SUBROGATION [G.R. No. L-36413. September 26, 1988.] MALAYAN INSURANCE CO., INC., petitioner, vs. THE HON.

COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.

Freqillana, Jr. for petitioner. B.F. Estrella & Associates for respondent Martin Vallejos. Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc. Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.
SYLLABUS 1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; LIABILITY OF OWNER OF A VEHICLE INVOLVED IN A MOTOR VEHICLE MISHAP AND EMPLOYER OF THE DRIVER DRIVING THE VEHICLE, JOINT AND SEVERAL. The owner of a vehicle involved in a motor vehicle mishap is solidarily liable with the employer of the driver driving the vehicle, the former under Article 2184 of the New Civil Code and the latter pursuant to Article 2180 of the New Civil Code, both being responsible for aquasi delict under Article 2194 of the Civil Code. 2.ID.; ID.; SUABILITY OF INSURER BY THIRD PERSONS UNDER INDEMNITY CONTRACT EXCLUDES SOLIDARY LIABILITY WITH THE INSURED AND/OR OTHER PARTIES AT FAULT. Although the insurer may be held directly liable under indemnity contracts against third party liability, it may not be held solidarily liable with the insured and/or other parties at fault being in violation of the principles embodying solidary obligations and insurance contracts. 3.ID.; ID.; INSURANCE CONTRACTS; PRINCIPLE OF SUBROGATION; RIGHT OF SUBROGATION NOT DEPENDENT UPON ANY PRIVITY OF CONTRACT. Subrogation being a normal incident of indemnity insurance, the insurer is entitled to be subrogated pro tanto to any right of action opted by the insured. That right is not dependent nor does it grow out of, any privity of contract. 4.ID.; ID.; ID.; ID.; RIGHT TO REIMBURSEMENT AS SUBROGEE TO SOLIDARY DEBTOR. Under Article 1217 of the Civil Code a solidary debtor who has paid the entire obligation is entitled to be reimbursed by his codebtors for the share which corresponds to each. The rule holds true as to an insurer subrogated to the right of a solidary debtor.

DECISION

PADILLA, J :
p

Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.
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The antecedent facts of the case are as follows: On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023, Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00. During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo, an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep. As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U2021. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees. Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability. Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO. Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to pay. Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner-for any sum that it may be ordered to pay the plaintiff. After trial, judgment was rendered as follows:
"WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows: 2

"(a)P4,103 as actual damages; "(b)P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years; "(c)P5,000.00 as moral damages; "(d)P2,000.00 as attorney's fees or the total of P29,103.00, plus costs. "The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00. "As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved." 1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2 Hence, the present recourse by petitioner insurance company. The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy. The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3 However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc. Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy. As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos. We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc., (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.
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It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:
"Art. 2184.In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. "If the owner was not in the motor vehicle, the provisions of article 2180 are applicable."

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads:
"Art. 2180.The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. xxx xxx xxx "Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. xxx xxx xxx "The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage."

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidary. 4 On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident. In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingoncase, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim. While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the
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insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors, namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party liability under which an insurer can be directly sued by a third party this will result in a violation of the principles underlying solidary obligation and insurance contracts. In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event." 8 In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos. As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree. The appellate court overlooked the principle of subrogation in insurance contracts. Thus
". . . Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037). "The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382). "Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, (italics supplied) or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co, 264 N.C. 456, 142 SE 2d 18)." 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of not exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to
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whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.
"Art. 1217.Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. "He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. xxx xxx xxx"

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc. To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00). WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs. SO ORDERED.

Melencio-Herrera, Paras, Sarmiento and Regalado, JJ., concur.

[G.R. No. 52756. October 12, 1987.] MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner, vs. COURT OF APPEALS AND ZENITH INSURANCE CORPORATION,respondents.

DECISION

PADILLA, J :
p

Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979, ordering petitioner Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the resolution of the same Court, dated 8 February 1980, denying petitioner's motion for reconsideration of its decision.
LLjur

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with respondent insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a truck owned by San Miguel Corporation. For the damage caused, respondent company paid petitioner five thousand pesos
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(P5,000.00) in amicable settlement. Petitioner's general manager executed a Release of Claim, subrogating respondent company to all its right to action against San Miguel Corporation. On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement from San Miguel Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San Miguel Corporation had already paid petitioner P4,500.00 for the damages to petitioner's motor vehicle, as evidenced by a cash voucher and a Release of Claim executed by the General Manager of petitioner discharging San Miguel Corporation from "all actions, claims, demands the rights of action that now exist or hereafter [sic] develop arising out of or as a consequence of the accident." Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit in the City Court of Manila for the recovery of P4,600.00. The City Court ordered petitioner to pay respondent P4,500.00. On appeal, the Court of First Instance of Manila affirmed the City Court's decision in toto, which CFI decision was affirmed by the Court of Appeals, with the modification that petitioner was to pay respondent the total amount of P5,000.00 that it had earlier received from the respondent insurance company. Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent company as the subrogation in the Release of Claim it executed in favor of respondent was conditioned on recovery of the total amount of damages petitioner had sustained. Since total damages were valued by petitioner at P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner argues that it was entitled to go after San Miguel Corporation to claim the additional P4,500.00 eventually paid to it by the latter, without having to turn over said amount to respondent. Respondent of course disputes this allegation and states that there was no qualification to its right of subrogation under the Release of Claim executed by petitioner, the contents of said deed having expressed all the intents and purposes of the parties.
cdll

To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner cites Art. 2207 of the Civil Code, which states:
"If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury."

Petitioner also invokes Art. 1304 of the Civil Code, stating:

"A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit."

We find petitioner's arguments to be untenable and without merit. In the absence of any other evidence to support its allegation that a gentlemen's agreement existed between it and respondent, not embodied in the Release of Claim, such Release of Claim must be taken as the best evidence of the intent and purpose of the parties. Thus, the Court of Appeals rightly stated:
"Petitioner argues that the release claim it executed subrogating private respondent to any right of action it had against San Miguel Corporation did not preclude Manila Mahogany from filing a deficiency claim against the wrongdoer. Citing Article 2207 New Civil Code, to the effect that if the amount paid by an insurance company does not fully cover the loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss, petitioner claims a preferred right to retain the amount collected from San Miguel Corporation, despite the subrogation in favor of private respondent. 7

"Although petitioner's right to file a deficiency claim against San Miguel Corporation is with legal basis, without prejudice to the insurer's right of subrogation, nevertheless when Manila Mahogany executed another release claim (Exhibit K) discharging San Miguel Corporation from all actions, claims, demands and rights of action that now exist or hereafter arising out of or as a consequence of the accident" after the insurer had paid the proceeds of the policy the compromise agreement of P5,000.00 being based on the insurance policy the insurer is entitled to recover from the insured the amount of insurance money paid (Metropolitan Casualty Insurance Company of New York v. Badler, 229 N.Y.S. 61, 132 Misc. 132, cited in Insurance Code and Insolvency Law with comments and annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts released San Miguel Corporation, thereby defeating private respondent's right of subrogation, the right of action of petitioner against the insurer was also nullified. (Sy Keng & Co. v. Queensland Insurance Co. Ltd., 54 O.G. 391.) Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid to petitioner." 1

As held in Phil. Air Lines v. Heald Lumber Co.,

If a property insured and the owner receives the indemnity from the insurer, it is provided in [Article 2207 of the New Civil Code] that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. . . . Under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. 3 (Emphasis supplied)

The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500 as originally asked for, but P5,000, the amount respondent company paid petitioner as insurance, is also in accord with law and jurisprudence. In disposing of the issue, the Court of Appeals held:
". . . petitioner is entitled to keep the sum of P4,500 paid by San Miguel Corporation under its clear right to file a deficiency claim for damages incurred, against the wrongdoer, should the insurance company not fully pay for the injury caused (Article 2207, New Civil Code). However, when petitioner's

right to retain the sum of P5,000.00 no longer existed, thereby entitling private respondent to recover the same. (Emphasis supplied)

As has been observed:

"xxx xxx xxx "The right of subrogation can only exist after the insurer has paid the insured, otherwise the insured will be deprived of his right to full indemnity. If the insurance proceeds are not sufficient to cover the damages suffered by the insured, then he may sue the party responsible for the damage for the [sic] remainder. To the extent of the amount he has already received from the insurer, the insurer enjoy's [sic] the right of subrogation. "Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer." 4 (Emphasis supplied)

And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still, the respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly reasoned as follows:
"It is to be noted that private respondent, in its complaint, prays for the recovery, not of P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel Corporation had paid to petitioner. On this score, We believe the City Court and Court of First Instance erred in not awarding the proper relief. Although private respondent prays for the reimbursement of P4,500.00 paid by San Miguel Corporation, 8

instead of P5,000.00 paid under the insurance policy, the trial court should have awarded the latter, although not prayed for, under the general prayer in the complaint "for such further or other relief as may be deemed just or equitable" (Rule 6, Sec. 3, Revised Rules of Court; Rosales v. Reyes Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios and Tupas, 77 Phil. 120)."

WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby AFFIRMED with costs against petitioner. SO ORDERED. Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.

[G.R. No. 168402. August 6, 2008.] ABOITIZ SHIPPING CORPORATION, petitioner, vs. INSURANCE COMPANY OF NORTH AMERICA, respondent.

DECISION

REYES, R.T., J :
p

THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the assured. As subrogee, the insurer steps into the shoes of the assured and may exercise only those rights that the assured may have against the wrongdoer who caused the damage. Before Us is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) which reversed the Decision 2 of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping Corporation to pay the sum of P280,176.92 plus interest and attorney's fees in favor of respondent Insurance Company of North America (ICNA).
cSATEH

The Facts Culled from the records, the facts are as follows: On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary Companies (MSAS) procured a marine insurance policy from respondent ICNA UK Limited of London. The insurance was for a transshipment of certain wooden work tools and workbenches purchased for the consignee Science Teaching Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu City, Philippines. 3 ICNA issued an "all-risk" open marine policy, 4 stating:
This Company, in consideration of a premium as agreed and subject to the terms and conditions printed hereon, does insure for MSAS Cargo International Limited &/or Associated &/or Subsidiary Companies on behalf of the title holder: Loss, if any, payable to the Assured or order. 5

The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany on board M/S Katsuragi. A clean bill of lading 6 was issued by Hapag-Lloyd which stated the consignee to be STIP, Ecotech Center, Sudlon Lahug, Cebu City.
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The container van was then off-loaded at Singapore and transshipped on board M/S Vigour Singapore. On July 18, 1993, the ship arrived and docked at the Manila International Container Port where the container van was again off-loaded. On July 26, 1993, the cargo was received by petitioner Aboitiz Shipping Corporation (Aboitiz) through its duly authorized booking representative, Aboitiz Transport System. The bill of lading 7 issued by Aboitiz contained the notation "grounded outside warehouse". The container van was stripped and transferred to another crate/container van without any notation on the condition of the cargo on the Stuffing/Stripping Report. 8On August 1, 1993, the container van was loaded on board petitioner's vessel, MV Super Concarrier I. The vessel left Manila en route to Cebu City on August 2, 1993.
CaASIc

On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the Cebu International Port. It was then brought to the Cebu Bonded Warehousing Corporation pending clearance from the Customs authorities. In the Stripping Report 9 dated August 5, 1993, petitioner's checker noted that the crates were slightly broken or cracked at the bottom. On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science Teaching Improvement Project (STIP) and delivered to Don Bosco Technical High School, Punta Princesa, Cebu City. It was received by Mr. Bernhard Willig. On August 13, 1993, Mayo B. Perez, then Claims Head of petitioner, received a telephone call from Willig informing him that the cargo sustained water damage. Perez, upon receiving the call, immediately went to the bonded warehouse and checked the condition of the container and other cargoes stuffed in the same container. He found that the container van and other cargoes stuffed there were completely dry and showed no sign of wetness. 10 Perez found that except for the bottom of the crate which was slightly broken, the crate itself appeared to be completely dry and had no water marks. But he confirmed that the tools which were stored inside the crate were already corroded. He further explained that the "grounded outside warehouse" notation in the bill of lading referred only to the container van bearing the cargo. 11 In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the cargo. 12 The letter stated that the crate was broken at its bottom part such that the contents were exposed. The work tools and workbenches were found to have been completely soaked in water with most of the packing cartons already disintegrating. The crate was properly sealed off from the inside with tarpaper sheets. On the outside, galvanized metal bands were nailed onto all the edges. The letter concluded that apparently, the damage was caused by water entering through the broken parts of the crate.
IaDSEA

The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of the damage. CAC reported to ICNA that the goods sustained water damage, molds, and corrosion which were discovered upon delivery to consignee. 13 On September 21, 1993, the consignee filed a formal claim the damaged condition of the following goods: ten (10) wooden workbenches three (3) carbide-tipped saw blades one (1) set of ball-bearing guides one (1) set of overarm router bits twenty (20) rolls of sandpaper for stroke sander
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14

with Aboitiz in the amount of P276,540.00 for

In a Supplemental Report dated October 20, 1993, 15 CAC reported to ICNA that based on official weather report from the Philippine Atmospheric, Geophysical and Astronomical Services Administration, it would appear that heavy rains on July 28 and 29, 1993 caused water damage to the shipment. CAC noted that the shipment was placed outside the warehouse of Pier No. 4, North Harbor, Manila when it was delivered on July 26, 1993. The shipment was placed outside the warehouse as can be gleaned from the bill of lading issued by Aboitiz which contained the notation "grounded outside warehouse". It was only on July 31, 1993 when the shipment was stuffed inside another container van for shipment to Cebu.
IDCScA

Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to consignee. A subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the claim and subrogation receipt executed in its favor. Despite follow-ups, however, no reply was received from Aboitiz. RTC Disposition ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum of P280,176.92, plus interest and attorney's fees. 16 ICNA alleged that the damage sustained by the shipment was exclusively and solely brought about by the fault and negligence of Aboitiz when the shipment was left grounded outside its warehouse prior to delivery. Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It countered that the complaint stated no cause of action, plaintiff ICNA had no personality to institute the suit, the cause of action was barred, and the suit was premature there being no claim made upon Aboitiz. On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the decision 17 states:
WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the relief claimed in the complaint for being baseless and without merit. The complaint is hereby DISMISSED. The defendant's counterclaims are, likewise, DISMISSED for lack of basis. 18

The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim against Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK Limited with address at Cigna House, 8 Lime Street, London EC3M 7NA. However, complainant ICNA Phils. did not present any evidence to show that ICNA UK is its predecessor-in-interest, or that ICNA UK assigned the insurance policy to ICNA Phils. Moreover, ICNA Phils.' claim that it had been subrogated to the rights of the consignee must fail because the subrogation receipt had no probative value for being hearsay evidence. The RTC reasoned:
CcADHI

While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of North America (U.K.) Limited (ICNA UK) with address at Cigna House, 8 Lime Street, London EC3M 7NA, no evidence

has been adduced which would show that ICNA UK is the same as or the predecessor-in-interest of plaintiff Insurance Company of North America ICNA with office address at Cigna-Monarch Bldg., dela Rosa cor. Herrera Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned the Marine Policy to ICNA. Second, the assured in the Marine Policy appears to be MSAS Cargo International

Limited &/or Associated &/or Subsidiary Companies. Plaintiff's witness, Francisco B. Francisco, claims that the signature below the name MSAS Cargo International is an endorsement of the marine policy in favor of Science Teaching Improvement Project. Plaintiff's witness, however, failed to identify whose

signature it was and plaintiff did not present on the witness stand or took (sic) the deposition of the person who made that signature. Hence, the claim that there was an endorsement of the marine policy has no probative value as it is hearsay.
Plaintiff, further, claims that it has been subrogated to the rights and interest of Science Teaching Improvement Project as shown by the Subrogation Form (Exhibit "K") allegedly signed by a representative of Science Teaching Improvement Project. Such representative, however, was not presented on the witness stand. Hence, the Subrogation Form is self-serving and has no probative value. 19 (Emphasis supplied) 11

The trial court also found that ICNA failed to produce evidence that it was a foreign corporation duly licensed to do business in the Philippines. Thus, it lacked the capacity to sue before Philippine Courts, to wit:

Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign insurance company duly authorized to do business in the Philippines. This allegation was, however, denied by the defendant. In fact, in the Pre-Trial Order of 12 March 1996, one of the issues defined by the court is whether or not the plaintiff has legal capacity to sue and be sued. Under Philippine law,

the condition is that a foreign insurance company must obtain licenses/authority to do business in the Philippines. These licenses/authority are obtained from the Securities and Exchange Commission, the Board of Investments and the Insurance Commission. If it fails to obtain these licenses/authority, such foreign corporation doing business in the Philippines cannot sue before Philippine courts. Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524. (Emphasis supplied)
SaAcHE

CA Disposition ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is anchored on the right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the same as the ICNA UK Limited as made known in the dorsal portion of the Open Policy. 20 On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal claim was not filed within the period required under Article 366 of the Code of Commerce; that ICNA had no right of subrogation because the subrogation receipt should have been signed by MSAS, the assured in the open policy, and not Willig, who is merely the representative of the consignee. On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:
WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed decision of the Regional Trial Court of Makati City in Civil Case No. 94-1590 is hereby REVERSED and SET ASIDE. A new judgment is hereby rendered ordering defendant-appellee Aboitiz Shipping Corporation to pay the plaintiff-appellant Insurance Company of North America the sum of P280,176.92 with interest thereon at the legal rate from the date of the institution of this case until fully paid, and attorney's fees in the sum of P50,000, plus the costs of suit. 21

The CA opined that the right of subrogation accrues simply upon payment by the insurance company of the insurance claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even assuming that it is an unlicensed foreign corporation. The CA ruled:
At any rate, We find the ground invoked for the dismissal of the complaint as legally untenable. Even assuming arguendo that the plaintiff-insurer in this case is an unlicensed foreign corporation, such circumstance will not bar it from claiming reimbursement from the defendant carrier by virtue of subrogation under the contract of insurance and as recognized by Philippine courts. . . .
CHIScD

xxx xxx xxx Plaintiff insurer, whether the foreign company or its duly authorized Agent/Representative in the country, as subrogee of the claim of the insured under the subject marine policy, is therefore the real party in interest to bring this suit and recover the full amount of loss of the subject cargo shipped by it from Manila to the consignee in Cebu City. . . . 22

The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not overcome by any countervailing evidence. Hence, the trial court erred in dismissing the complaint and in not finding that
12

based on the evidence on record and relevant provisions of law, Aboitiz is liable for the loss or damage sustained by the subject cargo. Issues The following issues are up for Our consideration: (1)THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT ICNA HAS A CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF SUBROGATION BUT WITHOUT CONSIDERING THE ISSUE CONSISTENTLY RAISED BY ABOITIZ THAT THE FORMAL CLAIM OF STIP WAS NOT MADE WITHIN THE PERIOD PRESCRIBED BY ARTICLE 366 OF THE CODE OF COMMERCE; AND, MORE SO, THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT. (2)THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE SUIT FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY ICNA AS THE LATTER WAS AN AUTHORIZED AGENT OF THE INSURANCE COMPANY OF NORTH AMERICA (U.K.) ("ICNA UK"). (3)THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THERE WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM THE ORIGINAL ASSURED MSAS CARGO INTERNATIONAL LIMITED ("MSAS") IN FAVOR OF THE CONSIGNEE STIP, AND THAT THE SUBROGATION RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS VALID NOTWITHSTANDING THE FACT THAT IT HAS NO PROBATIVE VALUE AND IS MERELY HEARSAY AND A SELF-SERVING DOCUMENT FOR FAILURE OF ICNA TO PRESENT A REPRESENTATIVE OF STIP TO IDENTIFY AND AUTHENTICATE THE SAME. (4)THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE EXTENT AND KIND OF DAMAGESUSTAINED BY THE SUBJECT CARGO WAS CAUSED BY THE FAULT OR NEGLIGENCE OF ABOITIZ. 23 (Underscoring supplied)
ETHCDS

Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the real partyin-interest that possesses the right of subrogation to claim reimbursement from petitioner Aboitiz? (b) Was there a timely filing of the notice of claim as required under Article 366 of the Code of Commerce? (c) If so, can petitioner be held liable on the claim for damages? Our Ruling We answer the triple questions in the affirmative. A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from filing a suit in local courts. Only when that foreign corporation is "transacting" or "doing business" in the country will a license be necessary before it can institute suits. 24 It may, however, bring suits on isolated business transactions, which is not prohibited under Philippine law. 25 Thus, this Court has held that a foreign insurance company may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country. It is the act of engaging in business without the prescribed license, and not the lack of license per se, which bars a foreign corporation from access to our courts. 26 In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the subject marine policy, the present suit was filed by the said company's authorized agent in Manila. It was the domestic
13

corporation that brought the suit and not the foreign company. Its authority is expressly provided for in the open policy which includes the ICNA office in the Philippines as one of the foreign company's agents. As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the insurance policy by MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the consignee. The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought against ICNA UK, the company who issued the insurance, or against any of its listed agents worldwide. 27 MSAS accepted said provision when it signed and accepted the policy. The acceptance operated as an acceptance of the authority of the agents. Hence, a formal indorsement of the policy to the agent in the Philippines was unnecessary for the latter to exercise the rights of the insurer.
AHCaES

Likewise, the Open Policy expressly provides that:

The Company, in consideration of a premium as agreed and subject to the terms and conditions printed hereon, does insure MSAS Cargo International Limited &/or Associates &/or Subsidiary Companies in behalf of the title holder: Loss, if any, payable to the Assured or Order.

The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims on behalf of the assured. This is in keeping with Section 57 of the Insurance Code which states:
A policy may be so framed that it will inure to the benefit of whosoever, during the continuance of the risk, may become the owner of the interest insured.(Emphasis added)

Respondent's cause of action is founded on it being subrogated to the rights of the consignee of the damaged shipment. The right of subrogation springs from Article 2207 of the Civil Code, which states:
Article 2207.If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (Emphasis added)

As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals, 28 payment by the insurer to the assured operates as an equitable assignment of all remedies the assured may have against the third party who caused the damage. Subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. 29 Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to subrogation equipped it with a cause of action against petitioner in case of a contractual breach or negligence. 30 This right of subrogation, however, has its limitations. First, both the insurer and the consignee are bound by the contractual stipulations under the bill of lading. 31 Second, the insurer can be subrogated only to the rights as the insured may have against the wrongdoer. If by its own acts after receiving payment from the insurer, the insured releases the wrongdoer who caused the loss from liability, the insurer loses its claim against the latter. 32
SAHITC

The giving of notice of loss or injury is a condition precedent to the action for loss or injury or the right to enforce the carrier's liability. Circumstances peculiar to this case lead Us to conclude that the notice requirement was complied with. As held in the case of Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., 33 this notice requirement protects the carrier by affording it an opportunity to
14

make an investigation of the claim while the matter is still fresh and easily investigated. It is meant to safeguard the carrier from false and fraudulent claims. Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from receipt of the cargo if the damage is not apparent from the outside of the package. For damages that are visible from the outside of the package, the claim must be made immediately. The law provides:
Article 366.Within twenty four hours following the receipt of the merchandise, the claim against the carrier for damages or average which may be found therein upon opening the packages, may be made, provided that the indications of the damage or average which give rise to the claim cannot be

ascertained from the outside part of such packages, in which case the claim shall be admitted only at the time of receipt.
After the periods mentioned have elapsed, or the transportation charges have been paid, no claim shall be admitted against the carrier with regard to the condition in which the goods transported were delivered. (Emphasis supplied)

The periods above, as well as the manner of giving notice may be modified in the terms of the bill of lading, which is the contract between the parties. Notably, neither of the parties in this case presented the terms for giving notices of claim under the bill of lading issued by petitioner for the goods. The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the damage was dated August 15, 1993, that letter, together with the notice of claim, was received by petitioner only on September 21, 1993. But petitioner admits that even before it received the written notice of claim, Mr. Mayo B. Perez, Claims Head of the company, was informed by telephone sometime in August 13, 1993. Mr. Perez then immediately went to the warehouse and to the delivery site to inspect the goods in behalf of petitioner. 34
HCDaAS

In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage Corporation, 35 the notice was allegedly made by the consignee through telephone. The claim for damages was denied. This Court ruled that such a notice did not comply with the notice requirement under the law. There was no evidence presented that the notice was timely given. Neither was there evidence presented that the notice was relayed to the responsible authority of the carrier. As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule differently from the PCIC case, albeit this ruling is being made pro hac vice, not to be made a precedent for other cases. Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of recovery from a carrier must be given a reasonable and practical construction, adapted to the circumstances of the case under adjudication, and their application is limited to cases falling fairly within their object and purpose. 36 Bernhard Willig, the representative of consignee who received the shipment, relayed the information that the delivered goods were discovered to have sustained water damage to no less than the Claims Head of petitioner, Mayo B. Perez. Immediately, Perez was able to investigate the claims himself and he confirmed that the goods were, indeed, already corroded. Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a reasonable and practical, rather than a strict construction. 37 We give due consideration to the fact that the final destination of the damaged cargo was a school institution where authorities are bound by rules and regulations governing their actions. Understandably, when the goods were delivered, the necessary clearance had to be made before the package was opened. Upon opening and discovery of the damaged condition of the goods, a report to this effect had to pass through the proper channels before it could be finalized and endorsed by the institution to the claims department of the shipping company.
cHSTEA

15

The call to petitioner was made two days from delivery, a reasonable period considering that the goods could not have corroded instantly overnight such that it could only have sustained the damage during transit. Moreover, petitioner was able to immediately inspect the damage while the matter was still fresh. In so doing, the main objective of the prescribed time period was fulfilled. Thus, there was substantial compliance with the notice requirement in this case. To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in interest to institute the claim for damages against petitioner; andpro hac vice, that a valid notice of claim was made by respondent. We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated in Article 1735 of the Civil Code is that in cases where the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence required by law. 38 Extraordinary diligence is that extreme measure of care and caution which persons of unusual prudence and circumspection use for securing and preserving their own property rights. 39 This standard is intended to grant favor to the shipper who is at the mercy of the common carrier once the goods have been entrusted to the latter for shipment. 40 Here, the shipment delivered to the consignee sustained water damage. We agree with the findings of the CA that petitioner failed to overturn this presumption:
. . . upon delivery of the cargo to the consignee Don Bosco Technical High School by a representative from Trabajo Arrastre, and the crates opened, it was discovered that the workbenches and work tools suffered damage due to "wettage" although by then they were already physically dry. Appellee carrier

having failed to discharge the burden of proving that it exercised extraordinary diligence in the vigilance over such goods it contracted for carriage, the presumption of fault or negligence on its part from the time the goods were unconditionally placed in its possession (July 26, 1993) up to the time the same were delivered to the consignee (August 11, 1993), therefore stands . The presumption that

the carrier was at fault or that it acted negligently was not overcome by any countervailing evidence. . . . 41 (Emphasis added)

The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26, 1993. On the same day, it was stripped from the container van. Five days later, on July 31, 1993, it was re-stuffed inside another container van. On August 1, 1993, it was loaded onto another vessel bound for Cebu. During the period between July 26 to 31, 1993, the shipment was outside a container van and kept in storage by petitioner. The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside warehouse", suggesting that from July 26 to 31, the goods were kept outside the warehouse. And since evidence showed that rain fell over Manila during the same period, We can conclude that this was when the shipment sustained water damage. To prove the exercise of extraordinary diligence, petitioner must do more than merely show the possibility that some other party could be responsible for the damage. It must prove that it used "all reasonable means to ascertain the nature and characteristic of the goods tendered for transport and that it exercised due care in handling them. 42 Extraordinary diligence must include safeguarding the shipment from damage coming from natural elements such as rainfall.
aDSHCc

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

16

On the other hand, the supplemental report submitted by the surveyor has confirmed that it was rainwater that seeped into the cargo based on official data from the PAGASA that there was, indeed, rainfall in the Port Area of Manila from July 26 to 31, 1993. The Surveyor specifically noted that the subject cargo was under the custody of appellee carrier from the time it was delivered by the shipper on July 26, 1993 until it was stuffed inside Container No. ACCU-213798-4 on July 31, 1993. No other

inevitable conclusion can be deduced from the foregoing established facts that damage from "wettage" suffered by the subject cargo was caused by the negligence of appellee carrier in grounding the shipment outside causing rainwater to seep into the cargoes.
Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to the subject goods by claiming that the notation "GROUNDED OUTSIDE WHSE". actually refers to the container and

not the contents thereof or the cargoes. And yet it presented no evidence to explain where did they place or store the subject goods from the time it accepted the same for shipment on July 26, 1993 up to the time the goods were stripped or transferred from the container van to another container and loaded into the vessel M/V Supercon Carrier I on August 1, 1993 and left Manila for Cebu City on August 2, 1993. . . . If the subject cargo was not grounded outside prior to shipment to Cebu City,

appellee provided no explanation as to where said cargo was stored from July 26, 1993 to July 31, 1993. What the records showed is that the subject cargo was stripped from the container van of the shipper and transferred to the container on August 1, 1993 and finally loaded into the appellee's vessel bound for Cebu City on August 2, 1993. The Stuffing/Stripping Report (Exhibit "D") at the Manila port did not indicate any such defect or damage, but when the container was stripped upon arrival in Cebu City port after being discharged from appellee's vessel, it was noted that only one (1) slab was slightly broken at the bottom allegedly hit by a forklift blade (Exhibit "F"). 43 (Emphasis added)
ATEHDc

Petitioner is thus liable for the water damage sustained by the goods due to its failure to satisfactorily prove that it exercised the extraordinary diligence required of common carriers. WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED. SO ORDERED.

Ynares-Santiago, Austria-Martinez, Chico-Nazario and Nachura, JJ., concur.

17

MARINE INSURANCE [G.R. No. 84507. March 15, 1990.] CHOA TIEK SENG, doing business under the name and style of SENG'S COMMERCIAL ENTERPRISES, petitioner, vs. HON. COURT OF APPEALS, FILIPINO MERCHANTS' INSURANCE COMPANY, INC., BEN LINES CONTAINER, LTD. AND E. RAZON, INC., respondents.

Lapuz Law Office for petitioner. De Santos, Balgoz & Perez for respondent Filipino Merchants' Insurance Company, Inc. Marilyn Cacho-Noe for respondent Ben Lines Container, Ltd.
SYLLABUS COMMERCIAL LAW; MARINE INSURANCE; LIABILITY OF INSURER; "ALL RISK" INSURANCE POLICY; COVERAGE; CASE AT BAR. In Gloren Inc. vs. Filipinas Cia. de Seguros, it was held that an all risk insurance policy insures against all causes of conceivable loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured. It covers all losses during the voyage whether arising from a marine peril or not, including pilferage losses during the war. In the present case, the "all risks" clause of the policy sued upon reads as follows: "5. This insurance is against all risks of loss or damage to the subject matter insured but shall in no case be deemed to extend to cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject matter insured. Claims recoverable hereunder shall be payable irrespective of percentage." The terms of the policy are so clear and require no interpretation. The insurance policy covers all loss or damage to the cargo except those caused by delay or inherent vice or nature of the cargo insured. It is the duty of the respondent insurance company to establish that said loss or damage falls within the exceptions provided for by law, otherwise it is liable therefor. An "all risks" provision of a marine policy creates a special type of insurance which extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of establishing that the loss was due to peril falling within the policy's coverage. The insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. In this case, the damage caused to the cargo has not been attributed to any of the exceptions provided for nor is there any pretension to this effect. Thus, the liability of respondent insurance company is clear.

DECISION

GANCAYCO, J :
p

This is an appeal from a decision of the Court of Appeals dated February 18, 1988 in CA-G.R. CV No. 09627 which affirmed the decision of the Regional Trial Court (RTC) of Manila which in turn dismissed the complaint. 1 On November 4, 1976 petitioner imported some lactose crystals from Holland. The importation involved fifteen (15) metric tons packed in 600 6-ply paper bags with polyethylene inner bags, each bag at 25 kilos net. The goods were loaded at the port at Rotterdam in sea vans on board the vessel "MS Benalder' as the mother vessel, and thereafter aboard the feeder vessel "Wesser Broker V-25" of respondent Ben Lines Container, Ltd.
18

(Ben Lines for short). The goods were insured by the respondent Filipino Merchants' Insurance Co., Inc. (insurance company for short) for the sum of P98,882.35, the equivalent of US$8,765.00 plus 50% mark-up or US $13,147.50, against all risks under the terms of the insurance cargo policy. Upon arrival at the port of Manila, the cargo was discharged into the custody of the arrastre operator respondent E. Razon, Inc. (broker for short), prior to the delivery to petitioner through his broker. Of the 600 bags delivered to petitioner, 403 were in bad order. The surveys showed that the bad order bags suffered spillage and loss later valued at P33,117.63.
prLL

Petitioner filed a claim for said loss dated February 16, 1977 against respondent insurance company in the amount of P33,117.63 as the insured value of the loss. Respondent insurance company rejected the claim alleging that assuming that spillage took place while the goods were in transit, petitioner and his agent failed to avert or minimize the loss by failing to recover spillage from the sea van, thus violating the terms of the insurance policy sued upon; and that assuming that the spillage did not occur while the cargo was in transit, the said 400 bags were loaded in bad order, and that in any case, the van did not carry any evidence of spillage. Hence, petitioner filed the complaint dated August 2, 1977 in the Regional Trial Court of Manila against respondent insurance company seeking payment of the sum of P33,117.63 as damages plus attorney's fees and expenses of litigation. In its answer, respondent insurance company denied all the material allegations of the complaint and raised several special defenses as well as a compulsory counterclaim. On February 24, 1978, respondent insurance company filed a third-party complaint against respondents Ben Lines and broker. Respondent broker filed its answer to the third-party complaint denying liability and arguing, among others, that the petitioner has no valid cause of action against it. Similarly, Ben Lines filed its answer denying any liability and a special defense arguing that respondent insurance company was not the proper party in interest and has no connection whatsoever with Ben Lines Containers, Ltd. and that the third-party complaint has prescribed under the applicable provisions of the Carriage of Goods by Sea Act. On November 6, 1979, respondent Ben Lines filed a motion for preliminary hearing on the affirmative defense of prescription. In an order dated February 28, 1980, the trial court deferred resolution of the aforesaid motion after trial on the ground that the defense of prescription did not appear to be indubitable. After the pre-trial conference and trial on the merits, on March 31, 1986, the court a quo rendered a judgment dismissing the complaint, the counterclaim and the third-party complaint with costs against the petitioner. Hence, the appeal to the Court of Appeals by petitioner which, in due course, as aforestated, affirmed the judgment of the trial court. A motion for reconsideration of said judgment was denied by the appellate court in a resolution dated August 1, 1988. Petitioner now filed this petition for review on certiorari in this Court predicated on the following grounds:
"I RESPONDENT COURT ERRED IN HOLDING THAT THE INSURED SHIPMENT DID NOT SUSTAIN ANY DAMAGE/LOSS DESPITE ADMISSION THEREOF ON THE PART OF RESPONDENT INSURANCE COMPANY AND THE FINDING OF THE LATTER'S SURVEYORS. II RESPONDENT COURT ERRED IN HOLDING THAT AN "ALL RISKS" COVERAGE COVERS ONLY LOSSES OCCASIONED BY OR RESULTING FROM "EXTRA AND FORTUITOUS EVENTS" DESPITE THE CLEAR AND UNEQUIVOCAL DEFINITION OF THE TERM MADE AND CONTAINED IN THE POLICY SUED UPON. 19

III THE HOLDING OF RESPONDENT COURT THAT AN "ALL RISKS" COVERAGE COVERS LOSSES OCCASIONED BY AND RESULTING FROM "EXTRA AND FORTUITOUS EVENTS" CONTRADICTS THE RULING OF THE SAME COURT IN ANOTHER CASE WHERE THE DEFINITION OF THE TERM "ALL RISKS"/ STATED IN THE POLICY WAS MADE TO CONTROL HENCE THE NEED FOR REVIEW." 2

The petition is impressed with merit. The appellate court, in arriving at the conclusion that there was no damage suffered by the cargo at the time of the devanning thereof, held as follows:
Cdpr

"Appellant argued that the cargo in question sustained damages while still in the possession of the carrying vessel, because as his appointed surveyor reported, Worldwide Marine Survey Corporation, at the time of devanning at the pier, 403 bags were already in bad order and condition. Appellant found support to this contention on the basis of the survey report of Worldwide Marine Survey Corporation of the Philippines and of the Adjustment Corporation of the Philippines which were identified by his sole witness, Jose See. It must be pointed out, however, that witness Jose See was incompetent to identify the two survey reports because he was not actually present during the actual devanning of the cargo, which fact was admitted by him, hence, he failed to prove the authenticity of the aforesaid survey reports. On the other hand, the evidence submitted by the appellee would conclusively establish the fact that there was no damage suffered by the subject cargo at the time of the devanning thereof. The cargo, upon discharge from the vessel, was delivered to the custody of the arrastre operator (E. Razon) under clean tally sheet (Exh. 6-FMIC). Moreover, the container van containing the cargo was found with both its seal and lock intact. Article IV, paragraph 4 of the Management Contract (Exh. 5) signed between the Bureau of Customs and the Arrastre operator provides: "4.Tally Sheets for Cargo Vans or Containers The contractor shall give a clean tally sheet for cargo vans received by it in good order and condition with locks, and seals intact." The same cargo was in turn delivered into the possession of the appellant by the arrastre operator at the pier in good order and condition as shown by the clean gate passes (Exhs. 2 and 3) and the delivery permit (Exh. 4). The clean gate passes were issued by appellee arrastre operator covering the shipment in question, with the conformity of the appellant's representative. The clean gate passes provide in part: ". . . issuance of this Gate Pass constitutes delivery to and receipt by consignee of the goods as described above, in good order and condition, unless an accompanying B.O. (Bad Order) Certificate duly issued and noted on the face of this Gate Pass appears." These clean gate passes are undoubtedly important and vital pieces of evidence. They are noted in the dorsal side of another important piece of document which is the permit to deliver (Exh. 4) issued by the Bureau of Customs to effect delivery of the cargo to the consignee. The significance and value of these documents is that they bind the shipping company and the arrastre operator whenever a cargo sustains damage while in their respective custody. It is worthy of note that there was no turnover survey executed between the vessel and the arrastre operator, indicating any damage to the cargo upon discharge from the custody of the vessel. There was no bad order certificate issued by the appellee arrastre operator, indicating likewise that there was no damage to the cargo while in its custody.
llcd

It is surprising to the point that one could not believe that if indeed there was really damage affecting the 403 bags out of the 600, with an alleged estimated spillage of 240%, this purportedly big quantity of spillage was never recovered which could have been easily done considering that the shipment was in a container van which was found to be sealed and intact." 3 20

However, in the same decision of the appellate court, the following evidence of the petitioner on this aspect was summarized as follows:
"The 600 bags which the original carrier received in apparent good order condition and certified to by the vessel's agent to be weighing 15,300 kg. gross, were unloaded from the transhipment vessel "Wesser Broker" stuffed in one container and turned over to the arrastre operator, third party defendant-appellee E. Razon, Inc. A shipboard surveyor, the Worldwide Marine Cargo Surveyor, as well as a representative of the vessel "Wesser Broker" and a representative of the arrastre operator attended the devanning of the shipment and the said shipboard surveyor certified that 403 bags were in bad order condition with estimated spillage as follows: 65 P/bags each of 20% 78 P/bags each of 35% 79 P/bags each of 45% 87 P/bags each of 65% 94 P/bags each of 75% (Exh. F-1) Defendant and third-party plaintiff-appellee's protective surveyor determined the exact spillage from the bad order bags as found by the shipboard surveyor at the consignee's warehouse by weighing the bad order bags. Said protective surveyor found after weighing the 403 bags in bad order condition that an aggregate of 5,173 kilos were missing therefrom (Exh. F)." 4

The assertion of the appellate court that the authenticity of the survey reports of the Worldwide Marine Cargo Survey Corporation and the Adjustment Corporation of the Philippines were not established as Jose See who identified the same was incompetent as he was not actually present during the actual devanning of the cargo is not well taken.
LexLib

In the first place it was respondent insurance company which undertook the protective survey aforestated relating to the goods from the time of discharge up to the time of delivery thereof to the consignee's warehouse, so that it is bound by the report of its surveyor which is the Adjustment Corporation of the Philippines. 5 The Worldwide Marine Cargo Survey Corporation of the Philippines was the vessel's surveyor. The survey report of the said Adjustment Corporation of the Philippines reads as follows:
"During the turn-over of the contents delivery from the cargo sea van by the representative of the shipping agent to consignee's representative/Broker (Saint Rose Forwarders), 403 bags were bursted and/or torn, opened on one end contents partly spilled. The same were inspected by the vessel's surveyor(Worldwide Marine & Cargo Survey Corporation), findings as follows: One (1) Container No. 2987789 Property locked and secured with Seal No. 18880. FOUND: 197-Paper Bags (6-Ply each with One inner Plastic Lining Machine Stitched with cotton Twine on Both ends. Containing Lactose Crystal 25 mesh Sep 061-09-03 in good order. 403-Bags, 6-ply torn/and or opened on one end, contents partly spilled, estimated spillages as follows: 65 P/bags each of 20% 21

78 P/bags each of 35% 79 P/bags each of 45% 87 P/bags each of 65% 94 P/bags each of 75% (Emphasis supplied for emphasis)"
6

The authenticity of the said survey report need not be established in evidence as it is binding on respondent insurance company who caused said protective survey. Secondly, contrary to the findings of the appellate court that petitioner's witness Jose See was not present at the time of the actual devanning of the cargo, what the record shows is that he was present when the cargo was unloaded and received in the warehouse of the consignee. He saw 403 bags to be in bad order. Present then was the surveyor, Adjustment Corporation of the Philippines, who surveyed the cargo by segregating the bad order cargo from the good order and determined the amount of loss. 7 Thus, said witness was indeed competent to identify the survey report aforestated.
LexLib

Thirdly, in its letter dated May 26, 1977 to petitioner, respondent insurance company admitted in no uncertain terms, the damages as indicated in the survey report in this manner:
"We do not question the fact that out of the 600 bags shipment 403 bags appeared to be in bad order or in damaged condition as indicated in the survey report of the vessel surveyor . . .." 8

This admission even standing alone is sufficient proof of loss or damage to the cargo. The appellate court observed that the cargo was discharged from the vessel and delivered to the custody of the broker under the clean tally sheet, that the container van containing the cargo was found with both its seal and lock intact; and that the cargo was delivered to the possession of the petitioner by the broker in good order and condition as shown by the clean gate passes and delivery permit. The clean tally sheet referred to by the appellate court covers the van container and not the cargo stuffed therein. 9 The appellate court clearly stated that the clean tally sheet issued by the broker covers the cargo vans received by it in good order and condition with lock and seal intact. Said tally sheet is no evidence of the condition of the cargo therein contained. Even the witness of the respondent insurance company, Sergio Icasiano, stated that the clean gate passes do not reflect the actual condition of the cargo when released by the broker as it was not physically examined by the broker. 10 There is no question, therefore, that there were 403 bags in damaged condition delivered and received by petitioner. Nevertheless, on the assumption that the cargo suffered damages, the appellate court ruled:
"Even assuming that the cargo indeed sustained damage, still the appellant cannot hold the appellee insurance company liable on the insurance policy. In the case at bar, appellant failed to prove that the alleged damage was due to risks connected with navigation. A distinction should be made between "perils of the sea" which render the insurer liable on account of the loss and/or damage brought about thereof and "perils of the ship" which do not render the insurer liable for any loss or damage. Perils of the sea or perils of navigation embrace all kinds of marine casualties, such as shipwreck, foundering, stranding, collision and every specie of damage done to the ship or goods at sea by the violent action of the winds or waves. They do not embrace all loses happening on the sea. A peril whose only connection with the sea is that it arises aboard ship is not necessarily a peril of the sea; the peril must 22

be of the sea and not merely one accruing on the sea (The Phil. Insurance Law, by Guevarra, 4th ed., 1961, p. 143). In Wilson, Sons and Co. vs. Owners of Cargo per the Xantho (1887) A.C. 503, 508, it was held:
cdphil

"There must, in order to make the insurer liable be "some casualty," something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen." Moreover, the cargo in question was insured in an "against all risk policy." Insurance "against all risk" has a technical meaning in marine insurance. "Under an "all risk" marine policy, there must as a general rule be a fortuitous event in order to impose liability on the insurer; losses occasioned by ordinary circumstances or wear and tear are not covered, thus, while an "all risk" marine policy purports to cover losses from casualties at sea, it does not cover losses occasioned by the ordinary circumstances of a voyage, but only those resulting from extra and fortuitous events." "It has been held that damage to a cargo by high seas and other weather is not covered by an "all risk" marine policy, since it is not fortuitous, particularly where the bad weather occurs at a place where it could be expected at the time in question." (44 Am. Jur. 2d. 216) In Go Tiaoco y Hermanas vs. Union Insurance Society of Canto, 40 Phil. 40, it was held: "In the present case, the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that whose results, from perils of the sea." 11

The Court disagrees. In Gloren Inc. vs. Filipinas Cia. de Seguros, 12 it was held that an all risk insurance policy insures against all causes of conceivable loss or damage, except as otherwise excluded in the policy or due to fraud or intentional misconduct on the part of the insured. It covers all losses during the voyage whether arising from a marine peril or not, including pilferage losses during the war.
cdrep

In the present case, the "all risks" clause of the policy sued upon reads as follows:
"5.This insurance is against all risks of loss or damage to the subject matter insured but shall in no case be deemed to extend to cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject matter insured. Claims recoverable hereunder shall be payable irrespective of percentage." 13

The terms of the policy are so clear and require no interpretation. The insurance policy covers all loss or damage to the cargo except those caused by delay or inherent vice or nature of the cargo insured. It is the duty of the respondent insurance company to establish that said loss or damage falls within the exceptions provided for by law, otherwise it is liable therefor. An "all risks" provision of a marine policy creates a special type of insurance which extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of establishing that the loss was due to peril falling within the policy's coverage. The insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. 14

In this case, the damage caused to the cargo has not been attributed to any of the exceptions provided for nor is there any pretension to this effect. Thus, the liability of respondent insurance company is clear.
23

WHEREFORE, the decision appealed from is hereby REVERSED AND SET ASIDE and another judgment is hereby rendered ordering the respondent Filipinas Merchants Insurance Company, Inc. to pay the sum of P33,117.63 as damages to petitioner with legal interest from the filing of the complaint, plus attorney's fees and expenses of litigation in the amount of P10,000.00 as well as the costs of the suit.
prLL

SO ORDERED.

Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

[G.R. No. 94052. August 9, 1991.] ORIENTAL ASSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.

Alejandro P. Ruiz, Jr. for petitioner. Federico R. Reyes for private respondent.
SYLLABUS 1.COMMERCIAL LAW; MARINE INSURANCE; TERMS OF CONTRACT; CONSTITUTE THE MEASURE OF INSURER'S LIABILITY. The terms of the contract 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 (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 78860, May 28, 1990, 185 SCRA 741. 2.ID.; ID.; ID.; DETERMINES WHETHER THE INSURER'S LIABILITY IS ENTIRE OR SEVERABLE; CASE AT BAR. Whether a contract is entire or severable is a question of intention to be determined by the language employed by the parties. The policy in question shows that the subject matter insured was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not make the contract several and divisible as to the items insured. The logs on the two barges were not separately valued or separately insured. Only one premium was paid for the entire shipment, making for only one cause or consideration. The insurance contract must, therefore, be considered indivisible. 3.ID.; ID.; INSURER'S LIABILITY; ACTUAL TOTAL LOSS; CAUSES. More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or constructive (Sec. 129, Insurance Code). An actual total loss is caused by: "(a) A total destruction of the thing insured; "(b) The irretrievable loss of the thing by sinking, or by being broken up; "(c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or "(d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured." (Section 130, Insurance Code). 4.ID.; ID.; ID.; CONSTRUCTIVE TOTAL LOSS; RIGHT OF THE PERSON INSURED TO ABANDON; RULE. A constructive total loss is one which gives to a person insured a right to abandon, under Section 139 of the Insurance Code. This provision reads: "SECTION 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against. "(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; "(b) If it is injured to such an extent as to reduce its value more than three-fourths."

24

5.ID.; ID.; ID.; ID.; BASIS FOR DETERMINING THEREOF. The requirements for the application of Section 139 of the Insurance Code, quoted above, have not been met. The logs involved, although placed in two barges, were not separately valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in relation to the total number of logs loaded on the same barge can not be made the basis for determining constructive total loss. The logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208 pieces of logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of logs, the shipment can not be said to have sustained a constructive total loss under Section 139(a) of the Insurance Code.

DECISION

MELENCIO-HERRERA, J :
p

An action to recover on a marine insurance policy, issued by petitioner in favor of private respondent, arising from the loss of a shipment of apitong logs from Palawan to Manila. The facts relevant to the present review disclose that sometime in January 1986, private respondent Panama Sawmill Co., Inc. (Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it against loss for PIM with petitioner Oriental Assurance Corporation (Oriental Assurance). There is a claim by Panama, however, that the insurance coverage should have been for P3M were it not for the fraudulent act of one Benito Sy Yee Long to whom it had entrusted the amount of P6,000.00 for the payment of the premium for a P3M policy. Oriental Assurance issued Marine Insurance Policy No. OACM-86/002, which stipulated, among others:
"Name of Insured: Panama Sawmill, Inc. Karuhatan, Valenzuela Metro Manila "Vessel: MT. 'Seminole' Barge PCT 7,000 1,000 cubic meter apitong Logs Barge Transpac 1,000 1,000 cubic meter apitong Logs "Voyage or Period of Insurance: From: Palawan ETD: January 16, 1986 To: Manila "Subject matter Insured: 2,000 cubic meters apitong Logs "Agreed Value "Amount Insured Hereunder: Pesos: One Million Only (P1,000,000.00) Philippine Currency "Premium P2,500.00rate 0.250% "Doc. stamps187.50Invoice No. 157862 25

"1 % P/tax25.00 TotalP2,712.50 "CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES. "Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses: Civil Code Article 1250 Waiver clause Typhoon warranty clause Omnibus clause."

The logs were loaded on two (2) barges: (1) on barge PCT7000, 610 pieces of logs with a volume f 1,000 cubic meters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters. On 28 January 1986, the two barges were towed by one tugboat, the MT "Seminole." But, as fate would have it, during the voyage, rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs out of the 598 pieces loaded thereon. Panama demanded payment for the loss but Oriental Assurance refused on the ground that its contracted liability was for "TOTAL LOSS ONLY." The rejection was upon the recommendation of the Tan Gatue Adjustment Company. Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages against Ever Insurance Agency (allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance, before the Regional Trial Court, Kalookan, Branch 123, docketed as Civil Case No. C-12601. After trial on the merit, the RTC
1

rendered its Decision, with the following dispositive portion:

"WHEREFORE, upon all the foregoing premises, judgment is hereby rendered: "1.Ordering the defendant Oriental Assurance Corporation to pay Plaintiff Panama Saw Mill Inc. the amount of P415,000.00 as insurance indemnity with interest at the rate of 12% per annum computed from the date of the filing of the complaint; "2.Ordering Panama Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy Lee Yong, owner thereof (Ever being a single proprietorship) for the amount of P20,000.00 as attorney's fee and another amount of P20,000.00 as moral damages. "3.Dismissing the complaint against defendant Benito Sy Lee Yong. "SO ORDERED."

On appeal by both parties, respondent Appellate Court 2 affirmed the lower Court judgment in all respects except for the rate of interest, which was reduced from twelve (12%) to six (6%) per annum. Both Courts shared the view that the insurance contract should be liberally construed in order to avoid a denial of substantial justice; and that the logs loaded in the two barges should be treated separately such that the loss sustained by the shipment in one of them may be considered as "constructive total loss" and correspondingly compensable. In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid dispositions. In its Comment, Panama, in turn, maintains that the constructive total loss should be based on a policy value of P3M
26

and not P1M, and prays that the award to Ever Insurance Agency or Antonio Sy Lee Yong of damages and attorney's fees be set aside. The question for determination is whether or not Oriental Assurance can be held liable under its marine insurance policy based on the theory of a divisible contract of insurance and, consequently, a constructive total loss. Our considered opinion is that no liability attaches. The terms of the contract 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 (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 78860, May 28, 1990, 185 SCRA 741). Whether a contract is entire or severable is a question of intention to be determined by the language employed by the parties. The policy in question shows that the subject matter insured was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not make the contract several and divisible as to the items insured. The logs on the two barges were not separately valued or separately insured. Only one premium was paid for the entire shipment, making for only one cause or consideration. The insurance contract must, therefore, be considered indivisible. More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or constructive (Sec. 129, Insurance Code). An actual total loss is caused by:
"(a)A total destruction of the thing insured; "(b)The irretrievable loss of the thing by sinking, or by being broken up; "(c)Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or "(d)Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured." (Section 130, Insurance Code).

A constructive total loss is one which gives to a person insured a right to abandon, under Section 139 of the Insurance Code. This provision reads:
"SECTION 139.A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against.

"(a)If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; "(b)If it is injured to such an extent as to reduce its value more than three-fourths; "xxx xxx xxx" (Emphasis ours)

Respondent Appellate Court treated the loss as a constructive total loss, and for the purpose of computing the more than three-fourths value of the logs actually lost, considered the cargo in one barge as separate from the logs in the other. Thus, it concluded that the loss of 497 pieces of logs from barge TPAC-1000, mathematically
27

speaking, is more than three-fourths (3/4) of the 598 pieces of logs loaded in that barge and may, therefore, be considered as constructive total loss. The basis thus used is, in our opinion, reversible error. The requirements for the application of Section 139 of the Insurance Code, quoted above, have not been met. The logs involved, although placed in two barges, were not separately valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in relation to the total number of logs loaded on the same barge can not be made the basis for determining constructive total loss. The logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof were lost or 41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of logs, the shipment can not be said to have sustained a constructive total loss under Section 139(a) of the Insurance Code. In the absence of either actual or constructive total loss, there can be no recovery by the insured Panama against the insurer, Oriental Assurance. By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be passed upon, besides the fact that no review, in proper form, has been sought by it. WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is hereby ABSOLVED from liability under its marine insurance policy No. OAC-M-86/002. No costs. SO ORDERED.

Paras, Padilla, Sarmiento and Regalado, JJ ., concur.

[G.R. No. L-66935. November 11, 1985.] ISABELA ROQUE, doing business under the name and style of Isabela Roque Timber Enterprises and ONG CHIONG, petitioners, vs.HON. INTERMEDIATE APPELLATE COURT and PIONEER INSURANCE AND SURETY CORPORATION, respondents.

DECISION

GUTIERREZ, J :
p

This petition for certiorari asks for the review of the decision of the Intermediate Appellate Court which absolved the respondent insurance company from liability on the grounds that the vessel carrying the insured cargo was unseaworthy and the loss of said cargo was caused not by the perils of the sea but by the perils of the ship. On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay) a common carrier, entered into a contract with the petitioners whereby the former would load and carry on board its barge Mable 10 about 422.18 cubic meters of logs from Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured the logs against loss for P100,000.00 with respondent Pioneer Insurance and Surety Corporation (Pioneer).

28

On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of Manila, but the shipment never reached its destination because Mable 10 sank with the 811 pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila. As alleged by the petitioners in their complaint and as found by both the trial and appellate courts, the barge where the logs were loaded was not seaworthy such that it developed a leak. The appellate court further found that one of the hatches was left open causing water to enter the barge and because the barge was not provided with the necessary cover or tarpaulin, the ordinary splash of sea waves brought more water inside the barge. On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment of P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits but the latter ignored the demand. Another letter was sent to respondent Pioneer claiming the full amount of P100,000.00 under the insurance policy but respondent refused to pay on the ground that its liability depended upon the "Total loss by Total Loss of Vessel only". Hence, petitioners commenced Civil Case No. 86599 against Manila Bay and respondent Pioneer. After hearing, the trial court found in favor of the petitioners. The dispositive portion of the decision reads:
"FOR ALL THE FOREGOING, the Court hereby rendered judgment as follows: "(a)Condemning defendants Manila Bay Lighterage Corporation and Pioneer Insurance and Surety Corporation to pay plaintiffs, jointly and severally, the sum of P100,000.00; "(b)Sentencing defendant Manila Bay Lighterage Corporation to pay plaintiff, in addition, the sum of P50,000.00, plus P12,500.00, that the latter advanced to the former as down payment for transporting the logs in question; "(c)Ordering the counterclaim of defendant Insurance against plaintiffs, dismissed, for lack of merit, but as to its cross-claim against its co-defendant Manila Bay Lighterage Corporation, the latter is ordered to reimburse the former for whatever amount it may pay the plaintiffs as such surety; "(d)Ordering the counterclaim of defendant Lighterage against plaintiffs, dismissed for lack of merit; "(e)Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as exemplary damages are ordered dismissed, for lack of merits; plaintiffs' claim for attorney's fees in the sum of P10,000.00 is hereby granted, against both defendants, who are, moreover ordered to pay the costs; and "(f)The sum of P150,000.00 award to plaintiffs, shall bear interest of six per cent (6%) from March 25, 1975, until amount is fully paid."

Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did not appeal. According to the petitioners, the transportation company is no longer doing business and is without funds. During the initial stages of the hearing, Manila Bay informed the trial court that it had salvaged part of the logs. The court ordered them to be sold to the highest bidder with the funds to be deposited in a bank in the name of Civil Case No. 86599. On January 30, 1984, the appellate court modified the trial court's decision and absolved Pioneer from liability after finding that there was a breach of implied warranty of seaworthiness on the part of the petitioners and that the loss of the insured cargo was caused by the "perils of the ship" and not by the "perils of the sea". It ruled that the loss is not covered by the marine insurance policy.
llcd

After the appellate court denied their motion for reconsideration, the petitioners filed this petition with the following assignments of errors:
29

I THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN CASES OF MARINE CARGO INSURANCE, THERE IS A WARRANTY OF SEAWORTHINESS BY THE CARGO OWNER. II THE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT THE LOSS OF THE CARGO IN THIS CASE WAS CAUSED BY 'PERILS OF THE SHIP' AND NOT BY 'PERILS OF THE SEA.'. III THE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING THE RETURN TO PETITIONER OF THE AMOUNT OF P8,000.00 WHICH WAS DEPOSITED IN THE TRIAL COURT AS SALVAGE VALUE OF THE LOGS THAT WERE RECOVERED.

In their first assignment of error, the petitioners contend that the implied warranty of seaworthiness provided for in the Insurance Code refers only to the responsibility of the shipowner who must see to it that his ship is reasonably fit to make in safety the contemplated voyage. The petitioners state that a mere shipper of cargo, having no control over the ship, has nothing to do with its seaworthiness. They argue that a cargo owner has no control over the structure of the ship, its cables, anchors, fuel and provisions, the manner of loading his cargo and the cargo of other shippers, and the hiring of a sufficient number of competent officers and seamen. The petitioners' arguments have no merit. There is no dispute over the liability of the common carrier Manila Bay. In fact, it did not bother to appeal the questioned decision. However, the petitioners state that Manila Bay has ceased operating as a firm and nothing may be recovered from it. They are, therefore, trying to recover their losses from the insurer. The liability of the insurance company is governed by law. Section 113 of the Insurance Code provides:
"In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy."

Section 99 of the same Code also provides in part.

'Marine insurance includes: "(1)Insurance against loss of or damage to: (a)Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, . . . ."

From the above-quoted provisions, there can be no mistaking the fact that the term "cargo" can be the subject of marine insurance and that once it is so made, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo whether he be the shipowner or not. As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of Canton (40 Phil. 40):
"The same conclusion must be reached if the question be discussed with reference to the seaworthiness of the ship. It is universally accepted that in every contract of insurance upon anything 30

which is the subject of marine insurance, a warranty is implied that the ship shall be seaworthy at the time of the inception of the voyage. This rule is accepted in our own Insurance Law (Act No. 2427, sec. 106). . . ."

Moreover, the fact that the unseaworthiness of the ship was unknown to the insured is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy.
LLjur

As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S. 406):
"There was no lookout, and both that and the rate of speed were contrary to the Canadian Statute. The exception of losses occasioned by unseaworthiness was in effect a warranty that a loss should not be so occasioned, and whether the fact of unseaworthiness were known or unknown would be immaterial."

Since the law provides for an implied warranty of seaworthiness in every contract of ordinary marine insurance, it becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. Or the cargo owner may enter into a contract of insurance which specifically provides that the insurer answers not only for the perils of the sea but also provides for coverage of perils of the ship. We are constrained to apply Section 113 of the Insurance Code to the facts of this case. As stated by the private respondents:
"In marine cases, the risks insured against are 'perils of the sea' (Chute v. North River Ins. Co., Minn 214 NW 472, 55 ALR 933). The purpose of such insurance is protection against contingencies and against possible damages and such a policy does not cover a loss or injury which must inevitably take place in the ordinary course of things. There is no doubt that the term 'perils of the sea' extends only to losses caused by sea damage, or by the violence of the elements, and does not embrace all losses happening at sea. They insure against losses from extraordinary occurrences only, such as stress of weather, winds and waves, lightning, tempests, rocks and the like. These are understood to be the 'perils of the sea' referred in the policy, and not those ordinary perils which every vessel must encounter. 'Perils of the sea' has been said to include only such losses as are of extraordinary nature, or arise from some overwhelming power, which cannot be guarded against by the ordinary exertion of human skill and prudence. Damage done to a vessel by perils of the sea includes every species of damages done to a vessel at sea, as distinguished from the ordinary wear and tear of the voyage, and distinct from injuries suffered by the vessel in consequence of her not being seaworthy at the outset of her voyage (as in this case). It is also the general rule that everything which happens thru the inherent vice of the thing, or by the act of the owners, master or shipper, shall not be reputed a peril, if not otherwise borne in the policy. (14 RCL on 'Insurance', Sec. 384, pp. 1203-1204; Cia. de Navegacion v. Firemen's Fund Ins. Co., 277 US 66, 72 L. ed. 787, 48 S. Ct. 459)."

With regard to the second assignment of error, petitioners maintain, that the loss of the cargo was caused by the perils of the sea, not by the perils of the ship because as found by the trial court, the barge was turned loose from the tugboat east of Cabuli Point "where it was buffeted by storm and waves." Moreover, petitioners also maintain that barratry, against which the cargo was also insured, existed when the personnel of the tugboat and the barge committed a mistake by turning loose the barge from the tugboat east of Cabuli Point. The trial court also found that the stranding and foundering of Mable 10 was due to improper loading of the logs as well as to a leak in the barge which constituted negligence.

31

On the contention of the petitioners that the trial court found that the loss was occasioned by the perils of the sea characterized by the "storm and waves" which buffeted the vessel, the records show that the court ruled otherwise. It stated: xxx xxx xxx
" . . . The other affirmative defense of defendant Lighterage, 'That the supposed loss of the logs was occasioned by force majeure . . . .', was not supported by the evidence. At the time Mable 10 sank, there was no typhoon but ordinary strong wind and waves, a condition which is natural and normal in the open sea. The evidence shows that the sinking of Mable 10 was due to improper loading of the logs on one side so that the barge was tilting on one side and for that it did not navigate on even keel; that it was no longer seaworthy that was why it developed leak; that the personnel of the tugboat and the barge committed a mistake when it turned loose the barge from the tugboat east of Cabuli point where it was buffeted by storm and waves, while the tugboat proceeded to west of Cabuli point where it was protected by the mountain side from the storm and waves coming from the east direction. . . ."

In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of defendant carrier developed a leak which allowed water to come in and that one of the hatches of said barge was negligently left open by the person in charge thereof causing more water to come in", and that "the loss of said plaintiffs' cargo was due to the fault, negligence, and/or lack of skill of defendant carrier and/or defendant carrier's representatives on barge Mable 10."
LexLib

It is quite unmistakable that the loss of the cargo was due to the perils of the ship rather than the perils of the sea. The facts clearly negate the petitioners' claim under the insurance policy. In the case of Go Tiaoco y Hermanos v. Union Ins. Society of Canton, supra, we had occasion to elaborate on the term "perils of the ship." We ruled:
"It must be considered to be settled, furthermore, that a loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the 'peril of the ship.' The insurer undertakes to insure against perils of the sea and similar perils, not against perils of the ship. As was well said by Lord Herschell in Wilson, Sons & Co. v. Owners of Cargo per the Xantho ([1887], 12 A. C., 503, 509), there must, in order to make the insurer liable, be 'some casualty, something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen. "In the present case the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which results from perils of the sea.

xxx xxx xxx

"Suffice it to say that upon the authority of those cases there is no room to doubt the liability of the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is not liable; for generally speaking, the shipowner excepts the perils of the sea from his engagement under the bill of lading, while this is the very perils against which the insurer intends to give protection. As applied to the present case it results that the owners of the damaged rice must look to the shipowner for redress and not to the insurer. "

Neither can petitioners allege barratry on the basis of the findings showing negligence on the part of the vessel's crew.
32

Barratry as defined in American Insurance Law is "any willful misconduct on the part of master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of the owner's interest." (Sec. 171, U.S. Insurance Law, quoted in Vance, Handbook on Law of Insurance, 1961, p. 929.) Barratry necessarily requires a willful and intentional act in its commission. No honest error of judgment or mere negligence, unless criminally gross, can be barratry. (See Vance on Law of Insurance, p. 929 and cases cited therein.) In the case at bar, there is no finding that the loss was occasioned by the willful or fraudulent acts of the vessel's crew. There was only simple negligence or lack of skill. Hence, the second assignment of error must likewise be dismissed. Anent the third assignment of error, we agree with the petitioners that the amount of P8,000.00 representing the amount of the salvaged logs should have been awarded to them. However, this should be deducted from the amounts which have been adjudicated against Manila Bay Lighterage Corporation by the trial court.
LibLex

WHEREFORE, the decision appealed from is AFFIRMED with the modification that the amount of P8,000.00 representing the value of the salvaged logs which was ordered to be deposited in the Manila Banking Corporation in the name of Civil Case No. 86599 is hereby awarded and ordered paid to the petitioners. The liability adjudged against Manila Bay Lighterage Corporation in the decision of the trial court is accordingly reduced by the same amount. SO ORDERED. Teehankee (Chairman), Melencio-Herrera, Plana, De la Fuente and Patajo, JJ., concur. Relova J., is on leave.

[G.R. No. 85141. November 28, 1989.] FILIPINO MERCHANTS INSURANCE CO., INC., petitioner, vs. COURT OF APPEALS and CHOA TIEK SENG, respondents.

Balgos & Perez Law Offices for petitioner. Lapuz Law Office for private respondent.
SYLLABUS 1.COMMERCIAL LAW; MARINE INSURANCE; "ALL RISKS POLICY;" COVERS ALL LOSSES BY ANY KIND OF ACCIDENTS. An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind. The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning. They are construed by the courts in their ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention and design, and which is unexpected, unusual and unforeseen. An accident is an event that takes place without one's foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected.
33

2.ID.; INSURANCE; CONSIDERED CONTRACTS OF INDEMNITY; IF TERMS ARE CLEAR, POLICY MUST BE UNDERSTOOD IN THEIR PLAIN, ORDINARY AND POPULAR SENSE. Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer's liability. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. 3.ID.; ID.; INSURABLE INTEREST, DEFINITION OF; KINDS. Section 13 of the Insurance Code defines insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured. In principle, anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction whether he has or has not any title in, or lien upon or possession of the property. Insurable interest in property may consist in (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. 4.ID.; ID.; VENDEE OF GOODS INSURED HAS AN EQUITABLE TITLE EVEN BEFORE DELIVERY ON PERFORMANCE OF CONDITIONS OF SALE. Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale. The perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title even before delivery or before he performed the conditions of the sale. The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance. 5.CIVIL LAW; SALES; DELIVERY OF GOODS ON BOARD THE CARRYING VESSEL CONSIDERED AN ACTUAL DELIVERY. Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them. 6.COMMERCIAL LAW; CODE OF COMMERCE; C & F CONTRACTS MEAN SELLER MUST PAY THE COSTS AND FREIGHT BUT BUYER ASSUMES RISKS OF LOSS. C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods and freight to the named destination. It simply means that the seller must pay the costs and freight necessary to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. 7.REMEDIAL LAW; APPEAL; ISSUE NOT RAISED IN THE COURT A QUO CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL. It is a settled rule that an issue which has not been raised in the court a quo cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process. This is but a permuted restatement of the long settled rule that when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he will not be permitted to change his theory on appeal because, to permit him to do so, would be unfair to the adverse party.

DECISION

34

REGALADO, J :
p

This is a review of the decision of the Court of Appeals, promulgated on July 19, 1988, the dispositive part of which reads:
LLpr

"WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at legal rate from the date of filing of the complaint, and is modified with respect to the third party complaint in that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party plaintiff the sum of P25,471.80 with legal interest from the date of payment until the date of reimbursement, and (2) the third-party complaint against third party defendant Compagnie Maritime Des Chargeurs Reunis is dismissed." 1

The facts as found by the trial court and adopted by the Court of Appeals are as follows:
"This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and seeks to recover from the defendant insurance company the amount of P51,568.62 representing damages to said shipment which has been insured by the defendant insurance company under Policy No. M-2678. The defendant brought a third party complaint against third party defendants Compagnie Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against the third (sic) defendants in case judgment is rendered against the third party plaintiff. It appears from the evidence presented that in December 1976, plaintiff insured said shipment with defendant insurance company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms. Actually, what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's surveyor ascertained and certified that in such discharge 105 bags were in bad order condition as jointly surveyed by the ship's agent and the arrastre contractor. The condition of the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6-Razon. The cargo was also surveyed by the arrastre contractor before delivery of the cargo to the consignee and the condition of the cargo on such delivery was reflected in E. Razon's Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant's surveyor has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a survey report Exhibit F with the findings on the extent of shortage or loss on the bad order bags totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62 (Exhibit C) the computation of which claim is contained therein. A formal claim statement was also presented by the plaintiff against the vessel dated December 21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay the claim. Consequently, the plaintiff brought an action against said defendant as adverted to above and defendant presented a third party complaint against the vessel and the arrastre contractor." 2

The court below, after trial on the merits, rendered judgment in favor of private respondent, the decretal portion whereof reads:
"WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and against the defendant Filipino Merchant's (sic) Insurance Co., ordering the defendants to pay the plaintiff the following amount: "The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint; "On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs Reunis and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff jointly and severally reimbursement of the amounts paid by the third party plaintiff with legal interest from the date of such payment until the date of such reimbursement. 35

"Without pronouncement as to costs."

On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the complaint is concerned and modified the same with regard to the adjudication of the third-party complaint. A motion for reconsideration of the aforesaid decision was denied, hence this petition with the following assignment of errors:
Cdpr

"1.The Court of Appeals erred in its interpretation and application of the 'all risks' clause of the marime insurance policy when it held the petitioner liable to the private respondent for the partial loss of the cargo, notwithstanding the clear absence of proof of some fortuitous event, casualty, or accidental cause to which the loss is attributable, thereby contradicting the very precedents cited by it in its decision as well as a prior decision of the same Division of the said court (then composed of Justices Cacdac, Castro-Bartolome, and Pronove); "2.The Court of Appeals erred in not holding that the private respondent had no insurable interest in the subject cargo, hence, the marine insurance policy taken out by private respondent is null and void; "3.The Court of Appeals erred in not holding that the private respondent was guilty of fraud in not disclosing the fact, it being bound out of utmost good faith to do so, that it had no insurable interest in the subject cargo, which bars its recovery on the policy." 4

On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical meaning in insurance in that before a claim can be compensable it is essential that there must be "some fortuity," "casualty" or "accidental cause" to which the alleged loss is attributable and the failure of herein private respondent, upon whom lay the burden, to adduce evidence showing that the alleged loss to the cargo in question was due to a fortuitous event precludes his right to recover from the insurance policy. We find said contention untenable. The "all risks clause" of the Institute Cargo Clauses read as follows:
"5.This insurance is against all risks of logs or damage to the subject-matter insured but shall in no case be deemed to extend to cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be payable irrespective of percentage." 5

An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind. The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning. They are construed by the courts in their ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention and design, and which is unexpected, unusual and unforeseen. An accident is an event that takes place without one's foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected. 6 The very nature of the term "all risks" must be given a broad and comprehensive meaning as covering any loss other than a wilful and fraudulent act of the insured. 7This is pursuant to the very purpose of an "all risks" insurance to give protection to the insured in those cases where difficulties of logical explanation or some mystery surround the loss or damage to property. 8 An "all risks" policy has been evolved to grant greater protection than that afforded by the "perils clause," in order to assure that no loss can happen through the incidence of a cause neither insured against nor creating liability in the ship; it is written against all losses, that is, attributable to external causes. 9 The term "all risks" cannot be given a strained technical meaning, the language of the clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it extends to all damages/losses
36

suffered by the insured cargo except (a) loss or damage or expense proximately caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or nature of the subject matter insured. Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an "all risks" policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company has the burden of proving that the loss is caused by the risks excepted and for want of such proof, the company is liable.
Cdpr

Coverage under an "all risks" provision of a marine insurance policy creates a special type of insurance which extends coverage to risks not usually contemplated and avoids putting upon the insured the burden of establishing that the loss was due to the peril falling within the policy's coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. 12 A marine insurance policy providing that the insurance was to be "against all risks" must be construed as creating a special insurance and extending to other risks than are usually contemplated, and covers all losses except such as arise from the fraud of the insured. 13 The burden of the insured, therefore, is to prove merely that the goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils. To impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the broad protective purpose of "all risks" insurance. In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer is liable under the policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the authorities and jurisprudence it discussed
". . . it is believed that in the absence of any showing that the losses/damages were caused by an excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and there is no such showing, the lower court did not err in holding that the loss was covered by the policy. "There is no evidence presented to show that the condition of the gunny bags in which the fishmeal was packed was such that they could not hold their contents in the course of the necessary transit, much less any evidence that the bags of cargo had burst as the result of the weakness of the bags themselves. Had there been such a showing that spillage would have been a certainty, there may have been good reason to plead that there was no risk covered by the policy (See Berk vs. Style [1956] cited in Marine Insurance Claims, ibid, p. 125). Under an 'all risks' policy, it was sufficient to show that there was damage occasioned by some accidental cause of any kind, and there is no necessity to point to any particular cause." 14

Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer's liability. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. 15 Anent the issue of insurable interest, we uphold the ruling of the respondent court that private respondent, as consignee of the goods in transit under an invoice containing the terms under "C & F Manila," has insurable interest in said goods. Section 13 of the Insurance Code defines insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured. In principle, anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction whether he has or has not any title in, or
37

lien upon or possession of the property. 16 Insurable interest in property may consist in (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. 17 Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale. 18 The perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title even before delivery or before he performed the conditions of the sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance. Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them. 20 C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods and freight to the named destination. 21 It simply means that the seller must pay the costs and freight necessary to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. 22

Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioner's answer. It was neither an issue agreed upon by the parties at the pre-trial conference nor was it raised during the trial in the court below. It is a settled rule that an issue which has not been raised in the court a quo cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process. 23 This is but a permuted restatement of the long settled rule that when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he will not be permitted to change his theory on appeal because, to permit him to do so, would be unfair to the adverse party. 24 If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on the issue of insurable interest raised by petitioner, it was to put at rest all doubts on the matter under the facts in this case and also to dispose of petitioner's third assignment of error which consequently needs no further discussion.
llcd

WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of Appeals is AFFIRMED in toto. SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur. Melencio-Herrera (Chairman), J., is on leave.

38

[G.R. No. 95070. September 5, 1991.] PAN MALAYAN INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and THE FOOD AND AGRICULTURAL ORGANIZATION OF THE UNITED NATIONS, respondents.

Alejandro P. Ruiz, Jr. for petitioner. Conrado R. Ayuyao for private respondent.
SYLLABUS 1.REMEDIAL LAW; SUPREME COURT; AS A GENERAL RULE; NOT A TRIER OF FACTS; EXCEPTION. While this Court is not a trier of facts, yet, when the findings of the Court of Appeals are alleged to be without citation of specific evidence on which they are based, there is sufficient reason for us to review the appellate court's decision. Air France vs. Court of Appeals, et al., 171 SCRA 399 (1989). 2.COMMERCIAL LAW; MARINE INSURANCE; ACTUAL TOTAL LOSS; WHERE THE CARGO BY THE PROCESS OF DECOMPOSITION OR OTHER CHEMICAL AGENCY NO LONGER REMAINS THE SAME KIND OF THING AS BEFORE; RULE. It will be recalled that said rice seeds were treated and would germinate upon mere contact with water. The rule is that where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before, an actual total loss has been suffered. ". . . However, the complete physical destruction of the subject matter is not essential to constitute an actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist (Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216), as where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before (Williams vs. Cole, 16 Me. 207)." (2 T.C. Martin, Commentaries and Jurisprudence on Philippine Commercial Laws, 173 [1981 Ed.]). 3.ID.; ID.; ID.; RIGHT OF THE INSURED IN CASE THEREOF. Section 135 of the Insurance Code explicitly provides that "(u)pon an actual total loss, a person insured is entitled to payment without notice of abandonment." This is a statutory adoption of a long standing doctrine in maritime insurance law that in case of actual total loss, the right of the insured to claim the whole insurance is absolute, without need of a notice of abandonment.

DECISION

REGALADO, J :
p

This case had its origin in a shipment of 1,500 metric tons of IR-36 certified rice seeds which private respondent, The Food and Agricultural Organization of the United Nations (hereinafter referred to as FAO), an autonomous intergovernmental organization created by treaty, intended and made arrangements to send to Kampuchea to be distributed to the people for seedling purposes. Respondent court affirms the factual findings therein of the court a quo as chronologized hereunder.
LLpr

On May 22, 1980, FAO received a formal offer from the Luzon Stevedoring Corporation (LUZTEVECO, for brevity) whereby the latter offered to ship the former's aforesaid cargo, consisting of 3,000 metric tons in two
39

lots of rice seeds, to Vietnam Ocean Shipping Industry in Vaung Tau, Vietnam for freight fees of $55 50/MT, subject to the terms and conditions indicated in the corresponding communication. 1 On May 28, 1980, FAO wrote LUZTEVECO formally confirming its acceptance of the foregoing offer amounting to US$83,325.92 in respect of one lot of 1,500 metric tons which is the subject of the present action. 2 The cargo was loaded on board LUZTEVECO Barge No. LC-3000 and consisted of 34,122 bags of IR-36 certified rice seeds purchased by FAO from the Bureau of Plant Industry for P4,602,270.00. 3 On June 12, 1980, the loading was completed and LUZTEVECO issued its Bill of Lading No. 01 in favor of FAO. 4 The latter then secured insurance coverage in the amount of P5,250,000.00 from petitioner, Pan Malayan Insurance Corporation, as evidenced by the latter's Marine Cargo Policy No. B-11474A and Premium Invoice No. 78615, dated June 16, 1980. 5 On June 16, 1980, FAO gave instructions to LUZTEVECO to leave for Vaung Tau, Vietnam to deliver the cargo which, by its nature, could not withstand delay because of the inherent risks of germination and/or spoilage. On the same date, the insurance premiums on the shipment was paid by FAO petitioner. On June 23, 1980, FAO was informed by LUZTEVECO that the tugboat and barge carrying FAO's shipment returned to Manila after leaving on June 16, 1980 and that the shipment again left Manila for Vaung Tau, Vietnam on June 21, 1980 with the barge being towed by a different tugboat. Since this was an unauthorized deviation, FAO demanded an explanation on June 25, 1980. 6 On June 26, 1980, FAO was advised of the sinking of the barge in the China Sea, hence it informed petitioner thereof and, later, formally filed its claim under the marine insurance policy. 7 On July 29, 1980, FAO was informed by LUSTEVECO of the recovery of the lost shipment, for which reason FAO formally filed its claim with LUZTEVECO for compensation of damage to its cargo. 8 Thereafter, despite repeated demands to replace the same or to pay for the total insured value in the sum of P5,250,000.00, LUZTEVECO failed and refused to do so. Petitioner likewise failed to pay for the losses and damages sustained by FAO by reason of its inability to recover the value of the shipment from LUZTEVECO. 9 Petitioner claims that on July 31, 1980 it supposedly engaged the services of Pan Asiatic Adjustment and Marine Surveying Corporation to investigate and examine the shipment. On August 4, 1980, J A Barroso, Jr. of said corporation reportedly conducted a survey on the shipment and found that 9,629 bags of rice seeds were in good order, 23,510 bags sustained wattage of 10% to 15%, and 983 bags were shorthanded or missing. After the alleged survey, Barroso, Jr. made a report recommending to petitioner the denial of FAO's claim because the partial damage suffered by the shipment is not compensable under the policy. On the basis of said recommendation, petitioner denied FAO's claim. 10 Petitioner further avers that upon the request of counsel of FAO, a survey of the shipment was conducted on September 26, 27 and 29, 1980 by Conrado Catalan, Jr. of Manila Adjusters & Surveyors Company and he found 6,200 bags in good order condition. At the time of his survey, 23,510 bags of the shipment had allegedly already been sold by LUZTEVECO. Petitioner further asserts that on September 29, 1980, FAO wrote a letter to petitioner signifying its willingness to abandon the proceeds of the sale of the 23,510 bags and the remaining good order bags, but that on October 6, 1980 petitioner rejected FAO's proposed abandonment.
LLjur

FAO then instituted Civil Case No. 41716 against LUZTEVECO and/or herein petitioner, as defendants, with the Regional Trial Court of Pasig, Metro Manila which, on December 14, 1987, rendered judgment in favor of FAO with the following decretal portion:
"WHEREFORE, by virtue of preponderance of evidence and in consideration of justice and equity, this Court hereby renders judgment in favor of the plaintiff against the defendant Luzon Stevedoring 40

Corporation and defendant Pan Malayan Insurance Corporation, ordering both the defendants, to pay jointly and severally, the plaintiff, to wit: 1.The sum of P5,250,000.00 with interest thereon, at legal rate from September 29, 1980 until fully paid; 2.The sum of P250,000.00 by way of attorney's fees and expenses of litigation; and 3.The cost of this suit."
11

Petitioner alone appealed the said decision to respondent court of Appeals, docketed therein as CA-G.R. CV No. 22114, and on July 20, 1990 respondent court affirmed the decision of the trial court except for the award of attorney's fees which was reduced to P25,000.00. 12 Petitioner's motion for reconsideration was denied in respondent court's resolution of September 3, 1990. 13 The petition now before us raises the following issues: (1) Whether or not respondent court committed a reversible error in holding that the trial court is correct in holding that there is a total loss of the shipment; and (2) Whether or not respondent court committed a reversible error in affirming the decision of the trial court ordering petitioner to pay private respondent the amount of P5,250,000 00 representing the full insured value of the rice seeds. 14 The law classifies loss into either total or partial. Total loss may be actual or absolute, 15 or it may otherwise be constructive or technical. 16 Petitioner submits that respondent court erred in ruling that there was total loss of the shipment despite the fact that only 27,922 bags of rice seeds out of 34,122 bags were rendered valueless to FAO and the shipment sustained only a loss of 78%. FAO, however, claims that, for all intents and purposes, it has practically lost its total or entire shipment in this case, inclusive of expenses, premium fees, and so forth, despite the alleged recovery by defendant LUZTEVECO. As found by the court below and reproduced with approval by respondent court, FAO "has never been compensated for this total loss or damage, a fact which is not denied nor controverted. If there were some cargoes saved, by LUZTEVECO, private respondent abandoned it and the same was sold or used for the benefit of LUZTEVECO or Pan Malayan Corporation. Under Sections 129 and 130 of the New Insurance Code, a total loss may either be actual or constructive. In case of total loss in Marine Insurance, the assured is entitled

to recover from the underwriter the whole amount of his subscription (Vol. 2, Arnold Mar. Ins. 9th Ed. P. 1304; Alsop vs. Commercial Insurance Co. cc Mass IF Case No. 262, summ 451." (Emphasis in the original text.) 17
It is a fact that on July 9, 1980, FAO formally filed its claim under the marine insurance policy issued by petitioner. 18 FAO thus claims actual loss under paragraphs (c) and (d) of Section 130 of the Insurance Code which provides:

"SEC. 130.An actual total loss is caused by: (a)A total destruction of the thing insured; (b)The irretrievable loss of the thing by sinking, or by being broken up; (c)Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (d)Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. 41

Respondent court affirmed the ruling of the trial court to the effect that there was indeed actual total loss, painstakingly explaining therein the following grounds for holding petitioner liable for the entire amount of the insurance coverage:
". . . The lower court was not incorrect in holding that there is a total or entire loss of shipment in the case at bar. "First, the fact of the sinking of Barge LC-3000 as the occurrence of the risk insured against under the marine insurance was proved and borne out by the following findings of the court a quo, thus; 'Here, we should not lose sight of the fact of sinking of the barge according to the defendant LUZTEVECO, in a phone call by Mr. Emata, defendant's representative, on June 26, 1980 and (of) which fact, the defendant Pan Malayan Insurance Corporation was notified. Subsequently, there was marine protest, based on said information released by the defendant LUZTEVECO. In fine, the barge LC-3000 carrying the load in question sank. If the barge was

made to refloat, it cannot be denied that it sank, otherwise, what is the use of refloating the barge? What is mentioned in the law as the risk or peril insured against is sinking. This is the
risk or peril covered by the Marine Insurance.' (Decision, p. 4) xxx xxx xxx ". . ., it is worth mentioning the following unrebutted documents, testimonies and pleadings cited by the plaintiff-appellant, viz.: '(1)Testimony of Mr. Keiner that he was informed by Mr. Emata, a representative of LUZTEVECO, that the barge and its cargo sank in the South China Sea on June 25, 1980 (Deposition, Q43, p. 11) '(2)Letter of Capt. Ilano of Luzon Stevedoring Corporation dated June 26, 1980 confirming the sinking of Barge LC-3000 and its cargo on June 25, 1980 (Exhibit "D-9").

'(3)Marine protest executed on July 2, 1980 by Capt. Rudy Vencer, master of tugboat towing Barge LC-3000, attesting to said barge's sinking on June 25, 1980, 385 miles off South Vietnam, due to very strong winds and rough seas. (Exhibit "E-4"). '(4)The answer of defendant LUZTEVECO itself which admits in no uncertain terms the sinking of Barge LC-3000 on June 25, 1980. . . . xxx xxx xxx "Basing on the evidence on record, the factual finding of the lower court re sinking of Barge LC-3000 is not without basis but rather sufficiently supported by evidence adduced by plaintiff-appellee. "Second, there is the direct testimony of Mr. Fritz Keiner (the UNFAO officer-in-charge in the Philippines at the time of the loss) which states as follows: '52.CONGEN: What eventually happened to your Organization's entire shipment of rice seedlings intended for the refugees of Vietnam? 'FK: First, I would like to point out that the rice seeds were intended for the people of Kampuchea, but for logistical reasons, the shipment had to go through Vungtan, (sic) Vietnam.
LLphil

42

In spite of the alleged salvaging of our shipment, there was absolutely no replacement or payment made by either defendant LUZTEVECO or defendant Pan Malayan Insurance Co. on our losses and eventually FAO did not recover anything from either of the said defendants. '53.CONGEN: Up to the present, has any replacement or payment of the value of your lost cargo been made to your organization by either of the defendants? 'FPKEINER: Up to the present, no replacement or payment of the value of our lost cargo was ever made to our Organization by either of the defendants in this case.' (Deposition of Fritz Keiner, pp. 13-14). "As emphasized by said witness, the insured cargo was intended for distribution by Vietnam Ocean Shipping Agency to the people of Kampuchea for the purpose of alleviating the acute rice shortage then prevailing in that country and to improve the rice production therein. (Deposition, Q17, p. 5). The bags containing said cargo were marked `TREATED, UNFIT FOR FOOD' (Exh. `E-3-b'; TSN, January 15, 1985, pp. 3-5) and the seeds themselves were of such a fragile nature that they have the tendency to germinate upon mere contact with water. "As shown, of the 34,122 bags of rice seeds shipped on board Barge LC-3000 (Exh. 'E-1'), 23,510 were determined by defendant-appellant's surveyor, the Pan Asiatic Adjustment and Marine Surveying Corporation to be bad order bags (Exh. '3'). Add to these bad order bags the shortlanded/missing bags numbering 983 per report of the same surveying corporation, the damaged/lost bags would total 24,493 thereby leaving a balance of 9,269 (sic) presumed to be good order/dry bags. Of these 9,629 good order/dry bags, an additional 2,682 bags were found damaged/wetted after sorting (Exh. 'E'). All in all, therefore, 27,175 bags were determined to be lost/damaged. Although 6,947 bags in apparent external good order and condition were presumed to be inside the LUZTEVECO warehouse, only 6,200 were actually determined to be there by Conrado Catalan on September 26, 27 and 29, 1980 (Exh. 'E', p. 2). This increases the number of lost/damaged bags to 27,922. "Thus considered, We agree with the plaintiff-appellee that the 27,922 damaged/lost bags were rendered valueless to plaintiff-appellee for planting or seeding purposes in Kampuchea since the wetting or contact with water had definitely activated their tendency to germinate. Moreover, all of said damaged/lost bags were no longer available for reshipment to Vietnam because the same were disposed of by defendant LUZTEVECO without authorization from plaintiff-appellee, to answer for alleged salvage charges, while the others were lost/shortlanded. "Third, the testimony of Mr. Conrado Catalan, Jr. that the shipment sustained a loss of 78% is not speculative. Uncontroverted is his testimony which is based on data corroborated by the report of defendant-appellant's adjuster/surveyor and on actual inspection of the remaining bags stored in LUZTEVECO's warehouse. Exhibit `3' of defendant-appellant states in part, thus: ConditionNo. of Bags Good order (dry)9,629 Partly wet but damage limited only to approximately 10% to 15% of the contents. Wet portion germinated/sprouted. Remaining 85% to 90% of the contents apparently dry23,510 Shortlanded/missing983 43

 Total 34,122 Bags "It is understandable that plaintiff-appellee's surveyor (Mr. Conrado Catalan, Jr.) no longer saw the 23,510 bad order/damaged bags as these were already sold at public auction by defendant LUZTEVECO, while 983 more were shortlanded/missing. When Mr. Catalan sought to verify on September 26, 27 and 29, 1980 the existence and condition of the 9,629 presumed to be good order bags, he discovered that 'an additional 2,629 bags were found damaged/wetted, with the estimated 6,947 bags in apparently external good order condition' (Exh. 'E'). However, out of these presumed 6,947 bags only approximately 6,200 bags were computed and counted by Mr. Catalan to the best of his ability. (Exh. 'E', p. 2). It is even more than 78% per testimony of Mr. Catalan but at least 82% if we divide 6,200 (the actual number of bags in the warehouse) by 34,122 (the actual number of bags loaded on Barge LC-3000)." 19

Petitioner, on the other hand, claims that respondent court gravely erred in sustaining the ruling of the trial court that there was total loss of the shipment since from the evidence on record and the findings of respondent court itself, only 27,922 bags of rice seeds out of 34,122 bags were rendered valueless to FAO and the shipment sustained only a loss of 78%. 20 Thus, petitioner concludes that the findings of the court a quo, as affirmed by the Court of Appeals, are contrary to the evidence. Upon an examination, however, of the records presented before this Court, it is quite clear that there was indeed actual total loss.
prLL

While this Court is not a trier of facts, yet, when the findings of the Court of Appeals are alleged to be without citation of specific evidence on which they are based, there is sufficient reason for us to review the appellate court's decision. 21 Under the factual milieu of this case, we find that there is abundant evidence to support the conclusion of respondent court. In his testimony on cross-examination at the trial, Conrado Catalan, Jr., declared:
"QYou said that you did not make an actual count but you estimated, how many bags all in all did you estimate? AIt is 6,200 bags if I may recall. QOut of these 6,200 bags you only opened two (2) bags? AYes, sir. QAnd the others, the balance you did not examine anymore? AIt is shown in the picture that it is stained. QYou must answer the question. AYes, sir. QWhat was the damage of the two (2) bags that you examined? AThey are stained." (Emphasis supplied.)
22

It will be recalled that said rice seeds were treated and would germinate upon mere contact with water. The rule is that where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before, an actual total loss has been suffered.
44

". . . However, the complete physical destruction of the subject matter is not essential to constitute an actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although the materials of which it consisted still exist (Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22 L. Ed. 216), as where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as before (Williams vs. Cole, 16 Me. 207)." 23

Moreover, it is undisputed that no replacement whatsoever or any payment, for that matter, of the value of said lost cargo was made to FAO by petitioner or LUZTEVECO. It is thus clear that FAO suffered actual total loss under Section 130 of the Insurance Code, specifically under paragraphs (c) and (d) thereof, recompense for which it has been denied up to the present.
LibLex

In view of our aforestated holding that there was actual total loss of the goods insured in this case, it is no longer necessary to pass upon the issue of the validity of the abandonment made by FAO. Section 135 of the Insurance Code explicitly provides that "(u)pon an actual total loss, a person insured is entitled to payment without notice of abandonment." This is a statutory adoption of a long standing doctrine in maritime insurance law that in case of actual total loss, the right of the insured to claim the whole insurance is absolute, without need of a notice of abandonment. 24 WHEREFORE, the assailed judgment and resolution of respondent Court of Appeals are hereby AFFIRMED in toto. SO ORDERED.

Melencio-Herrera, Paras and Padilla, JJ., concur. Sarmiento, J., is on leave.

45

***CLAIMS SETTLEMENT [G.R. No. L-38613. February 25, 1982.] PACIFIC TIMBER EXPORT CORPORATION, petitioner, vs. THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY, INC., respondents.

Jose J. Ferrer, Jr. & Augusto Z. Fajardo for petitioner. Augustin J. Guillermo for respondent Workmen's Ins. Co., Inc.
SYNOPSIS After respondent insurance company issued to petitioner a Cover Note for the temporary insurance of 1,250,000 board feet of logs for exportation to Okinawa and Japan, which included loss during loading operations, but before the issuance of the regular marine cargo policies which covered only loss during transit, thirty pieces of said logs were lost while being loaded in petitioner's vessel. Petitioner sought to recover the loss but private respondent refused on the ground that although said loss was covered under the Cover Note, nevertheless, the same became null and void upon the issuance of the marine policies which did not cover said loss. The Court of First Instance of Manila rendered a decision in favor of petitioner but on appeal, said decision was reversed by the Court of Appeals.
cdtai

On review, the Supreme Court held that a Cover Note is not a mere application for insurance but in a real sense a contract to be integrated to the regular policies subsequently issued and the fact that no separate premium was paid on the Cover Note before the loss occurred does not militate against recovery thereunder. Appealed decision, set aside. SYLLABUS 1.COMMERCIAL LAW; INSURANCE; COVER NOTE; NO SEPARATE PREMIUMS ARE REQUIRED TO BE PAID THEREON. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred, does not militate against the validity of petitioner's contention that the Cover Note is not without a consideration, for no such premium could have been paid, since by the nature of the Cover Note it did not contain, as all Cover Notes do not contain, particulars of the shipment that would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are intended or required to be paid on a Cover Note. 2.ID.; ID.; ID.; A CONTRACT AND NOT A MERE APPLICATION FOR INSURANCE; DEEMED INTEGRATED TO THE REGULAR POLICIES SUBSEQUENTLY ISSUED. Where the note is to be treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose and function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. 3.ID.; ID.; ID.; RISK INSURED AGAINST NOT INCLUDED IN THE REGULAR MARINE INSURANCE POLICIES; IMMATERIAL AS LOSS CAN BE DETERMINED INDEPENDENTLY; CASE AT BAR. While it may be true that the marine insurance policies issued were for logs no longer including those which had been lost during loading operations, this had to be so because the risk insured against is not for loss during loading operations anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no
46

difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can be determined independently, as in fact it had been so ascertained as the instance of private respondent itself when it sent its own adjuster to investigate and assess the lost, after the issuance of the marine insurance policies. 4.ID.; ID.; ID.; FUNCTIONS AS A "BINDER"; SUPPORTED BY PRESUMPTION OF VALIDITY OF POLICY DELIVERED WITHOUT REQUIRING PAYMENT OF THE PREMIUM. Now payment of premium on the Cover Note is no cause for the petitioner to lose what is due it as if there had been payment of premium, for nonpayment by it was not chargeable against its fault. This is how the cover note as a "binder" should legally operate; otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was intended and policy is valid (Miller vs. Brooklyn L. Inc., Co. (U.S.) 12 Wall, 285, 20 Led. 39 Am. Jur. New 'Insurance' Sec. 1845, p. 907, note 2; Sec. 1079, p. 246, note 20.). 5.ID.; ID.; CLAIM ON THE INSURANCE AGREEMENT; DEFENSE OF DELAY MUST BE PROMPTLY AND SPECIFICALLY ASSERTED; CASE AT BAR. Section 84 of the Insurance Act requires that the ground of delay must be promptly and specifically asserted when a claim on the insurance agreement is made. The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place, so that it could determine whether delay would be a valid ground upon which to object to a claim against it. In the case at bar, where the undisputed facts show that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on the cover note, respondent company took steps clearly indicative that this particular ground for objection to the claim was never in its mind, the Supreme Court is satisfied and convinced, even on the assumption that there was delay, that waiver can successfully be raised against private respondent.

DECISION

DE CASTRO, J :
p

This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First Instance of Manila in favor of petitioner and against private respondent which ordered the latter to pay the sum of P11,042.04 with interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the complete payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby dismissing petitioner's complaint with costs. 2
cdtai

The findings of fact of the Court of Appeals, which are generally binding upon this Court, except as shall be indicated in the discussion of the opinion of this Court the substantial correctness of such particular finding having been disputed, thereby raising a question of law reviewable by this Court 3 are as follows:
"On March 19, 1963, the plaintiff secured temporary insurance from the defendant for its exportation of 1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan Bay, Quezon Province to Okinawa and Tokyo, Japan. The defendant issued on said date Cover Note No. 1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved by the Office of the Insurance Commissioner" (Exhibit A). "The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2, 1963. The two marine policies bore the numbers of 53 HO 1032 and 53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 HO 1032 (Exhibit B) was for 542 pieces of logs equivalent to 499,950 board feet. Policy No. 53 HO 1033 was for 853 pieces of logs equivalent to 695, 548 board feet (Exhibit C). 47

The total cargo insured under the two marine policies accordingly consisted of 1,395 logs, or the equivalent of 1,195,498 bd. ft. "After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost during loading operations in the Diapitan Bay. The logs were to be loaded on the 'SS Woodlock' which Docked about 500 meters from the shortline of the Diapitan Bay. The logs were taken from the log pond of the plaintiff and from which they were towed in rafts to the vessel. At about 10:00 o'clock a.m. on March 29, 1963, while the logs were alongside the vessel, bad weather developed resulting in 75 pieces of logs which were rafted together to break loose from each other 45 pieces of logs were salvaged, but 30 pieces were verified to have been lost or washed away as a result of the accident. "In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'approximately 32 pieces of logs' during loading of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows: 'April 4, 1963 Workmen's Insurance Company, Inc. Manila, Philippines Gentlemen: This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft., Philippine Lauan and Apitong Logs. We would like to inform you that we have received advance preliminary report from our Office in Diapitan, Quezon that we have lost approximately 32 pieces of logs during loading of the S.S. Woodlock. We will send you an accurate report all the details including values as soon as same will be reported to us. Thank you for your attention, we wish to remain. Very respectfully yours, PACIFIC TIMBER EXPORT CORPORATION

(Sgd). EMMANUEL S.ATILANO Asst. General Manager Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15, 1963, as shown by the stamp impression appearing on the left bottom corner of said letter. The plaintiff subsequently submitted a 'Claim Statement' demanding payment of the loss under Policies Nos. 53 HO 1033, and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G). "On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the loss and assess the damage. The adjustment company submitted its 'Report' on August 23, 1963 (Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces of logs is not covered by Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of logs loaded on board the 'SS Woodlock'. However, the loss of 30 pieces of logs is within the 1,250,000 bd. ft. covered by Cover Note No. 1010 insured for $70,000.00. "On September 14, 1963, the adjustment company submitted a computation of the defendant's probable liability on the loss sustained by the shipment, in the total amount of P11,042.04 (Exhibit 4). 48

"On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground that defendant's investigation revealed that the entire shipment of logs covered by the two marine policies No. 53 HO 1032 and 53 HO 1033 were received in good order at their point of destination. It was further stated that the said loss may not be considered as covered under Cover Note No. 1010 because the said Note had become 'null and void by virtue of the issuance of Marine Policy Nos. 53 HO 1032 and 1033' (Exhibit J-1). The denial of the claim by the defendant was brought by the plaintiff to the attention of the Insurance Commissioner by means of a letter dated March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas observed that 'it is only fair and equitable to indemnify the insured under Cover Note No. 1010,' and advised early settlement of the said marine loss and salvage claim (Exhibit L).

"On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their attorneys, the claim of the plaintiff is being denied on the ground that the cover note is null and void for lack of valuable consideration (Exhibit M)." 4

Petitioner assigned as errors of the Court of Appeals, the following: I

"THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK OF VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.

II
"THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE INSURANCE ACT." 5

1.Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover note is made subject to the terms and conditions of the marine policies, and the payment of premiums is one of the terms of the policies. From this undisputed fact, We uphold petitioner's submission that the Cover Note was not without consideration for which the respondent court held the Cover Note as null and void, and denied recovery therefrom. The fact that no separate premium was paid on the Cover Note before the loss insured against occurred, does not militate against the validity of petitioner's contention, for no such premium could have been paid, since by the nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the shipment that would serve as basis for the computation of the premiums. As a logical consequence, no separate premiums are intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965). At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by private respondent after the issuance of the two regular marine insurance policies, thereby leaving no account unpaid by petitioner due on the insurance coverage, which must be deemed to include the Cover Note. If the Note is to be treated as a separate policy instead of integrating it to the regular policies subsequently issued, the purpose and function of the Cover Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. 6

49

It may be true that the marine insurance policies issued were for logs no longer including those which had been lost during loading operations. This had to be so because the risk insured against is not for loss during loading operations anymore, but for loss during transit, the logs having already been safely placed aboard. This would make no difference, however, insofar as the liability on the cover note is concerned, for the number or volume of logs lost can be determined independently, as in fact it had been so ascertained at the instance of private respondent itself when it sent its own adjuster to investigate and assess the loss, after the issuance of the marine insurance policies.
LLjur

The adjuster went as far as submitting his report to respondent, as well as its computation of respondent's liability on the insurance coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for no loss or damage had to be assessed on the coverage arising from the marine insurance policies. For obvious reasons, it was not necessary to ask petitioner to pay premium on the Cover Note, for the loss insured against having already occurred, the more practical procedure is simply to deduct the premium from the amount due the petitioner on the Cover Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose what is due it as if there had been payment of premium, for nonpayment by it was not chargeable against its fault. Had all the logs been lost during the loading operations, but after the issuance of the Cover Note, liability on the note would have already arisen even before payment of premium. This is how the cover note as a "binder" should legally operate; otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine that where a policy is delivered without requiring payment of the premium, the presumption is that a credit was intended and policy is valid. 7 2.The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires this ground of delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The undisputed facts show that instead of invoking the ground of delay in objecting to petitioner's claim of recovery on the cover note, it took steps clearly indicative that this particular ground for objection to the claim was never in its mind. The nature of this specific ground for resisting a claim places the insurer on duty to inquire when the loss took place, so that it could determine whether delay would be a valid ground upon which to object to a claim against it. As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on April 15, 1963, was to set in motion from July 1963 what would be necessary to determine the cause and extent of the loss, with a view to the payment thereof on the insurance agreement. Thus it sent its adjuster to investigate and assess the loss in July, 1963. The adjuster submitted his report on August 23, 1963 and his computation of respondent's liability on September 14, 1963. From April 15,1963 to July 1963, enough time was available for private respondent to determine if petitioner was guilty of delay in communicating the loss to respondent company. In the proceedings that took place later in the Office of the Insurance Commissioner, private respondent should then have raised this ground of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find a real and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and convinced that as expressly provided by law, waiver can successfully be raised against private respondent. Thus Section 84 of the Insurance Act provides:
prLL

"Section 84. Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his or if he omits to take objection promptly and specifically upon that ground."

From what has been said, We find duly substantiated petitioner's assignments of error. ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto with the affirmance of this Court. No special pronouncement as to costs. SO ORDERED.

Teehankee, Makasiar, Fernandez, Guerrero, Melencio-Herrera and Plana, JJ., concur.

50

[G.R. No. 150094. August 18, 2004.] FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC.,respondents.

DECISION

PANGANIBAN, J :
p

Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff must give the carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention and/or the airway bill.

The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision 2 and the September 21, 2001 Resolution 3 of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows:
WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 95-1219, entitled American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.), is hereby AFFIRMED and REITERATED. Costs against the [petitioner and Cargohaus, Inc.].
4

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts
The antecedent facts are summarized by the appellate court as follows:
On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French Overseas Company in Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825 with the words, REFRIGERATE WHEN NOT IN TRANSIT and PERISHABLE stamp marked on its face. That same day, Burlington insured the cargoes in the amount of $39,339.00 with American Home Assurance Company (AHAC). The following day, Burlington turned over the custody of said cargoes to Federal Express which transported the same to Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus Inc.s] warehouse. While the second, consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-30NRT which was likewise immediately stored at Cargohaus warehouse. Prior to the arrival of the cargoes, Federal Express informed GETC Cargo International Corporation, the customs broker hired by the consignee to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its clients cargoes.
CDaSAE

On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the cargoes arrived in Manila, a non-licensed customs broker who was assigned by GETC to facilitate the release of the 51

subject cargoes, found out, while he was about to cause the release of the said cargoes, that the same [were] stored only in a room with two (2) air conditioners running, to cool the place instead of a refrigerator. When he asked an employee of Cargohaus why the cargoes were stored in the cool room only, the latter told him that the cartons where the vaccines were contained specifically indicated therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed with the withdrawal of the vaccines and instead, samples of the same were taken and brought to the Bureau of Animal Industry of the Department of Agriculture in the Philippines by SMITHKLINE for examination wherein it was discovered that the ELISA reading of vaccinates sera are below the positive reference serum. As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the shipment and, declaring total loss for the unusable shipment, filed a claim with AHAC through its representative in the Philippines, the Philam Insurance Co., Inc. (PHILAM) which recompensed SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the [petitioner] imputing negligence on either or both of them in the handling of the cargo. Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily liable for the loss as follows: WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its Co-Defendant Cargohaus] are directed to pay [respondents], jointly and severally, the following: 1.Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from the time of the filing of the complaint to the time the same is fully paid. 2.Attorneys fees in the amount of P50,000.00 and 3.Costs of suit. SO ORDERED. Aggrieved, [petitioner] appealed to [the CA].
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Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held that the shipping Receipts were a prima facie proof that the goods had indeed been delivered to the carrier in good condition. We quote from the ruling as follows:
Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the carrier in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in a damaged condition, a presumption is raised that the damage occurred through the fault or negligence of the carrier, and this casts upon the carrier the burden of showing that the goods were not in good condition when delivered to the carrier, or that the damage was occasioned by some cause excepting the carrier from absolute liability. This the [petitioner] failed to discharge. . . . 6

Found devoid of merit was petitioners claim that respondents had no personality to sue. This argument was supposedly not raised in the Answer or during trial. Hence, this Petition.
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The Issues
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In its Memorandum, petitioner raises the following issues for our consideration:
I. Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure? II. Is the conclusion of the Honorable Court of Appeals petitioners claim that respondents have no personality to sue because the payment was made by the respondents to Smithkline when the insured under the policy is Burlington Air Express is devoid of merit correct or not? III. Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition, correct or not? IV. Are Exhibits F and G hearsay evidence, and therefore, not admissible? V. Is the Honorable Court of Appeals correct in ignoring and disregarding respondents own admission that petitioner is not liable? and VI. Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?
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Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2) Is Federal Express liable for damage to or loss of the insured goods?

This Courts Ruling

The Petition has merit.

Preliminary Issue: Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of law cognizable by the Supreme Court. 9 In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the conclusions drawn from such facts. Hence, this case is a proper subject for review by this Court.
CScTDE

Main Issue: Liability for Damages

Petitioner contends that respondents have no personality to sue thus, no cause of action against it because the payment made to Smithkline was erroneous.
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Pertinent to this issue is the Certificate of Insurance 10 (Certificate) that both opposing parties cite in support of their respective positions. They differ only in their interpretation of what their rights are under its terms. The determination of those rights involves a question of law, not a question of fact. As distinguished from a question of law which exists when the doubt or difference arises as to what the law is on a certain state of facts there is a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged facts; or when the query necessarily invites calibration of the whole evidence considering mainly the credibility of witnesses, existence and relevancy of specific surrounding circumstance, their relation to each other and to the whole and the probabilities of the situation. 11

Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is payable to order . . . upon surrender of this Certificate. Such wording conveys the right of collecting on any such damage or loss, as fully as if the property were covered by a special policy in the name of the holder itself. At the back of the Certificate appears the signature of the representative of Burlington. This document has thus been duly indorsed in blank and is deemed a bearer instrument. Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified for loss of or damage to the insured shipment, as fully as if the property were covered by a special policy in the name of the holder. Hence, being the holder of the Certificate and having an insurable interest in the goods, Smithkline was the proper payee of the insurance proceeds.

Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt 12 in favor of respondents. The latter were thus authorized to file claims and begin suit against any such carrier, vessel, person, corporation or government. Undeniably, the consignee had a legal right to receive the goods in the same condition it was delivered for transport to petitioner. If that right was violated, the consignee would have a cause of action against the person responsible therefor.

Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurers entitlement to subrogation pro tanto being of the highest equity equips it with a cause of action in case of a contractual breach or negligence. 13 Further, the insurers subrogatory right to sue for recovery under the bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld. 14 In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes, it stands in the place and in substitution of the consignee. A fortiori, both the insurer and the consignee are bound by the contractual stipulations under the bill of lading. 15

Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents claim and right of action are already barred. The latter, and even the consignee, never filed with the carrier any written notice or complaint regarding its claim for damage of or loss to the subject cargo within the period required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has never been denied by respondents and is plainly evident from the records. Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
6.No action shall be maintained in the case of damage to or partial loss of the shipment unless a written notice, sufficiently describing the goods concerned, the approximate date of the damage or loss, and the details of the claim, is presented by shipper or consignee to an office of Burlington within 54

(14) days from the date the goods are placed at the disposal of the person entitled to delivery, or in the case of total loss (including non-delivery) unless presented within (120) days from the date of issue of the [Airway Bill]. 16

Relevantly, petitioners airway bill states:

12./12.1The person entitled to delivery must make a complaint to the carrier in writing in the case: 12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within fourteen (14) days from receipt of the goods; 12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods; 12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and 12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the issue of the air waybill. 12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was used, or to the first carrier or to the last carrier or to the carrier who performed the transportation during which the loss, damage or delay took place. 17

Article 26 of the Warsaw Convention, on the other hand, provides:

ART. 26.(1)Receipt by the person entitled to the delivery of baggage or goods without complaint shall be prima facie evidence that the same have been delivered in good condition and in accordance with the document of transportation.
aECSHI

(2)In case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage and 7 days from the date of receipt in the case of goods. In case of delay the complaint must be made at the latest within 14 days from the date on which the baggage or goods have been placed at his disposal. (3)Every complaint must be made in writing upon the document of transportation or by separate notice in writing dispatched within the times aforesaid. (4)Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the case of fraud on his part. 18

Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or damage to the goods. 19 The shipper or consignee must allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former. The aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of action. 20 The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and easily investigated so as to safeguard itself from false and fraudulent claims. 21

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When an airway bill or any contract of carriage for that matter has a stipulation that requires a notice of claim for loss of or damage to goods shipped and the stipulation is not complied with, its enforcement can be prevented and the liability cannot be imposed on the carrier. To stress, notice is a condition precedent, and the carrier is not liable if notice is not given in accordance with the stipulation. 22 Failure to comply with such a stipulation bars recovery for the loss or damage suffered. 23 Being a condition precedent, the notice must precede a suit for enforcement. 24 In the present case, there is neither an allegation nor a showing of respondents compliance with this requirement within the prescribed period. While respondents may have had a cause of action then, they cannot now enforce it for their failure to comply with the aforesaid condition precedent. In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner. We note that respondents are not without recourse. Cargohaus, Inc. petitioners co-defendant in respondents Complaint below has been adjudged by the trial court as liable for, inter alia, actual damages in the amount of the peso equivalent of US $39,339. 25 This judgment was affirmed by the Court of Appeals and is already final and executory. 26 WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation. No pronouncement as to costs. SO ORDERED.

Corona and Carpio Morales, JJ ., concur. Sandoval-Gutierrez, J ., is on leave.

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