocable at will and that is when the agency has been given not only for the interest of the principal but for the interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the agency ceases to be freely revocable by the sole will of the principal (See Padilla, Civil Code Annotated, 56 ed., Vol. IV p. 350). The following citations are apropos:

"The principal may not defeat the agent's right to indemnification by a termination of the contract of agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32 ALR 196). "Where the principal terminates or repudiates the agent's employment in violation of the contract of employment and without cause . . . the agent is entitled to receive either the amount of net losses caused and gains prevented by the breach, or the reasonable value of the services rendered. Thus, the agent is entitled to prospective profits which he would have made except for such wrongful termination provided that such profits are not conjectural, or speculative but are capable of determination upon some fairly reliable basis. And a principal's revocation of the agency agreement made to avoid payment of compensation for a result which he has actually accomplished (Hildendorf v. Hague, 293 NW 2d 272; Newhall v. Journal Printing Co., 105 Minn 44, 117 NW 228; Gaylen Machinery Corp. v. Pitman-Moore Co. [CA 2 NY] 273 F 2d 340) "If a principal violates a contractual or quasi-contractual duty which he was his agent, the agent may as a rule bring an appropriate action for the breach of that duty. The agent may in a proper case maintain an action at law for compensation or damages . . . A wrongfully discharged agent has a right of action for damages and in such action the measure and element of damages are controlled generally by the rules governing any other action for the employer's breach of an employment contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419; Tiffin Glass Co. v. Stoehr, 54 Ohio 157, 43 NE 2798)

At any rate, the question of whether or not the agency agreement is coupled with interest is helpful to the petitioners' cause but is not the primary and compelling reason. For the pivotal factor rendering Philamgen and the other private respondents liable in damages is that the termination by them of the General Agency Agreement was tainted with bad faith. Hence, if a principal acts in bad faith and with abuse of right in terminating the agency, then he is liable in damages. This is in accordance with the precepts in Human Relations enshrined in our Civil Code that "every person must in the exercise of his rights and in the performance of his duties act with justice, give every one his due, and observe honesty and good faith: (Art. 19, Civil Code), and every person who, contrary to law, wilfully or negligently causes damages to another, shall indemnify the latter for the same (Art. 20, id). "Any person who wilfully causes loss or injury to

another in a manner contrary to morals, good customs and public policy shall compensate the latter for the damages" (Art. 21, id.) As to the issue of whether or not the petitioners are liable to Philamgen for the unpaid and uncollected premiums which the respondent court ordered Valenzuela to pay Philamgen the amount of One Million Nine Hundred Thirty-Two Thousand Five Hundred Thirty-Two and 17/100 Pesos (P1,932,532.17) with legal interest thereon until fully paid (Decision - January 20, 1988, p. 16; Petition, Annex "A"), we rule that the respondent court erred in holding Valenzuela liable. We find no factual and legal basis for the award. Under Section 77 of the Insurance Code, the remedy for the non-payment of premiums is to put an end to and render the insurance policy not binding
"Sec. 77 . . . [N]otwithstanding any agreement to the contrary, no policy or contract of insurance is valid and binding unless and until the premiums thereof have been paid except in the case of a life or industrial life policy whenever the grace period provision applies (P.D. 612, as amended otherwise known as the Insurance Code of 1974)

In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979]) we held that the non-payment of premium does not merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract. And in Arce v. The Capital Insurance and Surety Co., Inc. (117 SCRA 63-[1982]), we reiterated the rule that unless premium is paid, an insurance contract does not take effect. Thus:
llcd

"It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9 SCRA 177 [1963] was decided in the light of the Insurance Act before Sec. 72 was amended by the underscored portion. Supra. Prior to the Amendment, an insurance contract was effective even if the premium had not been paid so that an insurer was obligated to pay indemnity in case of loss and correlatively he had also the right to sue for payment of the premium. But the amendment to Sec. 72 has

radically changed the legal regime in that unless the premium is paid there is no insurance." (Arce v. Capitol Insurance and Surety Co., Inc.,
117 SCRA 66; Italics supplied)

In Philippine Phoenix Surety case, we held:

"Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the purpose of indemnity. (Citing Insurance Law and Practice by John Alan Appleman, Vol. 15, p. 331; Emphasis supplied)

"The foregoing findings are buttressed by Section 776 of the Insurance Code (Presidential Decree No. 612, promulgated on December 18, 1974), which now provides that no contract of Insurance by an insurance company is valid and binding unless and until the premium thereof has been paid, notwithstanding any agreement to the contrary" (Ibid., 92 SCRA 425).

Perforce, since admittedly the premiums have not been paid, the policies issued have lapsed. The insurance coverage did not go into effect or did not continue and the obligation of Philamgen as insurer ceased. Hence, for Philamgen which had no more liability under the lapsed and inexistent policies to demand, much less sue Valenzuela for the unpaid premiums would be the height of injustice and unfair dealing. In this instance, with the lapsing of the policies through the non-payment of premiums by the insured there were no more insurance contracts to speak of. As this Court held in the Philippine Phoenix Surety case, (supra) "the non-payment of premiums does not merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract." The respondent appellate court also seriously erred in according undue reliance to the report of Banaria and Banaria and Company, auditors, that as of December 31, 1978, Valenzuela owed Philamgen P1,528,698.40. This audit report of Banaria was commissioned by Philamgen after Valenzuela was almost through with the presentation of his evidence. In essence, the Banaria report started with an unconfirmed and unaudited beginning balance of account of P1,758,185.43 as of August 20, 1976. But even with that unaudited and unconfirmed beginning balance of P1,758,185.43, Banaria still came up with the amount of P3,865.49 as Valenzuela's balance as of December 1978 with Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December 31, 1977, Valenzuela had no unpaid account with Philamgen (Ref: Annexes "D", "D1" "E", Petitioner's Memorandum). But even disregarding these annexes which are records of Philamgen and addressed to Valenzuela in due course of business, the facts show that as of July 1977, the beginning balance of Valenzuela's account with Philamgen amounted to P744,159.80. This was confirmed by Philamgen itself not only once but four (4) times on different occasions, as shown by the records. On April 3, 1978, Philamgen sent Valenzuela a statement of account with a beginning balance of P744,159.80 as of July 1977. On May 23, 1978, another statement of account with exactly the same beginning balance was sent to Valenzuela.

On November 17, 1978, Philamgen sent still another statement of account with P744,159.80 as the beginning balance. And on December 20, 1978, a statement of account with exactly the same figure was sent to Valenzuela. It was only after the filing of the complaint that a radically different statement of accounts surfaced in court. Certainly, Philamgen's own statements made by its own accountants over a long period of time and covering examinations made on four different occasions must prevail over unconfirmed and unaudited statements made to support a position made in the course of defending against a lawsuit. It is not correct to say that Valenzuela should have presented its own records to refute the unconfirmed and unaudited finding of the Banaria auditor. The records of Philamgen itself are the best refutation against figures made as an afterthought in the course of litigation. Moreover, Valenzuela asked for a meeting where the figures would be reconciled. Philamgen refused to meet with him and, instead, terminated the agency agreement. After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of credits representing the commission due from Delta and other accounts, Valenzuela had overpaid Philamgen the amount of P530,040.37 as of November 30, 1978. Philamgen cannot later be heard to complain that it committed a mistake in its computation. The alleged error may be given credence if committed only once. But as earlier stated, the reconciliation of accounts was arrived at four (4) times on different occasions where Philamgen was duly represented by its account executives. On the basis of these admissions and representations, Philamgen cannot later on assume a different posture and claim that it was mistaken in its representation with respect to the correct beginning balance as of July 1977 amounting to P744,159.80. The Banaria audit report commissioned by Philamgen is unreliable since its results are admittedly based on an unconfirmed and unaudited beginning balance of P1,758,185.43 as of August 20, 1976.
Cdpr

As so aptly stated by the trial court in its decision:

"Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after the controversy has started. In fact, after hearing plaintiffs have already rested their case. "The results of said audit were presented in Court to show plaintiff Arturo P. Valenzuela's accountability to defendant PHILAMGEN.

However, the auditor, when presented as witness in this case testified that the beginning balance of their audit report was based on an unaudited amount of P1,758,185.43 (Exhibit 46-A) as of August 20, 1976, which was unverified and merely supplied by the officers of defendant PHILAMGEN. "Even defendants very own Exhibit 38-A-3, showed that plaintiff Arturo P. Valenzuela's balance as of 1978 amounted to only P3,865.59, not P826,128.46 as stated in defendant Bienvenido M. Aragon's letter dated December 20, 1978 (Exhibit 14) or P1,528,698.40 as reflected in defendant's Exhibit 46 (Audit Report of Banaria dated December 24, 1980). "These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela to defendant PHILAMGEN only lends credence to the claim of plaintiff Arturo P. Valenzuela that he has no outstanding account with defendant PHILAMGEN when the latter, thru defendant Bienvenido M. Aragon, terminated the General Agency Agreement entered into by plaintiff (Exhibit A) effective January 31, 1979 (see Exhibits "2" and "2A"). Plaintiff Arturo P. Valenzuela has shown that as of October 31, 1978, he has overpaid defendant PHILAMGEN in the amount of P53,040.37 (Exhibit "EEE", which computation was based on defendant PHILAMGEN's balance of P744,159.80 furnished on several occasions to plaintiff Arturo P. Valenzuela by defendant PHILAMGEN (Exhibits H-1, VV, VV-1, WW, WW-1, YY, YY-2, ZZ and ZZ-2).

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

The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand Pesos (P75,000,00) per month as compensatory damages from June 1980 until its decision becomes final and executory. This award is justified in the

light of the evidence extant on record (Exhibits "N", "N-10", "O", "0-1, "P" and "P-1") showing that the average gross premium collection monthly of Valenzuela over a period of four (4) months from December 1978 to February 1979, amounted to over P300,000.00 from which he is entitled to a commission of P100,000.00 more or less per month. Moreover, his annual sales production amounted to P2,500,000.00 from where he was given 32.5% commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain." The circumstances of the case, however, require that the contractual relationship between the parties shall be terminated upon the satisfaction of the judgment. No more claims arising from or as a result of the agency shall be entertained by the courts after that date.
LexLib

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

Bidin and Cortes, JJ., concur. Fernan, C.J., took no part. Feliciano, J., is on leave.

FIRST DIVISION
[G.R. No. 95546. November 6, 1992.] MAKATI TUSCANY CONDOMINIUM CORPORATION, petition er, vs. THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American International Underwriters (Phils.), Inc., respondent.

Agcaoili & Associates for petitioner. Salonga & Associates for private respondent.
SYLLABUS 1.COMMERCIAL LAW; INSURANCE POLICY, VALID EVEN IF PREMIUMS WERE PAID ON INSTALLMENTS. We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that petitioner and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full. 2. ID.; ID.; PREMIUMS; REFUND THEREOF, WHEN NOT AVAILABLE; RULE. As correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary. DECISION BELLOSILLO, J :
p

This case involves a purely legal question: whether payment by installment of the premiums due on an insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which provides:
LibLex

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

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which were accepted by private respondent. On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596, which replaced and renewed the previous policy, for a term covering 1 March 1903 to 1 March 1984. The premium in the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21 November 1983. All payments were likewise accepted by private respondent. On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy, petitioner made two installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium. Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651. In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-9210651. It explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor and the

receipts for the installment payments covering the policy for 1984-85, as well as the two (2) previous policies, stated the following reservations:
cdll

"2.Acceptance of this payment shall not waive any of the company rights to deny liability on any claim under the policy arising before such payments or after the expiration of the credit clause of the policy; and "3.Subject to no loss prior to premium payment. If there be any loss such is not covered."

Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85. After some incidents, petitioner and private respondent moved for summary judgment. On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following findings:
"While it is true that the receipts issued to the defendant contained the aforementioned reservations, it is equally true that payment of the premiums of the three aforementioned policies (being sought to be refunded) were made during the lifetime or term of said policies, hence, it could not be said, inspite of the reservations, that no risk attached under the policies. Consequently, defendant's counterclaim for refund is not justified. "As regards the unpaid premiums on Insurance Policy No. AH-CPP9210651, in view of the reservation in the receipts ordinarily issued by the plaintiff on premium payments the only plausible conclusion is that plaintiff has no right to demand their payment after the lapse of the term of said policy on March 1, 1985. Therefore, the defendant was justified in refusing to pay the same." 1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a decision 2 modifying that of the trial court by ordering herein petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the counterclaim. The appellate court thus explained

"The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire premium. Here, the parties herein agreed to make the premiums payable in installments, and there is no pretense that the parties never envisioned to make the insurance contract binding between them. It was renewed for two succeeding years, the second and third policies being a renewal/replacement for the previous one. And the insured never informed the insurer that it was terminating the policy because the terms were unacceptable. "While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the insurance contract valid and binding without payment of premiums, there is nothing in said section which suggests that the parties may not agree to allow payment of the premiums in installment, or to consider the contract as valid and binding upon payment of the first premium. Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by basic considerations of fairness and equity. "To our mind, the insurance contract became valid and binding upon payment of the first premium, and the plaintiff could not have denied liability on the ground that payment was not made in full, for the reason that it agreed to accept installment payments . . ." 3

Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss occurring before payment of premiums. It argues that where the premium is not actually paid in full, the policy would only be effective if there is an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the policies of such receipt of the corresponding premium payments, and petitioner's failure to pay said premiums on or before the effective dates of said policies rendered them invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance upon mere partial payment of the premiums because under Sec. 77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the alleged invalid insurance policies.
LLpr

We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that petitioner and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full. We therefore sustain the Court of Appeals. We quote with approval the wellreasoned findings and conclusion of the appellate court contained in its Resolution denying the motion to reconsider its Decision
"While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer, would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon, the Insurance Code, at p. 175). So is an understanding to allow insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted." 4

The reliance by petitioner on Arce v. Capital Surety and Insurance Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar. In Arce, no payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of the 1982

and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the balance.
llcd

It appearing from the peculiar circumstances that the parties actually intended to make the three (3) insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP9210651) in March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary. WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs against petitioner. SO ORDERED.

Cruz, Padilla and Grio-Aquino, JJ ., concur. Medialdea, J ., is on leave.

EN BANC
[G.R. No. 137172. April 4, 2001.] UCPB GENERAL INSURANCE CO., INC., petitioner, vs. MASAGANA TELAMART, INC., respondent. RESOLUTION DAVIDE, JR., C .J :
p

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 replacementrenewal 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.
AcTDaH

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 "X1"). 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").
HIcTDE

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 inValenzuela 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 nonrenewal 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.
AaITCS

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. (Emphasis 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.
TASCEc

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, YnaresSantiago, De Leon, Jr. and Sandoval-Gutierrez, JJ., concur. Vitug, J., Please see separate opinion. Melo, J., I join the dissents of Justices Vitug and Pardo. Pardo, J., I dissent. See attached. Puno and Quisumbing, JJ., I join the dissent of J. Pardo.

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.
ICTHDE

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 thegrant 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.
SIaHDA

"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]
EAIaHD

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.
IaDSEA

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.

SECOND DIVISION
[G.R. No. 107062. February 21, 1994.] PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC.,respondents. DECISION NOCON, J :
p

Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable decision from the Regional Trial Court and then again in theCourt of Appeals. 1 These are non-appearance during the pre-trial despite due notice, and non-payment of docket fees upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute. Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively. On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30) days extension within which to file a responsive pleading.
LexLib

In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the case was set for pre-trial conference on September 29, 1988. The petitioner received its notice on September 9, 1988, while the notice addressed to its counsel was returned to the trial court with the notation "Return to Sender, Unclaimed." 2 On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the representative of respondent and its counsel were present. The counsel for petitioner manifested that he was unable to contract the Vice-President for operations of petitioner, although his client intended to file a third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3 On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint" with the Third-Party Complaint attached. On this same day, in the presence of the representative for both petitioner and respondent and their respective counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on third party defendants. 4 On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their notice in open court. 5 The pre-trial was nevertheless reset to February 1, 1989. However, when the case was called for pre-trial conference on February 1, 1989, petitioner was again not represented by its officer or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered as in default and respondent was allowed to present evidence ex-parte, which was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 15, 1989. 7 On March 6, 1989, a decision was rendered by the trial court; the dispositive portion reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00 representing the principal of the amount due,

plus legal interest thereon from April 7, 1988, until date of payment; and P20,000.00 as and for attorney's fees." 8

Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied, it elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as the latter's order denying petitioner's motion for reconsideration.
llcd

Before us, petitioner assigns as errors the following:

I.The respondent Court of Appeals gravely erred in declaring that the case was already ripe for pre-trial conference when the trial court set it for the holding thereof. II.The respondent Court of Appeals gravely erred in affirming the decision of the trial court by relying on the ruling laid down by this Honorable Court in the case of Manchester Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.
llcd

III.The respondent Court of Appeals gravely erred in declaring that it would be useless and a waste of time to remand the case for further proceedings as defendant-appellant has no meritorious defense.

We do not find any reversible error in the conclusion reached by the court a quo. Relying on Section 1, Rule 20 of the Rules of Court, petitioner argues that since the last pleading, which was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third party defendant. The court further said:
". . . Defendant's claim that it was not aware of the Order admitting the third-party complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides: 'Completeness of service . . . Service by registered mail is complete upon actual receipt by the addressee, but if he fails to claim his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time." 9

Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in court despite supposed lack of notice. Second, in the regular course of events, the third-party defendant's answer would have been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed.
cdphil

The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court 10 and when a party fails to appear at a pre-trial conference he may be non-suited or considered as in default. 11 Records show that even at the very start, petitioner could have been declared as in default since it was not properly represented during the first scheduled pretrial on September 29, 1988. Nothing in the record is attached which would show that petitioner's counsel had a special authority to act in behalf of his client other than as its lawyer.
LLpr

We have said that in those instances where a party may not himself be present at the pre-trial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the client's person, it is imperative for that representative or the lawyer to have "special authority" to enter into agreements which otherwise only the client has the capacity to make. 12 Third, the Court of Appeals properly considered the third-party complaint as a mere scrap of paper due to petitioner's failure to pay the requisite docket fees. Said thecourt a quo:
"A third-party complaint is one of the pleadings for which Clerks of Court of Regional Trial Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding docket fees on its third-party complaint. Unless and until the corresponding docket fees are paid, the trial court would not acquire jurisdiction over the third-party complaint (Manchester

DevelopmentCorporation vs. Court of Appeals, 149 SCRA 562). The third-party complaint was thus reduced to a mere scrap of paper not worthy of the trial court'sattention. Hence, the trial court can and correctly set the case for pre-trial on the basis of the complaint, the answer and the answer to the counterclaim." 13

It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject matter of a case, unless the docket fees are paid.
LLjur

Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We then said:
"The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562 (1987)] could very well be applied in the present case. The pattern and the intent to defraud the government of the docket fee due it is obvious not only in the filing of the original complaint but also in the filing of the second amended complaint.

xxx xxx xxx "In the present case, a more liberal interpretation of the rules is called for considering that, unlike Manchester, private respondent demonstrated his willingness to abide by the rules by paying the additional docket fees as required. The promulgation of the decision in Manchester must have had that sobering influence on private respondent who thus paid the additional docket fee as ordered by the respondent court. It triggered his change of stance by manifesting his willingness to pay such additional docket fees as may be ordered. 17

Thus, we laid down the rules as follows:

1.It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial courtwith jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee

within a reasonable time, but in no case beyond the applicable prescriptive or reglementary period. 2.The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may also allow payment of said fee within a prescriptive or reglementary period. 3.Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee, but subsequently, the judgment awards a claim nor specified in the pleading, or if specified the same has not been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy to enforce said lien and assess and collect the additional fee. 18

It should be remembered that both in Manchester and Sun Insurance, plaintiffs therein paid docket fees upon filing of their respective pleadings, although the amount tendered were found to be insufficient considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even manifested to be given time to pay the requisite docket fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed.
cdll

Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the Insurance Commission to issue such bonds.
LLjur

The Insurance Code states that:

"SECTION 177.The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the

obligee has accepted the bond, in which case the bond becomes valid

and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . ." (emphasis added)

The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability, petitioner further asserts that the above provision is not applicable because the respondent allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which are on record.
cdrep

In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the following:
"Q.What are the conditions and terms of sales you extended to Sagum General Merchandise? A.First, we required him to submit to us Surety Bond to guaranty payment of the spare parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to issue postdated checks. Q.Did Sagum General Merchandise comply with your surety bond requirement? A.Yes. They submitted to us and which we have accepted two surety bonds. QWill you please present to us the aforesaid surety bonds? A.Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987 and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7, 1987." 20

Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices addressed to Sagum General Merchandise proving that parts were purchased, delivered and received.
cdll

On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against respondent. No person can claim benefit from the wrong he himself committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. 22

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition before them and affirming the decision of the trial court and its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit. SO ORDERED.

Narvasa, C .J ., Padilla, Regalado and Puno, JJ ., concur.

FIRST DIVISION
[G.R. No. L-22375. July 18, 1975.] THE CAPITAL INSURANCE & SURETY CO., INC., petitioners, v s. PLASTIC ERA CO., INC., AND COURT OF APPEALS, respondents.

Salcedo, Del Rosario, Bito, Misa & Lozada for petitioner. K. V. Faylona for Private respondent.
SYNOPSIS When Capital Insurance delivered to Plastic Era its open fire policy whereby the former undertook to insure the latter's property, the latter did not pay the premium, but instead executed an acknowledgment receipt with a promise to pay the premium within 30 days from December 17, 1960, the effectivity date of the policy.Capital Insurance duly accepted the receipt. On January 8, 1961, Plastic Era, in partial payment of the premium, delivered a check of P1,000, postdated January 16, 1961. Petitioner tried to deposit the check only on February 20, 1961, and the same was dishonored for lack of funds. But the records show that as of January 19, 1961, Plastic Era had sufficient funds with the bank to cover the check. On January 18, 1961, or two days after the insurance premium became due, the insured properties were destroyed by fire. In due time, Plastic Era notified CapitalInsurance of the loss and demanded payment of indemnity for the loss. Capital Insurance refused on the ground of non-payment

of premium. Plastic Era sued CapitalInsurance and the trial court rendered judgment in favor of the former. The Court of Appeals sustained the trial court. On petition for review, the Supreme Court affirmed the judgment of the Court of Appeals sustaining that of the lower court and held that by accepting Plastic Era'spromise to pay the insurance premium, Capital Insurance, in effect, had extended credit to the former and did not have the right to cancel the policy except by puttingPlastic Era in default by giving it personal notice to that effect. SYLLABUS 1.NEGOTIABLE INSTRUMENT; CHECK OR DRAFTS PRODUCE THE EFFECT OF PAYMENT ONLY WHEN CASHED. Under Article 1249 of the New Civil Code, the mere delivery of a bill of exchange in payment of a debt does not immediately effect payment. It simply suspends the action arising from the original obligation in satisfaction of which it was delivered, until payment is accomplished either actually or presumptively. In order that tender of draft or check shall produce the effect of payment that would extinguish the debtor's liability, the check should be actually cashed. 2.INSURANCE; PERFECTION; EFFECT OF ACCEPTANCE OF A PROMISE TO PAY INSURANCE PREMIUM. Where the insurer accepted the promise of the insured to pay the insurance premium within 30 days from the effectivity date of the policy, the former implicitly agreed to modify the tenor of the insurance contract and in effect waived the provisions therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium; and where the policy is silent as to the mode of payment, the insurer is deemed to have accepted the promissory note in payment of the premium. This rendered, the policy is immediately operative. 3.ID.; ID.; ID.; EFFECT OF DISHONORED CHECK ISSUED IN PARTIAL PAYMENT OF PREMIUM. The fact that the check issued by the insured payment of the promissory note was later on dishonored did not, in any way, operate as a forfeiture of its right under the policy, in the absence of an express stipulation to that effect. 4.ID.; ID.; ID.; WHEN PAYMENT OF PREMIUM ON INSURANCE POLICY IS CONVERTED INTO AN INDEPENDENT OBLIGATION. By accepting the insured's promise to pay the insurance premium within thirty days from the effectivity date of the policy, the insurer in effect had extended credit to the

insured . The payment of the premium on the insurance policy therefore became an independent obligation, the non-fulfillment of which would entitle the insurer to recover. It could just deduct premium due and unpaid upon the satisfaction of the loss under the policy. It did not have right to cancel the policy for nonpayment of the premium except by putting the insured in default and giving it personal notice to that effect. 5.ID.; CHECKS MUST BE PRESENTED FOR PAYMENT WITHIN A REASONABLE TIME EFFECT OF DELAY. Where the insurer accepted a check in partial payment of the first premium on insurance policy, and held the check for an unreasonable period of time, it is estopped from claiming a forfeiture of its policy for non-payment, even if the check had been dishonored later. DECISION MARTIN, J :
p

Petition for review of a decision of the Court of Appeals affirming the decision of the Court of First Instance of Manila in Civil Case No. 47934 entitled "Plastic EraManufacturing Co., Inc. versus The Capital Insurance and Surety Co., Inc." On December 17, 1960, petitioner Capital Insurance & Surety Co., Inc. (hereinafter referred to as Capital Insurance) delivered to the respondent Plastic Era Manufacturing Co., Inc., (hereinafter referred to as Plastic Era) its open Fire Policy No. 227601 wherein the former undertook to insure the latter's building, equipments, raw materials, products and accessories located at Sheridan Street, Mandaluyong, Rizal. The policy expressly provides that if the property insured would be destroyed or damaged by fire after the payment of the premiums, at any time between the 15th day of December 1960 and one o'clock in the afternoon of the 15th day of December 1961, the insurance company shall make good all such loss or damage in an amount not exceeding P100,000.00. When the policy was delivered, Plastic Era failed to pay the corresponding insurance premium. However, through its duly authorized representative, it executed the following acknowledgment receipt:
"This acknowledged receipt of Fire Policy) NO. 22760 Premium. . .)(I promise to pay) (P2,220.00)(has been paid) THIRTY DAYS AFTER

on effective date (Date)"

On January 8, 1961, in partial payment of the insurance premium, Plastic Era delivered to Capital Insurance, a check 2 for the amount of P1,000.00 postdated January 16, 1961 payable to the order of the latter and drawn against the Bank of America. However, Capital Insurance tried to deposit the check only on February 20, 1961 and the same was dishonored by the bank for lack of funds. The records show that as of January 19, 1961 Plastic Era had a balance of P1,193.41 with the Bank of America. On January 18, 1961 or two days after the insurance premium became due, at about 4:00 to 5:00 o'clock in the morning, the property insured by Plastic Era was destroyed by fire. In due time, the latter notified Capital Insurance of the loss of the insured property by fire 3 and accordingly filed its claim for indemnity thru the Manila Adjustment Company. 4 The loss and/or damage suffered by Plastic Era was estimated by the Manila Adjustment Company to be P283,875. However, according to the records the same property has been insured by Plastic Era with the Philamgen Insurance Company for P200,000.00. In less than a month Plastic Era demanded from Capital Insurance the payment of the sum of P100,000.00 as indemnity for the loss of the insured property under Policy No. 22760 but the latter refused for the reason that, among others, Plastic Era failed to pay the insurance premium. On August 25, 1961, Plastic Era filed its complaint against Capital Insurance for the recovery of the sum of P100,000.00 plus P25,000.00 for attorney's fees and P20,000.00. for additional expenses. Capital Insurance filed a counterclaim of P25,000.00 as and for attorney's fees. On November 15, 1961, the trial court rendered judgment, the dispositive portion of which reads as follows:
"WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant for the sum of P88,325.63 with interest at the legal rate from the filing of the complaint and to pay the costs."

From said decision, Capital Insurance appealed to the Court of Appeals.

On December 5, 1963, the Court of Appeals rendered its decision affirming that of the trial court. Hence, this petition for review by certiorari to this Court. Assailing the decision of the Court of Appeals petitioner assigns the following errors, to wit:
1.THE COURT OF APPEALS ERRED IN SENTENCING PETITIONER TO PAY PLASTIC ERA THE SUM OF P88,325.63 PLUS INTEREST, AND COST OF SUIT, ALTHOUGH PLASTIC ERA NEVER PAID PETITIONER THE INSURANCE PREMIUM OF P2,220.88. 2.THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER SHOULD HAVE INSTITUTED AN ACTION FOR RESCISSION OF THE INSURANCECONTRACT ENTERED INTO BETWEEN IT AND PLASTIC ERA BEFORE PETITIONER COULD BE RELIEVED OF RESPONSIBILITY UNDER ITS FIRE INSURANCEPOLICY. 3.WE HAVE SHOWN ABOVE THAT PLASTIC ERA'S ACTION WAS UNWARRANTED AND THAT THE PETITIONER SHOULD HAVE BEEN ABSOLVED FROM THE COMPLAINT, AND CONSEQUENTLY, THE LOWER COURT SHOULD HAVE AWARDED PETITIONER A REASONABLE SUM AND AS ATTORNEY'S FEES P25,000.00.

The pivotal issue in this petition is whether or not a contract of insurance has been duly perfected between the petitioner, Capital Insurance, and respondent PlasticEra. Necessarily, the issue calls for a correct interpretation of the insurance policy which states:.
"This Policy of Insurance Witnesseth That in consideration of PLASTIC ERA MANUFACTURING COMPANY, INC. hereinafter called the Insured, paying to theCapital Insurance & Surety Co., Inc., hereinafter called the Company, the sum of PESOS TWO THOUSAND ONE HUNDRED EIGHTY EIGHT the premium for the first period hereinafter mentioned, for insuring against Loss or Damage by only Fire or Lightning, as hereinafter appears, the Property hereinafter described and contained, or described herein and not elsewhere, in the several sums following namely: PESOS ONE HUNDRED THOUSAND ONLY, PHILIPPINE CURRENCY; . . . THE COMPANY HEREBY AGREES with the Insured but subject to the terms and conditions endorsed or otherwise expressed hereon, which are to be taken as part of this Policy), that if the Property described, or any part thereof, shall be destroyed or damaged by Fire or Lightning after payment of the Premiums, at any time between the 15th day of December One Thousand Nine Hundred and Sixty and 1 o'clock in the afternoon of the 15th day of December

One Thousand Nine Hundred and Sixty-One of the last day of any subsequent period in respect of which the insured, or a successor in interest to whom the insurance is by an endorsement hereon declared to be or is otherwise continued, shall pay to the Company and the Company shall accept the sum required for the renewal of this Policy, the Company will pay or make good all such loss or Damage, to an amount not exceeding during any one period of theinsurance in respect of the several matters specified, the sum; set opposite thereto respectively, and not exceeding the whole sum of PESOS, ONE HUNDRED THOUSAND ONLY, PHIL. CUR. . . ."

In clear and unequivocal terms the insurance policy provides that it is only upon payment of the premiums by Plastic Era that Capital Insurance agrees to insure the properties of the former against loss or damage in an amount not exceeding P100,000.00. The crux of the problem then is whether at the time the insurance policy was delivered to Plastic Era on December 17, 1960, the latter was able to pay the stipulated premium. It appears on record that on the day the insurance policy was delivered, Plastic Era did not pay the Capital Insurance, but instead executed an acknowledgment receipt of Policy No. 22760. In said receipt Plastic Era promised to pay the premium within thirty (30) days from the effectivity date of the policy on December 17, 1960 and Capital Insurance accepted it. What then is the effect of accepting such acknowledgment receipt from the Plastic Era? Did the CapitalInsurance mean to agree to make good its undertaking under the policy if the premium could be paid on or before January 16, 1961? And what would be the effect of the delivery to Capital Insurance on January 8, 1961 of a postdated check (January 16, 1961) in the amount of P1,000.00, payable to the order of the latter? Could not this have been considered a valid payment of the insurance premium? Pursuant to Article 1249 of the New Civil Code:
"xxx xxx xxx "The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired." xxx xxx xxx"

"In the meantime, the action derived from the original obligation shall be held in abeyance."

Under this provision the mere delivery of a bill of exchange in payment of a debt does not immediately effect payment. It simply suspends the action arising from the original obligation in satisfaction of which it was delivered, until payment is accomplished either actually or presumptively. 5 Tender of draft or check in order to effect payment that would extinguish the debtor's liability should be actually cashed. 6 If the delivery of the check of Plastic Era to Capital Insurance were to be viewed in the light of the foregoing, no payment of the premium had been effected, for it is only when the check is cashed that it is said to effect payment. 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 implicitly 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, CapitalInsurance 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. . . ." 7

Precisely, this was what actually happened when the Capital Insurance accepted the acknowledgment receipt of the Plastic Era promising to pay the insurancepremium within thirty (30) days from December 17, 1960. Hence, when the damage or 1099 of the insured property occurred, the insurance policy was in full force and effect. The fact that the check issued by Plastic Era in partial payment of the promissory note was later on dishonored did not in any way operate as a forfeiture of its rights under the policy, there being no express stipulation therein to that effect.
"In the absence of express agreement or stipulation to that effect in the policy, the non-payment at maturity of a note given for and accepted as

premium on a policy does not operate to forfeit the rights of the insured even though the note is given for an initial premium, nor does the fact that the collection of the note had been enjoined by the insured in any way affect the policy." 8 ". . . If the check is accepted as payment of the premium even though it turns out to be worthless, there is payment which will prevent forfeiture." 9

By accepting its promise to pay the insurance premium within thirty (30) days from the effectivity date of the policy December 17, 1960 Capital Insurance had in effect extended credit to Plastic Era. The payment of the premium on the insurance policy therefore became an independent obligation the non-fulfillment of which would entitle Capital Insurance to recover. It could just deduct the premium due and unpaid upon the satisfaction of the loss under the policy. 10 It did not have the right to cancel the policy for nonpayment of the premium except by putting Plastic Era in default and giving it personal notice to that effect. This CapitalInsurance failed to do.
". . . Where credit is given by an insurance company for the payment of the premium it has no right to cancel the policy for nonpayment except by putting the insured in default and giving him personal notice. . . ." 11

On the contrary Capital Insurance had accepted a check for P1,000.00 from Plastic Era in partial payment of the premium on the insurance policy. Although the check was due for payment on January 16, 1961 and Plastic Era had sufficient funds to cover it as of January 19, 1961, Capital Insurance decided to hold the same for thirty-five (35) days before presenting it for payment. Having held the check for such an unreasonable period of time, Capital Insurance was estopped from claiming a forfeiture of its policy for non-payment even if the check had been dishonored later.
"Where the check is held for an unreasonable time before presenting it for payment, the insurer may be held estopped from claiming a forfeiture if the check is dishonored." 12

Finally, it is submitted by petitioner that:

"We are here concerned with a case of reciprocal obligations, and respondent having failed to comply with its obligation to pay the insurance premium due on the policy within thirty days from December 17, 1960, petitioner was relieved of its obligation to pay

anything under the policy, without the necessity of first instituting an action for rescission of the contract of ensured entered into by the parties."

But precisely in this case, Plastic Era has complied with its obligation to pay the insurance premium and therefore Capital Insurance is obliged to make good its undertaking to Plastic Era. WHEREFORE, finding no reversible error in the decision appealed from, We hereby affirm the same in toto. Costs against the petitioner. SO ORDERED.

Castro, Makasiar, Esguerra and Muoz Palma, JJ., concur. Teehankee, J., is on leave.