G.R. No.

174116

September 11, 2009

EASTERN SHIPPING LINES, INC., Petitioner,

vs.
PRUDENTIAL GUARANTEE AND ASSURANCE, INC., Respondent.
DECISION
DEL CASTILLO, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, seeking
to set aside the April 26, 2006 Decision2 and August 15, 2006 Resolution3 of the Court of Appeals
(CA) in CA-G.R. CV No. 68165.
The facts of the case:
On November 8, 1995, fifty-six cases of completely knock-down auto parts of Nissan motor vehicle
(cargoes) were loaded on board M/V Apollo Tujuh (carrier) at Nagoya, Japan, to be shipped to
Manila. The shipment was consigned to Nissan Motor Philippines, Inc. (Nissan) and was covered by
Bill of Lading No. NMA-1.4 The carrier was owned and operated by petitioner Eastern Shipping
Lines, Inc.
On November 16, 1995, the carrier arrived at the port of Manila. On November 22, 1995, the
shipment was then discharged from the vessel onto the custody of the arrastre operator, Asian
Terminals, Inc. (ATI), complete and in good condition, except for four cases. 5
On November 24 to 28, 1995, the shipment was withdrawn by Seafront Customs and Brokerage
from the pier and delivered to the warehouse of Nissan in Quezon City.6
A survey of the shipment was then conducted by Tan-Gaute Adjustment Company, Inc. (surveyor) at
Nissans warehouse. On January 16, 1996, the surveyor submitted its report 7 with a finding that there
were "short (missing)" items in Cases Nos. 10/A26/T3K and 10/A26/7K and "broken/scratched" and
"broken" items in Case No. 10/A26/70K"; and that "(i)n (its) opinion, the "shortage and damage
sustained by the shipment were due to pilferage and improper handling, respectively while in the
custody of the vessel and/or Arrastre Contractors."8
As a result, Nissan demanded the sum of P1,047,298.349 representing the cost of the damages
sustained by the shipment from petitioner, the owner of the vessel, and ATI, the arrastre operator.
However, the demands were not heeded.10
On August 21, 1996, as insurer of the shipment against all risks per Marine Open Policy No. 86-168
and Marine Cargo Risk Note No. 3921/95, respondent Prudential Guarantee and Assurance Inc.
paid Nissan the sum ofP1,047,298.34.
On October 1, 1996, respondent sued petitioner and ATI for reimbursement of the amount it paid to
Nissan before the Regional Trial Court (RTC) of Makati City, Branch 148, docketed as Civil Case No.
96-1665, entitled Prudential Guarantee and Assurance, Inc. v. Eastern Shipping Lines,
Inc. Respondent claimed that it was subrogated to the rights of Nissan by virtue of said payment. 11
On June 21, 1999, the RTC rendered a Decision,12 the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendants Eastern Shipping Lines, Inc. and ATI, and said defendants are hereby
ordered to pay jointly and solidarily plaintiff the following:
1) The claim of P1,047,298.34 with legal interest thereon of 6% per annum from the date of
the filing of this complaint until the same is fully paid;
2) [Twenty-five (25%)] percent of the principal claim, as and for attorneys fees;
3) Plus costs of suit.
Both the counterclaims and crossclaims are without legal basis. The counterclaims and crossclaims
are based on the assumption that the other defendant is the one solely liable. However, inasmuch as
the solidary liability of the defendants have been established, the counterclaims and crossclaims
must be denied.
Equal costs against Eastern Shipping Lines, Inc. and Asian Terminals, Inc.
SO ORDERED.13
Both petitioner and ATI appealed to the CA.
On April 26, 2006, the CA rendered a Decision the dispositive portion of which reads:
WHEREFORE, the appealed decision is AFFIRMED with MODIFICATIONS, in that (i) defendantappellant Eastern Shipping Lines, Inc. is ordered to pay appellee (a) the amount of P904,293.75 plus
interest thereon at the rate of 6% per annum from the filing of the complaint up to the finality of this
judgment, when the interest shall become 12% per annum until fully paid, and (b) the costs of suit;
(ii) the award of attorneys fees is DELETED; and (iii) the complaint against defendant-appellant
Asian Terminals, Inc. is DISMISSED.
SO ORDERED.14
The CA exonerated ATI and ruled that petitioner was solely responsible for the damages caused to
the cargoes. Moreover, the CA relying on Delsan Transport Lines, Inc. vs. Court of Appeals,15 ruled
that the right of subrogation accrues upon payment by the insurance company of the insurance claim
and that the presentation of the insurance policy is not indispensable before the appellee may
recover in the exercise of its subrogatory right.16
Petitioner then filed a motion for reconsideration, which was, however, denied by the CA in a
Resolution dated August 15, 2006.
Hence, herein petition, with petitioner raising the following assignment of errors to wit:
I.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE
LOWER COURT FINDING HEREIN PETITIONER LIABLE DESPITE THE FACT THAT
RESPONDENT FAILED TO SUBMIT ANY INSURANCE POLICY.
II.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT APPLYING THE

US$500.00/PACKAGE/CASE PACKAGE LIMITATION OF LIABILITY IN ACCORDANCE WITH
THE CARRIAGE OF GOODS BY SEA ACT.17
The petition is meritorious.
The rule in our jurisdiction is that only questions of law may be entertained by this Court in a petition
for review oncertiorari. This rule, however, is not iron-clad and admits of certain exceptions, one of
which is when the CA manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different conclusion.18 In the case at bar, the records of the case contain
evidence which justify the application of the exception.
Anent the first error, petitioner argues that respondent was not properly subrogated because of the
non-presentation of the marine insurance policy. In the case at bar, in order to prove its claim,
respondent presented a marine cargo risk note and a subrogation receipt. Thus, the question to be
resolved is whether the two documents, without the Marine Insurance Policy, are sufficient to prove
respondents right of subrogation.
Before anything else, it must be emphasized that a marine risk note is not an insurance policy. It is
only an acknowledgment or declaration of the insurer confirming the specific shipment covered by its
marine open policy, the evaluation of the cargo and the chargeable premium. 19 In International
Container Terminal Services, Inc. v. FGU Insurance Corporation (International), 20 the nature of a
marine cargo risk note was explained, thus:
x x x It is the marine open policy which is the main insurance contract. In other words, the marine
open policy is the blanket insurance to be undertaken by FGU on all goods to be shipped by RAGC
during the existence of the contract, while the marine risk note specifies the particular
goods/shipment insured by FGU on that specific transaction, including the sum insured, the
shipment particulars as well as the premium paid for such shipment. x x x.21
For clarity, the pertinent portions of the Marine Cargo Risk Note,
hereunder reproduced, to wit:

22

relied upon by respondent, are

RN NO 39821/95
Date: Nov. 16, 1995
NISSAN MOTOR PHILS., INC.
xxx
Gentlemen:
We have this day noted a Risk in your favor subject to all clauses and condition of the
Companys printed form of Marine Open Policy No. 86-168
For PHILIPINE PESOS FOURTEEN MILLION ONE HUNDRED SEVENTY-THREE THOUSAND
FORTY-TWO & 91/100 ONLY (P14, 173,042.91) xxx
CARGO:
CONDITIONS:

56 CASES NISSAN MOTOR VEHICLE CKD (GC22)

INSTITUTE CARGO CLAUSES "A"
OTHER TERMS AND CONDITIONS PER
MOP-86-168

From: NAGOYA
To: MANILA, PHILS.
ETD: NOV. 8, 1995 ETA: NOV. 17, 1995
CARRIER: "APOLLO TUJUH"
B/L NO: NMA-1
BANK: BANK OF THE PHILLIPINE ISLANDS
L/C NO: 026010051971
Shipper/ Consignee: MARUBENI CORPORATION
It is undisputed that the cargoes were already on board the carrier as early as November 8, 1995
and that the same arrived at the port of Manila on November 16, 1995. It is, however, very apparent
that the Marine Cargo Risk Note was issued only on November 16, 1995. The same, therefore,
should have raised a red flag, as it would be impossible to know whether said goods were actually
insured while the same were in transit from Japan to Manila. On this score, this Court is guided
by Malayan Insurance Co., Inc. v. Regis Brokerage Corp., 23 where this Court ruled:
Thus, we can only consider the Marine Risk Note in determining whether there existed a contract of
insurance between ABB Koppel and Malayan at the time of the loss of the motors. However, the
very terms of the Marine Risk Note itself are quite damning. It is dated 21 March 1995, or after
the occurrence of the loss, and specifically states that Malayan "ha[d] this day noted the abovementioned risk in your favor and hereby guarantee[s] that this document has all the force and effect
of the terms and conditions in the Corporations printed form of the standard Marine Cargo Policy
and the Companys Marine Open Policy."24
Likewise, the date of the issuance of the Marine Risk Note also caught the attention of petitioner. In
petitioners Comment/Opposition25 to the formal offer of evidence before the RTC, petitioner made
the following manifestations, to wit:
Exhibit "B," Marine Cargo Risk Note No. 39821 dated November 16, 1995 is being objected to
for being irrelevant and immaterial as it was executed on November 16, 1995. The cargoes
arrived in Manila on November 16, 1995. This means that the cargoes are not specifically
covered by any particular insurance at the time of transit. The alleged Marine Open Policy was
not presented. Marine Open Policy may be subject to Institute Cargo Clauses which may require
arbitration prior to the filing of an action in court. 26
In addition, petitioner also contended that the Marine Cargo Risk Note referred to "Institute Cargo
Clauses A and other terms and conditions per Marine Open Policy-86-168."
Based on the forgoing, it is already evident why herein petition is meritorious. The Marine Risk Note
relied upon by respondent as the basis for its claim for subrogation is insufficient to prove said claim.
As previously stated, the Marine Risk Note was issued only on November 16, 1995; hence, without a
copy of the marine insurance policy, it would be impossible and simply guesswork to know whether
the cargo was insured during the voyage which started on November 8, 1995. Again, without the

marine insurance policy, it would be impossible for this Court to know the following: first, the specifics
of the "Institute Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168" as
alluded to in the Marine Risk Note; second, if the said terms and conditions were actually complied
with before respondent paid Nissans claim.
Furthermore, a reading of the transcript of the records clearly show that, at the RTC, petitioner had
already objected to the non-presentation of the marine insurance policy, to wit:
Q. Are you also the one preparing the Marine Insurance Contract?
A. No, sir.
Q. Who is the one?
A. Our Marine Cargo Underwriting Department.
Q. And do you know anybody in that department?
A. Yes, sir.
Q. And you were aware that this particular cargo of the shipment was insured?
A. Yes, sir, per policy issued.
Q. And that you are referring to Exhibit?
A. The Marine Cargo Risk.
Q. Is this the only contract of Insurance between Prudential Guarantee and Nissan?
A. Sir, there is a Marine Open Policy.
Q. Do you have any copy of that?
A. It is in the office.
Atty. Alojado Can you produce that copy?
Atty. Zapa May we know the request of counsel for producing this Marine Open Policy?
Atty. Alojado The basis of the question is the answer of the witness which says that there is
another contract of insurance.
COURT Yes, that is a Marine Open Policy.
Are you familiar with Marine Open Policy?
Atty. Alojado Yes, Your Honor.
But we would also like to be familiarize with that contract.

COURT But you know already a Marine Open Policy

Atty. Alojado Yes, Your Honor.
COURT I do not know if you work as a lawyer for several Insurance Company?
Atty. Alojado No, Your Honor. Honestly, Your Honor I worked as
a Maritime lawyer.
COURT Then you should know what is Marine Open Policy.
Atty. Alojado I would like to know the specification of the
Marine Open Policy in this regard.
Atty. Zapa I think your Honor, between the plaintiff and the defendant there is no issue
against the insurance.
COURT Yes because this witness it not testifying on the Marine Open Policy.
Atty. Alojado We submit.
COURT Proceed.
Atty. Alojado
Q. But there is a Marine Open Policy
A. Yes, sir.27
xxxx
COURT
Q. Is the policy a standing policy, a continuing policy or is it going only for only a year or for a
particular shipment or what?
A. For this particular consignee, they have Marine Open Policy.
Atty. Alojado That was not presented.
COURT Thats why Im asking. So the policy is not only for a particular shipment, but all
other shipments that may come?
A. Yes, Your Honor.
Q. Are covered?

A. Yes, Your Honor.

Q. Without any specifications?
A. Yes, Your Honor.28
Clearly, petitioner was not remiss when it openly objected to the non-presentation of the Marine
Insurance Policy. As testified to by respondents witness, they had a copy of the marine insurance
policy in their office. Thus, respondent was already apprised of the possible importance of the said
document to their cause.
In addition, this Court takes notice that notwithstanding that the RTC may have denied the repeated
manifestation of petitioner of the non-presentation of the marine insurance policy, the same by itself
does not exonerate respondent. As plaintiff, it was respondents burden to present the evidence
necessary to substantiate its claim.
In its Complaint,29 respondent alleged: "That the above-described shipment was insured
for P14,173,042.91 against all risks under plaintiffs Marine Cargo Risk Note No. 39821/Marine
Open Policy No. 86-168."30Therefore, other than the marine cargo risk note, respondent should
have also presented the marine insurance policy, as the same also served as the basis for its
complaint. Section 7, Rule 9 of the 1997 Rules of Civil Procedure, provide:
SECTION 7. Action or defense based on document.Whenever an action or defense is based upon
a written instrument or document, the substance of such instrument or document shall be set forth in
the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which
shall be deemed to be a part of the pleading, or said copy may, with like effect, be set forth in the
pleading.
On this score, Malayan is instructive:
Malayans right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability
of the respondent to ABB Koppel, even though such liability will necessarily have to be established
at the trial for Malayan to recover. Because Malayans right to recovery derives from contractual
subrogation as an incident to an insurance relationship, and not from any proximate injury to it
inflicted by the respondents, it is critical that Malayan establish the legal basis of such right to
subrogation by presenting the contract constitutive of the insurance relationship between it and ABB
Koppel. Without such legal basis, its cause of action cannot survive.
Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance
Policy. Ideally, this should have been accomplished from the moment it filed the complaint. Since the
Marine Insurance Policy was constitutive of the insurer-insured relationship from which Malayan
draws its right to subrogation, such document should have been attached to the complaint itself, as
provided for in Section 7, Rule 9 of the 1997 Rules of Civil Procedure: x x x31
Therefore, since respondent alluded to an actionable document in its complaint, the contract of
insurance between it and Nissan, as integral to its cause of action against petitioner, the Marine
Insurance Policy should have been attached to the Complaint. Even in its formal offer of evidence,
respondent alluded to the marine insurance policy which can stand independent of the Marine Cargo
Risk Note, to wit:
EXH "B" = Marine Cargo Risk Note No. 39821/95 Dated November 16, 1995.

Purpose: As proof that the subject shipment was covered by insurance for P14,173, 042.91 under
Marine Open Policy No. 86-168.32
It is significant that the date when the alleged insurance contract was constituted cannot be
established with certainty without the contract itself. Said point is crucial because there can be no
insurance on a risk that had already occurred by the time the contract was executed. 33 Surely, the
Marine Risk Note on its face does not specify when the insurance was constituted.
The importance of the presentation of the Marine Insurance Policy was also emphasized in Wallem
Philippines Shipping, Inc. v. Prudential Guarantee & Assurance, Inc., 34 where this Court ruled:
x x x Wallem still cannot be held liable because of the failure of Prudential to present the contract of
insurance or a copy thereof. Prudential claims that it is subrogated to the rights of GMC pursuant to
their insurance contract. For this purpose, it submitted a subrogation receipt (Exh. J) and a marine
cargo risk note (Exh. D). However, as the trial court pointed out, this is not sufficient. As GMCs
subrogee, Prudential can exercise only those rights granted to GMC under the insurance contract.
The contract of insurance must be presented in evidence to indicate the extent of its coverage. As
there was no determination of rights under the insurance contract, this Courts ruling in Home
Insurance Corporation v. Court of Appeals is applicable:
The insurance contract has not been presented. It may be assumed for the sake of argument that
the subrogation receipt may nevertheless be used to establish the relationship between the
petitioner [Home Insurance Corporation] and the consignee [Nestl Phil.] and the amount paid to
settle the claim. But that is all the document can do. By itself alone, the subrogation receipt is not
sufficient to prove the petitioners claim holding the respondent [Mabuhay Brokerage Co., Inc.] liable
for the damage to the engine.
....
It is curious that the petitioner disregarded this rule, knowing that the best evidence of the insurance
contract was its original copy, which was presumably in the possession of Home itself. Failure to
present this original (or even a copy of it), for reasons the Court cannot comprehend, must prove
fatal to this petition.35
Finally, there have been cases where this Court ruled that the non-presentation of the marine
insurance policy is not fatal, as can be gleaned in
International, where this Court held:
Indeed, jurisprudence has it that the marine insurance policy needs to be presented in evidence
before the trial court or even belatedly before the appellate court. In Malayan Insurance Co., Inc. v.
Regis Brokerage Corp., the Court stated that the presentation of the marine insurance policy was
necessary, as the issues raised therein arose from the very existence of an insurance contract
between Malayan Insurance and its consignee, ABB Koppel, even prior to the loss of the shipment.
In Wallem Philippines Shipping, Inc. v. Prudential Guarantee and Assurance, Inc., the Court ruled
that the insurance contract must be presented in evidence in order to determine the extent of the
coverage. This was also the ruling of the Court in Home Insurance Corporation v. Court of Appeals.
However, as in every general rule, there are admitted exceptions. In Delsan Transport Lines, Inc. v.
Court of Appeals, the Court stated that the presentation of the insurance policy was not fatal
because the loss of the cargo undoubtedly occurred while on board the petitioner's vessel, unlike

in Home Insurance in which the cargo passed through several stages with different parties and it
could not be determined when the damage to the cargo occurred, such that the insurer should be
liable for it.
As in Delsan, there is no doubt that the loss of the cargo in the present case occurred while in
petitioner's custody. Moreover, there is no issue as regards the provisions of Marine Open Policy No.
MOP-12763, such that the presentation of the contract itself is necessary for perusal, not to mention
that its existence was already admitted by petitioner in open court. And even though it was not
offered in evidence, it still can be considered by the court as long as they have been properly
identified by testimony duly recorded and they have themselves been incorporated in the records of
the case.36
Although the CA may have ruled that the damage to the cargo occurred while the same was in
petitioners custody, this Court cannot apply the ruling in International to the case at bar. In contrast,
unlike in International where there was no issue as regards the provisions of the marine insurance
policy, such that the presentation of the contract itself is necessary for perusal, herein petitioner had
repeatedly objected to the non-presentation of the marine insurance policy and had manifested its
desire to know the specific provisions thereof. Moreover, and the same is critical, the marine risk
note in the case at bar is questionable because: first, it is dated on the same day the cargoes arrived
at the port of Manila and not during the duration of the voyage; second, without the Marine Insurance
Policy to elucidate on the specifics of the terms and conditions alluded to in the marine risk note, it
would be simply guesswork to know if the same were complied with.
Lastly, to cast all doubt on the merits of herein petition, this Court is guided by the ruling in Malayan,
to wit:
It cannot be denied from the only established facts that Malayan and ABB Koppel comported as if
there was an insurance relationship between them and documents exist that evince the presence of
such legal relationship. But, under these premises, the very insurance contract emerges as the white
elephant in the room an obdurate presence which everybody reacts to, yet, legally invisible as a
matter of evidence since no attempt had been made to prove its corporeal existence in the court of
law. It may seem commonsensical to conclude anyway that there was a contract of insurance
between Malayan and ABB Koppel since they obviously behaved in a manner that indicates such
relationship, yet the same conclusion could be had even if, for example, those parties staged an
elaborate charade to impress on the world the existence of an insurance contract when there
actually was none. While there is absolutely no indication of any bad faith of such import by Malayan
or ABB Koppel, the fact that the "commonsensical" conclusion can be drawn even if there was bad
faith that convinces us to reject such line of thinking.
1avvphi1

The Court further recognizes the danger as precedent should we sustain Malayans position, and not
only because such a ruling would formally violate the rule on actionable documents. Malayan would
have us effectuate an insurance contract without having to consider its particular terms and
conditions, and on a blind leap of faith that such contract is indeed valid and subsisting. The
conclusion further works to the utter prejudice of defendants such as Regis or Paircargo since they
would be deprived the opportunity to examine the document that gives rise to the plaintiffs right to
recover against them, or to raise arguments or objections against the validity or admissibility of such
document. If a legal claim is irrefragably sourced from an actionable document, the defendants
cannot be deprived of the right to examine or utilize such document in order to intelligently raise a
defense. The inability or refusal of the plaintiff to submit such document into evidence constitutes an
effective denial of that right of the defendant which is ultimately rooted in due process of law, to say
nothing on how such failure fatally diminishes the plaintiffs substantiation of its own cause of
action.37

In conclusion, this Court rules that based on the applicable jurisprudence, because of the
inadequacy of the Marine Cargo Risk Note for the reasons already stated, it was incumbent on
respondent to present in evidence the Marine Insurance Policy, and having failed in doing so, its
claim of subrogation must necessarily fail.
Because of the foregoing, it would be unnecessary to discuss the second error raised by petitioner.
WHEREFORE, premises considered, the petition is GRANTED. The April 26, 2006 Decision and
August 15, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 68165 are
hereby REVERSED and SET ASIDE. The Complaint in Civil Case No. 96-1665 is DISMISSED.
SO ORDERED.
G.R. No. 165487

July 13, 2011

COUNTRY BANKERS INSURANCE CORPORATION, Petitioner,

vs.
ANTONIO LAGMAN, Respondent.
DECISION
PEREZ, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
assailing the Decision1 and Resolution2 of the Court of Appeals dated 21 June 2004 and 24
September 2004, respectively.
These are the undisputed facts.
Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage in the
business of storing not more than 30,000 sacks of palay valued at P5,250,000.00 in his warehouse
at Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the General Bonded Warehouse
Act, as amended, 3 the approval for said license was conditioned upon posting of a cash bond, a
bond secured by real estate, or a bond signed by a duly authorized bonding company, the amount of
which shall be fixed by the NFA Administrator at not less than thirty-three and one third percent (33
1/3%) of the market value of the maximum quantity of rice to be received.
Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond
No. 033044 forP1,749,825.00 on 5 November 1989 and Warehouse Bond No.
023555 for P749,925.00 on 13 December 1989 (1989 Bonds) through its agent, Antonio Lagman
(Lagman). Santos was the bond principal, Lagman was the surety and the Republic of the
Philippines, through the NFA was the obligee. In consideration of these issuances, corresponding
Indemnity Agreements6 were executed by Santos, as bond principal, together with Ban Lee Lim
Santos (Ban Lee Lim), Rhosemelita Reguine (Reguine) and Lagman, as co-signors. The latter
bound themselves jointly and severally liable to Country Bankers for any damages, prejudice,
losses, costs, payments, advances and expenses of whatever kind and nature, including attorneys
fees and legal costs, which it may sustain as a consequence of the said bond; to reimburse Country

Bankers of whatever amount it may pay or cause to be paid or become liable to pay thereunder; and
to pay interest at the rate of 12% per annum computed and compounded monthly, as well as to pay
attorneys fees of 20% of the amount due it.7
Santos then secured a loan using his warehouse receipts as collateral. 8 When the loan matured,
Santos defaulted in his payment. The sacks of palay covered by the warehouse receipts were no
longer found in the bonded warehouse.9 By virtue of the surety bonds, Country Bankers was
compelled to pay P1,166,750.37.10
Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No. 9573048 before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that the 1989
Bonds were valid only for 1 year from the date of their issuance, as evidenced by receipts; that the
bonds were never renewed and revived by payment of premiums; that on 5 November 1990,
Country Bankers issued Warehouse Bond No. 03515 (1990 Bond) which was also valid for one year
and that no Indemnity Agreement was executed for the purpose; and that the 1990 Bond
supersedes, cancels, and renders no force and effect the 1989 Bonds. 11
The bond principals, Santos and Ban Lee Lim, were not served with summons because they could
no longer be found.12 The case was eventually dismissed against them without prejudice. 13 The other
co-signor, Reguine, was declared in default for failure to file her answer.14
On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly and
severally liable to pay Country Bankers the amount of P2,400,499.87.15 The dispositive portion of the
RTC Decision16reads:
WHEREFORE, premises considered, judgment is hereby rendered, ordering defendants Rhomesita
[sic] Reguine and Antonio Lagman, jointly and severally liable to pay plaintiff, Country Bankers
Assurance Corporation, the amount of P2,400,499.87, with 12% interest from the date the complaint
was filed until fully satisfied plus 20% of the amount due plaintiff as and for attorneys fees and to
pay the costs.
As the Court did not acquire jurisdiction over the persons of defendants Nelson Santos and Ban Lee
Lim Santos, let the case against them be DISMISSED. Defendant Antonio Lagmans counterclaim is
likewise DISMISSED, for lack of merit.17
In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the
express terms of the Indemnity Agreement that they jointly and severally bound themselves to
indemnify and make good to Country Bankers any liability which the latter may incur on account of or
arising from the execution of the bonds.18
The trial court rationalized that the bonds remain in force unless cancelled by the Administrator of
the NFA and cannot be unilaterally cancelled by Lagman. The trial court emphasized that for the
failure of Lagman to comply with his obligation under the Indemnity Agreements, he is likewise liable
for damages as a consequence of the breach.

Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He insisted
that the lifetime of the 1989 Bonds, as well as the corresponding Indemnity Agreements was only 12
months. According to Lagman, the 1990 Bond was not pleaded in the complaint because it was not
covered by an Indemnity Agreement and it superseded the two prior bonds. 19
On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting aside
the Decision of the RTC and ordering the dismissal of the complaint filed against Lagman. 20
The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court
observed that the 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting the
intention of the parties to make the latter bond more comprehensive. Lagman was also exonerated
by the appellate court from liability because he was not a signatory to the alleged Indemnity
Agreement of 5 November 1990 covering the 1990 Bond. The appellate court rejected the argument
of Country Bankers that the 1989 bonds were continuing, finding, as reason therefor, that the
receipts issued for the bonds indicate that they were effective for only one-year.
Country Bankers sought reconsideration which was denied in a Resolution dated 24 September
2004.21
Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of
Appeals, to wit:
A.
THE HONORABLE COURT OF APPEALS seriously erred in disregarding the express
provisions of Section 177 of the insurance code when it held that the subject surety bonds
were superseded by a subsequent bond notwithstanding the non-cancellation thereof by the
bond obligee.
B.
The honorable court of appeals seriously erred in holding that receipts for the payment of
premiums prevail over the express provision of the surety bond that fixes the term thereof. 22
Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in full
force until cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers avers
that Section 177 of the Insurance Code applies, in that the bond may only be cancelled by the
obligee, by the Insurance Commissioner or by a competent court.
Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly cancelled
the 1989 Bonds on the following grounds: First, Lagman failed to produce the original of the 1990
Bond and no basis has been laid for the presentation of secondary evidence; Second, the issuance
of the 1990 Bond was not approved and processed by Country Bankers; Third, the NFA as bond
obligee was not in possession of the 1990 Bond. Country Bankers stresses that the cancellation of
the 1989 Bonds requires the participation of the bond obligee. Ergo, the bonds remain subsisting

until cancelled by the bond obligee. Country Bankers further assert that Lagman also failed to prove
that the NFA accepted the 1990 Bond in replacement of the 1989 Bonds.
Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of premium
payments and should not be relied on to determine the period of effectivity of the bonds. Country
Bankers explains that the receipts only represent the transactions between the bond principal and
the surety, and does not involve the NFA as bond obligee.
Country Bankers calls this Courts attention to the incontestability clause contained in the Indemnity
Agreements which prohibits Lagman from questioning his liability therein.
In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were
superseded by the 1990 Bond, which did not include Lagman as party. Therefore, Lagman argues,
Country Bankers has no cause of action against him. Lagman also reiterates that because of
novation, the 1989 bonds are neither perpetual nor continuing.
Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the
1990 Bond novates the 1989 Bonds.
The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced by
the receipts on the payment of premiums.
We do not agree.
The official receipts in question serve as proof of payment of the premium for one year on each
surety bond. It does not, however, automatically mean that the surety bond is effective for only one
(1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of premium.
Section 177 of the Insurance Code expresses:
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or
bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid
and binding unless and until the premium therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes valid and enforceable irrespective of
whether or not the premium has been paid by the obligor to the surety: Provided, That if the
contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect
only reasonable amount, not exceeding fifty per centum of the premium due thereon as service fee
plus the cost of stamps or other taxes imposed for the issuance of the contract or bond:Provided,
however, That if the non-acceptance of the bond be due to the fault or negligence of the surety, no
such service fee, stamps or taxes shall be collected. (Emphasis supplied)
The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of these
bonds, viz:
NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors
PALAY received by him for STORAGE at any time that demand therefore is made, or shall pay the
market value therefore in case he is unable to return the same, then this obligation shall be null and

void; otherwise it shall remain in full force and effect and may be enforced in the manner provided by
said Act No. 3893 as amended by Republic Act No. 247 and P.D. No. 4. This bond shall remain in
force until cancelled by the Administrator of National Food Authority.23
This provision in the bonds is but in compliance with the second paragraph of Section 177 of the
Insurance Code, which specifies that a continuing bond, as in this case where there is no fixed
expiration date, may be cancelled only by the obligee, which is the NFA, by the Insurance
Commissioner, and by the court. Thus:
In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due
until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of
competent jurisdiction, as the case may be.
By law and by the specific contract involved in this case, the effectivity of the bond required for the
obtention of a license to engage in the business of receiving rice for storage is determined not alone
by the payment of premiums but principally by the Administrator of the NFA. From beginning to end,
the Administrators brief is the enabling or disabling document.
The clear import of these provisions is that the surety bonds in question cannot be unilaterally
cancelled by Lagman. The same conclusion was reached by the trial court and we quote:
As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355 either
by the administrator of the NFA or by the Insurance Commissioner or by the Court, the Warehouse
Bonds are valid and binding and cannot be unilaterally cancelled by defendant Lagman as general
agent of the plaintiff.24
While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld the
1989 Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The Court of
Appeals, on the other hand, acknowledged the 1990 Bond as having cancelled the two previous
bonds by novation. Both courts however failed to discuss their basis for rejecting or admitting the
1990 Bond, which, as we indicated, is bone to pick in this case.
Lagmans insistence on novation depends on the validity, nay, existence of the allegedly novating
1990 Bond. Country Bankers understandably impugns both. We see the point. Lagman presented a
mere photocopy of the 1990 Bond. We rule as inadmissible such copy.
Under the best evidence rule, the original document must be produced whenever its contents are the
subject of inquiry.25 The rule is encapsulated in Section 3, Rule 130 of the Rules of Court, as follow:
Sec. 3. Original document must be produced; exceptions. When the subject of inquiry is the
contents of a documents, no evidence shall be admissible other than the original document itself,
except in the following cases:
(a) When the original has been lost or destroyed, or cannot be produced in court, without
bad faith on the part of the offeror;

(b) When the original is in the custody or under the control of the party against whom the
evidence is offered, and the latter fails to produce it after reasonable notice;
(c) When the original consists of numerous accounts or other documents which cannot be
examined in court without great loss of time and the fact sought to be established from them
is only the general result of the whole; and
(d) When the original is a public record in the custody of a public officer or is recorded in a
public office.26
A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original
is unavailable.27 Section 5, Rule 130 of the Rules of Court states:
SEC.5 When original document is unavailable. When the original document has been lost or
destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and
the cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by a
recital of its contents in some authentic document, or by the testimony of witnesses in the order
stated.
Before a party is allowed to adduce secondary evidence to prove the contents of the original, the
offeror must prove the following: (1) the existence or due execution of the original; (2) the loss and
destruction of the original or the reason for its non-production in court; and (3) on the part of the
offeror, the absence of bad faith to which the unavailability of the original can be attributed. The
correct order of proof is as follows: existence, execution, loss, and contents. 28
In the case at bar, Lagman mentioned during the direct examination that there are actually four (4)
duplicate originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan Officer
of the NFA in Tarlac, the third is with Country Bankers and the fourth was in his possession. 29 A party
must first present to the court proof of loss or other satisfactory explanation for the non-production of
the original instrument.30 When more than one original copy exists, it must appear that all of them
have been lost, destroyed, or cannot be produced in court before secondary evidence can be given
of any one. A photocopy may not be used without accounting for the other originals. 31
Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman merely
presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could no longer
produce it because he had already severed his ties with Country Bankers. However, he did not
explain why severance of ties is by itself reason enough for the non-availability of his copy of the
bond considering that, as it appears from the 1989 Bonds, Lagman himself is a bondsman. Neither
did Lagman explain why he failed to secure the original from any of the three other custodians he
mentioned in his testimony. While he apparently was able to find the original with the NFA Loan
Officer, he was merely contented with producing its photocopy. Clearly, Lagman failed to exert
diligent efforts to produce the original.
Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an Indemnity
Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he raises the defense

of "non-existence of an indemnity agreement" which would conveniently exempt him from liability.
The trial court deemed this defense as indicia of bad faith, thus:
To the observation of the Court, defendant Lagman contended that being a general agent (which
requires a much higher qualification than an ordinary agent), he is expected to have attended
seminars and workshops on general insurance wherein he is supposed to have acquired sufficient
knowledge of the general principles of insurance which he had fully practised or implemented from
experience. It somehow appears to the Courts assessment of his reneging liability of the bonds in
question, that he is still short of having really understood the principle of suretyship with reference to
the transaction of indemnity in which he is a signatory. If, as he alleged, that he is well-versed in
insurance, the Court finds no excuse for him to stand firm in denying his liability over the claim
against the bonds with indemnity provision. If he insists in not recognizing that liability, the more that
this Court is convinced that his knowledge that insurance operates under the principle of good faith
is inadequate. He missed the exception provided by Section 177 of the Insurance Code, as
amended, wherein non-payment of premium would not have the same essence in his mind that the
agreements entered into would not have full force or effect. It could be glimpsed, therefore, that the
mere fact of cancelling bonds with indemnity agreements and replacing them (absence of the same)
to escape liability clearly manifests bad faith on his part.32 (Emphasis supplied.)
Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak
of. Novation is the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. For novation to take place, the following requisites must concur: 1) There must
be a previous valid obligation; 2) The parties concerned must agree to a new contract; 3) The old
contract must be extinguished; and 4) There must be a valid new contract. 33
In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e.,
the 1989 Bonds. There is however neither a valid new contract nor a clear agreement between the
parties to a new contract since the very existence of the 1990 Bond has been rendered dubious.
Without the new contract, the old contract is not extinguished.
Implied novation necessitates a new obligation with which the old is in total incompatibility such that
the old obligation is completely superseded by the new one. 34 Quite obviously, neither can there be
implied novation. In this case, there is no new obligation.
The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the 1989
Bonds which we have considered as continuing contracts. Under both Indemnity Agreements,
Lagman, as co-signor, together with Santos, Ban Lee Lim and Reguine, bound themselves jointly
and severally to Country Bankers to indemnify it for any damage or loss sustained on the account of
the execution of the bond, among others. The pertinent identical stipulations of the Indemnity
Agreements state:
INDEMNITY: To indemnify and make good to the COMPANY jointly and severally, any damages,
prejudice, loss, costs, payments advances and expenses of whatever kind and nature, including
attorneys fees and legal costs, which the COMPANY may, at any time, sustain or incur, as well as to

reimburse to said COMPANY all sums and amounts of money which the COMPANY or its
representatives shall or may pay or cause to be paid or become liable to pay, on account of or
arising from the execution of the above-mentioned BOND or any extension, renewal, alteration or
substitution thereof made at the instance of the undersigned or anyone of them. 35
Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which provide:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment or disbursement
made by the COMPANY on account of the above-mentioned Bond, its renewals, extensions,
alterations or substitutions either in the belief that the COMPANY was obligated to make such
payment or in the belief that said payment was necessary or expedient in order to avoid greater
losses or obligations for which the COMPANY might be liable by virtue of the terms of the abovementioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall not be
disputed by the undersigned, who hereby jointly and severally bind themselves to indemnify [Country
Bankers] of any and all such payments, as stated in the preceding clauses.
In case the COMPANY shall have paid[,] settled or compromised any liability, loss, costs, damages,
attorneys fees, expenses, claims[,] demands, suits, or judgments as above-stated, arising out of or
in connection with said bond, an itemized statement thereof, signed by an officer of the COMPANY
and other evidence to show said payment, settlement or compromise, shall be prima facie evidence
of said payment, settlement or compromise, as well as the liability of the undersigned in any and all
suits and claims against the undersigned arising out of said bond or this bond application. 36
1awphil

Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue of
the 1989 Bonds gave rise to Lagmans obligation to reimburse it under the Indemnity Agreements.
Lagman, being a solidary debtor, is liable for the entire obligation.
WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 61797 are SET ASIDE and the Decision dated 21 September 1998 of
the RTC is hereby REINSTATED.
SO ORDERED.

ilipinas Cia de Seguros vs Christern 89 Phil 54

Fact:
On October 1, 1941, the respondent corporation, Christern Huenefeld and Co., Inc., after payment of
corresponding premium, obtained from the petitioner, Filipinas Cia de Seguros fire policy covering
merchandise contained in a building located at Binondo, Manila. On February 27, 1942 or during the
Japanese military occupation, the building and insured merchandise were burned. In due time the
respondent submitted to the petitioner its claim under the policy. The petitioner refused to pay the
claim on the ground that the policy in favor of the respondent that ceased to be a force on the date
the United States declared war against Germany, the respondent corporation (through organized under
and by virtue of the laws of Philippines) being controlled by German subjects and the petitioner being a
company under American jurisdiction when said policy was issued on October 1, 1941. The theory of
the petitioner is that the insured merchandise was burned after the policy issued in 1941 had ceased to
be effective because the outbreak of the war between United States and Germany on December 10,
1941, and that the payment made by the petitioner to the respondent corporation during the Japanese
military occupation was under pressure.

Issue:
W/N a public enemy can be insured.
Ruling:
Since the majority of stockholders of the respondent corporation were German subjects, the
respondent became an enemy of the state upon the outbreak of the war between US and Germany. The
English and American cases relied upon by the Court of Appeals lost in force upon the latest decision of
the Supreme Court of US in which the control test has adopted.
Since World War I, the determination of enemy nationality of corporations has been discussed in many
countries, belligerent and neutral. A corporation was subject to enemy legislation when it was
controlled by enemies, namely managed under the influence of individuals or corporations themselves
considered as enemies...
The Philippine Insurance Law (Act No 2427, as amended), in Section 8, provides that "anyone except a
public enemy may be insured". It stands to reason that an insurance policy ceases to be allowable as
soon as an insured becomes a public enemy.
The respondent having an enemy corporation on December 10, 1941, the insurance policy issued in its
favor on October 1, 1941, by the petitioner had ceased to be valid and enforceable, and since the
insured good were burned during the war, the respondent was not entitled to any indemnity under said
policy from the petitioner. However, elementary rule of justice (in the absence of specific provisions in
the Insurance Law) require that the premium paid by the respondent for the period covered by its
policy from December 11, 1941, should be returned by the petitioner.

G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No.
29333 in the sum of P1000,000, covering merchandise contained in a building located at No. 711
Roman Street, Binondo Manila. On February 27, 1942, or during the Japanese military occupation,
the building and insured merchandise were burned. In due time the respondent submitted to the
petitioner its claim under the policy. The salvage goods were sold at public auction and, after
deducting their value, the total loss suffered by the respondent was fixed at P92,650. The petitioner
refused to pay the claim on the ground that the policy in favor of the respondent had ceased to be in
force on the date the United States declared war against Germany, the respondent Corporation
(though organized under and by virtue of the laws of the Philippines) being controlled by the German
subjects and the petitioner being a company under American jurisdiction when said policy was
issued on October 1, 1941. The petitioner, however, in pursuance of the order of the Director of
Bureau of Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent
the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the
purpose of recovering from the respondent the sum of P92,650 above mentioned. The theory of the
petitioner is that the insured merchandise were burned up after the policy issued in 1941 in favor of
the respondent corporation has ceased to be effective because of the outbreak of the war between
the United States and Germany on December 10, 1941, and that the payment made by the
petitioner to the respondent corporation during the Japanese military occupation was under
pressure. After trial, the Court of First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of First
Instance of Manila was affirmed, with costs. The case is now before us on appeal by certiorari from
the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent corporation
became an enemy when the United States declared war against Germany, relying on English and
American cases which held that a corporation is a citizen of the country or state by and under the
laws of which it was created or organized. It rejected the theory that nationality of private corporation
is determine by the character or citizenship of its controlling stockholders.
There is no question that majority of the stockholders of the respondent corporation were German
subjects. This being so, we have to rule that said respondent became an enemy corporation upon
the outbreak of the war between the United States and Germany. The English and American cases
relied upon by the Court of Appeals have lost their force in view of the latest decision of the Supreme
Court of the United States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947,
92 Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper presented to the Second International Conference
of the Legal Profession held at the Hague (Netherlands) in August. 1948 the following enlightening
passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to enemy
legislation when it was controlled by enemies, namely managed under the influence of
individuals or corporations, themselves considered as enemies. It was the English courts
which first the Daimler case applied this new concept of "piercing the corporate veil," which
was adopted by the peace of Treaties of 1919 and the Mixed Arbitral established after the
First World War.
The United States of America did not adopt the control test during the First World War.
Courts refused to recognized the concept whereby American-registered corporations could
be considered as enemies and thus subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal ownership
of shares that a material influence could be exercised on the management of the corporation
but also by long term loans and other factual situations. For that reason, legislation on
enemy property enacted in various countries during World War II adopted by statutory
provisions to the control test and determined, to various degrees, the incidents of control.

Court decisions were rendered on the basis of such newly enacted statutory provisions in
determining enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act during the
last war, include as did other legislations the applications of the control test and again, as in
World War I, courts refused to apply this concept whereby the enemy character of an
American or neutral-registered corporation is determined by the enemy nationality of the
controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy interest in domestic corporations and
thus the application of the control test. Court decisions sanctioned such administrative
practice enacted under the First War Powers Act of 1941, and more recently, on December
8, 1947, the Supreme Court of the United States definitely approved of the control theory. In
Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss corporation allegedly
controlled by German interest, the Court: "The property of all foreign interest was placed
within the reach of the vesting power (of the Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy interest which masqueraded under those
innocent fronts. . . . The power of seizure and vesting was extended to all property of any
foreign country or national so that no innocent appearing device could become a Trojan
horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the
appealed decision. However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off
Gaz., (Supp. 9) 299, we already held that China Banking Corporation came within the meaning of
the word "enemy" as used in the Trading with the Enemy Acts of civilized countries not only because
it was incorporated under the laws of an enemy country but because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public enemy.
Effect of war, generally. All intercourse between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by the law of nations. Such prohibition includes
all negotiations, commerce, or trading with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary submission to it; or receiving its
protection; also all acts concerning the transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further prohibits insurance upon trade with or by the
enemy, upon the life or lives of aliens engaged in service with the enemy; this for the reason
that the subjects of one country cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien subjects, or to do anything
detrimental too their country's interest. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent that one country should destroy its
enemy's property and repay in insurance the value of what has been so destroyed, or that it
should in such manner increase the resources of the enemy, or render it aid, and the

commencement of war determines, for like reasons, all trading intercourse with the enemy,
which prior thereto may have been lawful. All individuals therefore, who compose the
belligerent powers, exist, as to each other, in a state of utter exclusion, and are public
enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for some
other specified term it is plain that when the parties become alien enemies, the contractual
tie is broken and the contractual rights of the parties, so far as not vested. lost. (Vance, the
Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the insurance policy
issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be
valid and enforcible, and since the insured goods were burned after December 10, 1941, and during
the war, the respondent was not entitled to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of specific provision in the Insurance Law)
require that the premium paid by the respondent for the period covered by its policy from December
11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of
whether the policy in question became null and void upon the declaration of war between the United
States and Germany on December 10, 1941, and its judgment in favor of the respondent corporation
was predicated on its conclusion that the policy did not cease to be in force. The Court of Appeals
necessarily assumed that, even if the payment by the petitioner to the respondent was involuntary,
its action is not tenable in view of the ruling on the validity of the policy. As a matter of fact, the Court
of Appeals held that "any intimidation resorted to by the appellee was not unjust but the exercise of
its lawful right to claim for and received the payment of the insurance policy," and that the ruling of
the Bureau of Financing to the effect that "the appellee was entitled to payment from the appellant
was, well founded." Factually, there can be no doubt that the Director of the Bureau of Financing, in
ordering the petitioner to pay the claim of the respondent, merely obeyed the instruction of the
Japanese Military Administration, as may be seen from the following: "In view of the findings and
conclusion of this office contained in its decision on Administrative Case dated February 9, 1943
copy of which was sent to your office and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of said authority, you are hereby
ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said claim,
however, should be made by means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the equivalent, in
actual Philippines currency of P92,650 paid on April 19, 1943, in accordance with the rate fixed in
the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to
pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in
Philippine currency, that should be returned by the petitioner for the unexpired term of the policy in
question, beginning December 11, 1941. Without costs. So ordered.

G.R. No. 167622

June 29, 2010

GREGORIO V. TONGKO, Petitioner,

vs.
THE MANUFACTURERS LIFE INSURANCE CO. (PHILS.), INC. and RENATO A. VERGEL DE
DIOS,Respondents.
RESOLUTION
BRION, J.:
This resolves the Motion for Reconsideration1 dated December 3, 2008 filed by respondent The
Manufacturers Life Insurance Co. (Phils.), Inc. (Manulife) to set aside our Decision of November 7,
2008. In the assailed decision, we found that an employer-employee relationship existed between
Manulife and petitioner Gregorio Tongko and ordered Manulife to pay Tongko backwages and
separation pay for illegal dismissal.
The following facts have been stated in our Decision of November 7, 2008, now under
reconsideration, but are repeated, simply for purposes of clarity.
The contractual relationship between Tongko and Manulife had two basic phases. The first or initial
phase began on July 1, 1977, under a Career Agents Agreement (Agreement) that provided:
It is understood and agreed that the Agent is an independent contractor and nothing contained
herein shall be construed or interpreted as creating an employer-employee relationship between the
Company and the Agent.
xxxx
a) The Agent shall canvass for applications for Life Insurance, Annuities, Group policies and other
products offered by the Company, and collect, in exchange for provisional receipts issued by the
Agent, money due to or become due to the Company in respect of applications or policies obtained
by or through the Agent or from policyholders allotted by the Company to the Agent for servicing,
subject to subsequent confirmation of receipt of payment by the Company as evidenced by an
Official Receipt issued by the Company directly to the policyholder.
xxxx
The Company may terminate this Agreement for any breach or violation of any of the provisions
hereof by the Agent by giving written notice to the Agent within fifteen (15) days from the time of the
discovery of the breach. No waiver, extinguishment, abandonment, withdrawal or cancellation of the
right to terminate this Agreement by the Company shall be construed for any previous failure to
exercise its right under any provision of this Agreement.
Either of the parties hereto may likewise terminate his Agreement at any time without cause, by
giving to the other party fifteen (15) days notice in writing. 2
Tongko additionally agreed (1) to comply with all regulations and requirements of Manulife, and (2) to
maintain a standard of knowledge and competency in the sale of Manulifes products, satisfactory to
Manulife and sufficient to meet the volume of the new business, required by his Production Club
membership.3

The second phase started in 1983 when Tongko was named Unit Manager in Manulifes Sales
Agency Organization. In 1990, he became a Branch Manager. Six years later (or in 1996), Tongko
became a Regional Sales Manager.4
Tongkos gross earnings consisted of commissions, persistency income, and management
overrides. Since the beginning, Tongko consistently declared himself self-employed in his income tax
returns. Thus, under oath, he declared his gross business income and deducted his business
expenses to arrive at his taxable business income. Manulife withheld the corresponding 10% tax on
Tongkos earnings.5
In 2001, Manulife instituted manpower development programs at the regional sales management
level. Respondent Renato Vergel de Dios wrote Tongko a letter dated November 6, 2001 on
concerns that were brought up during the October 18, 2001 Metro North Sales Managers Meeting.
De Dios wrote:
The first step to transforming Manulife into a big league player has been very clear to increase the
number of agents to at least 1,000 strong for a start. This may seem diametrically opposed to the
way Manulife was run when you first joined the organization. Since then, however, substantial
changes have taken place in the organization, as these have been influenced by developments both
from within and without the company.
xxxx
The issues around agent recruiting are central to the intended objectives hence the need for a
Senior Managers meeting earlier last month when Kevin OConnor, SVP-Agency, took to the floor to
determine from our senior agency leaders what more could be done to bolster manpower
development. At earlier meetings, Kevin had presented information where evidently, your Region
was the lowest performer (on a per Manager basis) in terms of recruiting in 2000 and, as of today,
continues to remain one of the laggards in this area.
While discussions, in general, were positive other than for certain comments from your end which
were perceived to be uncalled for, it became clear that a one-on-one meeting with you was
necessary to ensure that you and management, were on the same plane. As gleaned from some of
your previous comments in prior meetings (both in group and one-on-one), it was not clear that we
were proceeding in the same direction.
Kevin held subsequent series of meetings with you as a result, one of which I joined briefly. In those
subsequent meetings you reiterated certain views, the validity of which we challenged and
subsequently found as having no basis.
With such views coming from you, I was a bit concerned that the rest of the Metro North Managers
may be a bit confused as to the directions the company was taking. For this reason, I sought a
meeting with everyone in your management team, including you, to clear the air, so to speak.
This note is intended to confirm the items that were discussed at the said Metro North Regions
Sales Managers meeting held at the 7/F Conference room last 18 October.
xxxx
Issue # 2: "Some Managers are unhappy with their earnings and would want to revert to the position
of agents."

This is an often repeated issue you have raised with me and with Kevin. For this reason, I placed the
issue on the table before the rest of your Regions Sales Managers to verify its validity. As you must
have noted, no Sales Manager came forward on their own to confirm your statement and it took you
to name Malou Samson as a source of the same, an allegation that Malou herself denied at our
meeting and in your very presence.
This only confirms, Greg, that those prior comments have no solid basis at all. I now believe what I
had thought all along, that these allegations were simply meant to muddle the issues surrounding
the inability of your Region to meet its agency development objectives!
Issue # 3: "Sales Managers are doing what the company asks them to do but, in the process, they
earn less."
xxxx
All the above notwithstanding, we had your own records checked and we found that you made a lot
more money in the Year 2000 versus 1999. In addition, you also volunteered the information to Kevin
when you said that you probably will make more money in the Year 2001 compared to Year 2000.
Obviously, your above statement about making "less money" did not refer to you but the way you
argued this point had us almost believing that you were spouting the gospel of truth when you were
not. x x x
xxxx
All of a sudden, Greg, I have become much more worried about your ability to lead this group
towards the new direction that we have been discussing these past few weeks, i.e., Manulifes goal
to become a major agency-led distribution company in the Philippines. While as you claim, you have
not stopped anyone from recruiting, I have never heard you proactively push for greater agency
recruiting. You have not been proactive all these years when it comes to agency growth.
xxxx
I cannot afford to see a major region fail to deliver on its developmental goals next year and so, we
are making the following changes in the interim:
1. You will hire at your expense a competent assistant who can unload you of much of the routine
tasks which can be easily delegated. This assistant should be so chosen as to complement your
skills and help you in the areas where you feel "may not be your cup of tea."
You have stated, if not implied, that your work as Regional Manager may be too taxing for you and
for your health. The above could solve this problem.
xxxx
2. Effective immediately, Kevin and the rest of the Agency Operations will deal with the North Star
Branch (NSB) in autonomous fashion. x x x
I have decided to make this change so as to reduce your span of control and allow you to
concentrate more fully on overseeing the remaining groups under Metro North, your Central Unit and
the rest of the Sales Managers in Metro North. I will hold you solely responsible for meeting the
objectives of these remaining groups.

xxxx
The above changes can end at this point and they need not go any further. This, however, is entirely
dependent upon you. But you have to understand that meeting corporate objectives by everyone is
primary and will not be compromised. We are meeting tough challenges next year, and I would want
everybody on board. Any resistance or holding back by anyone will be dealt with accordingly.6
Subsequently, de Dios wrote Tongko another letter, dated December 18, 2001, terminating Tongkos
services:
It would appear, however, that despite the series of meetings and communications, both one-on-one
meetings between yourself and SVP Kevin OConnor, some of them with me, as well as group
meetings with your Sales Managers, all these efforts have failed in helping you align your directions
with Managements avowed agency growth policy.
xxxx
On account thereof, Management is exercising its prerogative under Section 14 of your Agents
Contract as we are now issuing this notice of termination of your Agency Agreement with us effective
fifteen days from the date of this letter.7
Tongko responded by filing an illegal dismissal complaint with the National Labor Relations
Commission (NLRC) Arbitration Branch. He essentially alleged despite the clear terms of the letter
terminating his Agency Agreement that he was Manulifes employee before he was illegally
dismissed.8
Thus, the threshold issue is the existence of an employment relationship. A finding that none exists
renders the question of illegal dismissal moot; a finding that an employment relationship exists, on
the other hand, necessarily leads to the need to determine the validity of the termination of the
relationship.
A. Tongkos Case for Employment Relationship
Tongko asserted that as Unit Manager, he was paid an annual over-rider not exceeding P50,000.00,
regardless of production levels attained and exclusive of commissions and bonuses. He also
claimed that as Regional Sales Manager, he was given a travel and entertainment allowance
of P36,000.00 per year in addition to his overriding commissions; he was tasked with numerous
administrative functions and supervisory authority over Manulifes employees, aside from merely
selling policies and recruiting agents for Manulife; and he recommended and recruited insurance
agents subject to vetting and approval by Manulife. He further alleges that he was assigned a
definite place in the Manulife offices when he was not in the field at the 3rd Floor, Manulife Center,
108 Tordesillas corner Gallardo Sts., Salcedo Village, Makati City for which he never paid any
rental. Manulife provided the office equipment he used, including tables, chairs, computers and
printers (and even office stationery), and paid for the electricity, water and telephone bills. As
Regional Sales Manager, Tongko additionally asserts that he was required to follow at least three
codes of conduct.9
B. Manulifes Case Agency Relationship with Tongko
Manulife argues that Tongko had no fixed wage or salary. Under the Agreement, Tongko was paid
commissions of varying amounts, computed based on the premium paid in full and actually received

by Manulife on policies obtained through an agent. As sales manager, Tongko was paid overriding
sales commission derived from sales made by agents under his unit/structure/branch/region.
Manulife also points out that it deducted and withheld a 10% tax from all commissions Tongko
received; Tongko even declared himself to be self-employed and consistently paid taxes as such
i.e., he availed of tax deductions such as ordinary and necessary trade, business and professional
expenses to which a business is entitled.
Manulife asserts that the labor tribunals have no jurisdiction over Tongkos claim as he was not its
employee as characterized in the four-fold test and our ruling in Carungcong v. National Labor
Relations Commission.10
The Conflicting Rulings of the Lower Tribunals
The labor arbiter decreed that no employer-employee relationship existed between the parties.
However, the NLRC reversed the labor arbiters decision on appeal; it found the existence of an
employer-employee relationship and concluded that Tongko had been illegally dismissed. In the
petition for certiorari with the Court of Appeals (CA), the appellate court found that the NLRC gravely
abused its discretion in its ruling and reverted to the labor arbiters decision that no employeremployee relationship existed between Tongko and Manulife.
Our Decision of November 7, 2008
In our Decision of November 7, 2008, we reversed the CA ruling and found that an employment
relationship existed between Tongko and Manulife. We concluded that Tongko is Manulifes
employee for the following reasons:
1. Our ruling in the first Insular11 case did not foreclose the possibility of an insurance agent
becoming an employee of an insurance company; if evidence exists showing that the
company promulgated rules or regulations that effectively controlled or restricted an
insurance agents choice of methods or the methods themselves in selling insurance, an
employer-employee relationship would be present. The determination of the existence of an
employer-employee relationship is thus on a case-to-case basis depending on the evidence
on record.
2. Manulife had the power of control over Tongko, sufficient to characterize him as an
employee, as shown by the following indicators:
2.1 Tongko undertook to comply with Manulifes rules, regulations and other
requirements, i.e., the different codes of conduct such as the Agent Code of Conduct,
the Manulife Financial Code of Conduct, and the Financial Code of Conduct
Agreement;
2.2 The various affidavits of Manulifes insurance agents and managers, who
occupied similar positions as Tongko, showed that they performed administrative
duties that established employment with Manulife;12 and
2.3 Tongko was tasked to recruit some agents in addition to his other administrative
functions. De Dios letter harped on the direction Manulife intended to take, viz.,
greater agency recruitment as the primary means to sell more policies; Tongkos
alleged failure to follow this directive led to the termination of his employment with
Manulife.

The Motion for Reconsideration

Manulife disagreed with our Decision and filed the present motion for reconsideration on the
following GROUNDS:
1. The November 7[, 2008] Decision violates Manulifes right to due process by: (a) confining
the review only to the issue of "control" and utterly disregarding all the other issues that had
been joined in this case; (b) mischaracterizing the divergence of conclusions between the CA
and the NLRC decisions as confined only to that on "control"; (c) grossly failing to consider
the findings and conclusions of the CA on the majority of the material evidence, especially
[Tongkos] declaration in his income tax returns that he was a "business person" or "selfemployed"; and (d) allowing [Tongko] to repudiate his sworn statement in a public document.
2. The November 7[, 2008] Decision contravenes settled rules in contract law and agency,
distorts not only the legal relationships of agencies to sell but also distributorship and
franchising, and ignores the constitutional and policy context of contract law vis--vis labor
law.
3. The November 7[, 2008] Decision ignores the findings of the CA on the three elements of
the four-fold test other than the "control" test, reverses well-settled doctrines of law on
employer-employee relationships, and grossly misapplies the "control test," by selecting,
without basis, a few items of evidence to the exclusion of more material evidence to support
its conclusion that there is "control."
4. The November 7[, 2008] Decision is judicial legislation, beyond the scope authorized by
Articles 8 and 9 of the Civil Code, beyond the powers granted to this Court under Article VIII,
Section 1 of the Constitution and contravenes through judicial legislation, the constitutional
prohibition against impairment of contracts under Article III, Section 10 of the Constitution.
5. For all the above reasons, the November 7[, 2008] Decision made unsustainable and
reversible errors, which should be corrected, in concluding that Respondent Manulife and
Petitioner had an employer-employee relationship, that Respondent Manulife illegally
dismissed Petitioner, and for consequently ordering Respondent Manulife to pay Petitioner
backwages, separation pay, nominal damages and attorneys fees.13
THE COURTS RULING
A. The Insurance and the Civil Codes;
the Parties Intent and Established
Industry Practices
We cannot consider the present case purely from a labor law perspective, oblivious that the factual
antecedents were set in the insurance industry so that the Insurance Code primarily governs.
Chapter IV, Title 1 of this Code is wholly devoted to "Insurance Agents and Brokers" and specifically
defines the agents and brokers relationship with the insurance company and how they are governed
by the Code and regulated by the Insurance Commission.
The Insurance Code, of course, does not wholly regulate the "agency" that it speaks of, as agency is
a civil law matter governed by the Civil Code. Thus, at the very least, three sets of laws namely,
the Insurance Code, the Labor Code and the Civil Code have to be considered in looking at the
present case. Not to be forgotten, too, is the Agreement (partly reproduced on page 2 of this Dissent

and which no one disputes) that the parties adopted to govern their relationship for purposes of
selling the insurance the company offers. To forget these other laws is to take a myopic view of the
present case and to add to the uncertainties that now exist in considering the legal relationship
between the insurance company and its "agents."
The main issue of whether an agency or an employment relationship exists depends on the incidents
of the relationship. The Labor Code concept of "control" has to be compared and distinguished with
the "control" that must necessarily exist in a principal-agent relationship. The principal cannot but
also have his or her say in directing the course of the principal-agent relationship, especially in cases
where the company-representative relationship in the insurance industry is an agency.
a. The laws on insurance and agency
The business of insurance is a highly regulated commercial activity in the country, in terms
particularly of who can be in the insurance business, who can act for and in behalf of an insurer, and
how these parties shall conduct themselves in the insurance business. Section 186 of the Insurance
Code provides that "No person, partnership, or association of persons shall transact any insurance
business in the Philippines except as agent of a person or corporation authorized to do the business
of insurance in the Philippines." Sections 299 and 300 of the Insurance Code on Insurance Agents
and Brokers, among other provisions, provide:
Section 299. No insurance company doing business in the Philippines, nor any agent thereof, shall
pay any commission or other compensation to any person for services in obtaining insurance, unless
such person shall have first procured from the Commissioner a license to act as an insurance agent
of such company or as an insurance broker as hereinafter provided.
No person shall act as an insurance agent or as an insurance broker in the solicitation or
procurement of applications for insurance, or receive for services in obtaining insurance, any
commission or other compensation from any insurance company doing business in the Philippines
or any agent thereof, without first procuring a license so to act from the Commissioner x x x The
Commissioner shall satisfy himself as to the competence and trustworthiness of the applicant and
shall have the right to refuse to issue or renew and to suspend or revoke any such license in his
discretion.
1avvphi1.net

Section 300. Any person who for compensation solicits or obtains insurance on behalf of any
insurance company or transmits for a person other than himself an application for a policy or
contract of insurance to or from such company or offers or assumes to act in the negotiating of such
insurance shall be an insurance agent within the intent of this section and shall thereby become
liable to all the duties, requirements, liabilities and penalties to which an insurance agent is subject.
The application for an insurance agents license requires a written examination, and the applicant
must be of good moral character and must not have been convicted of a crime involving moral
turpitude.14 The insurance agent who collects premiums from an insured person for remittance to the
insurance company does so in a fiduciary capacity, and an insurance company which delivers an
insurance policy or contract to an authorized agent is deemed to have authorized the agent to
receive payment on the companys behalf.15 Section 361 further prohibits the offer, negotiation, or
collection of any amount other than that specified in the policy and this covers any rebate from the
premium or any special favor or advantage in the dividends or benefit accruing from the policy.
Thus, under the Insurance Code, the agent must, as a matter of qualification, be licensed and must
also act within the parameters of the authority granted under the license and under the contract with
the principal. Other than the need for a license, the agent is limited in the way he offers and

negotiates for the sale of the companys insurance products, in his collection activities, and in the
delivery of the insurance contract or policy. Rules regarding the desired results (e.g., the required
volume to continue to qualify as a company agent, rules to check on the parameters on the authority
given to the agent, and rules to ensure that industry, legal and ethical rules are followed) are built-in
elements of control specific to an insurance agency and should not and cannot be read as elements
of control that attend an employment relationship governed by the Labor Code.
On the other hand, the Civil Code defines an agent as a "person [who] binds himself to render some
service or to do something in representation or on behalf of another, with the consent or authority of
the latter."16 While this is a very broad definition that on its face may even encompass an
employment relationship, the distinctions between agency and employment are sufficiently
established by law and jurisprudence.
Generally, the determinative element is the control exercised over the one rendering service. The
employer controls the employee both in the results and in the means and manner of achieving this
result. The principal in an agency relationship, on the other hand, also has the prerogative to
exercise control over the agent in undertaking the assigned task based on the parameters outlined in
the pertinent laws.
Under the general law on agency as applied to insurance, an agency must be express in light of the
need for a license and for the designation by the insurance company. In the present case, the
Agreement fully serves as grant of authority to Tongko as Manulifes insurance agent. 17 This
agreement is supplemented by the companys agency practices and usages, duly accepted by the
agent in carrying out the agency.18 By authority of the Insurance Code, an insurance agency is for
compensation,19 a matter the Civil Code Rules on Agency presumes in the absence of proof to the
contrary.20 Other than the compensation, the principal is bound to advance to, or to reimburse, the
agent the agreed sums necessary for the execution of the agency.21 By implication at least under
Article 1994 of the Civil Code, the principal can appoint two or more agents to carry out the same
assigned tasks,22 based necessarily on the specific instructions and directives given to them.
With particular relevance to the present case is the provision that "In the execution of the agency, the
agent shall act in accordance with the instructions of the principal." 23 This provision is pertinent for
purposes of the necessary control that the principal exercises over the agent in undertaking the
assigned task, and is an area where the instructions can intrude into the labor law concept of control
so that minute consideration of the facts is necessary. A related article is Article 1891 of the Civil
Code which binds the agent to render an account of his transactions to the principal.
B. The Cited Case
The Decision of November 7, 2008 refers to the first Insular and Grepalife cases to establish that the
company rules and regulations that an agent has to comply with are indicative of an employeremployee relationship.24 The Dissenting Opinions of Justice Presbitero Velasco, Jr. and Justice
Conchita Carpio Morales also cite Insular Life Assurance Co. v. National Labor Relations
Commission (second Insular case)25 to support the view that Tongko is Manulifes employee. On the
other hand, Manulife cites the Carungcong case and AFP Mutual Benefit Association, Inc. v. National
Labor Relations Commission (AFPMBAI case)26 to support its allegation that Tongko was not its
employee.
A caveat has been given above with respect to the use of the rulings in the cited cases because
none of them is on all fours with the present case; the uniqueness of the factual situation of the
present case prevents it from being directly and readily cast in the mold of the cited cases. These

cited cases are themselves different from one another; this difference underscores the need to read
and quote them in the context of their own factual situations.
The present case at first glance appears aligned with the facts in the Carungcong, the Grepalife, and
the second Insular Life cases. A critical difference, however, exists as these cited cases dealt with
the proper legal characterization of a subsequent management contract that superseded the original
agency contract between the insurance company and its agent. Carungcong dealt with a subsequent
Agreement making Carungcong a New Business Manager that clearly superseded the Agreement
designating Carungcong as an agent empowered to solicit applications for insurance. The Grepalife
case, on the other hand, dealt with the proper legal characterization of the appointment of the Ruiz
brothers to positions higher than their original position as insurance agents. Thus, after analyzing the
duties and functions of the Ruiz brothers, as these were enumerated in their contracts, we
concluded that the company practically dictated the manner by which the Ruiz brothers were to carry
out their jobs. Finally, the second Insular Life case dealt with the implications of de los Reyes
appointment as acting unit manager which, like the subsequent contracts in the Carungcong and the
Grepalife cases, was clearly defined under a subsequent contract. In all these cited cases, a
determination of the presence of the Labor Code element of control was made on the basis of the
stipulations of the subsequent contracts.
In stark contrast with the Carungcong, the Grepalife, and the second Insular Life cases, the only
contract or document extant and submitted as evidence in the present case is the Agreement a
pure agency agreement in the Civil Code context similar to the original contract in the first Insular
Life case and the contract in the AFPMBAI case. And while Tongko was later on designated unit
manager in 1983, Branch Manager in 1990, and Regional Sales Manager in 1996, no formal
contract regarding these undertakings appears in the records of the case. Any such contract or
agreement, had there been any, could have at the very least provided the bases for properly
ascertaining the juridical relationship established between the parties.
These critical differences, particularly between the present case and the Grepalife and the second
Insular Life cases, should therefore immediately drive us to be more prudent and cautious in
applying the rulings in these cases.
C. Analysis of the Evidence
c.1. The Agreement
The primary evidence in the present case is the July 1, 1977 Agreement that governed and defined
the parties relations until the Agreements termination in 2001. This Agreement stood for more than
two decades and, based on the records of the case, was never modified or novated. It assumes
primacy because it directly dealt with the nature of the parties relationship up to the very end;
moreover, both parties never disputed its authenticity or the accuracy of its terms.
By the Agreements express terms, Tongko served as an "insurance agent" for Manulife, not as an
employee. To be sure, the Agreements legal characterization of the nature of the relationship cannot
be conclusive and binding on the courts; as the dissent clearly stated, the characterization of the
juridical relationship the Agreement embodied is a matter of law that is for the courts to determine. At
the same time, though, the characterization the parties gave to their relationship in the Agreement
cannot simply be brushed aside because it embodies their intent at the time they entered the
Agreement, and they were governed by this understanding throughout their relationship. At the very
least, the provision on the absence of employer-employee relationship between the parties can be
an aid in considering the Agreement and its implementation, and in appreciating the other evidence
on record.

The parties legal characterization of their intent, although not conclusive, is critical in this case
because this intent is not illegal or outside the contemplation of law, particularly of the Insurance and
the Civil Codes. From this perspective, the provisions of the Insurance Code cannot be disregarded
as this Code (as heretofore already noted) expressly envisions a principal-agent relationship
between the insurance company and the insurance agent in the sale of insurance to the public. For
this reason, we can take judicial notice that as a matter of Insurance Code-based business practice,
an agency relationship prevails in the insurance industry for the purpose of selling insurance. The
Agreement, by its express terms, is in accordance with the Insurance Code model when it provided
for a principal-agent relationship, and thus cannot lightly be set aside nor simply be considered as an
agreement that does not reflect the parties true intent. This intent, incidentally, is reinforced by the
system of compensation the Agreement provides, which likewise is in accordance with the
production-based sales commissions the Insurance Code provides.
1awph!1

Significantly, evidence shows that Tongkos role as an insurance agent never changed during his
relationship with Manulife. If changes occurred at all, the changes did not appear to be in the nature
of their core relationship. Tongko essentially remained an agent, but moved up in this role through
Manulifes recognition that he could use other agents approved by Manulife, but operating under his
guidance and in whose commissions he had a share. For want of a better term, Tongko perhaps
could be labeled as a "lead agent" who guided under his wing other Manulife agents similarly tasked
with the selling of Manulife insurance.
Like Tongko, the evidence suggests that these other agents operated under their own agency
agreements. Thus, if Tongkos compensation scheme changed at all during his relationship with
Manulife, the change was solely for purposes of crediting him with his share in the commissions the
agents under his wing generated. As an agent who was recruiting and guiding other insurance
agents, Tongko likewise moved up in terms of the reimbursement of expenses he incurred in the
course of his lead agency, a prerogative he enjoyed pursuant to Article 1912 of the Civil Code. Thus,
Tongko received greater reimbursements for his expenses and was even allowed to use Manulife
facilities in his interactions with the agents, all of whom were, in the strict sense, Manulife agents
approved and certified as such by Manulife with the Insurance Commission.
That Tongko assumed a leadership role but nevertheless wholly remained an agent is the inevitable
conclusion that results from the reading of the Agreement (the only agreement on record in this
case) and his continuing role thereunder as sales agent, from the perspective of the Insurance and
the Civil Codes and in light of what Tongko himself attested to as his role as Regional Sales
Manager. To be sure, this interpretation could have been contradicted if other agreements had been
submitted as evidence of the relationship between Manulife and Tongko on the latters expanded
undertakings. In the absence of any such evidence, however, this reading based on the available
evidence and the applicable insurance and civil law provisions must stand, subject only to
objective and evidentiary Labor Code tests on the existence of an employer-employee relationship.
In applying such Labor Code tests, however, the enforcement of the Agreement during the course of
the parties relationship should be noted. From 1977 until the termination of the Agreement, Tongkos
occupation was to sell Manulifes insurance policies and products. Both parties acquiesced with the
terms and conditions of the Agreement. Tongko, for his part, accepted all the benefits flowing from
the Agreement, particularly the generous commissions.
Evidence indicates that Tongko consistently clung to the view that he was an independent agent
selling Manulife insurance products since he invariably declared himself a business or self-employed
person in his income tax returns. This consistency with, and action made pursuant to the
Agreement were pieces of evidence that were never mentioned nor considered in our
Decision of November 7, 2008. Had they been considered, they could, at the very least, serve as

Tongkos admissions against his interest. Strictly speaking, Tongkos tax returns cannot but be
legally significant because he certified under oath the amount he earned as gross business income,
claimed business deductions, leading to his net taxable income. This should be evidence of the first
order that cannot be brushed aside by a mere denial. Even on a laymans view that is devoid of legal
considerations, the extent of his annual income alone renders his claimed employment status
doubtful.27
Hand in hand with the concept of admission against interest in considering the tax returns, the
concept of estoppel a legal and equitable concept28 necessarily must come into play. Tongkos
previous admissions in several years of tax returns as an independent agent, as against his belated
claim that he was all along an employee, are too diametrically opposed to be simply dismissed or
ignored. Interestingly, Justice Velascos dissenting opinion states that Tongko was forced to declare
himself a business or self-employed person by Manulifes persistent refusal to recognize him as its
employee.29 Regrettably, the dissent has shown no basis for this conclusion, an
understandable omission since no evidence in fact exists on this point in the records of the
case. In fact, what the evidence shows is Tongkos full conformity with, and action as, an
independent agent until his relationship with Manulife took a bad turn.
Another interesting point the dissent raised with respect to the Agreement is its conclusion that the
Agreement negated any employment relationship between Tongko and Manulife so that the
commissions he earned as a sales agent should not be considered in the determination of the
backwages and separation pay that should be given to him. This part of the dissent is correct
although it went on to twist this conclusion by asserting that Tongko had dual roles in his relationship
with Manulife; he was an agent, not an employee, in so far as he sold insurance for Manulife, but
was an employee in his capacity as a manager. Thus, the dissent concluded that Tongkos
backwages should only be with respect to his role as Manulifes manager.
The conclusion with respect to Tongkos employment as a manager is, of course, unacceptable for
the legal, factual and practical reasons discussed in this Resolution. In brief, the factual reason is
grounded on the lack of evidentiary support of the conclusion that Manulife exercised control over
Tongko in the sense understood in the Labor Code. The legal reason, partly based on the lack of
factual basis, is the erroneous legal conclusion that Manulife controlled Tongko and was thus its
employee. The practical reason, on the other hand, is the havoc that the dissents unwarranted
conclusion would cause the insurance industry that, by the laws own design, operated along the
lines of principal-agent relationship in the sale of insurance.
c.2. Other Evidence of Alleged Control
A glaring evidentiary gap for Tongko in this case is the lack of evidence on record showing that
Manulife ever exercised means-and-manner control, even to a limited extent, over Tongko during his
ascent in Manulifes sales ladder. In 1983, Tongko was appointed unit manager. Inexplicably, Tongko
never bothered to present any evidence at all on what this designation meant. This also holds true
for Tongkos appointment as branch manager in 1990, and as Regional Sales Manager in 1996. The
best evidence of control the agreement or directive relating to Tongkos duties and responsibilities
was never introduced as part of the records of the case. The reality is, prior to de Dios letter,
Manulife had practically left Tongko alone not only in doing the business of selling insurance, but
also in guiding the agents under his wing. As discussed below, the alleged directives covered by de
Dios letter, heretofore quoted in full, were policy directions and targeted results that the company
wanted Tongko and the other sales groups to realign with in their own selling activities. This is the
reality that the parties presented evidence consistently tells us.

What, to Tongko, serve as evidence of labor law control are the codes of conduct that Manulife
imposes on its agents in the sale of insurance. The mere presentation of codes or of rules and
regulations, however, is not per se indicative of labor law control as the law and jurisprudence teach
us.
As already recited above, the Insurance Code imposes obligations on both the insurance company
and its agents in the performance of their respective obligations under the Code, particularly on
licenses and their renewals, on the representations to be made to potential customers, the collection
of premiums, on the delivery of insurance policies, on the matter of compensation, and on measures
to ensure ethical business practice in the industry.
The general law on agency, on the other hand, expressly allows the principal an element of control
over the agent in a manner consistent with an agency relationship. In this sense, these control
measures cannot be read as indicative of labor law control. Foremost among these are the directives
that the principal may impose on the agent to achieve the assigned tasks, to the extent that they do
not involve the means and manner of undertaking these tasks. The law likewise obligates the agent
to render an account; in this sense, the principal may impose on the agent specific instructions on
how an account shall be made, particularly on the matter of expenses and reimbursements. To these
extents, control can be imposed through rules and regulations without intruding into the labor law
concept of control for purposes of employment.
From jurisprudence, an important lesson that the first Insular Life case teaches us is that a
commitment to abide by the rules and regulations of an insurance company does not ipso facto
make the insurance agent an employee. Neither do guidelines somehow restrictive of the insurance
agents conduct necessarily indicate "control" as this term is defined in jurisprudence. Guidelines
indicative of labor law "control," as the first Insular Life case tells us, should not merely
relate to the mutually desirable result intended by the contractual relationship; they must
have the nature of dictating the means or methods to be employed in attaining the result, or of
fixing the methodology and of binding or restricting the party hired to the use of these means. In fact,
results-wise, the principal can impose production quotas and can determine how many agents, with
specific territories, ought to be employed to achieve the companys objectives. These are
management policy decisions that the labor law element of control cannot reach. Our ruling in these
respects in the first Insular Life case was practically reiterated in Carungcong. Thus, as will be
shown more fully below, Manulifes codes of conduct,30 all of which do not intrude into the insurance
agents means and manner of conducting their sales and only control them as to the desired results
and Insurance Code norms, cannot be used as basis for a finding that the labor law concept of
control existed between Manulife and Tongko.
The dissent considers the imposition of administrative and managerial functions on Tongko as
indicative of labor law control; thus, Tongko as manager, but not as insurance agent, became
Manulifes employee. It drew this conclusion from what the other Manulife managers disclosed in
their affidavits (i.e., their enumerated administrative and managerial functions) and after comparing
these statements with the managers in Grepalife. The dissent compared the control exercised by
Manulife over its managers in the present case with the control the managers in the Grepalife case
exercised over their employees by presenting the following matrix: 31
Duties of Manulifes Manager

Duties of Grepalifes Managers/Supervisors

- to render or recommend prospective

- train understudies for the position of district
agents to be licensed, trained and
manager
contracted to sell Manulife products and who

will be part of my Unit

- to coordinate activities of the agents under

[the managers] Unit in [the agents] daily,
weekly and monthly selling activities, making
sure that their respective sales targets are
met;

- properly account, record and document the

companys funds, spot-check and audit the work
of the zone supervisors, x x x follow up the
submission of weekly remittance reports of the
debit agents and zone supervisors

- to conduct periodic training sessions for

[the] agents to further enhance their sales
skill; and

- direct and supervise the sales activities of the

debit agents under him, x x x undertake and
discharge the functions of absentee debit
agents, spot-check the record of debit agents,
and insure proper documentation of sales and
collections of debit agents.

- to assist [the] agents with their sales

activities by way of joint fieldwork,
consultations and one-on-one evaluation
and analysis of particular accounts

Aside from these affidavits however, no other evidence exists regarding the effects of Tongkos
additional roles in Manulifes sales operations on the contractual relationship between them.
To the dissent, Tongkos administrative functions as recruiter, trainer, or supervisor of other sales
agents constituted a substantive alteration of Manulifes authority over Tongko and the performance
of his end of the relationship with Manulife. We could not deny though that Tongko remained, first
and foremost, an insurance agent, and that his additional role as Branch Manager did not lessen his
main and dominant role as insurance agent; this role continued to dominate the relations between
Tongko and Manulife even after Tongko assumed his leadership role among agents. This conclusion
cannot be denied because it proceeds from the undisputed fact that Tongko and Manulife never
altered their July 1, 1977 Agreement, a distinction the present case has with the contractual changes
made in the second Insular Life case. Tongkos results-based commissions, too, attest to the
primacy he gave to his role as insurance sales agent.
The dissent apparently did not also properly analyze and appreciate the great qualitative difference
that exists between:

the Manulife managers role is to coordinate activities of the agents under the managers
Unit in the agents daily, weekly, and monthly selling activities, making sure that their
respective sales targets are met.

the District Managers duty in Grepalife is to properly account, record, and document the
company's funds, spot-check and audit the work of the zone supervisors, conserve the
company's business in the district through "reinstatements," follow up the submission of
weekly remittance reports of the debit agents and zone supervisors, preserve company
property in good condition, train understudies for the position of district managers, and
maintain his quota of sales (the failure of which is a ground for termination).

the Zone Supervisors (also in Grepalife) has the duty to direct and supervise the sales
activities of the debit agents under him, conserve company property through

"reinstatements," undertake and discharge the functions of absentee debit agents, spotcheck the records of debit agents, and insure proper documentation of sales and collections
by the debit agents.
These job contents are worlds apart in terms of "control." In Grepalife, the details of how to do the
job are specified and pre-determined; in the present case, the operative words are the "sales target,"
the methodology being left undefined except to the extent of being "coordinative." To be sure, a
"coordinative" standard for a manager cannot be indicative of control; the standard only essentially
describes what a Branch Manager is the person in the lead who orchestrates activities within the
group. To "coordinate," and thereby to lead and to orchestrate, is not so much a matter of control by
Manulife; it is simply a statement of a branch managers role in relation with his agents from the point
of view of Manulife whose business Tongkos sales group carries.
A disturbing note, with respect to the presented affidavits and Tongkos alleged administrative
functions, is the selective citation of the portions supportive of an employment relationship and the
consequent omission of portions leading to the contrary conclusion. For example, the following
portions of the affidavit of Regional Sales Manager John Chua, with counterparts in the other
affidavits, were not brought out in the Decision of November 7, 2008, while the other portions
suggesting labor law control were highlighted. Specifically, the following portions of the affidavits
were not brought out:32
1.a. I have no fixed wages or salary since my services are compensated by way of
commissions based on the computed premiums paid in full on the policies obtained thereat;
1.b. I have no fixed working hours and employ my own method in soliticing insurance at a
time and place I see fit;
1.c. I have my own assistant and messenger who handle my daily work load;
1.d. I use my own facilities, tools, materials and supplies in carrying out my business of
selling insurance;
xxxx
6. I have my own staff that handles the day to day operations of my office;
7. My staff are my own employees and received salaries from me;
xxxx
9. My commission and incentives are all reported to the Bureau of Internal Revenue (BIR) as
income by a self-employed individual or professional with a ten (10) percent creditable
withholding tax. I also remit monthly for professionals.
These statements, read with the above comparative analysis of the Manulife and
the Grepalife cases, would have readily yielded the conclusion that no employer-employee
relationship existed between Manulife and Tongko.
Even de Dios letter is not determinative of control as it indicates the least amount of intrusion into
Tongkos exercise of his role as manager in guiding the sales agents. Strictly viewed, de Dios
directives are merely operational guidelines on how Tongko could align his operations with

Manulifes re-directed goal of being a "big league player." The method is to expand coverage through
the use of more agents. This requirement for the recruitment of more agents is not a means-andmethod control as it relates, more than anything else, and is directly relevant, to Manulifes objective
of expanded business operations through the use of a bigger sales force whose members are all on
a principal-agent relationship. An important point to note here is that Tongko was not supervising
regular full-time employees of Manulife engaged in the running of the insurance business; Tongko
was effectively guiding his corps of sales agents, who are bound to Manulife through the same
Agreement that he had with Manulife, all the while sharing in these agents commissions through his
overrides. This is the lead agent concept mentioned above for want of a more appropriate term,
since the title of Branch Manager used by the parties is really a misnomer given that what is involved
is not a specific regular branch of the company but a corps of non-employed agents, defined in
terms of covered territory, through which the company sells insurance. Still another point to consider
is that Tongko was not even setting policies in the way a regular company manager does; company
aims and objectives were simply relayed to him with suggestions on how these objectives can be
reached through the expansion of a non-employee sales force.
Interestingly, a large part of de Dios letter focused on income, which Manulife demonstrated, in
Tongkos case, to be unaffected by the new goal and direction the company had set. Income in
insurance agency, of course, is dependent on results, not on the means and manner of selling a
matter for Tongko and his agents to determine and an area into which Manulife had not waded.
Undeniably, de Dios letter contained a directive to secure a competent assistant at Tongkos own
expense. While couched in terms of a directive, it cannot strictly be understood as an intrusion into
Tongkos method of operating and supervising the group of agents within his delineated territory.
More than anything else, the "directive" was a signal to Tongko that his results were unsatisfactory,
and was a suggestion on how Tongkos perceived weakness in delivering results could be remedied.
It was a solution, with an eye on results, for a consistently underperforming group; its obvious intent
was to save Tongko from the result that he then failed to grasp that he could lose even his own
status as an agent, as he in fact eventually did.
The present case must be distinguished from the second Insular Life case that showed the
hallmarks of an employer-employee relationship in the management system established. These
were: exclusivity of service, control of assignments and removal of agents under the private
respondents unit, and furnishing of company facilities and materials as well as capital described as
Unit Development Fund. All these are obviously absent in the present case. If there is a commonality
in these cases, it is in the collection of premiums which is a basic authority that can be delegated to
agents under the Insurance Code.
As previously discussed, what simply happened in Tongkos case was the grant of an expanded
sales agency role that recognized him as leader amongst agents in an area that Manulife
defined. Whether this consequently resulted in the establishment of an employment
relationship can be answered by concrete evidence that corresponds to the following
questions:

as lead agent, what were Tongkos specific functions and the terms of his additional
engagement;

was he paid additional compensation as a so-called Area Sales Manager, apart from the
commissions he received from the insurance sales he generated;

what can be Manulifes basis to terminate his status as lead agent;

can Manulife terminate his role as lead agent separately from his agency contract; and

to what extent does Manulife control the means and methods of Tongkos role as lead agent?

The answers to these questions may, to some extent, be deduced from the evidence at hand, as
partly discussed above. But strictly speaking, the questions cannot definitively and concretely be
answered through the evidence on record. The concrete evidence required to settle these questions
is simply not there, since only the Agreement and the anecdotal affidavits have been marked and
submitted as evidence.
Given this anemic state of the evidence, particularly on the requisite confluence of the factors
determinative of the existence of employer-employee relationship, the Court cannot conclusively find
that the relationship exists in the present case, even if such relationship only refers to Tongkos
additional functions. While a rough deduction can be made, the answer will not be fully supported by
the substantial evidence needed.
Under this legal situation, the only conclusion that can be made is that the absence of evidence
showing Manulifes control over Tongkos contractual duties points to the absence of any employeremployee relationship between Tongko and Manulife. In the context of the established evidence,
Tongko remained an agent all along; although his subsequent duties made him a lead agent with
leadership role, he was nevertheless only an agent whose basic contract yields no evidence of
means-and-manner control.
This conclusion renders unnecessary any further discussion of the question of whether an agent
may simultaneously assume conflicting dual personalities. But to set the record straight, the concept
of a single person having the dual role of agent and employee while doing the same task is a novel
one in our jurisprudence, which must be viewed with caution especially when it is devoid of any
jurisprudential support or precedent. The quoted portions in Justice Carpio-Morales
dissent,33 borrowed from both the Grepalife and the second Insular Life cases, to support the duality
approach of the Decision of November 7, 2008, are regrettably far removed from their context i.e.,
the cases factual situations, the issues they decided and the totality of the rulings in these cases
and cannot yield the conclusions that the dissenting opinions drew.
The Grepalife case dealt with the sole issue of whether the Ruiz brothers appointment as zone
supervisor and district manager made them employees of Grepalife. Indeed, because of the
presence of the element of control in their contract of engagements, they were
considered Grepalifes employees. This did not mean, however, that they were simultaneously
considered agents as well as employees of Grepalife; the Courts ruling never implied that this
situation existed insofar as the Ruiz brothers were concerned. The Courts statement the
Insurance Code may govern the licensing requirements and other particular duties of insurance
agents, but it does not bar the application of the Labor Code with regard to labor standards and labor
relations simply means that when an insurance company has exercised control over its agents so
as to make them their employees, the relationship between the parties, which was otherwise one for
agency governed by the Civil Code and the Insurance Code, will now be governed by the Labor
Code. The reason for this is simple the contract of agency has been transformed into an employeremployee relationship.
The second Insular Life case, on the other hand, involved the issue of whether the labor bodies have
jurisdiction over an illegal termination dispute involving parties who had two contracts first, an
original contract (agency contract), which was undoubtedly one for agency, and another subsequent
contract that in turn designated the agent acting unit manager (a management contract). Both the
Insular Life and the labor arbiter were one in the position that both were agency contracts. The Court

disagreed with this conclusion and held that insofar as the management contract is concerned, the
labor arbiter has jurisdiction. It is in this light that we remanded the case to the labor arbiter for
further proceedings. We never said in this case though that the insurance agent had effectively
assumed dual personalities for the simple reason that the agency contract has been effectively
superseded by the management contract. The management contract provided that if the
appointment was terminated for any reason other than for cause, the acting unit manager would be
reverted to agent status and assigned to any unit.
The dissent pointed out, as an argument to support its employment relationship conclusion, that any
doubt in the existence of an employer-employee relationship should be resolved in favor of the
existence of the relationship.34This observation, apparently drawn from Article 4 of the Labor Code, is
misplaced, as Article 4 applies only when a doubt exists in the "implementation and application" of
the Labor Code and its implementing rules; it does not apply where no doubt exists as in a situation
where the claimant clearly failed to substantiate his claim of employment relationship by the
quantum of evidence the Labor Code requires.
On the dissents last point regarding the lack of jurisprudential value of our November 7, 2008
Decision, suffice it to state that, as discussed above, the Decision was not supported by the
evidence adduced and was not in accordance with controlling jurisprudence. It should, therefore, be
reconsidered and abandoned, but not in the manner the dissent suggests as the dissenting opinions
are as factually and as legally erroneous as the Decision under reconsideration.
In light of these conclusions, the sufficiency of Tongkos failure to comply with the guidelines of de
Dios letter, as a ground for termination of Tongkos agency, is a matter that the labor tribunals cannot
rule upon in the absence of an employer-employee relationship. Jurisdiction over the matter belongs
to the courts applying the laws of insurance, agency and contracts.
WHEREFORE, considering the foregoing discussion, we REVERSE our Decision of November 7,
2008, GRANTManulifes motion for reconsideration and, accordingly, DISMISS Tongkos petition. No
costs.
SO ORDERED.
G.R. No. 181132

June 5, 2009

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

MARAMAG,Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE
GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE
COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set
aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No.
85948, dismissing petitioners appeal for lack of jurisdiction.

The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch 29,
for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer
for a temporary restraining order (TRO) and a writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto Maramag
(Loreto), while respondents were Loretos illegitimate family; (2) Eva de Guzman Maramag (Eva)
was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive
any proceeds from his insurance policies from Insular Life Assurance Company, Ltd. (Insular) 4 and
Great Pacific Life Assurance Corporation (Grepalife); 5 (3) the illegitimate children of LoretoOdessa,
Karl Brian, and Trisha Angeliewere entitled only to one-half of the legitime of the legitimate
children, thus, the proceeds released to Odessa and those to be released to Karl Brian and Trisha
Angelie were inofficious and should be reduced; and (4) petitioners could not be deprived of their
legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among others,
that part of the insurance proceeds had already been released in favor of Odessa, while the rest of
the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the
appointment of their legal guardian. Petitioners also prayed for the total amount of P320,000.00 as
actual litigation expenses and attorneys fees.
In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl
Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the insurance
proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto,
it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha
Angelie, as the remaining designated beneficiaries; and that it released Odessas share as she was
of age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending
submission of letters of guardianship. Insular alleged that the complaint or petition failed to state a
cause of action insofar as it sought to declare as void the designation of Eva as beneficiary, because
Loreto revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy
No. A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian,
and Trisha Angelie, considering that no settlement of Loretos estate had been filed nor had the
respective shares of the heirs been determined. Insular further claimed that it was bound to honor
the insurance policies designating the children of Loreto with Eva as beneficiaries pursuant to
Section 53 of the Insurance Code.
In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated as
an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were
denied because Loreto was ineligible for insurance due to a misrepresentation in his application form
that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the legitimate family of
Loreto; and that the law on succession does not apply where the designation of insurance
beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their

answer. Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated
May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial court ordered petitioners to comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal
whether the complaint itself was proper or not and that the designation of a beneficiary is an act of
liberality or a donation and, therefore, subject to the provisions of Articles 752 8 and 7729 of the Civil
Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally
married to Vicenta Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and
Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The action
shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.10
In so ruling, the trial court ratiocinated thus
Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic) special
laws. Matters not expressly provided for in such special laws shall be regulated by this Code. The
principal law on insurance is the Insurance Code, as amended. Only in case of deficiency in the
Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil.
269.)
The Insurance Code, as amended, contains a provision regarding to whom the insurance proceeds
shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be applied
exclusively to the proper interest of the person in whose name or for whose benefit it is made, unless
otherwise specified in the policy. Since the defendants are the ones named as the primary
beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the insurance proceeds
shall exclusively be paid to them. This is because the beneficiary has a vested right to the indemnity,
unless the insured reserves the right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of
Canada, 48 Phil. [sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary
succession in order to defeat the right of herein defendants to collect the insurance indemnity. The
beneficiary in a contract of insurance is not the donee spoken in the law of donation. The rules on
testamentary succession cannot apply here, for the insurance indemnity does not partake of a

donation. As such, the insurance indemnity cannot be considered as an advance of the inheritance
which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon
Employees Association v. Juanita Golpeo, et al., the Honorable Supreme Court made the following
pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs exclusively
to the defendant as his individual and separate property, we agree that the proceeds of an insurance
policy belong exclusively to the beneficiary and not to the estate of the person whose life was
insured, and that such proceeds are the separate and individual property of the beneficiary and not
of the heirs of the person whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of Section 428 of the Code of Commerce x x x."
In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient
cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the
reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the
insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De
Guzman. Any person who is forbidden from receiving any donation under Article 739 cannot be
named beneficiary of a life insurance policy of the person who cannot make any donation to him,
according to said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed
that the insurance contract will still remain valid, but the indemnity must go to the legal heirs and not
to the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the improper
beneficiary. In such case, the action for the declaration of nullity may be brought by the spouse of
the donor or donee, and the guilt of the donor and donee may be proved by preponderance of
evidence in the same action (Comment of Edgardo L. Paras, Civil Code of the Philippines, page
897). Since the designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil
Code, the insurance indemnity that should be paid to her must go to the legal heirs of the deceased
which this court may properly take cognizance as the action for the declaration for the nullity of a
void donation falls within the general jurisdiction of this Court.11
Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main, that
the petition failed to state a cause of action. Insular further averred that the proceeds were divided
among the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged
that the premiums paid had already been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on the
basis of the allegations in the complaint, such that the defenses of Insular and Grepalife would be
better threshed out during trial.
1avvphi1

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

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by
defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the
Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case
against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the
case against them is hereby ordered DISMISSED.
SO ORDERED.14
In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the
allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to the
illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is
only in cases where there are no beneficiaries designated, or when the only designated beneficiary
is disqualified, that the proceeds should be paid to the estate of the insured. As to the claim that the
proceeds to be paid to Loretos illegitimate children should be reduced based on the rules on
legitime, the trial court held that the distribution of the insurance proceeds is governed primarily by
the Insurance Code, and the provisions of the Civil Code are irrelevant and inapplicable. With
respect to the Grepalife policy, the trial court noted that Eva was never designated as a beneficiary,
but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the
illegitimate children. It further held that the matter of Loretos misrepresentation was premature; the
appropriate action may be filed only upon denial of the claim of the named beneficiaries for the
insurance proceeds by Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a
cause of action involved a pure question of law. The appellate court also noted that petitioners did
not file within the reglementary period a motion for reconsideration of the trial courts Resolution,
dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha
Angelie; thus, the said Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of action, may
the Court consider matters which were not alleged in the Complaint, particularly the
defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to state a cause
of action, did not the Regional Trial Court engage in the examination and determination of
what were the facts and their probative value, or the truth thereof, when it premised the
dismissal on allegations of the defendants in their answer which had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the insurance
for the concubine?15
In essence, petitioners posit that their petition before the trial court should not have been dismissed
for failure to state a cause of action because the finding that Eva was either disqualified as a

beneficiary by the insurance companies or that her designation was revoked by Loreto,
hypothetically admitted as true, was raised only in the answers and motions for reconsideration of
both Insular and Grepalife. They argue that for a motion to dismiss to prosper on that ground, only
the allegations in the complaint should be considered. They further contend that, even assuming
Insular disqualified Eva as a beneficiary, her share should not have been distributed to her children
with Loreto but, instead, awarded to them, being the legitimate heirs of the insured deceased, in
accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the petition failed to
state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of another.16 A complaint
states a cause of action when it contains the three (3) elements of a cause of action(1) the legal
right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the
defendant in violation of the legal right. If any of these elements is absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause of action. 17
When a motion to dismiss is premised on this ground, the ruling thereon should be based only on
the facts alleged in the complaint. The court must resolve the issue on the strength of such
allegations, assuming them to be true. The test of sufficiency of a cause of action rests on whether,
hypothetically admitting the facts alleged in the complaint to be true, the court can render a valid
judgment upon the same, in accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the parties or in
the course of the hearings related to the case.18

In this case, it is clear from the petition filed before the trial court that, although petitioners are the
legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies issued by
Insular and Grepalife. The basis of petitioners claim is that Eva, being a concubine of Loreto and a
suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies,
and that Evas children with Loreto, being illegitimate children, are entitled to a lesser share of the
proceeds of the policies. They also argued that pursuant to Section 12 of the Insurance
Code,19 Evas share in the proceeds should be forfeited in their favor, the former having brought
about the death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of
Loretos illegitimate children should be awarded to them, being the legitimate heirs of Loreto entitled
to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a favorable judgment in
light of Article 2011 of the Civil Code which expressly provides that insurance contracts shall be
governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are
either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the
maturation of the policy.20 The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of favorable stipulations
or indemnity. In such a case, third parties may directly sue and claim from the insurer.21
Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not
entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal
obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary
in one policy and her disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loretos insurance policies remains valid.
Because no legal proscription exists in naming as beneficiaries the children of illicit relationships by
the insured,22 the shares of Eva in the insurance proceeds, whether forfeited by the court in view of
the prohibition on donations under Article 739 of the Civil Code or by the insurers themselves for
reasons based on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has not
designated any beneficiary,23 or when the designated beneficiary is disqualified by law to receive the
proceeds,24 that the insurance policy proceeds shall redound to the benefit of the estate of the
insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the same
light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate court
had no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of action is
a question of law and not of fact, there being no findings of fact in the first place. 25
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

G.R. No. 156302

April 7, 2009

THE HEIRS OF GEORGE Y. POE, Petitioners,

vs.
MALAYAN INSURANCE COMPANY, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
The instant Petition for Review under Rule 451 of the Rules of Court assails the Decision2 dated 26
June 2002 of the Court of Appeals in CA-G.R. SP No. 67297, which granted the Petition for
Certiorari of respondent Malayan Insurance Company, Inc. (MICI) and recalled and set aside the
Order3 dated 6 September 2001 of the Regional Trial Court (RTC), Branch 73, of Antipolo City, in
Civil Case No. 93-2705. The RTC, in its recalled Order, denied the Notice of Appeal of MICI and
granted the Motion for the Issuance of a Writ of Execution filed by petitioners Heirs of George Y.
Poe. The present Petition also challenges the Resolution4 dated 29 November 2002 of the appellate
court denying petitioners Motion for Reconsideration.
Records show that on 26 January 1996 at about 4:45 a.m., George Y. Poe (George) while waiting for
a ride to work in front of Capital Garments Corporation, Ortigas Avenue Extension, Barangay
Dolores, Taytay, Rizal, was run over by a ten-wheeler Isuzu hauler truck with Plate No. PMH-858
owned by Rhoda Santos (Rhoda), and then being driven by Willie Labrador (Willie). 5 The said truck
was insured with respondent MICI under Policy No. CV-293-007446-8.
To seek redress for Georges untimely death, his heirs and herein petitioners, namely, his widow
Emercelinda, and their children Flerida and Fernando, filed with the RTC a Complaint for damages
against Rhoda and respondent MICI, docketed as Civil Case No. 93-2705. 6 Petitioners identified
Rhoda and respondent MICI, as follows:
Defendant RHODA SANTOS is likewise of legal age, Filipino and a resident of Real Street,
Pamplona, Las Pias, Metro Manila where she may be served with summons and other court
processes.
[Herein respondent] MALAYAN INSURANCE COMPANY, INC. (hereinafter "[MICI]" for brevity) is a
corporation duly organized and existing under Philippine law with address at Yuchengco Bldg., 484
Q. Paredes Street, Binondo, Manila where it may be served with summons and other processes of
this Honorable Court;
Defendant Rhoda Santos, who is engaged in the business, among others, of selling gravel and sand
is the registered owner of one Isuzu Truck, with Plate No. PMH-858 and is the employer of Willie
Labrador the authorized driver of the aforesaid truck.
[Respondent MICI] on the other hand is the insurer of Rhoda Santos under a valid and existing
insurance policy duly issued by said [MICI], Policy No. CV-293-007446-8 over the subject vehicle
owned by Rhoda Santos, Truck-Hauler Isuzu 10 wheeler with plate no. PMH-858, serial no.
SRZ451-1928340 and motor no. 10PA1-403803. Under said insurance policy, [MICI] binds itself,
among others, to be liable for damages as well as any bodily injury to third persons which may be
caused by the operation of the insured vehicle.7
And prayed that:

[J]udgment issue in favor of [herein petitioners] ordering [Rhoda and herein respondent MICI] jointly
and solidarily to pay the [petitioners] the following:
1. Actual damages in the total amount of THIRTY SIX THOUSAND (P36,000.00) PESOS for
funeral and burial expenses;
2. Actual damages in the amount of EIGHT HUNDRED FIVE THOUSAND NINE HUNDRED
EIGHTY FOUR (P805,984.00) PESOS as loss of earnings and financial support given by the
deceased by reason of his income and employment;
3. Moral damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS;
4. Exemplary damages in the amount of FIFTY THOUSAND (P50,000.00) PESOS;
5. Attorneys fees in the amount of FIFTY THOUSAND (P50,000.00) PESOS and litigation
expense in the amount of ONE THOUSAND FIVE HUNDRED (P1,500.00) PESOS for each
court appearance;
6. The costs of suit.
Other reliefs just and equitable in the premises are likewise prayed for.8
Rhoda and respondent MICI made the following admissions in their Joint Answer 9 :
That [Rhoda and herein respondent MICI] admit the allegations in paragraphs 2, 3 and 4 of the
complaint;
That [Rhoda and respondent MICI] admit the allegations in paragraph 5 of the complaint that the
cargo truck is insured with [respondent] Malayan Insurance Company, Inc. [(MICI)] however, the
liability of the insured company attached only if there is a judicial pronouncement that the insured
and her driver are liable and moreover, the liability of the insurance company is subject to the
limitations set forth in the insurance policy.10
Rhoda and respondent MICI denied liability for Georges death averring, among other defenses,
that: a) the accident was caused by the negligent act of the victim George, who surreptitiously and
unexpectedly crossed the road, catching the driver Willie by surprise, and despite the latters effort to
swerve the truck to the right, the said vehicle still came into contact with the victim; b) the liability of
respondent MICI, if any, would attach only upon a judicial pronouncement that the insured Rhoda
and her driver Willie are liable; c) the liability of MICI should be based on the extent of the insurance
coverage as embodied in Rhodas policy; and d) Rhoda had always exercised the diligence of a
good father of a family in the selection and supervision of her driver Willie.
After the termination of the pre-trial proceedings, trial on the merits ensued.
Petitioners introduced and offered evidence in support of their claims for damages against MICI, and
then rested their case. Thereafter, the hearings for the reception of the evidence of Rhoda and
respondent MICI were scheduled, but they failed to adduce their evidence despite several
postponements granted by the trial court. Thus, during the hearing on 9 June 1995, the RTC, upon
motion of petitioners counsel, issued an Order11declaring that Rhoda and respondent MICI had
waived their right to present evidence, and ordering the parties to already submit their respective
Memorandum within 15 days, after which, the case would be deemed submitted for decision.
1avvphi1.zw+

Rhoda and respondent MICI filed a Motion for Reconsideration12 of the Order dated 9 June 1995, but
it was denied by the RTC in another Order dated 11 August 1995.13
Consequently, Rhoda and respondent MICI filed a Petition for Certiorari, Mandamus, 14 Prohibition
and Injunction with Prayer for a Temporary Restraining Order and Writ of Preliminary Injunction,
assailing the Orders dated 9 June 1995 and 11 August 1995 of the RTC foreclosing their right to
adduce evidence in support of their defense. The Petition was docketed as CA-G.R. SP No. 38948.
The Court of Appeals, through its Third Division, promulgated a Decision 15 on 29 April 1996, denying
due course to the Petition in CA-G.R. SP No. 38948. Rhoda and respondent MICI elevated the
matter to the Supreme Court via a Petition for Certiorari, 16 docketed as G.R. No. 126244. This Court
likewise dismissed the Petition in G.R. No. 126244 in a Resolution dated 30 September 1996. 17 Entry
of Judgment was made in G.R. No. 126244 on 8 November 1996. 18
On 28 February 2000, the RTC rendered a Decision in Civil Case No. 93-2705, the dispositive
portion of which reads:
Wherefore, [Rhoda and herein respondent MICI] are hereby ordered to pay jointly and solidarily to
the [herein petitioners] the following:
1. Moral damages amounting to P100,000.00;
2. Actual damages for loss of earning capacity amounting to P805,984.00;
3. P36,000.00 for funeral expenses;
4. P50,000.00 as exemplary damages;
5. P50,000.00 for attorneys fees plus P1,500 per court appearance; and
6. Cost of suit.19
Rhoda and respondent MICI received their copy of the foregoing RTC Decision on 14 March
2000.20 On 22 March 2000, respondent MICI and Rhoda filed a Motion for Reconsideration 21 of said
Decision, averring therein that the RTC erred in ruling that the obligation of Rhoda and respondent
MICI to petitioners was solidary or joint and several; in computing Georges loss of earning capacity
not in accord with established jurisprudence; and in awarding moral damages although it was not
buttressed by evidence.
Resolving the Motion of respondent MICI and Rhoda, the RTC issued an Order 22 on 24 January
2001 modifying and amending its Decision dated 28 February 2000, and dismissing the case against
respondent MICI.
The RTC held that:
After a careful evaluation of the issues at hand, the contention of the [herein respondent MICI] as far
as the solidary liability of the insurance company with the other defendant [Rhoda] is meritorious.
However, the assailed Decision can be modified or amended to correct the same honest
inadvertence without necessarily reversing it and set aside to conform with the evidence on hand.
The RTC also re-computed Georges loss of earning capacity, as follows:

The computation of actual damages for loss of earning capacity was determined by applying the
formula adopted in the American Expectancy Table of Mortality or the actuarial of Combined
Experience Table of Mortality applied in x x x Villa Rey Transit, Inc. v. Court of Appeals (31 SCRA
521). Moral damages is awarded in accordance with Article 2206 of the New Civil Code of the
Philippines. While death indemnity in the amount of P50,000.00 is automatically awarded in cases
where the victim had died (People v. Sison, September 14, 1990 [189 SCRA 643]). 23
In the end, the RTC decreed:
WHEREFORE, in view of the foregoing consideration, the Decision of this Court dated 28 February
2000 is hereby amended or modified. Said Decision should read as follows:
"Wherefore, defendant Rhoda Santos is hereby ordered to pay to the [herein petitioners] the
following:
1. Moral damages amounting to P100,000.00;
2. Actual damages for loss of earning capacity amounting to P102,106.00;
3. P36,000.00 for funeral expenses;
4. P50,000.00 as death indemnity;
5. P50,000.00 for attorneys fees plus P1,500.00 per court appearance;
6. Costs of the suit.
The case against Malayan Insurance Company, Inc. is hereby dismissed." 24
It was petitioners turn to file a Motion for Reconsideration25 of the 24 January 2001 Order, to which
respondent MICI filed a "Vigorous Opposition to the Plaintiffs Motion for Reconsideration." 26
On 15 June 2001, the RTC issued an Order reinstating its Decision dated 28 February 2000,
relevant portions of which state:
Finding the arguments raised by the [herein petitioners] in their Motion for Reconsideration of the
Order of this Court dated January 24, 2001 to be more meritorious to [herein respondents] Malayan
Insurance Co., Inc. (sic) arguments in its vigorous opposition thereto, said motion is hereby granted.
Accordingly, the Order under consideration is hereby reconsidered and set aside. The decision of
this Court dated February 28, 2000 is hereby reinstated.
Notify parties herein.27
Respondent MICI received a copy of the 15 June 2001 Order of the RTC on 27 June 2001.
Aggrieved by the latest turn of events, respondent MICI filed on 9 July 2001 a Notice of Appeal 28 of
the 28 February 2000 Decision of the RTC, reinstated by the 15 June 2001 Resolution of the same
court. Rhoda did not join respondent MICI in its Notice of Appeal.29

Petitioners filed their Opposition30 to the Notice of Appeal of respondent MICI, with a Motion for the
Issuance of Writ of Execution.
After considering the recent pleadings of the parties, the RTC, in its Order dated 6 September 2001,
denied the Notice of Appeal of respondent MICI and granted petitioners Motion for the Issuance of
Writ of Execution. The RTC reasoned in its Order:
The records disclosed that on February 28, 2000 this Court rendered a Decision in favor of the
[herein petitioners] and against [Rhoda and herein respondent MICI]. The Decision was said to have
been received by MICI on March 14, 2000. Eight days after or on March 22, 2000, MICI mailed its
Motion for Reconsideration to this Court and granted the same in the Order dated January 24, 2001.
From this Order, [petitioners] filed a Motion for Reconsideration on February 21, 2001 to which MICI
filed a vigorous opposition. On June 15, 2001 this Court granted [petitioners] motion reinstating the
Decision dated February 28, 2000. According to MICI, the June 15, 2001 order was received by it on
June 27, 2001. MICI filed a Notice of Appeal on July 9, 2001 or twelve (12) days from receipt of said
Order.
[Petitioners] contend that the Notice of Appeal was filed out of time while [respondent] MICI opposes,
arguing otherwise. The latter interposed that the Order dated June 15, 2001 is in reality a new
Decision thereby giving it a fresh fifteen (15) days within which to file notice of appeal.
[Respondent] MICIs contention is not meritorious. The fifteen (15) day period within which to file a
notice of appeal should be reckoned from the date it received the Decision on March 14, 2000. So
that when MICI mailed its Motion for Reconsideration on March 22, 2000, eight (8) days had already
lapsed, MICI has remaining seven (7) days to file a notice of appeal. However, when it received the
last Order of this Court it took [respondent] MICI twelve (12) days to file the same. Needless to say,
MICIs Notice of Appeal was filed out of time. The Court cannot countenance the argument of MICI
that a resolution to a motion for a final order or judgment will have the effect of giving a fresh
reglementary period. This would be contrary to what was provided in the rules of procedure. 31
Accordingly, the RTC adjudged:
WHEREFORE, premises considered, [herein respondent] MICIs Notice of Appeal is hereby Denied
for having filed out of time making the Decision of this Court dated February 28, 2000 as final and
executory. Accordingly, the Motion for Issuance of Writ of Execution filed by [herein petitioners] is
hereby Granted.
Notify parties herein.32
Respondent MICI filed a Petition for Certiorari33 under Rule 65 of the Rules of Court before the Court
of Appeals, which was docketed as CA-G.R. SP No. 67297. The Petition assailed, for having been
rendered by the RTC with grave abuse of discretion amounting to lack or excess of jurisdiction, the
following: (1) the Order dated 6 September 2001, denying the Notice of Appeal of respondent MICI
and granting petitioners Motion for the Issuance of Writ of Execution; (2) the Decision dated 28
February 2000, holding Rhoda and respondent MICI jointly and severally liable for Georges death;
and (3) the Order dated 15 June 2001, reinstating the Decision dated 28 February 2000.
The Court of Appeals granted the Petition for Certiorari of respondent MICI in a Decision dated 26
June 2000, ratiocinating thus:

Prescinding therefrom, we hold that the fifteen (15) day period to appeal must be reckoned
from the time the [herein respondent] Malayan received the order dated 15 June 2001
reversing in toto the order of 24 January 2000 and reinstating in full the Decision dated 28
February 2000. Thus, [respondent] Malayan had until 12 July 2001 within which to file its notice of
appeal. Therefore, when [respondent] Malayan filed its notice of appeal on 09 July 2001, it was well
within the reglementary period and should have been given due course by the public respondent
court.
It was therefore, an excess of jurisdiction on the part of the public respondent court when it reckoned
the [respondent] Malayans period to appeal on the date it received on 14 March 2000 the formers
decision dated 28 February 2000. As earlier expostulated, the said decision was completely vacated
insofar as the [respondent] Malayan is concerned when the public respondent court in its order
dated 24 January 2001 dismissed the case against the former. Thus, to reckon the fifteen (15) days
to appeal from the day the [respondent] Malayan received the said decision on 14 March 2000, is
the height of absurdity because there was nothing for the [respondent] Malayan to appeal inasmuch
as the public respondent court vacated the said decision in favor of the former.
The aforesaid conclusion finds support in Sta. Romana vs. Lacson (104 SCRA 93), where the court,
relying on the case of Magdalena Estate, Inc. vs. Caluag, 11 SCRA 334, held that where the court of
origin made a thoroughly (sic) restudy of the original judgment and rendered the amended and
clarified judgment only after considering all the factual and legal issues, the amended and clarified
decision was an entirely new decision which superseded (sic). For all intents and purposes, the court
concluded the trial court rendered a new judgment from which the time to appeal must be reckoned.
In the instant case, what is involved is not merely a substantial amendment or modification of the
original decision, but the total reversal thereof in the order dated 24 January 2000. Given the
rationale in the aforecited cases, it is only logical that the period of appeal be counted from 27 June
2001, the date that [respondent] Malayan received the order dated 15 June 2001 reversing in toto
the order of 24 January 2000 and reinstating the Decision dated 28 February 2000. 34 (Emphasis
supplied.)
The fallo of the Decision of the Court of Appeals reads:
WHEREFORE, in consideration of the foregoing premises, the petition for certiorari is partially
GRANTED. Accordingly, the public respondent courts order dated 06 September 2001 is hereby
RECALLED and SET ASIDE.
Public respondent court is hereby directed to approve the petitioner Malayans notice of appeal and
to refrain from executing the writ of execution granted on 06 September 2001. 35
The Court of Appeals denied petitioners Motion for Reconsideration in a Resolution dated 29
November 2002.
Understandably distraught, petitioners come before this Court in this Petition for Review, which raise
the following issues:
I.
Whether or not the respondent Court of Appeals committed grave abuse of discretion when it ruled
that private respondent could file a Petition for Certiorari even though its Motion for Reconsideration
was still pending resolution with the lower court.

II.
Whether or not the respondent Court of Appeals committed grave abuse of discretion when it ruled
that the private respondent had filed its Notice of Appeal with the trial court within the reglementary
period.36
The Court first turns its attention to the primary issue for its resolution: whether the Notice of Appeal
filed by respondent MICI before the RTC was filed out of time.
The period for filing a Notice of Appeal is set by Rule 41, Section 3 of the 1997 Rules of Court:
SEC. 3. Period of ordinary appeal. The appeal shall be taken within fifteen (15) days from notice of
the judgment or final order appealed from. Where a record on appeal is required, the appellants shall
file a notice of appeal and a record on appeal within thirty (30) days from notice of the judgment or
final order. x x x.
The period of appeal shall be interrupted by a timely motion for new trial or reconsideration. No
motion for extension of time to file a motion for new trial or reconsideration shall be allowed.
It is clear under the Rules that an appeal should be taken within 15 days from the notice of judgment
or final order appealed from.37 A final judgment or order is one that finally disposes of a case, leaving
nothing more for the court to do with respect to it. It is an adjudication on the merits which,
considering the evidence presented at the trial, declares categorically what the rights and obligations
of the parties are; or it may be an order or judgment that dismisses an action. 38
Propitious to petitioners is Neypes v. Court of Appeals,39 which the Court promulgated on 14
September 2005, and wherein it laid down the fresh period rule:
To standardize the appeal periods provided in the Rules and to afford litigants fair opportunity to
appeal their cases, the Court deems it practical to allow a fresh period of 15 days within which to
file the notice of appeal in the Regional Trial Court, counted from receipt of the order dismissing a
motion for a new trial or motion for reconsideration.
Henceforth, this "fresh period rule" shall also apply to Rule 40 governing appeals from the
Municipal Trial Courts to the Regional Trial Courts; Rule 42 on petitions for review from the
Regional Trial Courts to the Court of Appeals; Rule 43 on appeals from quasi-judicial agencies to
the Court of Appeals and Rule 45 governing appeals by certiorari to the Supreme Court. The new
rule aims to regiment or make the appeal period uniform, to be counted from receipt of the order
denying the motion for new trial, motion for reconsideration (whether full or partial) or any final order
or resolution. (Emphases ours.)
The fresh period of 15 days becomes significant when a party opts to file a motion for new trial or
motion for reconsideration. In this manner, the trial court which rendered the assailed decision is
given another opportunity to review the case and, in the process, minimize and/or rectify any error of
judgment.40 With the advent of the fresh period rule, parties who availed themselves of the remedy of
motion for reconsideration are now allowed to file a notice of appeal within fifteen days from the
denial of that motion.41
The Court has accentuated that the fresh period rule is not inconsistent with Rule 41, Section 3 of
the Rules of Court which states that the appeal shall be taken "within fifteen (15) days from notice of
judgment or final order appealed from." The use of the disjunctive word "or" signifies disassociation

and independence of one thing from another. It should, as a rule, be construed in the sense which it
ordinarily implies.42 Hence, the use of "or" in the above provision supposes that the notice of appeal
may be filed within 15 days from the notice of judgment or within 15 days from notice of the final
order in the case.
Applying the fresh period rule, the Court agrees with the Court of Appeals and holds that respondent
MICI seasonably filed its Notice of Appeal with the RTC on 9 July 2001, just 12 days from 27 June
2001, when it received the denial of its Motion for Reconsideration of the 15 June 2001 Resolution
reinstating the 28 February 2000 Decision of the RTC.
The fresh period rule may be applied to the case of respondent MICI, although the events which
transpired concerning its Notice of Appeal took place in June and July 2001, inasmuch as rules of
procedure may be given retroactive effect on actions pending and undetermined at the time of their
passage. The Court notes that Neypes was promulgated on 14 September 2005, while the instant
Petition was still pending before this Court.
Reference may be made to Republic v. Court of Appeals,43 involving the retroactive application of
A.M. No. 00-2-03-SC which provided that the 60-day period within which to file a petition
for certiorari shall be reckoned from receipt of the order denying the motion for reconsideration. In
said case, the Court declared that rules of procedure "may be given retroactive effect to actions
pending and undetermined at the time of their passage and this will not violate any right of a person
who may feel that he is adversely affected, inasmuch as there is no vested rights in rules of
procedure."
Hence, the fresh period rule laid down in Neypes was applied by the Court in resolving the
subsequent cases ofSumaway v. Urban Bank, Inc.,44 Elbia v. Ceniza,45 First Aqua Sugar Traders,
Inc. v. Bank of the Philippine Islands,46 even though the antecedent facts giving rise to said cases
transpired before the promulgation of Neypes.
In De los Santos v. Vda de Mangubat,47 particularly, the Court applied the fresh period rule,
elucidating that procedural law refers to the adjective law which prescribes rules and forms of
procedure in order that courts may be able to administer justice. Procedural laws do not come within
the legal conception of a retroactive law, or the general rule against the retroactive operation of
statutes. The fresh period rule is irrefragably procedural, prescribing the manner in which the
appropriate period for appeal is to be computed or determined and, therefore, can be made
applicable to actions pending upon its effectivity without danger of violating anyone elses rights.
Since the Court affirms the ruling of the Court of Appeals that respondent MICI filed its Notice of
Appeal with the RTC within the reglementary period, the appropriate action, under ordinary
circumstances, would be for the Court to remand the case to the RTC so that the RTC could approve
the Notice of Appeal of respondent MICI and respondent MICI could already file its appeal with the
Court of Appeals.
However, considering that the case at bar has been pending for almost sixteen years, 48 and the
records of the same are already before this Court, remand is no longer necessary.
Jurisprudence dictates that remand of a case to a lower court does not follow if, in the interest of
justice, the Supreme Court itself can resolve the dispute based on the records before it. As a rule,
remand is avoided in the following instances: (a) where the ends of justice would not be subserved
by a remand; or (b) where public interest demands an early disposition of the case; or (c) where the
trial court has already received all the evidence presented by both parties, and the Supreme Court is
in a position, based upon said evidence, to decide the case on its merits. 49 In Lao v. People,50 the

Supreme Court, in consideration of the years that it had taken for the controversy therein to reach it,
concluded that remand of the case to a lower court was no longer the more expeditious and practical
route to follow, and it then decided the said case based on the evidentiary record before it.
The consistent stand of the Court has always been that a case should be decided in its totality,
resolving all interlocking issues in order to render justice to all concerned and to end the litigation
once and for all. Verily, courts should always strive to settle the entire controversy in a single
proceeding, leaving no root or branch to bear the seed of future litigation. 51 Where the public interest
so demands, the court will broaden its inquiry into a case and decide the same on the merits rather
than merely resolve the procedural question raised.52 Such rule obtains in this case.
The Court is convinced that the non-remanding of the case at bar is absolutely justified. Petitioners
have already suffered from the tragic loss of a loved one, and must not be made to endure more
pain and uncertainty brought about by the continued pendency of their claims against those liable.
The case has been dragging on for almost 16 years now without the petitioners having been fully
compensated for their loss. The Court cannot countenance such a glaring indifference to petitioners
cry for justice. To be sure, they deserve nothing less than full compensation to give effect to their
substantive rights.53
The complete records of the present case have been elevated to this Court, and the pleadings and
evidence therein could fully support its factual adjudication. Indeed, after painstakingly going over
the records, the Court finds that the material and decisive facts are beyond dispute: George was
killed when he was hit by the truck driven by Willie, an employee of Rhoda; and the truck is insured
with respondent MICI. The only issue left for the Court to resolve is the extent of the liability of Rhoda
and respondent MICI for Georges death and the appropriate amount of the damages to be awarded
to petitioners.
The Court now turns to the issue of who is liable for damages for the death of George.
Respondent MICI does not deny that it is the insurer of the truck. Nevertheless, it asserts that its
liability is limited, and it should not be held solidarily liable with Rhoda for all the damages awarded
to petitioners.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. In a joint obligation, each obligor
answers only for a part of the whole liability and to each obligee belongs only a part of the correlative
rights. Well-entrenched is the rule that solidary obligation cannot lightly be inferred. There is solidary
liability only when the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires.54
It is settled that where the insurance contract provides for indemnity against liability to third persons,
the liability of the insurer is direct and such third persons can directly sue the insurer. The direct
liability of the insurer under indemnity contracts against third party liability does not mean, however,
that the insurer can be held solidarily liable with the insured and/or the other parties found at fault,
since they are being held liable under different obligations. The liability of the insured carrier or
vehicle owner is based on tort, in accordance with the provisions of the Civil Code; 55 while that of the
insurer arises from contract, particularly, the insurance policy. The third-party liability of the insurer is
only up to the extent of the insurance policy and that required by law; and it cannot be held solidarily
liable for anything beyond that amount.56 Any award beyond the insurance coverage would already
be the sole liability of the insured and/or the other parties at fault. 57

In Vda. de Maglana v. Consolacion,58 it was ruled that an insurer in an indemnity contract for thirdparty liability is directly liable to the injured party up to the extent specified in the agreement, but it
cannot be held solidarily liable beyond that amount. According to respondent MICI, its liability as
insurer of Rhodas truck is limited. Following Vda. de Maglana, petitioners would have had the option
either (1) to claim the amount awarded to them from respondent MICI, up to the extent of the
insurance coverage, and the balance from Rhoda; or (2) to enforce the entire judgment against
Rhoda, subject to reimbursement from respondent MICI to the extent of the insurance coverage. The
Court, though, is precluded from applying its ruling in Vda. de Maglana by the difference in one vital
detail between the said case and the one at bar. The insurer was able to sufficiently establish its
limited liability in Vda. de Maglana, while the same cannot be said for respondent MICI herein.
The Court highlights that in this case, the insurance policy between Rhoda and respondent MICI,
covering the truck involved in the accident which killed George, was never presented. There is no
means, therefore, for this Court to ascertain the supposed limited liability of respondent MICI under
said policy. Without the presentation of the insurance policy, the Court cannot determine the
existence of any limitation on the liability of respondent MICI under said policy, and the extent or
amount of such limitation.
It should be remembered that respondent MICI readily admits that it is the insurer of the truck that hit
and killed George, except that it insists that its liability under the insurance policy is limited. As the
party asserting its limited liability, respondent MICI then has the burden of evidence to establish its
claim. In civil cases, the party that alleges a fact has the burden of proving it. Burden of proof is the
duty of a party to present evidence on the facts in issue necessary to prove its claim or defense by
the amount of evidence required by law.59 Regrettably, respondent MICI failed to discharge this
burden.60 The Court cannot rely on mere allegations of limited liability sans proof.
The failure of respondent MICI to present the insurance policy which, understandably, is not in
petitioners possession, but in the custody and absolute control of respondent MICI as the insurer
and/or Rhoda as the insured gives rise to the presumption that its presentation is prejudicial to the
cause of respondent MICI.61 When the evidence tends to prove a material fact which imposes a
liability on a party, and he has it in his power to produce evidence which, from its very nature, must
overthrow the case made against him if it is not founded on fact, and he refuses to produce such
evidence, the presumption arises that the evidence, if produced, would operate to his prejudice and
support the case of his adversary.62
Respondent MICI had all the opportunity to prove before the RTC that its liability under the insurance
policy it issued to Rhoda, was limited; yet, respondent MICI failed to do so. The failure of respondent
MICI to rebut that which would have naturally invited an immediate, pervasive, and stiff opposition
from it created an adverse inference that either the controverting evidence to be presented by
respondent MICI would only prejudice its case, or that the uncontroverted evidence of petitioners
indeed speaks of the truth. And such adverse inference, recognized and adhered to by courts in
judging the weight of evidence in all kinds of proceedings, surely is not without basis its rationale
and effect rest on sound, logical and practical considerations, viz:
The presumption that a man will do that which tends to his obvious advantage, if he possesses the
means, supplies a most important test for judging of the comparative weight of evidence x x x If, on
the supposition that a charge or claim is unfounded, the party against whom it is made has evidence
within his reach by which he may repel that which is offered to his prejudice, his omission to do so
supplies a strong presumption that the charge or claim is well founded; it would be contrary to every
principle of reason, and to all experience of human conduct, to form any other conclusion." (Starkie
on Evidence, p. 846, Moore on Facts, Vol. I, p. 544)

xxxx
The ordinary rule is that one who has knowledge peculiarly within his own control, and refuses to
divulge it, cannot complain if the court puts the most unfavorable construction upon his silence, and
infers that a disclosure would have shown the fact to be as claimed by the opposing party." (Societe,
etc., v. Allen, 90 Fed. Rep. 815, 817, 33 C.C.A. 282, per Taft, C.J., Moore on Facts, Vol. I, p. 561). 63
The inference still holds even if it be assumed, for argument's sake, that the solidary liability of
respondent MICI with Rhoda is improbable, for it has likewise been said that:
Weak evidence becomes strong by the neglect of the party against whom it is put in, in not showing
by means within the easy control of that party that the conclusion drawn from such evidence is
untrue. (Pittsburgh, etc., R. Co. v. Callaghan, 50 III. App. 676, 681, Moore on Facts, Vol. I, p. 572). 64
Given the admission of respondent MICI that it is the insurer of the truck involved in the accident that
killed George, and in the utter absence of proof to establish both the existence and the
extent/amount of the alleged limited liability of respondent MICI as insurer, the Court could only
conclude that respondent MICI had agreed to fully indemnify third-party liabilities. Consequently,
there is no more difference in the amounts of damages which petitioners can recover from Rhoda or
respondent MICI; petitioners can recover the said amounts in full from either of them, thus, making
their liabilities solidary or joint and several.
The Court now comes to the issue of the amounts of the damages awarded.
In its Decision dated 22 February 2000, the RTC awarded petitioners moral and actual damages, as
well as funeral expenses and attorneys fees. Subsequently, in its Order dated 24 January 2001, the
RTC reduced the amount of actual damages from P805,984.00 to P102,106.00, but additionally
awarded death indemnity in the amount of P50,000.00. Its award of moral damages and funeral
expenses as well as attorneys fees remained constant in its 28 February 2000 decision and was
carried over to its 24 January 2001 Order.
The Court shall now proceed to scrutinize said award of damages.
As regards the award of actual damages, Article 2199 of the Civil Code provides that "[e]xcept as
provided by law or by stipulation one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved x x x."
The RTC awarded P36,000.00 for burial expenses. The award of P36,000.00 for burial expenses is
duly supported by receipts evidencing that petitioners did incur this expense. The petitioners held a
wake for two days at their residence and another two days at the Loyola Memorial Park. 65 The
amount covered the expenses by petitioners for the wake, funeral and burial of George. 66
As to compensation for loss of earning capacity, the RTC initially awarded P805,984.00 in its 28
February 2000 Decision, which it later reduced to P102,106.00 on 24 January 2001.
Article 2206 of the Civil Code provides that in addition to the indemnity for death caused by a crime
or quasi-delict, the "defendant shall be liable for the loss of the earning capacity of the deceased,
and the indemnity shall be paid to the heirs of the latter, x x x." Compensation of this nature is
awarded not for loss of earnings but for loss of capacity to earn money. Hence, it is proper that
compensation for loss of earning capacity should be awarded to the petitioners in accordance with
the formula established in decided cases for computing net earning capacity, to wit:

The formula for the computation of unearned income is:

Net Earning Capacity = life expectancy x (gross annual income -reasonable and necessary
living expenses).
Life expectancy is determined in accordance with the formula:
2 / 3 x [80 - age of deceased at the time of death]67
Jurisprudence provides that the first factor, i.e., life expectancy, shall be computed by applying the
formula (2/3 x [80 - age at death]) adopted in the American Expectancy Table of Mortality or the
Actuarial of Combined Experience Table of Mortality.
The second factor is computed by multiplying the life expectancy by the net earnings of the
deceased, i.e., the total earnings less expenses necessary in the creation of such earnings or
income and less living and other incidental expenses. The loss is not equivalent to the entire
earnings of the deceased, but only such portion that he would have used to support his dependents
or heirs. Hence, the Court deducts from his gross earnings the necessary expenses supposed to be
used by the deceased for his own needs. The Court explained in Villa Rey Transit v. Court of
Appeals68 :
[The award of damages for loss of earning capacity is] concerned with the determination of the
losses or damages sustained by the private respondents, as dependents and intestate heirs of the
deceased, and that said damages consist, not of the full amount of his earnings, but of the support
they received or would have received from him had he not died in consequence of the negligence of
petitioner's agent. In fixing the amount of that support, we must reckon with the "necessary
expenses of his own living," which should be deducted from his earnings. Thus, it has been
consistently held that earning capacity, as an element of damages to one's estate for his death by
wrongful act is necessarily his net earning capacity or his capacity to acquire money, "less necessary
expense for his own living." Stated otherwise, the amount recoverable is not the loss of the entire
earning, but rather the loss of that portion of the earnings which the beneficiary would have received.
In other words, only net earnings, and not gross earnings are to be considered that is, the total of the
earnings less expenses necessary in the creation of such earnings or income and less living and
other incidental expenses."
Applying the aforestated jurisprudential guidelines in the computation of the amount of award for
damages set out in Villa Rey, the Court computes the award for the loss of Georges earning
capacity as follows:
Life expectancy =

2/3 x [80 - age of deceased at the time of death]

2/3 x [80 56]
2/3 x [24]
FORMULA NET EARNING CAPACITY (NEC)

If:
Age at time of death of George Poe = 5869
Monthly Income at time of death = P6,94670

Gross Annual Income (GAI) = [(6,946) (12)] = P83,352

Reasonable/Necessary Living Expenses (R/NLE) = 50%71 of GAI = P41,676
NEC

= [2/3 (80-58)] [83,352-41,676]

= [2/3 (22)] [41,676]
= [14.67] [41,676]
= P611,386.92

Therefore, Georges lost net earning capacity is equivalent to P611,386.92

The RTC awarded moral damages72 in the amount of P100,000.00. With respect to moral damages,
the same are awarded under the following circumstances:
The award of moral damages is aimed at a restoration, within the limits of the possible, of the
spiritual status quo ante. Moral damages are designed to compensate and alleviate in some way the
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury unjustly caused a person. Although incapable of
pecuniary computation, they must be proportionate to the suffering inflicted. The amount of the
award bears no relation whatsoever with the wealth or means of the offender.
In the instant case, petitioners testimonies reveal the intense suffering which they continue to
experience as a result of Georges death.73 It is not difficult to comprehend that the sudden and
unexpected loss of a husband and father would cause mental anguish and serious anxiety in the
wife and children he left behind. Moral damages in the amount of P100,000.00 are proper for
Georges death.74
1avvphi1.zw+

The RTC also awarded P50,000.00 as death indemnity which the Court shall not disturb. The award
of P50,000.00 as death indemnity is in accordance with current rulings of the Court. 75
Finally, the RTC awarded attorneys fees to petitioners. Petitioners are entitled to attorneys fees.
Under Article 2008 of the Civil Code, attorneys fees may be granted when a party is compelled to
litigate or incur expenses to protect his interest by reason of an unjustified act of the other party.76 In
Metro Manila Transit Corporation v. Court of Appeals,77 the Court held that an award of P50,000.00
as attorneys fees was reasonable. Hence, petitioners are entitled to attorneys fees in that amount. 78
WHEREFORE, premises considered, the instant Petition is PARTIALLY GRANTED. While the Court
AFFIRMS the Decision, dated 26 June 2002, and Resolution, dated 29 November 2002, of the Court
of Appeals in CA-G.R. SP No. 67297, granting the Petition for Certiorari of respondent Malayan
Insurance Company, Inc., the Court, nonetheless, RESOLVES, in consideration of the speedy
administration of justice, and the peculiar circumstances of the case, to give DUE COURSE to the
present Petition and decide the same on its merits.
Rhoda Santos and respondent Malayan Insurance Company, Inc. are hereby ordered to pay jointly
and severally the petitioners Heirs of George Y. Poe the following:
(1) Funeral expenses P36,000.00;
(2) Actual damages for loss of earning capacity P611,386.92;

(3) Moral damages amounting to P100,000.00;

(4) Death indemnity P50,000.00; and
(5) Attorneys fees P50,000.00 plus P1,500.00 per court appearance.
No costs.
SO ORDERED.
G.R. No. L-51221 July 31, 1991
FIRST INTEGRATED BONDING & INSURANCE COMPANY, INC., petitioner,
vs.
HON. HAROLD M. HERNANDO, VICTORINO ADVINCULA, ROMANA ADVINCULA, SILVERIO
BLANCO & THE SHERIFF OF MANILA and his DEPUTY SHERIFFS, respondents.
Octavio M. Zavas for petitioner.

MEDIALDEA, J.:p
This petition for certiorari under Rule 65 of the Revised Rules of Court, seeks the annulment of the
amended decision of respondent trial court in Civil Case No. 1104 for allegedly having been
rendered in excess of jurisdiction. The same decision was sought to be annulled in a petition for
relief from judgment filed in the same case but the petition was denied for having been filed out of
time.
The narration of facts below was taken from the pleadings filed by the parties. As regards the
proceedings following the promulgation of the amended decision, the dates were supplied in the
Comment and Answer filed by respondent judge and which were not disputed by petitioner.
Silverio Blanco was the owner of a passenger jeepney which he insured against liabilities for death
and injuries to third persons with First Integrated Bonding and Insurance Company, Inc. (First
Insurance) under Motor Vehicle Policy No. V-0563751 with the face value of P30,000.00 (p.
15, Rollo).
On November 25, 1976, the said jeepney driven by Blanco himself bumped a five-year old child,
Deogracias Advincula, causing the latter's death.
A complaint (pp. 38-41, Rollo) for damages was brought by the child's parents, the Advincula
spouses, against Silverio Blanco. First Insurance was also impleaded in the complaint as the insurer.
The complaint was docketed as Civil Case No. 1104 of the Court of First Instance of Abra (now
Regional Trial Court).

Summons were served on Silverio Blanco and First Insurance. However, only Blanco filed an
answer. Upon motion of the Advincula spouses, First Insurance was declared in default (p. 45, Rollo)
on January 19, 1978. Thereafter, a pre-trial conference was conducted where the Advincula spouses
presented the following documentary evidence:
Exhibit "A" Marriage Certificate, Exhibit B Birth Certificate, Exhibit B-1 The
Certificate of the Local Civil Registrar, Exhibit C Certificate of Death, Exhibit C-1
the official receipt of the burial permit, Exhibit C-2 the autopsy report, Exhibit D
filing fee under official receipt in the amount of P80.00, Exhibit D-1 list of actual
expenses in connection with the death and burial of the deceased Advincula, Exhibit
E Criminal Case No. 666 of the Municipal Court of Tayum, Abra entitled People of
the Philippines versus Silverio Blanco for Homicide thru Reckless Imprudence,
Exhibit E-1 sworn statement of Severino Balneg Exhibit F Tax Declaration No.
906 in the name of Maria Blanco delivered by Silverio Blanco to the plaintiffs as
pledge of Silverio Blanco to settle the civil aspect of this case. (pp. 14-15, Rollo)
On the basis of the evidence presented by the Advincula spouses, judgment was rendered by the
trial court on March 1, 1978, the dispositive portion of which states:
WHEREFORE, for moral damages, this court adjudicates to the plaintiffs P5,000.00;
for the life of Deogracias Advincula P12,000.00, for funeral expenses, P3,663.50 and
for attomey's fees, P3,000.00. The satisfaction of these damages divulged (sic)
independently now upon the defendant insurance company and to pay the costs of
the proceedings.
SO ORDERED. (p. 16, Rollo)
First Insurance received a copy of the decision on March 14, 1978. Upon motion of the Advincula
spouses, the decision was amended on March 27, 1978 (p. 17, Rollo), which, in addition to the
damages granted in the original decision, awarded damages in the amount of P6,336.50 to Silverio
Blanco. The dispositive portion of the amended decision is quoted, as follows:
WHEREFORE, for moral damages, this Court hereby adjudicates to the plaintiffs
P5,000.00; for the life of Deogracias Advincula P12,000.00; for funeral expenses
P3,663.50 and for attorney's fees P3,000.00 or in the total amount of P23,663.50
which must be satisfied independently by the defendant First Integrated Bonding and
Insurance Company, Inc. in favor of the plaintiffs and the balance of P6,336.50 shall
also be paid by said defendant Insurance Company to the defendant Silverio Blanco.
The grand total under the insurance policy, Exhibit H, is P30,000.00.
The defendant Insurance Company to pay the costs of the proceedings.
SO ORDERED. (p. 17, Rollo)
The amended decision was received by First Instance on April 11, 1978. On May 11, 1978, entry of
judgment was made, a copy of which was furnished First Insurance on June 27, 1978. Upon motion

of the Advincula spouses, an order granting execution was issued by the court on June 14, 1978,
which was received by First Insurance on August 1, 1978 (pp. 31-32, Rollo).
On September 5, 1978, First Insurance filed a petition for relief from judgment in the same case. The
petition was set for hearing on September 28, 1978. No appearance was entered by First Insurance
on the said date. On October 4, 1978, the trial court issued an order, denying the petition for relief
from judgment (pp. 33-34, Rollo), a copy of which was received by First Insurance on October 10,
1978 (p. 35, Rollo). The order reads:
The records of this case show that on April 11, 1978, the defendant First Integrated
Bonding and Insurance Company, Inc. received a copy of the amended decision
dated March 27, 1978 and found on page 30 of the records of this case; on May 11,
1978, the Deputy Clerk of Court entered the corresponding entry of judgment and the
First Integrated Bonding and Insurance Company, Inc. received a copy thereof on
June 27, 1978, On June 13, 1978, the plaintiffs moved for execution of judgment and
the same was granted pursuant to an Order of this Court dated June 14, 1978 and
found on page 35 of the records of this case.
And now comes the petition for relief from the Order of execution and judgment with
preliminary injunction filed by First integrated Bonding and Insurance Co., Inc. and
which was received by this Court on September 5, 1978; on September 28, 1978, the
plaintiffs filed their written opposition to the petition for relief from judgment and
preliminary injunction. The opposition is based on three grounds, namely: 1. that the
petition is filed out of time; 2. that there was gross and notorious negligence of the
Insurance Company; 3. that this case is within the jurisdiction of this Court and
therefore the cause of action of the plaintiffs deserves judicial consideration.
It was on April 11, 1978 that the First Integrated Bonding and Insurance Co., Inc.
received the amended decision and the petition for relief from Order of Execution and
judgment with preliminary injunction was filed on September 5, 1978 or a period of
191 days already expired, that is, more than 6 months already as required by Section
3, Rule 38 of the Rules of Court. Consequently, the first ground invoked by the
opposition must be sustained. On the second ground, the records of this case show
that the First Integrated Bonding and Insurance Co., Inc. was duly summoned and
served a copy of the complaint on August 16, 1977 and it was received by the
President of the Insurance Company as shown by the certificate of Service of the
Sheriff of Manila and found in page 12 and page 13 of the records of this case; after
the reglementary period to file an answer expired, the plaintiffs move to declare the
defendant insurance company in default and likewise asked the Court that they be
allowed to present their evidence on January 23, 1978 and which was granted by this
Court pursuant to an order dated January 19, 1978 and found on page 16 of the
records of this case; after the reception of the evidence for the plaintiffs this Court
rendered a decision on March 1, 1978 and which is found on pages 23 to 26 of the
records of this case; subsequently, on March 27, 1978, an amended decision was
issued by this Court and it is found on page 30 of the records of this case. Clearly,
therefore, the First Integrated Bonding and Insurance Co., Inc. was grossly and

notoriously negligent in giving the proper attention to this case. This kind of gross
and notorious negligence can not be considered excusable. The last ground is that
this Court has jurisdiction over the plaintiffs' cause of action against the insurance
company. This ground is well-taken because according to Section 416 of the
Philippine Insurance Code, Presidential Decree No. 612, it provides that the authority
to adjudicate granted to the Commissioner of insurance shall be concurrent with that
of the civil courts, but the filing of a complaint with the commissioner shall preclude
the civil courts from taking cognizance of a suit involving the same subject matter.
Furthermore, the plaintiffs did not intervene in the criminal aspect of this case,
instead, they filed a separate and independent civil action on July 26, 1977 and
which is now the present Civil Case No. 1104. It may be added, that the matter of
exhaustion of administrative remedy may be waived which has been so in the
present case because the First Integrated Bonding and Insurance Co., Inc. was
declared in default.
In view of all the foregoing considerations, the petition for relief from the order of
execution and judgment with preliminary injunction, for lack of merit, is hereby
denied.
SO ORDERED. (pp. 33-34, Rollo)
First Insurance filed a motion for reconsideration of the order denying the petition for relief on May
14, 1979. The motion was set for hearing and again no appearance was entered by the movant First
Insurance (p. 35, Rollo), prompting the trial court to deny the same.
On August 13, 1979, the herein petitioner First Insurance filed this petition for certiorari on the
following grounds:
1. The trial court erred in deciding for the respondent spouse(s) where there exists
no cause of action against the herein petitioner.
2. The trial court erred when it abbreviated the proceeding and rendered judgment
based only on the documentary evidence presented during the pre-trial conference.
3. The trial court erred in holding the petitioner liable in excess of the limits of liability
as provided for in the policy contract.
On August 20, 1979, this Court issued a temporary restraining order enjoining the respondents from
enforcing the Writ of Execution dated August 1, 1978 (p. 19, Rollo)
It is the contention of the petitioner that the Advincula spouses have no cause of action against it. As
parents of the victim, they may proceed against the driver, Silverio Blanco on the basis of the
provisions of the New Civil Code. However, they have no cause of action against First Insurance,
because they are not parties to the insurance contract.

It is settled that where the insurance contract provides for indemnity against liability to a third party,
such third party can directly sue the insurer (Caguia v. Fieldman's Insurance Co., Inc., G. R. No.
23276, November 29, 1968, 26 SCRA 178). The liability of the insurer to such third person is based
on contract while the liability of the insured to the third party is based on tort (Malayan Insurance
Co., Inc. v. CA, L-36413, September 26, 1988, 165 SCRA 536). This rule was explained in the case
of Shafer v. Judge, RTC of Olongapo City, Br. 75, G.R. No. 78848, November 14, 1988:
The injured for whom the contract of insurance is intended can sue directly the
insurer. The general purpose of statutes enabling an injured person to proceed
directly against the insurer is to protect injured persons against the insolvency of the
insured who causes such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy, and statutes are to be liberally construed so
that their intended purpose may be accomplished. It has even been held that such a
provision creates a contractual relation which inures to the benefit of any and every
person who may be negligently injured by the named insured as if such injured
person were specifically named in the policy.
In the event that the injured fails or refuses to include the insurer as party defendant
in his claim for indemnity against the insured, the latter is not prevented by law to
avail of the procedural rules intended to avoid multiplicity of suits. Not even a "no
action" clause under the policy which requires that a final judgment be first obtained
against the insured and that only thereafter can the person insured recover on the
policy can prevail over the Rules of Court provisions aimed at avoiding multiplicity of
suits. (p. 391, 167 SCRA) (emphasis supplied)
First Insurance cannot evade its liability as insurer by hiding under the cloak of the insured. Its
liability is primary and not dependent on the recovery of judgment from the insured.
Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily
intended to provide compensation for the death or bodily injuries suffered by innocent
third parties or passengers as a result of a negligent operation and use of motor
vehicles. The victims and/or their dependents are assured of immediate financial
assistance, regardless of the financial capacity of the motor vehicle owners.
. . . the insurer's liability accrues immediately upon the occurrence of the injury or
event upon which the liability depends, and does not depend on the recovery of
judgment by the injured party against the insured (Shafer v. Judge, RTC of
Olongapo, supra, p. 390).
It is true that Blanco denied that he was negligent when the incident occurred. However, during the
pre-trial conference, when respondent judge admitted all the exhibits of the plaintiffs to abbreviate
the proceedings, no objection was interposed by Blanco. When a decision was rendered based only
on the exhibits of the plaintiffs, Blanco likewise did not object. No motion for reconsideration was
filed by either Blanco or First Insurance. Hence, the decision became final and may no longer be
attacked.

It should be noted also that First Insurance was declared in default because of its failure to file an
answer. As far as it was concerned, it failed to raise any triable issue. It lost its standing in court and
judgment may be rendered against it on the basis only of the evidence of the Advincula spouses.
Petitioner had been given its day in court. Despite its having been declared in default and its failure
to file a motion to lift the order of default, it was still notified of the subsequent proceedings in the trial
court. But no positive step was taken by it on time to vacate the order of default, the decision nor the
amended decision. Instead, it chose to file a petition for relief from judgment on September 1, 1978
almost five (5) months from its receipt of a copy of the amended decision on April 11, 1978. Clearly,
the said petition for relief from judgment was filed out of time. The rules require that such petitions
must be filed within sixty (60) days after the petitioner learns of the judgment and not more than six
(6) months after such judgment was entered (Rule 38, Section 3). The period fixed by Rule 38 of the
Rules of Court is non-extendible and never interrupted. It is not subject to any condition or
contingency, because it is itself devised to meet a condition or contingency. The remedy allowed by
Rule 38 is an act of grace, as it were, designed to give the aggrieved party another and last chance.
Being in the position of one who begs, such party's privilege is not to impose conditions, haggle or
dilly-dally, but to grab what is offered him. (Palomares, et al. v. Jimenez, et al., 90 Phil. 773, XVII,
L.J., No. 3, p. 136, Rafanan v. Rafanan, 35 O.G. 228; Santos v. Manila Electric Co., G.R. L-7735,
December 29, 1955; Gana v. Abaya, G.R. No. L-3106, December 29, 1955, cited in Vicente J.
Francisco, The Revised Rules of Court of the Philippines, Annotated and Commented, Vol, 11, p.
580.
It appears that the award of damages in favor of Blanco has no basis. The complaint in Civil case
1104 was for damages brought by the spouses against Blanco and First Insurance. Blanco did not
put up any claim against the latter. However, since the said decision had already become final and
executory, it can no longer be corrected or amended. In the same vein, the claim of petitioner that its
liability to third parties under the insurance policy is limited to P20,000.00 only can no longer be
given consideration at this late stage, when the decision of the trial court awarding damages had
already become final and executory.
ACCORDINGLY, finding respondent judge to have acted within his jurisdiction in denying the petition
for relief from judgment, the petition is DISMISSED. The questioned decision of the trial court in Civil
Case No. 1104 having become final and executory, is AFFIRMED. The temporary restraining order
issued on August 20, 1979 is hereby lifted. Costs against petitioner.
SO ORDERED.

Ang Ka Yu v. Phoenix Assurance - Insurable

Interest
1 CARA 704
Facts:
> Ang Ka Yu had a piece of property in his possession. He insured it with Phoenix.

> The property was lost, so Ang Ka Yu sought to claim the proceeds.
> Phoenix denied liability on the ground that Ang was not the owner but a mere possessor and as such,
had no insurable interest over the property.

Issue:

Whether or not a mere possessor has insurable interest over the property.

Held:
Yes.
A person having a mere right or possession of property may insure it to its full value and in his own name,
even when he is not responsible for its safekeeping. The reason is that even if a person is NOT interested
in the safety and preservation of material in his possession because they belong to 3 rd parties, said person
still has insurable interest, because he stands either to benefit from their continued existence or to be
prejudiced by their destruction.

G.R. No. 124520 August 18, 1997

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with
private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:

18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods
and effects placed at any stall or store or space in the leased premises without first obtaining
the written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance
thereof without the consent of the LESSOR then the policy is deemed assigned and
transferred to the LESSOR for its own benefit; . . . 1
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss
by fire the merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with
the United Insurance Co., Inc. (hereinafter United) without the written consent of private respondent
CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it
wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract
(between the Cha spouses and United) be paid directly to CKS, based on its lease contract with the
Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and
United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering
therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay
P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated 11
January 1996, affirming the trial court decision, deleting however the awards for exemplary damages
and attorney's fees. A motion for reconsideration by United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF
THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO
LAW, MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER

III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
THE RESPONDENT CORPORATION. 2
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the
lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that any
fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased
premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the
prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public order or public policy. 3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist
at the time the insurance takes effect and at the time the loss occurs. 4 The basis of such requirement
of insurable interest in property insured is based on sound public policy: to prevent a person from taking
out an insurance policy on property upon which he has no insurable interest and collecting the proceeds
of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance Code, which provides:
Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy shall be
received as proof of such interest, and every policy executed by way of gaming or wagering,
is void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code
which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the insured
might be damnified by loss of injury thereof.

Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise. This
insurable interest over said merchandise remains with the insured, the Cha spouses. The automatic
assignment of the policy to CKS under the provision of the lease contract previously quoted is void
for being contrary to law and/or public policy. The proceeds of the fire insurance policy thus rightfully
belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United)
cannot be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has no
insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses
obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a
new decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo
Cha and Stella Uy-Cha.
SO ORDERED.
G.R. No. 119655 May 24, 1996
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M.
RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO and ROSABELLA M.
RORALDO, petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.

BELLOSILLO, J.:p
May a fire insurance policy be valid, binding and enforceable upon mere partial payment of
premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE)
issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their
two-storey residential building located at 5855 Zobel Street, Makati City, together with all their
personal effects therein. The insurance was for P600,000.00 covering the period from 23 January
1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta
Tibay only paid P600.00 thus leaving a considerable balance unpaid.
On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10
March 1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with
FORTUNE a claim on the fire insurance policy. Her claim was accordingly referred to its adjuster,
Goodwill Adjustment Services, Inc. (GASI), which immediately wrote Violeta requesting her to furnish
it with the necessary documents for the investigation and processing of her claim. Petitioner forthwith

complied. On 28 March 1987 she signed a non-waiver agreement with GASI to the effect that any
action taken by the companies or their representatives in investigating the claim made by the
claimant for his loss which occurred at 5855 Zobel Roxas, Makati on March 8, 1987, or in the
investigating or ascertainment of the amount of actual cash value and loss, shall not waive or
invalidate any condition of the policies of such companies held by said claimant, nor the rights of
either or any of the parties to this agreement, and such action shall not be, or be claimed to be, an
admission of liability on the part of said companies or any of them. 1
In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition
No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance
Commission proved futile. On 3 March 1988 Violets and the other petitioners sued FORTUNE for
damages in the amount of P600,000.00 representing the total coverage of the fire insurance policy
plus 12% interest per annum, P100,000.00 moral damages, and attorney's fees equivalent to 20% of
the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value
of the insured building and personal properties in the amount of P600,000.00 plus interest at the
legal rate of 6% per annum from the filing of the complaint until full payment, and attorney's fees
equivalent to 20% of the total amount claimed plus costs of suit. 2
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be
liable to plaintiff-appellees therein but ordering defendant-appellant to return to the former the
premium of P2,983.50 plus 12% interest from 10 March 1987 until full payment. 3
Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the
appellate court, FORTUNE remains liable under the subject fire insurance policy in spite of the
failure of petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. 4 The consideration is the
premium, which must be paid at the time and in the way and manner specified in the policy, and if not so
paid, the policy will lapse and be forfeited by its own terms. 5
The pertinent provisions in the Policy on premium read
THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the
Company in accordance with Policy Condition No. 2 of the total premiums by the
insured as stipulated above for the period aforementioned for insuring against Loss
or Damage by Fire or Lightning as herein appears, the Property herein described . . .
2. This policy including any renewal thereof and/or any endorsement thereon is not
in force until the premium has been fully paid to and duly receipted by the
Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent,

broker or Company official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and regulations which
are or may hereafter be in force provide for the payment of the stipulated premiums
in periodic installments at fixed percentage, it is hereby declared, agreed and
warranted that this policy shall be deemed effective, valid and binding upon the
Company only when the premiums therefor have actually been paid in full and duly
acknowledged in a receipt signed by any authorized official or representative/agent
of the Company in such manner as provided herein. (emphasis supplied). 6
Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only
been partially paid and the balance paid only after the peril insured against has occurred, the
insurance contract did not take effect and the insured cannot collect at all on the policy. This is fully
supported by Sec. 77 of the Insurance Code which provides
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to
the contrary, no policy or contract of insurance issued by an insurance company is
valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies
(emphasis supplied).
Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has
been paid." This leads us to the manner of payment envisioned by the law to make the insurance
policy operative and binding. For whatever judicial construction may be accorded the disputed
phrase must ultimately yield to the clear mandate of the law. The principle that where the law does
not distinguish the court should neither distinguish assumes that the legislature made no
qualification on the use of a general word or expression. In Escosura v. San Miguel Brewery,
Inc., 7 the Court through Mr. Justice Jesus G. Barrera, interpreting the phrase "with pay" used in
connection with leaves of absence with pay granted to employees, ruled
. . . the legislative practice seems to be that when the intention is to distinguish
between full and partial payment, the modifying term is used . . .
Citing C.A. No. 647 governing maternity leaves of married women in government, R. A. No.
679 regulating employment of women and children, R.A. No. 843 granting vacation and sick
leaves to judges of municipal courts and justices of the peace, and finally, Art. 1695 of the
New Civil Code providing that every househelp shall be allowed four (4) days vacation each
month, which laws simply stated "with pay," the Court concluded that it was undisputed that
in all these laws the phrase "with pay" used without any qualifying adjective meant that the
employee was entitled to full compensation during his leave of absence.

Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial
payment of the premium due and the express stipulation thereof to the contrary, petitioners rely
heavily on the 1967 case ofPhilippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc. 8 where
the Court through Mr. Justice Arsenio P. Dizon sustained the ruling of the trial court that partial payment of
the premium made the policy effective during the whole period of the policy. In that case, the insurance
company commenced action against the insured for the unpaid balance on a fire insurance policy. In its
defense the insured claimed that nonpayment of premium produced the cancellation of the insurance
contract. Ruling otherwise the Court held
It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by
appellee and delivered to appellant, and that on September 22 of the same year, the
latter paid to the former the sum of P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no doubt at all that, as between the
insurer and the insured, there was not only a perfected contract of insurance but a
partially performed one as far as the payment of the agreed premium was
concerned. Thereafter the obligation of the insurer to pay the insured the amount, for
which the policy was issued in case the conditions therefor had been complied with,
arose and became binding upon it, while the obligation of the insured to pay the
remainder of the total amount of the premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the
factual scenario is different. In Phoenix it was the insurance company that sued for the balance of
the premium, i.e., it recognized and admitted the existence of an insurance contract with the insured.
In the case before us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is
not in force until the premium has been fully paid and duly receipted by the
Company . . . Resultantly, it is correct to say that in Phoenix a contract was perfected upon partial
payment of the premium since the parties had not otherwise stipulated that prepayment of the
premium in full was a condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of
the premium without any other precondition to its enforceability as in the instant case, the insurer in
effect had shown its intention to continue with the existing contract of insurance, as in fact it was
enforcing its right to collect premium, or exact specific performance from the insured. This is not so
here. By express agreement of the parties, novinculum juris or bond of law was to be established
until full payment was effected prior to the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals 9 the parties mutually agreed that the
premiums could be paid in installments, which in fact they did for three (3) years, hence, this Court
refused to invalidate the insurance policy. In giving effect to the policy, the Court quoted with approval the
Court of Appeals
The obligation to pay premiums when due is ordinarily an indivisible obligation to pay
the entire premium. Here, the parties . . . agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years,
the second and third policies being a renewal/replacement for the previous one. And

the insured never informed the insurer that it was terminating the policy because the
terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may
not agree to make the insurance contract valid and binding without payment of
premiums, there is nothing in said section which suggests that the parties may not
agree to allow payment of the premiums in installment, or to consider the contract as
valid and binding upon
payment of the first premium. Otherwise we would allow the insurer to renege on its
liability under the contract, had a loss incurred (sic) before completion of payment of
the entire premium, despite its voluntary acceptance of partial payments, a result
eschewed by basic considerations of fairness and equity . . .
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or
implied, of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in
Phoenix, and expressly, by agreeing to make premiums payable in installments as in Tuscany. But
contrary to the stance taken by petitioners, there is no waiver express or implied in the case at
bench. Precisely, the insurer and the insured expressly stipulated that (t)his policy including any
renewal thereof and/or any indorsement thereon is not in force until the premium has been fully paid
to and duly receipted by the Company . . . and that this policy shall be deemed effective, valid and
binding upon the Company only when the premiums therefor have actually been paid in full and duly
acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77
of the Insurance Code the payment of partial premium by the assured in this particular instance
should not be considered the payment required by the law and the stipulation of the parties. Rather,
it must be taken in the concept of a deposit to be held in trust by the insurer until such time that the
full amount has been tendered and duly receipted for. In other words, as expressly agreed upon in
the contract, full payment must be made before the risk occurs for the policy to be considered
effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law
ever resulted from the fractional payment of premium. The insurance contract itself expressly
provided that the policy would be effective only when the premium was paid in full. It would have
been altogether different were it not so stipulated. Ergo, petitioners had absolute freedom of choice
whether or not to be insured by FORTUNE under the terms of its policy and they freely opted to
adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is
the intention of the parties as expressed in the
policy. 10 Courts have no other function but to enforce the same. The rule that contracts of insurance will
be construed in favor of the insured and most strongly against the insurer should not be permitted to have
the effect of making a plain agreement ambiguous and then construe it in favor of the insured. 11 Verily, it
is elemental law that the payment of premium is requisite to keep the policy of insurance in force. If the
premium is not paid in the manner prescribed in the policy as intended by the parties the policy is
ineffective. Partial payment even when accepted as a partial payment will not keep the policy alive even

for such fractional part of the year as the part payment bears to the whole
payment. 12

Applying further the rules of statutory construction, the position maintained by petitioners becomes
even more untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of
Appeals, 13 speaks only of two (2) statutory exceptions to the requirement of payment of the entire
premium as a prerequisite to the validity of the insurance contract. These exceptions are: (a) in case the
insurance coverage relates to life or industrial life (health) insurance when a grace period applies, and (b)
when the insurer makes a written acknowledgment of the receipt of premium, this acknowledgment being
declared by law to be then conclusive evidence of the premium payment. 14
A maxim of recognized practicality is the rule that the expressed exception or exemption excludes
others. Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates
to exclude other exceptions; conversely, those which are not within the enumerated exceptions are
deemed included in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is
paid, and the law has not expressly excepted partial payments, there is no valid and binding
contract. Hence, in the absence of clear waiver of prepayment in full by the insurer, the insured
cannot collect on the proceeds of the policy.
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are
paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes
a risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire
sum agreed upon, and the insured, that of parting with the amount required as premium, without
receiving anything therefor in case the contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. 15 It should be understood that the integrity of this fund cannot be secured
and maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to the contrary. For what
could prevent the insurance applicant from deliberately or wilfully holding back full premium payment and
wait for the risk insured against to transpire and then conveniently pass on the balance of the premium to
be deducted from the proceeds of the insurance? Worse, what if the insured makes an initial payment of
only 10%, or even 1%, of the required premium, and when the risk occurs simply points to the proceeds
from where to source the balance? Can an insurance company then exist and survive upon the payment
of 1%, or even 10%, of the premium stipulated in the policy on the basis that, after all, the insurer can
deduct from the proceeds of the insurance should the risk insured against occur?
Interpreting the contract of insurance stringently against the insurer but liberally in favor of the
insured despite clearly defined obligations of the parties to the policy can be carried out to extremes
that there is the danger that we may, so to speak, "kill the goose that lays the golden egg." We are
well aware of insurance companies falling into the despicable habit of collecting premiums promptly
yet resorting to all kinds of excuses to deny or delay payment of just insurance claims. But, in this
case, the law is manifestly on the side of the insurer. For as long as the current Insurance Code
remains unchanged and partial payment of premiums is not mentioned at all as among the
exceptions provided in Sees. 77 and 78, no policy of insurance can ever pretend to be efficacious or
effective until premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to
the public, hence, the imperative need for its prompt payment and full satisfaction. 16 It must be
emphasized here that all actuarial calculations and various tabulations of probabilities of losses under the
risks insured against are based on the sound hypothesis of prompt payment of premiums. Upon this
bedrock insurance firms are enabled to offer the assurance of security to the public at favorable rates. But
once payment of premium is left to the whim and caprice of the insured, as when the courts tolerate the
payment of a mere P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and
the balance to be paid even after the risk insured against has occurred, as petitioners have done in this
case, on the principle that the strength of the vinculum juris is not measured by any specific amount of
premium payment, we will surely wreak havoc on the business and set to naught what has taken
actuarians centuries to devise to arrive at a fair and equitable distribution of risks and benefits between
the insurer and the insured.
The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit
their liability and to impose whatever conditions they deem best upon their obligations not
inconsistent with public policy. 17 The validity of these limitations is by law passed upon by the Insurance
Commissioner who is empowered to approve all forms of policies, certificates or contracts of insurance
which insurers intend to issue or deliver. That the policy contract in the case at bench was approved and
allowed issuance simply reaffirms the validity of such policy, particularly the provision in question.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24
March 1995 is AFFIRMED.
SO ORDERED.
G.R. No. 83122 October 19, 1990
ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E. PARNELL,
CARLOS K. CATOLICO and THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
INC., respondents.
Albino B. Achas for petitioners.
Angara, Abello, Concepcion, Regala & Cruz for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the January 29, 1988 decision of the Court of Appeals and the April 27,
1988 resolution denying the petitioners' motion for reconsideration, which decision and resolution
reversed the decision dated June 23,1986 of the Court of First Instance of Manila, Branch 34 in Civil

Case No. 121126 upholding the petitioners' causes of action and granting all the reliefs prayed for in
their complaint against private respondents.
The antecedent facts of the case are as follows:
Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private respondent
Philippine American General Insurance Company, Inc. (Philamgen for short) since 1965. As such, he
was authorized to solicit and sell in behalf of Philamgen all kinds of non-life insurance, and in
consideration of services rendered was entitled to receive the full agent's commission of 32.5% from
Philamgen under the scheduled commission rates (Exhibits "A" and "1"). From 1973 to 1975,
Valenzuela solicited marine insurance from one of his clients, the Delta Motors, Inc. (Division of
Electronics Airconditioning and Refrigeration) in the amount of P4.4 Million from which he was
entitled to a commission of 32% (Exhibit "B"). However, Valenzuela did not receive his full
commission which amounted to P1.6 Million from the P4.4 Million insurance coverage of the Delta
Motors. During the period 1976 to 1978, premium payments amounting to P1,946,886.00 were paid
directly to Philamgen and Valenzuela's commission to which he is entitled amounted to P632,737.00.
In 1977, Philamgen started to become interested in and expressed its intent to share in the
commission due Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela
refused (Exhibit "D").
On February 8, 1978 Philamgen and its President, Bienvenido M. Aragon insisted on the sharing of
the commission with Valenzuela (Exhibit E). This was followed by another sharing proposal dated
June 1, 1978. On June 16,1978, Valenzuela firmly reiterated his objection to the proposals of
respondents stating that: "It is with great reluctance that I have to decline upon request to signify my
conformity to your alternative proposal regarding the payment of the commission due me. However, I
have no choice for to do otherwise would be violative of the Agency Agreement executed between
our goodselves." (Exhibit B-1)
Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido Aragon, Carlos
Catolico and Robert E. Parnell took drastic action against Valenzuela. They: (a) reversed the
commission due him by not crediting in his account the commission earned from the Delta Motors,
Inc. insurance (Exhibit "J" and "2"); (b) placed agency transactions on a cash and carry basis; (c)
threatened the cancellation of policies issued by his agency (Exhibits "H" to "H-2"); and (d) started to
leak out news that Valenzuela has a substantial account with Philamgen. All of these acts resulted in
the decline of his business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on December
27, 1978, Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3,
Decision Trial Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition).
The petitioners sought relief by filing the complaint against the private respondents in the court a
quo (Complaint of January 24, 1979, Annex "F" Petition). After due proceedings, the trial court found:
xxx xxx xxx
Defendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of
defendant PHILAMGEN's General Agent by making it appear that plaintiff Arturo P.

Valenzuela has a substantial account with defendant PHILAMGEN particularly Delta

Motors, Inc.'s Account, thereby prejudicing defendant PHILAMGEN's interest
(Exhibits 6,"11","11- "12- A"and"13-A").
Defendants also invoked the provisions of the Civil Code of the Philippines (Article
1868) and the provisions of the General Agency Agreement as their basis for
terminating plaintiff Arturo P. Valenzuela as one of their General Agents.
That defendants' position could have been justified had the termination of plaintiff
Arturo P. Valenzuela was (sic) based solely on the provisions of the Civil Code and
the conditions of the General Agency Agreement. But the records will show that the
principal cause of the termination of the plaintiff as General Agent of defendant
PHILAMGEN was his refusal to share his Delta commission.
That it should be noted that there were several attempts made by defendant
Bienvenido M. Aragon to share with the Delta commission of plaintiff Arturo P.
Valenzuela. He had persistently pursued the sharing scheme to the point of
terminating plaintiff Arturo P. Valenzuela, and to make matters worse, defendants
made it appear that plaintiff Arturo P. Valenzuela had substantial accounts with
defendant PHILAMGEN.
Not only that, defendants have also started (a) to treat separately the Delta
Commission of plaintiff Arturo P. Valenzuela, (b) to reverse the Delta commission due
plaintiff Arturo P. Valenzuela by not crediting or applying said commission earned to
the account of plaintiff Arturo P. Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's
agency transactions on a "cash and carry basis", (d) sending threats to cancel
existing policies issued by plaintiff Arturo P. Valenzuela's agency, (e) to divert plaintiff
Arturo P. Valenzuela's insurance business to other agencies, and (f) to spread wild
and malicious rumors that plaintiff Arturo P. Valenzuela has substantial account with
defendant PHILAMGEN to force plaintiff Arturo P. Valenzuela into agreeing with the
sharing of his Delta commission." (pp. 9-10, Decision, Annex 1, Petition).
xxx xxx xxx
These acts of harrassment done by defendants on plaintiff Arturo P. Valenzuela to
force him to agree to the sharing of his Delta commission, which culminated in the
termination of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's
General Agent, do not justify said termination of the General Agency Agreement
entered into by defendant PHILAMGEN and plaintiff Arturo P. Valenzuela.
That since defendants are not justified in the termination of plaintiff Arturo P.
Valenzuela as one of their General Agents, defendants shall be liable for the resulting
damage and loss of business of plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil
Code of the Philippines). (Ibid, p. 11)
The court accordingly rendered judgment, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against

defendants ordering the latter to reinstate plaintiff Arturo P. Valenzuela as its General
Agent, and to pay plaintiffs, jointly and severally, the following:
1. The amount of five hundred twenty-one thousand nine hundred sixty four and
16/100 pesos (P521,964.16) representing plaintiff Arturo P. Valenzuela's Delta
Commission with interest at the legal rate from the time of the filing of the complaint,
which amount shall be adjusted in accordance with Article 1250 of the Civil Code of
the Philippines;
2. The amount of seventy-five thousand pesos (P75,000.00) per month as
compensatory damages from 1980 until such time that defendant Philamgen shall
reinstate plaintiff Arturo P. Valenzuela as one of its general agents;
3. The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff
as moral damages;
4. The amount of seventy-five thousand pesos (P75,000.00) as and for attorney's
fees;
5. Costs of the suit. (Ibid., P. 12)
From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell,
Carlos K. Catolico and PHILAMGEN respondents herein, and defendants-appellants
below, interposed an appeal on the following:
ASSIGNMENT OF ERRORS
I
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P.
VALENZUELA HAD NO OUTSTANDING ACCOUNT WITH DEFENDANT
PHILAMGEN AT THE TIME OF THE TERMINATION OF THE AGENCY.
II
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P.
VALENZUELA IS ENTITLED TO THE FULL COMMISSION OF 32.5% ON THE
DELTA ACCOUNT.
III
THE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF
PLAINTIFF ARTURO P. VALENZUELA WAS NOT JUSTIFIED AND THAT
CONSEQUENTLY DEFENDANTS ARE LIABLE FOR ACTUAL AND MORAL
DAMAGES, ATTORNEYS FEES AND COSTS.

IV
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST
DEFENDANT PHILAMGEN WAS PROPER, THE LOWER COURT ERRED IN
AWARDING DAMAGES EVEN AGAINST THE INDIVIDUAL DEFENDANTS WHO
ARE MERE CORPORATE AGENTS ACTING WITHIN THE SCOPE OF THEIR
AUTHORITY.
V
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF
PLAINTIFF ARTURO P. VALENZUELA WAS PROPER, THE LOWER COURT
ERRED IN AWARDING DAMAGES IN FAVOR OF HOSPITALITA VALENZUELA,
WHO, NOT BEING THE REAL PARTY IN INTEREST IS NOT TO OBTAIN RELIEF.
On January 29, 1988, respondent Court of Appeals promulgated its decision in the appealed case.
The dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is hereby modified accordingly and
judgment is hereby rendered ordering:
1. Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one
million nine hundred thirty two thousand five hundred thirty-two pesos and seventeen
centavos (P1,902,532.17), with legal interest thereon from the date of finality of this
judgment until fully paid.
2. Both plaintiff-appellees to pay jointly and severally defendants-appellants the sum
of fifty thousand pesos (P50,000.00) as and by way of attorney's fees.
No pronouncement is made as to costs. (p. 44, Rollo)
There is in this instance irreconcilable divergence in the findings and conclusions of the Court of
Appeals, vis-a-visthose of the trial court particularly on the pivotal issue whether or not Philamgen
and/or its officers can be held liable for damages due to the termination of the General Agency
Agreement it entered into with the petitioners. In its questioned decision the Court of Appeals
observed that:
In any event the principal's power to revoke an agency at will is so pervasive, that the
Supreme Court has consistently held that termination may be effected even if the
principal acts in bad faith, subject only to the principal's liability for damages (Danon
v. Antonio A. Brimo & Co., 42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158 and
Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V, Civil Code of the Philippines
Annotated [1986] 696).
The lower court, however, thought the termination of Valenzuela as General Agent
improper because the record will show the principal cause of the termination of the

plaintiff as General Agent of defendant Philamgen was his refusal to share his Delta
commission. (Decision, p. 9; p. 13, Rollo, 41)
Because of the conflicting conclusions, this Court deemed it necessary in the interest of substantial
justice to scrutinize the evidence and records of the cases. While it is an established principle that
the factual findings of the Court of Appeals are final and may not be reviewed on appeal to this
Court, there are however certain exceptions to the rule which this Court has recognized and
accepted, among which, are when the judgment is based on a misapprehension of facts and when
the findings of the appellate court, are contrary to those of the trial court (Manlapaz v. Court of
Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the
findings of the Court of Appeals and the trial court are contrary to each other, this Court may
scrutinize the evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v.
Court of Appeals, 156 SCRA 597 [1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the
conclusion of the Court of Appeals is grounded entirely on speculation, surmises or conjectures, or
when the inference made is manifestly mistaken, absurd or impossible, or when there is grave abuse
of discretion, or when the judgment is based on a misapprehension of facts, and when the findings
of facts are conflict the exception also applies (Malaysian Airline System Bernad v. Court of Appeals,
156 SCRA 321 [1987]).
After a painstaking review of the entire records of the case and the findings of facts of both the
court a quo and respondent appellate court, we are constrained to affirm the trial court's findings and
rule for the petitioners.
We agree with the court a quo that the principal cause of the termination of Valenzuela as General
Agent of Philamgen arose from his refusal to share his Delta commission. The records sustain the
conclusions of the trial court on the apparent bad faith of the private respondents in terminating the
General Agency Agreement of petitioners. It is axiomatic that the findings of fact of a trial judge are
entitled to great weight (People v. Atanacio, 128 SCRA 22 [1984]) and should not be disturbed on
appeal unless for strong and cogent reasons, because the trial court is in a better position to
examine the evidence as well as to observe the demeanor of the witnesses while testifying (Chase v.
Buencamino, Sr., 136 SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag
Trans., Inc. v. Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the
findings and conclusions of the trial court are supported by substantial evidence and there appears
to be no cogent reason to disturb them (Mendoza v. Court of Appeals. 156 SCRA 597 [1987]).
As early as September 30,1977, Philamgen told the petitioners of its desire to share the Delta
Commission with them. It stated that should Delta back out from the agreement, the petitioners
would be charged interests through a reduced commission after full payment by Delta.
On January 23, 1978 Philamgen proposed reducing the petitioners' commissions by 50% thus giving
them an agent's commission of 16.25%. On February 8, 1978, Philamgen insisted on the reduction
scheme followed on June 1, 1978 by still another insistence on reducing commissions and proposing
two alternative schemes for reduction. There were other pressures. Demands to settle accounts, to
confer and thresh out differences regarding the petitioners' income and the threat to terminate the
agency followed. The petitioners were told that the Delta commissions would not be credited to their
account (Exhibit "J"). They were informed that the Valenzuela agency would be placed on a cash

and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26, 1979, pp. 5457). Existing policies were threatened to be cancelled (Exhibits "H" and "14"; TSN., March 26, 1979,
pp. 29-30). The Valenzuela business was threatened with diversion to other agencies. (Exhibit
"NNN"). Rumors were also spread about alleged accounts of the Valenzuela agency (TSN., January
25, 1980, p. 41). The petitioners consistently opposed the pressures to hand over the agency or half
of their commissions and for a treatment of the Delta account distinct from other accounts. The
pressures and demands, however, continued until the agency agreement itself was finally
terminated.
It is also evident from the records that the agency involving petitioner and private respondent is one
"coupled with an interest," and, therefore, should not be freely revocable at the unilateral will of the
latter.
In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation
and persuasion of the prospective clients to buy insurance policies. Normally, agents would
encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation and
procurement of the insurance policies. To sell policies, an agent exerts great effort, patience,
perseverance, ingenuity, tact, imagination, time and money. In the case of Valenzuela, he was able
to build up an Agency from scratch in 1965 to a highly productive enterprise with gross billings of
about Two Million Five Hundred Thousand Pesos (P2,500,000.00) premiums per annum. The
records sustain the finding that the private respondent started to covet a share of the insurance
business that Valenzuela had built up, developed and nurtured to profitability through over thirteen
(13) years of patient work and perseverance. When Valenzuela refused to share his commission in
the Delta account, the boom suddenly fell on him.
The private respondents by the simple expedient of terminating the General Agency Agreement
appropriated the entire insurance business of Valenzuela. With the termination of the General
Agency Agreement, Valenzuela would no longer be entitled to commission on the renewal of
insurance policies of clients sourced from his agency. Worse, despite the termination of the agency,
Philamgen continued to hold Valenzuela jointly and severally liable with the insured for unpaid
premiums. Under these circumstances, it is clear that Valenzuela had an interest in the continuation
of the agency when it was unceremoniously terminated not only because of the commissions he
should continue to receive from the insurance business he has solicited and procured but also for
the fact that by the very acts of the respondents, he was made liable to Philamgen in the event the
insured fail to pay the premiums due. They are estopped by their own positive averments and claims
for damages. Therefore, the respondents cannot state that the agency relationship between
Valenzuela and Philamgen is not coupled with interest. "There may be cases in which an agent has
been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the
authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to
personal loss or liability" (See MEC 569 p. 406).
Furthermore, there is an exception to the principle that an agency is revocable at will and that is
when the agency has been given not only for the interest of the principal but for the interest of third
persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the
agency ceases to be freely revocable by the sole will of the principal (See Padilla, Civil Code
Annotated, 56 ed., Vol. IV p. 350). The following citations are apropos:

The principal may not defeat the agent's right to indemnification by a termination of
the contract of agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32
ALR 196).
Where the principal terminates or repudiates the agent's employment in violation of
the contract of employment and without cause ... the agent is entitled to receive
either the amount of net losses caused and gains prevented by the breach, or the
reasonable value of the services rendered. Thus, the agent is entitled to prospective
profits which he would have made except for such wrongful termination provided that
such profits are not conjectural, or speculative but are capable of determination upon
some fairly reliable basis. And a principal's revocation of the agency agreement
made to avoid payment of compensation for a result which he has actually
accomplished (Hildendorf v. Hague, 293 NW 2d 272; Newhall v. Journal Printing Co.,
105 Minn 44,117 NW 228; Gaylen Machinery Corp. v. Pitman-Moore Co. [C.A. 2 NY]
273 F 2d 340)
If a principal violates a contractual or quasi-contractual duty which he owes his
agent, the agent may as a rule bring an appropriate action for the breach of that duty.
The agent may in a proper case maintain an action at law for compensation or
damages ... A wrongfully discharged agent has a right of action for damages and in
such action the measure and element of damages are controlled generally by the
rules governing any other action for the employer's breach of an employment
contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419; Tiffin Glass Co. v. Stoehr, 54 Ohio
157, 43 NE 2798)
At any rate, the question of whether or not the agency agreement is coupled with interest is helpful
to the petitioners' cause but is not the primary and compelling reason. For the pivotal factor
rendering Philamgen and the other private respondents liable in damages is that the termination by
them of the General Agency Agreement was tainted with bad faith. Hence, if a principal acts in bad
faith and with abuse of right in terminating the agency, then he is liable in damages. This is in
accordance with the precepts in Human Relations enshrined in our Civil Code that "every person
must in the exercise of his rights and in the performance of his duties act with justice, give every one
his due, and observe honesty and good faith: (Art. 19, Civil Code), and every person who, contrary
to law, wilfully or negligently causes damages to another, shall indemnify the latter for the same (Art.
20, id). "Any person who wilfully causes loss or injury to another in a manner contrary to morals,
good customs and public policy shall compensate the latter for the damages" (Art. 21, id.).
As to the issue of whether or not the petitioners are liable to Philamgen for the unpaid and
uncollected premiums which the respondent court ordered Valenzuela to pay Philamgen the amount
of One Million Nine Hundred Thirty-Two Thousand Five Hundred Thirty-Two and 17/100 Pesos
(P1,932,532,17) with legal interest thereon until fully paid (Decision-January 20, 1988, p. 16;
Petition, Annex "A"), we rule that the respondent court erred in holding Valenzuela liable. We find no
factual and legal basis for the award. Under Section 77 of the Insurance Code, the remedy for the
non-payment of premiums is to put an end to and render the insurance policy not binding

Sec. 77 ... [N]otwithstanding any agreement to the contrary, no policy or contract of

insurance is valid and binding unless and until the premiums thereof have been paid
except in the case of a life or industrial life policy whenever the grace period
provision applies (P.D. 612, as amended otherwise known as the Insurance Code of
1974)
In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979]) we held
that the non-payment of premium does not merely suspend but puts an end to an insurance contract
since the time of the payment is peculiarly of the essence of the contract. And in Arce v. The Capital
Insurance and Surety Co. Inc.(117 SCRA 63, [1982]), we reiterated the rule that unless premium is
paid, an insurance contract does not take effect. Thus:
It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9
SCRA 177 [1963] was decided in the light of the Insurance Act before Sec. 72 was
amended by the underscored portion. Supra. Prior to the Amendment, an insurance
contract was effective even if the premium had not been paid so that an insurer was
obligated to pay indemnity in case of loss and correlatively he had also the right to
sue for payment of the premium. But the amendment to Sec. 72 has radically
changed the legal regime in that unless the premium is paid there is no insurance. "
(Arce v. Capitol Insurance and Surety Co., Inc., 117 SCRA 66; Emphasis supplied)
In Philippine Phoenix Surety case, we held:
Moreover, an insurer cannot treat a contract as valid for the purpose of collecting
premiums and invalid for the purpose of indemnity. (Citing Insurance Law and
Practice by John Alan Appleman, Vol. 15, p. 331; Emphasis supplied)
The foregoing findings are buttressed by Section 776 of the insurance Code
(Presidential Decree No. 612, promulgated on December 18, 1974), which now
provides that no contract of Insurance by an insurance company is valid and binding
unless and until the premium thereof has been paid, notwithstanding any agreement
to the contrary (Ibid., 92 SCRA 425)
Perforce, since admittedly the premiums have not been paid, the policies issued have lapsed. The
insurance coverage did not go into effect or did not continue and the obligation of Philamgen as
insurer ceased. Hence, for Philamgen which had no more liability under the lapsed and inexistent
policies to demand, much less sue Valenzuela for the unpaid premiums would be the height of
injustice and unfair dealing. In this instance, with the lapsing of the policies through the nonpayment
of premiums by the insured there were no more insurance contracts to speak of. As this Court held
in the Philippine Phoenix Surety case, supra "the non-payment of premiums does not merely
suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the
essence of the contract."
The respondent appellate court also seriously erred in according undue reliance to the report of
Banaria and Banaria and Company, auditors, that as of December 31, 1978, Valenzuela owed
Philamgen P1,528,698.40. This audit report of Banaria was commissioned by Philamgen after

Valenzuela was almost through with the presentation of his evidence. In essence, the Banaria report
started with an unconfirmed and unaudited beginning balance of account of P1,758,185.43 as of
August 20, 1976. But even with that unaudited and unconfirmed beginning balance of
P1,758,185.43, Banaria still came up with the amount of P3,865.49 as Valenzuela's balance as of
December 1978 with Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December
31, 1977, Valenzuela had no unpaid account with Philamgen (Ref: Annexes "D", "D-1", "E",
Petitioner's Memorandum). But even disregarding these annexes which are records of Philamgen
and addressed to Valenzuela in due course of business, the facts show that as of July 1977, the
beginning balance of Valenzuela's account with Philamgen amounted to P744,159.80. This was
confirmed by Philamgen itself not only once but four (4) times on different occasions, as shown by
the records.
On April 3,1978, Philamgen sent Valenzuela a statement of account with a beginning balance of
P744,159-80 as of July 1977.
On May 23, 1978, another statement of account with exactly the same beginning balance was sent
to Valenzuela.
On November 17, 1978, Philamgen sent still another statement of account with P744,159.80 as the
beginning balance.
And on December 20, 1978, a statement of account with exactly the same figure was sent to
Valenzuela.
It was only after the filing of the complaint that a radically different statement of accounts surfaced in
court. Certainly, Philamgen's own statements made by its own accountants over a long period of
time and covering examinations made on four different occasions must prevail over unconfirmed and
unaudited statements made to support a position made in the course of defending against a lawsuit.
It is not correct to say that Valenzuela should have presented its own records to refute the
unconfirmed and unaudited finding of the Banaria auditor. The records of Philamgen itself are the
best refutation against figures made as an afterthought in the course of litigation. Moreover,
Valenzuela asked for a meeting where the figures would be reconciled. Philamgen refused to meet
with him and, instead, terminated the agency agreement.
After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of credits
representing the commission due from Delta and other accounts, Valenzuela had overpaid
Philamgen the amount of P530,040.37 as of November 30, 1978. Philamgen cannot later be heard
to complain that it committed a mistake in its computation. The alleged error may be given credence
if committed only once. But as earlier stated, the reconciliation of accounts was arrived at four (4)
times on different occasions where Philamgen was duly represented by its account executives. On
the basis of these admissions and representations, Philamgen cannot later on assume a different
posture and claim that it was mistaken in its representation with respect to the correct beginning
balance as of July 1977 amounting to P744,159.80. The Banaria audit report commissioned by
Philamgen is unreliable since its results are admittedly based on an unconfirmed and unaudited
beginning balance of P1,758,185.43 as of August 20,1976.

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

Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after
the controversy has started. In fact, after hearing plaintiffs have already rested their
case.
The results of said audit were presented in Court to show plaintiff Arturo P.
Valenzuela's accountability to defendant PHILAMGEN. However, the auditor, when
presented as witness in this case testified that the beginning balance of their audit
report was based on an unaudited amount of P1,758,185.43 (Exhibit 46-A) as of
August 20, 1976, which was unverified and merely supplied by the officers of
defendant PHILAMGEN.
Even defendants very own Exhibit 38- A-3, showed that plaintiff Arturo P.
Valenzuela's balance as of 1978 amounted to only P3,865.59, not P826,128.46 as
stated in defendant Bienvenido M. Aragon's letter dated December 20,1978 (Exhibit
14) or P1,528,698.40 as reflected in defendant's Exhibit 46 (Audit Report of Banaria
dated December 24, 1980).
These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela
to defendant PHILAMGEN only lends credence to the claim of plaintiff Arturo P.
Valenzuela that he has no outstanding account with defendant PHILAMGEN when
the latter, thru defendant Bienvenido M. Aragon, terminated the General Agency
Agreement entered into by plaintiff (Exhibit A) effective January 31, 1979 (see
Exhibits "2" and "2-A"). Plaintiff Arturo P. Valenzuela has shown that as of October
31, 1978, he has overpaid defendant PHILAMGEN in the amount of P53,040.37
(Exhibit "EEE", which computation was based on defendant PHILAMGEN's balance
of P744,159.80 furnished on several occasions to plaintiff Arturo P. Valenzuela by
defendant PHILAMGEN (Exhibits H-1, VV, VV-1, WW, WW-1 , YY , YY-2 , ZZ and ,
ZZ-2).
Prescinding from the foregoing, and considering that the private respondents terminated Valenzuela
with evidentmala fide it necessarily follows that the former are liable in damages. Respondent
Philamgen has been appropriating for itself all these years the gross billings and income that it
unceremoniously took away from the petitioners. The preponderance of the authorities sustain the
preposition that a principal can be held liable for damages in cases of unjust termination of agency.
In Danon v. Brimo, 42 Phil. 133 [1921]), this Court ruled that where no time for the continuance of the
contract is fixed by its terms, either party is at liberty to terminate it at will, subject only to the
ordinary requirements of good faith. The right of the principal to terminate his authority is absolute
and unrestricted, except only that he may not do so in bad faith.
The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand Pesos
(P75,000,00) per month as compensatory damages from June 1980 until its decision becomes final
and executory. This award is justified in the light of the evidence extant on record (Exhibits "N", "N10", "0", "0-1", "P" and "P-1") showing that the average gross premium collection monthly of
Valenzuela over a period of four (4) months from December 1978 to February 1979, amounted to

over P300,000.00 from which he is entitled to a commission of P100,000.00 more or less per month.
Moreover, his annual sales production amounted to P2,500,000.00 from where he was given 32.5%
commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall
comprehend not only the value of the loss suffered, but also that of the profits which the obligee
failed to obtain."
The circumstances of the case, however, require that the contractual relationship between the
parties shall be terminated upon the satisfaction of the judgment. No more claims arising from or as
a result of the agency shall be entertained by the courts after that date.
ACCORDINGLY, the petition is GRANTED. The impugned decision of January 29, 1988 and
resolution of April 27, 1988 of respondent court are hereby SET ASIDE. The decision of the trial
court dated January 23, 1986 in Civil Case No. 121126 is REINSTATED with the MODIFICATIONS
that the amount of FIVE HUNDRED TWENTY ONE THOUSAND NINE HUNDRED SIXTY-FOUR
AND 16/100 PESOS (P521,964.16) representing the petitioners Delta commission shall earn only
legal interests without any adjustments under Article 1250 of the Civil Code and that the contractual
relationship between Arturo P. Valenzuela and Philippine American General Insurance Company
shall be deemed terminated upon the satisfaction of the judgment as modified.
SO ORDERED.
G.R. No. 95641 September 22, 1994
SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,
vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondentsappellees.
Gutierrez, Cortes & Gonzales for petitioners.
Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

ROMERO, J.:
On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident
Insurance Policy No. PA-20015, respondent insurance company unilaterally cancelled the same
since company records revealed that petitioner-insured failed to pay his premiums.
On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously
cancelled and even proposed to extend its lifetime to December 17, 1985, upon a finding that the
cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were
not remitted by Teofilo M. Malapit, respondent insurance company's branch manager.

These, in brief, are the material facts that gave rise to the action for damages due to breach of
contract instituted by petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.
There are two issues for resolution in this case:
(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment
of damages?
(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever liability for damages it may
have to bear, thus absolving it therefrom?
From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer
from Dagupan City, bought, through
the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as
Prudential), a personal accident insurance policy covering the one-year period between noon of
November 28, 1984 and noon of November 28, 1985. 1 Under the terms of the statement of account
issued by respondent insurance company, petitioner-insured was supposed to pay the total amount of
P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25 and 2% premium
tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is legibly printed:
This Statement of Account must not be considered a receipt. Official Receipt will be
issued to you upon payment of this account.
If payment is made to our representative, demand for a Provisional Receipt and if our
Official Receipts is (sic) not received by you within 7 days please notify us.
If payment is made to our office, demand for an OFFICIAL RECEIPT.
On December 17, 1984, respondent insurance company issued collector's provisional receipt No.
9300 to petitioner-insured for the amount of P1,609.65 3 On the lower portion of the receipt the
following is written in capital letters:
Note: This collector's provisional receipt will be confirmed by our official receipt. If our
official receipt is not received by you within 7 days, please notify us. 4
On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M.
Malapit, sent petitioner-insured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium
effective as of inception dated." 5 The same endorsement also credited "a return premium of P1,609.65
plus documentary stamps and premium tax" to the account of the insured.
Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of
respondent insurance company, and demanded the issuance of an official receipt. Ang told

petitioner-insured that the cancellation of the policy was a mistake but he would personally see to its
rectification. However, petitioner-insured failed to receive any official receipt from Prudential.
Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding
that he be insured under the same terms and conditions as those contained in Policy No. PA-BG20015 commencing upon its receipt of his letter, or that the current commercial rate of increase on
the payment he had made under provisional receipt No. 9300 be returned within five days. 6 Areola
also warned that should his demands be unsatisfied, he would sue for damages.
On July 17, 1985, he received a letter from production manager Malapit informing him that the
"partial payment" of P1,000.00 he had made on the policy had been "exhausted pursuant to the
provisions of the Short Period Rate Scale" printed at the back of the policy. Malapit warned Areola
that should be fail to pay the balance, the company's liability would cease to operate. 7
In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its
Assistant Vice-President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that
the company was verifying whether the payment had in fact been issued therefor. Ampil emphasized
that the official receipt should have been issued seven days from the issuance of the provisional
receipt but because no official receipt had been issued in Areola's name, there was reason to believe
that no payment had been made. Apologizing for the inconvenience, Ampil expressed the company's
concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time
that this matter is cleared." 8
On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65
covered by provisional receipt No. 9300 was in fact received by Prudential on December 17, 1984.
Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or
one year from the date when payment was received." Apologizing again for the inconvenience
caused Areola, Ampil exhorted him to indicate his conformity to the proposal by signing on the space
provided for in the letter. 9
The letter was personally delivered by Carlito Ang to Areola on
August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a
complaint for breach of contract with damages before the lower court.
In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's
policy was due to the failure of Malapit to turn over the premiums collected, for which reason no
official receipt was issued to him. However, it argued that, by acknowledging the inconvenience
caused on petitioner-insured and after taking steps to rectify its omission by reinstating the cancelled
policy prior to the filing of the complaint, respondent insurance company had complied with its
obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of
action against it. It insists that it cannot be held liable for damages arising from breach of contract,
having demonstrated fully well its fulfillment of its obligation.
The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering
respondent insurance company to pay the former the following:

a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and
c) P50,000.00 as exemplary damages;
2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and
3. To pay the costs.
In its decision, the court below declared that respondent insurance company acted in bad faith in
unilaterally cancelling subject insurance policy, having done so only after seven months from the
time that it had taken force and effect and despite the fact of full payment of premiums and other
charges on the issued insurance policy. Cancellation from the date of the policy's inception,
explained the lower court, meant that the protection sought by petitioner-insured from the risks
insured against was never extended by respondent insurance company. Had the insured met an
accident at the time, the insurance company would certainly have disclaimed any liability because
technically, the petitioner could not have been considered insured. Consequently, the trial court held
that there was breach of contract on the part of respondent insurance company, entitling petitionerinsured to an award of the damages prayed for.
This ruling was challenged on appeal by respondent insurance company, denying bad faith on its
part in unilaterally cancelling subject insurance policy.
After consideration of the appeal, the appellate court issued a reversal of the decision of the trial
court, convinced that the latter had erred in finding respondent insurance company in bad faith for
the cancellation of petitioner-insured's policy. According to the Court of Appeals, respondent
insurance company was not motivated by negligence, malice or bad faith in cancelling subject policy.
Rather, the cancellation of the insurance policy was based on what the existing records showed, i.e.,
absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad faith,
said the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior
purpose, proof of which must be established convincingly. On the contrary, it further observed, the
following acts indicate that respondent insurance company did not act precipitately or willfully to
inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid
the premium; (b) the letter of August 3, 1985 confirming that the premium had been paid on
December 17, 1984; (c) the reinstatement of the policy with a proposal to extend its effective period
to December 17, 1985; and (d) respondent insurance company's apologies for the "inconvenience"
caused upon petitioner-insured. The appellate court added that respondent insurance company even
relieved Malapit, its Baguio City manager, of his job by forcing him to resign.
Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals
denied. Hence, this petition for review on certiorari anchored on these arguments:
I

Respondent Court of Appeals is guilty of grave abuse of discretion and committed a

serious and reversible error in not holding Respondent Prudential liable for the
cancellation of the insurance contract which was admittedly caused by the fraudulent
acts and bad faith of its own officers.
II
Respondent Court of Appeals committed serious and reversible error and abused its
discretion in ruling that the defenses of good faith and honest mistake can co-exist
with the admitted fraudulent acts and evident bad faith.
III
Respondent Court of Appeals committed a reversible error in not finding that even
without considering the fraudulent acts of its own officer in misappropriating the
premium payment, the act itself in cancelling the insurance policy was done with bad
faith and/or gross negligence and wanton attitude amounting to bad faith, because
among others, it was
Mr. Malapit the person who committed the fraud who sent and signed the
notice of cancellation.
IV
Respondent Court of Appeals has decided a question of substance contrary to law
and applicable decision of the Supreme Court when it refused to award damages in
favor of herein Petitioner-Appellants.
It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent
insurance company's branch office in Baguio, in misappropriating his premium payments is the
proximate cause of the cancellation of the insurance policy. Petitioner-insured theorized that
Malapit's act of signing and even sending the notice of cancellation himself, notwithstanding his
personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation
of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to
respondent insurance company, an artificial corporate being which can act only through its officers or
employees. Malapit's actuation, concludes petitioner-insured, is therefore not separate and distinct
from that of respondent-insurance company, contrary to the view held by the Court of Appeals. It
must, therefore, bear the consequences of the erroneous cancellation of subject insurance policy
caused by the non-remittance by its own employee of the premiums paid. Subsequent
reinstatement, according to petitioner-insured, could not possibly absolve respondent insurance
company from liability, there being an obvious breach of contract. After all, reasoned out petitionerinsured, damage had already been inflicted on him and no amount of rectification could remedy the
same.
Respondent insurance company, on the other hand, argues that where reinstatement, the equitable
relief sought by petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the
complaint, petitioner-insured is left without a cause of action on which to predicate his claim for

damages. Reinstatement, it further explained, effectively restored petitioner-insured to all his rights
under the policy. Hence, whatever cause of action there might have been against it, no longer exists
and the consequent award of damages ordered by the lower court in unsustainable.
We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the
premiums paid by petitioner-insured is beyond doubt directly imputable to respondent insurance
company. A corporation, such as respondent insurance company, acts solely thru its employees. The
latters' acts are considered as its own for which it can be held to account. 11 The facts are clear as to
the relationship between private respondent insurance company and Malapit. As admitted by private
respondent insurance company in its answer, 12 Malapit was the manager of its Baguio branch. It is
beyond doubt that he represented its interest and acted in its behalf. His act of receiving the premiums
collected is well within the province of his authority. Thus, his receipt of said premiums is receipt by
private respondent insurance company who, by provision of law, particularly under Article 1910 of the Civil
Code, is bound by the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which the agent may
have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
Malapit's failure to remit the premiums he received cannot constitute a defense for private
respondent insurance company; no exoneration from liability could result therefrom. The fact that
private respondent insurance company was itself defrauded due to the anomalies that took place in
its Baguio branch office, such as the non-accrual of said premiums to its account, does not free the
same from its obligation to petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing
the ruling in McIntosh v. Dakota Trust Co.: 14
A bank is liable for wrongful acts of its officers done in the interests of the bank or in
the course of dealings of the officers in their representative capacity but not for acts
outside the scope of their authority. A bank holding out its officers and agent as
worthy of confidence will not be permitted to profit by the frauds they may thus be
enabled to perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent
third persons where the representation is made in the course of its business by an
agent acting within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit.
Consequently, respondent insurance company is liable by way of damages for the fraudulent acts
committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy.
Its earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitionerinsured. Respondent company should be reminded that a contract of insurance creates reciprocal
obligations for both insurer and insured. Reciprocal obligations are those which arise from the same

cause and in which each party is both a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. 15
Under the circumstances of instant case, the relationship as creditor and debtor between the parties
arose from a common cause: i.e., by reason of their agreement to enter into a contract of insurance
under whose terms, respondent insurance company promised to extend protection to petitionerinsured against the risk insured for a consideration in the form of premiums to be paid by the latter.
Under the law governing reciprocal obligations, particularly the second paragraph of Article
1191, 16 the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission
of the obligation in case one of the obligors, such as respondent insurance company, fails to comply with
what is incumbent upon him. However, said article entitles the injured party to payment of damages,
regardless of whether he demands fulfillment or rescission of the obligation. Untenable then is
reinstatement insurance company's argument, namely, that reinstatement being equivalent to fulfillment of
its obligation, divests petitioner-insured of a rightful claim for payment of damages. Such a claim finds no
support in our laws on obligations and contracts.
The nature of damages to be awarded, however, would be in the form of nominal
damages 17 contrary to that granted by the court below. Although the erroneous cancellation of the
insurance policy constituted a breach of contract, private respondent insurance company, within a
reasonable time took steps to rectify the wrong committed by reinstating the insurance policy of petitioner.
Moreover, no actual or substantial damage or injury was inflicted on petitioner Areola at the time the
insurance policy was cancelled. Nominal damages are "recoverable where a legal right is technically
violated and must be vindicated against an invasion that has produced no actual present loss of any kind,
or where there has been a breach of contract and no substantial injury or actual damages whatsoever
have been or can be shown. 18
WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the
Court of Appeals in CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40,
RTC Dagupan City, in Civil Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED
subject to the following modifications: (a) that nominal damages amounting to P30,000.00 be
awarded petitioner in lieu of the damages adjudicated by court a quo; and (b) that in the satisfaction
of the damages awarded therein, respondent insurance company is ORDERED to pay the legal rate
of interest computed from date of filing of complaint until final payment thereof.
SO ORDERED.
G.R. No. 130421 June 28, 1999
AMERICAN HOME ASSURANCE COMPANY, petitioner,
vs.
ANTONIO CHUA, respondent.

DAVIDE, JR. C.J.:

In this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, petitioner
seeks the reversal of the decision 1 of the Court of Appeals in CA-G.R. CV No. 40751, which affirmed in
toto the decision of the Regional Trial Court, Makati City, Branch 150 (hereafter trial court), in Civil Case
No. 91-1009.
Petitioner is a domestic corporation engaged in the insurance business. Sometime in 1990,
respondent obtained from petitioner a fire insurance covering the stock-in-trade of his business,
Moonlight Enterprises, located at Valencia, Bukidnon. The insurance was due to expire on 25 March
1990.
On 5 April 1990 respondent issued PCIBank Check No. 352123 in the amount of P2,983.50 to
petitioner's agent, James Uy, as payment for the renewal of the policy. In turn, the latter delivered
Renewal Certificate No. 00099047 to respondent. The check was drawn against a Manila bank and
deposited in petitioner's bank account in Cagayan de Oro City. The corresponding official receipt
was issued on 10 April. Subsequently, a new insurance policy, Policy No. 206-4234498-7, was
issued, whereby petitioner undertook to indemnify respondent for any damage or loss arising from
fire up to P200,000 for the period 25 March 1990 to 25 March 1991.
On 6 April 1990 Moonlight Enterprises was completely razed by fire. Total loss was estimated
between P4,000,000 and P5,000,000. Respondent filed an insurance claim with petitioner and four
other co-insurers, namely, Pioneer Insurance and Surety Corporation, Prudential Guarantee and
Assurance, Inc., Filipino Merchants Insurance Co. and Domestic Insurance Company of the
Philippines. Petitioner refused to honor the claim notwithstanding several demands by respondent,
thus, the latter filed an action against petitioner before the trial court.
In its defense, petitioner claimed there was no existing insurance contract when the fire occurred
since respondent did not pay the premium. It also alleged that even assuming there was a contract,
respondent violated several conditions of the policy, particularly: (1) his submission of fraudulent
income tax return and financial statements; (2) his failure to establish the actual loss, which
petitioner assessed at P70,000; and (3) his failure to notify to petitioner of any insurance already
effected to cover the insured goods. These violations, petitioner insisted, justified the denial of the
claim.
The trial court ruled in favor of respondent. It found that respondent paid by way of check a day
before the fire occurred. The check, which was deposited in petitioner's bank account, was even
acknowledged in the renewal certificate issued by petitioner's agent. It declared that the alleged
fraudulent documents were limited to the disparity between the official receipts issued by the Bureau
of Internal Revenue (BIR) and the income tax returns for the years 1987 to 1989. All the other
documents were found to be genuine. Nonetheless, it gave credence to the BIR certification that
respondent paid the corresponding taxes due for the questioned years.
As to respondent's failure to notify petitioner of the other insurance contracts covering the same
goods, the trial court held that petitioner failed to show that such omission was intentional and
fraudulent. Finally, it noted that petitioner's investigation of respondent's claim was done in
collaboration with the representatives of other insurance companies who found no irregularity

therein. In fact, Pioneer Insurance and Surety Corporation and Prudential Guarantee and Assurance,
Inc. promptly paid the claims filed by respondent.
The trial court decreed as follows:
WHEREFORE, judgment is hereby rendered in favor of [respondent] and against the
[petitioner] ordering the latter to pay the former the following:
1. P200,000.00, representing the amount of the insurance, plus legal
interest from the date of filing of this case;
2. P200,000.00 as moral damages;
3. P200,000.00 as loss of profit;
4. P100,000.00 as exemplary damages;
5. P50,000.00 as attorney's fees; and
6. Cost of suit.
On appeal, the assailed decision was affirmed in toto by the Court of Appeals. The Court of Appeals
found that respondent's claim was substantially proved and petitioner's unjustified refusal to pay the
claim entitled respondent to the award of damages.
Its motion for reconsideration of the judgment having been denied, petitioner filed the petition in this
case. Petitioner reiterates its stand that there was no existing insurance contract between the
parties. It invokes Section 77 of the Insurance Code, which provides:
An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of life
or an industrial life policy whenever the grace period provision applies.
and cites the case of Arce v. Capital Insurance & Surety Co., Inc., 2 where we ruled that unless
and until the premium is paid there is no insurance.
Petitioner emphasizes that when the fire occurred on 6 April 1990 the insurance contract was not yet
subsisting pursuant to Article 1249 3 of the Civil Code, which recognizes that a check can only effect
payment once it has been cashed. Although respondent testified that he gave the check on 5 April to a
certain James Uy, the check, drawn against a Manila bank and deposited in a Cagayan de Oro City bank,
could not have been cleared by 6 April, the date of the fire. In fact, the official receipt issued for
respondent's check payment was dated 10 April 1990, four days after the fire occurred.

Citing jurisprudence, 4 petitioner also contends that respondent's non-disclosure of the other insurance
contracts rendered the policy void. It underscores the trial court's neglect in considering the Commission
on Audit's certification that the BIR receipts submitted by respondent were, in effect, fake since they were
issued to other persons. Finally, petitioner argues that the award of damages was excessive and
unreasonable considering that it did not act in bad faith in denying respondent's claim.
Respondent counters that the issue of non-payment of premium is a question of fact which can no
longer be assailed. The trial court's finding on the matter, which was affirmed by the Court of
Appeals, is conclusive.
Respondent refutes the reason for petitioner's denial of his claim. As found by the trial court,
petitioner's loss adjuster admitted prior knowledge of respondent's existing insurance contracts with
the other insurance companies. Nonetheless, the loss adjuster recommended the denial of the
claim, not because of the said contracts, but because he was suspicious of the authenticity of certain
documents which respondent submitted in filing his claim.
To bolster his argument, respondent cites Section 66 of the Insurance Code, 5 which requires the
insurer to give a notice to the insured of its intention to terminate the policy forty-five days before the
policy period ends. In the instant case, petitioner opted not to terminate the policy. Instead, it renewed the
policy by sending its agent to respondent, who was issued a renewal certificate upon delivery of his check
payment for the renewal of premium. At this precise moment the contract of insurance was executed and
already in effect. Respondent also claims that it is standard operating procedure in the provinces to pay
insurance premiums by check when collected by insurance agents.
On the issue of damages, respondent maintains that the amounts awarded were reasonable. He
cites numerous trips he had to make from Cagayan de Oro City to Manila to follow up his rightful
claim. He imputes bad faith on petitioner who made enforcement of his claim difficult in the hope that
he would eventually abandon it. He further emphasizes that the adjusters of the other insurance
companies recommended payment of his claim, and they complied therewith.
In its reply, petitioner alleges that the petition questions the conclusions of law made by the trial court
and the Court of Appeals.
Petitioner invokes respondent's admission that his check for the renewal of the policy was received
only on 10 April 1990, taking into account that the policy period was 25 March 1990 to 25 March
1991. The official receipt was dated 10 April 1990. Anent respondent's testimony that the check was
given to petitioner's agent, a certain James Uy, the latter points out that even respondent was not
sure if Uy was indeed its agent. It faults respondent for not producing Uy as his witness and not
taking any receipt from him upon presentment of the check. Even assuming that the check was
received a day before the concurrence of the fire, there still could not have been payment until the
check was cleared.
Moreover, petitioner denies respondent's allegation that it intended a renewal of the contract for the
renewal certificate clearly specified the following conditions:
Subject to the payment by the assured of the amount due prior to renewal date, the
policy shall be renewed for the period stated.

Any payment tendered other than in cash is received subject to actual cash
collection.
Subject to no loss prior to premium and payment. If there be any loss, is not covered
[sic].
Petitioner asserts that an insurance contract can only be enforced upon the payment of the
premium, which should have been made before the renewal period.
Finally, in assailing the excessive damages awarded to respondent petitioner stresses that the policy
in issue was limited to a liability of P200,000; but the trial court granted the following monetary
awards: P200,000 as actual damages; P200,000 as moral damages; P100,000 as exemplary
damages; and P50,000 as attorney's fees.
The following issues must be resolved: first, whether there was a valid payment of premium,
considering that respondent's check was cashed after the occurrence of the fire; second, whether
respondent violated the policy by his submission of fraudulent documents and non-disclosure of the
other existing insurance contracts; and finally, whether respondent is entitled to the award of
damages.
The general rule in insurance laws is that unless the premium is paid the insurance policy is not valid
and binding. The only exceptions are life and industrial life insurance. 6 Whether payment was indeed
made is a question of fact which is best determined by the trial court. The trial court found, as affirmed by
the Court of Appeals, that there was a valid check payment by respondent to petitioner. Well-settled is the
rule that the factual findings and conclusions of the trial court and the Court of Appeals are entitled to
great weight and respect, and will not be disturbed on appeal in the absence of any clear showing that the
trial court overlooked certain facts or circumstances which would substantially affect the disposition of the
case. 7 We see no reason to depart from this ruling.
According to the trial court the renewal certificate issued to respondent contained the
acknowledgment that premium had been paid. It is not disputed that the check drawn by respondent
in favor of petitioner and delivered to its agent was honored when presented and petitioner forthwith
issued its official receipt to respondent on 10 April 1990. Section 306 of the Insurance Code provides
that any insurance company which delivers a policy or contract of insurance to an insurance agent or
insurance broker shall be deemed to have authorized such agent or broker to receive on its behalf
payment of any premium which is due on such policy or contract of insurance at the time of its
issuance or delivery or which becomes due thereon. 8 In the instant case, the best evidence of such
authority is the fact that petitioner accepted the check and issued the official receipt for the payment. It is,
as well, bound by its agent's acknowledgment of receipt of payment.
Sec. 78 of the Insurance Code explicitly provides:
An acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until the premium is
actually paid.

This Section establishes a legal fiction of payment and should be interpreted as an exception
to Section 77.9
Is respondent guilty of the policy violations imputed against him? We are not convinced by
petitioner's arguments. The submission of the alleged fraudulent documents pertained to
respondent's income tax returns for 1987 to 1989. Respondent, however, presented a BIR
certification that he had paid the proper taxes for the said years. The trial court and the Court of
Appeals gave credence to the certification and it being a question of fact, we hold that said finding is
conclusive.
Ordinarily, where the insurance policy specifies as a condition the disclosure of existing co-insurers,
non-disclosure thereof is a violation that entitles the insurer to avoid the policy. This condition is
common in fire insurance policies and is known as the "other insurance clause." The purpose for the
inclusion of this clause is to prevent an increase in the moral hazard. We have ruled on its validity
and the case of Geagonia v. Court of Appeals 10 clearly illustrates such principle. However, we see an
exception in the instant case.
Citing Section 29 11 of the Insurance Code, the trial court reasoned that respondent's failure to disclose
was not intentional and fraudulent. The application of Section 29 is misplaced. Section 29 concerns
concealment which is intentional. The relevant provision is Section 75, which provides that:
A policy may declare that a violation of specified provisions thereof shall avoid it,
otherwise the breach of an immaterial provision does not avoid the policy.
To constitute a violation the other existing insurance contracts must be upon the same subject matter
and with the same interest and risk. 12 Indeed, respondent acquired several co-insurers and he failed to
disclose this information to petitioner. Nonetheless, petitioner is estopped from must invoking this
argument. The trial court cited the testimony of petitioner's loss adjuster who admitted previous
knowledge of the co-insurers. Thus,
COURT:
Q The matter of additional insurance of other companies, was that
ever discussed in your investigation?
A Yes, sir.
Q In other words, from the start, you were aware the insured was
insured with other companies like Pioneer and so on?
A Yes, Your Honor.
Q But in your report you never recommended the denial of the claim
simply because of the non-disclosure of other insurance? [sic]
A Yes, Your Honor.

Q In other words, to be emphatic about this, the only reason you

recommended the denial of the claim, you found three documents to
be spurious. That is your only basis?
A Yes, Your Honor. 13 [Emphasis supplied]
Indubitably, it cannot be said that petitioner was deceived by respondent by the latter's nondisclosure of the other insurance contracts when petitioner actually had prior knowledge thereof.
Petitioner's loss adjuster had known all along of the other existing insurance contracts, yet, he did
not use that as basis for his recommendation of denial. The loss adjuster, being an employee of
petitioner, is deemed a representative of the latter whose awareness of the other insurance contracts
binds petitioner. We, therefore, hold that there was no violation of the "other insurance" clause by
respondent.
Petitioner is liable to pay its share of the loss. The trial court and the Court of Appeals were correct in
awarding P200,000 for this. There is, however, merit in petitioner's grievance against the damages
and attorney's fees awarded.
There is no legal and factual basis for the award of P200,000 for loss of profit. It cannot be denied
that the fire totally gutted respondent's business; thus, respondent no longer had any business to
operate. His loss of profit cannot be shouldered by petitioner whose obligation is limited to the object
of insurance, which was the stock-in-trade, and not the expected loss in income or profit.
Neither can we approve the award of moral and exemplary damages. At the core of this case is
petitioner's alleged breach of its obligation under a contract of insurance. Under Article 2220 of the
Civil Code, moral damages may be awarded in breaches of contracts where the defendant acted
fraudulently or in bad faith. We find no such fraud or bad faith. It must again be stressed that moral
damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. Such
damages are awarded only to enable the injured party to obtain means, diversion or amusements
that will serve to obviate the moral suffering he has undergone, by reason of the defendant's
culpable action. Its award is aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and it must be proportional to the suffering inflicted. 14 When awarded, moral
damages must not be palpably and scandalously excessive as to indicate that it was the result of passion,
prejudice or corruption on the part of the trial court judge. 15
The law 16 is likewise clear that in contracts and quasi-contracts the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Nothing
thereof can be attributed to petitioner which merely tried to resist what it claimed to be an unfounded
claim for enforcement of the fire insurance policy.
As to attorney's fees, the general rule is that attorney's fees cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate. 17 In short, the grant of
attorney's fees as part of damages is the exception rather than the rule; counsel's fees are not awarded
every time a party prevails in a suit. It can be awarded only in the cases enumerated in Article 2208 of the
Civil Code, and in all cases it must be reasonable. 18Thereunder, the trial court may award attorney's fees
where it deems just and equitable that it be so granted. While we respect the trial court's exercise of its

discretion in this case, the award of P50,000 is unreasonable and excessive. It should be reduced to
P10,000.

WHEREFORE, the instant petition is partly GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. No. 40751 is hereby MODIFIED by a) deleting the awards of P200,000 for loss
of profit, P200,000 as moral damages and P100,000 as exemplary damages, and b) reducing the
award of attorney's fees from P50,000 to P10,000.
No pronouncement as to costs.
.R. No. 102253 June 2, 1995
SOUTH SEA SURETY AND INSURANCE COMPANY, INC., petitioner,
vs.
HON. COURT OF APPEALS and VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY,
INC., respondents.
RESOLUTION

VITUG, J.:
Two issues on the subject of insurance are raised in this petition, that assails the decision, that
assails the decision of the Court of Appeals. (in CA-G.R. NO. CV-20156), the first dealing on the
requirement of premium payment and the second relating to the agency relationship of parties under
that contract.
The court litigation started when Valenzuela Hardwood and Industrial Supply, Inc. ("Hardwood"), filed
with the Regional, Trial Court of the National Capital Judicial Region, Branch l71 in Valenzuela,
Metro Manila, a complaint for the recovery of the value of lost logs and freight charges from Seven
Brothers Shipping Corporation or, to the extent of its alleged insurance cover, from South Sea Surety
and insurance Company.
The factual backdrop is described briefly by the appellate court thusly:
It appears that on 16 January 1984, plaintiff [Valenzuela Hardwood and Industrial
Supply, Inc.] entered into an agreement with the defendant Seven Brothers whereby
the latter undertook to load on board its vessel M/V Seven Ambassador the former's
lauan round logs numbering 940 at the port of Maconacon, Isabela for shipment to
Manila.
On 20 January 1984, plaintiff insured the logs, against loss and/or, damage with
defendant South Sea Surety and Insurance Co., Inc. for P2,000,000.00 end the latter
issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said
date.

On 24 January 1984, the plaintiff gave the check in payment of the premium on the
insurance policy to Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984
resulting in the loss of the plaintiffs insured logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the
premium and documentary stamps due on the policy was tendered to the insurer but
was not accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled
the insurance policy it issued as of the date of inception for non-payment of the
premium due in accordance with Section 77 of the Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South Sea Surety and
Insurance Co., Inc. the payment of the proceeds of the policy but the latter denied
liability under the policy. Plaintiff likewise filed a formal claim with defendant Seven
Brothers Shipping Corporation for the value of the lost logs but the latter denied the
claim. 1
In its decision, dated 11 May 1988, the trial court rendered judgment in favor of plaintiff Hardwood.
On appeal perfected by both the shipping firm and the insurance company, the Court of
Appeals affirmed the judgment of the court a quo only against the insurance corporation; in
absolving the shipping entity from liability, the appellate court ratiocinated:
The primary issue to be resolved before us is whether defendants shipping
corporation and the surety company are liable to the plaintiff for the latter's lost logs.
It appears that there is a stipulation in the charter party that the ship owner would be
exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil Code on common
carriers to establish the liability of the shipping corporation. The provisions on
common carriers should not be applied where the carrier is not acting as such but as
a private carrier.
Under American jurisprudence, a common carrier undertaking to carry a special or
chartered to a special person only, becomes a private carrier.
As a private carrier, a stipulation exempting the owner from liability even for the
negligence of its agent is valid (Home Insurance Company, Inc. vs. American
Steamship Agencies, Inc., 23 SCRA 24).
The shipping corporation should not therefore be held liable for the loss of the logs. 2
In this petition for review on certiorari brought by South Sea Surety and Insurance Co., Inc.,
petitioner argues that it likewise should have been freed from any liability to Hardwood. It faults the

appellate court (a) for having Supposedly disregarded Section 77 of the insurance Code and (b) for
holding Victorio Chua to have been an authorized representative of the insurer.
Section 77 of the Insurance Code provides:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to
the contrary, no policy or contract of insurance issued by an insurance company is
valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies.
Undoubtedly, the payment of the premium is a condition precedent to, and essential for, the
efficaciousness of the contract. The only two statutorily provided exceptions are (a) in case the
insurance coverage relates to life or industrial life (health) insurance when a grace period applies
and (b) when the insurer makes a written acknowledgment of the receipt of premium, this
acknowledgment being declared by law to be then conclusive evidence of the premium payment
(Secs. 77-78, Insurance Code). The appellate court, contrary to what the petition suggests, did not
make any pronouncement to the contrary. Indeed, it has said:
Concerning the issue as to whether there is a valid contract of insurance between
plaintiff-appellee and defendant-appellant South Sea Surety and Insurance Co., Inc.,
Section 77 of the Insurance Code explicitly provides that notwithstanding any
agreement to the contrary, no policy issued by an insurance company is valid and
binding unless and until premium thereof has been paid. It is therefore important to
determine whether at the time of the loss, the premium was already paid. 3
No attempt becloud the issues can disguise the fact that the sole question raised in the instant
petition is really evidentiary in nature, i.e., whether or not Victorio Chua, in receiving the check for
the insurance premium prior to the occurrence of the risk insured against has so acted as an agent
of petitioner. The appellate court, like the trial court, has found in the affirmative. Said the appellate
court:
In the instant case, the Marine Cargo Insurance Policy No. 84/24229 was issued by
defendant insurance company on 20 January 1984. At the time the vessel sank on
25 January 1984 resulting in the loss of the insured logs, the insured had already
delivered to Victorio Chua the check in payment of premium. But, as Victorio Chua
testified, it was only in the morning of 30 January 1984 or 5 days after the vessel
sank when his messenger tendered the check to defendant South Sea Surety and
Insurance Co., Inc. (TSN, pp. 3-27, 16-17, 22 October 1985).
The pivotal issue to be resolved to determine the liability, of the surety corporation is
whether Mr. Chua acted as an agent of the surety company or of the insured when
he received the check for insurance premiums.
Appellant surety company insists that Mr. Chua is an administrative assistant for the
past ten years and an agent for less than ten years of the Columbia Insurance

Brokers, Ltd. He is paid a salary as a administrative assistant and a commission as

agent based on the premiums he turns over to the broker. Appellant therefore argues
that Mr. Chua, having received the insurance premiums as an agent of the Columbia
Insurance Broker, acted as an agent of the insured under Section 301 of the
Insurance Code which provides as follows:
Sec. 301. Any person who for any compensation, commission or
other thing of value, acts, or aids in soliciting, negotiating or procuring
the making of any insurance contract or in placing risk or taking out
insurance, on behalf of an insured other than himself, shall be an
insurance broker within the intent of this Code, and shall thereby
become liable to all the duties requirements, liabilities and penalties
to which an insurance broker is subject.
The appellees, upon the other hand, claim that the second paragraph of Section 306
of the Insurance Code provide as follows:
Sec. 306. . . . Any insurance company which delivers to an insurance
agent or insurance broker a policy or contract of insurance shall be
deemed to have authorized such agent or broker to receive on its
behalf payment of any premium which is due on such policy of
contract of insurance at the time of its issuance or delivery or which
becomes due thereon.
On cross-examination in behalf of South Sea Surety and Insurance Co., Inc. Mr.
Chua testified that the marine cargo insurance policy for the plaintiff's logs was
delivered to him on 21 January 1984 at his office to be delivered to the plaintiff.
When the appellant South Sea Surety and Insurance Co., Inc. delivered to Mr. Chua
the marine cargo insurance policy for the plaintiffs logs, he is deemed to have been
authorized by the South Sea Surety and Insurance Co., Inc. to receive the premium
which is due on its behalf.
When therefore the insured logs were lost, the insured had already paid the premium
to an agent of the South Sea Surety and Insurance Co., Inc., which is consequently
liable to pay the insurance proceeds under the policy it issued to the insured. 4
We see no valid reason to discard the factual conclusions of the appellate court. Just as so correctly
pointed out by private respondent, it is not the function of this Court to assess and evaluate all over
again the evidence, testimonial and documentary, adduced by the parties particularly where, such as
here, the findings of both the trial court and the appellate court on the matter coincide.
WHEREFORE, the resolution, dated 01 February 1993, granting due course to the petition is
RECALLED, and the petition is DENIED. Costs against petitioner.
SO ORDERED.

G.R. No. L-43862 January 13, 1989

MERCANTILE INSURANCE CO., INC., plaintiff-appellee,
vs.
FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.
Beltran, Evangelista & Cuasay for plaintiff-appellee.
Abraham F. Sarmiento Law Office for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision** dated October 30, 1971 of the Court of First Instance of Manila
(now Regional Trial Court) in Civil Case No. 82168 entitled "Mercantile Insurance Co., Inc. (herein
referred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co., Inc., et al (hereinafter referred to as
the defendant-appellant) ordering defendants-appellants Felipe Ysmael, Jr. & Co., Inc. and Felipe
Ysmael, Jr., to pay jointly and severally to the plaintiff the sum of P100,000.00 plus 15% thereof as
attorney's fees, and costs. On appeal to the Court of Appeals, this case which involves only a
question of law, was certified to this Court.
The factual milieu of this case as found by the trial court is as follows:
Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application for
an overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine
National Bank. The latter was willing to grant credit accommodation of P2,000,000.00
applied for provided that the applicant shall have filed a bond in the sum of
P140,000.00 to guarantee the payment of the said amount. Accordingly, on March 6,
1967, Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond
No. G(16) 007 of Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh. A).
On December 4, 1967, Felipe Ysmael Jr. & Co., Inc. as principal and the Mercantile
Insurance Co., Inc. executed another surety bond MERICO Bond No. G (16) 0030 in
the sum of P40,000.00. It is the condition in both bonds that if the principal Felipe
Ysmael, Jr. & Co., Inc. shall perform and fulfill its undertakings with the Philippine
National Bank, then these surety bonds shall be null and void (Exh. B).
As security and in consideration of the execution of the surety bonds, exhibits A and
B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by Felipe
Ysmael, Jr. as president and in his personal capacity executed with the plaintiff
Mercantile Insurance Co., Inc. an indemnity agreement (Exh. D) wherein the
defendants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound themselves
jointly and severally to indemnify the plaintiff, hold save it harmless from and against
any and all payments, damages, costs, losses, penalties, charges and expenses
which said company as surety (relative to MERICO Bond No. 0007) shall incur or
become liable to pay plus an additional amount as attorney's fees equal to 20% of

the amount due to the company, Paragraph 3 of the indemnity agreement expressly
provides:
3) ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding
paragraph, where the obligation involves a liquidated amount for the payment of
which the company has become legally liable under the terms of the obligation and
its suretyship undertaking or by the demand of the obligee or otherwise and the latter
has merely allowed the COMPANY a term or extension for payment of the latter's
demand the full amount necessary to discharge the COMPANY's aforesaid liability
irrespective of whether or not payment has actually been made by the COMPANY,
the COMPANY for the protection of its interest may forthwith proceed against the
undersigned or either of them by court action or otherwise to enforce payment even
prior to making payment to the obligee which may hereafter be done by the
COMPANY.
On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta Torres
in their official capacities and the defendants executed another indemnity agreement
(Exh. E) with the plaintiff in consideration of the surety bond (referring to MERICO
Bond No. G (16) 0030. In the indemnity agreement (Exh. E) the same provisions of
paragraph 3 found in exhibit D is provided for.
By agreement dated September 5, 1967 (Exh. C), the amount of the Bond was
reduced by P40,000.00 so that the total liability of the plaintiff to the Philippine
National Bank in view of the aforesaid reduction is P100,000.00 (Exh. C), P60,000.00
on Surety Bond No. 0007 plus P40,000.00 on Surety Bond No. 0030.
In view of the failure of the defendants to pay the overdraft and credit line with the
Philippine National Bank demanded from the Mercantile Insurance Co., Inc.
settlement of its obligation under surety bonds No. (G-16)-0007 for P 60,000.00
which expired on March 6, 1970 and No. G (-16)- 0030 for P 40,000.00 which
expired since September 4, 1968 (Exh. P) otherwise drastic measures for collection
to protect the interest of the bank would be taken. Attached to the demand letter is a
statement of account.
By letter of December 17, 1970, the Legal Department of plaintiff company wrote a
letter of demand to the defendants (Exhs. G and H) inviting their attention to the letter
of demand of the Philippine National Bank sent to the plaintiff and demanding from
the defendants the settlement of said account. These letters were received as shown
by the registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to
settle their obligation with the Philippine National Bank, on February 10, 1971,
plaintiff brought the present action.
Instead of filing their answer, the defendants (appellants herein) filed a motion to DISMISS, which
motion was subsequently denied. Thereafter, the defendants filed their answer and the case was set
for pre-trial. On the date scheduled for pre-trial, the defendants and their counsel failed to appear,
thus on motion of the plaintiff, they were declared in default and plaintiff was allowed to present its

evidence ex-parte. Upon motion for reconsideration filed by the defendants, the case was ordered
re-opened and the case was scheduled for reception of defendant's evidence. Thereafter, the parties
were required to submit their respective memoranda and the case was submitted for decision. On
October 30, 1971, the trial court rendered its decision, the dispositive part of which reads:
WHEREFORE, in view of the foregoing considerations, judgment is rendered for the
plaintiff and the defendants are ordered to pay jointly and severally the plaintiff the
sum of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable
attorney's fees and the costs.
Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the
Philippine National Bank in partial satisfaction of the obligation of the defendants to
said Bank.
SO ORDERED. (Record on Appeal, p. 96)
Said decision was appealed to the Court of Appeals on questions of facts and law. Acting on the
appeal and finding that the only question raised therein involves a question of law, the Court of
Appeals by resolution *** dated April 29, 1976, certified the same to this Court, for proper disposition
(Rollo, pp. 62-63).
This Court, thru its First Division by Resolution dated May 31, 1978, resolved to have the case
docketed and declared the same submitted for decision (Rollo, p. 65).
The defendants-appellants raised the following assignments of errors in the Court of Appeals:
I
THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF
CAUSE OF ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE
PLAINTIFF HAS PAID NOTHING ON THE SURETY BONDS AND HAS SUFFERED
NO ACTUAL DAMAGE.
II
THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE
INDEMNITY AGREEMENTS IS VOID.
III
CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE
DEFENDANTS-APPELLANT'S TO PAY JOINTLY AND SEVERALLY TO THE
PLAINTIFF THE SUM OF P100,000.00 PLUS THE FURTHER SUM OF 15%
THEREOF IN THE CONCEPT OF REASONABLE ATTORNEY'S FEES AND THE
COSTS. (Brief for Defendants-Appellants, CA, pp. 1-2).

The crux of the controversy is whether or not the surety can be allowed indemnification from the
defendants-appellants, upon the latter's default even before the former has paid to the creditor.
There is no dispute that the overdraft line of P1,000,000.00 and the credit line of Pl,000,000.00
applied for by the defendant was granted by the Philippine National Bank on the strength of the two
surety bonds denominated as MERICO Bond No. G(16) 0007 for one hundred thousand pesos (Exh.
A) and MERICO Bond No. G(16) 0030 for forty thousand pesos (Exh. B), later reduced as above
stated on September 5, 1967 (Exh. C) by P40,000.00 or a total amount of P100,000.00. As security
and in consideration of the execution of the surety bonds, the defendants executed with the plaintiff
identical indemnity agreements (Exhs. D and E) which provide, among others that payment of
indemnity or compensation may be claimed irrespective of whether or not plaintiff company has
actually paid the same.
Defendants-appellants maintain that the complaint is premature and that paragraph 3 of the
indemnity agreements is void for being contrary to law, public policy and good morals. They argued
that to allow plaintiff surety (appellee herein) to receive indemnity or compensation for something it
has not paid in its capacity as surety would constitute unjust enrichment at the expense of another.
(Brief for Defendants-Appellants, CA, p.6).
To bolster their contention, defendants-appellants argue that it is an indispensable requisite for an
action to prosper, that the party bringing the action must have a cause of action against the other
party; and that for a cause of action to be ripe for litigation, there must be both wrongful violation and
damages; all of which are not present in the case at bar because plaintiff-appellee has not suffered
any injury whatsoever, notwithstanding the demand sent to it by the Philippine National Bank, nor
has plaintiff-appellee made a single actual payment to said bank. Hence, to allow plaintiff-appellee to
recover from them something which it has not paid in its capacity as surety would violate the
fundamental principle which states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI
POTEST (No person should unjustly enrich himself at the expense of another). [DefendantsAppellants' Brief, pp. 7-8; 49].
The question as to whether or not under the Indemnity Agreement of the parties, the Surety can
demand indemnification from the principal, upon the latter's default, even before the former has paid
to the creditor, has long been settled by this Court in the affirmative.
It has been held that:
The stipulation in the indemnity agreement allowing the surety to recover even before
it paid the creditor is enforceable. In accordance therewith, the surety may demand
from the indemnitors even before paying the creditors. (Cosmopolitan Ins. Co., Inc. v.
Reyes, 15 SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz.
3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625,
March 16, 1954).
Hence, appellants contention that the action of the appellee (surety company) is premature or that
the complaint fails to state a cause of action because the surety has not paid anything to the bank,
cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact, such contention is belied

not only by the allegations in the complaint but also by the agreement entered into between the
appellants and the appellee in favor of the bank.
The records show that the cause of action is distinctly set forth in the complaint, the pertinent portion
of which states:
6. That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B") were
extended by the Philippine National Bank, a credit accommodation in the sum of
TWO MILLION (P2,000,000.00) PESOS;
7. That the Philippine National Bank is demanding and collecting from the plaintiff the
sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which is the
defendants' account with the said bank that is secured and covered by the abovementioned bonds (Annexes "A" and "B");
8. That under the terms of the Indemnity Agreements (Annexes "D" and "E") more
particularly paragraph 3, plaintiff may forthwith proceed against the defendants to
impose payment, even prior to making payment to the Philippine National Bank;
9. That notwithstanding series of demands made by plaintiff, the defendants failed
and refused to pay the Philippine National Bank the sum of ONE HUNDRED
THOUSAND (P l00,000.00) PESOS;
10. That on account of defendants' default, plaintiff becomes liable to the Philippine
National Bank in the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;'
(Record on Appeal, p. 2.)
Correspondingly, it is readily apparent that said cause of action was derived from the terms of the
Indemnity Agreement, paragraph 3 thereof, as above quoted. By virtue of the provisions of the
Indemnity Agreement, defendants-appellants have undertaken to hold plaintiff-appellee free and
harmless from any suit, damage or liability which may be incurred by reason of non-performance by
the defendants-appellants of their obligation with the Philippine National Bank. The Indemnity
Agreement is principally entered into as security of plaintiff-appellee in case of default of defendantsappellants; and the liability of the parties under the surety bonds is joint and several, so that the
obligee PNB may proceed against either of them for the satisfaction of the obligation. (Brief for
Plaintiff-Appellee, p. 7).
II
Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiff-appellee the
prerogative of filing an action even prior to the latter's making any payment to the Philippine National
Bank.
Contracts are respected as the law between the contracting parties (Henson v. IAC, 148 SCRA 11
[1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is
settled that the parties may establish such stipulations, clauses, terms and conditions as they may

want to include, and as long as such agreements are not contrary to law, morals, good customs,
public policy or public order, they shall have the force of law between them (Herrera v. Petrophil
Corp., 146 SCRA [1986].
Contracts should be interpreted according to their literal meaning and should not be interpreted
beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in the interpretation of
contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of the stipulation shall control.
In the case at bar, there is no dispute as to meaning of the terms of the Indemnity Agreement. The
only bone of contention is whether or not such terms are null and void as defendants-appellants
would have this Court declare.
A careful analysis of the contract in question will show that the provisions therein do not contravene
any law or public policy much less do they militate against the public good. In fact, as shown above,
they are fully sanctioned by well-established jurisprudence. Having voluntarily entered into such
contract, the appellants cannot now be heard to complain. Their indemnity agreement have the force
and effect of law.
Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled:
...The indemnity agreement was not executed for the benefit of the creditors; it was
rather for the benefit of the surety and if the latter thought it necessary in its own
interest to impose this stipulation, and the indemnitors voluntarily agreed to the
same, the court should respect the agreement of the parties and require them to
abide by their contract. (Security Bank v. Globe Assurance, 107 Phil. 733 [1960].
III
Finally, the trial court did not err in ordering defendants-appellants to pay jointly and severally the
plaintiff the sum of P100,000.00 plus 15% as attorney's fees.
It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are
simultaneously the same persons who executed the Indemnity Agreement. Thus, the position
occupied by them is that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the plaintiff-appellee's, the Philippine National Bank may proceed
against either for fulfillment of the obligation as covered by the surety bonds. There is, therefore, no
principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not
apply. Otherwise stated, there is no more need for the plaintiff-appellee to exhaust all the properties
of the principal debtor before it may proceed against defendants-appellants.
As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen (15) per
cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, supra).
WHEREFORE, the decision appealed from is hereby AFFIRMED.

SO ORDERED.
G.R. No. 95546 November 6, 1992
MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American
International Underwriters (Phils.), Inc., respondent.

BELLOSILLO, J.:
This case involves a purely legal question: whether payment by installment of the premiums due on
an insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise
known as the Insurance Code, as amended, which provides:
Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is
exposed to the peril insured against. Notwithstanding any agreement to the contrary,
no policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid, except in the case of a
life or an industrial life policy whenever the grace period provision applies.
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by
American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany
Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's
building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total
premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982,
21 June 1982 and 16 November 1982, all of which were accepted by private respondent.
On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP9210596, which replaced and renewed the previous policy, for a term covering 1 March 1983 to 1
March 1984. The premium in the amount of P466,103.05 was again paid on installments on 13 April
1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21 November 1983. All payments were
likewise accepted by private respondent.
On 20 January 1984, the policy was again renewed and private respondent issued to petitioner
Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this
renewed policy, petitioner made two installment payments, both accepted by private respondent, the
first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00.
Thereafter, petitioner refused to pay the balance of the premium.
Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.

In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP9210651. It explained that it discontinued the payment of premiums because the policy did not
contain a credit clause in its favor and the receipts for the installment payments covering the policy
for 1984-85, as well as the two (2) previous policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company rights to deny
liability on any claim under the policy arising before such payments or after the
expiration of the credit clause of the policy; and
3. Subject to no loss prior to premium payment. If there be any loss such is not
covered.
Petitioner further claimed that the policy was never binding and valid, and no risk attached to the
policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85,
and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the
premium payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following
findings:
While it is true that the receipts issued to the defendant contained the
aforementioned reservations, it is equally true that payment of the premiums of the
three aforementioned policies (being sought to be refunded) were made during the
lifetime or term of said policies, hence, it could not be said, inspite of the
reservations, that no risk attached under the policies. Consequently, defendant's
counterclaim for refund is not justified.
As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view
of the reservation in the receipts ordinarily issued by the plaintiff on premium
payments the only plausible conclusion is that plaintiff has no right to demand their
payment after the lapse of the term of said policy on March 1, 1985. Therefore, the
defendant was justified in refusing to pay the same. 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered
a decision 2modifying that of the trial court by ordering herein petitioner to pay the balance of the
premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and
affirming the denial of the counterclaim. The appellate court thus explained
The obligation to pay premiums when due is ordinarily as indivisible obligation to pay
the entire premium. Here, the parties herein agreed to make the premiums payable
in installments, and there is no pretense that the parties never envisioned to make
the insurance contract binding between them. It was renewed for two succeeding
years, the second and third policies being a renewal/replacement for the previous

one. And the insured never informed the insurer that it was terminating the policy
because the terms were unacceptable.
While it may be true that under Section 77 of the Insurance Code, the parties may
not agree to make the insurance contract valid and binding without payment of
premiums, there is nothing in said section which suggests that the parties may not
agree to allow payment of the premiums in installment, or to consider the contract as
valid and binding upon payment of the first premium. Otherwise, we would allow the
insurer to renege on its liability under the contract, had a loss incurred (sic) before
completion of payment of the entire premium, despite its voluntary acceptance of
partial payments, a result eschewed by a basic considerations of fairness and equity.
To our mind, the insurance contract became valid and binding upon payment of the
first premium, and the plaintiff could not have denied liability on the ground that
payment was not made in full, for the reason that it agreed to accept installment
payment. . . . 3
Petitioner now asserts that its payment by installment of the premiums for the insurance policies for
1982, 1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance
Code, as amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability
for loss for occurring before payment of premiums.
It argues that where the premiums is not actually paid in full, the policy would only be effective if
there is an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the
Insurance Code. The absence of an express acknowledgment in the policies of such receipt of the
corresponding premium payments, and petitioner's failure to pay said premiums on or before the
effective dates of said policies rendered them invalid. Petitioner thus concludes that there cannot be
a perfected contract of insurance upon mere partial payment of the premiums because under Sec.
77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof
has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a
refund of all premium payments made on the alleged invalid insurance policies.
We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that petitioner and private respondent intended subject insurance policies to be
binding and effective notwithstanding the staggered payment of the premiums. The initial insurance
contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the
insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the
insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and
fairness would not allow the insurer to continue collecting and accepting the premiums, although
paid on installments, and later deny liability on the lame excuse that the premiums were not
prepared in full.
We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and
conclusion of the appellate court contained in its Resolution denying the motion to reconsider its
Decision

While the import of Section 77 is that prepayment of premiums is strictly required as

a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even if
premiums are not paid, but does not expressly prohibit an agreement granting credit
extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so proscribed. At
the very least, both parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted. 4
The reliance by petitioner on Arce vs. Capital Surety and Insurance
Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar.
In Arce, no payment was made by the insured at all despite the grace period given. In the case before Us,
petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of
the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it
refused to pay the balance.
It appearing from the peculiar circumstances that the parties actually intended to make three (3)
insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its
obligation to pay the balance of the premium after the expiration of the whole term of the third policy
(No. AH-CPP-9210651) in March 1985. Moreover, as correctly observed by the appellate court,
where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the
premiums paid if the insurer was exposed to the risk insured for any period, however brief or
momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED.
Costs against petitioner.
SO ORDERED.
G.R. No. 137172 June 15, 1999
UCPB GENERAL INSURANCE CO., INC., petitioner,
vs.
MASAGANA TELAMART, INC., respondent.

PARDO, J.:

The case is an appeal via certiorari seeking to set aside the decision of the Court of
Appeals, 1 affirming with modification that of the Regional Trial Court, Branch 58, Makati, ordering
petitioner to pay respondent the sum of P18,645,000.00, as the proceeds of the insurance coverage of
respondent's property razed by fire; 25% of the total amount due as attorney's fees and P25,000.00 as
litigation expenses, and costs.
The facts are undisputed and may be related as follows:
On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's various
property described therein against fire, for the period from May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them upon expiration of
their terms on May 22, 1992. Petitioner advised respondent's broker, Zuellig Insurance Brokers, Inc.
of its intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the policies at
the address stated in the policies.
On June 13, 1992, fire razed respondent's property covered by three of the insurance policies
petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5) manager's
checks in the total amount of P225,753.95, representing premium for the renewal of the policies from
May 22, 1992 to May 22, 1993. No notice of loss was filed by respondent under the policies prior to
July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of the insured
property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's checks that
it tendered, and at the same time rejected respondent's claim for the reasons (a) that the policies
had expired and were not renewed, and (b) that the fire occurred on June 13, 1992, before
respondent's tender of premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a civil
complaint against petitioner for recovery of P18,645,000.00, representing the face value of the
policies covering respondent's insured property razed by fire, and for attorney's fees. 2
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an answer to the
complaint. It alleged that the complaint "fails to state a cause of action"; that petitioner was not liable
to respondent for insurance proceeds under the policies because at the time of the loss of
respondent's property due to fire, the policies had long expired and were not renewed. 3
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered decision,
the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff and against the defendant, as follows:
(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of
P225,753.95 (refused by the defendant) as full payment of the corresponding
premiums for the replacement-renewal policies for Exhibits A, B, C, D and E;
(2) Declaring plaintiff to have fully complied with its obligation to pay the premium
thereby rendering the replacement-renewal policy of Exhibits A, B, C, D and E
effective and binding for the duration May 22, 1992 until May 22, 1993; and, ordering
defendant to deliver forthwith to plaintiff the said replacement-renewal policies;
(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992
and August 9, 1991 to August 9, 1992, respectively; and
(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00
representing the latter's claim for indemnity under Exhibits A, B & C and/or its
replacement-renewal policies; (b) 25% of the total amount due as and for attorney's
fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit.
All other claims and counterclaims asserted by the parties are denied and/or
dismissed, including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
ZOSIMO Z. ANGELES.
Judge. 4
In due time, petitioner appealed to the Court of Appeals. 5
On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming that of the Regional
Trial Court with the modification that item No. 3 of the dispositive portion was deleted, and the award of
attorney's fees was reduced to 10% of the total amount due. 7
The Court of Appeals held that following previous practise, respondent was allowed a sixty (60) to
ninety (90) day credit term for the renewal of its policies, and that the acceptance of the late
premium payment suggested an understanding that payment could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on the petition, not to
file a motion to dismiss within ten (10) days from notice. 8 On April 22, 1999, respondent filed its
comment. 9

Respondent submits that the Court of Appeals correctly ruled that no timely notice of non-renewal
was sent. The notice of non-renewal sent to broker Zuellig which claimed that it verbally notified the
insurance agency but not respondent itself did not suffice. Respondent submits further that the Court
of Appeals did not err in finding that there existed a sixty (60) to ninety (90) days credit agreement
between UCPB and Masagana, and that, finally, the Supreme Court could not review factual findings
of the lower court affirmed by the Court of Appeals. 10
We give due course to the appeal.
The basic issue raised is whether the fire insurance policies issued by petitioner to the respondent
covering the period May 22, 1991 to May 22, 1992, had expired on the latter date or had been
extended or renewed by an implied credit arrangement though actual payment of premium was
tendered on a later date after the occurrence of the risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other than life, issued
originally or on renewal, is not valid and binding until actual payment of the premium. Any agreement
to the contrary is void. 11The parties may not agree expressly or impliedly on the extension of creditor
time to pay the premium and consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of Appeals, is not
applicable. In that case, payment of the premium was in fact actually made on December 24, 1981, and
the fire occurred on January 18, 1982. Here, the payment of the premium for renewal of the policies was
tendered on July 13, 1992, a month after the fire occurred on June 13, 1992. The assured did not even
give the insurer a notice of loss within a reasonable time after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
in CA-G.R. CV No. 42321. In lieu thereof the Court renders judgment dismissing respondent's
complaint and petitioner's counterclaims thereto filed with the Regional Trial Court, Branch 58,
Makati City, in Civil Case No. 92-2023. Without costs.
1wphi1.nt

SO ORDERED.
G.R. No. L-15895

November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiffappellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer
to recover from the defendant life insurance company the sum of pesos 6,000 paid by the deceased
for a life annuity. The trial court gave judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the
Sun Life Assurance Company of Canada through its office in Manila for a life annuity. Two days later
he paid the sum of P6,000 to the manager of the company's Manila office and was given a receipt
reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia
solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina
Central de la Compaia.
The application was immediately forwarded to the head office of the company at Montreal, Canada.
On November 26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on
the same day the cable was received notice was sent by the Manila office of Herrer that the
application had been accepted, is a disputed point, which will be discussed later.) On December 4,
1917, the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres wrote to
the Manila office of the company stating that Herrer desired to withdraw his application. The
following day the local office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by Mr. Torres on the
morning of December 21, 1917. Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of
acceptance of his application. To resolve this question, we propose to go directly to the evidence of
record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the
trial testified that he prepared the letter introduced in evidence as Exhibit 3, of date November 26,
1917, and handed it to the local manager, Mr. E. E. White, for signature. The witness admitted on
cross-examination that after preparing the letter and giving it to he manager, he new nothing of what
became of it. The local manager, Mr. White, testified to having received the cablegram accepting the
application of Mr. Herrer from the home office on November 26, 1917. He said that on the same day
he signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters, after
being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The
witness could not tell if the letter had every actually been placed in the mails. Mr. Tuason, who was
the chief clerk, on November 26, 1917, was not called as a witness. For the defense, attorney
Manuel Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this occasion, Mr.
Herrer mentioned his application for a life annuity, and that he said that the only document relating to
the transaction in his possession was the provisional receipt. Rafael Enriquez, the administrator of
the estate, testified that he had gone through the effects of the deceased and had found no letter of
notification from the insurance company to Mr. Herrer.

Our deduction from the evidence on this issue must be that the letter of November 26, 1917,
notifying Mr. Herrer that his application had been accepted, was prepared and signed in the local
office of the insurance company, was placed in the ordinary channels for transmission, but as far as
we know, was never actually mailed and thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should
be applied to the facts. In order to reach our legal goal, the obvious signposts along the way must be
noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the
Code of Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title
VIII of Book III and Section III of Title III of Book III, which dealt with insurance contracts. In the Civil
Code there formerly existed and presumably still exist, Chapters II and IV, entitled insurance
contracts and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915, there was,
however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and health
insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the
code of Commerce. The law of insurance is consequently now found in the Insurance Act and the
Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be
followed in order that there may be a contract of insurance. On the other hand, the Civil Code, in
article 1802, not only describes a contact of life annuity markedly similar to the one we are
considering, but in two other articles, gives strong clues as to the proper disposition of the case. For
instance, article 16 of the Civil Code provides that "In matters which are governed by special laws,
any deficiency of the latter shall be supplied by the provisions of this Code." On the supposition,
therefore, which is incontestable, that the special law on the subject of insurance is deficient in
enunciating the principles governing acceptance, the subject-matter of the Civil code, if there be any,
would be controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the
concurrence of offer and acceptance with respect to the thing and the consideration which are to
constitute the contract. An acceptance made by letter shall not bind the person making the offer
except from the time it came to his knowledge. The contract, in such case, is presumed to have been
entered into at the place where the offer was made." This latter article is in opposition to the
provisions of article 54 of the Code of Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion,
then the only duty remaining is for the court to apply the law as it is found. The legislature in its
wisdom having enacted a new law on insurance, and expressly repealed the provisions in the Code
of Commerce on the same subject, and having thus left a void in the commercial law, it would seem
logical to make use of the only pertinent provision of law found in the Civil code, closely related to
the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only
from the date it came to his knowledge, may not be the best expression of modern commercial
usage. Still it must be admitted that its enforcement avoids uncertainty and tends to security. Not
only this, but in order that the principle may not be taken too lightly, let it be noticed that it is identical
with the principles announced by a considerable number of respectable courts in the United States.

The courts who take this view have expressly held that an acceptance of an offer of insurance not
actually or constructively communicated to the proposer does not make a contract. Only the mailing
of acceptance, it has been said, completes the contract of insurance, as the locus poenitentiae is
ended when the acceptance has passed beyond the control of the party. (I Joyce, The Law of
Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article
1262 of the Civil Code providing that an acceptance made by letter shall not bind the person making
the offer except from the time it came to his knowledge. The pertinent fact is, that according to the
provisional receipt, three things had to be accomplished by the insurance company before there was
a contract: (1) There had to be a medical examination of the applicant; (2) there had to be approval
of the application by the head office of the company; and (3) this approval had in some way to be
communicated by the company to the applicant. The further admitted facts are that the head office in
Montreal did accept the application, did cable the Manila office to that effect, did actually issue the
policy and did, through its agent in Manila, actually write the letter of notification and place it in the
usual channels for transmission to the addressee. The fact as to the letter of notification thus fails to
concur with the essential elements of the general rule pertaining to the mailing and delivery of mail
matter as announced by the American courts, namely, when a letter or other mail matter is
addressed and mailed with postage prepaid there is a rebuttable presumption of fact that it was
received by the addressee as soon as it could have been transmitted to him in the ordinary course of
the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For
instance, a letter will not be presumed to have been received by the addressee unless it is shown
that it was deposited in the post-office, properly addressed and stamped. (See 22 C.J., 96, and 49 L.
R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of the application ever came to the knowledge of the
applicant.
lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000
with legal interest from November 20, 1918, until paid, without special finding as to costs in either
instance. So ordered.
G.R. No. 112329

January 28, 2000

VIRGINIA A. PEREZ, petitioner,

vs.
COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be assented to by both parties, either in person
or through their agents and so long as an application for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a contract.

Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in
CA-G.R. CV 35529 entitled, "BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia
A. Perez. Defendant-Appellee," which declared Insurance Policy 056300 for P50,000.00 issued by
private respondent corporation in favor of the deceased Primitivo B. Perez, null and void and
rescinded, thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch
XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for
P20,000.00. Sometime in October 1987, an agent of the insurance corporation, Rodolfo Lalog,
visited Perez in Guinayangan, Quezon and convinced him to apply for additional insurance coverage
of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid
annually.
1wphi1.nt

On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional
insurance coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivo's wife,
paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount received was a
"deposit."1 Unfortunately, Lalog lost the application form accomplished by Perez and so on October
28, 1987, he asked the latter to fill up another application form. 2 On November 1, 1987, Perez was
made to undergo the required medical examination, which he passed. 3
Pursuant to the established procedure of the company, Lalog forwarded the application for additional
insurance of Perez, together with all its supporting papers, to the office of BF Lifeman Insurance
Corporation at Gumaca, Quezon which office was supposed to forward the papers to the Manila
office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during
a storm. At the time of his death, his application papers for the additional insurance of P50,000.00
were still with the Gumaca office. Lalog testified that when he went to follow up the papers, he found
them still in the Gumaca office and so he personally brought the papers to the Manila office of BF
Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in
Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation
approved the application and issued the corresponding policy for the P50,000.00 on December 2,
1987.4
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00 (double
indemnity in case of accident) but the insurance company refused to pay the claim under the
additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a
triple indemnity rider on the insurance policy. In its letter' of January 29, 1988 to Virginia A. Perez,
the insurance company maintained that the insurance for P50,000.00 had not been perfected at the
time of the death of Primitivo Perez. Consequently, the insurance company refunded the amount of
P2,075.00 which Virginia Perez had paid.

On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission and declaration of nullity of the insurance contract in
question.
Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his
prestations under the contract and all the elements of a valid contract are present. She then filed a
counterclaim against private respondent for the collection of P150,000.00 as actual damages,
P100,000.00 as exemplary damages, P30,000.00 as attorney's fees and P10,000.00 as expenses
for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion
of which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of
defendant Virginia A. Perez, ordering the plaintiff BF Lifeman Insurance Corporation to pay to
her the face value of BF Lifeman Insurance Policy No. 056300, plus double indemnity under
the SARDI or in the total amount of P150,000.00 (any refund made and/or premium
deficiency to be deducted therefrom).
SO ORDERED.5
The trial court, in ruling for petitioner, held that the premium for the additional insurance of
P50,000.00 had been fully paid and even if the sum of P2,075.00 were to be considered merely as
partial payment, the same does not affect the validity of the policy. The trial court further stated that
the deceased had fully complied with the requirements of the insurance company. He paid, signed
the application form and passed the medical examination. He should not be made to suffer the
subsequent delay in the transmittal of his application form to private respondent's head office since
these were no longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance
contract for P50,000.00 could not have been perfected since at the time that the policy was issued,
Primitivo was already dead.6 Citing the provision in the application form signed by Primitivo which
states that:
. . . there shall be no contract of insurance unless and until a policy is issued on this
application and that the policy shall not take effect until the first premium has been paid and
the policy has been delivered to and accepted by me/us in person while I/we, am/are in good
health
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so
long as the application for insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract.
Petitioner's motion for reconsideration having been denied by respondent court, the instant petition
for certiorariwas filed on the ground that there was a consummated contract of insurance between
the deceased and BF Lifeman Insurance Corporation and that the condition that the policy issued by

the corporation be delivered and received by the applicant in good health, is potestative, being
dependent upon the will of the insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate
the other for loss on a specified subject by specified perils.7 A contract, on the other hand, is a
meeting of the minds between two persons whereby one binds himself, with respect to the other to
give something or to render some service.8Under Article 1318 of the Civil Code, there is no contract
unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his
medical examination, his application was subject to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased
and respondent corporation was further conditioned upon compliance with the following requisites
stated in the application form:
there shall be no contract of insurance unless and until a policy is issued on this application
and that the said policy shall not take effect until the premium has been paid and the policy
delivered to and accepted by me/us in person while I/We, am/are in good health. 9
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it
merely received the application form and all the requisite supporting papers of the applicant. Its
assent was given when it issues a corresponding policy to the applicant. Under the abovementioned
provision, it is only when the applicant pays the premium and receives and accepts the policy while
he is in good health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers
for additional insurance coverage were still with the branch office of respondent corporation in
Gumaca and it was only two days later, or on November 27, 1987, when Lalog personally delivered
the application papers to the head office in Manila. Consequently, there was absolutely no way the
acceptance of the application could have been communicated to the applicant for the latter to accept
inasmuch as the applicant at the time was already dead. In the case of Enriquez vs. Sun Life
Assurance Co. of Canada,10 recovery on the life insurance of the deceased was disallowed on the
ground that the contract for annuity was not perfected since it had not been proved satisfactorily that
the acceptance of the application ever reached the knowledge of the applicant.

Petitioner insists that the condition imposed by respondent corporation that a policy must have been
delivered to and accepted by the proposed insured in good health is potestative being dependent
upon the will of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is
considered void. Article 1182 of the New Civil Code states: When the fulfillment of the condition
depends upon the sole will the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the respondent company for the
perfection of the contract of insurance:
(a) a policy must have been issued;
(b) the premiums paid; and
(c) the policy must have been delivered to and accepted by the applicant while he is in good
health.
The condition imposed by the corporation that the policy must have been delivered to and accepted
by the applicant while he is in good health can hardly be considered as a potestative or facultative
condition. On the contrary, the health of the applicant at the time of the delivery of the policy is
beyond the control or will of the insurance company. Rather, the condition is a suspensive one
whereby the acquisition of rights depends upon the happening of an event which constitutes the
condition. In this case, the suspensive condition was the policy must have been delivered and
accepted by the applicant while he is in good health. There was non-fulfillment of the condition,
however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the
non-fulfillment of the condition resulted in the non-perfection of the contract.
As stated above, a contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding
from the date of application, must have been a completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties have met in agreement. 11
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It
should be noted that an application is a mere offer which requires the overt act of the insurer for it to
ripen into a contract. Delay in acting on the application does not constitute acceptance even though
the insured has forwarded his first premium with his application. The corporation may not be
penalized for the delay in the processing of the application papers. Moreover, while it may have
taken some time for the application papers to reach the main office, in the case at bar, the same was
acted upon less than a week after it was received. The processing of applications by respondent
corporation normally takes two to three weeks, the longest being a month. 12 In this case, however,
the requisite medical examination was undergone by the deceased on November 1, 1987; the

application papers were forwarded to the head office on November 27, 1987; and the policy was
issued on December 2, 1987. Under these circumstances, we hold that the delay could not be
deemed unreasonable so as to constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy
056300 for P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its
Resolution of the motion for reconsideration filed by petitioner, thus:
Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to
which defendant-appellee attaches undue significance and makes capital of, it is clear that
the use of the words "and rescinded" is, as it is hereby declared, a superfluity. It is apparent
from the context of the decision that the insurance policy in question was found null and void,
and did not have to be "rescinded".13
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no
contract at all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is
AFFIRMED insofar as it declared Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman
Insurance Corporation of no force and effect and hence null and void. No costs.
1wphi1.nt

SO ORDERED.