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FIRST DIVISION

G.R. No. 76452

July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON
MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.
QUIASON, J.:

In said hearing, private respondent was required by respondent Commissioner to specify the
provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and praying that the
provisions on charges and fees stated in the Contract of Agency executed between Philamlife
and its agents, as well as the implementing provisions as published in the agents' handbook,
agency bulletins and circulars, be declared as null and void. He also asked that the amounts
of such charges and fees already deducted and collected by Philamlife in connection
therewith be reimbursed to the agents, with interest at the prevailing rate reckoned from the
date when they were deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.

This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of Court,
with preliminary injunction or temporary restraining order, to annul and set aside the Order
dated November 6, 1986 of the Insurance Commissioner and the entire proceedings taken in
I.C. Special Case No. 1-86.

Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter alia
that:

We grant the petition.

(1)
Private respondent's letter of August 11, 1986 does not contain any of the
particular information which Philamlife was seeking from him and which he promised to
submit.

The instant case arose from a letter-complaint of private respondent Ramon M. Paterno, Jr.
dated April 17, 1986, to respondent Commissioner, alleging certain problems encountered by
agents, supervisors, managers and public consumers of the Philippine American Life
Insurance Company (Philamlife) as a result of certain practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner Rodrigo de
los Reyes, in his capacity as Philamlife's president, to comment on respondent Paterno's
letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes
suggested that private respondent "submit some sort of a 'bill of particulars' listing and citing
actual cases, facts, dates, figures, provisions of law, rules and regulations, and all other
pertinent data which are necessary to enable him to prepare an intelligent reply" (Rollo, p.
37). A copy of this letter was sent by the Insurance Commissioner to private respondent for
his comments thereon.
On May 16, 1986, respondent Commissioner received a letter from private respondent
maintaining that his letter-complaint of April 17, 1986 was sufficient in form and substance,
and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6, 1986,
reiterated his claim that private respondent's letter of May 16, 1986 did not supply the
information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner on the
validity of the Contract of Agency complained of by private respondent.

(2)
That since the Commission's quasi-judicial power was being invoked with regard to
the complaint, private respondent must file a verified formal complaint before any further
proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption of the
hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April 17, 1986,
and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant VicePresident and Executive Assistant to the President, asked that respondent Commission first
rule on the questions of the jurisdiction of the Insurance Commissioner over the subject
matter of the letters-complaint and the legal standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the case on
November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following
grounds;
1.

The Subpoena/Notice has no legal basis and is premature because:

(1)

No complaint sufficient in form and contents has been filed;

(2)
No summons has been issued nor received by the respondent De los Reyes, and
hence, no jurisdiction has been acquired over his person;
(3)
No answer has been filed, and hence, the hearing scheduled on November 5, 1986
in the Subpoena/Notice, and wherein the respondent is required to appear, is premature and
lacks legal basis.
II.

In addition to the administrative sanctions provided elsewhere in this Code, the Insurance
Commissioner is hereby authorized, at his discretion, to impose upon insurance companies,
their directors and/or officers and/or agents, for any willful failure or refusal to comply with,
or violation of any provision of this Code, or any order, instruction, regulation or ruling of the
Insurance Commissioner, or any commission of irregularities, and/or conducting business in
an unsafe and unsound manner as may be determined by the the Insurance Commissioner,
the following:

The Insurance Commission has no jurisdiction over;


(a)

fines not in excess of five hundred pesos a day; and

(b)
agents.

suspension, or after due hearing, removal of directors and/or officers and/or

(2) over the parties involved (Rollo, p. 102).


In the Order dated November 6, 1986, respondent Commissioner denied the Motion to
Quash. The dispositive portion of said Order reads:

A plain reading of the above-quoted provisions show that the Insurance Commissioner has
the authority to regulate the business of insurance, which is defined as follows:

NOW, THEREFORE, finding the position of complainant thru counsel tenable and considering
the fact that the instant case is an informal administrative litigation falling outside the
operation of the aforecited memorandum circular but cognizable by this Commission, the
hearing officer, in open session ruled as it is hereby ruled to deny the Motion to Quash
Subpoena/Notice for lack of merit (Rollo, p. 109).

(2)
The term "doing an insurance business" or "transacting an insurance business,"
within the meaning of this Code, shall include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety; (c) doing any
kind of business, including a reinsurance business, specifically recognized as constituting the
doing of an insurance business within the meaning of this Code; (d) doing or proposing to do
any business in substance equivalent to any of the foregoing in a manner designed to evade
the provisions of this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).

(1) the subject matter or nature of the action; and

Hence, this petition.


II
The main issue to be resolved is whether or not the resolution of the legality of the Contract
of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to take
cognizance of the complaint in the exercise of its quasi-judicial powers. The Solicitor General,
upholding the jurisdiction of the Insurance Commissioner, claims that under Sections 414 and
415 of the Insurance Code, the Commissioner has authority to nullify the alleged illegal
provisions of the Contract of Agency.
III
The general regulatory authority of the Insurance Commissioner is described in Section 414
of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to insurance,
insurance companies and other insurance matters, mutual benefit associations and trusts for
charitable uses are faithfully executed and to perform the duties imposed upon him by this
Code, . . .
On the other hand, Section 415 provides:

Since the contract of agency entered into between Philamlife and its agents is not included
within the meaning of an insurance business, Section 2 of the Insurance Code cannot be
invoked to give jurisdiction over the same to the Insurance Commissioner. Expressio unius
est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the Insurance
Commissioner under Section 416 of the Insurance Code applies in his case, we likewise rule in
the negative. Section 416 of the Code in pertinent part, provides:
The Commissioner shall have the power to adjudicate claims and complaints involving any
loss, damage or liability for which an insurer may be answerable under any kind of policy or
contract of insurance, or for which such insurer may be liable under a contract of suretyship,
or for which a reinsurer may be used under any contract or reinsurance it may have entered
into, or for which a mutual benefit association may be held liable under the membership
certificates it has issued to its members, where the amount of any such loss, damage or
liability, excluding interest, costs and attorney's fees, being claimed or sued upon any kind of
insurance, bond, reinsurance contract, or membership certificate does not exceed in any
single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and complaints involving any loss, damage or
liability for which an insurer may be answerable under any kind of policy or contract of

insurance, . . ." Hence, this power does not cover the relationship affecting the insurance
company and its agents but is limited to adjudicating claims and complaints filed by the
insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV, Title I of the
Insurance Code, the provisions of said Chapter speak only of the licensing requirements and
limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between insurance
companies and their agents. It follows that the Insurance Commissioner cannot, in the
exercise of its quasi-judicial powers, assume jurisdiction over controversies between the
insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180 SCRA 445
(1989), and Investment Planning Corporation of the Philippines v. Social Security
Commission, 21 SCRA 904 (1962), that an insurance company may have two classes of agents
who sell its insurance policies: (1) salaried employees who keep definite hours and work
under the control and supervision of the company; and (2) registered representatives, who
work on commission basis.
Under the first category, the relationship between the insurance company and its agents is
governed by the Contract of Employment and the provisions of the Labor Code, while under
the second category, the same is governed by the Contract of Agency and the provisions of
the Civil Code on the Agency. Disputes involving the latter are cognizable by the regular
courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the Insurance
Commission is SET ASIDE.
SO ORDERED.

FIRST DIVISION
[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS,
respondents.
DECISION
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare Health Systems, Inc. In the standard application form,
he answered no to the following question:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff
Julita Trinos, ordering:
1.
Defendants to pay and reimburse the medical and hospital coverage of the late Ernani
Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff
who paid the same;
2.

3.
Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4.

Have you or any of your family members ever consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give
details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement,
respondents husband was entitled to avail of hospitalization benefits, whether ordinary or
emergency, listed therein. He was also entitled to avail of out-patient benefits such as
annual physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from
March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the
Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband
was in the hospital, respondent tried to claim the benefits under the health care agreement.
However, petitioner denied her claim saying that the Health Care Agreement was void.
According to petitioner, there was a concealment regarding Ernanis medical history. Doctors
at the MMC allegedly discovered at the time of Ernanis confinement that he was
hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus,
respondent paid the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at
home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties,
however, respondent brought her husband home again. In the morning of April 13, 1990,
Ernani had fever and was feeling very weak. Respondent was constrained to bring him back
to the Chinese General Hospital where he died on the same day.

Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all
awards for damages and absolved petitioner Reverente.[4] Petitioners motion for
reconsideration was denied.[5] Hence, petitioner brought the instant petition for review,
raising the primary argument that a health care agreement is not an insurance contract;
hence the incontestability clause under the Insurance Code[6] does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity
of the agreement until its expiration one-year thereafter. Petitioner also points out that only
medical and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is indemnified for his loss.
Moreover, since Health Care Agreements are only for a period of one year, as compared to
insurance contracts which last longer,[7] petitioner argues that the incontestability clause
does not apply, as the same requires an effectivity period of at least two years. Petitioner
further argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the Department
of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;

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

3. The insurer assumes the risk;


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

5. In consideration of the insurers promise, the insured pays a premium.[8]


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

I hereby authorize any person, organization, or entity that has any record or knowledge of
my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and
all information relative to any hospitalization, consultation, treatment or any other medical
advice or examination. This authorization is in connection with the application for health
care coverage only. A photographic copy of this authorization shall be as valid as the original.
[12] (Underscoring ours)

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


Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
(1)

of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance; and
(4)

Failure to disclose or misrepresentation of any material information by the member in the


application or medical examination, whether intentional or unintentional, shall automatically
invalidate the Agreement from the very beginning and liability of Philamcare shall be limited
to return of all Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the applicant by
Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied
for.[13]

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

In the case at bar, the insurable interest of respondents husband in obtaining the health care
agreement was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity.[9] Once the member incurs hospital,
medical or any other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It
appears that in the application for health coverage, petitioners required respondents
husband to sign an express authorization for any person, organization or entity that has any
record or knowledge of his health to furnish any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or examination.[10]
Specifically, the Health Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and in any
addendum annexed to this application are full, complete and true and bind all parties in
interest under the Agreement herein applied for, that there shall be no contract of health
care coverage unless and until an Agreement is issued on this application and the full
Membership Fee according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired by any
Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in
the application; that any physician is, by these presents, expressly authorized to disclose or
give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this application shall be a
ratification of any correction in or addition to this application as stated in the space for Home
Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for
authorization to inquire about the applicants medical history, thus:

The answer assailed by petitioner was in response to the question relating to the medical
history of the applicant. This largely depends on opinion rather than fact, especially coming
from respondents husband who was not a medical doctor. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not
avoid a policy even though they are untrue.[14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment
of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance
of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although
the statement is material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement, but is obligated
to make further inquiry. There is a clear distinction between such a case and one in which
the insured is fraudulently and intentionally states to be true, as a matter of expectation or
belief, that which he then knows, to be actually untrue, or the impossibility of which is shown
by the facts within his knowledge, since in such case the intent to deceive the insurer is
obvious and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of
the insurance contract.[16] Concealment as a defense for the health care provider or insurer
to avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or
without the authority to investigate, petitioner is liable for claims made under the contract.
Having assumed a responsibility under the agreement, petitioner is bound to answer the
same to the extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement or
whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind
a contract of insurance. The right to rescind should be exercised previous to the
commencement of an action on the contract.[17] In this case, no rescission was made.

Besides, the cancellation of health care agreements as in insurance policies require the
concurrence of the following conditions:
1.

Prior notice of cancellation to insured;

2.
Notice must be based on the occurrence after effective date of the policy of one or
more of the grounds mentioned;
3.
Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4.
Must state the grounds relied upon provided in Section 64 of the Insurance Code and
upon request of insured, to furnish facts on which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of insurance
contract contain limitations on liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation.[19] Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party
which prepared the contract the insurer.[20] By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.[21] This is equally applicable to Health Care Agreements. The
phraseology used in medical or hospital service contracts, such as the one at bar, must be
liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, and exclusionary
clauses of doubtful import should be strictly construed against the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote with
approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems
Inc. had twelve months from the date of issuance of the Agreement within which to contest
the membership of the patient if he had previous ailment of asthma, and six months from
the issuance of the agreement if the patient was sick of diabetes or hypertension. The
periods having expired, the defense of concealment or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member
considering that at the time of their marriage, the deceased was previously married to
another woman who was still alive. The health care agreement is in the nature of a contract
of indemnity. Hence, payment should be made to the party who incurred the expenses. It is
not controverted that respondent paid all the hospital and medical expenses. She is
therefore entitled to reimbursement. The records adequately prove the expenses incurred
by respondent for the deceaseds hospitalization, medication and the professional fees of the
attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the
Court of Appeals dated December 14, 1995 is AFFIRMED.

SO ORDERED.

SECOND DIVISION
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.
PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No.
47319-R, dated 22 February 1973, which affirmed, with some modifications, the decision, **
dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of
Pangasinan.
The antecedent facts of the case are as follows:
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.

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:

During the effectivity of said insurance policy, and more particularly on 19 December 1967,
at about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P.
Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger
bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short)
at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the
insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C.
Vallejos, who was riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan
Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan,
which was docketed as Civil Case No. U-2021. He prayed therein that the defendants be
ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for
medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
compensatory damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive
speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder
of the highway in order to avoid the jeep; and that it had observed the diligence of a good
father of a family to prevent damage, especially in the selection and supervision of its

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:
(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 attomey'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

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.

Hence, the present recourse by petitioner insurance company.

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:

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 onehalf (1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and
severally with Sio Choy.

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

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

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 ill
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.

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.

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 solidarily. 4

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.

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.

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.

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 Guingon case,

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.

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 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
(emphasis supplied) or upon written assignment of claim, and payment to the insured makes
the insurer 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 riot
exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy;
as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice
Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire
obligation the right to be reimbursed by his co-debtors for the share which corresponds to
each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
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.

THIRD DIVISION
MALAYAN INSURANCE CO., INC.,
Petitioner,
- versus RODELIO ALBERTO and
ENRICO ALBERTO REYES,
Respondents.
G.R. No. 194320
February 1, 2012
VELASCO, JR., J.:
The Case
Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and set
aside the July 28, 2010 Decision[1] of the Court of Appeals (CA) and its October 29, 2010
Resolution[2] denying the motion for reconsideration filed by petitioner Malayan Insurance
Co., Inc. (Malayan Insurance). The July 28, 2010 CA Decision reversed and set aside the
Decision[3] dated February 2, 2009 of the Regional Trial Court, Branch 51 in Manila.

registered owner and the driver, respectively, of the Fuzo Cargo Truck, requiring them to pay
the amount it had paid to the assured. When respondents refused to settle their liability,
Malayan Insurance was constrained to file a complaint for damages for gross negligence
against respondents.[7]
In their Answer, respondents asserted that they cannot be held liable for the vehicular
accident, since its proximate cause was the reckless driving of the Nissan Bus driver. They
alleged that the speeding bus, coming from the service road of EDSA, maneuvered its way
towards the middle lane without due regard to Reyes right of way. When the Nissan Bus
abruptly stopped, Reyes stepped hard on the brakes but the braking action could not cope
with the inertia and failed to gain sufficient traction. As a consequence, the Fuzo Cargo Truck
hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in
front of it. The Nissan Bus, on the other hand, sideswiped the Fuzo Cargo Truck, causing
damage to the latter in the amount of PhP 20,000. Respondents also controverted the
results of the Police Report, asserting that it was based solely on the biased narration of the
Nissan Bus driver.[8]
After the termination of the pre-trial proceedings, trial ensued. Malayan Insurance
presented the testimony of its lone witness, a motor car claim adjuster, who attested that he
processed the insurance claim of the assured and verified the documents submitted to him.
Respondents, on the other hand, failed to present any evidence.

The Facts
At around 5 oclock in the morning of December 17, 1995, an accident occurred at the corner
of EDSA and Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) a Nissan Bus
operated by Aladdin Transit with plate number NYS 381; (2) an Isuzu Tanker with plate
number PLR 684; (3) a Fuzo Cargo Truck with plate number PDL 297; and (4) a Mitsubishi
Galant with plate number TLM 732.[4]
Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer 1
Alfredo M. Dungga (SPO1 Dungga), the Isuzu Tanker was in front of the Mitsubishi Galant
with the Nissan Bus on their right side shortly before the vehicular incident. All three (3)
vehicles were at a halt along EDSA facing the south direction when the Fuzo Cargo Truck
simultaneously bumped the rear portion of the Mitsubishi Galant and the rear left portion of
the Nissan Bus. Due to the strong impact, these two vehicles were shoved forward and the
front left portion of the Mitsubishi Galant rammed into the rear right portion of the Isuzu
Tanker.[5]
Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance
Policy No. PV-025-00220 in favor of First Malayan Leasing and Finance Corporation (the
assured), insuring the aforementioned Mitsubishi Galant against third party liability, own
damage and theft, among others. Having insured the vehicle against such risks, Malayan
Insurance claimed in its Complaint dated October 18, 1999 that it paid the damages
sustained by the assured amounting to PhP 700,000.[6]
Maintaining that it has been subrogated to the rights and interests of the assured by
operation of law upon its payment to the latter, Malayan Insurance sent several demand
letters to respondents Rodelio Alberto (Alberto) and Enrico Alberto Reyes (Reyes), the

In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled in
favor of Malayan Insurance and declared respondents liable for damages. The dispositive
portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff against defendants jointly
and severally to pay plaintiff the following:
1. The amount of P700,000.00 with legal interest from the time of the filing of the complaint;
2. Attorneys fees of P10,000.00 and;
3. Cost of suit.
SO ORDERED.[9]
Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No. 93112. In
its Decision dated July 28, 2010, the CA reversed and set aside the Decision of the trial court
and ruled in favor of respondents, disposing:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the
assailed Decision dated 2 February 2009 REVERSED and SET ASIDE. The Complaint dated 18
October 1999 is hereby DISMISSED for lack of merit. No costs.
SO ORDERED.[10]
The CA held that the evidence on record has failed to establish not only negligence on the
part of respondents, but also compliance with the other requisites and the consequent right

of Malayan Insurance to subrogation.[11] It noted that the police report, which has been
made part of the records of the trial court, was not properly identified by the police officer
who conducted the on-the-spot investigation of the subject collision. It, thus, held that an
appellate court, as a reviewing body, cannot rightly appreciate firsthand the genuineness of
an unverified and unidentified document, much less accord it evidentiary value.[12]

Our Ruling

Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a police
report is a prima facie evidence of the facts stated in it. And inasmuch as they never
questioned the presentation of the report in evidence, respondents are deemed to have
waived their right to question its authenticity and due execution.[13]
In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration.
Hence, Malayan Insurance filed the instant petition.

Malayan Insurance contends that, even without the presentation of the police investigator
who prepared the police report, said report is still admissible in evidence, especially since
respondents failed to make a timely objection to its presentation in evidence.[16]
Respondents counter that since the police report was never confirmed by the investigating
police officer, it cannot be considered as part of the evidence on record.[17]

The Issues
In its Memorandum[14] dated June 27, 2011, Malayan Insurance raises the following issues
for Our consideration:
I
WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE POLICE REPORT SINCE THE
POLICE INVESTIGATOR WHO PREPARED THE SAME DID NOT ACTUALLY TESTIFY IN COURT
THEREON.
II
WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS IMPAIRED AND/OR DEFICIENT.
On the other hand, respondents submit the following issues in its Memorandum[15] dated
July 7, 2011:
I
WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR FAILURE OF MALAYAN
INSURANCE TO OVERCOME THE BURDEN OF PROOF REQUIRED TO ESTABLISH THE
NEGLIGENCE OF RESPONDENTS.

The petition has merit.


Admissibility of the Police Report

Indeed, under the rules of evidence, a witness can testify only to those facts which the
witness knows of his or her personal knowledge, that is, which are derived from the witness
own perception.[18] Concomitantly, a witness may not testify on matters which he or she
merely learned from others either because said witness was told or read or heard those
matters.[19] Such testimony is considered hearsay and may not be received as proof of the
truth of what the witness has learned. This is known as the hearsay rule.[20]
As discussed in D.M. Consunji, Inc. v. CA,[21] Hearsay is not limited to oral testimony or
statements; the general rule that excludes hearsay as evidence applies to written, as well as
oral statements.
There are several exceptions to the hearsay rule under the Rules of Court, among which are
entries in official records.[22] Section 44, Rule 130 provides:
Entries in official records made in the performance of his duty by a public officer of the
Philippines, or by a person in the performance of a duty specially enjoined by law are prima
facie evidence of the facts therein stated.

II
WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN INSURANCE ARE SUFFICIENT
TO CLAIM FOR THE AMOUNT OF DAMAGES.

In Alvarez v. PICOP Resources,[23] this Court reiterated the requisites for the admissibility in
evidence, as an exception to the hearsay rule of entries in official records, thus: (a) that the
entry was made by a public officer or by another person specially enjoined by law to do so;
(b) that it was made by the public officer in the performance of his or her duties, or by such
other person in the performance of a duty specially enjoined by law; and (c) that the public
officer or other person had sufficient knowledge of the facts by him or her stated, which
must have been acquired by the public officer or other person personally or through official
information.

III
WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS PASSED COMPLIANCE AND
REQUISITES AS PROVIDED UNDER PERTINENT LAWS.

Notably, the presentation of the police report itself is admissible as an exception to the
hearsay rule even if the police investigator who prepared it was not presented in court, as
long as the above requisites could be adequately proved.[24]

Essentially, the issues boil down to the following: (1) the admissibility of the police report; (2)
the sufficiency of the evidence to support a claim for gross negligence; and (3) the validity of
subrogation in the instant case.

Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared the
report, and he did so in the performance of his duty. However, what is not clear is whether
SPO1 Dungga had sufficient personal knowledge of the facts contained in his report. Thus,
the third requisite is lacking.

Respondents failed to make a timely objection to the police reports presentation in


evidence; thus, they are deemed to have waived their right to do so.[25] As a result, the
police report is still admissible in evidence.

Sufficiency of Evidence
Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck, bumped
the rear of the Mitsubishi Galant, he is presumed to be negligent unless proved otherwise. It
further contends that respondents failed to present any evidence to overturn the
presumption of negligence.[26] Contrarily, respondents claim that since Malayan Insurance
did not present any witness who shall affirm any negligent act of Reyes in driving the Fuzo
Cargo truck before and after the incident, there is no evidence which would show negligence
on the part of respondents.[27]
We agree with Malayan Insurance. Even if We consider the inadmissibility of the police
report in evidence, still, respondents cannot evade liability by virtue of the res ipsa loquitur
doctrine. The D.M. Consunji, Inc. case is quite elucidating:
Petitioners contention, however, loses relevance in the face of the application of res ipsa
loquitur by the CA. The effect of the doctrine is to warrant a presumption or inference that
the mere fall of the elevator was a result of the person having charge of the instrumentality
was negligent. As a rule of evidence, the doctrine of res ipsa loquitur is peculiar to the law of
negligence which recognizes that prima facie negligence may be established without direct
proof and furnishes a substitute for specific proof of negligence.
The concept of res ipsa loquitur has been explained in this wise:
While negligence is not ordinarily inferred or presumed, and while the mere happening of an
accident or injury will not generally give rise to an inference or presumption that it was due
to negligence on defendants part, under the doctrine of res ipsa loquitur, which means,
literally, the thing or transaction speaks for itself, or in one jurisdiction, that the thing or
instrumentality speaks for itself, the facts or circumstances accompanying an injury may be
such as to raise a presumption, or at least permit an inference of negligence on the part of
the defendant, or some other person who is charged with negligence.
x x x where it is shown that the thing or instrumentality which caused the injury complained
of was under the control or management of the defendant, and that the occurrence resulting
in the injury was such as in the ordinary course of things would not happen if those who had
its control or management used proper care, there is sufficient evidence, or, as sometimes
stated, reasonable evidence, in the absence of explanation by the defendant, that the injury
arose from or was caused by the defendants want of care.
One of the theoretical bases for the doctrine is its necessity, i.e., that necessary evidence is
absent or not available.

The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge
of the instrumentality which causes the injury either knows the cause of the accident or has
the best opportunity of ascertaining it and that the plaintiff has no such knowledge, and
therefore is compelled to allege negligence in general terms and to rely upon the proof of the
happening of the accident in order to establish negligence. The inference which the doctrine
permits is grounded upon the fact that the chief evidence of the true cause, whether
culpable or innocent, is practically accessible to the defendant but inaccessible to the injured
person.
It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a plaintiff,
without knowledge of the cause, reaches over to defendant who knows or should know the
cause, for any explanation of care exercised by the defendant in respect of the matter of
which the plaintiff complains. The res ipsa loquitur doctrine, another court has said, is a rule
of necessity, in that it proceeds on the theory that under the peculiar circumstances in which
the doctrine is applicable, it is within the power of the defendant to show that there was no
negligence on his part, and direct proof of defendants negligence is beyond plaintiffs power.
Accordingly, some courts add to the three prerequisites for the application of the res ipsa
loquitur doctrine the further requirement that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no knowledge or means of knowledge as to the cause
of the accident, or that the party to be charged with negligence has superior knowledge or
opportunity for explanation of the accident.
The CA held that all the requisites of res ipsa loquitur are present in the case at bar:
There is no dispute that appellees husband fell down from the 14th floor of a building to the
basement while he was working with appellants construction project, resulting to his death.
The construction site is within the exclusive control and management of appellant. It has a
safety engineer, a project superintendent, a carpenter leadman and others who are in
complete control of the situation therein. The circumstances of any accident that would
occur therein are peculiarly within the knowledge of the appellant or its employees. On the
other hand, the appellee is not in a position to know what caused the accident. Res ipsa
loquitur is a rule of necessity and it applies where evidence is absent or not readily available,
provided the following requisites are present: (1) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (2) the instrumentality or agency which caused
the injury was under the exclusive control of the person charged with negligence; and (3) the
injury suffered must not have been due to any voluntary action or contribution on the part of
the person injured. x x x.
No worker is going to fall from the 14th floor of a building to the basement while performing
work in a construction site unless someone is negligent[;] thus, the first requisite for the
application of the rule of res ipsa loquitur is present. As explained earlier, the construction
site with all its paraphernalia and human resources that likely caused the injury is under the
exclusive control and management of appellant[;] thus[,] the second requisite is also present.
No contributory negligence was attributed to the appellees deceased husband[;] thus[,] the
last requisite is also present. All the requisites for the application of the rule of res ipsa
loquitur are present, thus a reasonable presumption or inference of appellants negligence
arises. x x x.

Petitioner does not dispute the existence of the requisites for the application of res ipsa
loquitur, but argues that the presumption or inference that it was negligent did not arise
since it proved that it exercised due care to avoid the accident which befell respondents
husband.
Petitioner apparently misapprehends the procedural effect of the doctrine. As stated earlier,
the defendants negligence is presumed or inferred when the plaintiff establishes the
requisites for the application of res ipsa loquitur. Once the plaintiff makes out a prima facie
case of all the elements, the burden then shifts to defendant to explain. The presumption or
inference may be rebutted or overcome by other evidence and, under appropriate
circumstances a disputable presumption, such as that of due care or innocence, may
outweigh the inference. It is not for the defendant to explain or prove its defense to prevent
the presumption or inference from arising. Evidence by the defendant of say, due care,
comes into play only after the circumstances for the application of the doctrine has been
established.[28]
In the case at bar, aside from the statement in the police report, none of the parties disputes
the fact that the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn,
hit the rear end of the vehicle in front of it. Respondents, however, point to the reckless
driving of the Nissan Bus driver as the proximate cause of the collision, which allegation is
totally unsupported by any evidence on record. And assuming that this allegation is, indeed,
true, it is astonishing that respondents never even bothered to file a cross-claim against the
owner or driver of the Nissan Bus.
What is at once evident from the instant case, however, is the presence of all the requisites
for the application of the rule of res ipsa loquitur. To reiterate, res ipsa loquitur is a rule of
necessity which applies where evidence is absent or not readily available. As explained in
D.M. Consunji, Inc., it is partly based upon the theory that the defendant in charge of the
instrumentality which causes the injury either knows the cause of the accident or has the
best opportunity of ascertaining it and that the plaintiff has no such knowledge, and,
therefore, is compelled to allege negligence in general terms and to rely upon the proof of
the happening of the accident in order to establish negligence.
As mentioned above, the requisites for the application of the res ipsa loquitur rule are the
following: (1) the accident was of a kind which does not ordinarily occur unless someone is
negligent; (2) the instrumentality or agency which caused the injury was under the exclusive
control of the person charged with negligence; and (3) the injury suffered must not have
been due to any voluntary action or contribution on the part of the person injured.[29]
In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the
Mitsubishi Galant unless someone is negligent. Also, the Fuzo Cargo Truck was under the
exclusive control of its driver, Reyes. Even if respondents avert liability by putting the blame
on the Nissan Bus driver, still, this allegation was self-serving and totally unfounded. Finally,
no contributory negligence was attributed to the driver of the Mitsubishi Galant.
Consequently, all the requisites for the application of the doctrine of res ipsa loquitur are
present, thereby creating a reasonable presumption of negligence on the part of
respondents.

It is worth mentioning that just like any other disputable presumptions or inferences, the
presumption of negligence may be rebutted or overcome by other evidence to the contrary.
It is unfortunate, however, that respondents failed to present any evidence before the trial
court. Thus, the presumption of negligence remains. Consequently, the CA erred in
dismissing the complaint for Malayan Insurances adverted failure to prove negligence on the
part of respondents.
Validity of Subrogation
Malayan Insurance contends that there was a valid subrogation in the instant case, as
evidenced by the claim check voucher[30] and the Release of Claim and Subrogation
Receipt[31] presented by it before the trial court. Respondents, however, claim that the
documents presented by Malayan Insurance do not indicate certain important details that
would show proper subrogation.
As noted by Malayan Insurance, respondents had all the opportunity, but failed to object to
the presentation of its evidence. Thus, and as We have mentioned earlier, respondents are
deemed to have waived their right to make an objection. As this Court held in Asian
Construction and Development Corporation v. COMFAC Corporation:
The rule is that failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence. We note that ASIAKONSTRUCTs counsel of
record before the trial court, Atty. Bernard Dy, who actively participated in the initial stages
of the case stopped attending the hearings when COMFAC was about to end its presentation.
Thus, ASIAKONSTRUCT could not object to COMFACs offer of evidence nor present evidence
in its defense; ASIAKONSTRUCT was deemed by the trial court to have waived its chance to
do so.
Note also that when a party desires the court to reject the evidence offered, it must so state
in the form of a timely objection and it cannot raise the objection to the evidence for the first
time on appeal. Because of a partys failure to timely object, the evidence becomes part of
the evidence in the case. Thereafter, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented.[32] (Emphasis supplied.)
Bearing in mind that the claim check voucher and the Release of Claim and Subrogation
Receipt presented by Malayan Insurance are already part of the evidence on record, and
since it is not disputed that the insurance company, indeed, paid PhP 700,000 to the assured,
then there is a valid subrogation in the case at bar. As explained in Keppel Cebu Shipyard, Inc.
v. Pioneer Insurance and Surety Corporation:
Subrogation is the substitution of one person by another with reference to a lawful claim or
right, so that he who is substituted succeeds to the rights of the other in relation to a debt or
claim, including its remedies or securities. The principle covers a situation wherein an insurer
has paid a loss under an insurance policy is entitled to all the rights and remedies belonging
to the insured against a third party with respect to any loss covered by the policy. It

contemplates full substitution such that it places the party subrogated in the shoes of the
creditor, and he may use all means that the creditor could employ to enforce payment.
We have held that payment by the insurer to the insured operates as an equitable
assignment to the insurer of all the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon
payment by the insurance company of the insurance claim. The doctrine of subrogation has
its roots in equity. It is designed to promote and to accomplish justice; and is the mode that
equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and
good conscience, ought to pay.[33]
Considering the above ruling, it is only but proper that Malayan Insurance be subrogated to
the rights of the assured.
WHEREFORE, the petition is hereby GRANTED. The CAs July 28, 2010 Decision and October
29, 2010 Resolution in CA-G.R. CV No. 93112 are hereby REVERSED and SET ASIDE. The
Decision dated February 2, 2009 issued by the trial court in Civil Case No. 99-95885 is hereby
REINSTATED.
No pronouncement as to cost.
SO ORDERED.

THIRD DIVISION
G.R. No. 173773

November 28, 2012

PARAMOUNT INSURANCE CORPORATION, Petitioner,


vs.
SPOUSES YVES and MARIA TERESA REMONDEULAZ, Respondents.
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking
the reversal and setting aside of the Decision1 dated April 12, 2005 and Resolution2 dated
July 20, 2006 of the Court of Appeals in CA-G.R. CV No. 61490.
The undisputed facts follow.

amount of PhP409,000.00 under their policy. They alleged the loss of the vehicle and claimed
the same to be covered by the policys provision on "Theft." Defendant disagreed and
refused to pay.
It appears, however, that plaintiff had successfully prosecuted and had been awarded the
amount claimed in this action, in another action (Civil Case No. 95-1524 entitled Sps. Yves
and Maria Teresa Remondeulaz versus Standard Insurance Company, Inc.), which involved
the loss of the same vehicle under the same circumstances although under a different policy
and insurance company. This, considered with the principle that an insured may not recover
more than its interest in any property subject of an insurance, leads the court to dismiss this
action.
SO ORDERED.4
Not in conformity with the trial courts Order, respondents interposed an appeal to the Court
of Appeals (appellate court).

On May 26, 1994, respondents insured with petitioner their 1994


Toyota Corolla sedan under a comprehensive motor vehicle insurance policy for one year.
During the effectivity of said insurance, respondents car was unlawfully taken. Hence, they
immediately reported the theft to the Traffic Management Command of the PNP who made
them accomplish a complaint sheet. In said complaint sheet, respondents alleged that a
certain Ricardo Sales (Sales) took possession of the subject vehicle to add accessories and
improvements thereon, however, Sales failed to return the subject vehicle within the agreed
three-day period.

In its Decision dated April 12, 2005, the appellate court reversed and set aside the Order
issued by the trial court, to wit:
Indeed, the trial court erred when it dismissed the action on the ground of double recovery
since it is clear that the subject car is different from the one insured with another insurance
company, the Standard Insurance Company. In this case, defendant-appellee herein
petitioner denied the reimbursement for the lost vehicle on the ground that the said loss
could not fall within the concept of the "theft clause" under the insurance policy x x x
xxxx

As a result, respondents notified petitioner to claim for the reimbursement of their lost
vehicle. However, petitioner refused to pay.
Accordingly, respondents lodged a complaint for a sum of money against petitioner before
the Regional Trial Court of Makati City (trial court) praying for the payment of the insured
value of their car plus damages on April 21, 1995.

WHEREFORE, the October 7, 1998 Order of the Regional Trial Court of Makati City, Branch 63,
is hereby REVERSED and SET ASIDE
x x x.
SO ORDERED.5

After presentation of respondents evidence, petitioner filed a Demurrer to Evidence.


Acting thereon, the trial court dismissed the complaint filed by respondents. The full text of
said Order3 reads:
Before the Court is an action filed by the plaintiffs, spouses Yves and Maria Teresa
Remondeulaz against the defendant, Paramount Insurance Corporation, to recover from the
defendant the insured value of the motor vehicle.
It appears that on 26 May 1994, plaintiffs insured their vehicle, a 1994 Toyota Corolla XL with
chassis number EE-100-9524505, with defendant under Private Car Policy No. PC-37396 for
Own Damage, Theft, Third-Party Property Damage and Third-Party Personal Injury, for the
period commencing 26 May 1994 to 26 May 1995. Then on 1 December 1994, defendants
received from plaintiff a demand letter asking for the payment of the proceeds in the

Petitioner, thereafter, filed a motion for reconsideration against said Decision, but the same
was denied by the appellate court in a Resolution dated July 20, 2006.
Consequently, petitioner filed a petition for review on certiorari before this Court praying
that the appellate courts Decision and Resolution be reversed and set aside.
In its petition, petitioner raises this issue for our resolution:
Whether or not the Court of Appeals decided the case a quo in a way not in accord with law
and/or applicable jurisprudence when it promulgated in favor of the respondents
Remondeulaz, making Paramount liable for the alleged "theft" of respondents vehicle.6

Essentially, the issue is whether or not petitioner is liable under the insurance policy for the
loss of respondents vehicle.

imposition of the appropriate penalty. The Court therein clarified the distinction between the
crime of Estafa and Theft, to wit:

Petitioner argues that the loss of respondents vehicle is not a peril covered by the policy. It
maintains that it is not liable for the loss, since the car cannot be classified as stolen as
respondents entrusted the possession thereof to another person.

x x x The principal distinction between the two crimes is that in theft the thing is taken while
in estafa the accused receives the property and converts it to his own use or benefit.
However, there may be theft even if the accused has possession of the property. If he was
entrusted only with the material or physical (natural) or de facto possession of the thing, his
misappropriation of the same constitutes theft, but if he has the juridical possession of the
thing his conversion of the same constitutes embezzlement or estafa.11

We do not agree.
Adverse to petitioners claim, respondents policy clearly undertook to indemnify the insured
against loss of or damage to the scheduled vehicle when caused by theft, to wit:
SECTION III LOSS OR DAMAGE
1. The Company will, subject to the Limits of Liability, indemnify the insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon:
(a) by accidental collision or overturning, or collision or overturning consequent upon
mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;

In the instant case, Sales did not have juridical possession over the vehicle. Hence, it is
apparent that the taking of repondents vehicle by Sales is without any consent or authority
from the former.
Records would show that respondents entrusted possession of their vehicle only to the
extent that Sales will introduce repairs and improvements thereon, and not to permanently
deprive them of possession thereof. Since, Theft can also be committed through
misappropriation, the fact that Sales failed to return the subject vehicle to respondents
constitutes Qualified Theft. Hence, since repondents car is undeniably covered by a
Comprehensive Motor Vehicle Insurance Policy that allows for recovery in cases of theft,
petitioner is liable under the policy for the loss of respondents vehicle under the "theft
clause."

(c) by malicious act;


(d) whilst in transit (including the process of loading and unloading) incidental to such transit
by road, rail, inland waterway, lift or elevator.7

All told, Sales act of depriving respondents of their motor vehicle at, or soon after the
transfer of physical possession of the movable property, constitutes theft under the
insurance policy, which is compensable.12

Apropos, we now resolve the issue of whether the loss of respondents vehicle falls within
the concept of the "theft clause" under the insurance policy.

WHEREFORE, the instant petition is DENIED. The Decision dated April 12, 2005 and
Resolution dated July 20, 2006 of the Court of Appeals are hereby AFFIRMED in toto.

In People v. Bustinera,8 this Court had the occasion to interpret the "theft clause" of an
insurance policy. In this case, the Court explained that when one takes the motor vehicle of
another without the latters consent even if the motor vehicle is later returned, there is theft
there being intent to gain as the use of the thing unlawfully taken constitutes gain.

SO ORDERED.

Also, in Malayan Insurance Co., Inc. v. Court of Appeals,9 this Court held that the taking of a
vehicle by another person without the permission or authority from the owner thereof is
sufficient to place it within the ambit of the word theft as contemplated in the policy, and is
therefore, compensable.
Moreover, the case of Santos v. People10 is worthy of note. Similarly in Santos, the owner of
a car entrusted his vehicle to therein petitioner Lauro Santos who owns a repair shop for
carburetor repair and repainting. However, when the owner tried to retrieve her car, she was
not able to do so since Santos had abandoned his shop. In the said case, the crime that was
actually committed was Qualified Theft. However, the Court held that because of the fact
that it was not alleged in the information that the object of the crime was a car, which is a
qualifying circumstance, the Court found that Santos was only guilty of the crime of Theft and
merely considered the qualifying circumstance as an aggravating circumstance in the

SECOND DIVISION
[G.R. No. 147724. June 8, 2004]
LORENZO SHIPPING CORP., petitioner, vs. CHUBB and SONS, Inc., GEARBULK, Ltd. and
PHILIPPINE TRANSMARINE CARRIERS, INC., respondents.
DECISION
PUNO, J.:
On appeal is the Court of Appeals August 14, 2000 Decision[1] in CA-G.R. CV No. 61334 and
March 28, 2001 Resolution[2] affirming the March 19, 1998 Decision[3] of the Regional Trial
Court of Manila which found petitioner liable to pay respondent Chubb and Sons, Inc.
attorney's fees and costs of suit.
Petitioner Lorenzo Shipping Corporation (Lorenzo Shipping, for short), a domestic
corporation engaged in coastwise shipping, was the carrier of 581 bundles of black steel
pipes, the subject shipment, from Manila to Davao City. From Davao City, respondent
Gearbulk, Ltd., a foreign corporation licensed as a common carrier under the laws of Norway
and doing business in the Philippines through its agent, respondent Philippine Transmarine
Carriers, Inc. (Transmarine Carriers, for short), a domestic corporation, carried the goods on
board its vessel M/V San Mateo Victory to the United States, for the account of Sumitomo
Corporation. The latter, the consignee, is a foreign corporation organized under the laws of
the United States of America. It insured the shipment with respondent Chubb and Sons, Inc.,
a foreign corporation organized and licensed to engage in insurance business under the laws
of the United States of America.
The facts are as follows:
On November 21, 1987, Mayer Steel Pipe Corporation of Binondo, Manila, loaded 581
bundles of ERW black steel pipes worth US$137,912.84[4] on board the vessel M/V Lorcon
IV, owned by petitioner Lorenzo Shipping, for shipment to Davao City. Petitioner Lorenzo
Shipping issued a clean bill of lading designated as Bill of Lading No. T-3[5] for the account of
the consignee, Sumitomo Corporation of San Francisco, California, USA, which in turn,
insured the goods with respondent Chubb and Sons, Inc.[6]
The M/V Lorcon IV arrived at the Sasa Wharf in Davao City on December 2, 1987.
Respondent Transmarine Carriers received the subject shipment which was discharged on
December 4, 1987, evidenced by Delivery Cargo Receipt No. 115090.[7] It discovered
seawater in the hatch of M/V Lorcon IV, and found the steel pipes submerged in it. The
consignee Sumitomo then hired the services of R.J. Del Pan Surveyors to inspect the
shipment prior to and subsequent to discharge. Del Pans Survey Report[8] dated December
4, 1987 showed that the subject shipment was no longer in good condition, as in fact, the
pipes were found with rust formation on top and/or at the sides. Moreover, the surveyor
noted that the cargo hold of the M/V Lorcon IV was flooded with seawater, and the tank top
was rusty, thinning, and with several holes at different places. The rusty condition of the
cargo was noted on the mates receipts and the checker of M/V Lorcon IV signed his
conforme thereon.[9]

After the survey, respondent Gearbulk loaded the shipment on board its vessel M/V San
Mateo Victory, for carriage to the United States. It issued Bills of Lading Nos. DAV/OAK 1 to
7,[10] covering 364 bundles of steel pipes to be discharged at Oakland, U.S.A., and Bills of
Lading Nos. DAV/SEA 1 to 6,[11] covering 217 bundles of steel pipes to be discharged at
Vancouver, Washington, U.S.A. All bills of lading were marked ALL UNITS HEAVILY RUSTED.
While the cargo was in transit from Davao City to the U.S.A., consignee Sumitomo sent a
letter[12] of intent dated December 7, 1987, to petitioner Lorenzo Shipping, which the latter
received on December 9, 1987. Sumitomo informed petitioner Lorenzo Shipping that it will
be filing a claim based on the damaged cargo once such damage had been ascertained. The
letter reads:
Please be advised that the merchandise herein below noted has been landed in bad order exManila voyage No. 87-19 under B/L No. T-3 which arrived at the port of Davao City on
December 2, 1987.
The extent of the loss and/or damage has not yet been determined but apparently all
bundles are corroded. We reserve the right to claim as soon as the amount of claim is
determined and the necessary supporting documents are available.
Please find herewith a copy of the survey report which we had arranged for after unloading
of our cargo from your vessel in Davao.
We trust that you shall make everything in order.
On January 17, 1988, M/V San Mateo Victory arrived at Oakland, California, U.S.A., where it
unloaded 364 bundles of the subject steel pipes. It then sailed to Vancouver, Washington on
January 23, 1988 where it unloaded the remaining 217 bundles. Toplis and Harding, Inc. of
San Franciso, California, surveyed the steel pipes, and also discovered the latter heavily
rusted. When the steel pipes were tested with a silver nitrate solution, Toplis and Harding
found that they had come in contact with salt water. The survey report,[13] dated January
28, 1988 states:
xxx
We entered the hold for a close examination of the pipe, which revealed moderate to heavy
amounts of patchy and streaked dark red/orange rust on all lifts which were visible. Samples
of the shipment were tested with a solution of silver nitrate revealing both positive and
occasional negative chloride reactions, indicating pipe had come in contact with salt water.
In addition, all tension applied metal straps were very heavily rusted, and also exhibited
chloride reactions on testing with silver nitrate.
xxx
It should be noted that subject bills of lading bore the following remarks as to conditions of
goods: ALL UNITS HEAVILY RUSTED. Attached herein is a copy of a survey report issued by
Del Pan Surveyors of Davao City, Philippines dated, December 4, 1987 at Davao City,
Philippines, which describes conditions of the cargo as sighted aboard the vessel LORCON
IV, prior to and subsequent to discharge at Davao City. Evidently, the aforementioned rust
damages were apparently sustained while the shipment was in the custody of the vessel
LORCON IV, prior to being laden on board the vessel SAN MATEO VICTORY in Davao.

Due to its heavily rusted condition, the consignee Sumitomo rejected the damaged steel
pipes and declared them unfit for the purpose they were intended.[14] It then filed a marine
insurance claim with respondent Chubb and Sons, Inc. which the latter settled in the amount
of US$104,151.00.[15]
On December 2, 1988, respondent Chubb and Sons, Inc. filed a complaint[16] for collection of
a sum of money, docketed as Civil Case No. 88-47096, against respondents Lorenzo Shipping,
Gearbulk, and Transmarine. Respondent Chubb and Sons, Inc. alleged that it is not doing
business in the Philippines, and that it is suing under an isolated transaction.
On February 21, 1989, respondents Gearbulk and Transmarine filed their answer[17] with
counterclaim and cross-claim against petitioner Lorenzo Shipping denying liability on the
following grounds: (a) respondent Chubb and Sons, Inc. has no capacity to sue before
Philippine courts; (b) the action should be dismissed on the ground of forum non conveniens;
(c) damage to the steel pipes was due to the inherent nature of the goods or to the
insufficiency of packing thereof; (d) damage to the steel pipes was not due to their fault or
negligence; and, (e) the law of the country of destination, U.S.A., governs the contract of
carriage.
Petitioner Lorenzo Shipping filed its answer with counterclaim on February 28, 1989, and
amended it on May 24, 1989. It denied liability, alleging, among others: (a) that rust easily
forms on steel by mere exposure to air, moisture and other marine elements; (b) that it
made a disclaimer in the bill of lading; (c) that the goods were improperly packed; and, (d)
prescription, laches, and extinguishment of obligations and actions had set in.
The Regional Trial Court ruled in favor of the respondent Chubb and Sons, Inc., finding that:
(1) respondent Chubb and Sons, Inc. has the right to institute this action; and, (2) petitioner
Lorenzo Shipping was negligent in the performance of its obligations as a carrier. The
dispositive portion of its Decision states:
WHEREFORE, the judgment is hereby rendered ordering Defendant Lorenzo Shipping
Corporation to pay the plaintiff the sum of US$104,151.00 or its equivalent in Philippine peso
at the current rate of exchange with interest thereon at the legal rate from the date of the
institution of this case until fully paid, the attorneys fees in the sum of P50,000.00, plus the
costs of the suit, and dismissing the plaintiffs complaint against defendants Gearbulk, Ltd.
and Philippine Transmarine Carriers, Inc., for lack of merit, and the two defendants
counterclaim, there being no showing that the plaintiff had filed this case against said
defendants in bad faith, as well as the two defendants cross-claim against Defendant
Lorenzo Shipping Corporation, for lack of factual basis.[18]
Petitioner Lorenzo Shipping appealed to the Court of Appeals insisting that: (a) respondent
Chubb and Sons does not have capacity to sue before Philippine courts; and, (b) petitioner
Lorenzo Shipping was not negligent in the performance of its obligations as carrier of the
goods. The appellate court denied the petition and affirmed the decision of the trial court.
The Court of Appeals likewise denied petitioner Lorenzo Shippings Motion for
Reconsideration[19] dated September 3, 2000, in a Resolution[20] promulgated on March 28,
2001.

Hence, this petition. Petitioner Lorenzo Shipping submits the following issues for resolution:
(1) Whether or not the prohibition provided under Art. 133 of the Corporation Code applies
to respondent Chubb, it being a mere subrogee or assignee of the rights of Sumitomo
Corporation, likewise a foreign corporation admittedly doing business in the Philippines
without a license;
(2) Whether or not Sumitomo, Chubbs predecessor-in-interest, validly made a claim for
damages against Lorenzo Shipping within the period prescribed by the Code of Commerce;
(3) Whether or not a delivery cargo receipt without a notation on it of damages or defects in
the shipment, which created a prima facie presumption that the carrier received the
shipment in good condition, has been overcome by convincing evidence;
(4) Assuming that Lorenzo Shipping was guilty of some lapses in transporting the steel pipes,
whether or not Gearbulk and Transmarine, as common carriers, are to share liability for their
separate negligence in handling the cargo.[21]
In brief, we resolve the following issues:
(1)
whether respondent Chubb and Sons has capacity to sue before the Philippine
courts; and,
(2)
whether petitioner Lorenzo Shipping is negligent in carrying the subject cargo.
Petitioner argues that respondent Chubb and Sons is a foreign corporation not licensed to do
business in the Philippines, and is not suing on an isolated transaction. It contends that
because the respondent Chubb and Sons is an insurance company, it was merely subrogated
to the rights of its insured, the consignee Sumitomo, after paying the latters policy claim.
Sumitomo, however, is a foreign corporation doing business in the Philippines without a
license and does not have capacity to sue before Philippine courts. Since Sumitomo does not
have capacity to sue, petitioner then concludes that, neither the subrogee-respondent Chubb
and Sons could sue before Philippine courts.
We disagree with petitioner.
In the first place, petitioner failed to raise the defense that Sumitomo is a foreign corporation
doing business in the Philippines without a license. It is therefore estopped from litigating
the issue on appeal especially because it involves a question of fact which this Court cannot
resolve. Secondly, assuming arguendo that Sumitomo cannot sue in the Philippines, it does
not follow that respondent, as subrogee, has also no capacity to sue in our jurisdiction.
Subrogation is the substitution of one person in the place of another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the other in
relation to a debt or claim, including its remedies or securities.[22] The principle covers the
situation under which an insurer that has paid a loss under an insurance policy is entitled to
all the rights and remedies belonging to the insured against a third party with respect to any
loss covered by the policy.[23] It contemplates full substitution such that it places the party
subrogated in the shoes of the creditor, and he may use all means which the creditor could
employ to enforce payment.[24]

The rights to which the subrogee succeeds are the same as, but not greater than, those of
the person for whom he is substituted he cannot acquire any claim, security, or remedy the
subrogor did not have.[25] In other words, a subrogee cannot succeed to a right not
possessed by the subrogor.[26] A subrogee in effect steps into the shoes of the insured and
can recover only if insured likewise could have recovered.
However, when the insurer succeeds to the rights of the insured, he does so only in relation
to the debt. The person substituted (the insurer) will succeed to all the rights of the creditor
(the insured), having reference to the debt due the latter.[27] In the instant case, the rights
inherited by the insurer, respondent Chubb and Sons, pertain only to the payment it made to
the insured Sumitomo as stipulated in the insurance contract between them, and which
amount it now seeks to recover from petitioner Lorenzo Shipping which caused the loss
sustained by the insured Sumitomo. The capacity to sue of respondent Chubb and Sons
could not perchance belong to the group of rights, remedies or securities pertaining to the
payment respondent insurer made for the loss which was sustained by the insured Sumitomo
and covered by the contract of insurance. Capacity to sue is a right personal to its holder. It
is conferred by law and not by the parties. Lack of legal capacity to sue means that the
plaintiff is not in the exercise of his civil rights, or does not have the necessary qualification to
appear in the case, or does not have the character or representation he claims. It refers to a
plaintiffs general disability to sue, such as on account of minority, insanity, incompetence,
lack of juridical personality, or any other disqualifications of a party.[28] Respondent Chubb
and Sons who was plaintiff in the trial court does not possess any of these disabilities. On the
contrary, respondent Chubb and Sons has satisfactorily proven its capacity to sue, after
having shown that it is not doing business in the Philippines, but is suing only under an
isolated transaction, i.e., under the one (1) marine insurance policy issued in favor of the
consignee Sumitomo covering the damaged steel pipes.
The law on corporations is clear in depriving foreign corporations which are doing business in
the Philippines without a license from bringing or maintaining actions before, or intervening
in Philippine courts. Art. 133 of the Corporation Code states:
Doing business without a license. No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under Philippine laws.
The law does not prohibit foreign corporations from performing single acts of business. A
foreign corporation needs no license to sue before Philippine courts on an isolated
transaction.[29] As held by this Court in the case of Marshall-Wells Company vs. Elser &
Company:[30]
The object of the statute (Secs. 68 and 69, Corporation Law) was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable to suit in the
local courts . . . the implication of the law (being) that it was never the purpose of the
legislature to exclude a foreign corporation which happens to obtain an isolated order for
business for the Philippines, from seeking redress in the Philippine courts.

Likewise, this Court ruled in Universal Shipping Lines, Inc. vs. Intermediate Appellate
Court[31] that:
. . . The private respondent may sue in the 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, for it is not the lack of the
prescribed license (to do business in the Philippines) but doing business without such license,
which bars a foreign corporation from access to our courts.
We reject the claim of petitioner Lorenzo Shipping that respondent Chubb and Sons is not
suing under an isolated transaction because the steel pipes, subject of this case, are covered
by two (2) bills of lading; hence, two transactions. The stubborn fact remains that these two
(2) bills of lading spawned from the single marine insurance policy that respondent Chubb
and Sons issued in favor of the consignee Sumitomo, covering the damaged steel pipes. The
execution of the policy is a single act, an isolated transaction. This Court has not construed
the term isolated transaction to literally mean one or a mere single act. In Eriks Pte. Ltd.
vs. Court of Appeals, this Court held that:[32]
. . . What is determinative of "doing business" is not really the number or the quantity of the
transactions, but more importantly, the intention of an entity to continue the body of its
business in the country. The number and quantity are merely evidence of such intention. The
phrase "isolated transaction" has a definite and fixed meaning, i.e. a transaction or series of
transactions set apart from the common business of a foreign enterprise in the sense that
there is no intention to engage in a progressive pursuit of the purpose and object of the
business organization. Whether a foreign corporation is "doing business" does not
necessarily depend upon the frequency of its transactions, but more upon the nature and
character of the transactions. [Emphasis supplied.]
In the case of Gonzales vs. Raquiza, et al.,[33] three contracts, hence three transactions were
challenged as void on the ground that the three American corporations which are parties to
the contracts are not licensed to do business in the Philippines. This Court held that one
single or isolated business transaction does not constitute doing business within the meaning
of the law. Transactions which are occasional, incidental, and casual not of a character to
indicate a purpose to engage in business do not constitute the doing or engaging in
business as contemplated by law. Where the three transactions indicate no intent by the
foreign corporation to engage in a continuity of transactions, they do not constitute doing
business in the Philippines.
Furthermore, respondent insurer Chubb and Sons, by virtue of the right of subrogation
provided for in the policy of insurance,[34] is the real party in interest in the action for
damages before the court a quo against the carrier Lorenzo Shipping to recover for the loss
sustained by its insured. Rule 3, Section 2 of the 1997 Rules of Civil Procedure defines a real
party in interest as one who is entitled to the avails of any judgment rendered in a suit, or
who stands to be benefited or injured by it. Where an insurance company as subrogee pays
the insured of the entire loss it suffered, the insurer-subrogee is the only real party in
interest and must sue in its own name[35] to enforce its right of subrogation against the third
party which caused the loss. This is because the insurer in such case having fully

compensated its insured, which payment covers the loss in full, is subrogated to the insureds
claims arising from such loss. The subrogated insurer becomes the owner of the claim and,
thus entitled to the entire fruits of the action.[36] It then, thus possesses the right to enforce
the claim and the significant interest in the litigation.[37] In the case at bar, it is clear that
respondent insurer was suing on its own behalf in order to enforce its right of subrogation.
On the second issue, we affirm the findings of the lower courts that petitioner Lorenzo
Shipping was negligent in its care and custody of the consignees goods.
The steel pipes, subject of this case, were in good condition when they were loaded at the
port of origin (Manila) on board petitioner Lorenzo Shippings M/V Lorcon IV en route to
Davao City. Petitioner Lorenzo Shipping issued clean bills of lading covering the subject
shipment. A bill of lading, aside from being a contract[38] and a receipt,[39] is also a
symbol[40] of the goods covered by it. A bill of lading which has no notation of any defect or
damage in the goods is called a clean bill of lading.[41] A clean bill of lading constitutes
prima facie evidence of the receipt by the carrier of the goods as therein described.[42]
The case law teaches us that mere proof of delivery of goods in good order to a carrier and
the subsequent arrival in damaged condition at the place of destination raises a prima facie
case against the carrier.[43] In the case at bar, M/V Lorcon IV of petitioner Lorenzo Shipping
received the steel pipes in good order and condition, evidenced by the clean bills of lading it
issued. When the cargo was unloaded from petitioner Lorenzo Shippings vessel at the Sasa
Wharf in Davao City, the steel pipes were rusted all over. M/V San Mateo Victory of
respondent Gearbulk, Ltd, which received the cargo, issued Bills of Lading Nos. DAV/OAK 1 to
7 and Nos. DAV/SEA 1 to 6 covering the entire shipment, all of which were marked ALL
UNITS HEAVILY RUSTED. R.J. Del Pan Surveyors found that the cargo hold of the M/V Lorcon
IV was flooded with seawater, and the tank top was rusty, thinning and perforated, thereby
exposing the cargo to sea water. There can be no other conclusion than that the cargo was
damaged while on board the vessel of petitioner Lorenzo Shipping, and that the damage was
due to the latters negligence. In the case at bar, not only did the legal presumption of
negligence attach to petitioner Lorenzo Shipping upon the occurrence of damage to the
cargo.[44] More so, the negligence of petitioner was sufficiently established. Petitioner
Lorenzo Shipping failed to keep its vessel in seaworthy condition. R.J. Del Pan Surveyors
found the tank top of M/V Lorcon IV to be rusty, thinning, and with several holes at
different places. Witness Captain Pablo Fernan, Operations Manager of respondent
Transmarine Carriers, likewise observed the presence of holes at the deck of M/V Lorcon IV.
[45] The unpatched holes allowed seawater, reaching up to three (3) inches deep, to enter
the flooring of the hatch of the vessel where the steel pipes were stowed, submerging the
latter in sea water.[46] The contact with sea water caused the steel pipes to rust. The silver
nitrate test, which Toplis and Harding employed, further verified this conclusion.[47]
Significantly, petitioner Lorenzo Shipping did not even attempt to present any contrary
evidence. Neither did it offer any proof to establish any of the causes that would exempt it
from liability for such damage.[48] It merely alleged that the: (1) packaging of the goods was
defective; and (2) claim for damages has prescribed.
To be sure, there is evidence that the goods were packed in a superior condition. John M.
Graff, marine surveyor of Toplis and Harding, examined the condition of the cargo on board
the vessel San Mateo Victory. He testified that the shipment had superior packing because

the ends were covered with plastic, woven plastic. Whereas typically they would not go to
that bother ... Typically, they come in with no plastic on the ends. They might just be
banded, no plastic on the ends ...[49]
On the issue of prescription of respondent Chubb and Sons claim for damages, we rule that
it has not yet prescribed at the time it was made.
Art. 366 of the Code of Commerce states:
Within the twenty-four hours following the receipt of the merchandise, the claim
against the carrier for damage or average, which may be found therein upon the opening of
the packages, may be made, provided that the indications of the damage or average which
gives rise to the claim cannot be ascertained from the outside part of such package, in which
case the claim shall be admitted only at the time of the receipt.
After the periods mentioned have elapsed, or 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.
A somewhat similar provision is embodied in the Bill of Lading No. T-3 which reads:[50]
NOTE:
No claim for damage or loss shall be honored twenty-four (24) hours after
delivery. (Ref. Art. 366 C Com.)
The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within which
claims must be presented does not begin to run until the consignee has received such
possession of the merchandise that he may exercise over it the ordinary control pertinent to
ownership.[51] In other words, there must be delivery of the cargo by the carrier to the
consignee at the place of destination.[52] In the case at bar, consignee Sumitomo has not
received possession of the cargo, and has not physically inspected the same at the time the
shipment was discharged from M/V Lorcon IV in Davao City. Petitioner Lorenzo Shipping
failed to establish that an authorized agent of the consignee Sumitomo received the cargo at
Sasa Wharf in Davao City. Respondent Transmarine Carriers as agent of respondent
Gearbulk, Ltd., which carried the goods from Davao City to the United States, and the
principal, respondent Gearbulk, Ltd. itself, are not the authorized agents as contemplated by
law. What is clear from the evidence is that the consignee received and took possession of
the entire shipment only when the latter reached the United States shore. Only then was
delivery made and completed. And only then did the 24-hour prescriptive period start to
run.
Finally, we find no merit to the contention of respondents Gearbulk and Transmarine that
American law governs the contract of carriage because the U.S.A. is the country of
destination. Petitioner Lorenzo Shipping, through its M/V Lorcon IV, carried the goods from
Manila to Davao City. Thus, as against petitioner Lorenzo Shipping, the place of destination is
Davao City. Hence, Philippine law applies.
IN VIEW THEREOF, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 61334 dated August 14, 2000 and its Resolution dated March 28, 2001 are hereby
AFFIRMED. Costs against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.
PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21
March 1979, ordering petitioner Manila Mahogany Manufacturing Corporation to pay private
respondent Zenith Insurance Corporation the sum of Five Thousand Pesos (P5,000.00) with
6% annual interest from 18 January 1973, attorney's fees in the sum of five hundred pesos
(P500.00), and costs of suit, and the resolution of the same Court, dated 8 February 1980,
denying petitioner's motion for reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970 the insured vehicle was bumped and
damaged by a truck owned by San Miguel Corporation. For the damage caused, respondent
company paid petitioner five thousand pesos (P5,000.00) in amicable settlement. Petitioner's
general manager executed a Release of Claim, subrogating respondent company to all its
right to action against San Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand
reimbursement from San Miguel Corporation of the amount it had paid petitioner. Insurance
Adjusters, Inc. refused reimbursement, alleging that San Miguel Corporation had already paid
petitioner P4,500.00 for the damages to petitioner's motor vehicle, as evidenced by a cash
voucher and a Release of Claim executed by the General Manager of petitioner discharging
San Miguel Corporation from "all actions, claims, demands the rights of action that now exist
or hereafter [sic] develop arising out of or as a consequence of the accident."
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 P4,500.00. 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.
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 petitioners 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 ease 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 coming from San Miguel
Corporation, despite the subrogation in favor of Private respondent.
Although petitioners 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 policythe 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 vs. 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 respondents, the right of subrogation, the right of action of petitioner against the
insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391)
Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid to
petitioner. 1

As held in Phil. Air Lines v. Heald Lumber Co., 2


If a property is 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 P4,500.00 as originally asked for, but P5,000.00, the amount respondent company paid
petitioner as insurance, is also in accord with law and jurisprudence. In disposing of this
issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 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 released San Miguel Corporation from any liability, 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:
... The right of subrogation can only exist after the insurer has paid the 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 the [sic] remainder. To the extent of the amount he has already received
from 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 companies, prays for the recovery, not of
P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel Corporation had
paid to petitioner. On this score, We believe the City Court and Court of First Instance erred
in not awarding the proper relief. Although private respondent prays for the reimbursement
of P4,500.00 paid by San Miguel Corporation, instead of P5,000.00 paid under the insurance
policy, the trial court should have awarded the latter, although not prayed for, under the
general prayer in the complaint "for such further or other relief as may be deemed just or
equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ;
Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).

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

THIRD DIVISION
G.R. No. 81026

April 3, 1990

PAN MALAYAN INSURANCE CORPORATION, petitioner,


vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.
Regulus E. Cabote & Associates for petitioner.
Benito P. Fabie for private respondents.
CORTES, J.:
Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of
the Court of Appeals which upheld an order of the trial court dismissing for no cause of
action PANMALAY's complaint for damages against private respondents Erlinda Fabie and her
driver.
The principal issue presented for resolution before this Court is whether or not the insurer
PANMALAY may institute an action to recover the amount it had paid its assured in
settlement of an insurance claim against private respondents as the parties allegedly
responsible for the damage caused to the insured vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati
against private respondents Erlinda Fabie and her driver. PANMALAY averred the following:
that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the
name of Canlubang Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985,
due to the "carelessness, recklessness, and imprudence" of the unknown driver of a pick-up
with plate no. PCR-220, the insured car was hit and suffered damages in the amount of
P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore,
was subrogated to the rights of CANLUBANG against the driver of the pick-up and his
employer, Erlinda Fabie; and that, despite repeated demands, defendants, failed and refused
to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental
motion thereto. In compliance therewith, PANMALAY clarified, among others, that the
damage caused to the insured car was settled under the "own damage", coverage of the
insurance policy, and that the driver of the insured car was, at the time of the accident, an
authorized driver duly licensed to drive the vehicle. PANMALAY also submitted a copy of the
insurance policy and the Release of Claim and Subrogation Receipt executed by CANLUBANG
in favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY
had no cause of action against them. They argued that payment under the "own damage"
clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code,
since indemnification thereunder was made on the assumption that there was no wrongdoer
or no third party at fault.

After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC
issued an order dated June 16, 1986 dismissing PANMALAY's complaint for no cause of
action. On August 19, 1986, the RTC denied PANMALAY's motion for reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on
November 27, 1987. Consequently, PANMALAY filed the present petition for review.
After private respondents filed its comment to the petition, and petitioner filed its reply, the
Court considered the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the
petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had
indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident
allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie.
PANMALAY contended, therefore, that its cause of action against private respondents was
anchored upon Article 2207 of the Civil Code, which reads:
If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the
insured property is destroyed or damaged through the fault or negligence of a party other
than the assured, then the insurer, upon payment to the assured, will be subrogated to the
rights of the assured to recover from the wrongdoer to the extent that the insurer has been
obligated to pay. Payment by the insurer to the assured operates as an equitable assignment
to the former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer [Compania Maritima v.
Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213;
Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7,
1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by his own act
releases the wrongdoer or third party liable for the loss or damage, from liability, the
insurer's right of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western
Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v.
Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly, where the insurer pays the
assured the value of the lost goods without notifying the carrier who has in good faith settled
the assured's claim for loss, the settlement is binding on both the assured and the insurer,
and the latter cannot bring an action against the carrier on his right of subrogation [McCarthy
v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured

for a loss which is not a risk covered by the policy, thereby effecting "voluntary payment",
the former has no right of subrogation against the third party liable for the loss [Sveriges
Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5, 1967, 21
SCRA 12].

construed by the courts liberally in favor of the assured and strictly against the insurer [Union
Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-27932, October 30, 1972,
47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No. L-43706, November
14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-41014,
November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].

None of the exceptions are availing in the present case.


The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not
legally subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and
therefore did not have any cause of action against private respondents. On the one hand, the
trial court held that payment by PANMALAY of CANLUBANG's claim under the "own damage"
clause of the insurance policy was an admission by the insurer that the damage was caused
by the assured and/or its representatives. On the other hand, the Court of Appeals in
applying the ejusdem generis rule held that Section III-1 of the policy, which was the basis for
settlement of CANLUBANG's claim, did not cover damage arising from collision or
overturning due to the negligence of third parties as one of the insurable risks. Both tribunals
concluded that PANMALAY could not now invoke Article 2207 and claim reimbursement from
private respondents as alleged wrongdoers or parties responsible for the damage.
The above conclusion is without merit.
It must be emphasized that the lower court's ruling that the "own damage" coverage under
the policy implies damage to the insured car caused by the assured itself, instead of third
parties, proceeds from an incorrect comprehension of the phrase "own damage" as used by
the insurer. When PANMALAY utilized the phrase "own damage" a phrase which,
incidentally, is not found in the insurance policy to define the basis for its settlement of
CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the
costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with
Supplementary Motion for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the
so-called "own damage" coverage under Section III of the insurance policy is differentiated
from Sections I and IV-1 which refer to "Third Party Liability" coverage (liabilities arising from
the death of, or bodily injuries suffered by, third parties) and from Section IV-2 which refer to
"Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to
the properties of third parties).
Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under
Section III-1 of the policy does not include to the insured vehicle arising from collision or
overturning due to the negligent acts of the third party. Not only does it stem from an
erroneous interpretation of the provisions of the section, but it also violates a fundamental
rule on the interpretation of property insurance contracts.
It is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties thereto have
used. In the case of property insurance policies, the evident intention of the contracting
parties, i.e., the insurer and the assured, determine the import of the various terms and
provisions embodied in the policy. It is only when the terms of the policy are ambiguous,
equivocal or uncertain, such that the parties themselves disagree about the meaning of
particular provisions, that the courts will intervene. In such an event, the policy will be

Section III-1 of the insurance policy which refers to the conditions under which the insurer
PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the
insured vehicle, reads as follows:
SECTION III LOSS OR DAMAGE
1.
The Company will, subject to the Limits of Liability, indemnify the Insured against
loss of or damage to the Scheduled Vehicle and its accessories and spare parts whilst
thereon:
(a)
by accidental collision or overturning, or collision or overturning consequent upon
mechanical breakdown or consequent upon wear and tear;
(b)
theft;

by fire, external explosion, self ignition or lightning or burglary, housebreaking or

(c)

by malicious act;

(d)
whilst in transit (including the processes of loading and unloading) incidental to
such transit by road, rail, inland, waterway, lift or elevator.
xxx

xxx

xxx

[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars;
Record, p. 34; Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section, specifically
Section III-1(a), is comprehensive enough to include damage to the insured vehicle arising
from collision or overturning due to the fault or negligence of a third party. CANLUBANG is
apparently of the same understanding. Based on a police report wherein the driver of the
insured car reported that after the vehicle was sideswiped by a pick-up, the driver thereof
fled the scene [Record, p. 20], CANLUBANG filed its claim with PANMALAY for
indemnification of the damage caused to its car. It then accepted payment from PANMALAY,
and executed a Release of Claim and Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to be in disagreement
regarding the meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it
was improper for the appellate court to indulge in contract construction, to apply the
ejusdem generis rule, and to ascribe meaning contrary to the clear intention and
understanding of these parties.

It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by
accidental collision or overturning" found in the first paint of sub-paragraph (a) is untenable.
Although the terms "accident" or "accidental" as used in insurance contracts have not
acquired a technical meaning, the Court has on several occasions defined these terms to
mean that which takes place "without one's foresight or expectation, an event that proceeds
from an unknown cause, or is an unusual effect of a known cause and, therefore, not
expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30,
1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No.
85141, November 28, 1989]. Certainly, it cannot be inferred from jurisprudence that these
terms, without qualification, exclude events resulting in damage or loss due to the fault,
recklessness or negligence of third parties. The concept "accident" is not necessarily
synonymous with the concept of "no fault". It may be utilized simply to distinguish
intentional or malicious acts from negligent or careless acts of man.
Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss
of, the insured vehicle due to negligent or careless acts of third parties is not listed under the
general and specific exceptions to the coverage of insured risks which are enumerated in
detail in the insurance policy itself [See Annex "A-1" of PANMALAY's Compliance with
Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY
regarding the coverage of Section III-1(a) of the policy is undeniably more beneficial to
CANLUBANG than that insisted upon by respondents herein. By arguing that this section
covers losses or damages due not only to malicious, but also to negligent acts of third parties,
PANMALAY in effect advocates for a more comprehensive coverage of insured risks. And this,
in the final analysis, is more in keeping with the rationale behind the various rules on the
interpretation of insurance contracts favoring the assured or beneficiary so as to effect the
dominant purpose of indemnity or payment [See Calanoc v. Court of Appeals, 98 Phil. 79
(1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June
29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA
327].
Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance
policy does not cover damage to the insured vehicle caused by negligent acts of third parties,
and that PANMALAY's settlement of CANLUBANG's claim for damages allegedly arising from
a collision due to private respondents' negligence would amount to unwarranted or
"voluntary payment", dismissal of PANMALAY's complaint against private respondents for no
cause of action would still be a grave error of law.
For even if under the above circumstances PANMALAY could not be deemed subrogated to
the rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a
cause of action against private respondents. In the pertinent case of Sveriges Angfartygs
Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have
no rights of subrogation due to "voluntary" payment may nevertheless recover from the
third party responsible for the damage to the insured property under Article 1236 of the Civil
Code.

In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as
subrogee merely prays that it be allowed to institute an action to recover from third parties
who allegedly caused damage to the insured vehicle, the amount which it had paid its
assured under the insurance policy. Having thus shown from the above discussion that
PANMALAY has a cause of action against third parties whose negligence may have caused
damage to CANLUBANG's car, the Court holds that there is no legal obstacle to the filing by
PANMALAY of a complaint for damages against private respondents as the third parties
allegedly responsible for the damage. Respondent Court of Appeals therefore committed
reversible error in sustaining the lower court's order which dismissed PANMALAY's complaint
against private respondents for no cause of action. Hence, it is now for the trial court to
determine if in fact the damage caused to the insured vehicle was due to the "carelessness,
recklessness and imprudence" of the driver of private respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's
complaint for damages against private respondents is hereby REINSTATED. Let the case be
remanded to the lower court for trial on the merits.
SO ORDERED.

THIRD DIVISION
[G.R. No. 112360. July 18, 2000]
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS and
TRANSWORLD KNITTING MILLS, INC., respondents.
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
annul and set aside the July 15, 1993 Decision[1] and October 22, 1993 Resolution[2] of the
Court of Appeals[3] in CA-G.R. CV NO. 28779, which modified the Ruling[4] of the Regional
Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance
Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One
Million (P1,000,000.00) Pesos and eventually increased to One Million Five Hundred
Thousand (P1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13,
1981.

storey building (behind said four-span building) where fun and amusement machines and
spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India
Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance companies an
action for collection of sum of money and damages, docketed as Civil Case No. 46106 before
Branch 161 of the then Court of First Instance of Rizal; praying for judgment ordering Rizal
Insurance and New India to pay the amount of P2,747, 867.00 plus legal interest,
P400,000.00 as attorney's fees, exemplary damages, expenses of litigation of P50,000.00 and
costs of suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the
contents of the four-span building, which was partly burned, and not the damage caused by
the fire on the two-storey annex building.[7]
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;

Pertinent portions of subject policy on the buildings insured, and location thereof, read:
"On stocks of finished and/or unfinished products, raw materials and supplies of every kind
and description, the properties of the Insureds and/or held by them in trust, on commission
or on joint account with others and/or for which they (sic) responsible in case of loss whilst
contained and/or stored during the currency of this Policy in the premises occupied by them
forming part of the buildings situate (sic) within own Compound at MAGDALO STREET,
BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine portions is constructed
of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under galvanized iron roof occupied
as canteen and guardhouse, partly by building of two and partly one storey constructed of
concrete below, timber above undergalvanized iron roof occupied as garage and quarters
and partly by open space and/or tracking/ packing, beyond which is the aforementioned
Magdalo Street; on its right and left by driveway, thence open spaces, and at the rear by
open spaces.'"[5]

(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic) Knitting
Mills, Inc. the amount of P826, 500.00 representing the actual value of the losses suffered by
it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting
Mills, Inc., went to the Court of Appeals, which came out with its decision of July 15, 1993
under attack, the decretal portion of which reads:

The same pieces of property insured with the petitioner were also insured with New India
Assurance Company, Ltd., (New India).

"WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED in
that defendant New India Assurance Company has and is hereby required to pay plaintiffappellant the amount of P1,818,604.19 while the other Rizal Surety has to pay the plaintiffappellant P470,328.67, based on the actual losses sustained by plaintiff Transworld in the
fire, totalling P2,790,376.00 as against the amounts of fire insurance coverages respectively
extended by New India in the amount of P5,800,000.00 and Rizal Surety and Insurance
Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle
portion of its four-span building and partly gutting the left and right sections thereof. A two-

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India
appealed to this Court theorizing inter alia that the private respondent could not be

compensated for the loss of the fun and amusement machines and spare parts stored at the
two-storey building because it (Transworld) had no insurable interest in said goods or items.

"xxx contained and/or stored during the currency of this Policy in the premises occupied by
them forming part of the buildings situate (sic) within own Compound xxx"

On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New
India Assurance Company Ltd. vs. Court of Appeals).

Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit
its coverage to what were stored in the four-span building. As opined by the trial court of
origin, two requirements must concur in order that the said fun and amusement machines
and spare parts would be deemed protected by the fire insurance policy under scrutiny, to
wit:

Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for
Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of Appeals
reconsidered its decision of July 15, 1993, as regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the imposition of
legal interest is concerned, that, on the assessment against New India Assurance Company
on the amount of P1,818,604.19 and that against Rizal Surety & Insurance Company on the
amount of P470,328.67, from May 26, 1982 when the complaint was filed until payment is
made. The rest of the said decision is retained in all other respects.

"First, said properties must be contained and/or stored in the areas occupied by Transworld
and second, said areas must form part of the building described in the policy xxx"[14]
'Said building of four-span lofty one storey in height with mezzanine portions is constructed
of reinforced concrete and hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, ware house and caretaker's quarter.'

SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the
present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING WHERE THE
BULK OF THE BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT CONSIDERING THE
PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH
CLEARLY SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD ACTED IN
PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION,
AND IN NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND PUNITIVE
DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND EXPENSES OF LITIGATION
(ART. 2208 PARS. 4 and 11, CIVIL CODE).[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only the
contents of the main building (four-span),[12] and did not include those stored in the twostorey annex building. On the other hand, the private respondent theorized that the so called
"annex" was not an annex but was actually an integral part of the four-span building[13] and
therefore, the goods and items stored therein were covered by the same fire insurance
policy.
Resolution of the issues posited here hinges on the proper interpretation of the stipulation in
subject fire insurance policy regarding its coverage, which reads:

The Court is mindful of the well-entrenched doctrine that factual findings by the Court of
Appeals are conclusive on the parties and not reviewable by this Court, and the same carry
even more weight when the Court of Appeals has affirmed the findings of fact arrived at by
the lower court.[15]
In the case under consideration, both the trial court and the Court of Appeals found that the
so called "annex " was not an annex building but an integral and inseparable part of the fourspan building described in the policy and consequently, the machines and spare parts stored
therein were covered by the fire insurance in dispute. The letter-report of the Manila
Adjusters and Surveyor's Company, which petitioner itself cited and invoked, describes the
"annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete hollow blocks under
g.i. roof which is adjoining and intercommunicating with the repair of the first right span of
the lofty storey building and thence by property fence wall."[16]
Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building",[17] formed part
thereof, and meets the requisites for compensability under the fire insurance policy sued
upon.
So also, considering that the two-storey building aforementioned was already existing when
subject fire insurance policy contract was entered into on January 12, 1981, having been
constructed sometime in 1978,[18] petitioner should have specifically excluded the said twostorey building from the coverage of the fire insurance if minded to exclude the same but if
did not, and instead, went on to provide that such fire insurance policy covers the products,
raw materials and supplies stored within the premises of respondent Transworld which was
an integral part of the four-span building occupied by Transworld, knowing fully well the
existence of such building adjoining and intercommunicating with the right section of the
four-span building.

After a careful study, the Court does not find any basis for disturbing what the lower courts
found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has
created a doubt regarding the portions of the building insured thereby. Article 1377 of the
New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the petitioner,
Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy
contract under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho
vs. Government Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled that the
'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are to be
construed strictly and most strongly against the insurer, and liberally in favor of the insured
so as to effect the dominant purpose of indemnity or payment to the insured, especially
where forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that the 'insured
usually has no voice in the selection or arrangement of the words employed and that the
language of the contract is selected with great care and deliberation by experts and legal
advisers employed by, and acting exclusively in the interest of, the insurance company.' (44
C.J.S., p. 1174).""[20]
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company,
Inc. vs. Vda. De Songco,[21] to wit:
"'This rigid application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to impose
upon parties dealing with them cunningly prepared 'agreements' that the weaker party may
not change one whit, his participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by adherence' (contrats [sic]
d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such
contracts (of which policies of insurance and international bills of lading are prime example)
obviously call for greater strictness and vigilance on the part of courts of justice with a view
to protecting the weaker party from abuses and imposition, and prevent their becoming
traps for the unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec.
1934, 27 February 1942.)'"[22]
The issue of whether or not Transworld has an insurable interest in the fun and amusement
machines and spare parts, which entitles it to be indemnified for the loss thereof, had been
settled in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of
Appeals, where the appeal of New India from the decision of the Court of Appeals under
review, was denied with finality by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises, precludes the
relitigation of a particular fact or issue in another action between the same parties based on
a different claim or cause of action. "xxx the judgment in the prior action operates as
estoppel only as to those matters in issue or points controverted, upon the determination of
which the finding or judgment was rendered. In fine, the previous judgment is conclusive in
the second case, only as those matters actually and directly controverted and determined
and not as to matters merely involved therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc.
vs. Court of Appeals,[24] held that the issue of negligence of the shipping line, which issue
had already been passed upon in a case filed by one of the insurers, is conclusive and can no
longer be relitigated in a similar case filed by another insurer against the same shipping line
on the basis of the same factual circumstances. Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been
negligent, or so negligent as to have proximately caused the collision between them, was an
issue that was actually, directly and expressly raised, controverted and litigated in C.A.-G.R.
No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to
have been negligent rather than the 'Yotai Maru' and, as already noted, that Decision was
affirmed by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The Reyes
Decision thus became final and executory approximately two (2) years before the Sison
Decision, which is assailed in the case at bar, was promulgated. Applying the rule of
conclusiveness of judgment, the question of which vessel had been negligent in the collision
between the two (2) vessels, had long been settled by this Court and could no longer be
relitigated in C.A.-G.R. No. 61206-R. Private respondent Go Thong was certainly bound by the
ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell into clear
and reversible error when it disregarded the Decision of this Court affirming the Reyes
Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering that private
respondent's insurable interest in, and compensability for the loss of subject fun and
amusement machines and spare parts, had been adjudicated, settled and sustained by the
Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a
Resolution, dated February 2, 1994, the same can no longer be relitigated and passed upon in
the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the
ruling of the Court of Appeals and of this Court that the private respondent has an insurable
interest in the aforesaid fun and amusement machines and spare parts; and should be
indemnified for the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the amount of
P470,328.67, it being the total loss and damage suffered by Transworld for which petitioner
Rizal Insurance is liable.[26]
All things studiedly considered and viewed in proper perspective, the Court is of the
irresistible conclusion, and so finds, that the Court of Appeals erred not in holding the
petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the insured
buildings and articles of the private respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993,
of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement
as to costs.
SO ORDERED.

THIRD DIVISION
PHILIPPINE DEPOSIT INSURANCE CORPORATION,
Petitioner, - versus
CITIBANK, N.A. and BANK OF AMERICA, S.T. & N.A.,
Respondents.
G.R. No. 170290
April 11, 2012
MENDOZA, J.:
This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure,
assailing the October 27, 2005 Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No.
61316, entitled Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit
Insurance Corporation.
The Facts
Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality
created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No. 9302.[2]
Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of
America, S.T. & N.A. (BA) is a national banking association, both of which are duly organized
and existing under the laws of the United States of America and duly licensed to do business
in the Philippines, with offices in Makati City.[3]
In 1977, PDIC conducted an examination of the books of account of Citibank. It discovered
that Citibank, in the course of its banking business, from September 30, 1974 to June 30,
1977, received from its head office and other foreign branches a total of P11,923,163,908.00
in dollars, covered by Certificates of Dollar Time Deposit that were interest-bearing with
corresponding maturity dates.[4] These funds, which were lodged in the books of Citibank
under the account Their Account-Head Office/Branches-Foreign Currency, were not
reported to PDIC as deposit liabilities that were subject to assessment for insurance.[5] As
such, in a letter dated March 16, 1978, PDIC assessed Citibank for deficiency in the sum of
P1,595,081.96.[6]
Similarly, sometime in 1979, PDIC examined the books of accounts of BA which revealed that
from September 30, 1976 to June 30, 1978, BA received from its head office and its other
foreign branches a total of P629,311,869.10 in dollars, covered by Certificates of Dollar Time
Deposit that were interest-bearing with corresponding maturity dates and lodged in their
books under the account Due to Head Office/Branches.[7] Because BA also excluded these
from its deposit liabilities, PDIC wrote to BA on October 9, 1979, seeking the remittance of
P109,264.83 representing deficiency premium assessments for dollar deposits.[8]

their head office and other foreign branches were not deposits and did not give rise to
insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the PDIC Charter) and, as
a consequence, the deficiency assessments made by PDIC were improper and erroneous.[10]
The cases were then consolidated.[11]
On June 29, 1998, the Regional Trial Court, Branch 163, Pasig City (RTC) promulgated its
Decision[12] in favor of Citibank and BA, ruling that the subject money placements were not
deposits and did not give rise to insurable deposit liabilities, and that the deficiency
assessments issued by PDIC were improper and erroneous. Therefore, Citibank and BA were
not liable to pay the same. The RTC reasoned out that the money placements subject of the
petitions were not assessable for insurance purposes under the PDIC Charter because said
placements were deposits made outside of the Philippines and, under Section 3.05(b) of the
PDIC Rules and Regulations,[13] such deposits are excluded from the computation of deposit
liabilities. Section 3(f) of the PDIC Charter likewise excludes from the definition of the term
deposit any obligation of a bank payable at the office of the bank located outside the
Philippines. The RTC further stated that there was no depositor-depository relationship
between the respondents and their head office or other branches. As a result, such deposits
were not included as third-party deposits that must be insured. Rather, they were
considered inter-branch deposits which were excluded from the assessment base, in
accordance with the practice of the United States Federal Deposit Insurance Corporation
(FDIC) after which PDIC was patterned.
Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in its October 27,
2005 Decision. In so ruling, the CA found that the money placements were received as part of
the banks internal dealings by Citibank and BA as agents of their respective head offices.
This showed that the head office and the Philippine branch were considered as the same
entity. Thus, no bank deposit could have arisen from the transactions between the Philippine
branch and the head office because there did not exist two separate contracting parties to
act as depositor and depositary.[14] Secondly, the CA called attention to the purpose for the
creation of PDIC which was to protect the deposits of depositors in the Philippines and not
the deposits of the same bank through its head office or foreign branches.[15] Thirdly,
because there was no law or jurisprudence on the treatment of inter-branch deposits
between the Philippine branch of a foreign bank and its head office and other branches for
purposes of insurance, the CA was guided by the procedure observed by the FDIC which
considered inter-branch deposits as non-assessable.[16] Finally, the CA cited Section 3(f) of
R.A. No. 3591, which specifically excludes obligations payable at the office of the bank
located outside the Philippines from the definition of a deposit or an insured deposit. Since
the subject money placements were made in the respective head offices of Citibank and BA
located outside the Philippines, then such placements could not be subject to assessment
under the PDIC Charter.[17]
Hence, this petition.
The Issues

Believing that litigation would inevitably arise from this dispute, Citibank and BA each filed a
petition for declaratory relief before the Court of First Instance (now the Regional Trial Court)
of Rizal on July 19, 1979 and December 11, 1979, respectively.[9] In their petitions, Citibank
and BA sought a declaratory judgment stating that the money placements they received from

PDIC raises the issue of whether or not the subject dollar deposits are assessable for
insurance purposes under the PDIC Charter with the following assigned errors:

A.

B.

The appellate court erred in ruling that the subject dollar deposits are money
placements, thus, they are not subject to the provisions of Republic Act No. 6426
otherwise known as the Foreign Currency Deposit Act of the Philippines.
The appellate court erred in ruling that the subject dollar deposits are not covered
by the PDIC insurance.[18]

The Court begins by examining the manner by which a foreign corporation can establish
its presence in the Philippines. It may choose to incorporate its own subsidiary as a domestic
corporation, in which case such subsidiary would have its own separate and independent
legal personality to conduct business in the country. In the alternative, it may create a
branch in the Philippines, which would not be a legally independent unit, and simply obtain a
license to do business in the Philippines.[24]

Respondents similarly identify only one issue in this case:


Whether or not the money placements subject matter of these petitions are assessable for
insurance purposes under the PDIC Act.[19]
The sole question to be resolved in this case is whether the funds placed in the
Philippine branch by the head office and foreign branches of Citibank and BA are insurable
deposits under the PDIC Charter and, as such, are subject to assessment for insurance
premiums.
The Courts Ruling

In the case of Citibank and BA, it is apparent that they both did not incorporate a
separate domestic corporation to represent its business interests in the Philippines. Their
Philippine branches are, as the name implies, merely branches, without a separate legal
personality from their parent company, Citibank and BA. Thus, being one and the same
entity, the funds placed by the respondents in their respective branches in the Philippines
should not be treated as deposits made by third parties subject to deposit insurance under
the PDIC Charter.
For lack of judicial precedents on this issue, the Court seeks guidance from American
jurisprudence. In the leading case of Sokoloff v. The National City Bank of New York,[25]
where the Supreme Court of New York held:

The Court rules in the negative.


A branch has no separate legal personality;
Purpose of the PDIC
PDIC argues that the head offices of Citibank and BA and their individual foreign
branches are separate and independent entities. It insists that under American
jurisprudence, a banks head office and its branches have a principal-agent relationship only
if they operate in the same jurisdiction. In the case of foreign branches, however, no such
relationship exists because the head office and said foreign branches are deemed to be two
distinct entities.[20] Under Philippine law, specifically, Section 3(b) of R.A. No. 3591, which
defines the terms bank and banking institutions, PDIC contends that the law treats a
branch of a foreign bank as a separate and independent banking unit.[21]
The respondents, on the other hand, initially point out that the factual findings of the
RTC and the CA, with regard to the nature of the money placements, the capacity in which
the same were received by the respondents and the exclusion of inter-branch deposits from
assessment, can no longer be disturbed and should be accorded great weight by this Court.
[22] They also argue that the money placements are not deposits. They postulate that for a
deposit to exist, there must be at least two parties a depositor and a depository each with
a legal personality distinct from the other. Because the respondents respective head offices
and their branches form only a single legal entity, there is no creditor-debtor relationship and
the funds placed in the Philippine branch belong to one and the same bank. A bank cannot
have a deposit with itself.[23]
This Court is of the opinion that the key to the resolution of this controversy is the
relationship of the Philippine branches of Citibank and BA to their respective head offices and
their other foreign branches.

Where a bank maintains branches, each branch becomes a separate business entity with
separate books of account. A depositor in one branch cannot issue checks or drafts upon
another branch or demand payment from such other branch, and in many other respects the
branches are considered separate corporate entities and as distinct from one another as any
other bank. Nevertheless, when considered with relation to the parent bank they are not
independent agencies; they are, what their name imports, merely branches, and are subject
to the supervision and control of the parent bank, and are instrumentalities whereby the
parent bank carries on its business, and are established for its own particular purposes, and
their business conduct and policies are controlled by the parent bank and their property and
assets belong to the parent bank, although nominally held in the names of the particular
branches. Ultimate liability for a debt of a branch would rest upon the parent bank.
[Emphases supplied]
This ruling was later reiterated in the more recent case of United States v. BCCI Holdings
Luxembourg[26] where the United States Court of Appeals, District of Columbia Circuit,
emphasized that while individual bank branches may be treated as independent of one
another, each branch, unless separately incorporated, must be viewed as a part of the parent
bank rather than as an independent entity.
In addition, Philippine banking laws also support the conclusion that the head office of
a foreign bank and its branches are considered as one legal entity. Section 75 of R.A. No.
8791 (The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act Liberalizing
the Entry of Foreign Banks) both require the head office of a foreign bank to guarantee the
prompt payment of all the liabilities of its Philippine branch, to wit:
Republic Act No. 8791:

Sec. 75. Head Office Guarantee. In order to provide effective protection of the interests of
the depositors and other creditors of Philippine branches of a foreign bank, the head office of
such branches shall fully guarantee the prompt payment of all liabilities of its Philippine
branch.
Residents and citizens of the Philippines who are creditors of a branch in the Philippines of
foreign bank shall have preferential rights to the assets of such branch in accordance with the
existing laws.
Republic Act No. 7721:
Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.
Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section 1 of
R.A. No. 3591 (The PDIC Charter) which provides:
Section 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter
referred to as the Corporation which shall insure, as herein provided, the deposits of all
banks which are entitled to the benefits of insurance under this Act, and which shall have the
powers hereinafter granted.
The Corporation shall, as a basic policy, promote and safeguard the interests of the
depositing public by way of providing permanent and continuing insurance coverage on all
insured deposits.
R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the
establishment of the PDIC:
Section 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy of
the State to strengthen the mandatory deposit insurance coverage system to generate,
preserve, maintain faith and confidence in the country's banking system, and protect it from
illegal schemes and machinations.
Towards this end, the government must extend all means and mechanisms necessary for the
Philippine Deposit Insurance Corporation to effectively fulfill its vital task of promoting and
safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and
stable banking system at all times.
The purpose of the PDIC is to protect the depositing public in the event of a bank closure. It
has already been sufficiently established by US jurisprudence and Philippine statutes that the
head office shall answer for the liabilities of its branch. Now, suppose the Philippine branch
of Citibank suddenly closes for some reason. Citibank N.A. would then be required to answer
for the deposit liabilities of Citibank Philippines. If the Court were to adopt the posture of
PDIC that the head office and the branch are two separate entities and that the funds placed

by the head office and its foreign branches with the Philippine branch are considered
deposits within the meaning of the PDIC Charter, it would result to the incongruous situation
where Citibank, as the head office, would be placed in the ridiculous position of having to
reimburse itself, as depositor, for the losses it may incur occasioned by the closure of
Citibank Philippines. Surely our law makers could not have envisioned such a preposterous
circumstance when they created PDIC.
Finally, the Court agrees with the CA ruling that there is nothing in the definition of a
bank and a banking institution in Section 3(b) of the PDIC Charter[27] which explicitly
states that the head office of a foreign bank and its other branches are separate and distinct
from their Philippine branches.
There is no need to complicate the matter when it can be solved by simple logic
bolstered by law and jurisprudence. Based on the foregoing, it is clear that the head office of
a bank and its branches are considered as one under the eyes of the law. While branches are
treated as separate business units for commercial and financial reporting purposes, in the
end, the head office remains responsible and answerable for the liabilities of its branches
which are under its supervision and control. As such, it is unreasonable for PDIC to require
the respondents, Citibank and BA, to insure the money placements made by their home
office and other branches. Deposit insurance is superfluous and entirely unnecessary when,
as in this case, the institution holding the funds and the one which made the placements are
one and the same legal entity.
Funds not a deposit under the definition
of the PDIC Charter;
Excluded from assessment
PDIC avers that the funds are dollar deposits and not money placements. Citing R.A. No.
6848, it defines money placement as a deposit which is received with authority to invest.
Because there is no evidence to indicate that the respondents were authorized to invest the
subject dollar deposits, it argues that the same cannot be considered money placements.[28]
PDIC then goes on to assert that the funds received by Citibank and BA are deposits, as
contemplated by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar
deposits were received by Citibank and BA in the course of their banking operations from
their respective head office and foreign branches and were recorded in their books as
Account-Head Office/Branches-Time Deposits pursuant to Central Bank Circular No. 343
which implements R.A. No. 6426; (2) the dollar deposits were credited as dollar time
accounts and were covered by Certificates of Dollar Time Deposit which were interestbearing and payable upon maturity, and (3) the respondents maintain 100% foreign currency
cover for their deposit liability arising from the dollar time deposits as required by Section 4
of R.A. No. 6426.[29]
To refute PDICs allegations, the respondents explain the inter-branch transactions which
necessitate the creation of the accounts or placements subject of this case. When the
Philippine branch needs to procure foreign currencies, it will coordinate with a branch in
another country which handles foreign currency purchases. Both branches have existing
accounts with their head office and when a money placement is made in relation to the
acquisition of foreign currency from the international market, the amount is credited to the

account of the Philippine branch with its head office while the same is debited from the
account of the branch which facilitated the purchase. This is further documented by the
issuance of a certificate of time deposit with a stated interest rate and maturity date. The
interest rate represents the cost of obtaining the funds while the maturity date represents
the date on which the placement must be returned. On the maturity date, the amount
previously credited to the account of the Philippine branch is debited, together with the cost
for obtaining the funds, and credited to the account of the other branch. The respondents
insist that the interest rate and maturity date are simply the basis for the debit and credit
entries made by the head office in the accounts of its branches to reflect the inter-branch
accommodation.[30] As regards the maintenance of currency cover over the subject money
placements, the respondents point out that they maintain foreign currency cover in excess of
what is required by law as a matter of prudent banking practice.[31]
PDIC attempts to define money placement in order to impugn the respondents claim that
the funds received from their head office and other branches are money placements and not
deposits, as defined under the PDIC Charter. In the process, it loses sight of the important
issue in this case, which is the determination of whether the funds in question are subject to
assessment for deposit insurance as required by the PDIC Charter. In its struggle to find an
adequate definition of money placement, PDIC desperately cites R.A. No. 6848, The
Charter of the Al-Amanah Islamic Investment Bank of the Philippines. Reliance on the said
law is unfounded because nowhere in the law is the term money placement defined.
Additionally, R.A. No. 6848 refers to the establishment of an Islamic bank subject to the
rulings of Islamic Sharia to assist in the development of the Autonomous Region of Muslim
Mindanao (ARMM),[32] making it utterly irrelevant to the case at bench. Since Citibank and
BA are neither Islamic banks nor are they located anywhere near the ARMM, then it should
be painfully obvious that R.A. No. 6848 cannot aid us in deciding this case.
Furthermore, PDIC heavily relies on the fact that the respondents documented the money
placements with certificates of time deposit to simply conclude that the funds involved are
deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment
for deposit insurance. It is this kind of reasoning that creates non-existent obscurities in the
law and obstructs the prompt resolution of what is essentially a straightforward issue,
thereby causing this case to drag on for more than three decades.
Noticeably, PDIC does not dispute the veracity of the internal transactions of the
respondents which gave rise to the issuance of the certificates of time deposit for the funds
the subject of the present dispute. Neither does it question the findings of the RTC and the
CA that the money placements were made, and were payable, outside of the Philippines,
thus, making them fall under the exclusions to deposit liabilities. PDIC also fails to impugn
the truth of the testimony of John David Shaffer, then a Fiscal Agent and Head of the
Assessment Section of the FDIC, that inter-branch deposits were excluded from the
assessment base. Therefore, the determination of facts of the lower courts shall be accepted
at face value by this Court, following the well-established principle that factual findings of the
trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court,
and will generally not be reviewed on appeal.[33]
As explained by the respondents, the transfer of funds, which resulted from the inter-branch
transactions, took place in the books of account of the respective branches in their head

office located in the United States. Hence, because it is payable outside of the Philippines, it
is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:
Sec. 3(f) The term deposit means the unpaid balance of money or its equivalent received
by a bank in the usual course of business and for which it has given or is obliged to give credit
to a commercial, checking, savings, time or thrift account or which is evidenced by its
certificate of deposit, and trust funds held by such bank whether retained or deposited in any
department of said bank or deposit in another bank, together with such other obligations of
a bank as the Board of Directors shall find and shall prescribe by regulations to be deposit
liabilities of the Bank; Provided, that any obligation of a bank which is payable at the office of
the bank located outside of the Philippines shall not be a deposit for any of the purposes of
this Act or included as part of the total deposits or of the insured deposits; Provided further,
that any insured bank which is incorporated under the laws of the Philippines may elect to
include for insurance its deposit obligation payable only at such branch. [Emphasis supplied]
The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the
FDIC, after which PDIC was modelled, is also persuasive. Inter-branch deposits refer to funds
of one branch deposited in another branch and both branches are part of the same parent
company and it is the practice of the FDIC to exclude such inter-branch deposits from a
banks total deposit liabilities subject to assessment.[34]
All things considered, the Court finds that the funds in question are not deposits within
the definition of the PDIC Charter and are, thus, excluded from assessment.
WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of
Appeals in CA-G.R. CV No. 61316 is AFFIRMED.

EN BANC
G.R. No. 23703

September 28, 1925

HILARIO GERCIO, plaintiff-appellee,


vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.
MALCOLM, J.:
The question of first impression in the law of life insurance to be here decided is whether the
insured the husband has the power to change the beneficiary the former wife and
to name instead his actual wife, where the insured and the beneficiary have been divorced
and where the policy of insurance does not expressly reserve to the insured the right to
change the beneficiary. Although the authorities have been exhausted, no legal situation
exactly like the one before us has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer,
and Andrea Zialcita, the beneficiary, are the defendants. The complaint is in the nature of
mandamus. Its purpose is to compel the defendant Sun Life Assurance Co. of Canada to
change the beneficiary in the policy issued by the defendant company on the life of the
plaintiff Hilario Gercio, with one Andrea Zialcita as beneficiary.
A default judgment was taken in the lower court against the defendant Andrea Zialcita. The
other defendant, the Sun Life Assurance Co. of Canada, first demurred to the complaint and
when the demurrer was overruled, filed an answer in the nature of a general denial. The case
was then submitted for decision on an agreed statement of facts. The judgment of the trial
court was in favor of the plaintiff without costs, and ordered the defendant company to
eliminate from the insurance policy the name of Andrea Zialcita as beneficiary and to
substitute therefor such name as the plaintiff might furnish to the defendant for that
purpose.
The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged to
have been committed by the lower court. The appellee has countered with a motion which
asks the court to dismiss the appeal of the defendant Sun Life Assurance Co. of Canada, with
costs.
As the motion presented by the appellee and the first two errors assigned by the appellant
are preliminary in nature, we will pass upon the first. Appellee argues that the "substantial
defendant" was Andrea Zialcita, and that since she was adjudged in default, the Sun Life
Assurance Co. of Canada has no interest in the appeal. It will be noticed, however, that the
complaint prays for affirmative relief against the insurance company. It will be noticed
further that it is stipulated that the insurance company has persistently refused to change
the beneficiary as desired by the plaintiff. As the rights of Andrea Zialcita in the policy are

rights which are enforceable by her only against the insurance company, the defendant
insurance company will only be fully protected if the question at issue is conclusively
determined. Accordingly, we have decided not to accede to the motion of the appellee and
not to order the dismissal of the appeal of the appellant.
This brings us to the main issue. Before, however, discussing its legal aspects, it is advisable
to have before us the essential facts. As they are stipulated, this part of the decision can
easily be accomplished.
On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No.
161481 on the life of Hilario Gercio. The policy was what is known as a twenty-year
endowment policy. By its terms, the insurance company agreed to insure the life of Hilario
Gercio for the sum of P/2,000, to be paid him on February 1, 1930, or if the insured should
die before said date, then to his wife, Mrs. Andrea Zialcita, should she survive him; otherwise
to the executors, administrators, or assigns of the insured. The policy also contained a
schedule of reserves, amounts in cash, paid-up policies, and renewed insurance, guaranteed.
The policy did not include any provision reserving to the insured the right to change the
beneficiary.
On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio.
Towards the end of the year 1919, she was convicted of the crime of adultery. On September
4, 1920, a decree of divorce was issued in civil case no. 17955, which had the effect of
completely dissolving the bonds of matrimony contracted by Hilario Gercio and Andrea
Zialcita.
On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada that
he had revoked his donation in favor of Andrea Zialcita, and that he had designated in her
stead his present wife, Adela Garcia de Gercio, as the beneficiary of the policy. Gercio
requested the insurance company to eliminate Andrea Zialcita as beneficiary. This, the
insurance company has refused and still refuses to do.
With all of these introductory matters disposed of and with the legal question to the
forefront, it becomes our first duty to determine what law should be applied to the facts. In
this connection, it should be remembered that the insurance policy was taken out in 1910,
that the Insurance Act. No. 2427, became effective in 1914, and that the effort to change the
beneficiary was made in 1922. Should the provisions of the Code of Commerce and the Civil
Code in force in 1910, or the provisions of the Insurance Act now in force, or the general
principles of law, guide the court in its decision?
On the supposition, first, that the Code of Commerce is applicable, yet there can be found in
it no provision either permitting or prohibiting the insured to change the beneficiary.
On the supposition, next, that the Civil Code regulates insurance contracts, it would be most
difficult, if indeed it is practicable, to test a life insurance policy by its provisions. Should the
insurance contract, whereby the husband names the wife as the beneficiary, be denominated
a donation inter vivos, a donation causa mortis, a contract in favor of a third person, or an
aleatory contract? The subject is further complicated by the fact that if an insurance contract
should be considered a donation, a husband may then never insure his life in favor of his wife

and vice versa, inasmuch as article 1334 prohibits all donations between spouses during
marriage. It would seem, therefore, that this court was right when in the case of Del Val vs.
Del Val ([1915]), 29 Phil., 534), it declined to consider the proceeds of the insurance policy as
a donation or gift, saying "the contract of life insurance is a special contract and the
destination of the proceeds thereof is determined by special laws which deal exclusively with
that subject. The Civil Code has no provisions which relate directly and specifically to lifeinsurance contracts or to the destination of life-insurance proceeds. . . ." Some satisfaction is
gathered from the perplexities of the Louisiana Supreme Court, a civil law jurisdiction, where
the jurists have disagreed as to the classification of the insurance contract, but have agreed
in their conclusions as will hereafter see. (Re Succession of Leone Desforges [1914], 52 L.R.A.
[N.S.], 689; Lambert vs Penn Mutual Life Insurance Company of Philadelphia and L'Hote & Co.
[1898], 50 La. Ann., 1027.)
On the further supposition that the Insurance Act applies, it will be found that in this Law,
there is likewise no provision either permitting or prohibiting the insured to change the
beneficiary.
We must perforce conclude that whether the case be considered as of 1910, or 1914, or
1922, and whether the case be considered in the light of the Code of Commerce, the Civil
Code, or the Insurance Act, the deficiencies in the law will have to be supplemented by the
general principles prevailing on the subject. To that end, we have gathered the rules which
follow from the best considered American authorities. In adopting these rules, we do so with
the purpose of having the Philippine Law of Insurance conform as nearly as possible to the
modern Law of Insurance as found in the United States proper.
The wife has an insurable interest in the life of her husband. The beneficiary has an absolute
vested interest in the policy from the date of its issuance and delivery. So when a policy of
life insurance is taken out by the husband in which the wife is named as beneficiary, she has
a subsisting interest in the policy. And this applies to a policy to which there are attached the
incidents of a loan value, cash surrender value, an automatic extension by premiums paid,
and to an endowment policy, as well as to an ordinary life insurance policy. If the husband
wishes to retain to himself the control and ownership of the policy he may so provide in the
policy. But if the policy contains no provision authorizing a change of beneficiary without the
beneficiary's consent, the insured cannot make such change. Accordingly, it is held that a life
insurance policy of a husband made payable to the wife as beneficiary, is the separate
property of the beneficiary and beyond the control of the husband.
As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely
provides in section 9 that the decree of divorce shall dissolve the community property as
soon as such decree becomes final. Unlike the statutes of a few jurisdictions, there is no
provision in the Philippine Law permitting the beneficiary in a policy for the benefit of the
wife of the husband to be changed after a divorce. It must follow, therefore, in the absence
of a statute to the contrary, that if a policy is taken out upon a husband's life the wife is
named as beneficiary therein, a subsequent divorce does not destroy her rights under the
policy.

These are some of the pertinent principles of the Law of Insurance. To reinforce them, we
would, even at the expense of clogging the decision with unnecessary citation of authority,
bring to notice certain decisions which seem to us to have controlling influence.
To begin with, it is said that our Insurance Act is mostly taken from the statute of California.
It should prove of interest, therefore, to know the stand taken by the Supreme Court of that
State. A California decision oft cited in the Cyclopedias is Yore vs. Booth ([1895]), 110 Cal.,
238; 52 Am. St. Rep., 81), in which we find the following:
. . . It seems to be the settled doctrine, with but slight dissent in the courts of this country,
that a person who procures a policy upon his own life, payable to a designated beneficiary,
although he pays the premiums himself, and keeps the policy in his exclusive possession, has
no power to change the beneficiary, unless the policy itself, or the charter of the insurance
company, so provides. In policy, although he has parted with nothing, and is simply the
object of another's bounty, has acquired a vested and irrevocable interest in the policy,
which he may keep alive for his own benefit by paying the premiums or assessments if the
person who effected the insurance fails or refuses to do so.
As carrying great weight, there should also be taken into account two decisions coming from
the Supreme Court of the United States. The first of these decisions, in point of time, is
Connecticut Mutual Life Insurance Company vs Schaefer ([1877]), 94 U.S., 457). There, Mr.
Justice Bradley, delivering the opinion of the court, in part said:
This was an action on a policy of the court, in part said: July 25, 1868, on the joint lives of
George F. and Francisca Schaefer, then husband and wife, payable to the survivor on the
death of either. In January, 1870, they were divorced, and alimony was decreed and paid to
the wife, and there was never any issue of the marriage. They both subsequently married
again, after which, in February, 1871, George F. Schaefer died. This action was brought by
Francisca, the survivor.
xxx

xxx

xxx

The other point, relating to the alleged cessation of insurable interest by reason of the
divorce of the parties, is entitled to more serious consideration, although we have very little
difficulty in disposing of it.
It will be proper, in the first place, to ascertain what is an insurable interest. It is generally
agreed that mere wager policies, that is, policies in which the insured party has no interest in
its loss or destruction, are void, as against public policy. . . . But precisely what interest is
necessary, in order to take a policy out of the category of mere wager, has been the subject
of much discussion. In marine and fire insurance the difficulty is not so great, because there
insurance is considered as strictly an indemnity. But in life insurance the loss can seldom be
measured by pecuniary values. Still, an interest of some sort in the insured life must exist. A
man cannot take out insurance on the life of a total stranger, nor on that of one who is not so
connected with him as to make the continuance of the life a matter of some real interest to
him.

It is well settled that a man has an insurable interest in his own life and in that of his wife and
children; a woman in the life of her husband; and the creditor in the life of his debtor. Indeed
it may be said generally that any reasonable expectation of pecuniary benefit or advantage
from the continued life of another creates an insurable interest in such life. And there is no
doubt that a man may effect an insurance on his own life for the benefit of a relative or fried;
or two or more persons, on their joint lives, for the benefit of the survivor or survivors. The
old tontines were based substantially on this principle, and their validity has never been
called in question.
xxx

xxx

xxx

The policy in question might, in our opinion, be sustained as a joint insurance, without
reference to any other interest, or to the question whether the cessation of interest avoids a
policy good at its inception. We do not hesitate to say, however, that a policy taken out in
good faith and valid at its inception, is not avoided by the cessation of the insurable interest,
unless such be the necessary effect of the provisions of the policy itself. . . .
. . . .In our judgment of life policy, originally valid, does not cease to be so by the cessation of
the assured party's interest in the life insured.
Another controlling decision of the United States Supreme Court is that of the Central
National Bank of Washington City vs. Hume ([1888], 128 U.S., 134). Therein, Mr. Chief Justice
Fuller, as the organ of the court, announced the following doctrines:
We think it cannot be doubted that in the instance of contracts of insurance with a wife or
children, or both, upon their insurable interest in the life of the husband or father, the latter,
while they are living, can exercise no power of disposition over the same without their
consent, nor has he any interest therein of which he can avail himself; nor upon his death
have his personal representatives or his creditors any interest in the proceeds of such
contracts, which belong to the beneficiaries to whom they are payable.
It is indeed the general rule that a policy, and the money to become due under it, belong, the
moment it is issued, to the person or persons named in it as the beneficiary or beneficiaries,
and that there is no power in the person procuring the insurance, by any act of his, by deed
or by will, to transfer to any other person the interest of the person named.
A jurisdiction which found itself in somewhat the same situation as the Philippines, because
of having to reconcile the civil law with the more modern principles of insurance, is Louisiana.
In a case coming before the Federal Courts, In re Dreuil & Co. ([1915]), 221 Fed., 796), the
facts were that an endowment insurance policy provided for payment of the amount thereof
at the expiration of twenty years to the insured, or his executors, administrators, or assigns,
with the proviso that, if the insured die within such period, payment was to be made to his
wife if she survive him. It was held that the wife has a vested interest in the policy, of which
she cannot be deprived without her consent. Foster, District Judge, announced:
In so far as the law of Louisiana is concerned, it may also be considered settled that where a
policy is of the semitontine variety, as in this case, the beneficiary has a vested right in the
policy, of which she cannot be deprived without her consent. (Lambert vs Penn Mutual Life

Ins. Co., 50 La. Ann., 1027; 24 South., 16.) (See in same connection a leading decision of the
Louisiana Supreme Court, Re Succession of Leonce Desforges, [1914], 52 L.R.A. [N.S.], 689.)
Some question has arisen as to the power of the insured to destroy the vested interest of the
beneficiary in the policy. That point is well covered in the case of Entwistle vs. Travelers
Insurance Company ([1902], 202 Pa. St., 141). To quote:
. . . The interest of the wife was wholly contingent upon her surviving her husband, and she
could convey no greater interest in the policy than she herself had. The interest of the
children of the insured, which was created for them by the contract when the policy was
issued; vested in them at the same time that the interest of the wife became vested in her.
Both interests were contingent. If the wife die before the insured, she will take nothing under
the policy. If the insured should die before the wife, then the children take nothing under the
policy. We see no reason to discriminate between the wife and the children. They are all
payees, under the policy, and together constitute the assured.
The contingency which will determine whether the wife, or the children as a class will take
the proceeds, has not as yet happened; all the beneficiaries are living, and nothing has
occurred by which the rights of the parties are in any way changed. The provision that the
policy may be converted into cash at the option of the holder does not change the relative
rights of the parties. We agree entirely with the suggestion that "holder" or "holders", as
used in this connection, means those who in law are the owners of the policy, and are
entitled to the rights and benefits which may accrue under it; in other words, all the
beneficiaries; in the present case, not only the wife, by the children of the insured. If for any
reason, prudence required the conversion of the policy into cash, a guardian would have no
special difficulty in reasonable protecting the interest of his wards. But however that may be,
it is manifest that the option can only be exercised by those having the full legal interest in
the policy, or by their assignee. Neither the husband, nor the wife, nor both together had
power to destroy the vested interest of the children in the policy.
The case most nearly on all fours with the one at bar is that of Wallace vs Mutual Benefit Life
Insurance Co. ([1906], 97 Minn., 27; 3 L.R.A. [N.S.], 478). The opinion there delivered also
invokes added interest when it is noted that it was written by Mr. Justice Elliott, the author
of a text on insurance, later a member of this court. In the Minnesota case cited, one Wallace
effected a "twenty-year endowment" policy of insurance on his life, payable in the event of
his death within twenty years to Emma G. Wallace, his wife, but, if he lived, to himself at the
end of twenty years. If Wallace died before the death of his wife, within the twenty years,
the policy was payable to the personal representatives of the insured. During the pendency
of divorce proceedings, the parties signed a contract by which Wallace agreed that, if a
divorce was granted to Mrs. Wallace, the court might award her certain specified property as
alimony, and Mrs. Wallace agreed to relinquish all claim to any property arising out of the
relation of husband and wife. The divorce was granted. An action was brought by Wallace to
compel Mrs. Wallace to relinquish her interest in the insurance policy. Mr. Justice Elliott said:
As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of which
she could not be deprived without her consent, except under the terms of the contract with
the insurance company. No right to change the beneficiary was reserved. Her interest in the
policy was her individual property, subject to be divested only by her death, the lapse of

time, or by the failure of the insured to pay the premiums. She could keep the policy alive by
paying the premiums, if the insured did not do so. It was contingent upon these events, but it
was free from the control of her husband. He had no interest in her property in this policy,
contingent or otherwise. Her interest was free from any claim on the part of the insured or
his creditors. He could deprive her of her interest absolutely in but one way, by living more
than twenty years. We are unable to see how the plaintiff's interest in the policy was primary
or superior to that of the husband. Both interests were contingent, but they were entirely
separate and distinct, the one from the other. The wife's interest was not affected by the
decree of court which dissolved the marriage contract between the parties. It remains her
separate property, after the divorce as before. . .
. . . . The fact that she was his wife at the time the policy was issued may have been, and
undoubtedly was, the reason why she was named as beneficiary in the event of his death.
But her property interest in the policy after it was issued did not in any reasonable sense
arise out of the marriage relation.
Somewhat the same question came before the Supreme Court of Kansas in the leading case
of Filley vs. Illinois Life Insurance Company ([1914]), 91 Kansas, 220; L.R.A. [1915 D], 130). It
was held, following consideration extending to two motions for rehearing, as follows:
The benefit accruing from a policy of life insurance upon the life of a married man, payable
upon his death to his wife, naming her, is payable to the surviving beneficiary named,
although she may have years thereafter secured a divorce from her husband, and he was
thereafter again married to one who sustained the relation of wife to him at the time of his
death.
The rights of a beneficiary in an ordinary life insurance policy become vested upon the
issuance of the policy, and can thereafter, during the life of the beneficiary, be defeated only
as provided by the terms of the policy.
If space permitted, the following corroborative authority could also be taken into account:
Joyce, The Law of Insurance, second edition, vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp. 394
et seq.; 14 R.C.L., pp. 1376 et seq.; Green vs. Green ([1912], 147 Ky., 608; 39 L.R.A. [N.S.],
370); Washington Life Insurance Co. vs. Berwald ([1903], 97 Tex., 111); Begley vs. Miller
([1907]), 137 Ill., App., 278); Blum vs. New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L.R.A.
[N.S.], 923; Union Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49 L.R.A., 737);
Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., 96); Preston vs.
Conn. Mut. L. Ins. Co. of Hartford ([1902]); 95 Md., 101); Snyder vs. Supreme Ruler of
Fraternal Mystic Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.], 209); Lloyd vs. Royal Union
Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878], 46
Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep.,
129); Supreme Council American Legion of Honor vs. Smith and Smith ([1889], 45 N.J. Eq.,
466); Overhiser vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552);
Condon vs. New York Life Insurance Co. ([1918], 183 Iowa, 658); with which compare Foster
vs. Gile ([1880], 50 Wis., 603) and Hatch vs. Hatch ([1904], 35 Tex. Civ. App., 373).

On the admitted facts and the authorities supporting the nearly universally accepted
principles of insurance, we are irresistibly led to the conclusion that the question at issue
must be answered in the negative.
The judgment appealed from will be reversed and the complaint ordered dismissed as to the
appellant, without special pronouncement as to the costs in either instance. So ordered.
Street, Villamor, Ostrand, Johns, and Villa-Real, JJ., concur.
Avancea, C.J., concurs in the result.
Romualdez, J., took no part.
Separate Opinions
JOHNSON, J., concurring in the result.
I agree with the majority of the court, that the judgment of the lower court should be
revoked, but for a different reason. In my judgment, the question presented by the plaintiff is
purely an academic one. The purpose of the petition is to have declared the rights of certain
persons in an insurance policy which is not yet due and payable. It may never become due
and payable. The premiums may not be paid, thereby rendering the contract of insurance of
non effect, and many other things may occur, before the policy becomes due, which would
render it non effective. The plaintiff and the other parties who are claiming an interest in said
policy should wait until there is something due them under the same. For the courts to
declare now who are the persons entitled to receive the amounts due, if they ever become
due and payable, is impossible, for the reason that nothing may ever become payable under
the contract of insurance, and for many reasons such persons may never have a right to
receive anything when the policy does become due and payable. In my judgment, the action
is premature and should have been dismissed.

EN BANC
G.R. No. 34774

September 21, 1931

EL ORIENTE FABRICA DE TABACOS, INC., plaintiff-appellant,


vs.
JUAN POSADAS, Collector of Internal Revenue, defendant-appellee.
Gibbs and McDonough and Roman Ozaeta for appellant.
Attorney-General Jaranilla for appellee.
MALCOLM, J.:

7.
That upon the death of said A. Velhagen in the year 1929, the plaintiff received all
the proceeds of the said life insurance policy, together with the interests and the dividends
accruing thereon, aggregating P104,957.88.
8.
That over the protest of the plaintiff, which claimed exemption under section 4 of
the Income Tax Law, the defendant Collector of Internal Revenue assessed and levied the
sum of P3,148.74 as income tax on the proceeds of the insurance policy mentioned in the
preceding paragraph, which tax the plaintiff paid under instant protest on July 2, 1930; and
that defendant overruled said protest on July 9, 1930.
Thereupon, a decision was handed down which absolved the defendant from the complaint,
with costs against the plaintiff. From this judgment, the plaintiff appealed, and its counsel
now allege that:

The issue in this case is whether the proceeds of insurance taken by a corporation on the life
of an important official to indemnify it against loss in case of his death, are taxable as income
under the Philippine Income Tax Law.

1.
That trial court erred in holding that section 4 of the Income Tax Law (Act No. 2833)
is not applicable to the present case.

The parties submitted the case to the Court of First Instance of Manila for decision upon the
following agreed statement of facts:

2.
The trial court erred in reading into the law certain exceptions and distinctions not
warranted by its clear and unequivocal provisions.

1.
That the plaintiff is a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippine Islands, having its principal office at No. 732 Calle
Evangelista, Manila, P.I.; and that the defendant is the duly appointed, qualified and acting
Collector of Internal Revenue of the Philippine Islands.

3.
The trial court erred in assuming that the proceeds of the life insurance policy in
question represented a net profit to the plaintiff when, as a matter of fact, it merely
represented an indemnity, for the loss suffered by it thru the death of its manager, the
insured.

2.
That on March 18, 1925, plaintiff, in order to protect itself against the loss that it
might suffer by reason of the death of its manager, A. Velhagen, who had had more than
thirty-five (35) years of experience in the manufacture of cigars in the Philippine Islands, and
whose death would be a serious loss to the plaintiff, procured from the Manufacturers Life
Insurance Co., of Toronto, Canada, thru its local agent E.E. Elser, an insurance policy on the
life of the said A. Velhagen for the sum of $50,000, United States currency.

4.
The trial court erred in refusing to hold that the proceeds of the life insurance
policy in question is not taxable income, and in absolving the defendant from the complaint.

3.
That the plaintiff, El Oriente, Fabrica de Tabacos, Inc., designated itself as the sole
beneficiary of said policy on the life of its said manager.
4.
That during the time the life insurance policy hereinbefore referred to was in force
and effect plaintiff paid from its funds all the insurance premiums due thereon.
5.
That the plaintiff charged as expenses of its business all the said premiums and
deducted the same from its gross incomes as reported in its annual income tax returns,
which deductions were allowed by the defendant upon a showing made by the plaintiff that
such premiums were legitimate expenses of its (plaintiff's) business.
6.
That the said A. Velhagen, the insured, had no interest or participation in the
proceeds of said life insurance policy.

The Income Tax Law for the Philippines is Act No. 2833, as amended. It is divided into four
chapters: Chapter I On Individuals, Chapter II On Corporations, Chapter III General
Administrative Provisions, and Chapter IV General Provisions. In chapter I On Individuals, is to
be found section 4 which provides that, "The following incomes shall be exempt from the
provisions of this law: (a) The proceeds of life insurance policies paid to beneficiaries upon
the death of the insured ... ." Section 10, as amended, in Chapter II On Corporations, provides
that, There shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources by every corporation ... a tax of
three per centum upon such income ... ." Section 11 in the same chapter, provides the
exemptions under the law, but neither here nor in any other section is reference made to the
provisions of section 4 in Chapter I.
Under the view we take of the case, it is sufficient for our purposes to direct attention to the
anomalous and vague condition of the law. It is certain that the proceeds of life insurance
policies are exempt. It is not so certain that the proceeds of life insurance policies paid to
corporate beneficiaries upon the death of the insured are likewise exempt. But at least, it
may be said that the law is indefinite in phraseology and does not permit us unequivocally to
hold that the proceeds of life insurance policies received by corporations constitute income
which is taxable.

The situation will be better elucidated by a brief reference to laws on the same subject in the
United States. The Income Tax Law of 1916 extended to the Philippine Legislature, when it
came to enact Act No. 2833, to copy the American statute. Subsequently, the Congress of the
United States enacted its Income Tax Law of 1919, in which certain doubtful subjects were
clarified. Thus, as to the point before us, it was made clear, when not only in the part of the
law concerning individuals were exemptions provided for beneficiaries, but also in the part
concerning corporations, specific reference was made to the exemptions in favor of
individuals, thereby making the same applicable to corporations. This was authoritatively
pointed out and decided by the United States Supreme Court in the case of United States vs.
Supplee-Biddle Hardware Co. ( [1924], 265 U.S., 189), which involved facts quite similar to
those before us. We do not think the decision of the higher court in this case is necessarily
controlling on account of the divergences noted in the federal statute and the local statute,
but we find in the decision certain language of a general nature which appears to furnish the
clue to the correct disposition of the instant appeal. Conceding, therefore, without
necessarily having to decide, the assignments of error Nos. 1 and 2 are not well taken, we
would turn to the third assignment of error.
It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life
of its manager, who had had more than thirty-five years' experience in the manufacture of
cigars in the Philippines, to protect itself against the loss it might suffer by reason of the
death of its manager. We do not believe that this fact signifies that when the plaintiff
received P104,957.88 from the insurance on the life of its manager, it thereby realized a net
profit in this amount. It is true that the Income Tax Law, in exempting individual
beneficiaries, speaks of the proceeds of life insurance policies as income, but this is a very
slight indication of legislative intention. In reality, what the plaintiff received was in the
nature of an indemnity for the loss which it actually suffered because of the death of its
manager.
To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the
court:
It is earnestly pressed upon us that proceeds of life insurance paid on the death of the
insured are in fact capital, and cannot be taxed as income under the Sixteenth Amendment.
Eisner vs. Macomber, 252 U.S., 189, 207; Merchants' Loan & Trust Co. vs. Smietanka, 255
U.S., 509, 518. We are not required to meet this question. It is enough to sustain our
construction of the act to say that proceeds of a life insurance policy paid on the death of the
insured are not usually classed as income.
. . . Life insurance in such a case is like that of fire and marine insurance, a contract of
indemnity. Central Nat. Bank vs. Hume, 128 U.S., 195. The benefit to be gained by death has
no periodicity. It is a substitution of money value for something permanently lost, either in a
house, a ship, or a life. Assuming, without deciding, that Congress could call the proceeds of
such indemnity income, and validly tax it as such, we think that, in view of the popular
conception of the life insurance as resulting in a single addition of a total sum to the
resources of the beneficiary, and not in a periodical return, such a purpose on its part should
be express, as it certainly is not here.

Considering, therefore, the purport of the stipulated facts, considering the uncertainty of
Philippine law, and considering the lack of express legislative intention to tax the proceeds of
life insurance policies paid to corporate beneficiaries, particularly when in the exemption in
favor of individual beneficiaries in the chapter on this subject, the clause is inserted "exempt
from the provisions of this law," we deem it reasonable to hold the proceeds of the life
insurance policy in question as representing an indemnity and not taxable income.
The foregoing pronouncement will result in the judgment being reversed and in another
judgment being rendered in favor of the plaintiff and against the defendant for the sum of
P3,148.74. So ordered, without costs in either instance.
Avancea, C.J., Street, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur.

EN BANC
G.R. No. L-6114

October 30, 1954

SOUTHERN LUZON EMPLOYEES' ASSOCIATION, plaintiff,


vs.
JUANITA GOLPEO, ET AL., defendants-appellants;
AQUILINO MALOLES , ET AL., defendants-appellees;
ELSIE HICBAN, ET AL., defendants;
MARCELINO CONCEPCION, ET AL., intervenors-appellants.
Enrique Al. Capistrano, Pio O. Golfeo, Jose E. Erfe and Hilario Mutuc for appellants.
Manuel Alvero and Elden B. Brion for appellees.
Juan A. Baes for defendant Elsie Hicban.
PARAS, C.J.:
The plaintiff, Southern Luzon Employees' Association is composed of laborers and employees
of Laguna tayabas Bus Co., and Batangas Transportation Company, and one of its purposes is
mutual aid of its members and their defendants in case of death. Roman A. Concepcion was a
member until his death on December 13, 1950. The association adopted on September 17,
1949 the following resolution:
RESOLVED: That a family record card of each member be printed wherein the members will
put down his dependents and/or beneficiaries.
BE IT RESOLVED, FURTHER, that a member may, if he chooses, put down his common-law
wife as his beneficiary and/or children had with her as the case may be; that in case of a
widower, he may put down his legitimate children with the first marriage who are below 21
years of age, single, and may at the same time, also name his common-law wife, if he has
any, as dependents and/or beneficiaries; and
BE IT RESOLVED: That such person so named by the member will be sole persons to be
recognized by the Association regarding claims for condolence contributions.
In the form required by the association to be accomplished by its members, with reference to
the death benefit, Roman A. Concepcion listed as his beneficiaries Aquilina Maloles, Roman
M. Concepcion, Jr., Estela M. Concepcion, Rolando M. Concepcion and Robin M. Concepcion.
After the death of Roman A. Concepcion, the association was able to collect voluntary
contributions from its members amounting to P2,5055. Three sets of claimants presented
themselves, namely, (1) Juanita Golpeo, legal wife of Roman A. Concepcion, and her children,
named beneficiaries by the deceased; and (3) Elsie Hicban, another common law wife of
Roman A. Concepcion, and her child. The plaintiff association was accordingly constrained to
institute in the Court of First Instance of Laguna the present action for interpleading against
the three conflicting claimants as defendants. Marcelino and Josefina Concepcion, children of
the deceased Roman A. Concepcion with Juanita Golpeo, intervened in their own rights,
aligning themselves with the defendants, Juanita Golpeo and her minor children. After
hearing, the court rendered a decision, declaring the defendants Aquilina Maloles and her

children the sole beneficiaries of the sum of P2,505.00, and ordering the plaintiff to deliver
said amount to them. From this decision only the defendants Juanita Golpeo and her minor
children and the intervenors Marcelino and Josefina Concepcion have appealed to this court.
The decision is based mainly on the theory that the contract between the plaintiff and the
deceased Roman A. Concepcion partook of the nature of an insurance and that, therefore,
the amount in question belonged exclusively to the beneficiaries, invoking the following
pronouncements of this Court in the case of Del Val vs. Del Val, 29 Phil., 534:
With the finding of the trial court that the proceeds of the life-insurance policy belongs
exclusively to the defendant as his individual and separate property, we agree. That the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of
the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary, and not of the heirs of the person whose life was insured, is the
doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of
section 428 of the Code of Commerce, which reads:
"The amounts which the underwriter must deliver to the person insured, in fulfillment of the
contract, shall be the property creditors of any kind whatsoever of the person who effected
the insurance in favor of the formers."
It is claimed by the attorney for the plaintiffs that the section just quoted in subordinated to
the provisions of the civil code as found in article 10035. This article reads:
"An heir by force of law surviving with others of the same character to a succession must
bring into the hereditary estate the property or securities he may bring into the hereditary
estate the property or securities he may have been received from the deceased during the
life of the same, by way of dowry, gift, or for any good consideration, in order to compute it
in fixing the legal portions and in the amount of the division."
Counsel also claims that the proceed of the insurance policy were donation or gift made by
the father during his lifetime to the defendant and that, as such, its ultimate destination is
determined by those provisions of the Civil Code which relate to donations, especially article
819. This article provides that "gifts made to children which are not betterments shall be
considered as part of their legal portion."
We cannot agree with these contention. The contract of life insurance is a special contract
and the destination of the proceeds thereof is determined by special laws which deal
exclusively with that subject. The Civil Code has no provisions which relate directly and
specifically to life-insurance contract or to the destination of life-insurance proceeds. That
subject is regulate exclusively by the Code of Commerce which provides for the terms of the
contract, the relations of the parties and the destination of the proceeds of the policy.
(Supra, pp. 540-541.)
It is argued for the appellants, however, that the Insurance Law is not applicable because the
plaintiff is a mutual benefit association as defined in section 1628 of the Revised
Administrative Code. This argument evidently ignore the fact that the trial court has no
considered the plaintiff as a regular insurance company but merely ruled that the death

benefit in question is analogous to an insurance. Moreover, section 1628 of the Revised


Administrative Code defines a mutual benefit association as one, among others, "providing
for any method of accident or life insurance among its members out of dues or assessments
collected from the membership." The comparison made in the appealed decision is,
therefore, well taken.
Appellant also contend that the stipulation between the plaintiff and the deceased Roman A.
Concepcion regarding the specification of the latter's beneficiaries, and the resolution of
September 17, 1949, are void for the being contrary to law, moral or public policy.
Specifically, the appellants cite article 2012 of the new Civil Code providing that "Any person
who is forbidden from receiving any donation under article 739 cannot be named beneficiary
of a life insurance policy and by the person who cannot make any donation to him, according
to said article." Inasmuch as, according to article 739 of the new Civil Code, a donation is
valid when made "between persons who are guilty or adultery or concubinage at the time of
the donation," it is alleged that the defendant-appellee Aquilina Maloles, cannot be named a
beneficiary, every assuming that the insurance law is applicable. Without considering the
intimation in the brief for the defendant appellees that appellant Juanita Golpeo, by her
silence and actions, had acquiesced in the illicit relations between her husband and appellee
Aquilina Maloles, appellant argument would certainly not apply to the children of Aquilina
likewise named beneficiaries by the deceased Roman A. Concepcion. As a matter of a fact the
new Civil Code recognized certain successional rights of illegitimate children. (Article 287.)
The other contention advanced rather exhaustively by counsel for appellants, and the
citations in support there of are either negative or rendered inapplicable by the decisive
considerations already stated. In this connection it is noteworthy that the estate of the
deceased Roman A. Concepcion was not entirely left without anything legally due it since it is
an admitted fact that the sum of P2,500 was paid by Laguna Tayabas Bus Co., employer of
the deceased to the appellants under the Workmen's Compensation Act. Wherefore, the
appealed decision is affirmed, and it is so ordered without costs.
Bengzon, Jugo and Bautista Angelo, JJ., concur.
Padilla and Reyes, A., JJ., concur in the result.
Separate Opinions
REYES, J.B.L., J., concurring:
I concur in the result for the reason that the contract here involved was perfected before the
new Civil Code took effect, and hence its provisions cannot be made to apply retroactively.
Concepcion and Montemayor, JJ., concur.

EN BANC
G.R. No. L-6114

October 30, 1954

SOUTHERN LUZON EMPLOYEES' ASSOCIATION, plaintiff,


vs.
JUANITA GOLPEO, ET AL., defendants-appellants;
AQUILINO MALOLES , ET AL., defendants-appellees;
ELSIE HICBAN, ET AL., defendants;
MARCELINO CONCEPCION, ET AL., intervenors-appellants.
Enrique Al. Capistrano, Pio O. Golfeo, Jose E. Erfe and Hilario Mutuc for appellants.
Manuel Alvero and Elden B. Brion for appellees.
Juan A. Baes for defendant Elsie Hicban.
PARAS, C.J.:
The plaintiff, Southern Luzon Employees' Association is composed of laborers and employees
of Laguna tayabas Bus Co., and Batangas Transportation Company, and one of its purposes is
mutual aid of its members and their defendants in case of death. Roman A. Concepcion was a
member until his death on December 13, 1950. The association adopted on September 17,
1949 the following resolution:
RESOLVED: That a family record card of each member be printed wherein the members will
put down his dependents and/or beneficiaries.
BE IT RESOLVED, FURTHER, that a member may, if he chooses, put down his common-law
wife as his beneficiary and/or children had with her as the case may be; that in case of a
widower, he may put down his legitimate children with the first marriage who are below 21
years of age, single, and may at the same time, also name his common-law wife, if he has
any, as dependents and/or beneficiaries; and
BE IT RESOLVED: That such person so named by the member will be sole persons to be
recognized by the Association regarding claims for condolence contributions.
In the form required by the association to be accomplished by its members, with reference to
the death benefit, Roman A. Concepcion listed as his beneficiaries Aquilina Maloles, Roman
M. Concepcion, Jr., Estela M. Concepcion, Rolando M. Concepcion and Robin M. Concepcion.
After the death of Roman A. Concepcion, the association was able to collect voluntary
contributions from its members amounting to P2,5055. Three sets of claimants presented
themselves, namely, (1) Juanita Golpeo, legal wife of Roman A. Concepcion, and her children,
named beneficiaries by the deceased; and (3) Elsie Hicban, another common law wife of
Roman A. Concepcion, and her child. The plaintiff association was accordingly constrained to
institute in the Court of First Instance of Laguna the present action for interpleading against
the three conflicting claimants as defendants. Marcelino and Josefina Concepcion, children of
the deceased Roman A. Concepcion with Juanita Golpeo, intervened in their own rights,
aligning themselves with the defendants, Juanita Golpeo and her minor children. After
hearing, the court rendered a decision, declaring the defendants Aquilina Maloles and her

children the sole beneficiaries of the sum of P2,505.00, and ordering the plaintiff to deliver
said amount to them. From this decision only the defendants Juanita Golpeo and her minor
children and the intervenors Marcelino and Josefina Concepcion have appealed to this court.
The decision is based mainly on the theory that the contract between the plaintiff and the
deceased Roman A. Concepcion partook of the nature of an insurance and that, therefore,
the amount in question belonged exclusively to the beneficiaries, invoking the following
pronouncements of this Court in the case of Del Val vs. Del Val, 29 Phil., 534:
With the finding of the trial court that the proceeds of the life-insurance policy belongs
exclusively to the defendant as his individual and separate property, we agree. That the
proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of
the person whose life was insured, and that such proceeds are the separate and individual
property of the beneficiary, and not of the heirs of the person whose life was insured, is the
doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of
section 428 of the Code of Commerce, which reads:
"The amounts which the underwriter must deliver to the person insured, in fulfillment of the
contract, shall be the property creditors of any kind whatsoever of the person who effected
the insurance in favor of the formers."
It is claimed by the attorney for the plaintiffs that the section just quoted in subordinated to
the provisions of the civil code as found in article 10035. This article reads:
"An heir by force of law surviving with others of the same character to a succession must
bring into the hereditary estate the property or securities he may bring into the hereditary
estate the property or securities he may have been received from the deceased during the
life of the same, by way of dowry, gift, or for any good consideration, in order to compute it
in fixing the legal portions and in the amount of the division."
Counsel also claims that the proceed of the insurance policy were donation or gift made by
the father during his lifetime to the defendant and that, as such, its ultimate destination is
determined by those provisions of the Civil Code which relate to donations, especially article
819. This article provides that "gifts made to children which are not betterments shall be
considered as part of their legal portion."
We cannot agree with these contention. The contract of life insurance is a special contract
and the destination of the proceeds thereof is determined by special laws which deal
exclusively with that subject. The Civil Code has no provisions which relate directly and
specifically to life-insurance contract or to the destination of life-insurance proceeds. That
subject is regulate exclusively by the Code of Commerce which provides for the terms of the
contract, the relations of the parties and the destination of the proceeds of the policy.
(Supra, pp. 540-541.)
It is argued for the appellants, however, that the Insurance Law is not applicable because the
plaintiff is a mutual benefit association as defined in section 1628 of the Revised
Administrative Code. This argument evidently ignore the fact that the trial court has no
considered the plaintiff as a regular insurance company but merely ruled that the death

benefit in question is analogous to an insurance. Moreover, section 1628 of the Revised


Administrative Code defines a mutual benefit association as one, among others, "providing
for any method of accident or life insurance among its members out of dues or assessments
collected from the membership." The comparison made in the appealed decision is,
therefore, well taken.
Appellant also contend that the stipulation between the plaintiff and the deceased Roman A.
Concepcion regarding the specification of the latter's beneficiaries, and the resolution of
September 17, 1949, are void for the being contrary to law, moral or public policy.
Specifically, the appellants cite article 2012 of the new Civil Code providing that "Any person
who is forbidden from receiving any donation under article 739 cannot be named beneficiary
of a life insurance policy and by the person who cannot make any donation to him, according
to said article." Inasmuch as, according to article 739 of the new Civil Code, a donation is
valid when made "between persons who are guilty or adultery or concubinage at the time of
the donation," it is alleged that the defendant-appellee Aquilina Maloles, cannot be named a
beneficiary, every assuming that the insurance law is applicable. Without considering the
intimation in the brief for the defendant appellees that appellant Juanita Golpeo, by her
silence and actions, had acquiesced in the illicit relations between her husband and appellee
Aquilina Maloles, appellant argument would certainly not apply to the children of Aquilina
likewise named beneficiaries by the deceased Roman A. Concepcion. As a matter of a fact the
new Civil Code recognized certain successional rights of illegitimate children. (Article 287.)
The other contention advanced rather exhaustively by counsel for appellants, and the
citations in support there of are either negative or rendered inapplicable by the decisive
considerations already stated. In this connection it is noteworthy that the estate of the
deceased Roman A. Concepcion was not entirely left without anything legally due it since it is
an admitted fact that the sum of P2,500 was paid by Laguna Tayabas Bus Co., employer of
the deceased to the appellants under the Workmen's Compensation Act. Wherefore, the
appealed decision is affirmed, and it is so ordered without costs.
Bengzon, Jugo and Bautista Angelo, JJ., concur.
Padilla and Reyes, A., JJ., concur in the result.
Separate Opinions
REYES, J.B.L., J., concurring:
I concur in the result for the reason that the contract here involved was perfected before the
new Civil Code took effect, and hence its provisions cannot be made to apply retroactively.
Concepcion and Montemayor, JJ., concur.

EN BANC
G.R. No. L-2227

August 31, 1948

Intestate estate of the late Esperanza J. Villanueva. MARIANO J. VILLANUEVA, claimantappellant,


vs.
PABLO ORO, administrator.
Nicolas P. Nonato for claimant and appellant.
Rodrigo J. Harder for administrator and appellee.
PARAS, J.:
The West Coast Life Insurance Company issued two policies of insurance on the life of
Esperanza J. Villanueva, one for two thousand pesos and maturing on April 1, 1943, and the
other for three thousand pesos and maturing on March 31, 1943. In both policies (with
corresponding variation in amount and date of maturity) the insurer agreed "to pay two
thousand pesos, at the home office of the Company, in San Francisco, California, to the
insured hereunder, if living, on the 1st day of April 1943, or to the beneficiary Bartolome
Villanueva, father of the insured, immediately upon receipt of due proof of the prior death of
the insured, Esperanza J. Villanueva, of La Paz, Philippine Islands, during the continuance of
this policy, with right on the part of the insured to change the beneficiary.
After the death of Bartolome Villanueva in 1940, the latter was duly substituted as
beneficiary under the policies by Mariano J. Villanueva, a brother of the insured. Esperanza J.
Villanueva survived the insurance period, for she died only on October 15, 1944, without,
however, collecting the insurance proceeds. Adverse claims for said proceeds were
presented by the estate of Esperanza J. Villanueva on the one hand and by Mariano J.
Villanueva on the other, which conflict was squarely submitted in the intestate proceedings
of Esperanza J. Villanueva pending in the Court of First Instance of Iloilo. From an order,
dated February 26, 1947, holding the estate of the insured is entitled to the insurance
proceeds, to the exclusion of the beneficiary, Mariano J. Villanueva, the latter has interposed
the present appeal.
The lower court committed no error. Under the policies, the insurer obligated itself to pay
the insurance proceeds (1) to the insured if the latter lived on the dates of maturity or (2) to
the beneficiary if the insured died during the continuance of the policies. The first
contingency of course excludes the second, and vice versa. In other words, as the insured
Esperanza J. Villanueva was living on April 1, and March 31, 1943, the proceeds are payable
exclusively to her estate unless she had before her death otherwise assigned the matured
policies. (It is not here pretended and much less proven, that there was such assignment.)
The beneficiary, Mariano J. Villanueva, could be entitled to said proceeds only in default of
the first contingency. To sustain the beneficiary's claim would be altogether eliminate from
the policies the condition that the insurer "agrees to pay . . . to the insured hereunder, if
living".

There is nothing there in the Insurance Law (Act No. 2427) that militates against the
construction placed by the lower court on the disputed condition appearing in the two
policies now under advisement. On the contrary, said law provides that "an insurance upon
life may be made payable on the death of the death of the person, or on his surviving a
specified period, or otherwise, contingently on the continuance or cessation of life" (section
165), and that "a policy of insurance upon life or health mat pass by transfer, will, or
succession, to any person, whether he has an insurable interest or not, and such person may
recover upon it whatever the insured might have recovered" (section 166).
Counsel for the beneficiary invokes the decision in Del Val vs. Del Val, 29 Phil., 534, 540, in
which it was held that "the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured, and that such
proceeds are the separate and individual property of the beneficiary, and not of the heirs of
the person whose life was insured." This citation is clearly not controlling, first, because it
does not appear therein that the insurance contract contained the stipulation appearing in
the policies issued on the life of Esperanza J. Villanueva and on which the appealed order in
the case at bar is based; and, secondly, because the Del Val doctrine was made upon the
authority of the provisions of the Code of Commerce relating to insurance (particularly
section 428) which had been expressly repealed by the present Insurance Act No. 2427.
Our pronouncement is not novel, since it tallies with the following typical American
authorities: "If a policy of insurance provides that the proceeds shall be payable to the
assured, if he lives to a certain date, and, in case of his death before that date, then they shall
be payable to the beneficiary designated, the interest of the beneficiary is a contingent one,
and the benefit of the policy will only inure to such beneficiary in case the assured dies
before the end of the period designated in the policy." (Couch, Cyclopedia of Insurance Law,
Vol. 2, sec. 343. p. 1023.) "Under endowment of tontine policies payable to the insured at
the expiration of a certain period, if alive, but providing for the payment of a stated sum to a
designated beneficiary in case of the insured death during the period mentioned, the insured
and the beneficiary take contingent interests. The interest of the insured in the proceeds of
the insurance depends upon his survival of the expiration of endowment period. Upon the
insured's death, within the period, the beneficiary will take, as against the personal
representative or the assignee of the insured. Upon the other hand, if the insured survives
the endowment period, the benefits are payable to him or to his assignee, notwithstanding a
beneficiary is designated in the policy." (29 Am. Jur., section 1277, pp. 952, 953.).
The appealed order is, therefore, hereby affirmed, and it is so ordered with costs against the
appellant.
Feria, Pablo, Perfecto, Bengzon, Briones, Padilla, and Tuason, JJ., concur.

SECOND DIVISION
G.R. No. L-54216 July 19, 1989
THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,
vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of First Instance of
Rizal, and RODOLFO C. DIMAYUGA, respondents.

We are of the opinion that his Honor, the respondent Judge, was in error in issuing the
questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise known
as Act No. 2427 as amended, the policy having been procured in 1968. Under the said law,
the beneficiary designated in a life insurance contract cannot be changed without the
consent of the beneficiary because he has a vested interest in the policy (Gercio v. Sun Life
Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International Assurance Co., Ltd., 72
Phil. 71).

PARAS, J.:
Challenged before Us in this petition for review on certiorari are the Orders of the
respondent Judge dated March 19, 1980 and June 10, 1980 granting the prayer in the
petition in Sp. Proc. No. 9210 and denying petitioner's Motion for Reconsideration,
respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy from the
petitioner company and designated his wife and children as irrevocable beneficiaries of said
policy.
Under date February 22, 1980 private respondent filed a petition which was docketed as Civil
Case No. 9210 of the then Court of First Instance of Rizal to amend the designation of the
beneficiaries in his life policy from irrevocable to revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the same
date, petitioner filed its Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge Gregorio
G. Pineda, presiding Judge of the then Court of First Instance of Rizal, Pasig Branch XXI,
denied petitioner's Urgent Motion, thus allowing the private respondent to adduce evidence,
the consequence of which was the issuance of the questioned Order granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an Order
June 10, 1980. Hence, this petition raising the following issues for resolution:
I
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES COULD BE
CHANGED OR AMENDED WITHOUT THE CONSENT OF ALL THE IRREVOCABLE BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF WHOM IS ALREADY
DECEASED WHILE THE OTHERS ARE ALL MINORS, COULD VALIDLY GIVE CONSENT TO THE
CHANGE OR AMENDMENT IN THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES.

In this regard, it is worth noting that the Beneficiary Designation Indorsement in the policy
which forms part of Policy Number 0794461 in the name of Rodolfo Cailles Dimayuga states
that the designation of the beneficiaries is irrevocable (Annex "A" of Petition in Sp. Proc. No.
9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions of this policy to the
contrary, inasmuch as the designation of the primary/contingent beneficiary/beneficiaries in
this Policy has been made without reserving the right to change said beneficiary/
beneficiaries, such designation may not be surrendered to the Company, released or
assigned; and no right or privilege under the Policy may be exercised, or agreement made
with the Company to any change in or amendment to the Policy, without the consent of the
said beneficiary/beneficiaries. (Petitioner's Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to
disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention the
law then applicable, it is only with the consent of all the beneficiaries that any change or
amendment in the policy concerning the irrevocable beneficiaries may be legally and validly
effected. Both the law and the policy do not provide for any other exception, thus,
abrogating the contention of the private respondent that said designation can be amended if
the Court finds a just, reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot be considered an effective ratification to
the change of the beneficiaries from irrevocable to revocable. Indubitable is the fact that all
the six (6) children named as beneficiaries were minors at the time,** for which reason, they
could not validly give their consent. Neither could they act through their father insured since
their interests are quite divergent from one another. In point is an excerpt from the Notes
and Cases on Insurance Law by Campos and Campos, 1960, readingThe insured ... can do nothing to divest the beneficiary of his rights without his consent. He
cannot assign his policy, nor even take its cash surrender value without the consent of the
beneficiary. Neither can the insured's creditors seize the policy or any right thereunder. The
insured may not even add another beneficiary because by doing so, he diminishes the
amount which the beneficiary may recover and this he cannot do without the beneficiary's
consent.

Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested rights of the irrevocable beneficiaries would be
rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law
binding on both of them and for so many times, this court has consistently issued
pronouncements upholding the validity and effectivity of contracts. Where there is nothing in
the contract which is contrary to law, good morals, good customs, public policy or public
order the validity of the contract must be sustained. Likewise, contracts which are the private
laws of the contracting parties should be fulfilled according to the literal sense of their
stipulations, if their terms are clear and leave no room for doubt as to the intention of the
contracting parties, for contracts are obligatory, no matter in what form they may be,
whenever the essential requisites for their validity are present (Phoenix Assurance Co., Ltd.
vs. United States Lines, 22 SCRA 675, Phil. American General Insurance Co., Inc. vs. Mutuc, 61
SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this Court
ruled that:
... it is settled that the parties may establish such stipulations, clauses, terms, and conditions
as they may want to include; and as long as such agreements are not contrary to law, good
morals, good customs, public policy or public order, they shall have the force of law between
them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its
validity and does not in any way violate the law, morals, customs, orders, etc. leaving no
reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the
change in the designation of beneficiaries could be validly effected means that it was never
within the contemplation of the parties. The lower court, in gratuitously providing for such
contingency, made a new contract for them, a proceeding which we cannot tolerate. Ergo,
We cannot help but conclude that the lower court acted in excess of its authority when it
issued the Order dated March 19, 1980 amending the designation of the beneficiaries from
"irrevocable" to "revocable" over the disapprobation of the petitioner insurance company.
WHEREFORE, premises considered, the questioned Orders of the respondent Judge are
hereby nullified and set aside.
SO ORDERED.

EN BANC
G.R. No. L-21642

July 30, 1966

SOCIAL SECURITY SYSTEM, petitioner-appellee,


vs.
CANDELARIA D. DAVAC, ET AL., respondents;
LOURDES Tuplano, respondent-appellant.
J. Ma. Francisco and N. G. Bravo for respondent-appellant.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Camilo D. Quiason and E. T. Duran
for petitioner-appellee.
BARRERA, J.:
This is an appeal from the resolution of the Social Security Commission declaring respondent
Candelaria Davac as the person entitled to receive the death benefits payable for the death
of Petronilo Davac.
The facts of the case as found by the Social Security Commission, briefly are: The late
Petronilo Davac, a former employee of Lianga Bay Logging Co., Inc. became a member of the
Social Security System (SSS for short) on September 1, 1957. As such member, he was
assigned SS I.D. No. 08-007137. In SSS form E-1 (Member's Record) which he accomplished
and filed with the SSS on November 21, 1957, he designated respondent Candelaria Davac as
his beneficiary and indicated his relationship to her as that of "wife". He died on April 5, 1959
and, thereupon, each of the respondents (Candelaria Davac and Lourdes Tuplano) filed their
claims for death benefit with the SSS. It appears from their respective claims and the
documents submitted in support thereof, that the deceased contracted two marriages, the
first, with claimant Lourdes Tuplano on August 29, 1946, who bore him a child, Romeo Davac,
and the second, with Candelaria Davac on January 18, 1949, with whom he had a minor
daughter Elizabeth Davac. Due to their conflicting claims, the processing thereof was held in
abeyance, whereupon the SSS filed this petition praying that respondents be required to
interpose and litigate between themselves their conflicting claims over the death benefits in
question.1wph1.t
On February 25, 1963, the Social Security Commission issued the resolution referred to
above, Not satisfied with the said resolution, respondent Lourdes Tuplano brought to us the
present appeal.
The only question to be determined herein is whether or not the Social Security Commission
acted correctly in declaring respondent Candelaria Davac as the person entitled to receive
the death benefits in question.
Section 13, Republic Act No. 1161, as amended by Republic Act No. 1792, in force at the time
Petronilo Davac's death on April 5, 1959, provides:
1. SEC. 13. Upon the covered employee's death or total and permanent disability under such
conditions as the Commission may define, before becoming eligible for retirement and if

either such death or disability is not compensable under the Workmen's Compensation Act,
he or, in case of his death, his beneficiaries, as recorded by his employer shall be entitled to
the following benefit: ... . (emphasis supplied.)
Under this provision, the beneficiary "as recorded" by the employee's employer is the one
entitled to the death benefits. In the case of Tecson vs. Social Security System, (L-15798,
December 28, 1961), this Court, construing said Section 13, said:
It may be true that the purpose of the coverage under the Social Security System is
protection of the employee as well as of his family, but this purpose or intention of the law
cannot be enforced to the extent of contradicting the very provisions of said law as
contained in Section 13, thereof, ... . When the provision of a law are clear and explicit, the
courts can do nothing but apply its clear and explicit provisions (Velasco vs. Lopez, 1 Phil,
270; Caminetti vs. U.S., 242 U.S. 470, 61 L. ed. 442).
But appellant contends that the designation herein made in the person of the second and,
therefore, bigamous wife is null and void, because (1) it contravenes the provisions of the
Civil Code, and (2) it deprives the lawful wife of her share in the conjugal property as well as
of her own and her child's legitime in the inheritance.
As to the first point, appellant argues that a beneficiary under the Social Security System
partakes of the nature of a beneficiary in life insurance policy and, therefore, the same
qualifications and disqualifications should be applied.
Article 2012 of the New Civil Code provides:
ART. 2012. Any person who is forbidden from receiving any donation under Article 739
cannot be named beneficiary of a life insurance policy by the person who cannot make any
donation to him according to said article.
And Article 739 of the same Code prescribes:
ART. 739. The following donations shall be void:
(1) Those made between persons who were guilty of adultery or concubinage at the time of
the donation;
xxx

xxx

xxx

Without deciding whether the naming of a beneficiary of the benefits accruing from
membership in the Social Security System is a donation, or that it creates a situation
analogous to the relation of an insured and the beneficiary under a life insurance policy, it is
enough, for the purpose of the instant case, to state that the disqualification mentioned in
Article 739 is not applicable to herein appellee Candelaria Davac because she was not guilty
of concubinage, there being no proof that she had knowledge of the previous marriage of her
husband Petronilo.1

Regarding the second point raised by appellant, the benefits accruing from membership in
the Social Security System do not form part of the properties of the conjugal partnership of
the covered member. They are disbursed from a public special fund created by Congress in
pursuance to the declared policy of the Republic "to develop, establish gradually and perfect
a social security system which ... shall provide protection against the hazards of disability,
sickness, old age and death."2
The sources of this special fund are the covered employee's contribution (equal to 2- per
cent of the employee's monthly compensation);3 the employer's contribution (equivalent to
3- per cent of the monthly compensation of the covered employee);4 and the Government
contribution which consists in yearly appropriation of public funds to assure the maintenance
of an adequate working balance of the funds of the System.5 Additionally, Section 21 of the
Social Security Act, as amended by Republic Act 1792, provides:
SEC. 21. Government Guarantee. The benefits prescribed in this Act shall not be
diminished and to guarantee said benefits the Government of the Republic of the Philippines
accepts general responsibility for the solvency of the System.
From the foregoing provisions, it appears that the benefit receivable under the Act is in the
nature of a special privilege or an arrangement secured by the law, pursuant to the policy of
the State to provide social security to the workingmen. The amounts that may thus be
received cannot be considered as property earned by the member during his lifetime. His
contribution to the fund, it may be noted, constitutes only an insignificant portion thereof.
Then, the benefits are specifically declared not transferable,6 and exempted from tax legal
processes, and lien.7 Furthermore, in the settlement of claims thereunder the procedure to
be observed is governed not by the general provisions of law, but by rules and regulations
promulgated by the Commission. Thus, if the money is payable to the estate of a deceased
member, it is the Commission, not the probate or regular court that determines the person
or persons to whom it is payable.8 that the benefits under the Social Security Act are not
intended by the lawmaking body to form part of the estate of the covered members may be
gathered from the subsequent amendment made to Section 15 thereof, as follows:
SEC. 15. Non-transferability of benefit. The system shall pay the benefits provided for in
this Act to such persons as may be entitled thereto in accordance with the provisions of this
Act. Such benefits are not transferable, and no power of attorney or other document
executed by those entitled thereto in favor of any agent, attorney, or any other individual for
the collection thereof in their behalf shall be recognized except when they are physically and
legally unable to collect personally such benefits: Provided, however, That in the case of
death benefits, if no beneficiary has been designated or the designation there of is void, said
benefits shall be paid to the legal heirs in accordance with the laws of succession. (Rep. Act
2658, amending Rep. Act 1161.)
In short, if there is a named beneficiary and the designation is not invalid (as it is not so in
this case), it is not the heirs of the employee who are entitled to receive the benefits (unless
they are the designated beneficiaries themselves). It is only when there is no designated
beneficiaries or when the designation is void, that the laws of succession are applicable. And
we have already held that the Social Security Act is not a law of succession.9

Wherefore, in view of the foregoing considerations, the resolution of the Social Security
Commission appealed from is hereby affirmed, with costs against the appellant.
So ordered.

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