Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-36413September 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 Ofce 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 afrmed, with some
modifcations, 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, efective from 18 April
1967 to 18 April 1968, covering a Willys jeep with
Motor No. ET-03023 Serial No. 351672, and Plate No.
J-21536, Quezon City, 1967. The insurance coverage
was for "own damage" not to exceed P600.00 and
"third-party liability" in the amount of P20,000.00.
During the efectivity 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 fled 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 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
plaintif, claiming that the fault in the accident was
solely imputable to the PANTRANCO.
Sio Choy, however, later fled a separate answer with
a cross-claim against the herein petitioner wherein
he alleged that he had actually paid the plaintif,
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 efectivity of such insurance
contract, which policy was in full force and efect
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 fle 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 plaintif 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
plaintif.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing fndings of
this Court judgment is hereby rendered in favor of
the plaintif 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
plaintif 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 afrmed
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 plaintif Martin C. Vallejos.
It ruled, however, that the San Leon Rice Mill, Inc.
has no obligation to indemnify or reimburse the
petitioner insurance company for whatever amount it
has been ordered to pay on its policy, since the San
Leon Rice Mill, Inc. is not a privy to the contract of
insurance between Sio Choy and the insurance
company. 2
Hence, the present recourse by petitioner insurance
company.
The petitioner prays for the reversal of the appellate
court's judgment, or, in the alternative, to order the
San Leon Rice Mill, Inc. to reimburse petitioner any
amount, in excess of one-half (1/2) of the entire
amount of damages, petitioner may be ordered to pay
jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course
to the same, but "only insofar as it concerns the
alleged liability of respondent San Leon Rice Mill,
Inc. to petitioner, it being understood that no other
aspect of the decision of the Court of Appeals shall
be reviewed, hence, execution may already issue in
favor of respondent Martin C. Vallejos against the
respondents, without prejudice to the determination
of whether or not petitioner shall be entitled to
reimbursement by respondent San Leon Rice Mill,
Inc. for the whole or part of whatever the former may
pay on the P20,000.00 it has been adjudged to pay
respondent Vallejos." 3
However, in order to determine the alleged liability of
respondent San Leon Rice Mill, Inc. to petitioner, it is
important to determine frst the nature or basis of
the liability of petitioner to respondent Vallejos, as
compared to that of respondents Sio Choy and San
Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved
are (1) whether the trial court, as upheld by the
Court of Appeals, was correct in holding petitioner
and respondents Sio Choy and San Leon Rice Mill,
Inc. "solidarily liable" to respondent Vallejos; and (2)
whether petitioner is entitled to be reimbursed by
respondent San Leon Rice Mill, Inc. for whatever
amount petitioner has been adjudged to pay
respondent Vallejos on its insurance policy.
As to the frst issue, it is noted that the trial court
found, as afrmed by the appellate court, that
petitioner and respondents Sio Choy and San Leon
Rice Mill, Inc. are jointly and severally liable to
respondent Vallejos.
We do not agree with the aforesaid ruling. We hold
instead that it is only respondents Sio Choy and San
Leon Rice Mill, Inc, (to the exclusion of the petitioner)
that are solidarily liable to respondent Vallejos for
the damages awarded to Vallejos.
It must be observed that respondent Sio Choy is
made liable to said plaintif 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 trafc
regulations at least twice within the next preceding
two months.
If the owner was not in the motor vehicle, the
provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of
liability of respondent San Leon Rice Mill, Inc. to
plaintif Vallejos, the former being the employer of
the driver of the Willys jeep at the time of the motor
vehicle mishap, is Article 2180 of the Civil Code
which reads:
Art. 2180. The obligation imposed by article 2176 is
demandable not only for one's own acts or
omissions, but also for those of persons for whom
one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by
their employees and household helpers acting within
the scope of their assigned tasks, even though the
former are not engaged 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.
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
On the other hand, the basis of petitioner's liability
is its insurance contract with respondent Sio Choy. If
petitioner is adjudged to pay respondent Vallejos in
the amount of not more than P20,000.00, this is on
account of its being the insurer of respondent Sio
Choy under the third party liability clause included
in the private car comprehensive policy existing
between petitioner and respondent Sio Choy at the
time of the complained vehicular accident.
In Guingon vs. Del Monte, 5 a passenger of a jeepney
had just alighted therefrom, when he was bumped by
another passenger jeepney. He died as a result
thereof. In the damage suit fled 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, afrmed 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, 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 defned 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
qualifcation 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 qualifcation 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 qualifcation made in the
decision of the trial court to the efect 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
afrming 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 frst 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 efect of payment inures to the insurer without
any formal assignment or any express stipulation to
that efect 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 ofer to pay, the creditor may choose
which ofer 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 afrmed by the Court
of Appeals, is hereby AFFIRMED, with the
modifcation above-mentioned. Without
pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52756October 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 fve 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 fve
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 fled
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 afrmed the City Court's decision
in toto, which CFI decision was afrmed by the
Court of Appeals, with the modifcation 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 qualifcation 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 plaintif'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 defciency 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 fnd 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 fling a defciency
claim against the wrongdoer. Citing Article 2207,
New Civil Code, to the efect that if the amount paid
by an insurance company does not fully cover the
loss, the aggrieved party shall be entitled to recover
the defciency 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 fle a defciency claim
against San Miguel Corporation is with legal basis,
without prejudice to the insurer's right of
subrogation, nevertheless when Manila Mahogany
executed another release claim (Exhibit K)
discharging San Miguel Corporation from "all
actions, claims, demands and rights of action that
now exist or hereafter arising out of or as a
consequence of the accident" after the insurer had
paid the proceeds of the policy- the compromise
agreement of P5,000.00 being based on the
insurance policy-the insurer is entitled to recover
from the insured the amount of insurance money
paid (Metropolitan Casualty Insurance Company of
New York 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
nullifed. (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
defciency. ... 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 fle a defciency 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 sufcient to cover the
damages sufered 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 specifc 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.
Republic of the Philippines
SUPREME COURT
Manila
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 fled 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
sufered 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, fled a Motion for Bill
of Particulars and a supplemental motion thereto. In
compliance therewith, PANMALAY clarifed, 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 fled 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 indemnifcation
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 fled the present
petition for review.
After private respondents fled its comment to the
petition, and petitioner fled 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 fnds merit in the petition.
PANMALAY alleged in its complaint that, pursuant to
a motor vehicle insurance policy, it had indemnifed
CANLUBANG for the damage to the insured car
resulting from a trafc 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 plaintifs 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 efecting
"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].
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 defne 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
diferentiated from Sections I and IV-1 which refer to
"Third Party Liability" coverage (liabilities arising
from the death of, or bodily injuries sufered 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 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; Pacifc 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].
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)by fre, external explosion, self ignition or
lightning or burglary, housebreaking or theft;
(c)by malicious act;
(d)whilst in transit (including the processes of
loading and unloading) incidental to such transit by
road, rail, inland, waterway, lift or elevator.
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, specifcally 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 fed the scene [Record, p. 20], CANLUBANG
fled its claim with PANMALAY for indemnifcation 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, specifcally
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 frst
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 defned
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 efect 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 qualifcation, 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
specifc 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. fnds it noteworthy that the
meaning advanced by PANMALAY regarding the
coverage of Section III-1(a) of the policy is undeniably
more benefcial 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 efect advocates for a more
comprehensive coverage of insured risks. And this,
in the fnal analysis, is more in keeping with the
rationale behind the various rules on the
interpretation of insurance contracts favoring the
assured or benefciary so as to efect 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 fling 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.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 132607May 5, 1999
CEBU SHIPYARD AND ENGINEERING WORKS,
INC., petitioner,
vs.
WILLIAM LINES, INC. and PRUDENTIAL
GUARANTEE and ASSURANCE COMPANY, INC.,
respondents.

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court seeking a
reversal of the decision of the Court of Appeal 1
which afrmed the decision of the trial court of
origin fnding the petitioner herein, Cebu Shipyard
and Engineering Works, Inc. (CSEW) negligent and
liable for damages to the private respondent, William
Lines, Inc., and to the insurer, Prudential Guarantee
Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW)
is a domestic corporation engaged in the business of
dry-docking and repairing of marine vessels while
the private respondent, Prudential Guarantee and
Assurance, Inc. (Prudential), also a domestic
corporation is in the non-life insurance business.
William Lines, Inc. (plaintif below) is in the shipping
business. It the owner of M/V Manila City, a luxury
passenger-cargo vessel, which caught fre and sank
on February 16, 1991. At the time of the unfortunate
occurrence sued upon, subject vessel was insured
with Prudential for P45,000,000.00 pesos for hull
and machinery. The Hull Policy included an
"Additional Perils (INCHMAREE)" Clause covering
loss of or damage to the vessel through the
negligence of, among others, ship repairmen. The
Policy provided as follows:
Subject to the conditions of this Policy, this
insurance also covers loss of or damage to Vessel
directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided
such Charterers and/or Repairers are not an
Assured hereunder.
xxx xxx xxx
provided such loss or damage has not resulted from
want of due diligence by the Assured, the Owners or
Managers of the Vessel, of any of them Masters,
Ofcers, Crew or Pilots are not to be considered
Owners within the meaning of this Clause should
they hold shares in the Vessel. 2
Petitioner CSEW was also insured by Prudential for
third party liability under a Shiprepairer's Legal
Liability Insurance Policy. The policy was for P10
million only, under the limited liability clause, to wit:
7.Limit of Liability
The limit of liability under this insurance, in respect
of any one accident or series of accidents, arising out
of one occurrence, shall be [P10 million], including
liability for costs and expense which are either:
(a)incurred with the written consent of the
underwriters hereon, or
(b)awarded against the Assured. 3
On February 5, 1991, William Lines, Inc. brought its
vessel, M/V Manila City, to the Cebu Shipyard in
Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held
between representatives of William Lines, Inc. and
CSEW to discuss the work to be undertaken on the
M/V Manila City.
The contracts, denominated as Work Orders, were
signed thereafter, with the following stipulations:
10.The Contractor shall replace at its own work and
at its own cost any work or material which can be
shown to be defective and which is communicated in
writing within one (1) month of redelivery of the
vessel or if the vessel was not in the Contractor's
Possession, the withdrawal of the Contractor's
workmen, or at its option to pay a sum equal to the
cost of such replacement at its own works. These
conditions shall apply to any such replacements.
11.Save as provided in Clause 10, the Contractor
shall not be under any liability to the Customer
either in contract or for delict or quasi-delict or
otherwise except for negligence and such liability
shall itself be subject to the following overriding
limitations and exceptions, namely:
(a)The total liability of the Contractor to the
Customer (over and above the liability to replace
under Clause 10) or of any sub-contractor shall be
limited in respect of any defect or event (and a series
of accidents arising out of the same defect or event
shall constitute one defect or event) to the sum of
Pesos Philippine Currency One Million only.
(b)In no circumstance whatsoever shall the liability
of the Contractor or any Sub-Contractor include any
sum in respect of loss of proft or loss of use of the
vessel or damages consequential on such loss of use
xxx xxx xxx
20.The insurance on the vessel should be
maintained by the customer and/or owner of the
vessel during the period the contract is in efect. 4
While the M/V Manila City was undergoing dry-
docking and repairs within the premises of CSEW,
the master, ofcers and crew of M/V Manila City
stayed in the vessel using their cabins as living
quarters. Other employees hired by William Lines to
do repairs and maintenance work on the vessel were
also present during the dry-docking.
On February 16, 1991, after subject vessel was
transferred to the docking quay, it caught fre and
sank, resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. fled a
complaint for damages against CSEW, alleging that
the fre which broke out in M/V Manila City was
caused by CSEW's negligence and lack of care.
On July 15, 1991 was fled an Amended Complaint
impleading Prudential as co-plaintif, after the latter
had paid William Lines, Inc. the value of the hull and
machinery insurance on the M/V Manila City. As a
result of such payment Prudential was subrogated to
the claim of P45 million, representing the value of
the said insurance it paid.
On June 10, 1994, the trial court a quo came out
with a judgment against CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor
of the plaintifs and against the defendant, ordering
the latter.
1.To pay unto plaintif Prudential Guarantee and
Assurance Inc., the subrogee, the amount of Forty-
fve Million (P45 million) Pesos, with interest at the
legal rate until full payment is made.
2.To pay unto plaintif, William Lines, Inc., the
amount of Fifty-six Million Seven Hundred Fifteen
Thousand (P56,715,000.00) Pesos representing loss
of income of M/V MANILA CITY, with interest at the
legal rate until full payment is made.
3.To pay unto plaintif, William Lines, Inc. the
amount of Eleven Million (P11 million) as payment,
in addition to what it received from the insurance
company to fully cover the injury or loss, in order to
replace the M/V MANILA CITY, with interest at the
legal rate until full payment is made;
4.To pay unto plaintif, William Lines, Inc. the sum
of Nine Hundred Twenty-Seven Thousand Thirty-nine
(P927,039.00) Pesos for the loss of fuel and lub (sic)
oil on board the vessel when she was completely
gutted by fre at defendant, Cebu Shipyard's quay,
with interest at the legal rate until full payment is
made;
5.To pay unto plaintif, William Lines, Inc. the sum
of Three Million Fifty-four Thousand Six Hundred
Seventy-seven Pesos and Ninety-fve centavos
(P3,054.677.95) as payment for the spare parts and
materials used in the M/V MANILA CITY during dry-
docking with interest at the legal rate until full
payment is made;
6.To pay unto plaintif William Lines, Inc., the sum
of Five Hundred Thousand (P500,000 00) Pesos in
moral damages;
7.To pay unto plaintif, William Lines, Inc. the
amount of Ten Million (P10,000.000.00) Pesos in
attorney's fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid
decision to the Court of Appeals. During the
pendency of the appeal, CSEW and William Lines
presented a "Joint Motion for Partial Dismissal" with
prejudice, on the basis of the amicable settlement
inked between Cebu Shipyard and William Lines
only.
On July 31, 1996, the Court of Appeals ordered the
partial dismissal of the case insofar as CSEW and
William Lines were concerned.
On September 3, 1997, the Court of Appeals
afrmed the appealed decision of the trial court,
ruling thus:
WHEREFORE, the judgment of the lower court
ordering the defendant, Cebu Shipyard and
Engineering Works, Inc. to pay the plaintif
Prudential Guarantee and Assurance, Inc., the
subrogee, the sum of P45 Million, with interest at the
legal rate until full payment is made, as contained in
the decision of Civil Case No. CEB-9935 is hereby
AFFIRMED.
With the denial of its motion for reconsideration by
the Court of Appeal's Resolution dated February 13,
1998, CSEW found its way to this court via the
present petition, contending that:
I. THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT CSEW
HAD "MANAGEMENT AND SUPERVISORY
CONTROL" OF THE M/V MANILA CITY AT THE
TIME THE FIRE BROKE OUT.
II THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN APPLYING THE DOCTRINE
OF RES IPSA LOQUITUR AGAINST CSEW.
IIITHE COURT OF APPEALS RULING HOLDING
CSEW NEGLIGENT AND THEREBY LIABLE FOR
THE LOSS OF THE M/V MANILA CITY IS BASED
FINDINGS OF FACT NOT SUPPORTED BY
EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR IN RULING CSEW'S EXPERT
EVIDENCE AS INADMISSIBLE OR OF NO
PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR IN RULING THAT
PRUDENTIAL HAS THE RIGHT OF SUBROGATION
AGAINST ITS OWN INSURED.
VIASSUMING ARGUENDO THAT PRUDENTIAL
HAS THE RIGHT OF SUBROGATION AND THAT
CSEW WAS NEGLIGENT IN THE PERFORMANCE OF
ITS OBLIGATIONS UNDER THE SHIPREPAIR
CONTRACTS. THE CONTRACTUAL PROVISIONS
LIMITING CSEW'S LIABILITY FOR NEGLIGENCE TO
A MAXIMUM OF P 1 MILLION IS NOT VALID,
CONTRARY TO THE APPLICABLE RULINGS OF THIS
HONORABLE COURT.
Petitioner's version of the events that led to the fre
runs as follows:
On February 13, 1991, the CSEW completed the
drydocking of M/V Manila City at its grave dock. It
was then transferred to the docking quay of CSEW
where the remaining repair to be done was the
replating of the top of Water Ballast Tank No. 12
(Tank Top No. 12) which was subcontracted by
CSEW to JNB General Services. Tank Top No. 12 was
at the rear section of the vessel, on level with the
fooring of the crew cabins located on the vessel's
second deck.
At around seven o'clock in the morning of February
16, 1991, the JNB workers trimmed and cleaned the
tank framing which involved minor hotworks
(welding/cutting works). The said work was
completed at about 10:00 a.m. The JNB workers
then proceeded to rig the steel plates, after which
they had their lunch break. The rigging was resumed
at 1:00 p.m.
While in the process of rigging the second steel plate,
the JNB workers noticed smoke coming from the
passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to
ascertain the origin of the smoke, he noticed that
smoke was gathering on the ceiling of the
passageway but did not see any fre as the crew
cabins on either side of the passageway were locked.
He immediately sought out the proprietor of JNB, Mr.
Buenavista, and the Safety ofcer CSEW, Mr. Aves,
who sounded the fre alarm. CSEW's fre brigade
immediately responded as well as the other fre
fghting units in Metro Cebu. However, there were no
WLI representative, ofcer or crew to guide the
fremen inside the vessel.
Despite the combined eforts of the fremen of the
Lapulapu City Fire Department, Mandaue Fire
Cordova Fire Department, Emergency Rescue Unit
Foundation, and fre brigade of CSEW, the fre was
not controlled until 2:00 a.m., of the following day,
February 17, 1991.
On the early morning of February 17, 1991, gusty
winds rekindled the fames on the vessel and fre
again broke out. Then the huge amounts of water
pumped into the vessel, coupled with the strong
current, caused the vessel to tilt until it capsized and
sank.
When M/V Manila City capsized, steel and angle
bars were noticed to have been newly welded along
the port side of the hull of the vessel, at the level of
the crew cabins. William Lines did not previously
apply for a permit to do hotworks on the said portion
of the ship as it should have done pursuant to its
work order with CSEW. 5
Respondent Prudential, on the other hand, theorized
that the fre broke out in the following manner:
At around eleven o'clock in the morning of February
16, 1991, the Chief Mate of M/V Manila City was
inspecting the various works being done by CSEW
on the vessel, when he saw that some workers of
CSEW were cropping out steel plates Tank Top No.
12 using acetylene, oxygen and welding torch. He
also observed that the rubber insulation wire coming
out of the air-conditioning unit was already burning,
prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses
saw smoke coming from Tank No. 12. The vessel's
reeferman reported such occurence to the Chief Mate
who immediately assembled the crew members to
put out the fre. When it was too hot for them to stay
on board and seeing that the fre cannot be
controlled, the vessel's crew were forced to withdraw
from CSEW's docking quay.
In the morning of February 17, 1991, M/V Manila
City sank. As the vessel was insured with Prudential
Guarantee, William Lines fled a claim for
constructive loss, and after a thorough investigation
of the surrounding circumstances of the tragedy,
Prudential Guaranteed found the said insurance
claim to be meritorious and issued a check in favor
of William Lines in the amount of P 45 million pesos
representing the total value of M/V Manila City's
hull and machinery insurance. 6
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for
adjudging it negligent and liable for damages for the
respondents, William Lines, Inc., and Prudential for
the loss of M/V Manila City. It is petitioner's
submission that the fnding of negligence by the
Court of Appeals is not supported by the evidence on
record, and contrary to what the Court of Appeals
found, petitioner did not have management and
control over M/V Manila City. Although it was
brought to the premises of CSEW for annual repair,
William Lines, Inc. retained control over the vessel as
the ship captain remained in command and the
ship's crew were still present. While it imposed
certain rules and regulations on William Lines, it
was in the exercise of due diligence and not an
indication of CSEW's exclusive control over subject
vessel. Thus, CSEW maintains that it did not have
exclusive control over the M/V Manila City and the
trial court and the Court of Appeals erred in
applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate
the well-established rule that factual fndings by the
Court of Appeals are conclusive on the parties and
are not reviewable by this Court. They are entitled to
great weight and respect, even fnality, especially
when, as in this case, the Court of Appeals afrmed
the factual fndings arrived at by the trial court. 7
When supported by sufcient evidence, fndings of
fact by the Court of Appeals afrming those of the
trial court, are not to be disturbed on appeal. The
rationale behind this doctrine is that review of the
fndings of fact of the Court of Appeals is not a
function that the Supreme Court normally
undertakes. 8
Here, the Court of Appeals and the Cebu Regional
Trial Court of origin are agreed that the fre which
caused the total loss of subject M/V Manila City was
due to the negligence of the employees and workers
of CSEW. Both courts found that the M/V Manila
City was under the custody and control of petitioner
CSEW, when the ill-fated vessel caught fre. The
decisions of both the lower court and the Court of
Appeals set forth clearly the evidence sustaining
their fnding of actionable negligence on the part of
CSEW. This factual fnding is conclusive on the
parties. The court discerns no basis for disturbing
such fnding frmly anchored on enough evidence. As
held in the case of Roblett Industrial Construction
Corporation vs. Court of Appeals, "in the absence of
any showing that the trial court failed to appreciate
facts and circumstances of weight and substance
that would have altered its conclusion, no compelling
reason exists for the Court to impinge upon matters
more appropriately within its province. 9
Furthermore, in petitions for review on certiorari,
only questions of law may be put into issue.
Questions of fact cannot be entertained. The fnding
of negligence by the Court of Appeals is a question
which this Court cannot look into as it would entail
going into factual matters on which the fnding of
negligence was based. Such an approach cannot be
allowed by this Court in the absence of clear showing
that the case falls under any of the exceptions 10 to
the well-established principle.
The fnding by the trial court and the Court of
Appeals that M/V Manila City caught fre and sank
by reason of the negligence of the workers of CSEW,
when the said vessel was under the exclusive
custody and control of CSEW is accordingly upheld.
Under the circumstances of the case, the doctrine of
res ipsa loquitur applies. For the doctrine of res ipsa
loquitur to apply to a given situation, the following
conditions must concur (1) the accident was of a
kind which does not ordinarily occur unless
someone is negligent; and (2) that the
instrumentality or agency which caused the injury
was under the exclusive control of the person
charged with negligence.
The facts and evidence on record reveal the
concurrence of said conditions in the case under
scrutiny. First, the fre that occurred and consumed
M/V Manila City would not have happened in the
ordinary course of things if reasonable care and
diligence had been exercised. In other words, some
negligence must have occurred. Second, the agency
charged with negligence, as found by the trial court
and the Court of Appeals and as shown by the
records, is the herein petitioner, Cebu Shipyard and
Engineering Works, Inc., which had control over
subject vessel when it was docketed for annual
repairs. So also, as found by the regional trial court,
"other responsible causes, including the conduct of
the plaintif, and third persons, are sufciently
eliminated by the evidence. 11
What is more, in the present case the trial court
found direct evidence to prove that the workers
and/or employees of CSEW were remiss in their duty
of exercising due diligence in the care of subject
vessel. The direct evidence substantiates the
conclusion that CSEW was really negligent. Thus,
even without applying the doctrine of res ipsa
loquitur, in light of the direct evidence on record, the
ineluctable conclusion is that the petitioner, Cebu
Shipyard and Engineering Works, Inc., was negligent
and consequently liable for damages to the
respondent, William Lines, Inc.
Neither is there tenability in the contention of
petitioner that the Court of Appeals erroneously
ruled on the inadmissibility of the expert testimonies
it (petitioner) introduced on the probable cause and
origin of the fre. Petitioner maintains that the Court
of Appeals erred in disregarding the testimonies of
the fre experts, Messrs. David Grey and Gregory
Michael Southeard, who testifed on the probable
origin of the fre in M/V Manila City. Petitioner avers
that since the said fre experts were one in their
opinion that the fre did not originate in the area of
Tank Top No. 12 where the JNB workers were doing
hotworks but on the crew accommodation cabins on
the portside No. 2 deck, the trial court and the Court
of Appeals should have given weight to such fnding
based on the testimonies of fre experts; petitioner
argues.
But courts are not bound by the testimonies of
expert witnesses. Although they may have probative
value, reception in evidence of expert testimonies is
within the discretion of the court. Section 49, Rule
130 of the Revised Rules of Court, provides:
Sec. 49. Opinion of expert witness. The opinion
of a witness on a matter requiring special knowledge,
skill, experience or training which he is shown to
possess, may be received in evidence.
The word "may" signifes that the use of opinion of
an expert witness as evidence is a prerogative of the
courts. It is never mandatory for judges to give
substantial weight to expert testimonies. If from the
facts and evidence on record, a conclusion is readily
ascertainable, there is no need for the judge to resort
to expert opinion evidence. In the case under
consideration, the testimonies of the fre experts
were not the only available evidence on the probable
cause and origin of the fre. There were witnesses
who were actually on board the vessel when the fre
occurred. Between the testimonies of the fre experts
who merely based their fndings and opinions on
interviews and the testimonies of those present
during the fre, the latter are of more probative value.
Verily, the trial court and the Court of Appeals did
not err in giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that
Prudential is not entitled to be subrogated to the
rights of William Lines, Inc., theorizing that (1) the
fre which gutted M/V Manila City was an excluded
risk and (2) it is a co-assured under the Marine Hull
Insurance Policy.
It is petitioner's submission that the loss of M/V
Manila City or damage thereto is expressly excluded
from the coverage of the insurance because the same
resulted from "want of due diligence by the Assured,
Owners or Managers" which is not included in the
risks insured against. Again, this theory of petitioner
is bereft of any factual or legal basis. It proceeds
from a wrong premise that the fre which gutted
subject vessel was caused by the negligence of the
employees of William Lines, Inc. To repeat, the issue
of who between the parties was negligent has already
been resolved against Cebu Shipyard and
Engineering Works, Inc. Upon proof of payment by
Prudential to William Lines, Inc. the former was
subrogated to the right of the latter to
indemnifcation from CSEW. As aptly ruled by the
Court of Appeals, the law on the manner is succinct
and clear, to wit:
Art. 2207.If the plaintifs 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 defciency from the person causing the
loss or injury. 12
Thus, when Prudential, after due verifcation of the
merit and validity of the insurance claim of William
Lines, Inc., paid the latter the total amount covered
by its insurance policy, it was subrogated to the right
of the latter to recover the insured loss from the
liable party, CSEW.
Petitioner theorizes further that there can be no
right of subrogation as it is deemed a co-assured
under the subject insurance policy. To buttress its
stance that it is a co-assured, petitioner placed
reliance on Clause 20 of the Work Order which
states:
20The insurance on the vessel should be
maintained by the customer and/or owner of the
vessel during the period the contract is in efect. 13
According to petitioner, under the aforecited clause,
William Lines, Inc., agreed to assume the risk of loss
of the vessel while under dry-dock or repair and to
such extent, it is benefted and efectively constituted
as a co-assured under the policy.
This theory of petitioner is devoid of sustainable
merit. Clause 20 of the Work Order in question is
clear in the sense that it requires William Lines to
maintain insurance on the vessel during the period
of dry-docking or repair. Concededly, such a
stipulation works to the beneft of CSEW as the ship
repairer. However, the fact that CSEW benefts from
the said stipulation does not automatically make it
as a co-assured of William Lines. The intention of the
parties to make each other a co-assured under an
insurance policy is to be gleaned principally from the
insurance contract or policy itself and not from any
other contract or agreement because the insurance
policy denominates the assured and the benefciaries
of the insurance. The hull and machinery insurance
procured by William Lines, Inc. from Prudential
named only "William Lines, Inc." as the assured.
There was no manifestation of any intention of
William Lines, Inc. to constitute CSEW as a co-
assured under subject policy. It is axiomatic that
when the terms of a contract are clear its
stipulations control. 14 Thus, when the insurance
policy involved named only William Lines, Inc. as the
assured thereunder, the claim of CSEW that it is a
co-assured is unfounded.
Then too, in the Additional Perils Clause of the same
Marine Insurance Policy, it is provided that:
Subject to the conditions of this Policy, this
insurance also covers loss of or damage to vessel
directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided
such Charterers and/or Repairers are not an
Assured hereunder 15 (emphasis supplied).
As correctly pointed out by respondent Prudential, if
CSEW were deemed a co-assured under the policy, it
would nullify any claim of William Lines, Inc. from
Prudential for any loss or damage caused by the
negligence of CSEW. Certainly, no shipowner would
agree to make a shiprepairer a co-assured under
such insurance policy; otherwise, any claim for loss
or damage under the policy would be invalidated.
Such result could not have been intended by William
Lines, Inc.
Finally, CSEW argues that even assuming that it was
negligent and therefore liable to William Lines Inc.,
by stipulation in the Contract or Work Order its
liability is limited to One Million (P1,000,000.00)
Pesos only, and Prudential a mere subrogee of
William Lines, Inc., should only be entitled to collect
the sum stipulated in the said contract.
Although in this jurisdiction, contracts of adhesion
have been consistently upheld as valid per se; as
binding as an ordinary contract, the Court
recognizes instances when reliance on such
contracts cannot be favored especially where the
facts and circumstances warrant that subject
stipulations be disregarded. 16 Thus, in ruling on
the validity and applicability of the stipulation
limiting the liability of CSEW for negligence to One
Million (P1,000,000.00) Pesos only, the facts and
circumstances vis-a-vis the nature of the provision
sought to be enforced should be considered, bearing
in mind the principles of equity and fair play.
It is worthy to note that M/V Manila City was
insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity
and sustainability of the claim of William Lines, Inc.,
for a total loss, Prudential conducted its own inquiry.
Upon thorough investigation by its hull surveyor,
M/V Manila City was found to be beyond economical
salvage and repair. 17 The evaluation of the average
adjuster also reported a constructive total loss. 18
The said claim of William Lines, Inc., was then found
to be valid and compensable such that Prudential
paid the latter the total value of its insurance claim.
Furthermore, it was ascertained that the
replacement cost of the vessel (the price of a vessel
similar to M/V Manila City), amounts to Fifty Million
(P 50,000,000.00) Pesos. 19
Considering the aforestated circumstances, let alone
the fact that negligence on the part of petitioner has
been sufciently proven, it would indeed be unfair
and inequitable to limit the liability of petitioner to
One Million Pesos only. As aptly held by the trial
court, "it is rather unconscionable if not
overstrained." To allow CSEW to limit its liability to
One Million Pesos notwithstanding the fact that the
total loss sufered by the assured and paid for by
Prudential amounted to Forty Five Million
(P45,000,000.00) Pesos would sanction the exercise
of a degree of diligence short of what is ordinarily
required because, then, it would not be difcult for
petitioner to escape liability by the simple expedient
of paying an amount very much lower than the
actual damage or loss sufered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is
hereby DENIED and the decision, dated September
3, 1997, and Resolution, dated February 13, 1998,
of the Court of Appeals AFFIRMED. No
pronouncement as to costs.1wphi1.nt
SO ORDERED.
DELSAN TRANSPORT LINES, INC., petitioner, vs.
THE HON. COURT OF APPEALS and AMERICAN
HOME ASSURANCE CORPORATION, respondents.
D E C I S I O N
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the
Decision[1] of the Court of Appeals in CA-G.R. CV
No. 39836 promulgated on June 17, 1996, reversing
the decision of the Regional Trial Court of Makati
City, Branch 137, ordering petitioner to pay private
respondent the sum of Five Million Ninety-Six
Thousand Six Hundred Thirty-Five Pesos and Fifty-
Seven Centavos (P5,096,635.57) and costs and the
Resolution[2] dated January 21, 1997 which denied
the subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for
brevity) entered into a contract of afreightment with
the petitioner, Delsan Transport Lines, Inc., for a
period of one year whereby the said common carrier
agreed to transport Caltexs industrial fuel oil from
the Batangas-Bataan Refnery to diferent parts of
the country. Under the contract, petitioner took on
board its vessel, MT Maysun, 2,277.314 kiloliters of
industrial fuel oil of Caltex to be delivered to the
Caltex Oil Terminal in Zamboanga City. The
shipment was insured with the private respondent,
American Home Assurance Corporation.
On August 14, 1986, MT Maysun set sail from
Batangas for Zamboanga City. Unfortunately, the
vessel sank in the early morning of August 16, 1986
near Panay Gulf in the Visayas taking with it the
entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the
sum of Five Million Ninety-Six Thousand Six
Hundred Thirty-Five Pesos and Fifty-Seven Centavos
(P5,096,635.57) representing the insured value of
the lost cargo. Exercising its right of subrogation
under Article 2207 of the New Civil Code, the private
respondent demanded of the petitioner the same
amount it paid to Caltex.
Due to its failure to collect from the petitioner
despite prior demand, private respondent fled a
complaint with the Regional Trial Court of Makati
City, Branch 137, for collection of a sum of money.
After the trial and upon analyzing the evidence
adduced, the trial court rendered a decision on
November 29, 1990 dismissing the complaint against
herein petitioner without pronouncement as to cost.
The trial court found that the vessel, MT Maysun,
was seaworthy to undertake the voyage as
determined by the Philippine Coast Guard per
Survey Certifcate Report No. M5-016-MH upon
inspection during its annual dry-docking and that
the incident was caused by unexpected inclement
weather condition or force majeure, thus exempting
the common carrier (herein petitioner) from liability
for the loss of its cargo.[3]
The decision of the trial court, however, was
reversed, on appeal, by the Court of Appeals. The
appellate court gave credence to the weather report
issued by the Philippine Atmospheric, Geophysical
and Astronomical Services Administration (PAGASA
for brevity) which showed that from 2:00 oclock to
8:00 oclock in the morning on August 16, 1986, the
wind speed remained at 10 to 20 knots per hour
while the waves measured from .7 to two (2) meters
in height only in the vicinity of the Panay Gulf where
the subject vessel sank, in contrast to herein
petitioners allegation that the waves were twenty
(20) feet high. In the absence of any explanation as
to what may have caused the sinking of the vessel
coupled with the fnding that the same was
improperly manned, the appellate court ruled that
the petitioner is liable on its obligation as common
carrier[4] to herein private respondent insurance
company as subrogee of Caltex. The subsequent
motion for reconsideration of herein petitioner was
denied by the appellate court.
Petitioner raised the following assignments of error
in support of the instant petition,[5] to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING
THE DECISION OF THE REGIONAL TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT
JUSTIFIED IN REBUTTING THE LEGAL
PRESUMPTION THAT THE VESSEL MT MAYSUN
WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING
THE DOCTRINE OF THE SUPREME COURT IN THE
CASE OF HOME INSURANCE CORPORATION V.
COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the
provision of Section 113 of the Insurance Code of the
Philippines, which states that in every marine
insurance upon a ship or freight, or freightage, or
upon any thing which is the subject of marine
insurance there is an implied warranty by the
shipper that the ship is seaworthy. Consequently,
the insurer will not be liable to the assured for any
loss under the policy in case the vessel would later
on be found as not seaworthy at the inception of the
insurance. It theorized that when private
respondent paid Caltex the value of its lost cargo, the
act of the private respondent is equivalent to a tacit
recognition that the ill-fated vessel was seaworthy;
otherwise, private respondent was not legally liable
to Caltex due to the latters breach of implied
warranty under the marine insurance policy that the
vessel was seaworthy.
The petitioner also alleges that the Court of Appeals
erred in ruling that MT Maysun was not seaworthy
on the ground that the marine ofcer who served as
the chief mate of the vessel, Francisco Berina, was
allegedly not qualifed. Under Section 116 of the
Insurance Code of the Philippines, the implied
warranty of seaworthiness of the vessel, which the
private respondent admitted as having been fulflled
by its payment of the insurance proceeds to Caltex of
its lost cargo, extends to the vessels complement.
Besides, petitioner avers that although Berina had
merely a 2nd ofcers license, he was qualifed to act
as the vessels chief ofcer under Chapter IV(403),
Category III(a)(3)(ii)(aa) of the Philippine Merchant
Marine Rules and Regulations. In fact, all the crew
and ofcers of MT Maysun were exonerated in the
administrative investigation conducted by the Board
of Marine Inquiry after the subject accident.[6]
In any event, petitioner further avers that private
respondent failed, for unknown reason, to present in
evidence during the trial of the instant case the
subject marine cargo insurance policy it entered into
with Caltex. By virtue of the doctrine laid down in
the case of Home Insurance Corporation vs. CA,[7]
the failure of the private respondent to present the
insurance policy in evidence is allegedly fatal to its
claim inasmuch as there is no way to determine the
rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I
Whether or not the payment made by the private
respondent to Caltex for the insured value of the lost
cargo amounted to an admission that the vessel was
seaworthy, thus precluding any action for recovery
against the petitioner.
II
Whether or not the non-presentation of the marine
insurance policy bars the complaint for recovery of
sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the
insured value of the lost cargo operates as waiver of
its (private respondent) right to enforce the term of
the implied warranty against Caltex under the
marine insurance policy. However, the same cannot
be validly interpreted as an automatic admission of
the vessels seaworthiness by the private respondent
as to foreclose recourse against the petitioner for any
liability under its contractual obligation as a
common carrier. The fact of payment grants the
private respondent subrogatory right which enables
it to exercise legal remedies that would otherwise be
available to Caltex as owner of the lost cargo against
the petitioner common carrier.[8] Article 2207 of the
New Civil Code provides that:
Art. 2207. If the plaintifs 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 defciency from the person causing the
loss or injury.
The right of subrogation has its roots in equity. It is
designed to promote and to accomplish justice and is
the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice and good
conscience ought to pay.[9] It 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 by the insurance company of the
insurance claim.[10] Consequently, the payment
made by the private respondent (insurer) to Caltex
(assured) operates as an equitable assignment to the
former of all the remedies which the latter may have
against the petitioner.
From the nature of their business and for reasons of
public policy, common carriers are bound to observe
extraordinary diligence in the vigilance over the
goods and for the safety of passengers transported by
them, according to all the circumstances of each
case.[11] In the event of loss, destruction or
deterioration of the insured goods, common carriers
shall be responsible unless the same is brought
about, among others, by food, storm, earthquake,
lightning or other natural disaster or calamity.[12] In
all other cases, if the goods are lost, destroyed or
deteriorated, common carriers are presumed to have
been at fault or to have acted negligently, unless they
prove that they observed extraordinary diligence.[13]
In order to escape liability for the loss of its cargo of
industrial fuel oil belonging to Caltex, petitioner
attributes the sinking of MT Maysun to fortuitous
event or force majeure. From the testimonies of
Jaime Jarabe and Francisco Berina, captain and
chief mate, respectively of the ill-fated vessel, it
appears that a sudden and unexpected change of
weather condition occurred in the early morning of
August 16, 1986; that at around 3:15 oclock in the
morning a squall (unos) carrying strong winds with
an approximate velocity of 30 knots per hour and big
waves averaging eighteen (18) to twenty (20) feet
high, repeatedly bufeted MT Maysun causing it to
tilt, take in water and eventually sink with its cargo.
[14] This tale of strong winds and big waves by the
said ofcers of the petitioner however, was efectively
rebutted and belied by the weather report[15] from
the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the
independent government agency charged with
monitoring weather and sea conditions, showing that
from 2:00 oclock to 8:00 oclock in the morning on
August 16, 1986, the wind speed remained at ten
(10) to twenty (20) knots per hour while the height of
the waves ranged from .7 to two (2) meters in the
vicinity of Cuyo East Pass and Panay Gulf where the
subject vessel sank. Thus, as the appellate court
correctly ruled, petitioners vessel, MT Maysun, sank
with its entire cargo for the reason that it was not
seaworthy. There was no squall or bad weather or
extremely poor sea condition in the vicinity when the
said vessel sank.
The appellate court also correctly opined that the
petitioners witnesses, Jaime Jarabe and Francisco
Berina, ship captain and chief mate, respectively, of
the said vessel, could not be expected to testify
against the interest of their employer, the herein
petitioner common carrier.
Neither may petitioner escape liability by presenting
in evidence certifcates[16] that tend to show that at
the time of dry-docking and inspection by the
Philippine Coast Guard, the vessel MT Maysun, was
ft for voyage. These pieces of evidence do not
necessarily take into account the actual condition of
the vessel at the time of the commencement of the
voyage. As correctly observed by the Court of
appeals:
At the time of dry-docking and inspection, the ship
may have appeared ft. The certifcates issued,
however, do not negate the presumption of
unseaworthiness triggered by an unexplained
sinking. Of certifcates issued in this regard,
authorities are likewise clear as to their probative
value, (thus):
Seaworthiness relates to a vessels actual condition.
Neither the granting of classifcation or the issuance
of certifcates establishes seaworthiness. (2-A
Benedict on Admiralty, 7-3, Sec. 62)
And also:
Authorities are clear that diligence in securing
certifcates of seaworthiness does not satisfy the
vessel owners obligation. Also securing the approval
of the shipper of the cargo, or his surveyor, of the
condition of the vessel or her stowage does not
establish due diligence if the vessel was in fact
unseaworthy, for the cargo owner has no obligation
in relation to seaworthiness. (Ibid.)[17]
Additionally, the exoneration of MT Maysuns ofcers
and crew by the Board of Marine Inquiry merely
concerns their respective administrative liabilities. It
does not in any way operate to absolve the petitioner
common carrier from its civil liability arising from its
failure to observe extraordinary diligence in the
vigilance over the goods it was transporting and for
the negligent acts or omissions of its employees, the
determination of which properly belongs to the
courts.[18] In the case at bar, petitioner is liable for
the insured value of the lost cargo of industrial fuel
oil belonging to Caltex for its failure to rebut the
presumption of fault or negligence as common
carrier[19] occasioned by the unexplained sinking of
its vessel, MT Maysun, while in transit.
Anent the second issue, it is our view and so hold
that the presentation in evidence of the marine
insurance policy is not indispensable in this case
before the insurer may recover from the common
carrier the insured value of the lost cargo in the
exercise of its subrogatory right. The subrogation
receipt, by itself, is sufcient to establish not only
the relationship of herein private respondent as
insurer and Caltex, as the assured shipper of the
lost cargo of industrial fuel oil, but also the amount
paid to settle the insurance claim. The right of
subrogation accrues simply upon payment by the
insurance company of the insurance claim.[20]
The presentation of the insurance policy was
necessary in the case of Home Insurance
Corporation v. CA[21] (a case cited by petitioner)
because the shipment therein (hydraulic engines)
passed through several stages with diferent parties
involved in each stage. First, from the shipper to the
port of departure; second, from the port of departure
to the M/S Oriental Statesman; third, from the M/S
Oriental Statesman to the M/S Pacifc Conveyor;
fourth, from the M/S Pacifc Conveyor to the port of
arrival; ffth, from the port of arrival to the arrastre
operator; sixth, from the arrastre operator to the
hauler, Mabuhay Brokerage Co., Inc. (private
respondent therein); and lastly, from the hauler to
the consignee. We emphasized in that case that in
the absence of proof of stipulations to the contrary,
the hauler can be liable only for any damage that
occurred from the time it received the cargo until it
fnally delivered it to the consignee. Ordinarily, it
cannot be held responsible for the handling of the
cargo before it actually received it. The insurance
contract, which was not presented in evidence in
that case would have indicated the scope of the
insurers liability, if any, since no evidence was
adduced indicating at what stage in the handling
process the damage to the cargo was sustained.
Hence, our ruling on the presentation of the
insurance policy in the said case of Home Insurance
Corporation is not applicable to the case at bar. In
contrast, there is no doubt that the cargo of
industrial fuel oil belonging to Caltex, in the case at
bar, was lost while on board petitioners vessel, MT
Maysun, which sank while in transit in the vicinity of
Panay Gulf and Cuyo East Pass in the early morning
of August 16, 1986.
WHEREFORE, the instant petition is DENIED. The
Decision dated June 17, 1996 of the Court of
Appeals in CA-G.R. CV No. 39836 is AFFIRMED.
Costs against the petitioner.
SO ORDERED.
FEDERAL EXPRESS CORPORATION, petitioner,
vs. AMERICAN HOME ASSURANCE COMPANY and
PHILAM INSURANCE COMPANY, INC.,
respondents.
D E C I S I O N
PANGANIBAN, J.:
Basic is the requirement that before suing to recover
loss of or damage to transported goods, the plaintif
must give the carrier notice of the loss or damage,
within the period prescribed by the Warsaw
Convention and/or the airway bill.
The Case
Before us is a Petition for Review[1] under Rule 45 of
the Rules of Court, challenging the June 4, 2001
Decision[2] and the September 21, 2001
Resolution[3] of the Court of Appeals (CA) in CA-GR
CV No. 58208. The assailed Decision disposed as
follows:
WHEREFORE, premises considered, the present
appeal is hereby DISMISSED for lack of merit. The
appealed Decision of Branch 149 of the Regional
Trial Court of Makati City in Civil Case No. 95-1219,
entitled American Home Assurance Co. and PHILAM
Insurance Co., Inc. v. FEDERAL EXPRESS
CORPORATION and/or CARGOHAUS, INC. (formerly
U-WAREHOUSE, INC.), is hereby AFFIRMED and
REITERATED.
Costs against the [petitioner and Cargohaus,
Inc.].[4]
The assailed Resolution denied petitioners Motion
for Reconsideration.
The Facts
The antecedent facts are summarized by the
appellate court as follows:
On January 26, 1994, SMITHKLINE Beecham
(SMITHKLINE for brevity) of Nebraska, USA delivered
to Burlington Air Express (BURLINGTON), an agent
of [Petitioner] Federal Express Corporation, a
shipment of 109 cartons of veterinary biologicals for
delivery to consignee SMITHKLINE and French
Overseas Company in Makati City, Metro Manila.
The shipment was covered by Burlington Airway Bill
No. 11263825 with the words, REFRIGERATE
WHEN NOT IN TRANSIT and PERISHABLE stamp
marked on its face. That same day, Burlington
insured the cargoes in the amount of $39,339.00
with American Home Assurance Company (AHAC).
The following day, Burlington turned over the
custody of said cargoes to Federal Express which
transported the same to Manila. The frst shipment,
consisting of 92 cartons arrived in Manila on
January 29, 1994 in Flight No. 0071-28NRT and was
immediately stored at [Cargohaus Inc.s] warehouse.
While the second, consisting of 17 cartons, came in
two (2) days later, or on January 31, 1994, in Flight
No. 0071-30NRT which was likewise immediately
stored at Cargohaus warehouse. Prior to the arrival
of the cargoes, Federal Express informed GETC
Cargo International Corporation, the customs broker
hired by the consignee to facilitate the release of its
cargoes from the Bureau of Customs, of the
impending arrival of its clients cargoes.
On February 10, 1994, DARIO C. DIONEDA
(DIONEDA), twelve (12) days after the cargoes
arrived in Manila, a non-licensed customs broker
who was assigned by GETC to facilitate the release of
the subject cargoes, found out, while he was about
to cause the release of the said cargoes, that the
same [were] stored only in a room with two (2) air
conditioners running, to cool the place instead of a
refrigerator. When he asked an employee of
Cargohaus why the cargoes were stored in the cool
room only, the latter told him that the cartons where
the vaccines were contained specifcally indicated
therein that it should not be subjected to hot or cold
temperature. Thereafter, DIONEDA, upon
instructions from GETC, did not proceed with the
withdrawal of the vaccines and instead, samples of
the same were taken and brought to the Bureau of
Animal Industry of the Department of Agriculture in
the Philippines by SMITHKLINE for examination
wherein it was discovered that the ELISA reading of
vaccinates sera are below the positive reference
serum.
As a consequence of the foregoing result of the
veterinary biologics test, SMITHKLINE abandoned
the shipment and, declaring total loss for the
unusable shipment, fled a claim with AHAC through
its representative in the Philippines, the Philam
Insurance Co., Inc. (PHILAM) which recompensed
SMITHKLINE for the whole insured amount of
THIRTY NINE THOUSAND THREE HUNDRED
THIRTY NINE DOLLARS ($39,339.00). Thereafter,
[respondents] fled an action for damages against the
[petitioner] imputing negligence on either or both of
them in the handling of the cargo.
Trial ensued and ultimately concluded on March 18,
1997 with the [petitioner] being held solidarily liable
for the loss as follows:
WHEREFORE, judgment is hereby rendered in favor
of [respondents] and [petitioner and its Co-Defendant
Cargohaus] are directed to pay [respondents], jointly
and severally, the following:
1. Actual damages in the amount of the peso
equivalent of US$39,339.00 with interest from the
time of the fling of the complaint to the time the
same is fully paid.
2. Attorneys fees in the amount of P50,000.00 and
3. Costs of suit.
SO ORDERED.
Aggrieved, [petitioner] appealed to [the CA].[5]
Ruling of the Court of Appeals
The Test Report issued by the United States
Department of Agriculture (Animal and Plant Health
Inspection Service) was found by the CA to be
inadmissible in evidence. Despite this ruling, the
appellate court held that the shipping Receipts were
a prima facie proof that the goods had indeed been
delivered to the carrier in good condition. We quote
from the ruling as follows:
Where the plaintif introduces evidence which
shows prima facie that the goods were delivered to
the carrier in good condition [i.e., the shipping
receipts], and that the carrier delivered the goods in
a damaged condition, a presumption is raised that
the damage occurred through the fault or negligence
of the carrier, and this casts upon the carrier the
burden of showing that the goods were not in good
condition when delivered to the carrier, or that the
damage was occasioned by some cause excepting the
carrier from absolute liability. This the [petitioner]
failed to discharge. x x x.[6]
Found devoid of merit was petitioners claim that
respondents had no personality to sue. This
argument was supposedly not raised in the Answer
or during trial.
Hence, this Petition.[7]
The Issues
In its Memorandum, petitioner raises the following
issues for our consideration:
I.
Are the decision and resolution of the Honorable
Court of Appeals proper subject for review by the
Honorable Court under Rule 45 of the 1997 Rules of
Civil Procedure?
II.
Is the conclusion of the Honorable Court of Appeals
petitioners claim that respondents have no
personality to sue because the payment was made by
the respondents to Smithkline when the insured
under the policy is Burlington Air Express is devoid
of merit correct or not?
III.
Is the conclusion of the Honorable Court of Appeals
that the goods were received in good condition,
correct or not?
IV.
Are Exhibits F and G hearsay evidence, and
therefore, not admissible?
V.
Is the Honorable Court of Appeals correct in ignoring
and disregarding respondents own admission that
petitioner is not liable? and
VI.
Is the Honorable Court of Appeals correct in ignoring
the Warsaw Convention?[8]
Simply stated, the issues are as follows: (1) Is the
Petition proper for review by the Supreme Court? (2)
Is Federal Express liable for damage to or loss of the
insured goods?
This Courts Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the
Court of Appeals from undisputed facts is a question
of law cognizable by the Supreme Court.[9]
In the present case, the facts are undisputed. As
will be shown shortly, petitioner is questioning the
conclusions drawn from such facts. Hence, this case
is a proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no
personality to sue -- thus, no cause of action against
it -- because the payment made to Smithkline was
erroneous.
Pertinent to this issue is the Certifcate of
Insurance[10] (Certifcate) that both opposing
parties cite in support of their respective positions.
They difer only in their interpretation of what their
rights are under its terms. The determination of
those rights involves a question of law, not a question
of fact. As distinguished from a question of law
which exists when the doubt or diference arises as
to what the law is on a certain state of facts -- there
is a question of fact when the doubt or diference
arises as to the truth or the falsehood of alleged
facts; or when the query necessarily invites
calibration of the whole evidence considering mainly
the credibility of witnesses, existence and relevancy
of specifc surrounding circumstance, their relation
to each other and to the whole and the probabilities
of the situation.[11]
Proper Payee
The Certifcate specifes that loss of or damage to the
insured cargo is payable to order x x x upon
surrender of this Certifcate. Such wording conveys
the right of collecting on any such damage or loss, as
fully as if the property were covered by a special
policy in the name of the holder itself. At the back of
the Certifcate appears the signature of the
representative of Burlington. This document has
thus been duly indorsed in blank and is deemed a
bearer instrument.
Since the Certifcate was in the possession of
Smithkline, the latter had the right of collecting or of
being indemnifed for loss of or damage to the
insured shipment, as fully as if the property were
covered by a special policy in the name of the holder.
Hence, being the holder of the Certifcate and having
an insurable interest in the goods, Smithkline was
the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the
consignee (Smithkline) executed a subrogation
Receipt[12] in favor of respondents. The latter were
thus authorized to fle claims and begin suit against
any such carrier, vessel, person, corporation or
government. Undeniably, the consignee had a legal
right to receive the goods in the same condition it
was delivered for transport to petitioner. If that right
was violated, the consignee would have a cause of
action against the person responsible therefor.
Upon payment to the consignee of an indemnity for
the loss of or damage to the insured goods, the
insurers entitlement to subrogation pro tanto --
being of the highest equity -- equips it with a cause
of action in case of a contractual breach or
negligence.[13] Further, the insurers subrogatory
right to sue for recovery under the bill of lading in
case of loss of or damage to the cargo is
jurisprudentially upheld.[14]
In the exercise of its subrogatory right, an insurer
may proceed against an erring carrier. To all intents
and purposes, it stands in the place and in
substitution of the consignee. A fortiori, both the
insurer and the consignee are bound by the
contractual stipulations under the bill of lading.[15]
Prescription of Claim
From the initial proceedings in the trial court up to
the present, petitioner has tirelessly pointed out that
respondents claim and right of action are already
barred. The latter, and even the consignee, never
fled with the carrier any written notice or complaint
regarding its claim for damage of or loss to the
subject cargo within the period required by the
Warsaw Convention and/or in the airway bill.
Indeed, this fact has never been denied by
respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as
agent of petitioner, states:
6. No action shall be maintained in the case of
damage to or partial loss of the shipment unless a
written notice, sufciently describing the goods
concerned, the approximate date of the damage or
loss, and the details of the claim, is presented by
shipper or consignee to an ofce of Burlington within
(14) days from the date the goods are placed at the
disposal of the person entitled to delivery, or in the
case of total loss (including non-delivery) unless
presented within (120) days from the date of issue of
the [Airway Bill].[16]
Relevantly, petitioners airway bill states:
12./12.1 The person entitled to delivery must make
a complaint to the carrier in writing in the case:
12.1.1 of visible damage to the goods, immediately
after discovery of the damage and at the latest within
fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen
(14) days from the date of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date
the goods are placed at his disposal; and
12.1.4 of non-delivery of the goods, within one
hundred and twenty (120) days from the date of the
issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing
may be made to the carrier whose air waybill was
used, or to the frst carrier or to the last carrier or to
the carrier who performed the transportation during
which the loss, damage or delay took place.[17]
Article 26 of the Warsaw Convention, on the other
hand, provides:
ART. 26. (1) Receipt by the person entitled to the
delivery of baggage or goods without complaint shall
be prima facie evidence that the same have been
delivered in good condition and in accordance with
the document of transportation.
(2) In case of damage, the person entitled to
delivery must complain to the carrier forthwith after
the discovery of the damage, and, at the latest,
within 3 days from the date of receipt in the case of
baggage and 7 days from the date of receipt in the
case of goods. In case of delay the complaint must
be made at the latest within 14 days from the date
on which the baggage or goods have been placed at
his disposal.
(3) Every complaint must be made in writing upon
the document of transportation or by separate notice
in writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid,
no action shall lie against the carrier, save in the
case of fraud on his part.[18]
Condition Precedent
In this jurisdiction, the fling of a claim with the
carrier within the time limitation therefor actually
constitutes a condition precedent to the accrual of a
right of action against a carrier for loss of or damage
to the goods.[19] The shipper or consignee must
allege and prove the fulfllment of the condition. If it
fails to do so, no right of action against the carrier
can accrue in favor of the former. The
aforementioned requirement is a reasonable
condition precedent; it does not constitute a
limitation of action.[20]
The requirement of giving notice of loss of or injury
to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to
inform the carrier that the cargo has been damaged,
and that it is being charged with liability therefor;
and (2) to give it an opportunity to examine the
nature and extent of the injury. This protects the
carrier by afording it an opportunity to make an
investigation of a claim while the matter is fresh and
easily investigated so as to safeguard itself from false
and fraudulent claims.[21]
When an airway bill -- or any contract of carriage for
that matter -- has a stipulation that requires a notice
of claim for loss of or damage to goods shipped and
the stipulation is not complied with, its enforcement
can be prevented and the liability cannot be imposed
on the carrier. To stress, notice is a condition
precedent, and the carrier is not liable if notice is not
given in accordance with the stipulation.[22] Failure
to comply with such a stipulation bars recovery for
the loss or damage sufered.[23]
Being a condition precedent, the notice must precede
a suit for enforcement.[24] In the present case, there
is neither an allegation nor a showing of
respondents compliance with this requirement
within the prescribed period. While respondents
may have had a cause of action then, they cannot
now enforce it for their failure to comply with the
aforesaid condition precedent.
In view of the foregoing, we fnd no more necessity to
pass upon the other issues raised by petitioner.
We note that respondents are not without recourse.
Cargohaus, Inc. -- petitioners co-defendant in
respondents Complaint below -- has been adjudged
by the trial court as liable for, inter alia, actual
damages in the amount of the peso equivalent of US
$39,339.[25] This judgment was afrmed by the
Court of Appeals and is already fnal and executory.
[26]
WHEREFORE, the Petition is GRANTED, and the
assailed Decision REVERSED insofar as it pertains
to Petitioner Federal Express Corporation. No
pronouncement as to costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. LINCOLN PHILIPPINE LIFE
INSURANCE COMPANY, INC. (now JARDINE-CMA
LIFE INSURANCE COMPANY, INC.) and THE
COURT OF APPEALS, respondents.
D E C I S I O N
KAPUNAN, J.:
This is a petition for review on certiorari fled by the
Commission on Internal Revenue of the decision of
the Court of Appeals dated November 18, 1994 in
C.A. G.R. SP No. 31224 which reversed in part the
decision of the Court of Tax Appeals in C.T.A. Case
No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance
Co., Inc., (now Jardine-CMA Life Insurance
Company, Inc.) is a domestic corporation registered
with the Securities and Exchange Commission and
engaged in life insurance business. In the years
prior to 1984, private respondent issued a special
kind of life insurance policy known as the Junior
Estate Builder Policy, the distinguishing feature of
which is a clause providing for an automatic increase
in the amount of life insurance coverage upon
attainment of a certain age by the insured without
the need of issuing a new policy. The clause was to
take efect in the year 1984. Documentary stamp
taxes due on the policy were paid by petitioner only
on the initial sum assured.
In 1984, private respondent also issued 50,000
shares of stock dividends with a par value of P100.00
per share or a total par value of P5,000,000.00. The
actual value of said shares, represented by its book
value, was P19,307,500.00. Documentary stamp
taxes were paid based only on the par value of
P5,000,000.00 and not on the book value.
Subsequently, petitioner issued defciency
documentary stamps tax assessment for the year
1984 in the amounts of (a) P464,898.75,
corresponding to the amount of automatic increase
of the sum assured on the policy issued by
respondent, and (b) P78,991.25 corresponding to the
book value in excess of the par value of the stock
dividends. The computation of the defciency
documentary stamp taxes is as follows:
On Policies Issued:
Total policy issued during the year
P1,360,054,000.00
Documentary stamp tax due thereon
(P1,360,054,000.00 divided by
P200.00 multiplied by P0.35)
P 2,380,094.50
Less: Payment
P 1,915,495.75
Defciency
P 464,598.75
Add: Compromise Penalty
300.00

-----------------------
TOTAL AMOUNT DUE & COLLECTIBLE
P 464,898.75
Private respondent questioned the defciency
assessments and sought their cancellation in a
petition fled in the Court of Tax Appeals, docketed
as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found
no valid basis for the defciency tax assessment on
the stock dividends, as well as on the insurance
policy. The dispositive portion of the CTAs decision
reads:
WHEREFORE, the defciency documentary stamp
tax assessments in the amount of P464,898.76 and
P78,991.25 or a total of P543,890.01 are hereby
cancelled for lack of merit. Respondent
Commissioner of Internal Revenue is ordered to
desist from collecting said defciency documentary
stamp taxes for the same are considered withdrawn.
SO ORDERED.[1]
Petitioner appealed the CTAs decision to the Court of
Appeals. On November 18, 1994, the Court of
Appeals promulgated a decision afrming the CTAs
decision insofar as it nullifed the defciency
assessment on the insurance policy, but reversing
the same with regard to the defciency assessment
on the stock dividends. The CTA ruled that the
correct basis of the documentary stamp tax due on
the stock dividends is the actual value or book value
represented by the shares. The dispositive portion of
the Court of Appeals decision states:
IN VIEW OF ALL THE FOREGOING, the decision
appealed from is hereby REVERSED with respect to
the defciency tax assessment on the stock
dividends, but AFFIRMED with regards to the
assessment on the Insurance Policies. Consequently,
private respondent is ordered to pay the petitioner
herein the sum of P78,991.25, representing
documentary stamp tax on the stock dividends it
issued. No costs pronouncement.
SO ORDERED.[2]
A motion for reconsideration of the decision having
been denied,[3] both the Commissioner of Internal
Revenue and private respondent appealed to this
Court, docketed as G.R. No. 118043 and G.R. No.
119176, respectively. In G.R. No. 118043, private
respondent appealed the decision of the Court of
Appeals insofar as it upheld the validity of the
defciency tax assessment on the stock dividends.
The Commissioner of Internal Revenue, on his part,
fled the present petition questioning that portion of
the Court of Appeals decision which invalidated the
defciency assessment on the insurance policy,
attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED
WHEN IT RULED THAT THERE IS A SINGLE
AGREEMENT EMBODIED IN THE POLICY AND
THAT THE AUTOMATIC INCREASE CLAUSE IS NOT
A SEPARATE AGREEMENT, CONTRARY TO
SECTION 49 OF THE INSURANCE CODE AND
SECTION 183 OF THE REVENUE CODE THAT A
RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN
NOT COMPUTING THE AMOUNT OF TAX ON THE
TOTAL VALUE OF THE INSURANCE ASSURED IN
THE POLICY INCLUDING THE ADDITIONAL
INCREASE ASSURED BY THE AUTOMATIC
INCREASE CLAUSE DESPITE ITS RULING THAT
THE ORIGINAL POLICY AND THE AUTOMATIC
CLAUSE CONSTITUTED ONLY A SINGULAR
TRANSACTION.[4]
Section 173 of the National Internal Revenue Code
on documentary stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments
and papers. - Upon documents, instruments, loan
agreements, and papers, and upon acceptances,
assignments, sales, and transfers of the obligation,
right or property incident thereto, there shall be
levied, collected and paid for, and in respect of the
transaction so had or accomplished, the
corresponding documentary stamp taxes prescribed
in the following section of this Title, by the person
making, signing, issuing, accepting, or transferring
the same wherever the document is made, signed,
issued, accepted, or transferred when the obligation
or right arises from Philippine sources or the
property is situated in the Philippines, and at the
same time such act is done or transaction had:
Provided, That whenever one party to the taxable
document enjoys exemption from the tax herein
imposed, the other party thereto who is not exempt
shall be the one directly liable for the tax. (As
amended by PD No. 1994) The basis for the value of
documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National
Internal Revenue Code which states in part:
The basis for the value of documentary stamp taxes
to be paid on the insurance policy is Section 183 of
the National Internal Revenue Code which states in
part:
Sec. 183. Stamp tax on life insurance policies. - On
all policies of insurance or other instruments by
whatever name the same may be called, whereby
any insurance shall be made or renewed upon any
life or lives, there shall be collected a documentary
stamp tax of thirty (now 50c) centavos on each Two
hundred pesos per fractional part thereof, of the
amount insured by any such policy.
Petitioner claims that the automatic increase
clause in the subject insurance policy is separate
and distinct from the main agreement and involves
another transaction; and that, while no new policy
was issued, the original policy was essentially re-
issued when the additional obligation was assumed
upon the efectivity of this automatic increase
clause in 1984; hence, a defciency assessment
based on the additional insurance not covered in the
main policy is in order.
The Court of Appeals sustained the CTAs ruling that
there was only one transaction involved in the
issuance of the insurance policy and that the
automatic increase clause is an integral part of
that policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defnes an
insurance policy as the written instrument in which
a contract of insurance is set forth.[5] Section 50 of
the same Code provides that the policy, which is
required to be in printed form, may contain any
word, phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the contract
of insurance.[6] It is thus clear that any rider,
clause, warranty or endorsement pasted or attached
to the policy is considered part of such policy or
contract of insurance.
The subject insurance policy at the time it was
issued contained an automatic increase clause.
Although the clause was to take efect only in 1984,
it was written into the policy at the time of its
issuance. The distinctive feature of the junior estate
builder policy called the automatic increase clause
already formed part and parcel of the insurance
contract, hence, there was no need for an execution
of a separate agreement for the increase in the
coverage that took efect in 1984 when the assured
reached a certain age.
It is clear from Section 173 that the payment of
documentary stamp taxes is done at the time the act
is done or transaction had and the tax base for the
computation of documentary stamp taxes on life
insurance policies under Section 183 is the amount
fxed in policy, unless the interest of a person
insured is susceptible of exact pecuniary
measurement.[7] What then is the amount fxed in
the policy? Logically, we believe that the amount
fxed in the policy is the fgure written on its face and
whatever increases will take efect in the future by
reason of the automatic increase clause embodied
in the policy without the need of another contract.
Here, although the automatic increase in the amount
of life insurance coverage was to take efect later on,
the date of its efectivity, as well as the amount of
the increase, was already defnite at the time of the
issuance of the policy. Thus, the amount insured by
the policy at the time of its issuance necessarily
included the additional sum covered by the
automatic increase clause because it was already
determinable at the time the transaction was entered
into and formed part of the policy.
The automatic increase clause in the policy is in
the nature of a conditional obligation under Article
1181,[8] by which the increase of the insurance
coverage shall depend upon the happening of the
event which constitutes the obligation. In the instant
case, the additional insurance that took efect in
1984 was an obligation subject to a suspensive
obligation,[9] but still a part of the insurance sold to
which private respondent was liable for the payment
of the documentary stamp tax.
The defciency of documentary stamp tax imposed on
private respondent is defnitely not on the amount of
the original insurance coverage, but on the increase
of the amount insured upon the efectivity of the
Junior Estate Builder Policy.
Finally, it should be emphasized that while tax
avoidance schemes and arrangements are not
prohibited,[10] tax laws cannot be circumvented in
order to evade the payment of just taxes. In the case
at bar, to claim that the increase in the amount
insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance)
should not be included in the computation of the
documentary stamp taxes due on the policy would
be a clear evasion of the law requiring that the tax be
computed on the basis of the amount insured by the
policy.
WHEREFORE, the petition is hereby given DUE
COURSE. The decision of the Court of Appeals is
SET ASIDE insofar as it afrmed the decision of the
Court of Tax Appeals nullifying the defciency stamp
tax assessment petitioner imposed on private
respondent in the amount of P464,898.75
corresponding to the increase in 1984 of the sum
under the policy issued by respondent.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 71360 July 16, 1986
DEVELOPMENT INSURANCE CORPORATION,
petitioner,
vs.
INTERMEDIATE APPELLATE COURT, and
PHILIPPINE UNION REALTY DEVELOPMENT
CORPORATION, respondents.
Balgos & Perez Law Ofces for petitioner.
Agustin M. Sundiam for private respondent.

CRUZ, J.:
A fre occurred in the building of the private
respondent and it sued for recovery of damages from
the petitioner on the basis of an insurance contract
between them. The petitioner allegedly failed to
answer on time and was declared in default by the
trial court. A judgment of default was subsequently
rendered on the strength of the evidence submitted
ex parte by the private respondent, which was
allowed full recovery of its claimed damages. On
learning of this decision, the petitioner moved to lift
the order of default, invoking excusable neglect, and
to vacate the judgment by default. Its motion was
denied. It then went to the respondent court, which
afrmed the decision of the trial court in toto. The
petitioner is now before us, hoping presumably that
it will fare better here than before the trial court and
the Intermediate Appellate Court. We shall see.
On the question of default, the record argues
mightily against it. It is indisputable that summons
was served on it, through its senior vice-president,
on June 19,1980. On July 14, 1980, ten days after
the expiration of the original 15-day period to answer
(excluding July 4), its counsel fled an ex parte
motion for an extension of fve days within which to
fle its answer. On July 18, 1980, the last day of the
requested extension-which at the time had not yet
been granted-the same counsel fled a second motion
for another 5-day extension, fourteen days after the
expiry of the original period to fle its answer. The
trial court nevertheless gave it fve days from July
14, 1980, or until July 19, 1980, within which to fle
its answer. But it did not. It did so only on July 26,
1980, after the expiry of the original and extended
periods, or twenty-one days after the July 5,
deadline. As a consequence, the trial court, on
motion of the private respondent fled on July 28,
1980, declared the petitioner in default. This was
done almost one month later, on August 25, 1980.
Even so, the petitioner made no move at all for two
months thereafter. It was only on October 27, 1980,
more than one month after the judgment of default
was rendered by the trial court on September 26,
1980, that it fled a motion to lift the order of default
and vacate the judgment by default. 1
The pattern of inexcusable neglect, if not deliberate
delay, is all too clear. The petitioner has slumbered
on its right and awakened too late. While it is true
that in Trajano v. Cruz, 2 which it cites, this Court
declared "that judgments by default are generally
looked upon with disfavor," the default judgment in
that case was set aside precisely because there was
excusable neglect, Summons in that case was served
through "an employee in petitioners' ofce and not
the person in-charge," whereas in the present case
summons was served on the vice-president of the
petitioner who however refused to accept it.
Furthermore, as Justice Guerrero noted, there was
no evidence showing that the petitioners in Trajano
intended to unduly delay the case.
Besides, the petitioners in Trajano had a valid
defense against the complaint fled against them,
and this justifed a relaxation of the procedural rules
to allow full hearing on the substantive issues
raised. In the instant case, by contrast, the petitioner
must just the same fail on the merits even if the
default orders were to be lifted. As the respondent
Court observed, "Nothing would be gained by having
the order of default set aside considering the
appellant has no valid defense in its favor." 3
The petitioner's claim that the insurance covered
only the building and not the elevators is absurd, to
say the least. This Court has little patience with
puerile arguments that afront common sense, let
alone basic legal principles with which even law
students are familiar. The circumstance that the
building insured is seven stories high and so had to
be provided with elevators-a legal requirement
known to the petitioner as an insurance company-
makes its contention all the more ridiculous.
No less preposterous is the petitioner's claim that the
elevators were insured after the occurrence of the
fre, a case of shutting the barn door after the horse
had escaped, so to speak. 4 This pretense merits
scant attention. Equally undeserving of serious
consideration is its submission that the elevators
were not damaged by the fre, against the report of
The arson investigators of the INP 5 and, indeed, its
own expressed admission in its answer 6 where it
afrmed that the fre "damaged or destroyed a
portion of the 7th foor of the insured building and
more particularly a Hitachi elevator control panel." 7
There is no reason to disturb the factual fndings of
the lower court, as afrmed by the Intermediate
Appellate Court, that the heat and moisture caused
by the fre damaged although they did not actually
burn the elevators. Neither is this Court justifed in
reversing their determination, also factual, of the
value of the loss sustained by the private respondent
in the amount of P508,867.00.
The only remaining question to be settled is the
amount of the indemnity due to the private
respondent under its insurance contract with the
petitioner. This will require an examination of this
contract, Policy No. RY/F-082, as renewed, by virtue
of which the petitioner insured the private
respondent's building against fre for P2,500,000.00.
8
The petitioner argues that since at the time of the
fre the building insured was worth P5,800,000.00,
the private respondent should be considered its own
insurer for the diference between that amount and
the face value of the policy and should share pro
rata in the loss sustained. Accordingly, the private
respondent is entitled to an indemnity of only
P67,629.31, the rest of the loss to be shouldered by
it alone. In support of this contention, the petitioner
cites Condition 17 of the policy, which provides:
If the property hereby insured shall, at the breaking
out of any fre, be collectively of greater value than
the sum insured thereon then the insured shall be
considered as being his own insurer for the
diference, and shall bear a ratable proportion of the
loss accordingly. Every item, if more than one, of the
policy shall be separately subject to this condition.
However, there is no evidence on record that the
building was worth P5,800,000.00 at the time of the
loss; only the petitioner says so and it does not back
up its self-serving estimate with any independent
corroboration. On the contrary, the building was
insured at P2,500,000.00, and this must be
considered, by agreement of the insurer and the
insured, the actual value of the property insured on
the day the fre occurred. This valuation becomes
even more believable if it is remembered that at the
time the building was burned it was still under
construction and not yet completed.
The Court notes that Policy RY/F-082 is an open
policy and is subject to the express condition that:
Open Policy
This is an open policy as defned in Section 57 of the
Insurance Act. In the event of loss, whether total or
partial, it is understood that the amount of the loss
shall be subject to appraisal and the liability of the
company, if established, shall be limited to the actual
loss, subject to the applicable terms, conditions,
warranties and clauses of this Policy, and in no case
shall exceed the amount of the policy.
As defned in the aforestated provision, which is now
Section 60 of the Insurance Code, "an open policy is
one in which the value of the thing insured is not
agreed upon but is left to be ascertained in case of
loss. " This means that the actual loss, as
determined, will represent the total indemnity due
the insured from the insurer except only that the
total indemnity shall not exceed the face value of the
policy.
The actual loss has been ascertained in this case
and, to repeat, this Court will respect such factual
determination in the absence of proof that it was
arrived at arbitrarily. There is no such showing.
Hence, applying the open policy clause as expressly
agreed upon by the parties in their contract, we hold
that the private respondent is entitled to the
payment of indemnity under the said contract in the
total amount of P508,867.00.
The refusal of its vice-president to receive the private
respondent's complaint, as reported in the sherif's
return, was the frst indication of the petitioner's
intention to prolong this case and postpone the
discharge of its obligation to the private respondent
under this agreement. That intention was revealed
further in its subsequent acts-or inaction-which
indeed enabled it to avoid payment for more than fve
years from the fling of the claim against it in 1980.
The petitioner has temporized long enough to avoid
its legitimate responsibility; the delay must and does
end now.
WHEREFORE, the appealed decision is afrmed in
full, with costs against the petitioner.
SO ORDERED.