Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 136914

January 25, 2002

COUNTRY BANKERS INSURANCE CORPORATION, petitioner,

vs.
LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., respondent.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision of the Court of Appeals dated December 29, 1998 in
CA-G.R. CV Case No. 36902 affirming in toto the Decision dated December 26, 1991 of the Regional Trial Court of
Lianga, Surigao del Sur, Branch 28, in Civil Case No. L-518 which ordered petitioner Country Bankers Insurance
Corporation to fully pay the insurance claim of respondent Lianga Bay and Community Multi-Purpose Cooperative,
Inc., under Fire Insurance Policy No. F-1397, for loss sustained as a result of the fire that occurred on July 1, 1989 in
the amount of Two Hundred Thousand Pesos (P200,000.00), with interest at twelve percent (12%) per annum from the
date of filing of the complaint until fully paid, as well as Fifty Thousand Pesos ( P50,000.00) as actual damages, Fifty
Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation expenses, Ten
Thousand Pesos (P10,000.00) as attorneys fees, and the costs of suit.
The facts are undisputed:
The petitioner is a domestic corporation principally engaged in the insurance business wherein it undertakes, for a
consideration, to indemnify another against loss, damage or liability from an unknown or contingent event including
fire while the respondent is a duly registered cooperative judicially declared insolvent and represented by the elected
assignee, Cornelio Jamero.
It appears that sometime in 1989, the petitioner and the respondent entered into a contract of fire insurance. Under Fire
Insurance Policy No. F-1397, the petitioner insured the respondents stocks-in-trade against fire loss, damage or
liability during the period starting from June 20, 1989 at 4:00 p.m. to June 20, 1990 at 4:00 p.m., for the sum of Two
Hundred Thousand Pesos (P200,000.00).
On July 1, 1989, at or about 12:40 a.m., the respondents building located at Barangay Diatagon, Lianga, Surigao del
Sur was gutted by fire and reduced to ashes, resulting in the total loss of the respondents stocks-in-trade, pieces of
furnitures and fixtures, equipments and records.
Due to the loss, the respondent filed an insurance claim with the petitioner under its Fire Insurance Policy No. F-1397,
submitting: (a) the Spot Report of Pfc. Arturo V. Juarbal, INP Investigator, dated July 1, 1989; (b) the Sworn Statement
of Jose Lomocso; and (c) the Sworn Statement of Ernesto Urbiztondo.
The petitioner, however, denied the insurance claim on the ground that, based on the submitted documents, the
building was set on fire by two (2) NPA rebels who wanted to obtain canned goods, rice and medicines as provisions
for their comrades in the forest, and that such loss was an excepted risk under paragraph No. 6 of the policy conditions
of Fire Insurance Policy No. F-1397, which provides:
This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or
indirectly, of any of the following occurrences, namely:
xxx

xxx

xxx

(d) Mutiny, riot, military or popular uprising, insurrection, rebellion, revolution, military or usurped power.
Any loss or damage happening during the existence of abnormal conditions (whether physical or otherwise)
which are occasioned by or through or in consequence, directly or indirectly, of any of said occurrences shall
be deemed to be loss or damage which is not covered by this insurance, except to the extent that the Insured
shall prove that such loss or damage happened independently of the existence of such abnormal conditions.
Finding the denial of its claim unacceptable, the respondent then instituted in the trial court the complaint for recovery
of "loss, damage or liability" against petitioner. The petitioner answered the complaint and reiterated the ground it

earlier cited to deny the insurance claim, that is, that the loss was due to NPA rebels, an excepted risk under the fire
insurance policy.
In due time, the trial court rendered its Decision dated December 26, 1991 in favor of the respondent, declaring that:
Based on its findings, it is therefore the considered opinion of this Court, as it so holds, that the defenses raised
by defendant-Country Bankers has utterly crumbled on account of its inherent weakness, incredibility and
unreliability, and after applying those helpful tools like common sense, logic and the Courts honest appraisal
of the real and actual situation obtaining in this area, such defenses remains (sic) unimpressive and
unconvincing, and therefore, the defendant-Country Bankers has to be irreversibly adjudged liable, as it should
be, to plaintiff-Insolvent Cooperative, represented in this action by its Assignee, Cornelio Jamero, and thus,
ordering said defendant-Country Bankers to pay the plaintiff-Insolvent Cooperative, as follows:
1. To fully pay the insurance claim for the loss the insured-plaintiff sustained as a result of the fire
under its Fire Insurance Policy No. F-1397 in its full face value of P200,000.00 with interest of 12%
per annum from date of filing of the complaint until the same is fully paid;
2. To pay as and in the concept of actual or compensatory damages in the total sum of P50,000.00;
3. To pay as and in the concept of exemplary damages in the total sum of P50,000.00;
4. To pay in the concept of litigation expenses the sum of P5,000.00;
5. To pay by way of reimbursement the attorneys fees in the sum of P10,000.00; and
6. To pay the costs of the suit.
For being unsubstantiated with credible and positive evidence, the "counterclaim" is dismissed.
IT IS SO ORDERED.
Petitioner interposed an appeal to the Court of Appeals. On December 29, 1998, the appellate court affirmed the
challenged decision of the trial court in its entirety. Petitioner now comes before us via the instant petition anchored on
three (3) assigned errors, to wit:
1. THE HONORABLE COURT OF APPEALS FAILED TO APPRECIATE AND GIVE CREDENCE
TO THE SPOT REPORT OF PFC. ARTURO JUARBAL (EXH. 3) AND THE SWORN STATEMENT
OF JOSE LOMOCSO (EXH. 4) THAT THE RESPONDENTS STOCK-IN-TRADE WAS BURNED BY
THE NPA REBELS, HENCE AN EXCEPTED RISK UNDER THE FIRE INSURANCE POLICY.
2. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE FOR
12% INTEREST PER ANNUM ON THE FACE VALUE OF THE POLICY FROM THE FILING OF
THE COMPLAINT UNTIL FULLY PAID.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THE PETITIONER LIABLE
FOR ACTUAL AND EXEMPLARY DAMAGES, LITIGATION EXPENSES, ATTORNEYS FEES AND
COST OF SUIT.
A party is bound by his own affirmative allegations. This is a well-known postulate echoed in Section 1 of Rule 131 of
the Revised Rules of Court. Each party must prove his own affirmative allegations by the amount of evidence required
by law which in civil cases, as in this case, is preponderance of evidence, to obtain a favorable judgment.
In the instant case, the petitioner does not dispute that the respondents stocks-in-trade were insured against fire loss,
damage or liability under Fire Insurance Policy No. F- 1397 and that the respondent lost its stocks-in-trade in a fire that
occurred on July 1, 1989, within the duration of said fire insurance. The petitioner, however, posits the view that the
cause of the loss was an excepted risk under the terms of the fire insurance policy.
Where a risk is excepted by the terms of a policy which insures against other perils or hazards, loss from such a risk
constitutes a defense which the insurer may urge, since it has not assumed that risk, and from this it follows that an
insurer seeking to defeat a claim because of an exception or limitation in the policy has the burden of proving that the
loss comes within the purview of the exception or limitation set up. If a proof is made of a loss apparently within a
contract of insurance, the burden is upon the insurer to prove that the loss arose from a cause of loss which is excepted
or for which it is not liable, or from a cause which limits its liability. Stated else wise, since the petitioner in this case is
defending on the ground of non-coverage and relying upon an exemption or exception clause in the fire insurance
policy, it has the burden of proving the facts upon which such excepted risk is based, by a preponderance of evidence.
But petitioner failed to do so.
The petitioner relies on the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo as well as on the Spot Report
of Pfc. Arturo V. Juarbal dated July 1, 1989, more particularly the following statement therein:

xxx investigation revealed by Jose Lomocso that those armed men wanted to get can goods and rice for their
consumption in the forest PD investigation further disclosed that the perpetrator are member (sic) of the NPA
PD end x x x
A witness can testify only to those facts which he knows of his personal knowledge, which means those facts which
are derived from his perception. Consequently, a witness may not testify as to what he merely learned from others
either because he was told or read or heard the same. Such testimony is considered hearsay and may not be received as
proof of the truth of what he has learned. Such is the hearsay rule which applies not only to oral testimony or
statements but also to written evidence as well.
The hearsay rule is based upon serious concerns about the trustworthiness and reliability of hearsay evidence inasmuch
as such evidence are not given under oath or solemn affirmation and, more importantly, have not been subjected to
cross-examination by opposing counsel to test the perception, memory, veracity and articulateness of the out-of-court
declarant or actor upon whose reliability on which the worth of the out-of-court statement depends.
Thus, the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo are inadmissible in evidence, for being hearsay,
inasmuch as they did not take the witness stand and could not therefore be cross-examined.
There are exceptions to the hearsay rule, among which are entries in official records. To be admissible in evidence,
however, three (3) requisites must concur, to wit:
(a) that the entry was made by a public officer, or by another person specially enjoined by law to do so;
(b) that it was made by the public officer in the performance of his duties, or by such other person in the
performance of a duty specially enjoined by law; and
(c) that the public officer or other person had sufficient knowledge of the facts by him stated, which must have
been acquired by him personally or through official information.
The third requisite was not met in this case since no investigation, independent of the statements gathered from Jose
Lomocso, was conducted by Pfc. Arturo V. Juarbal. In fact, as the petitioner itself pointed out, citing the testimony of
Pfc. Arturo Juarbal, the latters Spot Report "was based on the personal knowledge of the caretaker Jose Lomocso who
witnessed every single incident surrounding the facts and circumstances of the case." This argument undeniably
weakens the petitioners defense, for the Spot Report of Pfc. Arturo Juarbal relative to the statement of Jose Lomocso
to the effect that NPA rebels allegedly set fire to the respondents building is inadmissible in evidence, for the purpose
of proving the truth of the statements contained in the said report, for being hearsay.
The said Spot Report is admissible only insofar as it constitutes part of the testimony of Pfc. Arturo V. Juarbal since he
himself took the witness stand and was available for cross-examination. The portions of his Spot Report which were of
his personal knowledge or which consisted of his perceptions and conclusions are not hearsay. The rest of the said
report relative to the statement of Jose Lomocso may be considered as independently relevant statements gathered in
the course of Juarbals investigation and may be admitted as such but not necessarily to prove the truth thereof.
The petitioners evidence to prove its defense is sadly wanting and thus, gives rise to its liability to the respondent
under Fire Insurance Policy No. F-1397. Nonetheless, we do not sustain the trial courts imposition of twelve percent
(12%) interest on the insurance claim as well as the monetary award for actual and exemplary damages, litigation
expenses and attorneys fees for lack of legal and valid basis.
Concerning the application of the proper interest rates, the following guidelines were set in Eastern Shipping Lines,
Inc. v. Court of Appeals and Mercantile Insurance Co., Inc.:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts, is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
In the said case of Eastern Shipping, the Court further observed that a "forbearance" in the context of the usury law is a
"contractual obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower or
debtor to repay a loan or debt then due and payable."
Considering the foregoing, the insurance claim in this case is evidently not a forbearance of money, goods or credit,
and thus the interest rate should be as it is hereby fixed at six percent (6%) computed from the date of filing of the
complaint.
We find no justification for the award of actual damages of Fifty Thousand Pesos (P50,000.00). Well-entrenched is the
doctrine that actual, compensatory and consequential damages must be proved, and cannot be presumed. That part of
the dispositive portion of the Decision of the trial court ordering the petitioner to pay actual damages of Fifty
Thousand Pesos (P50,000.00) has no basis at all. The justification, if any, for such an award of actual damages does not
appear in the body of the decision of the trial court. Neither is there any testimonial and documentary evidence on the
alleged actual damages of Fifty Thousand Pesos (P50,000.00) to warrant such an award. Thus, the same must be
deleted.
Concerning the award of exemplary damages for Fifty Thousand Pesos (P50,000.00), we likewise find no legal and
valid basis for granting the same. Article 2229 of the New Civil Code provides that exemplary damages may be
imposed by way of example or correction for the public good. Exemplary damages are imposed not to enrich one party
or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions.
They are designed to permit the courts to mould behavior that has socially deleterious consequences, and its imposition
is required by public policy to suppress the wanton acts of an offender. However, it cannot be recovered as a matter of
right. It is based entirely on the discretion of the court. We find no cogent and valid reason to award the same in the
case at bar.
With respect to the award of litigation expenses and attorneys fees, Article 2208 of the New Civil Code enumerates
the instances where such may be awarded and, in all cases, it must be reasonable, just and equitable if the same were to
be granted. Attorneys fees as part of damages are not meant to enrich the winning party at the expense of the losing
litigant. They are not awarded every time a party prevails in a suit because of the policy that no premium should be
placed on the right to litigate. The award of attorneys fees is the exception rather than the general rule. As such, it is
necessary for the court to make findings of facts and law that would bring the case within the exception and justify the
grant of such award. We find none in this case to warrant the award by the trial court of litigation expenses and
attorneys fees in the amounts of Five Thousand Pesos (P5,000.00) and Ten Thousand Pesos (P10,000.00),
respectively, and therefore, the same must also be deleted.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest on the adjudged principal amount of Two
Hundred Thousand Pesos (P200,000.00) shall be six percent (6%) per annum computed from the date of filing of the
Complaint in the trial court. The awards in the amounts of Fifty Thousand Pesos (P50,000.00) as actual damages, Fifty
Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation expenses, and Ten
Thousand Pesos (P10,000.00) as attorneys fees are hereby DELETED. Costs against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 169737

February 12, 2008

BLUE CROSS HEALTH CARE, INC., petitioner,

vs.
NEOMI* and DANILO OLIVARES, respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari of a decision and resolution of the Court of Appeals (CA) dated July 29, 2005
and September 21, 2005, respectively, in CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial
Court (RTC), Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153, which in turn reversed the
decision of the Metropolitan Trial Court (MeTC), Makati City, Branch 66 dated August 5, 2003 in Civil Case No.
80867.
Respondent Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health Care, Inc., a health
maintenance firm. For the period October 16, 2002 to October 15, 2003, she paid the amount of P11,117. For the same
period, she also availed of the additional service of limitless consultations for an additional amount of P1,000. She paid
these amounts in full on October 17, 2002. The application was approved on October 22, 2002. In the health care
agreement, ailments due to "pre-existing conditions" were excluded from the coverage.
On November 30, 2002, or barely 38 days from the effectivity of her health insurance, respondent Neomi suffered a
stroke and was admitted at the Medical City which was one of the hospitals accredited by petitioner. During her
confinement, she underwent several laboratory tests. On December 2, 2002, her attending physician, Dr. Edmundo
Saniel, informed her that she could be discharged from the hospital. She incurred hospital expenses amounting to
P34,217.20. Consequently, she requested from the representative of petitioner at Medical City a letter of authorization
in order to settle her medical bills. But petitioner refused to issue the letter and suspended payment pending the
submission of a certification from her attending physician that the stroke she suffered was not caused by a pre-existing
condition.
She was discharged from the hospital on December 3, 2002. On December 5, 2002, she demanded that petitioner pay
her medical bill. When petitioner still refused, she and her husband, respondent Danilo Olivares, were constrained to
settle the bill. They thereafter filed a complaint for collection of sum of money against petitioner in the MeTC on
January 8, 2003. In its answer dated January 24, 2003, petitioner maintained that it had not yet denied respondents'
claim as it was still awaiting Dr. Saniel's report.
In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares called by phone on
January 29, 2003. She stated that she is invoking patient-physician confidentiality. That she no longer has any
relationship with [petitioner]. And that I should not release any medical information concerning her neurologic
status to anyone without her approval. Hence, the same day I instructed my secretary to inform your office thru
Ms. Bernie regarding [respondent's] wishes.
xxx

xxx

xxx

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause of action. It held:
xxx the best person to determine whether or not the stroke she suffered was not caused by "pre-existing
conditions" is her attending physician Dr. Saniel who treated her and conducted the test during her
confinement. xxx But since the evidence on record reveals that it was no less than [respondent Neomi] herself
who prevented her attending physician from issuing the required certification, petitioner cannot be faulted
from suspending payment of her claim, for until and unless it can be shown from the findings made by her
attending physician that the stroke she suffered was not due to pre-existing conditions could she demand
entitlement to the benefits of her policy.
On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the MeTC and ordered petitioner to
pay respondents the following amounts: (1) P34,217.20 representing the medical bill in Medical City and P1,000 as

reimbursement for consultation fees, with legal interest from the filing of the complaint until fully paid; (2) P20,000 as
moral damages; (3) P20,000 as exemplary damages; (4) P20,000 as attorney's fees and (5) costs of suit. The RTC held
that it was the burden of petitioner to prove that the stroke of respondent Neomi was excluded from the coverage of the
health care program for being caused by a pre-existing condition. It was not able to discharge that burden.
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in the CA. In a decision
promulgated on July 29, 2005, the CA affirmed the decision of the RTC. It denied reconsideration in a resolution
promulgated on September 21, 2005. Hence this petition which raises the following issues: (1) whether petitioner was
able to prove that respondent Neomi's stroke was caused by a pre-existing condition and therefore was excluded from
the coverage of the health care agreement and (2) whether it was liable for moral and exemplary damages and
attorney's fees.
The health care agreement defined a "pre-existing condition" as:
x x x a disability which existed before the commencement date of membership whose natural history can be
clinically determined, whether or not the Member was aware of such illness or condition. Such conditions also
include disabilities existing prior to reinstatement date in the case of lapse of an Agreement. Notwithstanding,
the following disabilities but not to the exclusion of others are considered pre-existing conditions including
their complications when occurring during the first year of a Members coverage:
I. Tumor of Internal Organs
II. Hemorrhoids/Anal Fistula
III. Diseased tonsils and sinus conditions requiring surgery
IV. Cataract/Glaucoma
V. Pathological Abnormalities of nasal septum or turbinates
VI. Goiter and other thyroid disorders
VII. Hernia/Benign prostatic hypertrophy
VIII. Endometriosis
IX. Asthma/Chronic Obstructive Lung disease
X. Epilepsy
XI. Scholiosis/Herniated disc and other Spinal column abnormalities
XII. Tuberculosis
XIII. Cholecysitis
XIV. Gastric or Duodenal ulcer
XV. Hallux valgus
XVI. Hypertension and other Cardiovascular diseases
XVII. Calculi
XVIII. Tumors of skin, muscular tissue, bone or any form of blood dyscracias
XIX. Diabetes Mellitus
XX. Collagen/Auto-Immune disease
After the Member has been continuously covered for 12 months, this pre-existing provision shall no longer be
applicable except for illnesses specifically excluded by an endorsement and made part of this Agreement.
Under this provision, disabilities which existed before the commencement of the agreement are excluded from its
coverage if they become manifest within one year from its effectivity. Stated otherwise, petitioner is not liable for preexisting conditions if they occur within one year from the time the agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his report regarding the medical condition of
Neomi. Hence, it contends that the presumption that evidence willfully suppressed would be adverse if produced
should apply in its favor.
Respondents counter that the burden was on petitioner to prove that Neomi's stroke was excluded from the coverage of
their agreement because it was due to a pre-existing condition. It failed to prove this.
We agree with respondents.
In Philamcare Health Systems, Inc. v. CA, we ruled that a health care agreement is in the nature of a non-life insurance.
It is an established rule in insurance contracts that when their terms contain limitations on liability, they should be
construed strictly against the insurer. These are contracts of adhesion the terms of which must be interpreted and
enforced stringently against the insurer which prepared the contract. This doctrine is equally applicable to health care
agreements.

Petitioner never presented any evidence to prove that respondent Neomi's stroke was due to a pre-existing condition. It
merely speculated that Dr. Saniel's report would be adverse to Neomi, based on her invocation of the doctor-patient
privilege. This was a disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence:
xxx

xxx

xxx

(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both parties; (b) the
suppression was not willful; (c) it is merely corroborative or cumulative and (d) the suppression is an exercise of a
privilege. Here, respondents' refusal to present or allow the presentation of Dr. Saniel's report was justified. It was
privileged communication between physician and patient.
Furthermore, as already stated, limitations of liability on the part of the insurer or health care provider must be
construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the
courts with "extreme jealousy" and "care" and with a "jaundiced eye." Since petitioner had the burden of proving
exception to liability, it should have made its own assessment of whether respondent Neomi had a pre-existing
condition when it failed to obtain the attending physician's report. It could not just passively wait for Dr. Saniel's report
to bail it out. The mere reliance on a disputable presumption does not meet the strict standard required under our
jurisprudence.
Next, petitioner argues that it should not be held liable for moral and exemplary damages, and attorney's fees since it
did not act in bad faith in denying respondent Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report
and that, based on general medical findings, it had reasonable ground to believe that her stroke was due to a preexisting condition, considering it occurred only 38 days after the coverage took effect.
We disagree.
The RTC and CA found that there was a factual basis for the damages adjudged against petitioner. They found that it
was guilty of bad faith in denying a claim based merely on its own perception that there was a pre-existing condition:
[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with [petitioner] over a
legitimate claim while [respondent Neomi was] still experiencing the effects of a stroke and forced to pay for
her medical bills during and after her hospitalization despite being covered by [petitioners] health care
program, thereby suffering in the process extreme mental anguish, shock, serious anxiety and great stress.
[They] have shown that because of the refusal of [petitioner] to issue a letter of authorization and to pay
[respondent Neomi's] hospital bills, [they had] to engage the services of counsel for a fee of P20,000.00.
Finally, the refusal of petitioner to pay respondent Neomi's bills smacks of bad faith, as its refusal [was]
merely based on its own perception that a stroke is a pre-existing condition. (emphasis supplied)
This is a factual matter binding and conclusive on this Court. We see no reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and September 21, 2005 resolution of the
Court of Appeals in CA-G.R. SP No. 84163 are AFFIRMED.
Treble costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153587

February 27, 2008

GLORIA SONDAYON, petitioner,

vs.
P.J. LHUILLER, INC. and RICARDO DIAGO, respondents.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari seeking the nullification of the Decision rendered by the Court of Appeals
(CA) on December 21, 2001, and its Resolution denying reconsideration, dated May 14, 2002, in CA-G.R. CV No.
67514, entitled "Gloria Sondayon v. P.J. Lhuillier, Inc. and Ricardo Diago."
The facts are:
Respondent P.J. Lhuillier, Inc. is a domestic corporation that owns and operates pawnshops under the business name
"La Cebuana Pawnshop." Respondent Ricardo Diago acts as manager in one of its pawnshops located at Maywood,
President Avenue, B.F. Homes Subdivision, Paraaque, Metro Manila.
Respondent company contracted the services of the Sultan Security Agency. The security agency assigned Guimad
Mantung to guard the La Cebuana Pawnshop in Maywood.
On June 6, 1996, petitioner Gloria Sondayon, a store manager of Shekinah Jewelry & Boutique, secured a loan from
La Cebuana and pledged her Patek Philippe solid gold watch worth P250,000. The watch was given to her as part of
her commission by the owner of the shop where she works. She had pawned the watch to La Cebuana a few times in
the past and, each time, she was able to redeem it.
On August 10, 1996, Guimad Mantung, employing force and violence, robbed La Cebuana, resulting in the deaths of
respondent company's appraiser and vault custodian.
An information for Robbery with Homicide was filed against Mantung before the Regional Trial Court (RTC) of
Paraaque, docketed as Criminal Case No. 96-761. The information alleged that Mantung divested the pawnshop of
P62,000 in cash and several pieces of jewelry amounting to P5,300,000.
On December 10, 1996, respondent company received a letter from petitioner's counsel demanding for the gold watch
that she had pawned. Respondent company, however, failed to comply with the demand letter because the watch was
among the articles of jewelry stolen by Mantung.
Petitioner filed a complaint with the RTC of Paraaque for recovery of possession of personal property with prayer for
preliminary attachment against respondent company and its Maywood branch manager, Ricardo Diago.
In their Answer, respondents averred that petitioner had no cause of action against them because the incident was
beyond their control.
On August 18, 1997, the RTC, stating that the loss of the thing pledged was due to a fortuitous event, rendered a
Decision dismissing petitioner's complaint as well as respondents' counterclaim. The pertinent portions of the Decision
read:
Culled from the testimonies of all the witnesses presented as well as the pieces of documentary evidence
offered, this Court, after a thorough and careful evaluation and deliberation thereof is of the honest and firm
belief that plaintiff failed to establish a sufficient cause of action against defendant as to warrant the recovery
of the pledged Patek Philippe Solid Gold Watch which was allegedly concealed, removed or disposed of by the
latter defendants as the facts and evidence proved otherwise as said watch was lost on account of a robbery
with double homicide that happened on August 10, 1996 perpetrated by one Guimad Mantung, the security
guard of defendant employed by Sultan Security Agency as found out by the Court (Exh. "7"); thus,
defendants were not negligent in the safekeeping of the watch of plaintiff.

Not only that. The pledge bears the terms and conditions which the parties should adhere being the law
between them pursuant to Art. 1159 of the New Civil Code.
Paragraph 13 of Exhibits "A" and "B" specifically provides:
The pawnee shall not be liable for the loss or damage of the article pawned due to fortuitous events or force
majeure such as fire, robbery, theft, hold-ups and other similar acts. When the loss is due to the fault and/or
negligence of the pawnee, the amount of its liability, if any, shall be limited to the appraised value appearing
on the face hereof.
Said provision is not violative of law, customs, public policy or tradition, hence, has the force of law
between the plaintiff and defendants, and the incident that happened which led to the loss of the thing pledged
cannot be considered as negligence but more of a fortuitous event which the defendants could not have
foreseen or which though foreseen, was inevitable. This finds support in Art. 1174 of the Civil Code.
The defendants, therefore, are not bound to return the thing pledged nor the Court to fix its value. There was
no unjustifiable refusal on the part of the defendants to return the thing pledged because, as testified by
plaintiff herself, she has pawned the watch at least five (5) times to defendant corporation.
Appeal was taken to the CA.
On December 21, 2001, the CA rendered a Decision affirming the ruling of the trial court. Petitioner's motion for
reconsideration was denied in the Resolution dated May 14, 2002.
Petitioner contends that the CA erred:
1) in considering the loss of the thing pledged a fortuitous event although the robbery was caused by
respondents' own employees;
2) in disregarding the legal principle that existing laws, rules and regulations in relation to the operation and
regulation of pawnshops are part and parcel of the contract of pledge between petitioner and respondents;
3) in affirming the ruling of the trial court that paragraph 13 of Exhibits "A" and "B" binds the parties and the
courts as to the limitation on the value of the thing pledged; and
4) in affirming the ruling of the trial court that paragraph 13 of Exhibits "A" and "B" is not violative of laws,
customs, public policy or tradition when it is clearly a contract of adhesion.
Petitioner argues that respondents have not shown that the incident constitutes a fortuitous event; that the security
guard was an employee of respondent corporation regardless of the existence of a contract of employment because the
latter had supervision and control over the former; that respondents were negligent because they did not insure the
articles of jewelry including petitioner's watch against fire and burglary as required under the Pawnshop Regulation
Act; that the provision in the pawnshop ticket limiting the value of the thing pledged is not binding on petitioner and
the courts because the appraised value was very low and was not reached voluntarily by the parties but was merely
imposed on the former; and that paragraph 13 of the pawnshop ticket limiting the liability of respondents to the
appraised value is a contract of adhesion, and thus, should be declared void.
The Court will only resolve issues of law in this proceeding under Rule 45.
Accordingly, the existence or non-existence of an employer-employee relationship between respondent company and
the security guard is a factual issue on which the Court defers to the findings of the CA. So, also, on the issue of the
voluntariness of the agreement on the valuation of the thing pledged, the Court is not wont to disturb the finding of the
appellate court.
However, on the issue of the legal effect of the failure of respondents to insure the article pledged against burglary, the
Court finds a reversible error in the appealed decision.
Said the CA:

Equally barren of merit is the Appellant's claim that the Appellee should bear the loss of the watch because of
the failure of the Appellee to insure the watch by an insurance company accredited by the Insurance
Commission, as required by Section 17 of the Rules and Regulations Implementing Presidential Decree No.
114, quoted, infra:
"Sec. 17. Insurance of office building and pawns. - The place of business of a pawnshop and the pawns
pledged to it must be insured against fire, and against burglary as well for the latter, by an insurance company
accredited by the Insurance Commission." (idem supra)
Even if We assume, for the nonce, that, indeed, the Appellee failed to comply with the aforequoted "Rule &
Regulation," nevertheless, the Appellant was burdened to prove the causal connection between the violation,
by the Appellee, of the aforequoted "Rule/Regulation" and the heist-homicide committed by the security
guard:
"First of all, it has not been shown how the alleged negligence of the Cimarron driver contributed to
the collision between the vehicles. Indeed, petitioner has the burden of showing a causal connection
between the injury received and the violation of the Land Transportation and Traffic Code. He must
show that the violation of the statute was the proximate or legal cause of the injury or that it
substantially contributed thereto. Negligence, consisting in whole or in part, of violation of law, like
any other negligence, is without legal consequence unless it is a contributing cause of the injury.
Petitioner says that 'driving an overloaded vehicle with only one functioning headlight during
nighttime certainly increases the risk of accident,' that because the Cimarron had only one headlight,
there was 'decreased visibility,' and that the fact that the vehicle was overloaded and its front seat
overcrowded 'decreased [its] maneuverability.' However, mere allegations such as these are no
sufficient to discharge its burden of proving clearly that such alleged negligence was the contributing
cause of injury." (Sanitary Steam Laundry, Inc. versus Court of Appeals, et al., 300 SCRA 20, at pages
27-28, supra)
The Appellant failed to discharge her burden. Indeed, the Appellant failed to allege, in her "Complaint," the
causal connection of the loss of the watch and the violation by the Appellee, of the aforequoted
"Rule/Regulation."
Additionally, the appellant never invoked the aforequoted "Rule/Regulation" as anchor for her claim for
damages against the Appellee. It was only, in the present recourse, in her "Brief," when the appellant invoked
the aforequoted "Rule/Regulation." The Appellant is, thus, estopped from so doing. As our Supreme Court
declared:
"The issue of minority was first raised only on petitioners' Motion for Reconsideration of the Court of
Appeals' Decision; thus, it is as if it was never duly raised in that court at all.' Hence, this Court cannot
now, for the first time on appeal, entertain this issue, for to do so would plainly violate the basic rule
of fair play, justice and due process. We take this opportunity to reiterate and emphasize the wellsettled rule that '(a)n issue raised for the first time on appeal and not raised timely in the proceedings
in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed
by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time
on appeal." (Rolando Sanchez, et al. versus Court of Appeals, et al., 279 SCRA 647, at pages 678-679,
supra)
The records show that the matter of the insurance of the article pledged was taken up during the trial with no objection
by respondents (Petition, p. 17, citing the testimony of Mr. Anthony Erenea, Area Manager of respondent company, on
September 8, 1999):
Q: Now, you said, Mr. Witness, you said that there were items lost?
A: Yes, sir.
Q: As a result of the robbery?
A: Yes, sir.
Q: Were those jewelry insured?
A: At the time we were self-insured, sir.
Q: I mean an independent Insurance Company accredited by the Insurance Commission?
A: At that time, sir I have no knowledge of any insurance sir.
Hence, petitioner correctly raised it in her brief in the CA.

As to the causal connection between respondent company's violation of the legal obligation to insure the articles
pledged and the heist-homicide committed by the security guard, the answer is simple: had respondent company
insured the articles pledged against burglary, petitioner would have been compensated for the loss from the burglary.
Respondent company's failure to insure the article is, therefore, a contributory cause to petitioner's loss.
Considering, however, that petitioner agreed to a valuation of P15,000 for the article pledged in case of a loss, the
replacement value for failure to insure is likewise limited to P15,000.
Nevertheless, this Court, taking into account all the circumstances of this case, deems it fair and just to award
exemplary damages against respondent company for its failure to comply with the rule and regulation requiring it to
insure the articles pledged against fire and burglary, in the amount of Twenty Five Thousand (P25,000) Pesos.
This Decision is without prejudice to appropriate proceedings to recover any excess value of the article pledged from
amounts that may be or have been awarded payable by third parties answerable for the loss arising from the robbery.
WHEREFORE, the petition is partly GRANTED and the Decision and Resolution of the Court of Appeals dated
December 21, 2001 and May 14, 2002 in CA-G.R. CV No. 67514 are MODIFIED in that respondent company is
ordered to pay petitioner the sum of Fifteen Thousand (P15,000) Pesos representing the agreed value of the watch
pledged and Twenty Five Thousand (P25,000) Pesos as, and by way of, exemplary damages.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 161539

April 24, 2009

INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., Petitioner,

vs.
FGU INSURANCE CORPORATION, HAPAG-LLOYD, HAPAG-LLOYD PHILS., INC., and DESMA
CARGO HANDLERS, INC., Respondents.
RESOLUTION
AUSTRIA-MARTINEZ, J.:
In a Decision dated June 27, 2008, the Court denied the petition filed in this case and affirmed the CA Decision dated
October 22, 2003 and Resolution dated January 8, 2004, finding petitioner liable for the full amount of the shipment
which was lost while in its charge. Petitioner filed a motion for reconsideration, which was denied by the Court with
finality per Resolution dated August 27, 2008.
Undaunted, petitioner filed the present second motion for partial reconsideration where it solely assails the award and
reckoning date of the 12% interest imposed by the RTC on it adjudged liability. Petitioner contends that the complaint
filed before the RTC is not one for loan or forbearance of money, but one for breach of contract or damages; hence,
petitioner insists that the interest rate should be the legal rate of 6%, and not 12%. Petitioner also argues that the RTC
reckoned the date when interest should accrue on the date when respondent FGU Insurance Corporation paid the
amount insured, or on January 3, 1995. Petitioner contends that this is erroneous and the date should be reckoned from
the time when respondent filed the complaint with the RTC, which is on April 10, 1995.
A second look at petitioners arguments shows that indeed, the interest rate of 6% should have been imposed, and not
12%, as affirmed by the Court. Also, it should have been reckoned from April 10, 1995, when respondent filed by the

complaint for sum of money, and not January 3, 1995, which was the date respondent paid the amount insured to the
Republic Asahi Glass Corporation (RAGC).
The claim in this case is one for reimbursement of the sum of money paid by FGU Insurance Corporation to RAGC.
This is not one for forbearance of money, goods or credit. Forbearance in the context of the usury law is a contractual
obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay
a loan or debt then due and payable. Thus the interest rate should be as it is hereby fixed at 6%. Moreover, the interest
rate of 6% shall be computed from the date of filing of the complaint, i.e., April 10, 1995. This is in accordance with
the ruling that where the demand cannot be established with reasonable certainty, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
WHEREFORE, the second motion for partial reconsideration is GRANTED. The Decision dated June 27, 2008 is
MODIFIED. The rate of interest on the principal amount of P1,875,068.88, as adjudged in the Regional Trial Court
Decision dated July 1, 1999 in Civil Case No. 95-73532, and affirmed in the Courts Decision dated June 27, 2008,
shall be six percent (6%) per annum computed from the date of filing of the complaint or April 10, 1995 until finality
of this judgment. From the time this Decision becomes final and executory and the judgment amount remains
unsatisfied, the same shall earn interest at the rate of 12% per annum until its satisfaction.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 156571

July 9, 2008

INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION,

Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF CUSTOMS, Respondent.
DECISION
BRION, J.:
Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Intra-Strata
Assurance Corporation (Intra-Strata) and Philippine Home Assurance Corporation (PhilHome), collectively referred to
as "petitioners."
The petition seeks to set aside the decision dated November 26, 2002 of the Court of Appeals (CA) that in turn
affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case No. 83-15071. In its ruling, the
RTC found the petitioners liable as sureties for the customs duties, internal revenue taxes, and other charges due on the
importations made by the importer, Grand Textile Manufacturing Corporation (Grand Textile).
BACKGROUND FACTS
Grand Textile is a local manufacturing corporation. In 1974, it imported from different countries various articles such
as dyestuffs, spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type
reciprocating compressor, and trevira filament. Subsequent to the importation, these articles were transferred to
Customs Bonded Warehouse No. 462. As computed by the Bureau of Customs, the customs duties, internal revenue
taxes, and other charges due on the importations amounted to P2,363,147.00. To secure the payment of these
obligations pursuant to Section 1904 of the Tariff and Customs Code (Code), Intra-Strata and PhilHome each issued
general warehousing bonds in favor of the Bureau of Customs. These bonds, the terms of which are fully quoted

below, commonly provide that the goods shall be withdrawn from the bonded warehouse "on payment of the legal
customs duties, internal revenue, and other charges to which they shall then be subject."
Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand
Textile withdrew the imported goods from storage. The Bureau of Customs demanded payment of the amounts due
from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The
government responded on January 14, 1983 by filing a collection suit against the parties with the RTC of Manila.
LOWER COURT DECISIONS
After hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer) and the petitioners (as
sureties) liable for the taxes, duties, and charges due on the imported articles. The dispositive portion of this decision
states:
WHEREFORE, premises considered, the Court RESOLVES directing:
(1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus
interests at the legal rate from the filing of the Complaint until fully paid;
(2) the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly and severally, with defendant
Grand, the sum of P2,319,211.00 plus interest from the filing of the Complaint until fully paid; and the
defendant Philippine Home Assurance Corporation to pay plaintiff the sum of P43,936.00 plus interests to be
computed from the filing of the Complaint until fully paid;
(3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and PhilHome; and
(4) all the defendants to pay the costs of suit.
SO ORDERED.
The CA fully affirmed the RTC decision in its decision dated November 26, 2002. From this CA decision, the
petitioners now come before this Court through a petition for review on certiorari alleging that the CA decided the
presented legal questions in a way not in accord with the law and with the applicable jurisprudence.
ASSIGNED ERRORS
The petitioners present the following points as the conclusions the CA should have made:
1. that they were released from their obligations under their bonds when Grand Textile withdrew the imported
goods without payment of taxes, duties, and other charges; and
2. that their non-involvement in the active handling of the warehoused items from the time they were stored up
to their withdrawals substantially increased the risks they assumed under the bonds they issued, thereby
releasing them from liabilities under these bonds.
In their arguments, they essentially pose the legal issue of whether the withdrawal of the stored goods, wares, and
merchandise without notice to them as sureties released them from any liability for the duties, taxes, and charges
they committed to pay under the bonds they issued. They additionally posit that they should be released from any
liability because the Bureau of Customs, through the fault or negligence of its employees, allowed the withdrawal of
the goods without the payment of the duties, taxes, and other charges due.
The respondent, through the Solicitor General, maintains the opposite view.
THE COURTS RULING
We find no merit in the petition and consequently affirm the CA decision.
Nature of the Suretys Obligations

Section 175 of the Insurance Code defines a contract of suretyship as an agreement whereby a party called the surety
guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of
another party called the obligee, and includes among its various species bonds such as those issued pursuant to Section
1904 of the Code. Significantly, "pertinent provisions of the Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the provisions of a contract of suretyship." By its very nature
under the terms of the laws regulating suretyship, the liability of the surety is joint and several but limited to the
amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee.
The definition and characteristics of a suretyship bring into focus the fact that a surety agreement is an accessory
contract that introduces a third party element in the fulfillment of the principal obligation that an obligor owes an
obligee. In short, there are effectively two (2) contracts involved when a surety agreement comes into play a
principal contract and an accessory contract of suretyship. Under the accessory contract, the surety becomes directly,
primarily, and equally bound with the principal as the original promissor although he possesses no direct or personal
interest over the latters obligations and does not receive any benefit therefrom.
The Bonds Under Consideration
That the bonds under consideration are surety bonds (and hence are governed by the above laws and rules) is not
disputed; the petitioners merely assert that they should not be liable for the reasons summarized above. Two elements,
both affecting the suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law
on the suretyship agreement; the terms of the suretyship agreement constitute the second.
A feature of the petitioners bonds, not stated expressly in the bonds themselves but one that is true in every contract, is
that applicable laws form part of and are read into the contract without need for any express reference. This feature
proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule:
It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They
may, according to Article 1306 of the Civil Code "establish such stipulations, clauses, terms, and conditions as they
may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public
policy." The law thus sets limits. It is a fundamental requirement that the contract entered into must be in
accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting
parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only
what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."
Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs
Code which provide that:
Sec 101. Imported Items Subject to Duty All articles when imported from any foreign country into the Philippines
shall be subject to duty upon such importation even though previously exported from the Philippines, except as
otherwise specifically provided for in this Code or in clear laws.
xxxx
Sec. 1204. Liability of Importer for Duties Unless relieved by laws or regulations, the liability for duties, taxes, fees,
and other charges attaching on importation constitutes a personal debt due from the importer to the government which
can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also
constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the
control of the government.
The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship
agreement under Section 1904 of the Code which itself provides:
Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond After articles declared
in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been
determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or
bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles
within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to
which the articles shall then be subject and upon compliance with all legal requirements regarding their importation.

We point these out to stress the legal basis for the submission of the petitioners bonds and the conditions attaching to
these bonds. As heretofore mentioned, there is, firstly, a principal obligation belonging to the importer-obligor as
provided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section
1904 which, by the nature of a surety agreement, directly, primarily, and equally bind them to the obligee to pay the
obligors obligation.
The second element to consider in a suretyship agreement relates to the terms of the bonds themselves, under the rule
that the terms of the suretyship are determined by the suretyship contract itself. The General Warehousing Bond that is
at the core of the present dispute provides:
KNOW ALL MEN BY THESE PRESENTS:
That I/we GRAND TEXTILE MANUFACTURING CORPORATION Km. 21, Marilao, Bulacan, as Principal, and
PHILIPPINE HOME ASSURANCE as the latter being a domestic corporation duly organized and existing under and
by virtue of the laws of the Philippines, as Surety, are held and firmly bound unto the Republic of the Philippines, in
the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the
Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and assigns, jointly and
severally, firmly by these presents:
WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in
customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and
special import tax or internal revenue taxes or both;
WHEREAS, the above principal in making application for storing merchandise in customs-internal revenue bonded
warehouse as above stated, will file this in his name as principal, which bond shall be approved by the Collector of
Customs or his Deputy; and
WHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done
in accordance with the terms of this bond.
NOW THEREFORE, the condition of this obligation is such that if within six (6) months from the date of arrival of the
importing vessel in any case, the goods, wares, and merchandise shall be regularly and lawfully withdrawn from public
stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which
they shall then be subject; or if at any time within six (6) months from the said date of arrival, or within nine (9)
months if the time is extended for a period of three (3) months, as provided in Section 1903 of the Tariff and Customs
Code of the Philippines, said importation shall be so withdrawn for consumption, then the above obligation shall be
void, otherwise, to remain in full force and effect.
Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the
corresponding Collector of Customs to refuse to accept further liabilities under this general bond, whenever, in his
opinion, conditions warrant doing so.
IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20th day of September, 1974 at
Makati, Rizal, Philippines.
Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds
shall subsist that is, "shall remain in full force and effect" unless the imported articles are "regularly and lawfully
withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall be
subject." Fully fleshed out, the obligation to pay the duties, taxes, and other charges primarily rested on the principal
Grand Textile; it was allowed to warehouse the imported articles without need for prior payment of the amounts due,
conditioned on the filing of a bond that shall remain in full force and effect until the payment of the duties, taxes, and
charges due. Under these terms, the fact that a withdrawal has been made and its circumstances are not material to the
sureties liability, except to signal both the principals default and the elevation to a due and demandable status of the
sureties solidary obligation to pay. Under the bonds plain terms, this solidary obligation subsists for as long as the
amounts due on the importations have not been paid. Thus, it is completely erroneous for the petitioners to say that
they were released from their obligations under their bond when Grand Textile withdrew the imported goods without
payment of taxes, duties, and charges. From a commonsensical perspective, it may well be asked: why else would the
law require a surety when such surety would be bound only if the withdrawal would be regular due to the payment of
the required duties, taxes, and other charges?

We note in this regard the rule that a surety is released from its obligation when there is a material alteration of the
contract in connection with which the bond is given, such as a change which imposes a new obligation on the
promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the
original contract and not merely its form. A surety, however, is not released by a change in the contract which does not
have the effect of making its obligation more onerous.
We find under the facts of this case no significant or material alteration in the principal contract between the
government and the importer, nor in the obligation that the petitioners assumed as sureties. Specifically, the petitioners
never assumed, nor were any additional obligation imposed, due to any modification of the terms of importation and
the obligations thereunder. The obligation, and one that never varied, is on the part of the importer, to pay the
customs duties, taxes, and charges due on the importation, and on the part of the sureties, to be solidarily bound to the
payment of the amounts due on the imported goods upon their withdrawal or upon expiration of the given terms. The
petitioners lack of consent to the withdrawal of the goods, if this is their complaint, is a matter between them and the
principal Grand Textile; it is a matter outside the concern of government whose interest as creditor-obligee in the
importation transaction is the payment by the importer-obligor of the duties, taxes, and charges due before the
importation process is concluded. With respect to the sureties who are there as third parties to ensure that the amounts
due are paid, the creditor-obligee's active concern is to enforce the sureties solidary obligation that has become due
and demandable. This matter is further and more fully explored below.
The Need for Notice to Bondsmen
To support the conclusion that they should be released from the bonds they issued, the petitioners argue that upon the
issuance and acceptance of the bonds, they became direct parties to the bonded transaction entitled to participate and
actively intervene, as sureties, in the handling of the imported articles; that, as sureties, they are entitled to notice of
any act of the bond obligee and of the bond principal that would affect the risks secured by the bond; and that
otherwise, the door becomes wide open for possible fraudulent conspiracy between the bond obligee and principal to
defraud the surety.
In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact
that two types of relationships are involved, that is, the underlying principal relationship between the creditor
(government) and the debtor (importer), and the accessory surety relationship whereby the surety binds itself, for a
consideration paid by the debtor, to be jointly and solidarily liable to the creditor for the debtors default. The creditor
in this latter relationship accepts the suretys solidary undertaking to pay if the debtor does not pay. Such acceptance,
however, does not change in any material way the creditors relationship with the principal debtor nor does it make the
surety an active party to the principal creditor-debtor relationship. The contract of surety simply gives rise to an
obligation on the part of the surety in relation with the creditor and is a one-way relationship for the benefit of the
latter.
In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal
creditor-debtor relationship; its role becomes alive only upon the debtors default, at which time it can be directly held
liable by the creditor for payment as a solidary obligor. A surety contract is made principally for the benefit of the
creditor-obligee and this is ensured by the solidary nature of the sureties undertaking. Under these terms, the surety is
not entitled as a rule to a separate notice of default, nor to the benefit of excussion, and may be sued separately or
together with the principal debtor. The words of this Court in Palmares v. CA are worth noting:
Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning
that a surety is not even entitled, as a matter of right, to be given notice of the principals default. Inasmuch as the
creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give
information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is
bound to take notice of the principals default and to perform the obligation. He cannot complain that the creditor has
not notified him in the absence of a special agreement to that effect in the contract of suretyship.
Significantly, nowhere in the petitioners bonds does it state that prior notice is required to fix the sureties liabilities.
Without such express requirement, the creditors right to enforce payment cannot be denied as the petitioners became
bound as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of the collection suit was sufficient
notice to the sureties of their principals default.

The petitioners reliance on Visayan Surety and Insurance Corporation v. Pascual and Aguasin v. Velasquez does not
appear to us to be well taken as these cases do not squarely apply to the present case. These cases relate to bonds
issued as a requirement for the issuance of writs of replevin. The Rules of Court expressly require that before damages
can be claimed against such bonds, notice must be given to the sureties to bind them to the award of damages. No such
requirement is evident in this case as neither the Tariff and Customs Code nor the issued bonds require prior notice to
sureties.
The petitioners argument focusing on the additional risks they incur if they cannot intervene in the handling of the
warehoused articles must perforce fail in light of what we have said above regarding the nature of their obligation as
sureties and the relationships among the parties where a surety agreement exists. We add that the petitioners have
effectively waived as against the creditor (the government) any such claim in light of the provision of the bond that
"the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in
accordance with the terms of this bond." Any such claim including those arising from the withdrawal of the
warehoused articles without the payment of the requisite duties, taxes and charges is for the principal and the sureties
to thresh out between or among themselves.
Government is Not Bound by Estoppel
As its final point, the petitioners argue that they cannot be held liable for the unpaid customs duties, taxes, and other
charges because it is the Bureau of Customs duty to ensure that the duties and taxes are paid before the imported
goods are released from its custody and they cannot be made to pay for the error or negligence of the Bureaus
employees in authorizing the unlawful and irregular withdrawal of the goods.
It has long been a settled rule that the government is not bound by the errors committed by its agents. Estoppel does
not also lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers.
This is particularly true in the collection of legitimate taxes due where the collection has to be made whether or not
there is error, complicity, or plain neglect on the part of the collecting agents. In CIR v. CTA, we pointedly said:
It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are
the lifeblood of the nation through which the government agencies continue to operate and with which the State effects
its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay.
We see no reason to deviate from this rule and we shall not do so now.
WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision of the Court of
Appeals. Costs against the petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 168402

August 6, 2008

ABOITIZ SHIPPING CORPORATION, petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, respondent.
DECISION
REYES, R.T., J.:

THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the assured. As subrogee,
the insurer steps into the shoes of the assured and may exercise only those rights that the assured may have against the
wrongdoer who caused the damage.
Before Us is a petition for review on certiorari of the Decision of the Court of Appeals (CA) which reversed the
Decision of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping Corporation to pay the sum
of P280,176.92 plus interest and attorney's fees in favor of respondent Insurance Company of North America (ICNA).
The Facts
Culled from the records, the facts are as follows:
On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary Companies (MSAS)
procured a marine insurance policy from respondent ICNA UK Limited of London. The insurance was for a
transshipment of certain wooden work tools and workbenches purchased for the consignee Science Teaching
Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu City, Philippines. ICNA issued an "all-risk" open
marine policy, stating:
This Company, in consideration of a premium as agreed and subject to the terms and conditions printed
hereon, does insure for MSAS Cargo International Limited &/or Associated &/or Subsidiary Companies on
behalf of the title holder: - Loss, if any, payable to the Assured or order.
The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany on board M/S
Katsuragi. A clean bill of lading was issued by Hapag-Lloyd which stated the consignee to be STIP, Ecotech Center,
Sudlon Lahug, Cebu City.
The container van was then off-loaded at Singapore and transshipped on board M/S Vigour Singapore. On July 18,
1993, the ship arrived and docked at the Manila International Container Port where the container van was again offloaded. On July 26, 1993, the cargo was received by petitioner Aboitiz Shipping Corporation (Aboitiz) through its duly
authorized booking representative, Aboitiz Transport System. The bill of lading issued by Aboitiz contained the
notation "grounded outside warehouse."
The container van was stripped and transferred to another crate/container van without any notation on the condition of
the cargo on the Stuffing/Stripping Report. On August 1, 1993, the container van was loaded on board petitioner's
vessel, MV Super Concarrier I. The vessel left Manila en route to Cebu City on August 2, 1993.
On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the Cebu International
Port. It was then brought to the Cebu Bonded Warehousing Corporation pending clearance from the Customs
authorities. In the Stripping Report dated August 5, 1993, petitioner's checker noted that the crates were slightly broken
or cracked at the bottom.
On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science Teaching Improvement
Project (STIP) and delivered to Don Bosco Technical High School, Punta Princesa, Cebu City. It was received by Mr.
Bernhard Willig. On August 13, 1993, Mayo B. Perez, then Claims Head of petitioner, received a telephone call from
Willig informing him that the cargo sustained water damage. Perez, upon receiving the call, immediately went to the
bonded warehouse and checked the condition of the container and other cargoes stuffed in the same container. He
found that the container van and other cargoes stuffed there were completely dry and showed no sign of wetness.
Perez found that except for the bottom of the crate which was slightly broken, the crate itself appeared to be
completely dry and had no water marks. But he confirmed that the tools which were stored inside the crate were
already corroded. He further explained that the "grounded outside warehouse" notation in the bill of lading referred
only to the container van bearing the cargo.
In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the cargo. The letter
stated that the crate was broken at its bottom part such that the contents were exposed. The work tools and
workbenches were found to have been completely soaked in water with most of the packing cartons already
disintegrating. The crate was properly sealed off from the inside with tarpaper sheets. On the outside, galvanized metal
bands were nailed onto all the edges. The letter concluded that apparently, the damage was caused by water entering
through the broken parts of the crate.

The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the Claimsmen
Adjustment Corporation (CAC) conducted an ocular inspection and survey of the damage. CAC reported to ICNA that
the goods sustained water damage, molds, and corrosion which were discovered upon delivery to consignee.
On September 21, 1993, the consignee filed a formal claim with Aboitiz in the amount of P276,540.00 for the damaged
condition of the following goods:
ten (10) wooden workbenches
three (3) carbide-tipped saw blades
one (1) set of ball-bearing guides
one (1) set of overarm router bits
twenty (20) rolls of sandpaper for stroke sander
In a Supplemental Report dated October 20, 1993, CAC reported to ICNA that based on official weather report from
the Philippine Atmospheric, Geophysical and Astronomical Services Administration, it would appear that heavy rains
on July 28 and 29, 1993 caused water damage to the shipment. CAC noted that the shipment was placed outside the
warehouse of Pier No. 4, North Harbor, Manila when it was delivered on July 26, 1993. The shipment was placed
outside the warehouse as can be gleaned from the bill of lading issued by Aboitiz which contained the notation
"grounded outside warehouse." It was only on July 31, 1993 when the shipment was stuffed inside another container
van for shipment to Cebu.
Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to consignee. A
subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the claim and subrogation receipt
executed in its favor. Despite follow-ups, however, no reply was received from Aboitiz.
RTC Disposition
ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum of P280,176.92, plus interest
and attorney's fees. ICNA alleged that the damage sustained by the shipment was exclusively and solely brought about
by the fault and negligence of Aboitiz when the shipment was left grounded outside its warehouse prior to delivery.
Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It countered that the
complaint stated no cause of action, plaintiff ICNA had no personality to institute the suit, the cause of action was
barred, and the suit was premature there being no claim made upon Aboitiz.
On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the decision states:
WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the relief claimed in the
complaint for being baseless and without merit. The complaint is hereby DISMISSED. The defendant's
counterclaims are, likewise, DISMISSED for lack of basis.
The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim against Aboitiz. The
trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK Limited with address at Cigna House, 8
Lime Street, London EC3M 7NA. However, complainant ICNA Phils. did not present any evidence to show that ICNA
UK is its predecessor-in-interest, or that ICNA UK assigned the insurance policy to ICNA Phils. Moreover, ICNA
Phils.' claim that it had been subrogated to the rights of the consignee must fail because the subrogation receipt had no
probative value for being hearsay evidence. The RTC reasoned:
While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of North America
(U.K.) Limited (ICNA UK) with address at Cigna House, 8 Lime Street, London EC3M 7NA, no evidence has
been adduced which would show that ICNA UK is the same as or the predecessor-in-interest of plaintiff
Insurance Company of North America ICNA with office address at Cigna-Monarch Bldg., dela Rosa cor.
Herrera Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned the Marine Policy to ICNA.
Second, the assured in the Marine Policy appears to be MSAS Cargo International Limited &/or Associated
&/or Subsidiary Companies. Plaintiff's witness, Francisco B. Francisco, claims that the signature below the
name MSAS Cargo International is an endorsement of the marine policy in favor of Science Teaching
Improvement Project. Plaintiff's witness, however, failed to identify whose signature it was and plaintiff did
not present on the witness stand or took (sic) the deposition of the person who made that signature. Hence, the
claim that there was an endorsement of the marine policy has no probative value as it is hearsay.

Plaintiff, further, claims that it has been subrogated to the rights and interest of Science Teaching Improvement
Project as shown by the Subrogation Form (Exhibit "K") allegedly signed by a representative of Science
Teaching Improvement Project. Such representative, however, was not presented on the witness stand. Hence,
the Subrogation Form is self-serving and has no probative value. (Emphasis supplied)
The trial court also found that ICNA failed to produce evidence that it was a foreign corporation duly licensed to do
business in the Philippines. Thus, it lacked the capacity to sue before Philippine Courts, to wit:
Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign insurance company duly
authorized to do business in the Philippines. This allegation was, however, denied by the defendant. In fact,
in the Pre-Trial Order of 12 March 1996, one of the issues defined by the court is whether or not the plaintiff
has legal capacity to sue and be sued. Under Philippine law, the condition is that a foreign insurance company
must obtain licenses/authority to do business in the Philippines. These licenses/authority are obtained from the
Securities and Exchange Commission, the Board of Investments and the Insurance Commission. If it fails to
obtain these licenses/authority, such foreign corporation doing business in the Philippines cannot sue before
Philippine courts. Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524. (Emphasis supplied)
CA Disposition
ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is anchored on the
right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the same as the ICNA UK Limited
as made known in the dorsal portion of the Open Policy.
On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal claim was not filed
within the period required under Article 366 of the Code of Commerce; that ICNA had no right of subrogation because
the subrogation receipt should have been signed by MSAS, the assured in the open policy, and not Willig, who is
merely the representative of the consignee.
On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:
WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed decision of the
Regional Trial Court of Makati City in Civil Case No. 94-1590 is hereby REVERSED and SET ASIDE. A new
judgment is hereby rendered ordering defendant-appellee Aboitiz Shipping Corporation to pay the plaintiffappellant Insurance Company of North America the sum of P280,176.92 with interest thereon at the legal rate
from the date of the institution of this case until fully paid, and attorney's fees in the sum of P50,000, plus the
costs of suit.
The CA opined that the right of subrogation accrues simply upon payment by the insurance company of the insurance
claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even assuming that it is an unlicensed foreign
corporation. The CA ruled:
At any rate, We find the ground invoked for the dismissal of the complaint as legally untenable. Even
assuming arguendo that the plaintiff-insurer in this case is an unlicensed foreign corporation, such
circumstance will not bar it from claiming reimbursement from the defendant carrier by virtue of subrogation
under the contract of insurance and as recognized by Philippine courts. x x x
xxxx
Plaintiff insurer, whether the foreign company or its duly authorized Agent/Representative in the country, as
subrogee of the claim of the insured under the subject marine policy, is therefore the real party in interest to
bring this suit and recover the full amount of loss of the subject cargo shipped by it from Manila to the
consignee in Cebu City. x x x
The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not overcome by any
countervailing evidence. Hence, the trial court erred in dismissing the complaint and in not finding that based on the
evidence on record and relevant provisions of law, Aboitiz is liable for the loss or damage sustained by the subject
cargo.
Issues

The following issues are up for Our consideration:

(1) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT ICNA HAS A CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF
SUBROGATION BUT WITHOUT CONSIDERING THE ISSUE CONSISTENTLY RAISED BY ABOITIZ
THAT THE FORMAL CLAIM OF STIP WAS NOT MADE WITHIN THE PERIOD PRESCRIBED BY
ARTICLE 366 OF THE CODE OF COMMERCE; AND, MORE SO, THAT THE CLAIM WAS MADE BY A
WRONG CLAIMANT.
(2) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT THE SUIT FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY ICNA AS
THE LATTER WAS AN AUTHORIZED AGENT OF THE INSURANCE COMPANY OF NORTH
AMERICA (U.K.) ("ICNA UK").
(3) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT THERE WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM THE ORIGINAL
ASSURED MSAS CARGO INTERNATIONAL LIMITED ("MSAS") IN FAVOR OF THE CONSIGNEE
STIP, AND THAT THE SUBROGATION RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS VALID
NOTWITHSTANDING THE FACT THAT IT HAS NO PROBATIVE VALUE AND IS MERELY HEARSAY
AND A SELF-SERVING DOCUMENT FOR FAILURE OF ICNA TO PRESENT A REPRESENTATIVE OF
STIP TO IDENTIFY AND AUTHENTICATE THE SAME.
(4) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
THAT THE EXTENT AND KIND OF DAMAGE SUSTAINED BY THE SUBJECT CARGO WAS CAUSED
BY THE FAULT OR NEGLIGENCE OF ABOITIZ. (Underscoring supplied)
Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the real party-in-interest
that possesses the right of subrogation to claim reimbursement from petitioner Aboitiz? (b) Was there a timely filing of
the notice of claim as required under Article 366 of the Code of Commerce? (c) If so, can petitioner be held liable on
the claim for damages?
Our Ruling
We answer the triple questions in the affirmative.
A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from filing a
suit in local courts. Only when that foreign corporation is "transacting" or "doing business" in the country will a
license be necessary before it can institute suits. It may, however, bring suits on isolated business transactions, which is
not prohibited under Philippine law. Thus, this Court has held that a foreign insurance company may sue in Philippine
courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a
Philippine carrier, even if it has no license to do business in this country. It is the act of engaging in business without
the prescribed license, and not the lack of license per se, which bars a foreign corporation from access to our courts.
In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the subject marine
policy, the present suit was filed by the said company's authorized agent in Manila. It was the domestic corporation
that brought the suit and not the foreign company. Its authority is expressly provided for in the open policy which
includes the ICNA office in the Philippines as one of the foreign company's agents.
As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the insurance policy by
MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the consignee.
The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought against ICNA UK,
the company who issued the insurance, or against any of its listed agents worldwide. MSAS accepted said provision
when it signed and accepted the policy. The acceptance operated as an acceptance of the authority of the agents.
Hence, a formal indorsement of the policy to the agent in the Philippines was unnecessary for the latter to exercise the
rights of the insurer.
Likewise, the Open Policy expressly provides that:

The Company, in consideration of a premium as agreed and subject to the terms and conditions printed hereon,
does insure MSAS Cargo International Limited &/or Associates &/or Subsidiary Companies in behalf of the
title holder: - Loss, if any, payable to the Assured or Order.
The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims on behalf of the
assured. This is in keeping with Section 57 of the Insurance Code which states:
A policy may be so framed that it will inure to the benefit of whosoever, during the continuance of the risk,
may become the owner of the interest insured. (Emphasis added)
Respondent's cause of action is founded on it being subrogated to the rights of the consignee of the damaged
shipment. The right of subrogation springs from Article 2207 of the Civil Code, which states:
Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated
the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the loss or injury. (Emphasis added)
As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals, payment by the insurer to
the assured operates as an equitable assignment of all remedies the assured may have against the third party who
caused the damage. Subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer.
Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to subrogation
equipped it with a cause of action against petitioner in case of a contractual breach or negligence. This right of
subrogation, however, has its limitations. First, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading. Second, the insurer can be subrogated only to the rights as the insured may have
against the wrongdoer. If by its own acts after receiving payment from the insurer, the insured releases the wrongdoer
who caused the loss from liability, the insurer loses its claim against the latter.
The giving of notice of loss or injury is a condition precedent to the action for loss or injury or the right to
enforce the carrier's liability. Circumstances peculiar to this case lead Us to conclude that the notice
requirement was complied with. As held in the case of Philippine American General Insurance Co., Inc. v. Sweet
Lines, Inc., this notice requirement protects the carrier by affording it an opportunity to make an investigation of the
claim while the matter is still fresh and easily investigated. It is meant to safeguard the carrier from false and
fraudulent claims.
Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from receipt of the
cargo if the damage is not apparent from the outside of the package. For damages that are visible from the outside of
the package, the claim must be made immediately. The law provides:
Article 366. Within twenty four hours following the receipt of the merchandise, the claim against the carrier for
damages or average which may be found therein upon opening the packages, may be made, provided that the
indications of the damage or average which give rise to the claim cannot be ascertained from the outside part
of such packages, in which case the claim shall be admitted only at the time of receipt.
After the periods mentioned have elapsed, or the transportation charges have been paid, no claim shall be
admitted against the carrier with regard to the condition in which the goods transported were delivered.
(Emphasis supplied)
The periods above, as well as the manner of giving notice may be modified in the terms of the bill of lading, which is
the contract between the parties. Notably, neither of the parties in this case presented the terms for giving notices of
claim under the bill of lading issued by petitioner for the goods.
The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the damage was dated
August 15, 1993, that letter, together with the notice of claim, was received by petitioner only on September 21, 1993.
But petitioner admits that even before it received the written notice of claim, Mr. Mayo B. Perez, Claims Head of the

company, was informed by telephone sometime in August 13, 1993. Mr. Perez then immediately went to the
warehouse and to the delivery site to inspect the goods in behalf of petitioner.
In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage Corporation, the notice was
allegedly made by the consignee through telephone. The claim for damages was denied. This Court ruled that such a
notice did not comply with the notice requirement under the law. There was no evidence presented that the notice was
timely given. Neither was there evidence presented that the notice was relayed to the responsible authority of the
carrier.
As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule differently from the
PCIC case, albeit this ruling is being made pro hac vice, not to be made a precedent for other cases.
Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of recovery from a carrier
must be given a reasonable and practical construction, adapted to the circumstances of the case under adjudication, and
their application is limited to cases falling fairly within their object and purpose.
Bernhard Willig, the representative of consignee who received the shipment, relayed the information that the delivered
goods were discovered to have sustained water damage to no less than the Claims Head of petitioner, Mayo B. Perez.
Immediately, Perez was able to investigate the claims himself and he confirmed that the goods were, indeed, already
corroded.
Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a reasonable and
practical, rather than a strict construction. We give due consideration to the fact that the final destination of the
damaged cargo was a school institution where authorities are bound by rules and regulations governing their actions.
Understandably, when the goods were delivered, the necessary clearance had to be made before the package was
opened. Upon opening and discovery of the damaged condition of the goods, a report to this effect had to pass through
the proper channels before it could be finalized and endorsed by the institution to the claims department of the
shipping company.
The call to petitioner was made two days from delivery, a reasonable period considering that the goods could not have
corroded instantly overnight such that it could only have sustained the damage during transit. Moreover, petitioner was
able to immediately inspect the damage while the matter was still fresh. In so doing, the main objective of the
prescribed time period was fulfilled. Thus, there was substantial compliance with the notice requirement in this case.
To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in interest to institute the
claim for damages against petitioner; and pro hac vice, that a valid notice of claim was made by respondent.
We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated in Article 1735 of
the Civil Code is that in cases where the goods are lost, destroyed or deteriorated, common carriers are
presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary
diligence required by law. Extraordinary diligence is that extreme measure of care and caution which persons of
unusual prudence and circumspection use for securing and preserving their own property rights. This standard is
intended to grant favor to the shipper who is at the mercy of the common carrier once the goods have been entrusted to
the latter for shipment.
Here, the shipment delivered to the consignee sustained water damage. We agree with the findings of the CA that
petitioner failed to overturn this presumption:
x x x upon delivery of the cargo to the consignee Don Bosco Technical High School by a representative from
Trabajo Arrastre, and the crates opened, it was discovered that the workbenches and work tools suffered
damage due to "wettage" although by then they were already physically dry. Appellee carrier having failed to
discharge the burden of proving that it exercised extraordinary diligence in the vigilance over such goods it
contracted for carriage, the presumption of fault or negligence on its part from the time the goods were
unconditionally placed in its possession (July 26, 1993) up to the time the same were delivered to the
consignee (August 11, 1993), therefore stands. The presumption that the carrier was at fault or that it acted
negligently was not overcome by any countervailing evidence. x x x (Emphasis added)
The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26, 1993. On the same
day, it was stripped from the container van. Five days later, on July 31, 1993, it was re-stuffed inside another container

van. On August 1, 1993, it was loaded onto another vessel bound for Cebu. During the period between July 26 to 31,
1993, the shipment was outside a container van and kept in storage by petitioner.
The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside warehouse,"
suggesting that from July 26 to 31, the goods were kept outside the warehouse. And since evidence showed that rain
fell over Manila during the same period, We can conclude that this was when the shipment sustained water damage.
To prove the exercise of extraordinary diligence, petitioner must do more than merely show the possibility that some
other party could be responsible for the damage. It must prove that it used "all reasonable means to ascertain the nature
and characteristic of the goods tendered for transport and that it exercised due care in handling them. Extraordinary
diligence must include safeguarding the shipment from damage coming from natural elements such as rainfall.
Aside from denying that the "grounded outside warehouse" notation referred not to the crate for shipment but only to
the carrier van, petitioner failed to mention where exactly the goods were stored during the period in question. It failed
to show that the crate was properly stored indoors during the time when it exercised custody before shipment to Cebu.
As amply explained by the CA:
On the other hand, the supplemental report submitted by the surveyor has confirmed that it was rainwater that
seeped into the cargo based on official data from the PAGASA that there was, indeed, rainfall in the Port Area
of Manila from July 26 to 31, 1993. The Surveyor specifically noted that the subject cargo was under the
custody of appellee carrier from the time it was delivered by the shipper on July 26, 1993 until it was stuffed
inside Container No. ACCU-213798-4 on July 31, 1993. No other inevitable conclusion can be deduced from
the foregoing established facts that damage from "wettage" suffered by the subject cargo was caused by the
negligence of appellee carrier in grounding the shipment outside causing rainwater to seep into the cargoes.
Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to the subject goods by
claiming that the notation "GROUNDED OUTSIDE WHSE." actually refers to the container and not the
contents thereof or the cargoes. And yet it presented no evidence to explain where did they place or store the
subject goods from the time it accepted the same for shipment on July 26, 1993 up to the time the goods were
stripped or transferred from the container van to another container and loaded into the vessel M/V Supercon
Carrier I on August 1, 1993 and left Manila for Cebu City on August 2, 1993. x x x If the subject cargo was
not grounded outside prior to shipment to Cebu City, appellee provided no explanation as to where said cargo
was stored from July 26, 1993 to July 31, 1993. What the records showed is that the subject cargo was stripped
from the container van of the shipper and transferred to the container on August 1, 1993 and finally loaded into
the appellee's vessel bound for Cebu City on August 2, 1993. The Stuffing/Stripping Report (Exhibit "D") at
the Manila port did not indicate any such defect or damage, but when the container was stripped upon arrival
in Cebu City port after being discharged from appellee's vessel, it was noted that only one (1) slab was slightly
broken at the bottom allegedly hit by a forklift blade (Exhibit "F"). (Emphasis added)
Petitioner is thus liable for the water damage sustained by the goods due to its failure to satisfactorily prove that it
exercised the extraordinary diligence required of common carriers.
WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 158085 October 14, 2005
REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
vs.
SUNLIFE ASSURANCE COMPANY OF CANADA, Respondent.

DECISION
PANGANIBAN, J.:
aving satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a bona fide
cooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums and
documentary stamps. Not being governed by the Cooperative Code of the Philippines, it is not required to be registered
with the Cooperative Development Authority in order to avail itself of the tax exemptions. Significantly, neither the
Tax Code nor the Insurance Code mandates this administrative registration.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the January 23, 2003
Decision and the April 21, 2003 Resolution of the Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive
portion of the Decision reads as follows:
"WHEREFORE, the petition for review is hereby DENIED."
The Facts
The antecedents, as narrated by the CA, are as follows:
"Sun Life is a mutual life insurance company organized and existing under the laws of Canada. It is registered and
authorized by the Securities and Exchange Commission and the Insurance Commission to engage in business in the
Philippines as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR) its insurance premium tax
return for the third quarter of 1997 and paid the premium tax in the amount of P31,485,834.51. For the period covering
August 21 to December 18, 1997, petitioner filed with the CIR its [documentary stamp tax (DST)] declaration returns
and paid the total amount of P30,000,000.00.
"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular Life Assurance Co. Ltd. v.
[CIR], which held that mutual life insurance companies are purely cooperative companies and are exempt from the
payment of premium tax and DST. This pronouncement was later affirmed by this court in [CIR] v. Insular Life
Assurance Company, Ltd. Sun Life surmised that[,] being a mutual life insurance company, it was likewise exempt
from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with the CIR an administrative
claim for tax credit of its alleged erroneously paid premium tax and DST for the aforestated tax periods.
"For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year period to file a claim for
tax credit or refund dwindling away and about to expire, Sun Life filed with the CTA a petition for review on August
23, 1999. In its petition, it prayed for the issuance of a tax credit certificate in the amount of P61,485,834.51
representing P31,485,834.51 of erroneously paid premium tax for the third quarter of 1997 and P30,000[,000].00 of
DST on policies of insurance from August 21 to December 18, 1997. Sun Life stood firm on its contention that it is a
mutual life insurance company vested with all the characteristic features and elements of a cooperative company or
association as defined in [S]ection 121 of the Tax Code. Primarily, the management and affairs of Sun Life were
conducted by its members; secondly, it is operated with money collected from its members; and, lastly, it has for its
purpose the mutual protection of its members and not for profit or gain.
"In its answer, the CIR, then respondent, raised as special and affirmative defenses the following:
7. Petitioners (Sun Lifes) alleged claim for refund is subject to administrative routinary investigation/examination by
respondents (CIRs) Bureau.
8. Petitioner must prove that it falls under the exception provided for under Section 121 (now 123) of the Tax Code to
be exempted from premium tax and be entitled to the refund sought.
9. Claims for tax refund/credit are construed strictly against the claimants thereof as they are in the nature of
exemption from payment of tax.

10. In an action for tax credit/refund, the burden is upon the taxpayer to establish its right thereto, and failure to
sustain this burden is fatal to said claim x x x.
11. It is incumbent upon petitioner to show that it has complied with the provisions of Section 204[,] in relation to
Section 229, both in the 1997 Tax Code.
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier findings in Insular Life
Assurance Company, Ltd. v. [CIR], which it found to be on all fours with the present action, the CTA ruled:
The [CA] has already spoken. It ruled that a mutual life insurance company is a purely cooperative company[;] thus,
exempted from the payment of premium and documentary stamp taxes. Petitioner Sun Life is without doubt a mutual
life insurance company. x x x.
xxxxxxxxx
Being similarly situated with Insular, Petitioner at bar is entitled to the same interpretation given by this Court in the
earlier cases of The Insular Life Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the [CA]
in the case entitled [CIR] vs. The Insular Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29,
1998. Petitioner Sun Life as a mutual life insurance company is[,] therefore[,] a cooperative company or association
and is exempted from the payment of premium tax and [DST] on policies of insurance pursuant to Section 121 (now
Section 123) and Section 199[1]) (now Section 199[a]) of the Tax Code.
"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have registered, foremost,
with the Cooperative Development Authority before it could enjoy the exemptions from premium tax and DST
extended to purely cooperative companies or associations under [S]ections 121 and 199 of the Tax Code. For its failure
to register, it could not avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove that
ownership of the company was vested in its members who are entitled to vote and elect the Board of Trustees among
[them]. The CIR further claimed that change in the 1997 Tax Code subjecting mutual life insurance companies to the
regular corporate income tax rate reflected the legislatures recognition that these companies must be earning profits.
"Notwithstanding these arguments, the CTA denied the CIRs motion for reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on the sole ground that:
The Tax Court erred in granting the refund[,] because respondent does not fall under the exception provided for under
Section 121 (now 123) of the Tax Code to be exempted from premium tax and DST and be entitled to the refund.
"The CIR repleads the arguments it raised with the CTA and proposes further that the [CA] decision in [CIR] v. Insular
Life Assurance Company, Ltd. is not controlling and cannot constitute res judicata in the present action. At best, the
pronouncements are merely persuasive as the decisions of the Supreme Court alone have a universal and mandatory
effect."
Ruling of the Court of Appeals
In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to engage
in mutual life insurance business in the Philippines. Thus, respondent was deemed exempt from premium and
documentary stamp taxes, because its affairs are managed and conducted by its members with money collected from
among themselves, solely for their own protection, and not for profit. Its members or policyholders constituted both
insurer and insured who contribute, by a system of premiums or assessments, to the creation of a fund from which all
losses and liabilities were paid. The dividends it distributed to them were not profits, but returns of amounts that had
been overcharged them for insurance.
For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably filed its claim for
premium and documentary stamp taxes, respondent was entitled to a refund, the CA ruled.
Hence, this Petition.
The Issues

Petitioner raises the following issues for our consideration:

"I.
"Whether or not respondent is a purely cooperative company or association under Section 121 of the National Internal
Revenue Code and a fraternal or beneficiary society, order or cooperative company on the lodge system or local
cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member
and not for profit under Section 199 of the National Internal Revenue Code.
"II.
"Whether or not registration with the Cooperative Development Authority is a sine qua non requirement to be entitled
to tax exemption.
"III.
"Whether or not respondent is exempted from payment of tax on life insurance premiums and documentary stamp tax."
We shall tackle the issues seriatim.
The Courts Ruling
The Petition has no merit.
First Issue:
Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the members thereof with the money collected
from among themselves and solely for their own protection and not for profit." Without a doubt, respondent is a
cooperative engaged in a mutual life insurance business.
First, it is managed by its members. Both the CA and the CTA found that the management and affairs of respondent
were conducted by its member-policyholders.
A stock insurance company doing business in the Philippines may "alter its organization and transform itself into a
mutual insurance company." Respondent has been mutualized or converted from a stock life insurance company to a
nonstock mutual life insurance corporation pursuant to Section 266 of the Insurance Code of 1978. On the basis of its
bylaws, its ownership has been vested in its member-policyholders who are each entitled to one vote; and who, in turn,
elect from among themselves the members of its board of trustees. Being the governing body of a nonstock
corporation, the board exercises corporate powers, lays down all corporate business policies, and assumes
responsibility for the efficiency of management.
Second, it is operated with money collected from its members. Since respondent is composed entirely of members who
are also its policyholders, all premiums collected obviously come only from them.
The member-policyholders constitute "both insurer and insured" who "contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and liabilities are paid." The premiums pooled into this
fund are earmarked for the payment of their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone.
As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a corporation
organized and existing under the laws of Canada -- to engage in business in the Philippines. Pursuant to Section 225 of
Canadas Insurance Companies Act, the Canadian minister of state (for finance and privatization) also declared in its
Amending Letters Patent that respondent would be a mutual company effective June 1, 1992. In the Philippines, the
insurance commissioner also granted it annual Certificates of Authority to transact life insurance business, the most
relevant of which were dated July 1, 1997 and July 1, 1998.

A mutual life insurance company is conducted for the benefit of its member-policyholders, who pay into its capital by
way of premiums. To that extent, they are responsible for the payment of all its losses. "The cash paid in for premiums
and the premium notes constitute their assets x x x." In the event that the company itself fails before the terms of the
policies expire, the member-policyholders do not acquire the status of creditors. Rather, they simply become debtors
for whatever premiums that they have originally agreed to pay the company, if they have not yet paid those amounts in
full, for "[m]utual companies x x x depend solely upon x x x premiums." Only when the premiums will have
accumulated to a sum larger than that required to pay for company losses will the member-policyholders be entitled to
a "pro rata division thereof as profits."
Contributing to its capital, the member-policyholders of a mutual company are obviously also its owners. Sustaining a
dual relationship inter se, they not only contribute to the payment of its losses, but are also entitled to a proportionate
shareand participate alike in its profits and surplus.
Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be larger
than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table of
mortality used will show an admittedly higher death rate than will probably prevail; the assumed interest rate on the
investments of the company is made lower than is expected to be realized; and the provision for contingencies and
expenses, made greater than would ordinarily be necessary. This course of action is taken, because a mutual company
has no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and expenses.
Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind of
insurance taken and with the group of policyholders insured, any excess in the amount anticipated by a mutual
company to cover the cost of providing for the insurance over its actual realized cost will also vary. If a memberpolicyholder receives an excess payment, then the apportionment must have been based upon a calculation of the
actual cost of insurance that the company has provided for that particular member-policyholder. Accordingly, in
apportioning divisible surpluses, any mutual company uses a contribution method that aims to distribute those
surpluses among its member-policyholders, in the same proportion as they have contributed to the surpluses by their
payments.
Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply them in
order to reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although the
premium made at the beginning of a year is more than necessary to provide for the cost of carrying the insurance, the
member-policyholder will nevertheless receive the benefit of the overcharge by way of dividends, at the end of the
year when the cost is actually ascertained. "The declaration of a dividend upon a policy reduces pro tanto the cost of
insurance to the holder of the policy. That is its purpose and effect."
A stipulated insurance premium "cannot be increased, but may be lessened annually by so much as the experience of
the preceding year has determined it to have been greater than the cost of carrying the insurance x x x." The difference
between that premium and the cost of carrying the risk of loss constitutes the so-called "dividend" which, however, "is
not in any real sense a dividend." It is a technical term that is well understood in the insurance business to be widely
different from that to which it is ordinarily attached.
The so-called "dividend" that is received by member-policyholders is not a portion of profits set aside for distribution
to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has
no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And , two,
the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not
change its character. It remains an overpayment, a benefit to which the member-policyholder is equitably entitled.
Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It does not
operate for profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost, while
reasonably and properly guarding and maintaining the stability and solvency of the company. "The economic benefits
filter to the cooperative members. Either equally or proportionally, they are distributed among members in correlation
with the resources of the association utilized."
It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose other
than profit, the company can no longer make any profits. Earning profits is merely its secondary, not primary, purpose.
In fact, it may not lawfully engage in any business activity for profit, for to do so would change or contradict its nature
as a non-profit entity. It may, however, invest its corporate funds in order to earn additional income for paying its

operating expenses and meeting benefit claims. Any excess profit it obtains as an incident to its operations can only be
used, whenever necessary or proper, for the furtherance of the purpose for which it was organized.
Second Issue:
Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration with the Cooperative Development Authority
(CDA) is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums,
under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199.
First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual life insurance
company to register with that agency in order to enjoy exemption from both percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the
Certificate of Registration with the CDA, before the issuance of a tax exemption certificate. That provision cannot
prevail over the clear absence of an equivalent requirement under the Tax Code. One, as we will explain below, the
Circular does not apply to respondent, but only to cooperatives that need to be registered under the Cooperative Code.
Two, it is a mere issuance directing all internal revenue officers to publicize a new tax legislation. Although the
Circular does not derogate from their authority to implement the law, it cannot add a registration requirement, when
there is none under the law to begin with.
Second, the provisions of the Cooperative Code of the Philippines do not apply. Let us trace the Codes development in
our history.
As early as 1917, a cooperative company or association was already defined as one "conducted by the members thereof
with money collected from among themselves and solely for their own protection and not profit." In 1990, it was
further defined by the Cooperative Code as a "duly registered association of persons, with a common bond of interest,
who have voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles."
The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973, Presidential Decree (PD) No.
175 was signed into law by then President Ferdinand E. Marcos in order to strengthen the cooperative movement. The
promotion of cooperative development was one of the major programs of the "New Society" under his administration.
It sought to improve the countrys trade and commerce by enhancing agricultural production, cottage industries,
community development, and agrarian reform through cooperatives.
The whole cooperative system, with its vertical and horizontal linkages -- from the market cooperative of agricultural
products to cooperative rural banks, consumer cooperatives and cooperative insurance -- was envisioned to offer
considerable economic opportunities to people who joined cooperatives. As an effective instrument in redistributing
income and wealth, cooperatives were promoted primarily to support the agrarian reform program of the government.
Notably, the cooperative under PD 175 referred only to an organization composed primarily of small producers and
consumers who voluntarily joined to form a business enterprise that they themselves owned, controlled, and
patronized. The Bureau of Cooperatives Development -- under the Department of Local Government and Community
Development (later Ministry of Agriculture) -- had the authority to register, regulate and supervise only the following
cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2) local or primary
cooperatives composed of natural persons and/or barrio associations; (3) federations composed of cooperatives that
may or may not perform business activities; and (4) unions of cooperatives that did not perform any business activities.
Respondent does not fall under any of the above-mentioned types of cooperatives required to be registered under PD
175.
When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and previous
laws were also deemed registered with the CDA. Since respondent was not required to be registered under the old law
on cooperatives, it followed that it was not required to be registered even under the new law.
Furthermore, only cooperatives to be formed or organized under the Cooperative Code needed registration with the
CDA. Respondent already existed before the passage of the new law on cooperatives. It was not even required to

organize under the Cooperative Code, not only because it performed a different set of functions, but also because it did
not operate to serve the same objectives under the new law -- particularly on productivity, marketing and credit
extension.
The insurance against losses of the members of a cooperative referred to in Article 6(7) of the Cooperative Code is not
the same as the life insurance provided by respondent to member-policyholders. The former is a function of a service
cooperative, the latter is not. Cooperative insurance under the Code is limited in scope and local in character. It is not
the same as mutual life insurance.
We have already determined that respondent is a cooperative. The distinguishing feature of a cooperative enterprise is
the mutuality of cooperation among its member-policyholders united for that purpose. So long as respondent meets this
essential feature, it does not even have to use and carry the name of a cooperative to operate its mutual life insurance
business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege
merely because it failed to register. The nature of its operations is clear; its purpose well-defined. Exemption when
granted cannot prevail over administrative convenience.
Third, not even the Insurance Code requires registration with the CDA. The provisions of this Code primarily govern
insurance contracts; only if a particular matter in question is not specifically provided for shall the provisions of the
Civil Code on contracts and special laws govern.
True, the provisions of the Insurance Code relative to the organization and operation of an insurance company also
apply to cooperative insurance entities organized under the Cooperative Code. The latter law, however, does not apply
to respondent, which already existed as a cooperative company engaged in mutual life insurance prior to the laws
passage of that law. The statutes prevailing at the time of its organization and mutualization were the Insurance Code
and the Corporation Code, which imposed no registration requirement with the CDA.
Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST
Having determined that respondent is a cooperative that does not have to be registered with the CDA, we hold that it is
entitled to exemption from both premium taxes and documentary stamp taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative companies from the 5 percent
percentage tax on insurance premiums. On the other hand, Section 199 also exempts from the DST, policies of
insurance or annuities made or granted by cooperative companies. Being a cooperative, respondent is thus exempt
from both types of taxes.
It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of 10 percent imposed upon
the gross investment income of mutual life insurance companies domestic and foreign -- the provisions of Section
121 and 199 remain unchanged.
Having been seasonably filed and amply substantiated, the claim for exemption in the amount of P61,485,834.51,
representing percentage taxes on insurance premiums and documentary stamp taxes on policies of insurance or
annuities that were paid by respondent in 1997, is in order. Thus, the grant of a tax credit certificate to respondent as
ordered by the appellate court was correct.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 94052August 9, 1991
ORIENTAL ASSURANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS AND PANAMA SAW MILL CO., INC., respondents.
Alejandro P. Ruiz, Jr. for petitioner.
Federico R. Reyes for private respondent.
MELENCIO-HERRERA, J:
An action to recover on a marine insurance policy, issued by petitioner in favor of private respondent, arising from the
loss of a shipment of apitong logs from Palawan to Manila.
The facts relevant to the present review disclose that sometime in January 1986, private respondent Panama Sawmill
Co., Inc. (Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It
hired Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it against loss for P1-M with
petitioner Oriental Assurance Corporation (Oriental Assurance). There is a claim by Panama, however, that the
insurance coverage should have been for P3-M were it not for the fraudulent act of one Benito Sy Yee Long to whom it
had entrusted the amount of P6,000.00 for the payment of the premium for a P3-M policy.
Oriental Assurance issued Marine Insurance Policy No. OACM 86/002, which stipulated, among others:
Name of Insured:
Panama Sawmill, Inc.
Karuhatan, Valenzuela
Metro Manila
Vessel:
MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter apitong Logs
Barge Transpac 1,000-1,000 cubic meter apitong Logs
Voyage or Period of Insurance:
From Palawan-ETD January 16, 1986
To: Manila
Subject matter Insured:
2,000 cubic meters apitong Logs Agreed Value
Amount Insured Hereunder:
Pesos: One Million Only (P1,000,000.00) Philippine Currency
Premium P2,500.00 rate 0.250%
Doc. stamps 187.60 Invoice No. 157862
l % P/tax 25.00
TOTAL P2,712.50
CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES
Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses:
Civil Code Article 1250 Waiver clause
Typhoon warranty clause
Omnibus clause.
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a volume of 1,000
cubicmeters; and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters.

On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as fate would have it, during
the voyage, rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of
logs out of the 598 pieces loaded thereon.
Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its contracted liability was for
"TOTAL LOSS ONLY." The rejection was upon the recommendation of the Tan Gatue Adjustment Company.
Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages against Ever Insurance
Agency (allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance, before the Regional Trial Court,
Kalookan, Branch 123, docketed as Civil Case No. C-12601.
After trial on the merit, the RTC rendered its Decision, with the following dispositive portion:
WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:
1. Ordering the defendant Oriental Assurance Corporation to pay plaintiff Panama Saw Mill Inc. the
amount of P415,000.00 as insurance indemnity with interest at the rate of 12% per annum computed
from the date of the filing of the complaint;
2. Ordering Panama Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy Lee Yong,
owner thereof, (Ever being a single proprietorship) for the amount of P20,000.00 as attorney's fee and
another amount of P20,000.00 as moral damages.
3. Dismissing the complaint against defendant Benito Sy Lee Yong.
SO ORDERED.
On appeal by both parties, respondent Appellate Court affirmed the lower Court judgment in all respects except for the
rate of interest, which was reduce from twelve (12%) to six (6%) per annum.
Both Courts shared the view that the insurance contract should be liberally construed in order to avoid a denial of
substantial justice; and that the logs loaded in the two barges should be treated separately such that the loss sustained
by the shipment in one of them may be considered as "constructive total loss" and correspondingly compensable.
In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid dispositions. In its Comment,
Panama, in turn, maintains that the constructive total loss should be based on a policy value of P3-M and not P1-M,
and prays that the award to Ever Insurance Agency or Antonio Sy Lee Yong of damages and attorney's fees be set
aside.
The question for determination is whether or not Oriental Assurance can be held liable under its marine insurance
policy based on the theory of a divisible contract of insurance and, consequently, a constructive total loss.
Our considered opinion is that no liability attaches.
The terms of the contract constitute the measure of the insurer liability and compliance therewith is a condition
precedent to the insured's right to recovery from the insurer (Perla Compania de Seguros, Inc. v. Court of Appeals,
G.R. No. 78860, May 28, 1990, 185 SCRA 741). Whether a contract is entire or severable is a question of intention to
be determined by the language employed by the parties. The policy in question shows that the subject matter insured
was the entire shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different
barges did not make the contract several and divisible as to the items insured. The logs on the two barges were not
separately valued or separately insured. Only one premium was paid for the entire shipment, making for only one
cause or consideration. The insurance contract must, therefore, be considered indivisible.
More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or constructive (Sec.
129, Insurance Code). An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being broken up;

(c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held
it; or
(d) Any other event which effectively deprives the owner of the possession, at the port of destination,
of the thing insured. (Section 130, Insurance Code).
A constructive total loss is one which gives to a person insured a right to abandon, under Section 139 of the Insurance
Code. This provision reads:
SECTION 139. A person insured by a contract of marine insurance may abandon the thing insured, or
any particular portion thereof separately valued by the policy, or otherwise separately insured, and
recover for a total loss thereof, when the cause of the loss is a peril injured against,
(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover
it from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths;
xxx xxx xxx
(Emphasis supplied)
Respondent Appellate Court treated the loss as a constructive total loss, and for the purpose of computing the more
than three-fourths value of the logs actually lost, considered the cargo in one barge as separate from the logs in the
other. Thus, it concluded that the loss of 497 pieces of logs from barge TPAC-1000, mathematically speaking, is more
than three-fourths () of the 598 pieces of logs loaded in that barge and may, therefore, be considered as constructive
total loss.
The basis thus used is, in our opinion, reversible error. The requirements for the application of Section 139 of the
Insurance Code, quoted above, have not been met. The logs involved, although placed in two barges, were not
separately valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in relation to the
total number of logs loaded on the same barge can not be made the basis for determining constructive total loss. The
logs having been insured as one inseparable unit, the correct basis for determining the existence of constructive total
loss is the totality of the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof were lost or
41.45% of the entire shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces
of logs, the shipment can not be said to have sustained a constructive total loss under Section 139(a) of the Insurance
Code.
In the absence of either actual or constructive total loss, there can be no recovery by the insured Panama against the
insurer, Oriental Assurance.
By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be passed upon,
besides the fact that no review, in proper form, has been sought by it.
WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is
hereby ABSOLVED from liability under its marine insurance policy No. OAC-M-86/002. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 95070

September 5, 1991

PAN MALAYAN INSURANCE CORPORATION, petitioner,

vs.

COURT OF APPEALS and THE FOOD AND AGRICULTURAL ORGANIZATION OF THE UNITED
NATIONS, respondents.
Alejandro P. Ruiz, Jr. for petitioner.
Conrado R. Ayuyao for private respondent.
REGALADO, J.:
This case had its origin in a shipment of 1,500 metric petitions of IR-36 certified rice seeds which private respondent,
The Food and Agricultural Organization of the United Nations (hereinafter referred to as FAO), an autonomous
intergovernmental organization created by treaty, intended and made arrangements to send to Kampuchea to be
distributed to the people for seedling purposes. Respondent court affirms the factual findings therein of the court a quo
as chronologized hereunder.
On May 22, 1980, FAO received a formal offer from the Luzon Stevedoring Corporation (LUZTEVECO, for brevity)
whereby the latter offered to ship the former's aforesaid cargo, consisting of 3,000 metric petitions in two lots of rice
seeds, to Vietnam Ocean Shipping Industry in Vaung Tau, Vietnam for freight fees of $55.50/MT, subject to the terms
and conditions indicated in the corresponding communication.
On May 28, 1980, FAO wrote LUZTEVECO formally confirming its acceptance of the foregoing offer amounting to
US$83,325.92 in respect of one lot of 1,500 metric petitions winch is the subject of the present action. The cargo was
loaded on board LUZTEVECO Barge No. LC-3000 and consisted of 34,122 bags of IR-36 certified rice seeds
purchased by FAO from the Bureau of Plant Industry for P4,602,270.00.
On June 12, 1980, the loading was completed and LUZTEVECO issued its Bill of Lading No. 01 in favor of FAO. The
latter then secured insurance coverage in the amount of P5,250,000.00 from petitioner, Pan Malayan Insurance
Corporation, as evidenced by the latter's Marine Cargo Policy No. B-11474A and Premium Invoice No. 78615, dated
June 16, 1980.
On June 16, 1980, FAO gave instructions to LUZTEVECO to leave for Vaung Tau, Vietnam to deliver the cargo
which, by its nature, could not withstand delay because of the inherent risks of termination and/or spoilage. On the
same date, the insurance premiums on the shipment was paid by FAO petitioner.
On June 23, 1980, FAO was informed by LUZTEVECO that the tugboat and barge carrying FAO's shipment returned
to Manila after leaving on June 16, 1980 and that the shipment again left Manila for Vaung Tau Vietnam on June 21,
1980 with the barge being towed by a different tugboat. Since this was an unauthorized deviation, FAO demanded an
explanation on June 25, 1980.
On June 26, 1980, FAO was advised of the sinking of the barge in the China Sea, hence it informed petitioner thereof
and, later, formally filed its claim under the marine insurance policy. On July 29, 1980, FAO was informed by
LUSTEVECO of the recovery of the lost shipment, for which reason FAO formally filed its claim with LUZTEVECO
for compensation of damage to its cargo.
Thereafter, despite repeated demands to replace the same or to pay for the total insured value in the sum of
P5,250,000.00, LUSTEVECO failed and refused to do so. Petitioner likewise failed to pay for the losses and damages
sustained by FAO by reason of its inability to recover the value of the shipment from LUZTEVECO.
Petitioner claims that on July 31, 1980 it supposedly engaged the services of Pan Asiatic Adjustment and Marine
Surveying Corporation to investigate and examine the shipment. On August 4, 1980, J.A. Barroso, Jr. of said
corporation reportedly conducted a survey on the shipment and found that 9,629 bags of rice seeds were in good order,
23,510 bags sustained wattage of 10% to 15%, and 983 bags were shorthanded or missing. After the alleged survey,
Barroso, Jr. made a report recommending to petitioner the denial of FAO's claim because the partial damage suffered
by the shipment is not compensable under the policy. On the basis of said recommendation, petitioner denied FAO's
claim.
Petitioner further avers that upon the request of counsel of FAO, a survey of the shipment was conducted on September
26, 27 and 29, 1980 by Conrado Catalan, Jr. of Manila Adjusters & Surveyors Company and he found 6,200 bags in
good order condition. At the time of his survey, 23,510 bags of the shipment had allegedly already been sold by
LUZTEVECO. Petitioner further asserts that on September 29, 1980, FAO wrote a letter to petitioner signifying its
willingness to abandon the proceeds of the sale of the 23,510 bags and the remaining good order bags, but that on
October 6, 1980 petitioner rejected FAO's proposed abandonment.

FAO then instituted Civil Case No. 41716 against LUZTEVECO and/or herein petitioner, as defendants, with the
Regional Trial Court of Pasig, Metro Manila which, on December 14, 1987, rendered judgment in favor of FAO with
the following decretal portion:
WHEREFORE, by virtue of preponderance of evidence and in consideration of justice and equity, this
Court hereby renders judgment in favor of the plaintiff against the defendant Luzon Stevedoring
Corporation and defendant Pan Malayan Insurance Corporation, ordering both the defendants, to pay
jointly and severally, the plaintiff, to wit:
1. The sum of P5,250,000.00 with interest thereon, at legal rate from September 29, 1980 until fully
paid;
2. The sum of P250,000.00 by way of attorney's fees and expenses of litigation; and
3. The cost of this suit.
Petitioner alone appealed the said decision to respondent Court of Appeals, docketed therein as CA-G.R. CV No.
22114, and on July 20, 1990 respondent court affirmed the decision of the trial court except for the award of attorney's
fees which was reduced to P25,000.00. Petitioner's motion for reconsideration was denied in respondent court's
resolution of September 3, 1990.
The petition now before us raises the following issues: (1) Whether or not respondent court committed a reversible
error in holding that the trial court is correct in holding that there is a total loss of the shipment; and (2) Whether or not
respondent court committed a reversible error in affirming the decision of the trial court ordering petitioner to pay
private respondent the amount of P5,250,000.00 representing the full insured value of the rice seeds.
The law classifies loss into either total or partial. Total loss may be actual or absolute, or it may otherwise be
constructive or technical. Petitioner submits that respondent court erred in ruling that there was total loss of the
shipment despite the fact that only 27,922 bags of rice seeds out of 34,122 bags were rendered valueless to FAO and
the shipment sustained only a loss of 78%. FAO, however, claims that, for all intents and purposes, it has practically
lost its total or entire shipment in this case, inclusive of expenses, premium fees, and so forth, despite the alleged
recovery by defendant LUZTEVECO.
As found by the court below and reproduced with approval by respondent court, FAO "has never been compensated for
this total loss or damage, a fact which is not denied nor controverted. If there were some cargoes saved, by
LUZTEVECO, private respondent abandoned it and the same was sold or used for the benefit of LUZTEVECO or Pan
Malayan Corporation. Under Sections 129 and 130 of the New Insurance Code, a total loss may either be actual or
constructive. In case of total loss in Marine Insurance, the assured is entitled to recover from the underwriter the
whole amount of his subscription (Vol. 2, Arnould Mar. Ins. 9th Ed. P. 1304; Alsop vs. Commercial Insurance Co. cc
Mass IF Case No. 262, summ 451."(Emphasis in the original text.)
It is a fact that on July 9, 1980, FAO formally filed its claim under the marine insurance policy issued by petitioner.
FAO thus claims actual loss under paragraphs (c) and (d) of Section 130 of the Insurance Code which provides:
SEC. 130. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by sinking, or by being broken up;
(c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held
it; or
(d) Any other event which effectively deprives the owner of the possession, at the port of destination
of the thing insured.
Respondent court affirmed the ruling of the trial court to the effect that there was indeed actual total loss, painstakingly
explaining therein the following grounds for holding petitioner liable for the entire amount of the insurance coverage:
... The lower court was not incorrect in holding that there is a total or entire loss of shipment in the
case at bar.
First, the fact of the sinking of Barge LC-3000 as the occurrence of the risk insured against under the
marine insurance was proved and borne out by the following findings of the court a quo, thus;
Here, we should not lose sight of the fact of sinking of the barge according to the
defendant LUZTEVECO, in a phone call by Mr. Emata, defendant's representative, on
June 26, 1980 and (of) which fact, the defendant Pan Malayan Insurance Corporation
was notified. Subsequently, there was marine protest, based on said information
released by the defendant LUZTEVECO. In fine, the barge LC-3000 carrying the load
in question sank. If the barge was made to refloat, it cannot be denied that it sank,
otherwise, what is the use of refloating the barge? What is mentioned in the law as the

risk or peril insured against is sinking. This is the risk or peril covered by the Marine
Insurance. (Decision, p. 4)
xxx xxx xxx
..., it is worth mentioning the following unrebutted documents, testimonies and pleadings cited by the
plaintiff-appellant, viz:
(1) Testimony of Mr. Keiner that he was informed by Mr. Emata, a representative of
LUZTEVECO, that the barge and its cargo sank in the South China Sea on June 25,
1980 (Deposition, Q43 p. 11)
(2) Letter of Capt. Ilano of Luzon Stevedoring Corporation dated June 26, 1980
confirming the sinking of Barge LC-3000 and its cargo on June 25, 1980 (Exhibit "D9").
(3) Marine protest executed on July 2, 1980 by Capt. Rudy Vencer, master of tugboat
towing Barge LC-3000, attesting to said barge's sinking on June 25, 1980, 385 miles
off South Vietnam, due to very strong winds and rough seas. (Exhibit "E- 4").
(4) The answer of defendant LUZTEVECO itself which admits in no uncertain terms
the sinking of Barge LC-3000 on June 25, 1980. ...
xxx xxx xxx
Basing on the evidence on record, the factual finding of the lower court re sinking of Barge LC-3000
is not without basis but rather sufficiently supported by evidence adduced by plaintiff-appellee.
Second, there is the direct testimony of Mr. Fritz Keiner (the UNFAO officer-in-charge in the
Philippines at the time of the loss) which states as follows:
52. CONGEN:
What eventually happened to your Organization's entire shipment of rice seedlings
intended for the refugees of Vietnam?
FK:
First, I would like to point out that the rice seeds were intended for the people of
Kampuchea, but for logistical reasons, the shipment had to go through Vungtan, (sic)
Vietnam.
In spite of the alleged salvaging of our shipment, there was absolutely no replacement
or payment made by either defendant LUZTEVECO or defendant Pan Malayan
Insurance Co. on our losses and eventually FAO did not recover anything from either
of the said defendants.
53. CONGEN:
Up to the present, has any replacement or payment of the value of your lost cargo
been made to your organization by either of the defendants?
FPKEINER:
Up to the present, no replacement or payment of the value of our lost cargo was ever
made to our Organization by either of the defendants in this case. (Deposition of Fritz
Keiner, pp. 13-14)
As emphasized by said witness, the insured cargo was intended for distribution by Vietnam Ocean
Shipping Agency to the people of Kampuchea for the purpose of alleviating the acute rice shortage
then prevailing in that country and to improve the rice production therein. (Deposition, Q17 p. 5). The
bags containing said cargo were marked "TREATED, UNFIT FOR FOOD" (Exh. "E-3-b"; TSN,
January 15, 1985, pp. 3-5) and the seeds themselves were of such a fragile nature that they have the
tendency to germinate upon mere contact with water.

As shown, of the 34,122 bags of rice seeds shipped on board Barge LC-3000 (Exh. "E-l"), 23,510
were determined by defendant-appellant's surveyor, the Pan Asiatic Adjustment and Marine Surveying
Corporation to be bad order bags (Exh. "3"). Add to these bad order bags the shortlanded/missing bags
numbering 983 per report of the same surveying corporation, the damaged/lost bags would total
24,493 thereby leaving a balance of 9,269 (sic) presumed to be good order/dry bags. Of these 9,629
good order/dry bags, an additional 2,682 bags were found damaged/wetted after sorting (Exh. "E"). All
in all, therefore, 27,175 bags were determined to be lost/damaged. Although 6,947 bags in apparent
external good order and condition were presumed to be inside the LUZTEVECO warehouse, only
6,200 were actually determined to be there by Conrado Catalan on September 26, 27 and 29, 1980
(Exh. "E", p. 2). This increases the number of lost/damaged bags to 27,922.
Thus considered, We agree with the plaintiff-appellee that the 27,922 damaged/lost bags were
rendered valueless to plaintiff-appellee for planting or seeding purposes in Kampuchea since the
wetting or contact with water had definitely activated their tendency to terminate. Moreover, all of said
damaged/lost bags were no longer available for reshipment to Vietnam because the same were
disposed of by defendant LUZTEVECO without authorization from plaintiff-appellee, to answer for
alleged salvage charges, while the others were lost/shortlanded.
Third the testimony of Mr. Conrado Catalan, Jr. that the shipment sustained a loss of 78% is not
speculative. Uncontroverted is his testimony which is based on data corroborated by the report of
defendant-appellant's adjuster/surveyor and on actual inspection of the remaining bags stored in
LUZTEVECO's warehouse. Exhibit '3' of defendant-appellant states in part, thus:

Condition

Good order(dry)

No. of Bags

9,629

Partly wet but damage

limited only to
approximately 10% to 15%
of the contents. Wet portion
terminated/sprouted.
Remaining 85% to 90% of
the contents apparently dry

23,510

Shortlanded/missing

983

Total

34,122 Bags

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

27,922 bags of rice seeds out of 34,122 bags were rendered valueless to FAO and the shipment sustained only a loss of
78%. Thus, petitioner concludes that the findings of the court a quo, as affirmed by the Court of Appeals, are contrary
to the evidence. Upon an examination, however, of the records presented before this Court, it is quite clear that there
was indeed actual total loss.
While this Court is not a trier of facts, yet, when the findings of the Court of Appeals are alleged to be without citation
of specific evidence on which they are based, there is sufficient reason for us to review the appellate court's decision.
Under the factual milieu of this case, we find that there is abundant evidence to support the conclusion of respondent
court.
In his testimony on cross-examination at the trial, Conrado Catalan, Jr., declared:
Q You said that you did not make an actual count but you estimated, how many bags all in all did you
estimate?
A It is 6,200 bags if I may recall.
Q Out of these 6,200 bags you only opened two (2) bags?
A Yes, sir.
Q And the others, the balance you did not examine anymore?
A It is shown in the picture that it is stained.
Q You must answer the question.
A Yes, sir.
Q What was the damage of the two (2) bags that you examined?
A They are stained. (Emphasis supplied.)
It will be recalled that said rice seeds were treated and would germinate upon mere contact with water. The rule is that
where the cargo by the process of decomposition or other chemical agency no longer remains the same kind of thing as
before, an actual total loss has been suffered.
... However, the complete physical destruction of the subject matter is not essential to constitute an
actual total loss. Such a loss may exist where the form and specie of the thing is destroyed, although
the materials of which it consisted still exist (Great Western Ins. Co. vs. Fogarty, N.Y., 19 Wall 640, 22
L. Ed. 216), as where the cargo by the process of decomposition or other chemical agency no longer
remains the same kind of thing as before (Williams vs. Cole, 16 Me. 207).
Moreover, it is undisputed that no replacement whatsoever or any payment, for that matter, of the value of said lost
cargo was made to FAO by petitioner or LUZTEVECO. It is thus clear that FAO suffered actual total loss under
Section 130 of the Insurance Code, specifically under paragraphs (c) and (d) thereof, recompense for which it has been
denied up to the present.
In view of our aforestated holding that there was actual total loss of the goods insured in this case, it is no longer
necessary to pass upon the issue of the validity of the abandonment made by FAO. Section 135 of the Insurance Code
explicitly provides that "(u)pon an actual total loss, a person insured is entitled to payment without notice of
abandonment." This is a statutory adoption of a long standing doctrine in maritime insurance law that in case of actual
total loss, the right of the insured to claim the whole insurance is absolute, without need of a notice of abandonment.
WHEREFORE, the assailed judgment and resolution of respondent Court of Appeals are hereby AFFIRMED in toto.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-36480

May 31, 1988

ANDREW PALERMO, plaintiff-appellee,

vs.
PYRAMID INSURANCE CO., INC., defendant- appellant.
GRIO-AQUINO, J:

The Court of Appeals certified this case to Us for proper disposition as the only question involved is the interpretation
of the provision of the insurance contract regarding the "authorized driver" of the insured motor vehicle.
On March 7, 1969, the insured, appellee Andrew Palermo, filed a complaint in the Court of First Instance of Negros
Occidental against Pyramid Insurance Co., Inc., for payment of his claim under a Private Car Comprehensive Policy
MV-1251 issued by the defendant (Exh. A).
In its answer, the appellant Pyramid Insurance Co., Inc., alleged that it disallowed the claim because at the time of the
accident, the insured was driving his car with an expired driver's license.
After the trial, the court a quo rendered judgment on October 29, 1969 ordering the defendant "to pay the plaintiff the
sum of P20,000.00, value of the insurance of the motor vehicle in question and to pay the costs."
On November 26, 1969, the plaintiff filed a "Motion for Immediate Execution Pending Appeal." It was opposed by the
defendant, but was granted by the trial court on December 15, 1969.
The trial court found the following facts to be undisputed:
On October 12,1968, after having purchased a brand new Nissan Cedric de Luxe Sedan car bearing
Motor No. 087797 from the Ng Sam Bok Motors Co. in Bacolod City, plaintiff insured the same with
the defendant insurance company against any loss or damage for P 20,000.00 and against third party
liability for P 10,000.00. Plaintiff paid the defendant P 361.34 premium for one year, March 12, 1968
to March 12, 1969, for which defendant issued Private Car Comprehensive Policy No. MV-1251,
marked Exhibit "A."
The automobile was, however, mortgaged by the plaintiff with the vendor, Ng Sam Bok Motors Co., to
secure the payment of the balance of the purchase price, which explains why the registration certificate
in the name of the plaintiff remains in the hands of the mortgagee, Ng Sam Bok Motors Co.
On April 17, 1968, while driving the automobile in question, the plaintiff met a violent accident. The
La Carlota City fire engine crashed head on, and as a consequence, the plaintiff sustained physical
injuries, his father, Cesar Palermo, who was with am in the car at the time was likewise seriously
injured and died shortly thereafter, and the car in question was totally wrecked.
The defendant was immediately notified of the occurrence, and upon its orders, the damaged car was
towed from the scene of the accident to the compound of Ng Sam Bok Motors in Bacolod City where
it remains deposited up to the present time.
The insurance policy, Exhibit "A," grants an option unto the defendant, in case of accident either to
indemnify the plaintiff for loss or damage to the car in cash or to replace the damaged car. The
defendant, however, refused to take either of the above-mentioned alternatives for the reason as
alleged, that the insured himself had violated the terms of the policy when he drove the car in question
with an expired driver's license. (Decision, Oct. 29, 1969, p. 68, Record on Appeal.)
Appellant alleges that the trial court erred in interpreting the following provision of the Private Car Comprehensive
Policy MV-1251:
AUTHORIZED DRIVER:
Any of the following:
(a) The Insured.
(b) Any person driving on the Insured's order or with his permission. Provided that the person driving
is permitted in accordance with the licensing or other laws or regulations to drive the Motor Vehicle
and is not disqualified from driving such motor vehicle by order of a Court of law or by reason of any
enactment or regulation in that behalf. (Exh. "A.")

There is no merit in the appellant's allegation that the plaintiff was not authorized to drive the insured motor vehicle
because his driver's license had expired. The driver of the insured motor vehicle at the time of the accident was, the
insured himself, hence an "authorized driver" under the policy.
While the Motor Vehicle Law prohibits a person from operating a motor vehicle on the highway without a license or
with an expired license, an infraction of the Motor Vehicle Law on the part of the insured, is not a bar to recovery
under the insurance contract. It however renders him subject to the penal sanctions of the Motor Vehicle Law.
The requirement that the driver be "permitted in accordance with the licensing or other laws or regulations to drive the
Motor Vehicle and is not disqualified from driving such motor vehicle by order of a Court of Law or by reason of any
enactment or regulation in that behalf," applies only when the driver" is driving on the insured's order or with his
permission." It does not apply when the person driving is the insured himself.
This view may be inferred from the decision of this Court in Villacorta vs. Insurance Commission, 100 SCRA 467,
where it was held that:
The main purpose of the "authorized driver" clause, as may be seen from its text, is that a person other
than the insured owner, who drives the car on the insured's order, such as his regular driver, or with his
permission, such as a friend or member of the family or the employees of a car service or repair shop,
must be duly licensed drivers and have no disqualification to drive a motor vehicle.
In an American case, where the insured herself was personally operating her automobile but without a license to
operate it, her license having expired prior to the issuance of the policy, the Supreme Court of Massachusetts was more
explicit:
... Operating an automobile on a public highway without a license, which act is a statutory crime is not
precluded by public policy from enforcing a policy indemnifying her against liability for bodily
injuries The inflicted by use of the automobile." (Drew C. Drewfield McMahon vs. Hannah Pearlman,
et al., 242 Mass. 367, 136 N.E. 154, 23 A.L.R. 1467.)
WHEREFORE, the appealed decision is affirmed with costs against the defendant-appellant.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-29749

April 15, 1988

PLACIDA PEZA et al., petitioners,

vs.
HON. FEDERICO C. ALIKPALA, etc., et al., respondents.
Chaves, Elio Chaves & Associates for petitioners.
Jacinto D. Jimenez for respondents.
NARVASA, J.:
Presented in the proceeding at bar is the sorry situation of the loss by a party of the right to argue the merits of a cause
on appeal due to an obsessive pre-occupation with a question of admissibility of evidence, like a man who, it is said,
"fails to see the forest for the trees."

The case had its origin in an unfortunate vehicular accident. Two (2) children ran across the path of a vehicle as it was
running along the national highway at barrio Makiling Calamba, Laguna. They were killed.
The vehicle, a Chevrolet "Carry-All", belonged to a partnership known as Diman & Company, and was then being
driven by its driver, Perfecto Amar. It was insured with the Empire Insurance Co., Inc. under a so-called
'comprehensive coverage" policy, loss by theft excluded. The policy was in force at the time of the accident.
Placida Peza, the managing partner of Diman & Co. filed a claim with the insurance company, hereafter simply,
Empire, for payment of compensation to the family of the two (2) children who died as a result of the accident. Empire
refused to pay on the ground that the driver had no authority to operate the vehicle, a fact which expressly excepted it
from liability under the policy. What Peza did was to negotiate directly with the deceased children father for an out-ofcourt settlement. The father agreed to accept P 6,200.00 in fun settlement of the liability of the vehicles owner and
driver, and Peza paid him this sum.
Peza thereafter sued Empire to recover this sum of P6,200.00 as actual damages, as well as P20,000.00 as moral
damages, P10,000.00 as exemplary damages, and P10,000.00 as attorney's fees. She amended her complaint shortly
thereafter to include Diman & Co. as alternative party plaintiff.
Empire's basic defense to the suit was anchored on the explicit requirement in the policy limiting the operation of the
insured vehicle to the "authorized driver" therein defined, namely, (a) the insured, or (b) any person driving on the
insured order or with his permission, provided that... that the person driving is permited in accordance with the licensing or other laws or regulations to
drive the Motor vehicle or has been so permitted and is not disqualified by order of the Court of Law
of by reason of any enactment or regulation in that behalf from driving such Motor Vehicle.It appearing, according to Empire, that at the time of the mishap, the driver Perfecto Amar only had a temporary
operator's permit (TVR) already expired his drivers license having earlier been confiscated by an agent of the
Land Transportation Commission for an alleged violation of Land Transportation and Traffic Rules, he was not
permitted by law and was in truth disqualified to operate any motor vehicle; and this operated to relieve it (Empire)
from liability under its policy.
The fact of Amar's having only an expired TVR at the time of the accident was duly established during the trial. It does
not seem to have been seriously disputed by the plaintiffs. What plaintiff's counsel attempted to do, to neutralize that
fact, was to offer rebuttal testimony (1) to explain the circumstances attending the issuance of the TVR by the LTC
officer to Amar in proof of the proposition that there was no reason for confiscation of Amar's license and the
issuance to him of a TVR, and the LTC agent was wrong in doing so, and also, to (2) prove that, "contrary to the
implication' of one of Empire's exhibits, Amar's license had not expired, but had been renewed. The respondent Judge
however sustained the objection of Empire's councel to the evidence on the ground that it was irrelevant to the issue.
The Judge also denied plaintiffs' request for time to present additional rebuttal evidence in proof of the same
propositions.
The plaintiffs having moved for reconsideration, and the Court having refused, said plaintiffs have come to this Court
seeking communication on certiorari of the above describe orders, assailing them as being tainted by grave abuse of
discretion.
It would seem fairly obvious that whether the LTC agent was correct or not in his opinion that driver Amar had
violated some traffic regulation warranting confiscation of his license and issuance of a TVR in lieu thereof, this would
not alter the undisputed fact that Amar's licence had indeed been confiscated and a TVR issued to him, and the TVR
had already expired at the time that the vehicle being operated by him killed two children by accident. Neither would
proof of the renewal of Amar's license change the fact that it had really been earlier confiscated by the LTC agent. The
plaintiffs' proferred proof therefore had no logical connection with the facts thereby sought to be refuted, the proof had
no rational tendency to establish the improbability of the facts demonstrated by Empire's evidence. The proofs were
thus correctly by the respondent Judge as being irrelevant.
Even positing error in the Judge's analysis of the evidence attempted to be introduced and his rejection thereof, it is
clear that it was at most an error of judgment, not such an error as may be branded a grave abuse of discretion, i.e.,
such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, against which the writ of
certiorari will lie. In any event, the established principle is "that ruling of the trial court on procedural questions and on

admissibility of evidence during the course of the trial are interlocutory in nature and may not be the subject of
separate appeal or review on certiorari, but are to be assigned as errors and reviewed in the appeal properly taken from
the decision rendered by the trial court on the merits of the case.
In the meantime, respondent Judge Alikpala rendered judgment on the merits, since the case was then already ripe for
adjudication. The judgment ordered dismissal of the case for failure on the part of the plaintiff to prove their cause of
action against Empire. Notice of the judgment was served on the parties in due course. The plaintiffs did not appeal.
instead, they filed a motion praying that Judge Alikpala be declared guilty of contempt of court for having decided the
case on the merits despite the pendency in this Court of the the certiorari action instituted by the plaintiffs.
It is elementary that the mere pendency of a special civil action for certiorari, commenced in relation to a case pending
before a lower Court, does not interrupt the course of the latter when there is no writ of injunction restraining it. This
was particularly true in the case of the respondent Judge in the light of the requirement of the Judiciary Act that a case
be decided within ninety (90) days from date of submission. As His Honor has pointed out, he but did his duty under
the law, and hence, by no stretch of the imagination may his act be regarded as contempt of court, much less an 'affront
to the Tribunal.' He is right, and must therefore be absolved of any responsibility for contempt.
In their eagerness to prove the respondent Judge wrong in sustaining objections to their proffered proofs, and to have
him punished for contempt for rendering judgment on the merits adversely to them despite his being a respondent in
their certiorari suit before this Court, the plaintiff failed to perfect an appeal from that judgment on the merits. Judge
Alikpala's judgment has thus become and executory, and this is an additional factor precluding relief to the petitioners.
WHEREFORE, the petition is DISMISSED for lack of merit, without pronouncement as to costs.
Teehankee, C.J., Cruz, Gancayco and Grio-Aquino, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 78848

November 14, 1988

SHERMAN SHAFER, petitioner,

vs.
HON. JUDGE, REGIONAL TRIAL COURT OF OLONGAPO CITY, BRANCH 75, and MAKATI
INSURANCE COMPANY, INC., respondents.
R.M. Blanco for petitioner.
Camacho and Associates for respondents.
PADILLA, J.:
This is a petition for review on certiorari of the Order * of the Regional Trial Court, Olongapo City, Branch 75, dated
24 April 1986 dismissing petitioner's third party complaint filed in Criminal Case No. 381-85, a prosecution for
reckless imprudence resulting in damage to property and serious physical injuries.
On 2 January 1985, petitioner Sherman Shafer obtained a private car policy, GA No. 0889, over his Ford Laser car
with Plate No. CFN-361 from Makati Insurance Company, Inc., for third party liability (TPL).<re||an1w> During
the effectivity of the policy, an information for reckless imprudence resulting in damage to property and serious
physical injuries was filed against petitioner. The information reads as follows:
That on or about the seventeeth (17th) day of May 1985, in the City of Olongapo, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused, being then the driver and in
actual physical control of a Ford Laser car bearing Plate No. CFN-361, did then and there wilfully,

unlawfully and criminally drive, operate and manage the said Ford Laser car in a careless, reckless and
imprudent manner without exercising reasonable caution, diligence and due care to avoid accident to
persons and damage to property and in disregard of existing traffic rules and regulations, causing by
such carelessness, recklessness and imprudence the said Ford Laser car to hit and bump a Volkswagen
car bearing Plate No. NJE-338 owned and driven by Felino llano y Legaspi, thereby causing damage
in the total amount of P12,345.00 Pesos, Philippine Currency, and as a result thereof one Jovencio
Poblete, Sr. who was on board of the said Volkswagen car sustained physical injuries, to wit:
1. 2 cm. laceration of left side of tongue.
2. 6 cm. laceration with partial transection of muscle (almost full thickness) left side of face.
3. Full thickness laceration of lower lip and adjacent skin.
which injuries causing [sic] deformity on the face.
The owner of the damaged Volkswagen car filed a separate civil action against petitioner for damages, while Jovencio
Poblete, Sr., who was a passenger in the Volkswagen car when allegedly hit and bumped by the car driven by
petitioner, did not reserve his right to file a separate civil action for damages. Instead, in the course of the trial in the
criminal case, Poblete, Sr. testified on his claim for damages for the serious physical injuries which he claimed to have
sustained as a result of the accident.
Upon motion, petitioner was granted leave by the former presiding judge of the trail court to file a third party
complaint against the herein private respondent, Makati Insurance Company, Inc. Said insurance company, however,
moved to vacate the order granting leave to petitioner to file a third party complaint against it and/or to dismiss the
same.
On 24 April 1987, the court a quo issued an order dismissing the third party complaint on the ground that it was
premature, based on the premise that unless the accused (herein petitioner) is found guilty and sentenced to pay the
offended party (Poblete Sr.) indemnity or damages, the third party complaint is without cause of action. The court
further stated that the better procedure is for the accused (petitioner) to wait for the outcome of the criminal aspect of
the case to determine whether or not the accused, also the third party plaintiff, has a cause of action against the third
party defendant for the enforcement of its third party liability (TPL) under the insurance contract. Petitioner moved for
reconsideration of said order, but the motion was denied; hence, this petition.
It is the contention of herein petitioner that the dismissal of the third party complaint amounts to a denial or curtailment
of his right to defend himself in the civil aspect of the case. Petitioner further raises the legal question of whether the
accused in a criminal action for reckless imprudence, where the civil action is jointly prosecuted, can legally implead
the insurance company as third party defendant under its private car insurance policy, as one of his modes of defense in
the civil aspect of said proceedings.
On the other hand, the insurance company submits that a third party complaint is, under the rules, available only if the
defendant has a right to demand contribution, indemnity, subrogation or any other relief in respect of plaintiff's claim,
to minimize the number of lawsuits and avoid the necessity of bringing two (2) or more suits involving the same
subject matter. The insurance company further contends that the contract of motor vehicle insurance, the damages and
attorney's fees claimed by accused/third party plaintiff are matters entirely different from his criminal liability in the
reckless imprudence case, and that petitioner has no cause of action against the insurer until petitioner's liability shall
have been determined by final judgment, as stipulated in the contract of insurance.
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 motor vehicle owners.
The liability of the insurance company under the Compulsory Motor Vehicle Liability Insurance is for loss or damage.
Where an insurance policy insures directly against liability, 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.
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.
In the instant case, the court a quo erred in dismissing petitioner's third party complaint on the ground that petitioner
had no cause of action yet against the insurance company (third party defendant). There is no need on the part of the
insured to wait for the decision of the trial court finding him guilty of reckless imprudence. The occurrence of the
injury to the third party immediately gave rise to the liability of the insurer under its policy.
A third party complaint is a device allowed by the rules of procedure by which the defendant can bring into the original
suit a party against whom he will have a claim for indemnity or remuneration as a result of a liability established
against him in the original suit. Third party complaints are allowed to minimize the number of lawsuits and avoid the
necessity of bringing two (2) or more actions involving the same subject matter. They are predicated on the need for
expediency and the avoidance of unnecessary lawsuits. If it appears probable that a second action will result if the
plaintiff prevails, and that this result can be avoided by allowing the third party complaint to remain, then the motion to
dismiss the third party complaint should be denied.
Respondent insurance company's contention that the third party complaint involves extraneous matter which will only
clutter, complicate and delay the criminal case is without merit. An offense causes two (2) classes of injuries the first is
the social injury produced by the criminal act which is sought to be repaired thru the imposition of the corresponding
penalty, and the second is the personal injury caused to the victim of the crime, which injury is sought to be
compensated thru indemnity, which is civil in nature.
In the instant case, the civil aspect of the offense charged, i.e., serious physical injuries allegedly suffered by Jovencio
Poblete, Sr., was impliedly instituted with the criminal case. Petitioner may thus raise all defenses available to him
insofar as the criminal and civil aspects of the case are concerned. The claim of petitioner for payment of indemnity to
the injured third party, under the insurance policy, for the alleged bodily injuries caused to said third party, arose from
the offense charged in the criminal case, from which the injured (Jovencio Poblete, Sr.) has sought to recover civil
damages. Hence, such claim of petitioner against the insurance company cannot be regarded as not related to the
criminal action.
WHEREFORE, the instant petition is GRANTED. The questioned order dated 24 April 1987 is SET ASIDE and a new
one entered admitting petitioner's third party complaint against the private respondent Makati Insurance Company, Inc.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Sarmiento and Regalado, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 92383

July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.
CRUZ, J.:

The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two
months later, he was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the
policy but her claim was rejected. The petitioner agreed that there was no suicide. It argued, however that there was no
accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10
o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not
drunk) and was playing with his handgun, from which he had previously removed the magazine. As she watched
television, he stood in front of her and pointed the gun at her. She pushed it aside and said it might he loaded. He
assured her it was not and then pointed it to his temple. The next moment there was an explosion and Lim slumped to
the floor. He was dead before he fell.
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. The petitioner was
sentenced to pay her P200,000.00, representing the face value of the policy, with interest at the legal rate; P10,000.00
as moral damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00
as attorney's fees, plus the costs of the suit. This decision was affirmed on appeal, and the motion for reconsideration
was denied. The petitioner then came to this Court to fault the Court of Appeals for approving the payment of the claim
and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an
insurance contract are to be construed and considered according to the ordinary understanding and common usage and
speech of people generally. In-substance, the courts are practically agreed that the words "accident" and "accidental"
mean that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual, and
unforeseen. The definition that has usually been adopted by the courts is that an accident is an event that takes place
without one's foresight or expectation an event that proceeds from an unknown cause, or is an unusual effect of a
known case, and therefore not expected.
An accident is an event which happens without any human agency or, if happening through human agency, an event
which, under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been
defined as an injury which happens by reason of some violence or casualty to the injured without his design, consent,
or voluntary co-operation.
In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an
accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, says that "there is no accident when a
deliberate act is performed unless some additional, unexpected, independent and unforeseen happening occurs which
produces or brings about their injury or death." There was such a happening. This was the firing of the gun, which was
the additional unexpected and independent and unforeseen occurrence that led to the insured person's death.
The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the private
petitioner's claim is barred by such provision. It is there stated:
Exceptions
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting to commit suicide or willfully exposing himself to needless peril except in an
attempt to save human life.
To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured
willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they both
signify a disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such life
whereas the second act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who
walks a tightrope one thousand meters above the ground and without any safety device may not actually be intending
to commit suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully exposing himself to
needless peril" within the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to
needless peril and so came under the exception. The theory is that a gun is per se dangerous and should therefore be
handled cautiously in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the gun
and believed it was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that Lim
did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he
thought it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.
The contrary view is expressed by the petitioner thus:
Accident insurance policies were never intended to reward the insured for his tendency to show off or
for his miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate
and jump from the Quezon Bridge into the Pasig River in the belief that I can overcome the current, I
have wilfully exposed myself to peril and must accept the consequences of my act. If I drown I cannot
go to the insurance company to ask them to compensate me for my failure to swim as well as I thought
I could. The insured in the case at bar deliberately put the gun to his head and pulled the trigger. He
wilfully exposed himself to peril.
The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That
might frighten the insurance people to death. We also agree that under the circumstances narrated, his beneficiary
would not be able to collect on the insurance policy for it is clear that when he braved the currents below, he
deliberately exposed himself to a known peril.
The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's
hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below were dangerous. By
contrast, Lim did not know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from
recovering from the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves
the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his
own accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly made in the
contract to relieve the insurer from liability, and none of these exceptions is applicable in the case at bar. **
It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. There
is no reason to deviate from this rule, especially in view of the circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this case
is, as the petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good faith
then it resisted the private respondent's claim on the ground that the death of the insured was covered by the exception.
The issue was indeed debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We
hold therefore that the award of moral and exemplary damages and of attorney's fees is unjust and so must be
disapproved.
In order that a person may be made liable to the payment of moral damages, the law requires that his
act be wrongful. The adverse result of an action does not per se make the act wrongful and subject the
act or to the payment of moral damages. The law could not have meant to impose a penalty on the
right to litigate; such right is so precious that moral damages may not be charged on those who may
exercise it erroneously. For these the law taxes costs.
The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the
action wrongful because in most cases one party will lose; we would be imposing an unjust condition
or limitation on the right to litigate. We hold that the award of moral damages in the case at bar is not
justified by the facts had circumstances as well as the law.
If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the
fact of winning alone that entitles him to recover such damages of the exceptional circumstances
enumerated in Art. 2208. Otherwise, every time a defendant wins, automatically the plaintiff must pay

attorney's fees thereby putting a premium on the right to litigate which should not be so. For those
expenses, the law deems the award of costs as sufficient.
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable
to the private respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest
at the legal rate from the date of the filing of the complaint until the full amount is paid, but MODIFIED with the
deletion of all awards for damages, including attorney's fees, except the costs of the suit.
SO ORDERED.
Grio-Aquino, Medialdea and Bellosillo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21574

June 30, 1966

SIMON DE LA CRUZ, plaintiff and appellee,

vs.
THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.
Achacoso, Nera and Ocampo for defendant and appellant.
Agustin M. Gramata for plaintiff and appellee.
BARRERA, J.:
This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the Court of First Instance of
Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff Simon de la Cruz for the death of the
latter's son, to pay the burial expenses, and attorney's fees.
Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the holder of an accident
insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance & Surety Co., Inc., for the period
beginning November 13, 1956 to November 12, 1957. On January 1, 1957, in connection with the celebration of the
New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing contest for general entertainment wherein the insured
Eduardo de la Cruz, a non-professional boxer participated. In the course of his bout with another person, likewise a
non-professional, of the same height, weight, and size, Eduardo slipped and was hit by his opponent on the left part of
the back of the head, causing Eduardo to fall, with his head hitting the rope of the ring. He was brought to the Baguio
General Hospital the following day. The cause of death was reported as hemorrhage, intracranial, left.
Simon de la Cruz, the father of the insured and who was named beneficiary under the policy, thereupon filed a claim
with the insurance company for payment of the indemnity under the insurance policy. As the claim was denied, De la
Cruz instituted the action in the Court of First Instance of Pangasinan for specific performance. Defendant insurer set
up the defense that the death of the insured, caused by his participation in a boxing contest, was not accidental and,
therefore, not covered by insurance. After due hearing the court rendered the decision in favor of the plaintiff which is
the subject of the present appeal.
It is not disputed that during the ring fight with another non-professional boxer, Eduardo slipped, which was
unintentional. At this opportunity, his opponent landed on Eduardo's head a blow, which sent the latter to the ropes.
That must have caused the cranial injury that led to his death. Eduardo was insured "against death or disability caused
by accidental means". Appellant insurer now contends that while the death of the insured was due to head injury, said
injury was sustained because of his voluntary participation in the contest. It is claimed that the participation in the
boxing contest was the "means" that produced the injury which, in turn, caused the death of the insured. And, since his
inclusion in the boxing card was voluntary on the part of the insured, he cannot be considered to have met his death by
"accidental means".

The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning, and
are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that
which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and
unforeseen. An accident is an event that takes place without one's foresight or expectation an event that proceeds
from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected.
Appellant however, would like to make a distinction between "accident or accidental" and "accidental means", which
is the term used in the insurance policy involved here. It is argued that to be considered within the protection of the
policy, what is required to be accidental is the means that caused or brought the death and not the death itself. It may
be mentioned in this connection, that the tendency of court decisions in the United States in recent years is to eliminate
the fine distinction between the terms "accidental" and "accidental means" and to consider them as legally
synonymous. But, even if we take appellant's theory, the death of the insured in the case at bar would still be entitled to
indemnification under the policy. The generally accepted rule is that, death or injury does not result from accident or
accidental means within the terms of an accident-policy if it is the natural result of the insured's voluntary act,
unaccompanied by anything unforeseen except the death or injury. There is no accident when a deliberate act is
performed unless some additional, unexpected, independent, and unforeseen happening occurs which produces or
brings about the result of injury or death. In other words, where the death or injury is not the natural or probable result
of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the
resulting death is within the protection of policies insuring against death or injury from accident.
In the present case, while the participation of the insured in the boxing contest is voluntary, the injury was sustained
when he slid, giving occasion to the infliction by his opponent of the blow that threw him to the ropes of the ring.
Without this unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he could not have
received that blow in the head and would not have died. The fact that boxing is attended with some risks of external
injuries does not make any injuries received in the course of the game not accidental. In boxing as in other equally
physically rigorous sports, such as basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it
ever does, the injury or death can only be accidental or produced by some unforeseen happening or event as what
occurred in this case.
Furthermore, the policy involved herein specifically excluded from its coverage
(e) Death or disablement consequent upon the Insured engaging in football, hunting, pigsticking,
steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling.
Death or disablement resulting from engagement in boxing contests was not declared outside of the protection of the
insurance contract. Failure of the defendant insurance company to include death resulting from a boxing match or other
sports among the prohibitive risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from
liability for such death.
Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed, with costs against
appellant.
SO ORDERED.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 89741March 13, 1991
SUN INSURANCE OFFICE, LTD., petitioner,
vs.
COURT OF APPEALS and EMILIO TAN, respondents.

Alfonso Felix, Jr., for petitioner.

William B. Devilles for private respondent.
PARAS, J.:p
This is a petition for review on certiorari of the June 20, 1989 decision of the Court of Appeals in CA-G.R. SP. Case
No. 13848 affirming the November 3, 1987 and January 14, 1988 orders of the Regional Trial Court of Iloilo, Branch
27, in Civil Case No. 16817, denying the motion to dismiss and the subsequent motion for reconsideration; and the
August 22, 1989 resolution of the same court denying the motion for reconsideration.
On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a P300,000.00 property
insurance policy to cover his interest in the electrical supply store of his brother housed in a building in Iloilo City.
Four (4) days after the issuance of the policy, the building was burned including the insured store. On August 20, 1983,
Tan filed his claim for fire loss with petitioner, but on February 29, 1984, petitioner wrote Tan denying the latter's
claim. On April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of his claim. On September 3,
1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3, 1984 request for reconsideration.
Petitioner answered the letter on October 11, 1985, advising Tan's counsel that the Insurer's denial of Tan's claim
remained unchanged, enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985 (response to
petition for reconsideration). On November 20, 1985, Tan filed Civil Case No. 16817 with the Regional Trial Court of
Iloilo, Branch 27 but petitioner filed a motion to dismiss on the alleged ground that the action had already prescribed.
Said motion was denied in an order dated November 3, 1987; and petitioner's motion for reconsideration was also
denied in an order dated January 14, 1988.
Petitioner went to the Court of Appeals and sought the nullification of the said Nov. 3, 1987 and January 14, 1988
orders, but the Court of Appeals, in its June 20, 1989 decision denied the petition and held that the court a quo may
continue until its final termination.
A motion for reconsideration was filed, but the same was denied by the Court of Appeals in its resolution of August 22,
1989 (Rollo, pp. 42-43).
Hence, the instant petition.
The Second Division of this Court, in its resolution of December 18, 1989 resolved to give due course to the petition
and to require the parties to submit simultaneous memoranda (Ibid., p. 56).
Petitioner raised two (2) issues which may be stated in substance, as follows:
I
WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION INTERRUPTS
THE TWELVE (12) MONTHS PRESCRIPTIVE PERIOD TO CONTEST THE DENIAL OF THE
INSURANCE CLAIM; and
II
WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED FINAL ONLY IF
IT CONTAINS WORDS TO THE EFFECT THAT THE DENIAL IS FINAL.
The answer to the first issue is in the negative.
While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in
favor of the insured and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be
construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense (Pacific Banking
Corp. v. Court of Appeals, 168 SCRA 1 [1988]).
Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the parties, reads:

27. Action or suit clause If a claim be made and rejected and an action or suit be not commenced
either in the Insurance Commission or in any court of competent jurisdiction within twelve (12)
months from receipt of notice of such rejection, or in case of arbitration taking place as provided
herein, within twelve (12) months after due notice of the award made by the arbitrator or arbitrators or
umpire, then the claim shall for all purposes be deemed to have been abandoned and shall not
thereafter be recoverable hereunder.
As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken and understood in its
plain, ordinary and popular sense pursuant to the above-cited principle laid down by this Court.
Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984 ( Rollo, pp. 50-52),
admitted that he received a copy of the letter of rejection on April 2, 1984. Thus, the 12-month prescriptive period
started to run from the said date of April 2, 1984, for such is the plain meaning and intention of Section 27 of the
insurance policy.
While the question of whether or not the insured was definitely advised of the rejection of his claim through the letter
(Rollo, pp. 48-49) of petitioner dated February 29, 1984, may arise, the certainty of the denial of Tan's claim was
clearly manifested in said letter, the pertinent portion of which reads:
We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz, Iloilo City.
We now have the report of our adjusters and after a thorough and careful review of the same and the
accompanying documents at hand, we are rejecting, much to our regrets, liability for the claim under
our policies for one or more of the following reasons:
1. xxx xxx xxx
2. xxx xxx xxx
For your information, we have referred all these matters to our lawyers for their opinion as to the
compensability of your claim, particularly referring to the above violations. It is their opinion and in
fact their strong recomendation to us to deny your claim. By this letter, we do not intend to waive or
relinquish any of our rights or defenses under our policies of insurance.
It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire Insurance Co., (2
SCRA 945 [1961]), to wit:
The condition contained in an insurance policy that claims must be presented within one year after
rejection is not merely a procedural requirement but an important matter essential to a prompt
settlement of claims against insurance companies as it demands that insurance suits be brought by the
insured while the evidence as to the origin and cause of destruction have not yet disappeared.
In enunciating the above-cited principle, this Court had definitely settled the rationale for the necessity of bringing
suits against the Insurer within one year from the rejection of the claim. The contention of the respondents that the oneyear prescriptive period does not start to run until the petition for reconsideration had been resolved by the insurer,
runs counter to the declared purpose for requiting that an action or suit be filed in the Insurance Commission or in a
court of competent jurisdiction from the denial of the claim. To uphold respondents' contention would contradict and
defeat the very principle which this Court had laid down. Moreover, it can easily be used by insured persons as a
scheme or device to waste time until any evidence which may be considered against them is destroyed.
It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the Insurance Code,
which states that:
Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for
commencing an action thereunder to a period of less than one year from the time when the cause of
action accrues, is void.
The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent's view, two rulings of this Court have been cited, namely, the case of Eagle Star
Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where the Court held:
The right of the insured to the payment of his loss accrues from the happening of the loss. However,
the cause of action in an insurance contract does not accrue until the insured's claim is finally rejected
by the insurer. This is because before such final rejection there is no real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:
Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a
correlated obligation of the defendant in violation of the said legal right, the cause of action does not
accrue until the party obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this
case to pay the amount of the bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured's cause of action or
his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction commences from the
time of the denial of his claim by the Insurer, either expressly or impliedly.
But as pointed out by the petitioner insurance company, the rejection referred to should be construed as the rejection,
in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for
reconsideration, such should have been expressly stipulated.
Thus, to allow the filing of a motion for reconsideration to suspend the running of the prescriptive period of twelve
months, a whole new body of rules on the matter should be promulgated so as to avoid any conflict that may be
brought by it, such as:
a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it be supported
by arguments/affidavits/material evidence;
b) how many petitions for reconsideration should be permitted?
While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the same cannot be taken to
mean the rejection of a petition for reconsideration as insisted by respondents. Such was clearly not the meaning
contemplated by this Court. The Insurance policy in said case provides that the insured should file his claim, first, with
the carrier and then with the insurer. The "final rejection" being referred to in said case is the rejection by the insurance
company.
PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and SET ASIDE, and
Civil Case No. 16817 filed with the Regional Trial Court is hereby DISMISSED.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
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, 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.
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.
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 replacementrenewal 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.
In due time, petitioner appealed to the Court of Appeals.
On September 7, 1998, the Court of Appeals promulgated its decision 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.
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. On April 22, 1999, respondent filed its comment.
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.
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. The
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, 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.
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 114427

February 6, 1995

ARMANDO GEAGONIA, petitioner,

vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision of the Court of Appeals in CA-G.R. SP No. 31916,
entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance
Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against private
respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22
December 1989, he obtained from the private respondent fire insurance policy No. F-14622 for P100,000.00. The
period of the policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-in-trade
consisting principally of dry goods such as RTW's for men and women wear and other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co.,
Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to
P392,130.50, itemized as follows:

Zenco Sales, Inc.

P55,698.00

F. Legaspi Gen.
Merchandise

86,432.50

Cebu Tesing Textiles

250,000.00 (on credit)

P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or
which may subsequently be effected, covering any of the property or properties consisting of stocks in
trade, goods in process and/or inventories only hereby insured, and unless such notice be given and the
particulars of such insurance or insurances be stated therein or endorsed in this policy pursuant to
Section 50 of the Insurance Code, by or on behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited, provided however, that this condition
shall not apply when the total insurance or insurances in force at the time of the loss or damage is not
more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan
del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with the private
respondent a claim under the policy. On 28 December 1990, the private respondent denied the claim because it found
that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No. GA28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance Co.,

Inc. (hereinafter PFIC). These policies indicate that the insured was "Messrs. Discount Mart (Mr. Armando Geagonia,
Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their
interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000.
Phils. First CEB/F 24758.
The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.
The petitioner then filed a complaint against the private respondent with the Insurance Commission (Case No. 3340)
for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation.
He attached as Annex "AM" thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He
admitted in the said letter that at the time he obtained the private respondent's fire insurance policy he knew that the
two policies issued by the PFIC were already in existence; however, he had no knowledge of the provision in the
private respondent's policy requiring him to inform it of the prior policies; this requirement was not mentioned to him
by the private respondent's agent; and had it been mentioned, he would not have withheld such information. He further
asserted that the total of the amounts claimed under the three policies was below the actual value of his stocks at the
time of loss, which was P1,000,000.00.
In its answer, the private respondent specifically denied the allegations in the complaint and set up as its principal
defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993, the Insurance Commission found that the petitioner did not violate Condition 3 as he
had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without informing him or securing his consent; and that Cebu Tesing
Textile, as his creditor, had insurable interest on the stocks. These findings were based on the petitioner's testimony
that he came to know of the PFIC policies only when he filed his claim with the private respondent and that Cebu
Tesing Textile obtained them and paid for their premiums without informing him thereof. The Insurance Commission
then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the
sum of P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus
the amount of P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is
hereby dismissed.
Its motion for the reconsideration of the decision having been denied by the Insurance Commission in its resolution of
20 August 1993, the private respondent appealed to the Court of Appeals by way of a petition for review. The petition
was docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, the Court of Appeals reversed the decision of the Insurance Commission because
it found that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART
(MR. ARMANDO GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only
the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private respondent, not by the Tesing
Textiles which is alleged to have taken out the other insurance without the knowledge of private
respondent. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both
invoices, Tesing Textiles is indicated to be only the mortgagee of the goods insured but the party to
which they were issued were the "DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who took out the policies on the same
property subject of the insurance with petitioner. Hence, in failing to disclose the existence of these
insurances private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by
his letter to petitioner [of 18 January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision requiring me to inform
your office about my prior insurance under FGA-28146 and F-CEB-24758. Your
representative did not mention about said requirement at the time he was convincing

me to insure with you. If he only die or even inquired if I had other existing policies
covering my establishment, I would have told him so. You will note that at the time he
talked to me until I decided to insure with your company the two policies
aforementioned were already in effect. Therefore I would have no reason to withhold
such information and I would have desisted to part with my hard earned peso to pay
the insurance premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested in protecting my investments. The
actual value of my stocks damaged by the fire was estimated by the Police
Department to be P1,000,000.00 (Please see xerox copy of Police Report Annex "A").
My Income Statement as of December 31, 1989 or five months before the fire, shows
my merchandise inventory was already some P595,455.75. . . . These will support my
claim that the amount claimed under the three policies are much below the value of
my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did not know that there were other
insurances taken on the stock-in-trade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He contends
therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING
INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN
FINALITY BY THE COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED
AS EVIDENCE DURING THE HEARING OR TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE
PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of the
two insurance policies issued by the PFIC when he obtained the fire insurance policy from the private respondent,
thereby, for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded
from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18
January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus should
not have been considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of
this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral
part of the complaint. It has attained the status of a judicial admission and since its due execution and authenticity was
not denied by the other party, the petitioner is bound by it even if it were not introduced as an independent evidence.
As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two
policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in his
letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of
Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under
Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are conclusive and binding
upon this Court.
We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18
January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied upon cannot prevail over a written admission made ante litem
motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or
original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed
twice, the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its
incorporation in the policy is allowed by Section 75 of the Insurance Code which provides that "[a] policy may
declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision
does not avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies and is
intended to prevent an increase in the moral hazard. It is commonly known as the additional or "other insurance"

clause and has been upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the
policy. However, in order to constitute a violation, the other insurance must be upon same subject matter, the same
interest therein, and the same risk.
As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and
both interests may be one policy, or each may take out a separate policy covering his interest, either at the same or at
separate times. The mortgagor's insurable interest covers the full value of the mortgaged property, even though the
mortgage debt is equivalent to the full value of the property. The mortgagee's insurable interest is to the extent of the
debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest
or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt,
not exceeding the value of the mortgaged property. Thus, separate insurances covering different insurable interests may
be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The
mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the
consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage clause;
or a rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or a "standard
mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may be attached; or
the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a
contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the
proceeds.
In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear,
the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to
the contract himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the
mortgagee. This kind of policy covers only such interest as the mortgagee has at the issuing of the policy.
On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an
agreement by which the mortgagor is to pay the premiums upon such insurance. It has been noted, however, that
although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of
his interest, pays the premiums, and obtains on the assurance that it insures him, the policy is in fact in the form used to
insure a mortgagor with loss payable clause.
The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which
reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may
appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety
Corp. vs. Ng Hua or in Pioneer Insurance & Surety Corp. vs. Yap, which read:
The insured shall give notice to the company of any insurance or insurances already effected, or which
may subsequently be effected covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or
on behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy
shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. which provided "that any outstanding
insurance upon the whole or a portion of the objects thereby assured must be declared by the insured in writing
and he must cause the company to add or insert it in the policy, without which such policy shall be null and
void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the private respondent's
policy No. F-14622 does not absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the time of the loss or damage is
not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured
and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was
endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not
favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for
example, by finding a waiver for such forfeiture. Stated differently, provisions, conditions or exceptions in policies
which tend to work a forfeiture of insurance policies should be construed most strictly against those for whose benefits

they are inserted, and most favorably toward those against whom they are intended to operate. The reason for this is
that, except for riders which may later be inserted, the insured sees the contract already in its final form and has had no
voice in the selection or arrangement of the words employed therein. On the other hand, the language of the contract
was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of
the insurers and the technical language employed therein is rarely understood by ordinary laymen.
With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from
ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition
applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of
the total policies obtained.
The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the
property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the
portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-insurer is Mercantile
Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by several
insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a mortgagor
and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC do not cover
the same interest as that covered by the policy of the private respondent, no double insurance exists. The nondisclosure then of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the
time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to
a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind
the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration
of fraud. When a property owner obtains insurance policies from two or more insurers in a total amount that exceeds
the property's value, the insured may have an inducement to destroy the property for the purpose of collecting the
insurance. The public as well as the insurer is interested in preventing a situation in which a fire would be profitable to
the insured.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No.
31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance Corporation.
SO ORDERED.
Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-54216

July 19, 1989

THE PHILIPPINE AMERICAN INSURANCE COMPANY, petitioner,

vs.
HONORABLE GREGORIO G. PINEDA in his capacity as Judge of the Court of First Instance of Rizal, and
RODOLFO C. DIMAYUGA, respondents.
PARAS, J.:
Challenged before Us in this petition for review on certiorari are the Orders of the respondent Judge dated March 19,
1980 and June 10, 1980 granting the prayer in the petition in Sp. Proc. No. 9210 and denying petitioner's Motion for
Reconsideration, respectively.
The undisputed facts are as follows:
On January 15, 1968, private respondent procured an ordinary life insurance policy from the petitioner company and
designated his wife and children as irrevocable beneficiaries of said policy.

Under date February 22, 1980 private respondent filed a petition which was docketed as Civil Case No. 9210 of the
then Court of First Instance of Rizal to amend the designation of the beneficiaries in his life policy from irrevocable to
revocable.
Petitioner, on March 10, 1980 filed an Urgent Motion to Reset Hearing. Also on the same date, petitioner filed its
Comment and/or Opposition to Petition.
When the petition was called for hearing on March 19, 1980, the respondent Judge Gregorio G. Pineda, presiding
Judge of the then Court of First Instance of Rizal, Pasig Branch XXI, denied petitioner's Urgent Motion, thus allowing
the private respondent to adduce evidence, the consequence of which was the issuance of the questioned Order
granting the petition.
Petitioner promptly filed a Motion for Reconsideration but the same was denied in an Order June 10, 1980. Hence, this
petition raising the following issues for resolution:
I
WHETHER OR NOT THE DESIGNATION OF THE IRREVOCABLE BENEFICIARIES COULD
BE CHANGED OR AMENDED WITHOUT THE CONSENT OF ALL THE IRREVOCABLE
BENEFICIARIES.
II
WHETHER OR NOT THE IRREVOCABLE BENEFICIARIES HEREIN, ONE OF WHOM IS
ALREADY DECEASED WHILE THE OTHERS ARE ALL MINORS, COULD VALIDLY GIVE
CONSENT TO THE CHANGE OR AMENDMENT IN THE DESIGNATION OF THE
IRREVOCABLE BENEFICIARIES.
We are of the opinion that his Honor, the respondent Judge, was in error in issuing the questioned Orders.
Needless to say, the applicable law in the instant case is the Insurance Act, otherwise known as Act No. 2427 as
amended, the policy having been procured in 1968. Under the said law, the beneficiary designated in a life insurance
contract cannot be changed without the consent of the beneficiary because he has a vested interest in the policy (Gercio
v. Sun Life Ins. Co. of Canada, 48 Phil. 53; Go v. Redfern and the International Assurance Co., Ltd., 72 Phil. 71).
In this regard, it is worth noting that the Beneficiary Designation Indorsement in the policy which forms part of Policy
Number 0794461 in the name of Rodolfo Cailles Dimayuga states that the designation of the beneficiaries is
irrevocable (Annex "A" of Petition in Sp. Proc. No. 9210, Annex "C" of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that, notwithstanding the provisions of this policy to the contrary,
inasmuch as the designation of the primary/contingent beneficiary/beneficiaries in this Policy has been
made without reserving the right to change said beneficiary/ beneficiaries, such designation may not
be surrendered to the Company, released or assigned; and no right or privilege under the Policy may
be exercised, or agreement made with the Company to any change in or amendment to the Policy,
without the consent of the said beneficiary/beneficiaries. (Petitioner's Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted provision of the contract, not to mention the law then applicable, it is
only with the consent of all the beneficiaries that any change or amendment in the policy concerning the irrevocable
beneficiaries may be legally and validly effected. Both the law and the policy do not provide for any other exception,
thus, abrogating the contention of the private respondent that said designation can be amended if the Court finds a just,
reasonable ground to do so.
Similarly, the alleged acquiescence of the six (6) children beneficiaries of the policy (the beneficiary-wife predeceased
the insured) cannot be considered an effective ratification to the change of the beneficiaries from irrevocable to
revocable. Indubitable is the fact that all the six (6) children named as beneficiaries were minors at the time,** for
which reason, they could not validly give their consent. Neither could they act through their father insured since their

interests are quite divergent from one another. In point is an excerpt from the Notes and Cases on Insurance Law by
Campos and Campos, 1960, readingThe insured ... can do nothing to divest the beneficiary of his rights without his consent. He cannot
assign his policy, nor even take its cash surrender value without the consent of the beneficiary. Neither
can the insured's creditors seize the policy or any right thereunder. The insured may not even add
another beneficiary because by doing so, he diminishes the amount which the beneficiary may recover
and this he cannot do without the beneficiary's consent.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the insurance contract, for
otherwise, the vested rights of the irrevocable beneficiaries would be rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law binding on both of them and
for so many times, this court has consistently issued pronouncements upholding the validity and effectivity of
contracts. Where there is nothing in the contract which is contrary to law, good morals, good customs, public policy or
public order the validity of the contract must be sustained. Likewise, contracts which are the private laws of the
contracting parties should be fulfilled according to the literal sense of their stipulations, if their terms are clear and
leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter in what
form they may be, whenever the essential requisites for their validity are present (Phoenix Assurance Co., Ltd. vs.
United States Lines, 22 SCRA 675, Phil. American General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22.)
In the recent case of Francisco Herrera vs. Petrophil Corporation, 146 SCRA 385, this Court ruled that:
... it is settled that the parties may establish such stipulations, clauses, terms, and conditions as they
may want to include; and as long as such agreements are not contrary to law, good morals, good
customs, public policy or public order, they shall have the force of law between them.
Undeniably, the contract in the case at bar, contains the indispensable elements for its validity and does not in any way
violate the law, morals, customs, orders, etc. leaving no reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not contain a contingency when the change in the designation of
beneficiaries could be validly effected means that it was never within the contemplation of the parties. The lower court,
in gratuitously providing for such contingency, made a new contract for them, a proceeding which we cannot tolerate.
Ergo, We cannot help but conclude that the lower court acted in excess of its authority when it issued the Order dated
March 19, 1980 amending the designation of the beneficiaries from "irrevocable" to "revocable" over the
disapprobation of the petitioner insurance company.
WHEREFORE, premises considered, the questioned Orders of the respondent Judge are hereby nullified and set aside.
SO ORDERED.
Melencio-Herrera (Chairperson), Sarmiento and Regalado, JJ., concur.
Padilla, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22796

June 26, 1967

DELFIN NARIO, and ALEJANDRA SANTOS-NARIO, plaintiffs-appellants,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.

Ricardo T. Bancod and Severino C. Zarasate for plaintiffs-appellants.

M. Lim, M. Y. Macias and Associates for defendant-appellee.
REYES, J.B.L., J.:
Direct appeal, on pure question of law, from a decision of the Court of First Instance of Manila, in its Civil Case No.
54942, dismissing plaintiffs' complaint as well as from a later order of the same court, denying a motion to set aside
and/or reconsider said decision of dismissal.
The facts of this case may be stated briefly as follows:
Mrs. Alejandra Santos-Mario was, upon application, issued, on June 12, 1959, by the Philippine American Life
Insurance Co., a life insurance policy (No. 503617) under a 20-year endowment plan, with a face value of P5,000.00.
She designated thereon her husband, Delfin Nario, and their unemancipated minor son, Ernesto Nario, as her
irrevocable beneficiaries.
About the middle of June, 1963, Mrs. Nario applied for a loan on the above stated policy with the Insurance Company,
which loan she, as policy-holder, has been entitled to avail of under one of the provisions of said policy after the same
has been in force for three (3) years, for the purpose of using the proceeds thereof for the school expenses of her minor
son, Ernesto Nario. Said application bore the written signature and consent of Delfin Nario in two capacities: first, as
one of the irrevocable beneficiaries of the policy; and the other, as the father-guardian of said minor son and
irrevocable beneficiary, Ernesto Nario, and as the legal administrator of the minor's properties, pursuant to Article 320
of the Civil Code of the Philippines.
The Insurance Company denied said application, manifesting to the policy holder that the written consent for the minor
son must not only be given by his father as legal guardian but it must also be authorized by the court in a competent
guardianship proceeding.
After the denial of said policy loan application, Mrs. Nario signified her decision to surrender her policy to the
Insurance Company, which she was also entitled to avail of under one of the provisions of the same policy, and
demanded its cash value which then amounted to P520.00.
The Insurance Company also denied the surrender of the policy, on the same ground as that given in disapproving the
policy loan application; hence, on September 10, 1963, Mrs. Alejandra Santos-Nario and her husband, Delfin Nario,
brought suit against the Philippine American Life Insurance Co. in the above mentioned court of first instance, seeking
to compel the latter (defendant) to grant their policy loan application and/or to accept the surrender of said policy in
exchange for its cash value.1wph1.t
Defendant Insurance Company answered the complaint, virtually admitting its material allegations, but it set up the
affirmative defense that inasmuch as the policy loan application and the surrender of the policy involved acts of
disposition and alienation of the property rights of the minor, said acts are not within the powers of the legal
administrator, under article 320 in relation to article 326 of the Civil Code; hence, mere written consent given by the
father-guardian, for and in behalf of the minor son, without any court authority therefor, was not a sufficient
compliance of the law, and it (defendant Insurance Company) was, therefore, justified in refusing to grant and in
disapproving the proposed transactions in question.
There having been no substantial disagreement or dispute as to any material fact, the parties, upon joint motion which
the lower court granted, dispensed with the presentation of evidence and submitted their respective memoranda, after
which the case was considered submitted for decision.
The lower court found and opined that since the parties expressly stipulated in the endorsement attached to the policy
and which formed part thereof that
It is hereby understood and agreed that, notwithstanding the provisions of this Policy to the contrary, inasmuch
as the designation of the beneficiaries have been made by the Insured without reserving the right to change
said beneficiaries, the Insured may not designate a new beneficiary or assign, release or surrender this Policy
to the Company and exercise any and all other rights and privileges hereunder or agree with the Company to
any change in or amendment to this Policy, without the consent of the beneficiaries originally designated;

that under the above quoted provision, the minor son, as one of the designated irrevocable beneficiaries, "acquired a
vested right to all benefits accruing to the policy, including that of obtaining a policy loan to the extent stated in the
schedule of values attached to the policy (Gercio vs. Sun Life Assurance of Canada, 48 Phil. 53, 58)"; that the
proposed transactions in question (policy loan and surrender of policy) involved acts of disposition or alienation of the
minor's properties for which the consent given by the father-guardian for and in behalf of the minor son, must be with
the requisite court authority (U.S.V.A. vs. Bustos, 92 Phil. 327; Visaya vs. Suguitan, G.R. No. L-8300, November 18,
1955; 99 Phil. 1004 [unrep] and in the case at bar, such consent was given by the father-guardian without any judicial
authority; said court, agreeing with defendant's contention, sustained defendant's affirmative defense, and rendered, on
January 28, 1964, its decision dismissing plaintiffs' complaint.
Unable to secure reconsideration of the trial Court's ruling, petitioner appealed directly to this Court, contending that
the minor's interest amounted to only one-half of the policy's cash surrender value of P520.00; that under Rule 96,
Section 2 of the Revised Rules of Court, payment of the ward's debts is within the powers of the guardian, where no
realty is involved; hence, there is no reason why the father may not validly agree to the proposed transaction on behalf
of the minor without need of court authority.
The appeal is unmeritorious. We agree with the lower court that the vested interest or right of the beneficiaries in the
policy should be measured on its full face value and not on its cash surrender value, for in case of death of the insured,
said beneficiaries are paid on the basis of its face value and in case the insured should discontinue paying premiums,
the beneficiaries may continue paying it and are entitled to automatic extended term or paid-up insurance options, etc.
and that said vested right under the policy cannot be divisible at any given time. We likewise agree with the conclusion
of the lower court that the proposed transactions in question (policy loan and surrender of policy) constitute acts of
disposition or alienation of property rights and not merely of management or administration because they involve the
incurring or termination of contractual obligations.
As above noted, the full face value of the policy is P5,000.00 and the minor's vested interest therein, as one of the two
(2) irrevocable beneficiaries, consists of one-half () of said amount or P2,500.00.
Article 320 of the Civil Code of the Philippines provides
The father, or in his absence the mother, is the legal administrator of the property pertaining to the child under
parental authority. If the property is worth more than two thousand pesos, the father or mother shall give a
bond subject to the approval of the Court of First Instance.
and article 326 of the same Code reads
When the property of the child is worth more than two thousand pesos, the father or mother shall be
considered a guardian of the child's property, subject to the duties and obligations of guardians under the Rules
of Court.
The above quoted provisions of the Civil Code have already been implemented and clarified in our Revised Rules of
Court which provides
SEC. 7. Parents as guardians. When the property of the child under parental authority is worth two
thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be his legal
guardian. When the property of the child is worth more than two thousand pesos, the father or the mother shall
be considered guardian of the child's property, with the duties and obligations of guardians under these rules,
and shall file the petition required by Section 2 hereof. For good reasons the court may, however, appoint
another suitable person. (Rule 93).
It appearing that the minor beneficiary's vested interest or right on the policy exceeds two thousand pesos (P2,000.00);
that plaintiffs did not file any guardianship bond to be approved by the court; and as later implemented in the
abovequoted Section 7, Rule 93 of the Revised Rules of Court, plaintiffs should have, but, had not, filed a formal
application or petition for guardianship, plaintiffs-parents cannot possibly exercise the powers vested on them, as legal
administrators of their child's property, under articles 320 and 326 of the Civil Code. As there was no such petition and
bond, the consent given by the father-guardian, for and in behalf of the minor son, without prior court authorization, to
the policy loan application and the surrender of said policy, was insufficient and ineffective, and defendant-appellee
was justified in disapproving the proposed transactions in question.

The American cases cited by appellants are not applicable to the case at bar for lack of analogy. In those cases, there
were pending guardianship proceedings and the guardians therein were covered by bonds to protect the wards'
interests, which circumstances are wanting in this case.
The result would be the same even if we regarded the interest of the ward to be worth less than P2,000.00. While the
father or mother would in such event be exempt from the duty of filing a bond, and securing judicial appointment, still
the parent's authority over the estate of the ward as a legal-guardian would not extend to acts of encumbrance or
disposition, as distinguished from acts of management or administration. The distinction between one and the other
kind of power is too basic in our law to be ignored. Thus, under Article 1877 of the Civil Code of the Philippines, an
agency in general terms does not include power to encumber or dispose of the property of the principal; and the Code
explicitly requires a special power or authority for the agent "to loan or borrow money, unless the latter act be urgent
or indispensable for the preservation of the thing under administration" (Art. 1878 no. 7). Similarly, special powers are
required to required to effect novations, to waive any obligation gratuitously or obligate the principal as a guarantor or
surety (Do., nos. 2, 4 and 11). By analogy, since the law merely constitutes the parent as legal administrator of the
child's property (which is a general power), the parent requires special authority for the acts above specified, and this
authority can be given only by a court. This restricted interpretation of the parent's authority becomes all the more
necessary where as in the case before us, there is no bond to guarantee the ward against eventual losses.
Appellants seek to bolster their petition by invoking the parental power (patria potestas) under the Civil Code of 1889,
which they claim to have been revived by the Civil Code of the Philippines (Rep. Act 386). The appeal profits them
nothing. For the new Civil Code has not effected a restitutio in integrum of the Spanish patria potestas; the revival has
been only in part. And, significantly, the Civil Code now in force did not reenact Article 164 of the Civil Code of 1889,
that prohibited the alienation by the parents of the real property owned by the child without court authority and led the
commentators and interpreters of said Code to infer that the parents could by themselves alienate the child's movable
property. The omission of any equivalent precept in the Civil Code now in force proves the absence of any authority in
the parents to carry out now acts of disposition or alienation of the child's goods without court approval, as contended
by the appellee and the court below.
Wherefore, the decision appealed from is affirmed. Costs against appellants Nario. So ordered.
Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Regala, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 105135

June 22, 1995

SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,

vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, respondents.
QUIASON, J.:
This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the
Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April
22, 1992, denying reconsideration thereof.
We grant the petition.
I

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was issued
Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The designated
beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking
the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings prompted it
to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts relevant to
the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total premiums
paid in the amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when he answered the following questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital or other medical facility?
6. Have you ever had or sought advice for:
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a certain Dr.
Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The other
questions were answered in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at
the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased
was subjected to urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an action for
specific performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list of exhibits consisting of medical records furnished by the Lung
Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment" where
they manifested that they "have no evidence to refute the documentary evidence of concealment/misrepresentation by
the decedent of his health condition (Rollo, p. 62).
Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents as well
as allegations regarding the health of the insured. Private respondents failed to oppose said request or reply thereto,
thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The
dispositive portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant,
condemning the latter to pay the former the amount of One Hundred Thousand Pesos (P100,000.00)
the face value of insured's Insurance Policy No. 3903766, and the Accidental Death Benefit in the
amount of One Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the concept
of reasonable attorney's fees and costs of suit.
Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in good
faith and under a belief that they need not be disclosed. Moreover, it held that the health history of the insured was
immaterial since the insurance policy was "non-medical".

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court ruled
that petitioner cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the
facts concealed by the insured. It also sustained the finding of the trial court that matters relating to the health history
of the insured were irrelevant since petitioner waived the medical examination prior to the approval and issuance of the
insurance policy. Moreover, the appellate court agreed with the trial court that the policy was "non-medical" ( Rollo, pp.
4-5).
Petitioner's motion for reconsideration was denied; hence, this petition.
II
We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate court are binding on this Court is not absolute and
admits of exceptions, such as when the judgment is based on a misappreciation of the facts (Geronimo v. Court of
Appeals, 224 SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded that indeed there was concealment and misrepresentation,
however, the same was made in "good faith" and the facts concealed or misrepresented were irrelevant since the policy
was "non-medical". We disagree.
Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the other,
in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty,
and which the other has no means of ascertaining. Said Section provides:
A neglect to communicate that which a party knows and ought to communicate, is called concealment.
Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon
the party to whom communication is due, in forming his estimate of the disadvantages of the proposed contract or in
making his inquiries (The Insurance Code, Sec. 31).
The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his
health.
The information which the insured failed to disclose were material and relevant to the approval and issuance of the
insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either by
approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure
may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk
involved in accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld
does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which
ensue.
Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized for
two weeks prior to filing his application for insurance, raises grave doubts about his bonafides. It appears that such
concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts
concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA
316 (1963), that " . . . the waiver of a medical examination [in a non-medical insurance contract] renders even more
material the information required of the applicant concerning previous condition of health and diseases suffered, for
such information necessarily constitutes an important factor which the insurer takes into consideration in deciding
whether to issue the policy or not . . . "
Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows the
injured party to rescind a contract of insurance where there is concealment, ineffective (See Vda. de Canilang v. Court
of Appeals, supra).

Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that the
insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure misled
the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries (Henson v. The
Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of the
concealment employed by the insured. It must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.
SO ORDERED.
Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 150094

August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner,

vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.
DECISION
PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff must give the
carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention and/or the airway bill.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision and the
September 21, 2001 Resolution of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision
disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The
appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 95-1219,
entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS
CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED and
REITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]."
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to
Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of
109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French Overseas Company
in Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825 with the
words, 'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face. That same
day, Burlington insured the cargoes in the amount of $39,339.00 with American Home Assurance Company
(AHAC). The following day, Burlington turned over the custody of said cargoes to Federal Express which

transported the same to Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29,
1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus Inc.'s] warehouse. While the
second, consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 007130NRT which was likewise immediately stored at Cargohaus' warehouse. Prior to the arrival of the cargoes,
Federal Express informed GETC Cargo International Corporation, the customs broker hired by the consignee
to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its client's
cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the cargoes arrived in
Manila, a non-licensed custom's broker who was assigned by GETC to facilitate the release of the subject
cargoes, found out, while he was about to cause the release of the said cargoes, that the same [were] stored
only in a room with two (2) air conditioners running, to cool the place instead of a refrigerator. When he asked
an employee of Cargohaus why the cargoes were stored in the 'cool room' only, the latter told him that the
cartons where the vaccines were contained specifically indicated therein that it should not be subjected to hot
or cold temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed with the
withdrawal of the vaccines and instead, samples of the same were taken and brought to the Bureau of Animal
Industry of the Department of Agriculture in the Philippines by SMITHKLINE for examination wherein it was
discovered that the 'ELISA reading of vaccinates sera are below the positive reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the
shipment and, declaring 'total loss' for the unusable shipment, filed a claim with AHAC through its
representative in the Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY
NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the [petitioner]
imputing negligence on either or both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily liable for
the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its CoDefendant Cargohaus] are directed to pay [respondents], jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from
the time of the filing of the complaint to the time the same is fully paid.
2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]."
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection Service)
was found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held that the shipping
Receipts were a prima facie proof that the goods had indeed been delivered to the carrier in good condition. We quote
from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the carrier
in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in a damaged condition,
a presumption is raised that the damage occurred through the fault or negligence of the carrier, and this casts
upon the carrier the burden of showing that the goods were not in good condition when delivered to the carrier,
or that the damage was occasioned by some cause excepting the carrier from absolute liability. This the
[petitioner] failed to discharge. x x x."
Found devoid of merit was petitioner's claim that respondents had no personality to sue. This argument was supposedly
not raised in the Answer or during trial.
Hence, this Petition.
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.

Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the Honorable
Court under Rule 45 of the 1997 Rules of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals petitioner's claim that respondents have no personality
to sue because the payment was made by the respondents to Smithkline when the insured under the policy is
Burlington Air Express is devoid of merit correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition, correct or
not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own admission that
petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?"
Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2) Is Federal
Express liable for damage to or loss of the insured goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of law
cognizable by the Supreme Court.
In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the conclusions drawn
from such facts. Hence, this case is a proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -- because the
payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance ("Certificate") that both opposing parties cite in support of their
respective positions. They differ only in their interpretation of what their rights are under its terms. The determination
of those rights involves a question of law, not a question of fact. "As distinguished from a question of law which exists
'when the doubt or difference arises as to what the law is on a certain state of facts' -- 'there is a question of fact when
the doubt or difference arises as to the truth or the falsehood of alleged facts'; or when the 'query necessarily invites
calibration of the whole evidence considering mainly the credibility of witnesses, existence and relevancy of specific
surrounding circumstance, their relation to each other and to the whole and the probabilities of the situation.'"
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x upon surrender of this
Certificate." Such wording conveys the right of collecting on any such damage or loss, as fully as if the property were
covered by a special policy in the name of the holder itself. At the back of the Certificate appears the signature of the
representative of Burlington. This document has thus been duly indorsed in blank and is deemed a bearer instrument.

Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified
for loss of or damage to the insured shipment, as fully as if the property were covered by a special policy in the name
of the holder. Hence, being the holder of the Certificate and having an insurable interest in the goods, Smithkline was
the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt in favor of
respondents. The latter were thus authorized "to file claims and begin suit against any such carrier, vessel, person,
corporation or government." Undeniably, the consignee had a legal right to receive the goods in the same condition it
was delivered for transport to petitioner. If that right was violated, the consignee would have a cause of action against
the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurer's
entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a cause of action in case of a
contractual breach or negligence. "Further, the insurer's subrogatory right to sue for recovery under the bill of lading in
case of loss of or damage to the cargo is jurisprudentially upheld."
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes, it
stands in the place and in substitution of the consignee. A fortiori, both the insurer and the consignee are bound by the
contractual stipulations under the bill of lading.
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents'
claim and right of action are already barred. The latter, and even the consignee, never filed with the carrier any written
notice or complaint regarding its claim for damage of or loss to the subject cargo within the period required by the
Warsaw Convention and/or in the airway bill. Indeed, this fact has never been denied by respondents and is plainly
evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a written
notice, sufficiently describing the goods concerned, the approximate date of the damage or loss, and the details
of the claim, is presented by shipper or consignee to an office of Burlington within (14) days from the date the
goods are placed at the disposal of the person entitled to delivery, or in the case of total loss (including nondelivery) unless presented within (120) days from the date of issue of the [Airway Bill]."
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within
fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the issue of
the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was used, or to
the first carrier or to the last carrier or to the carrier who performed the transportation during which the loss,
damage or delay took place."
Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint shall be
prima facie evidence that the same have been delivered in good condition and in accordance with the
document of transportation.
(2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery
of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage and 7 days from
the date of receipt in the case of goods. In case of delay the complaint must be made at the latest within 14
days from the date on which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or by separate notice in
writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the case of fraud
on his part."

Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually constitutes a
condition precedent to the accrual of a right of action against a carrier for loss of or damage to the goods. The shipper
or consignee must allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the
carrier can accrue in favor of the former. The aforementioned requirement is a reasonable condition precedent; it does
not constitute a limitation of action.
The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons
for such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being charged with
liability therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. "This protects the
carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent claims."
When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a notice of claim for
loss of or damage to goods shipped and the stipulation is not complied with, its enforcement can be prevented and the
liability cannot be imposed on the carrier. To stress, notice is a condition precedent, and the carrier is not liable if
notice is not given in accordance with the stipulation. Failure to comply with such a stipulation bars recovery for the
loss or damage suffered.
Being a condition precedent, the notice must precede a suit for enforcement. In the present case, there is neither an
allegation nor a showing of respondents' compliance with this requirement within the prescribed period. While
respondents may have had a cause of action then, they cannot now enforce it for their failure to comply with the
aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in respondents'
Complaint below -- has been adjudged by the trial court as liable for, inter alia, "actual damages in the amount of the
peso equivalent of US $39,339." This judgment was affirmed by the Court of Appeals and is already final and
executory.
WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to Petitioner
Federal Express Corporation. No pronouncement as to costs.
SO ORDERED.
Corona, and Carpio-Morales, JJ., concur.
Sandoval-Gutierrez, J., on leave.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 138060

September 1, 2004

WILLIAM TIU, doing business under the name and style of "D Rough Riders," and VIRGILIO TE LAS
PIAS petitioners,
vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC., respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision of the Court of
Appeals in CA-G.R. CV No. 54354 affirming with modification the Decision of the Regional Trial Court, 7th Judicial
Region, Cebu City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of carriage, damages and attorneys
fees, and the Resolution dated February 26, 1999 denying the motion for reconsideration thereof.

The following facts are undisputed:

At about 10:00 p.m. of March 15, 1987, the cargo truck marked "Condor Hollow Blocks and General
Merchandise" bearing plate number GBP-675 was loaded with firewood in Bogo, Cebu and left for Cebu City.
Upon reaching Sitio Aggies, Poblacion, Compostela, Cebu, just as the truck passed over a bridge, one of its
rear tires exploded. The driver, Sergio Pedrano, then parked along the right side of the national highway and
removed the damaged tire to have it vulcanized at a nearby shop, about 700 meters away. Pedrano left his
helper, Jose Mitante, Jr. to keep watch over the stalled vehicle, and instructed the latter to place a spare tire six
fathoms away behind the stalled truck to serve as a warning for oncoming vehicles. The trucks tail lights were
also left on. It was about 12:00 a.m., March 16, 1987.
At about 4:45 a.m., D Rough Riders passenger bus with plate number PBP-724 driven by Virgilio Te Laspias was
cruising along the national highway of Sitio Aggies, Poblacion, Compostela, Cebu. The passenger bus was also bound
for Cebu City, and had come from Maya, Daanbantayan, Cebu. Among its passengers were the Spouses Pedro A.
Arriesgado and Felisa Pepito Arriesgado, who were seated at the right side of the bus, about three (3) or four (4) places
from the front seat.
As the bus was approaching the bridge, Laspias saw the stalled truck, which was then about 25 meters away. He
applied the breaks and tried to swerve to the left to avoid hitting the truck. But it was too late; the bus rammed into the
trucks left rear. The impact damaged the right side of the bus and left several passengers injured. Pedro Arriesgado
lost consciousness and suffered a fracture in his right colles. His wife, Felisa, was brought to the Danao City Hospital.
She was later transferred to the Southern Island Medical Center where she died shortly thereafter.
Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of carriage, damages and attorneys fees
before the Regional Trial Court of Cebu City, Branch 20, against the petitioners, D Rough Riders bus operator William
Tiu and his driver, Virgilio Te Laspias on May 27, 1987. The respondent alleged that the passenger bus in question
was cruising at a fast and high speed along the national road, and that petitioner Laspias did not take precautionary
measures to avoid the accident. Thus:
6. That the accident resulted to the death of the plaintiffs wife, Felisa Pepito Arriesgado, as evidenced by a
Certificate of Death, a xerox copy of which is hereto attached as integral part hereof and marked as ANNEX
"A", and physical injuries to several of its passengers, including plaintiff himself who suffered a "COLLES
FRACTURE RIGHT," per Medical Certificate, a xerox copy of which is hereto attached as integral part hereof
and marked as ANNEX "B" hereof.
7. That due to the reckless and imprudent driving by defendant Virgilio Te Laspias of the said Rough Riders
passenger bus, plaintiff and his wife, Felisa Pepito Arriesgado, failed to safely reach their destination which
was Cebu City, the proximate cause of which was defendant-drivers failure to observe utmost diligence
required of a very cautious person under all circumstances.
8. That defendant William Tiu, being the owner and operator of the said Rough Riders passenger bus which
figured in the said accident, wherein plaintiff and his wife were riding at the time of the accident, is therefore
directly liable for the breach of contract of carriage for his failure to transport plaintiff and his wife safely to
their place of destination which was Cebu City, and which failure in his obligation to transport safely his
passengers was due to and in consequence of his failure to exercise the diligence of a good father of the family
in the selection and supervision of his employees, particularly defendant-driver Virgilio Te Laspias.
The respondent prayed that judgment be rendered in his favor and that the petitioners be condemned to pay the
following damages:
1). To pay to plaintiff, jointly and severally, the amount of P30,000.00 for the death and untimely demise of
plaintiffs wife, Felisa Pepito Arriesgado;
2). To pay to plaintiff, jointly and severally, the amount of P38,441.50, representing actual expenses incurred
by the plaintiff in connection with the death/burial of plaintiffs wife;
3). To pay to plaintiff, jointly and severally, the amount of P1,113.80, representing medical/hospitalization
expenses incurred by plaintiff for the injuries sustained by him;
4). To pay to plaintiff, jointly and severally, the amount of P50,000.00 for moral damages;
5). To pay to plaintiff, jointly and severally, the amount of P50,000.00 by way of exemplary damages;
6). To pay to plaintiff, jointly and severally, the amount of P20,000.00 for attorneys fees;
7). To pay to plaintiff, jointly and severally, the amount of P5,000.00 for litigation expenses.
PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES IN LAW AND EQUITY.
The petitioners, for their part, filed a Third-Party Complaint on August 21, 1987 against the following: respondent
Philippine Phoenix Surety and Insurance, Inc. (PPSII), petitioner Tius insurer; respondent Benjamin Condor, the

registered owner of the cargo truck; and respondent Sergio Pedrano, the driver of the truck. They alleged that petitioner
Laspias was negotiating the uphill climb along the national highway of Sitio Aggies, Poblacion, Compostela, in a
moderate and normal speed. It was further alleged that the truck was parked in a slanted manner, its rear portion almost
in the middle of the highway, and that no early warning device was displayed. Petitioner Laspias promptly applied the
brakes and swerved to the left to avoid hitting the truck head-on, but despite his efforts to avoid damage to property
and physical injuries on the passengers, the right side portion of the bus hit the cargo trucks left rear. The petitioners
further alleged, thus:
5. That the cargo truck mentioned in the aforequoted paragraph is owned and registered in the name of the
third-party defendant Benjamin Condor and was left unattended by its driver Sergio Pedrano, one of the thirdparty defendants, at the time of the incident;
6. That third-party defendant Sergio Pedrano, as driver of the cargo truck with marked (sic) "Condor Hollow
Blocks & General Merchandise," with Plate No. GBP-675 which was recklessly and imprudently parked along
the national highway of Compostela, Cebu during the vehicular accident in question, and third-party defendant
Benjamin Condor, as the registered owner of the cargo truck who failed to exercise due diligence in the
selection and supervision of third-party defendant Sergio Pedrano, are jointly and severally liable to the thirdparty plaintiffs for whatever liability that may be adjudged against said third-party plaintiffs or are directly
liable of (sic) the alleged death of plaintiffs wife;
7. That in addition to all that are stated above and in the answer which are intended to show reckless
imprudence on the part of the third-party defendants, the third-party plaintiffs hereby declare that during the
vehicular accident in question, third-party defendant was clearly violating Section 34, par. (g) of the Land
Transportation and Traffic Code

10. That the aforesaid passenger bus, owned and operated by third-party plaintiff William Tiu, is covered by a
common carrier liability insurance with Certificate of Cover No. 054940 issued by Philippine Phoenix Surety
and Insurance, Inc., Cebu City Branch, in favor of third-party plaintiff William Tiu which covers the period
from July 22, 1986 to July 22, 1987 and that the said insurance coverage was valid, binding and subsisting
during the time of the aforementioned incident (Annex "A" as part hereof);
11. That after the aforesaid alleged incident, third-party plaintiff notified third-party defendant Philippine
Phoenix Surety and Insurance, Inc., of the alleged incident hereto mentioned, but to no avail;
12. That granting, et arguendo et arguendi, if herein third-party plaintiffs will be adversely adjudged, they
stand to pay damages sought by the plaintiff and therefore could also look up to the Philippine Phoenix Surety
and Insurance, Inc., for contribution, indemnification and/or reimbursement of any liability or obligation that
they might [be] adjudged per insurance coverage duly entered into by and between third-party plaintiff
William Tiu and third-party defendant Philippine Phoenix Surety and Insurance, Inc.;
The respondent PPSII, for its part, admitted that it had an existing contract with petitioner Tiu, but averred that it had
already attended to and settled the claims of those who were injured during the incident. It could not accede to the
claim of respondent Arriesgado, as such claim was way beyond the scheduled indemnity as contained in the contract of
insurance.
After the parties presented their respective evidence, the trial court ruled in favor of respondent Arriesgado. The
dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff as against defendant
William Tiu ordering the latter to pay the plaintiff the following amounts:
1 - The sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
2 - The sum of FIFTY THOUSAND PESOS (P50,000.00) as exemplary damages;
3 - The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-ONE PESOS (P38,441.00)
as actual damages;
4 - The sum of TWENTY THOUSAND PESOS (P20,000.00) as attorneys fees;
5 - The sum of FIVE THOUSAND PESOS (P5,000.00) as costs of suit;
SO ORDERED.
According to the trial court, there was no dispute that petitioner William Tiu was engaged in business as a common
carrier, in view of his admission that D Rough Rider passenger bus which figured in the accident was owned by him;
that he had been engaged in the transportation business for 25 years with a sole proprietorship; and that he owned 34

buses. The trial court ruled that if petitioner Laspias had not been driving at a fast pace, he could have easily swerved
to the left to avoid hitting the truck, thus, averting the unfortunate incident. It then concluded that petitioner Laspias
was negligent.
The trial court also ruled that the absence of an early warning device near the place where the truck was parked was
not sufficient to impute negligence on the part of respondent Pedrano, since the tail lights of the truck were fully on,
and the vicinity was well lighted by street lamps. It also found that the testimony of petitioner Tiu, that he based the
selection of his driver Laspias on efficiency and in-service training, and that the latter had been so far an efficient and
good driver for the past six years of his employment, was insufficient to prove that he observed the diligence of a good
father of a family in the selection and supervision of his employees.
After the petitioners motion for reconsideration of the said decision was denied, the petitioners elevated the case to the
Court of Appeals on the following issues:
I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS RECKLESS AND IMPRUDENT
WHEN HE PARKED THE CARGO TRUCK IN AN OBLIQUE MANNER;
II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND SEVERALLY LIABLE
DIRECTLY TO PLAINTIFF-APPELLEE OR TO DEFENDANTS-APPELLANTS FOR WHATEVER
LIABILITY THAT MAY BE ADJUDGED TO THE SAID DEFENDANTS-APPELLANTS;
III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIAS WAS GUILTY OF GROSS
NEGLIGENCE;
IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD EXERCISED THE DUE DILIGENCE
OF A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF HIS DRIVERS;
V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-APPELLANT WILLIAM TIU IS
LIABLE TO PLAINTIFF-APPELLEE, WHETHER THERE IS LEGAL AND FACTUAL BASIS IN
AWARDING EXCESSIVE MORAL DAMAGES, EX[E]MPLARY DAMAGES, ATTORNEYS FEES AND
LITIGATION EXPENSES TO PLAINTIFF-APPELLEE;
VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX SURETY AND INSURANCE, INC.
IS LIABLE TO DEFENDANT- APPELLANT WILLIAM TIU.
The appellate court rendered judgment affirming the trial courts decision with the modification that the awards for
moral and exemplary damages were reduced to P25,000. The dispositive portion reads:
WHEREFORE, the appealed Decision dated November 6, 1995 is hereby MODIFIED such that the awards for
moral and exemplary damages are each reduced to P25,000.00 or a total of P50,000.00 for both. The judgment
is AFFIRMED in all other respects.
SO ORDERED.
According to the appellate court, the action of respondent Arriesgado was based not on quasi-delict but on breach of
contract of carriage. As a common carrier, it was incumbent upon petitioner Tiu to prove that extraordinary diligence
was observed in ensuring the safety of passengers during transportation. Since the latter failed to do so, he should be
held liable for respondent Arriesgados claim. The CA also ruled that no evidence was presented against the respondent
PPSII, and as such, it could not be held liable for respondent Arriesgados claim, nor for contribution, indemnification
and/or reimbursement in case the petitioners were adjudged liable.
The petitioners now come to this Court and ascribe the following errors committed by the appellate court:
I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING RESPONDENTS
BENJAMIN CONDOR AND SERGIO PEDRANO GUILTY OF NEGLIGENCE AND HENCE, LIABLE TO
RESPONDENT PEDRO A. ARRIESGADO OR TO PETITIONERS FOR WHATEVER LIABILITY THAT
MAY BE ADJUDGED AGAINST THEM.
II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS GUILTY OF
NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A. ARRIESGADO.
III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONER WILLIAM TIU
LIABLE FOR EXEMPLARY DAMAGES, ATTORNEYS FEES AND LITIGATION EXPENSES.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC. LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR
TO PETITIONER WILLIAM TIU.
According to the petitioners, the appellate court erred in failing to appreciate the absence of an early warning device
and/or built-in reflectors at the front and back of the cargo truck, in clear violation of Section 34, par. (g) of the Land
Transportation and Traffic Code. They aver that such violation is only a proof of respondent Pedranos negligence, as
provided under Article 2185 of the New Civil Code. They also question the appellate courts failure to take into
account that the truck was parked in an oblique manner, its rear portion almost at the center of the road. As such, the
proximate cause of the incident was the gross recklessness and imprudence of respondent Pedrano, creating the
presumption of negligence on the part of respondent Condor in supervising his employees, which presumption was not
rebutted. The petitioners then contend that respondents Condor and Pedrano should be held jointly and severally liable
to respondent Arriesgado for the payment of the latters claim.
The petitioners, likewise, aver that expert evidence should have been presented to prove that petitioner Laspias was
driving at a very fast speed, and that the CA could not reach such conclusion by merely considering the damages on the
cargo truck. It was also pointed out that petitioner Tiu presented evidence that he had exercised the diligence of a good
father of a family in the selection and supervision of his drivers.
The petitioners further allege that there is no legal and factual basis to require petitioner Tiu to pay exemplary damages
as no evidence was presented to show that the latter acted in a fraudulent, reckless and oppressive manner, or that he
had an active participation in the negligent act of petitioner Laspias.
Finally, the petitioners contend that respondent PPSII admitted in its answer that while it had attended to and settled
the claims of the other injured passengers, respondent Arriesgados claim remained unsettled as it was beyond the
scheduled indemnity under the insurance contract. The petitioners argue that said respondent PPSII should have settled
the said claim in accordance with the scheduled indemnity instead of just denying the same.
On the other hand, respondent Arriesgado argues that two of the issues raised by the petitioners involved questions of
fact, not reviewable by the Supreme Court: the finding of negligence on the part of the petitioners and their liability to
him; and the award of exemplary damages, attorneys fees and litigation expenses in his favor. Invoking the principle
of equity and justice, respondent Arriesgado pointed out that if there was an error to be reviewed in the CA decision, it
should be geared towards the restoration of the moral and exemplary damages to P50,000 each, or a total of P100,000
which was reduced by the Court of Appeals to P25,000 each, or a total of only P50,000.
Respondent Arriesgado also alleged that respondents Condor and Pedrano, and respondent Phoenix Surety, are parties
with whom he had no contract of carriage, and had no cause of action against. It was pointed out that only the
petitioners needed to be sued, as driver and operator of the ill-fated bus, on account of their failure to bring the
Arriesgado Spouses to their place of destination as agreed upon in the contract of carriage, using the utmost diligence
of very cautious persons with due regard for all circumstances.
Respondents Condor and Pedrano point out that, as correctly ruled by the Court of Appeals, the proximate cause of the
unfortunate incident was the fast speed at which petitioner Laspias was driving the bus owned by petitioner Tiu.
According to the respondents, the allegation that the truck was not equipped with an early warning device could not in
any way have prevented the incident from happening. It was also pointed out that respondent Condor had always
exercised the due diligence required in the selection and supervision of his employees, and that he was not a party to
the contract of carriage between the petitioners and respondent Arriesgado.
Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu, it settled all the claims of those
injured in accordance with the insurance contract. It further avers that it did not deny respondent Arriesgados claim,
and emphasizes that its liability should be within the scheduled limits of indemnity under the said contract. The
respondent concludes that while it is true that insurance contracts are contracts of indemnity, the measure of the
insurers liability is determined by the insureds compliance with the terms thereof.
The Courts Ruling
At the outset, it must be stressed that this Court is not a trier of facts. Factual findings of the Court of Appeals are final
and may not be reviewed on appeal by this Court, except when the lower court and the CA arrived at diverse factual
findings. The petitioners in this case assail the finding of both the trial and the appellate courts that petitioner Laspias
was driving at a very fast speed before the bus owned by petitioner Tiu collided with respondent Condors stalled
truck. This is clearly one of fact, not reviewable by the Court in a petition for review under Rule 45.
On this ground alone, the petition is destined to fail.

However, considering that novel questions of law are likewise involved, the Court resolves to examine and rule on the
merits of the case.
Petitioner Laspias was negligent in driving the Ill-fated bus
In his testimony before the trial court, petitioner Laspias claimed that he was traversing the two-lane road at
Compostela, Cebu at a speed of only forty (40) to fifty (50) kilometers per hour before the incident occurred. He also
admitted that he saw the truck which was parked in an "oblique position" at about 25 meters before impact, and tried to
avoid hitting it by swerving to the left. However, even in the absence of expert evidence, the damage sustained by the
truckitself supports the finding of both the trial court and the appellate court, that the D Rough Rider bus driven by
petitioner Laspias was traveling at a fast pace. Since he saw the stalled truck at a distance of 25 meters, petitioner
Laspias had more than enough time to swerve to his left to avoid hitting it; that is, if the speed of the bus was only 40
to 50 kilometers per hour as he claimed. As found by the Court of Appeals, it is easier to believe that petitioner
Laspias was driving at a very fast speed, since at 4:45 a.m., the hour of the accident, there were no oncoming vehicles
at the opposite direction. Petitioner Laspias could have swerved to the left lane with proper clearance, and, thus, could
have avoided the truck. Instinct, at the very least, would have prompted him to apply the breaks to avert the impending
disaster which he must have foreseen when he caught sight of the stalled truck. As we had occasion to reiterate:
A man must use common sense, and exercise due reflection in all his acts; it is his duty to be cautious, careful
and prudent, if not from instinct, then through fear of recurring punishment. He is responsible for such results
as anyone might foresee and for acts which no one would have performed except through culpable abandon.
Otherwise, his own person, rights and property, and those of his fellow beings, would ever be exposed to all
manner of danger and injury.
We agree with the following findings of the trial court, which were affirmed by the CA on appeal:
A close study and evaluation of the testimonies and the documentary proofs submitted by the parties which
have direct bearing on the issue of negligence, this Court as shown by preponderance of evidence that
defendant Virgilio Te Laspias failed to observe extraordinary diligence as a driver of the common carrier in
this case. It is quite hard to accept his version of the incident that he did not see at a reasonable distance ahead
the cargo truck that was parked when the Rough Rider [Bus] just came out of the bridge which is on an (sic)
[more] elevated position than the place where the cargo truck was parked. With its headlights fully on,
defendant driver of the Rough Rider was in a vantage position to see the cargo truck ahead which was parked
and he could just easily have avoided hitting and bumping the same by maneuvering to the left without hitting
the said cargo truck. Besides, it is (sic) shown that there was still much room or space for the Rough Rider to
pass at the left lane of the said national highway even if the cargo truck had occupied the entire right lane
thereof. It is not true that if the Rough Rider would proceed to pass through the left lane it would fall into a
canal considering that there was much space for it to pass without hitting and bumping the cargo truck at the
left lane of said national highway. The records, further, showed that there was no incoming vehicle at the
opposite lane of the national highway which would have prevented the Rough Rider from not swerving to its
left in order to avoid hitting and bumping the parked cargo truck. But the evidence showed that the Rough
Rider instead of swerving to the still spacious left lane of the national highway plowed directly into the parked
cargo truck hitting the latter at its rear portion; and thus, the (sic) causing damages not only to herein plaintiff
but to the cargo truck as well.
Indeed, petitioner Laspias negligence in driving the bus is apparent in the records. By his own admission, he had just
passed a bridge and was traversing the highway of Compostela, Cebu at a speed of 40 to 50 kilometers per hour before
the collision occurred. The maximum speed allowed by law on a bridge is only 30 kilometers per hour. And, as
correctly pointed out by the trial court, petitioner Laspias also violated Section 35 of the Land Transportation and
Traffic Code, Republic Act No. 4136, as amended:1avvphil.net
Sec. 35. Restriction as to speed. (a) Any person driving a motor vehicle on a highway shall drive the same at
a careful and prudent speed, not greater nor less than is reasonable and proper, having due regard for the
traffic, the width of the highway, and or any other condition then and there existing; and no person shall drive
any motor vehicle upon a highway at such speed as to endanger the life, limb and property of any person, nor
at a speed greater than will permit him to bring the vehicle to a stop within the assured clear distance ahead.
Under Article 2185 of the Civil Code, a person driving a vehicle is presumed negligent if at the time of the mishap, he
was violating any traffic regulation.
Petitioner Tiu failed to overcome the presumption of negligence against him as one engaged in the business of
common carriage
The rules which common carriers should observe as to the safety of their passengers are set forth in the Civil Code,
Articles 1733, 1755 and 1756. In this case, respondent Arriesgado and his deceased wife contracted with petitioner Tiu,
as owner and operator of D Rough Riders bus service, for transportation from Maya, Daanbantayan, Cebu, to Cebu

City for the price of P18.00. It is undisputed that the respondent and his wife were not safely transported to the
destination agreed upon. In actions for breach of contract, only the existence of such contract, and the fact that the
obligor, in this case the common carrier, failed to transport his passenger safely to his destination are the matters that
need to be proved. This is because under the said contract of carriage, the petitioners assumed the express obligation to
transport the respondent and his wife to their destination safely and to observe extraordinary diligence with due regard
for all circumstances. Any injury suffered by the passengers in the course thereof is immediately attributable to the
negligence of the carrier. Upon the happening of the accident, the presumption of negligence at once arises, and it
becomes the duty of a common carrier to prove that he observed extraordinary diligence in the care of his passengers.
It must be stressed that in requiring the highest possible degree of diligence from common carriers and in creating a
presumption of negligence against them, the law compels them to curb the recklessness of their drivers.
While evidence may be submitted to overcome such presumption of negligence, it must be shown that the carrier
observed the required extraordinary diligence, which means that the carrier must show the utmost diligence of very
cautious persons as far as human care and foresight can provide, or that the accident was caused by fortuitous event. As
correctly found by the trial court, petitioner Tiu failed to conclusively rebut such presumption. The negligence of
petitioner Laspias as driver of the passenger bus is, thus, binding against petitioner Tiu, as the owner of the passenger
bus engaged as a common carrier.
The Doctrine of Last Clear Chance Is Inapplicable in the Case at Bar
Contrary to the petitioners contention, the principle of last clear chance is inapplicable in the instant case, as it only
applies in a suit between the owners and drivers of two colliding vehicles. It does not arise where a passenger demands
responsibility from the carrier to enforce its contractual obligations, for it would be inequitable to exempt the negligent
driver and its owner on the ground that the other driver was likewise guilty of negligence. The common law notion of
last clear chance permitted courts to grant recovery to a plaintiff who has also been negligent provided that the
defendant had the last clear chance to avoid the casualty and failed to do so. Accordingly, it is difficult to see what role,
if any, the common law of last clear chance doctrine has to play in a jurisdiction where the common law concept of
contributory negligence as an absolute bar to recovery by the plaintiff, has itself been rejected, as it has been in Article
2179 of the Civil Code.
Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgados wife due to the negligence of
petitioner Laspias, his employee, on this score.
Respondents Pedrano and Condor were likewise Negligent
In Phoenix Construction, Inc. v. Intermediate Appellate Court, where therein respondent Dionisio sustained injuries
when his vehicle rammed against a dump truck parked askew, the Court ruled that the improper parking of a dump
truck without any warning lights or reflector devices created an unreasonable risk for anyone driving within the
vicinity, and for having created such risk, the truck driver must be held responsible. In ruling against the petitioner
therein, the Court elucidated, thus:
In our view, Dionisios negligence, although later in point of time than the truck drivers negligence, and
therefore closer to the accident, was not an efficient intervening or independent cause. What the petitioners
describe as an "intervening cause" was no more than a foreseeable consequence of the risk created by the
negligent manner in which the truck driver had parked the dump truck. In other words, the petitioner truck
driver owed a duty to private respondent Dionisio and others similarly situated not to impose upon them the
very risk the truck driver had created. Dionisios negligence was not that of an independent and overpowering
nature as to cut, as it were, the chain of causation in fact between the improper parking of the dump truck and
the accident, nor to sever the juris vinculum of liability.

We hold that private respondent Dionisios negligence was "only contributory," that the "immediate and
proximate cause" of the injury remained the truck drivers "lack of due care."
In this case, both the trial and the appellate courts failed to consider that respondent Pedrano was also negligent in
leaving the truck parked askew without any warning lights or reflector devices to alert oncoming vehicles, and that
such failure created the presumption of negligence on the part of his employer, respondent Condor, in supervising his
employees properly and adequately. As we ruled in Poblete v. Fabros:
It is such a firmly established principle, as to have virtually formed part of the law itself, that the negligence of
the employee gives rise to the presumption of negligence on the part of the employer. This is the presumed
negligence in the selection and supervision of employee. The theory of presumed negligence, in contrast with
the American doctrine of respondeat superior, where the negligence of the employee is conclusively presumed
to be the negligence of the employer, is clearly deducible from the last paragraph of Article 2180 of the Civil

Code which provides that the responsibility therein mentioned shall cease if the employers prove that they
observed all the diligence of a good father of a family to prevent damages.
The petitioners were correct in invoking respondent Pedranos failure to observe Article IV, Section 34(g) of the Rep.
Act No. 4136, which provides:1avvphil.net
(g) Lights when parked or disabled. Appropriate parking lights or flares visible one hundred meters away
shall be displayed at a corner of the vehicle whenever such vehicle is parked on highways or in places that are
not well-lighted or is placed in such manner as to endanger passing traffic.
The manner in which the truck was parked clearly endangered oncoming traffic on both sides, considering that the tire
blowout which stalled the truck in the first place occurred in the wee hours of the morning. The Court can only now
surmise that the unfortunate incident could have been averted had respondent Condor, the owner of the truck, equipped
the said vehicle with lights, flares, or, at the very least, an early warning device. Hence, we cannot subscribe to
respondents Condor and Pedranos claim that they should be absolved from liability because, as found by the trial and
appellate courts, the proximate cause of the collision was the fast speed at which petitioner Laspias drove the bus. To
accept this proposition would be to come too close to wiping out the fundamental principle of law that a man must
respond for the foreseeable consequences of his own negligent act or omission. Indeed, our law on quasi-delicts seeks
to reduce the risks and burdens of living in society and to allocate them among its members. To accept this proposition
would be to weaken the very bonds of society.
The Liability of Respondent PPSII as Insurer
The trial court in this case did not rule on the liability of respondent PPSII, while the appellate court ruled that, as no
evidence was presented against it, the insurance company is not liable.
A perusal of the records will show that when the petitioners filed the Third-Party Complaint against respondent PPSII,
they failed to attach a copy of the terms of the insurance contract itself. Only Certificate of Cover No. 054940 issued in
favor of "Mr. William Tiu, Lahug, Cebu City" signed by Cosme H. Boniel was appended to the third-party complaint.
The date of issuance, July 22, 1986, the period of insurance, from July 22, 1986 to July 22, 1987, as well as the
following items, were also indicated therein:
SCHEDULED VEHICLE
MODEL

MAKE
Isuzu Forward

TYPE OF BODY
Bus

COLOR
blue mixed

BLT FILE NO.

PLATE NO. SERIAL/CHASSIS

PBP-724
NO.
SER450-1584124

MOTOR NO.
677836

AUTHORIZED
CAPACITY
50

UNLADEN WEIGHT
6 Cyls. Kgs.

SECTION 1/11

*LIMITS OF LIABILITY
P50,000.00

A. THIRD PARTY LIABILITY

B. PASSENGER LIABILITY

Per Person
P12,000.00

PREMIUMS PAID
P540.00

Per Accident
P50,000

In its Answer to the Third-Party Complaint, the respondent PPSII admitted the existence of the contract of insurance,
in view of its failure to specifically deny the same as required under then Section 8(a), Rule 8 of the Rules of Court,
which reads:
Sec. 8. How to contest genuineness of such documents. When an action or defense is founded upon a written
instrument copied in or attached to the corresponding pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under
oath, specifically denies them, and sets forth what he claims to be the facts; but the requirement of an oath
does not apply when the adverse party does not appear to be a party to the instrument or when compliance with
an order for inspection of the original instrument is refused.
In fact, respondent PPSII did not dispute the existence of such contract, and admitted that it was liable thereon. It
claimed, however, that it had attended to and settled the claims of those injured during the incident, and set up the
following as special affirmative defenses:
Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates and incorporates by way
of reference the preceding paragraphs and further states THAT:-

8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and Neptali Palces who
sustained injuries during the incident in question. In fact, it settled financially their claims per
vouchers duly signed by them and they duly executed Affidavit[s] of Desistance to that effect, xerox
copies of which are hereto attached as Annexes 1, 2, 3, 4, 5, and 6 respectively;
9. With respect to the claim of plaintiff, herein answering third party defendant through its authorized
insurance adjuster attended to said claim. In fact, there were negotiations to that effect. Only that it
cannot accede to the demand of said claimant considering that the claim was way beyond the
scheduled indemnity as per contract entered into with third party plaintiff William Tiu and third party
defendant (Philippine Phoenix Surety and Insurance, Inc.). Third party Plaintiff William Tiu knew all
along the limitation as earlier stated, he being an old hand in the transportation business;
Considering the admissions made by respondent PPSII, the existence of the insurance contract and the salient terms
thereof cannot be dispatched. It must be noted that after filing its answer, respondent PPSII no longer objected to the
presentation of evidence by respondent Arriesgado and the insured petitioner Tiu. Even in its Memorandum before the
Court, respondent PPSII admitted the existence of the contract, but averred as follows:
Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification and/or reimbursement.
This has no basis under the contract. Under the contract, PPSII will pay all sums necessary to discharge
liability of the insured subject to the limits of liability but not to exceed the limits of liability as so stated in the
contract. Also, it is stated in the contract that in the event of accident involving indemnity to more than one
person, the limits of liability shall not exceed the aggregate amount so specified by law to all persons to be
indemnified.
As can be gleaned from the Certificate of Cover, such insurance contract was issued pursuant to the Compulsory Motor
Vehicle Liability Insurance Law. It was expressly provided therein that the limit of the insurers liability for each
person was P12,000, while the limit per accident was pegged at P50,000. An insurer in an indemnity contract for third
party 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. The respondent PPSII could not then just deny petitioner Tius claim; it should
have paid P12,000 for the death of Felisa Arriesgado, and respondent Arriesgados hospitalization expenses of
P1,113.80, which the trial court found to have been duly supported by receipts. The total amount of the claims, even
when added to that of the other injured passengers which the respondent PPSII claimed to have settled, would not
exceed the P50,000 limit under the insurance agreement.
Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended to provide
compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of the
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 motor vehicle owners. As the Court, speaking through Associate
Justice Leonardo A. Quisumbing, explained in Government Service Insurance System v. Court of Appeals:
However, although the victim may proceed directly against the insurer for indemnity, the third party liability is
only up to the extent of the insurance policy and those required by law. While it is true that where the
insurance contract provides for indemnity against liability to third persons, and such persons can directly sue
the insurer, the direct liability of the insurer under indemnity contracts against third party liability does not
mean that the insurer can be held liable in solidum with the insured and/or the other parties found at fault. For
the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on tort.
Obviously, the insurer could be held liable only up to the extent of what was provided for by the contract of
insurance, in accordance with the CMVLI law. At the time of the incident, the schedule of indemnities for
death and bodily injuries, professional fees and other charges payable under a CMVLI coverage was provided
for under the Insurance Memorandum Circular (IMC) No. 5-78 which was approved on November 10, 1978.
As therein provided, the maximum indemnity for death was twelve thousand (P12,000.00) pesos per victim.
The schedules for medical expenses were also provided by said IMC, specifically in paragraphs (C) to (G).
Damages to be Awarded
The trial court correctly awarded moral damages in the amount of P50,000 in favor of respondent Arriesgado. The
award of exemplary damages by way of example or correction of the public good, is likewise in order. As the Court
ratiocinated in Kapalaran Bus Line v. Coronado:
While the immediate beneficiaries of the standard of extraordinary diligence are, of course, the passengers
and owners of cargo carried by a common carrier, they are not the only persons that the law seeks to benefit.
For if common carriers carefully observed the statutory standard of extraordinary diligence in respect of their
own passengers, they cannot help but simultaneously benefit pedestrians and the passengers of other vehicles
who are equally entitled to the safe and convenient use of our roads and highways. The law seeks to stop and
prevent the slaughter and maiming of people (whether passengers or not) on our highways and buses, the very

size and power of which seem to inflame the minds of their drivers. Article 2231 of the Civil Code explicitly
authorizes the imposition of exemplary damages in cases of quasi-delicts "if the defendant acted with gross
negligence."
The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa Arriesgado, is entitled to indemnity in
the amount of P50,000.00.
The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and severally liable for
said amount, conformably with the following pronouncement of the Court in Fabre, Jr. vs. Court of Appeals:
The same rule of liability was applied in situations where the negligence of the driver of the bus on which
plaintiff was riding concurred with the negligence of a third party who was the driver of another vehicle, thus
causing an accident. In Anuran v. Buo, Batangas Laguna Tayabas Bus Co. v. Intermediate Appellate Court,
and Metro Manila Transit Corporation v. Court of Appeals, the bus company, its driver, the operator of the
other vehicle and the driver of the vehicle were jointly and severally held liable to the injured passenger or the
latters heirs. The basis of this allocation of liability was explained in Viluan v. Court of Appeals, thus:
"Nor should it make difference that the liability of petitioner [bus owner] springs from contract while
that of respondents [owner and driver of other vehicle] arises from quasi-delict. As early as 1913, we
already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case of injury to a passenger due to the
negligence of the driver of the bus on which he was riding and of the driver of another vehicle, the
drivers as well as the owners of the two vehicles are jointly and severally liable for damages. Some
members of the Court, though, are of the view that under the circumstances they are liable on quasidelict."
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court of
Appeals is AFFIRMED with MODIFICATIONS:
(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner William Tiu are ORDERED to
pay, jointly and severally, respondent Pedro A. Arriesgado the total amount of P13,113.80;
(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are ORDERED to pay, jointly
and severally, respondent Pedro A. Arriesgado P50,000.00 as indemnity; P26,441.50 as actual damages;
P50,000.00 as moral damages; P50,000.00 as exemplary damages; and P20,000.00 as attorneys fees.
SO ORDERED.
Puno*, Austria-Martinez**, Tinga, and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 168115

June 8, 2007

VICENTE ONG LIM SING, JR., petitioner,

vs.
FEB LEASING & FINANCE CORPORATION, respondent.
DECISION
NACHURA, J.:
This is a petition for review on certiorari assailing the Decision dated March 15, 2005 and the Resolution dated May
23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.
The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease of equipment and motor vehicles
with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty
Agreement with FEB to guarantee the prompt and faithful performance of the terms and conditions of the aforesaid
lease agreement. Corresponding Lease Schedules with Delivery and Acceptance Certificates over the equipment and
motor vehicles formed part of the agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross
monthly rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (P170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears, including penalty
charges and insurance premiums, amounted to Three Million Four Hundred Fourteen Thousand Four Hundred SixtyEight and 75/100 Pesos (P3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of the said
amount. However, JVL failed to pay.
On December 6, 2000, FEB filed a Complaint with the Regional Trial Court of Manila, docketed as Civil Case No. 0099451, for sum of money, damages, and replevin against JVL, Lim, and John Doe.
In the Amended Answer, JVL and Lim admitted the existence of the lease agreement but asserted that it is in reality a
sale of equipment on installment basis, with FEB acting as the financier. JVL and Lim claimed that this intention was
apparent from the fact that they were made to believe that when full payment was effected, a Deed of Sale will be
executed by FEB as vendor in favor of JVL and Lim as vendees. FEB purportedly assured them that documenting the
transaction as a lease agreement is just an industry practice and that the proper documentation would be effected as
soon as full payment for every item was made. They also contended that the lease agreement is a contract of adhesion
and should, therefore, be construed against the party who prepared it, i.e., FEB.
In upholding JVL and Lims stance, the trial court stressed the contradictory terms it found in the lease agreement. The
pertinent portions of the Decision dated November 22, 2002 read:
A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed the use of several
contradictory terms. To name a few, in Section 9 of the said contract disclaiming warranty, it is stated that the lessor
is not the manufacturer nor the latters agent and therefore does not guarantee any feature or aspect of the object of the
contract as to its merchantability. Merchantability is a term applied in a contract of sale of goods where conditions and
warranties are made to apply. Article 1547 of the Civil Code provides that unless a contrary intention appears an
implied warranty on the part of the seller that he has the right to sell and to pass ownership of the object is furnished by
law together with an implied warranty that the thing shall be free from hidden faults or defects or any charge or
encumbrance not known to the buyer.
In an adhesion contract which is drafted and printed in advance and parties are not given a real arms length
opportunity to transact, the Courts treat this kind of contract strictly against their architects for the reason that the party
entering into this kind of contract has no choice but to accept the terms and conditions found therein even if he is not in
accord therewith and for that matter may not have understood all the terms and stipulations prescribed thereat.
Contracts of this character are prepared unilaterally by the stronger party with the best legal talents at its disposal. It is
upon that thought that the Courts are called upon to analyze closely said contracts so that the weaker party could be
fully protected.
Another instance is when the alleged lessee was required to insure the thing against loss, damage or destruction.
In property insurance against loss or other accidental causes, the assured must have an insurable interest, 32 Corpus
Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the assured has a right, title or interest
therein that he will be benefited by its preservation and continued existence or suffer a direct pecuniary loss from its
destruction or injury by the peril insured against. If the defendants were to be regarded as only a lessee, logically the
lessor who asserts ownership will be the one directly benefited or injured and therefore the lessee is not supposed to be
the assured as he has no insurable interest.
There is also an observation from the records that the actual value of each object of the contract would be the result
after computing the monthly rentals by multiplying the said rentals by the number of months specified when the rentals
ought to be paid.

Still another observation is the existence in the records of a Deed of Absolute Sale by and between the same parties,
plaintiff and defendants which was an exhibit of the defendant where the plaintiff sold to the same defendants one unit
1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The Court noticed that the same terms as in the
alleged lease were used in respect to warranty, as well as liability in case of loss and other conditions. This action of
the plaintiff unequivocally exhibited their real intention to execute the corresponding Deed after the defendants have
paid in full and as heretofore discussed and for the sake of emphasis the obscurity in the written contract cannot favor
the party who caused the obscurity.
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident
intention of the parties, their contemporaneous and subsequent acts shall be principally considered. If the doubts are
cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention
or will of the parties, the contract shall be null and void.
Thus, the court concluded with the following disposition:
In this case, which is held by this Court as a sale on installment there is no chattel mortgage on the thing sold, but it
appears amongst the Complaints prayer, that the plaintiff elected to exact fulfillment of the obligation.
For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because of the previous
payments made by the defendants for the reasonable use of the units, specially so, as it appears, these returned vehicles
were sold at auction and that the plaintiff can apply the proceeds to the balance. However, with respect to the
unreturned units and machineries still in the possession of the defendants, it is this Courts view and so hold that the
defendants are liable therefore and accordingly are ordered jointly and severally to pay the price thereof to the plaintiff
together with attorneys fee and the costs of suit in the sum of Php25,000.00.
SO ORDERED.
On December 27, 2002, FEB filed its Notice of Appeal. Accordingly, on January 17, 2003, the court issued an Order
elevating the entire records of the case to the CA. FEB averred that the trial court erred:
A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal properties on installment
and not of lease;
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not R.A. No. 8556;
C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price because of the
previous payments made by the defendants for the reasonable use of the units;
D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong Lim, Jr. to the
Plaintiff-Appellant.
On March 15, 2005, the CA issued its Decision declaring the transaction between the parties as a financial lease
agreement under Republic Act (R.A.) No. 8556. The fallo of the assailed Decision reads:
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002 rendered by the
Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is REVERSED and SET ASIDE, and a new
judgment is hereby ENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to solidarily pay
appellant FEB Leasing and Finance Corporation the amount of Three Million Four Hundred Fourteen Thousand
Four Hundred Sixty Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%)
per annum starting from the date of judicial demand on 06 December 2000, until full payment thereof. Costs against
appellees.
SO ORDERED.
Lim filed the instant Petition for Review on Certiorari under Rule 45contending that:
I
The Honorable Court of Appeals erred when it failed to consider that the undated complaint was filed by Saturnino J.
Galang, Jr., without any authority from respondents Board of Directors and/or Secretarys Certificate.
II

The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the 1997 Rules of Civil
Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).
III
The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent to file on time its
appellants brief and to separately rule on the petitioners motion to dismiss.
IV
The Honorable Court of Appeals erred in finding that the contract between the parties is one of a financial lease and
not of a contract of sale.
V
The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the respondent are
"rentals" and not installments paid for the purchase price of the subject motor vehicles, heavy machines and
equipment.
VI
The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the pick-up vehicle is of no
consequence.
VII
The Honorable Court of Appeals failed to take into consideration that the contract of lease, a contract of adhesion,
concealed the true intention of the parties, which is a contract of sale.
VIII
The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable interest over the subject
personal properties.
IX
The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage of the term
merchantability.
We affirm the ruling of the appellate court.
First, Lim can no longer question Galangs authority as FEBs authorized representative in filing the suit against Lim.
Galang was the representative of FEB in the proceedings before the trial court up to the appellate court. Petitioner
never placed in issue the validity of Galangs representation before the trial and appellate courts. Issues raised for the
first time on appeal are barred by estoppel. Arguments not raised in the original proceedings cannot be considered on
review; otherwise, it would violate basic principles of fair play.
Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters agreed upon during
the pre-trial conference, or in not dismissing the appeal for failure of FEB to file its brief on time, or in not ruling
separately on the petitioners motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to
reconcile both the need to speedily put an end to litigation and the parties right to due process. In numerous cases, this
Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and
equity. In Aguam v. Court of Appeals , the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not
a duty. The "discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play,
having in mind the circumstances obtaining in each case." Technicalities, however, must be avoided. The law abhors

technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is
not a game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts
its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration
from courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded
the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of
technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is
to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid,
technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and
more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on
appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the
parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not a
miscarriage of justice.
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is not void per se. It is
as binding as any ordinary contract. A party who enters into an adhesion contract is free to reject the stipulations
entirely. If the terms thereof are accepted without objection, then the contract serves as the law between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between them, and that no
representations have been made other than as set forth herein. This Agreement shall not be amended or altered in any
manner, unless such amendment be made in writing and signed by the parties hereto.
Petitioners claim that the real intention of the parties was a contract of sale of personal property on installment basis is
more likely a mere afterthought in order to defeat the rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates is, in point of fact,
a financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines "financial leasing" as:
[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at
the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other
movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money
sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the
right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost
of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the
leased property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic payment of
P170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of the purchase price or
acquisition cost of the said movables in accordance with the Lease Schedules with Delivery and Acceptance
Certificates. "The basic purpose of a financial leasing transaction is to enable the prospective buyer of equipment, who
is unable to pay for such equipment in cash in one lump sum, to lease such equipment in the meantime for his use, at a
fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for
the financial lessor) with the expectation that at the end of the lease period the buyer/financial lessee will be able to
pay any remaining balance of the purchase price."
The allegation of petitioner that the rent for the use of each movable constitutes the value of the vehicle or equipment
leased is of no moment. The law on financial lease does not prohibit such a circumstance and this alone does not make
the transaction between the parties a sale of personal property on installment. In fact, the value of the lease, usually
constituting the value or amount of the property involved, is a benefit allowed by law to the lessor for the use of the
property by the lessee for the duration of the lease. It is recognized that the value of these movables depreciates
through wear and tear upon use by the lessee. In Beltran v. PAIC Finance Corporation, we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading company. Neither is it an
ordinary leasing company; it does not make its profit by buying equipment and repeatedly leasing out such equipment
to different users thereof. But a financial lease must be preceded by a purchase and sale contract covering the

equipment which becomes the subject matter of the financial lease. The financial lessor takes the role of the buyer of
the equipment leased. And so the formal or documentary tie between the seller and the real buyer of the equipment,
i.e., the financial lessee, is apparently severed. In economic reality, however, that relationship remains. The sale of the
equipment by the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure
the repayment over time of the purchase price of the equipment, plus financing charges, through the payment of lease
rentals; that legal title is the upfront security held by the financial lessor, a security probably superior in some instances
to a chattel mortgagee's lien.
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into the lease contract
with full knowledge of its terms and conditions. The contract was in force for more than four years. Since its inception
on March 9, 1995, JVL and Lim never questioned its provisions. They only attacked the validity of the contract after
they were judicially made to answer for their default in the payment of the agreed rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions as they may want to
include in a contract. 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 the parties. Contracting parties may stipulate on terms and
conditions as they may see fit and these have the force of law between them.
The stipulation in Section 14 of the lease contract, that the equipment shall be insured at the cost and expense of the
lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk for the full term of the
lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor
vehicles leased. Section 17 of the Insurance Code provides that the measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly
damnified in case of loss, damage, or destruction of any of the properties leased.
Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the merchantability of the
equipment is a valid stipulation. Section 9.1 of the lease contract is stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE MANUFACTURER OR
SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE MANUFACTURER OR SUPPLIER THEREOF.
THE LESSEE HEREBY ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER
THEREOF AND THAT THERE ARE NO WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR
INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF
THE LESSOR AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO
ITS FITNESS, SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE
EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR CONTRACT
WHICH PROVIDE FOR SPECIFIC MACHINERY OR APPARATUS OR SPECIAL METHODS.
In the financial lease agreement, FEB did not assume responsibility as to the quality, merchantability, or capacity of the
equipment. This stipulation provides that, in case of defect of any kind that will be found by the lessee in any of the
equipment, recourse should be made to the manufacturer. "The financial lessor, being a financing company, i.e., an
extender of credit rather than an ordinary equipment rental company, does not extend a warranty of the fitness of the
equipment for any particular use. Thus, the financial lessee was precisely in a position to enforce such warranty
directly against the supplier of the equipment and not against the financial lessor. We find nothing contra legem or
contrary to public policy in such a contractual arrangement."
Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a contract of sale on
installment in the same manner that a previous transaction between the parties over a 1995 Mitsubishi L-200 Strada
DC-Pick-Up was initially covered by an agreement denominated as a lease and eventually became the subject of a
Deed of Absolute Sale.
We join the CA in rejecting this view because to allow the transaction involving the pick-up to be read into the terms of
the lease agreement would expand the coverage of the agreement, in violation of Article 1372 of the New Civil Code.
The lease contract subject of the complaint speaks only of a lease. Any agreement between the parties after the lease
contract has ended is a different transaction altogether and should not be included as part of the lease. Furthermore, it
is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is
necessary in order to determine the parties' intent.

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in CA-G.R. CV No.
77498 dated March 15, 2005 and Resolution dated May 23, 2005 are AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 152505-06

September 13, 2007

PRUDENTIAL GUARANTEE and ASSURANCE, INC., petitioner,

vs.
EQUINOX LAND CORPORATION, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us for resolution is the instant Petition for Review on Certiorari assailing the Decision of the Court of Appeals
(Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57335.
The undisputed facts of the case, as established by the Construction Industry Arbitration Commission (CIAC) and
affirmed by the Court of Appeals, are:
Sometime in 1996, Equinox Land Corporation (Equinox), respondent, decided to construct five (5) additional floors to
its existing building, the Eastgate Centre, located at 169 EDSA, Mandaluyong City. It then sent invitations to bid to
various building contractors. Four (4) building contractors, including JMarc Construction & Development
Corporation (JMarc), responded.
Finding the bid of JMarc to be the most advantageous, Equinox offered the construction project to it. On February 22,
1997, JMarc accepted the offer. Two days later, Equinox formally awarded to JMarc the contract to build the
extension for a consideration of P37,000,000.00.
On February 24, 1997, JMarc submitted to Equinox two (2) bonds, namely: (1) a surety bond issued by Prudential
Guarantee and Assurance, Inc. (Prudential), herein petitioner, in the amount of P9,250,000.00 to guarantee the
unliquidated portion of the advance payment payable to JMarc; and (2) a performance bond likewise issued by
Prudential in the amount of P7,400,000.00 to guarantee JMarcs faithful performance of its obligations under the
construction agreement.
On March 17, 1997, Equinox and JMarc signed the contract and related documents. Under the terms of the contract,
JMarc would supply all the labor, materials, tools, equipment, and supervision required to complete the project.
In accordance with the terms of the contract, Equinox paid JMarc a downpayment of P9,250,000.00 equivalent to
25% of the contract price.
JMarc did not adhere to the terms of the contract. It failed to submit the required monthly progress billings for the
months of March and April 1997. Its workers neglected to cover the drainpipes, hence, they were clogged by wet
cement. This delayed the work on the project.
On May 23, 1997, JMarc requested an unscheduled cash advance of P300,000.00 from Equinox, explaining it had
encountered cash problems. Equinox granted JMarcs request to prevent delay.
On May 31, 1997, JMarc submitted its first progress billing showing that it had accomplished only 7.3825% of the
construction work estimated at P2,731,535.00. After deducting the advanced payments, the net amount payable to

JMarc was only P1,285,959.12. Of this amount, Equinox paid JMarc only P697,005.12 because the former paid
EXAN P588,954.00 for concrete mix.
Shortly after Equinox paid JMarc based on its first progress billing, the latter again requested an advanced payment of
P150,000.00. Again Equinox paid JMarc this amount. Eventually, Equinox found that the amount owing to JMarcs
laborers was only P121,000.00, not P150,000.00.
In June 1997, EXAN refused to deliver concrete mix to the project site due to JMarcs recurring failure to pay on
time. Faced with a looming delay in the project schedule, Equinox acceded to EXANs request that payments for the
concrete mix should be remitted to it directly.
On June 30, 1997, JMarc submitted its second progress billing showing that it accomplished only 16.0435% of the
project after 4 months of construction work. Based on the contract and its own schedule, JMarc should have
accomplished at least 37.70%.
Faced with the problem of delay, Equinox formally gave JMarc one final chance to take remedial steps in order to
finish the project on time. However, JMarc failed to undertake any corrective measure. Consequently, on July 10,
1997, Equinox terminated its contract with JMarc and took over the project. On the same date, Equinox sent
Prudential a letter claiming relief from JMarcs violations of the contract.
On July 11, 1997, the work on the project stopped. The personnel of both Equinox and JMarc jointly conducted an
inventory of all materials, tools, equipment, and supplies at the construction site. They also measured and recorded the
amount of work actually accomplished. As of July 11, 1997, JMarc accomplished only 19.0573% of the work or a
shortage of 21.565% in violation of the contract.
The cost of JMarcs accomplishment was only P7,051,201.00. In other words, Equinox overpaid JMarc in the sum of
P3,974,300.25 inclusive of the 10% retention on the first progress billing amounting to P273,152.50. In addition,
Equinox also paid the wages of JMarcs laborers, the billings for unpaid supplies, and the amounts owing to
subcontractors of JMarc in the total sum of P664,998.09.
On August 25, 1997, Equinox filed with the Regional Trial Court (RTC), Branch 214, Mandaluyong City a complaint
for sum of money and damages against JMarc and Prudential. Equinox prayed that JMarc be ordered to reimburse the
amounts corresponding to its (Equinox) advanced payments and unliquidated portion of its downpayment; and to pay
damages. Equinox also prayed that Prudential be ordered to pay its liability under the bonds.
In its answer, JMarc alleged that Equinox has no valid ground for terminating their contract. For its part, Prudential
denied Equinoxs claims and instituted a cross-claim against JMarc for any judgment that might be rendered against
its bonds.
During the hearing, Prudential filed a motion to dismiss the complaint on the ground that pursuant to Executive Order
No. 1008, it is the CIAC which has jurisdiction over it.
On February 12, 1999, the trial court granted Prudentials motion and dismissed the case.
On May 19, 1999, Equinox filed with the CIAC a request for arbitration, docketed as CIAC Case No. 17-99. Prudential
submitted a position paper contending that the CIAC has no jurisdiction over it since it is not a privy to the
construction contract between Equinox and JMarc; and that its surety and performance bonds are not construction
agreements, thus, any action thereon lies exclusively with the proper court.
On December 21, 1999, the CIAC rendered its Decision in favor of Equinox and against JMarc and Prudential, thus:
AWARD
After considering the evidence and the arguments of the parties, we find that:
1. JMarc has been duly notified of the filing and pendency of the arbitration proceeding commenced by
Equinox against JMarc and that CIAC has acquired jurisdiction over JMarc;

2. The construction Contract was validly terminated by Equinox due to JMarcs failure to provide a timely
supply of adequate labor, materials, tools, equipment, and technical services and to remedy its inability to
comply with the construction schedule;
3. Equinox is not entitled to claim liquidated damages, although under the circumstances, in the absence of
adequate proof of actual and compensatory damages, we award to Equinox nominal or temperate damages in
the amount of P500,000.00;
4. The percentage of accomplishment of JMarc at the time of the termination of the Contract was 19.0573%
of the work valued at P7,051,201.00. This amount should be credited to JMarc. On the other hand, Equinox
[i] had paid JMarc 25% of the contract price as down or advance payment, [ii] had paid JMarc its first
progress billing, [iii] had made advances for payroll of the workers, and for unpaid supplies and the works of
JMarcs subcontractors, all in the total sum of P11,690,483.34. Deducting the value of JMarcs
accomplishment from these advances and payment, there is due from JMarc to Equinox the amount of
P4,639,285.34. We hold JMarc liable to pay Equinox this amount of P4,639,285.34.
5. If JMarc had billed Equinox for its accomplishment as of July 11, 1997, 25% of the P7,051,201.00 would
have been recouped as partial payment of the advanced or down payment. This would have resulted in
reducing Prudentials liability on the Surety Bond from P8,250,000.00 to P7,487,199.80. We, therefore, find
that Prudential is liable to Equinox on its Surety Bond the amount of P7,487,199.80;
6. Prudential is furthermore liable on its Performance Bond for the following amounts: the advances made by
Equinox on behalf of JMarc to the workers, suppliers, and subcontractors amounting to P664,985.09, the
nominal damages of P500,000.00 and attorneys fees of P100,000.00 or a total amount of P1,264,985.00;
7. All other claims and counterclaims are denied;
8. JMarc shall pay the cost of arbitration and shall indemnify Equinox the total amount paid by Equinox as
expenses of arbitration;
9. The total liability of JMarc to Equinox is determined to be P5,139,285.34 plus attorneys fees of
P100,000.00. The suretys liability cannot exceed that of the principal debtor [Art. 2054, Civil Code}. We hold
that, notwithstanding our finding in Nos. 5 and 6 of this Award, Prudential is liable to Equinox on the Surety
Bond and Performance Bond an amount not to exceed P5,239,285.34. The cost of arbitration shall be paid by
JMarc alone.
The amount of P5,239,285.34 shall be paid by respondent JMarc and respondent Prudential, jointly and
severally, with interest at six percent [6%] per annum from promulgation of this award. This amount, including
accrued interest, shall earn interest at the rate of 12% per annum from the time this decision becomes final and
executory until the entire amount is fully paid or judgment fully satisfied. The expenses of arbitration, which
shall be paid by JMarc alone, shall likewise earn interest at 6% per annum from the date of promulgation of
the award, and 12% from the date the award becomes final until this amount including accrued interest is fully
paid.
SO ORDERED.
Thereupon, Prudential filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 56491.
Prudential alleged that the CIAC erred in ruling that it is bound by the terms of the construction contract between
Equinox and JMarc and that it is solidarily liable with JMarc under its bonds.
Equinox filed a motion for reconsideration on the ground that there is an error in the computation of its claim for
unliquidated damages; and that it is entitled to an award of liquidated damages.
On February 2, 2000, the CIAC amended its Award by reducing the total liability of JMarc to Equinox to
P4,060,780.21, plus attorneys fees of P100,000 or P4,160,780.21, and holding that Prudentials liability to Equinox on
the surety and performance bonds should not exceed the said amount of P4,160,780.21, payable by JMarc and
Prudential jointly and severally.

Dissatisfied, Equinox filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 57335. This
case was consolidated with CA-G.R. SP No. 56491 filed by Prudential.
On November 23, 2001, the Court of Appeals rendered its Decision in CA-G.R. SP No. 57335 and CA-G.R. SP No.
56491, the dispositive portion of which reads:
WHEREFORE, the Amended Decision dated February 2, 2000 is AFFIRMED with MODIFICATION in
paragraph 4 in the Award by holding JMarc liable for unliquidated damages to Equinox in the amount of
P5,358,167.09 and in paragraph 9 thereof by increasing the total liability of JMarc to Equinox to
P5,958,167.09 (in view of the additional award of P500,000.00 as nominal and temperate damages and
P100,000.00 in attorneys fees), and AFFIRMED in all other respects.
SO ORDERED.
Prudential seasonably filed a motion for reconsideration but it was denied by the Court of Appeals.
The issue raised before us is whether the Court of Appeals erred in (1) upholding the jurisdiction of the CIAC over the
case; and (2) finding Prudential solidarily liable with JMarc for damages.
On the first issue, basic is the rule that administrative agencies are tribunals of limited jurisdiction and as such, can
only wield such powers as are specifically granted to them by their enabling statutes.
Section 4 of Executive Order No. 1008, provides:
SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes arising from, or
connected with contracts entered into by parties involved in construction in the Philippines, whether the
dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These
disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a
dispute must agree to submit the same to voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and
workmanship, violation of the terms of agreement, interpretation and/or application of contractual time and
delays, maintenance and defects, payment, default of employer or contractor and changes in contract cost.
Excluded from the coverage of the law are disputes arising from employer-employee relationships which
continue to be covered by the Labor Code of the Philippines.
In David v. Construction Industry and Arbitration Commission, we ruled that Section 4 vests upon the CIAC original
and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties
who have agreed to submit their case for voluntary arbitration.
As earlier mentioned, when Equinox lodged with the RTC its complaint for a sum of money against JMarc and
Prudential, the latter filed a motion to dismiss on the ground of lack of jurisdiction, contending that since the case
involves a construction dispute, jurisdiction lies with CIAC. Prudentials motion was granted. However, after the CIAC
assumed jurisdiction over the case, Prudential again moved for its dismissal, alleging that it is not a party to the
construction contract between Equinox and JMarc; and that the surety and performance bonds it issued are not
construction agreements.
After having voluntarily invoked before the RTC the jurisdiction of CIAC, Prudential is estopped to question its
jurisdiction. As we held in Lapanday Agricultural & Development Corporation v. Estita, the active participation of a
party in a case pending against him before a court or a quasi-judicial body is tantamount to a recognition of that courts
or quasi-judicial bodys jurisdiction and a willingness to abide by the resolution of the case and will bar said party
from later on impugning the courts or quasi-judicial bodys jurisdiction.
Moreover, in its Reply to Equinoxs Opposition to the Motion to Dismiss before the RTC, Prudential, citing Philippine
National Bank v. Pineda and Finman General Assurance Corporation v. Salik, argued that as a surety, it is considered
under the law to be the same party as the obligor in relation to whatever is adjudged regarding the latters obligation.
Therefore, it is the CIAC which has jurisdiction over the case involving a construction contract between Equinox and
JMarc. Such an admission by Prudential binds it and it cannot now claim otherwise.

Anent the second issue, it is not disputed that Prudential entered into a suretyship contract with JMarc. Section 175 of
the Insurance Code defines a suretyship as "a contract or agreement whereby a party, called the suretyship, guarantees
the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third
party, called the obligee. It includes official recognizances, stipulations, bonds, or undertakings issued under Act 536,
as amended." Corollarily, Article 2047 of the Civil Code provides that suretyship arises upon the solidary binding of a
person deemed the surety with the principal debtor for the purpose of fulfilling an obligation.
In Castellvi de Higgins and Higgins v. Seliner, we held that while a surety and a guarantor are alike in that each
promises to answer for the debt or default of another, the surety assumes liability as a regular party to the
undertaking and hence its obligation is primary.
In Security Pacific Assurance Corporation v. Tria-Infante, we reiterated the rule that while a contract of surety is
secondary only to a valid principal obligation, the suretys liability to the creditor is said to be direct, primary, and
absolute. In other words, the surety is directly and equally bound with the principal. Thus, Prudential is barred from
disclaiming that its liability with JMarc is solidary.
WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals (Third Division) dated
November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57355 is AFFIRMED in toto. Costs against
petitioner.
SO ORDERED.
Puno, C.J., Chairperson, Corona, Garcia, JJ., concur.
Azcuna*, J., no part.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. NO. 147039

January 27, 2006

DBP POOL OF ACCREDITED INSURANCE COMPANIES, Petitioner,

vs.
RADIO MINDANAO NETWORK, INC., Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
This refers to the petition for certiorari under Rule 45 of the Rules of Court seeking the review of the Decision dated
November 16, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 56351, the dispositive portion of which reads:
Wherefore, premises considered, the appealed Decision of the Regional Trial Court of Makati City, Branch 138 in
Civil Case No. 90-602 is hereby AFFIRMED with MODIFICATION in that the interest rate is hereby reduced to 6%
per annum.
Costs against the defendants-appellants.
SO ORDERED.
The assailed decision originated from Civil Case No. 90-602 filed by Radio Mindanao Network, Inc. (respondent)
against DBP Pool of Accredited Insurance Companies (petitioner) and Provident Insurance Corporation (Provident) for
recovery of insurance benefits. Respondent owns several broadcasting stations all over the country. Provident covered
respondents transmitter equipment and generating set for the amount of P13,550,000.00 under Fire Insurance Policy

No. 30354, while petitioner covered respondents transmitter, furniture, fixture and other transmitter facilities for the
amount of P5,883,650.00 under Fire Insurance Policy No. F-66860.
In the evening of July 27, 1988, respondents radio station located in SSS Building, Bacolod City, was razed by fire
causing damage in the amount of P1,044,040.00. Respondent sought recovery under the two insurance policies but the
claims were denied on the ground that the cause of loss was an excepted risk excluded under condition no. 6 (c) and
(d), to wit:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly,
of any of the following consequences, namely:
(c) War, invasion, act of foreign enemy, hostilities, or warlike operations (whether war be declared or not), civil war.
(d) Mutiny, riot, military or popular rising, insurrection, rebellion, revolution, military or usurped power.
The insurance companies maintained that the evidence showed that the fire was caused by members of the Communist
Party of the Philippines/New Peoples Army (CPP/NPA); and consequently, denied the claims. Hence, respondent was
constrained to file Civil Case No. 90-602 against petitioner and Provident.
After trial on the merits, the Regional Trial Court of Makati, Branch 138, rendered a decision in favor of respondent.
The dispositive portion of the decision reads:
IN VIEW THEREOF, judgment is rendered in favor of plaintiff. Defendant Provident Insurance Corporation is
directed to pay plaintiff the amount of P450,000.00 representing the value of the destroyed property insured under its
Fire Insurance Policy plus 12% legal interest from March 2, 1990 the date of the filing of the Complaint. Defendant
DBP Pool Accredited Insurance Companies is likewise ordered to pay plaintiff the sum of P602,600.00 representing
the value of the destroyed property under its Fire Insurance Policy plus 12% legal interest from March 2, 1990.
SO ORDERED.
Both insurance companies appealed from the trial courts decision but the CA affirmed the decision, with the
modification that the applicable interest rate was reduced to 6% per annum. A motion for reconsideration was filed by
petitioner DBP which was denied by the CA per its Resolution dated January 30, 2001.
Hence, herein petition by DBP Pool of Accredited Insurance Companies, with the following assignment of errors:
Assignment of Errors
THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THERE WERE NO SUFFICIENT
EVIDENCE SHOWING THAT THE APPROXIMATELY TENTY [sic] (20) ARMED MEN WHO CUSED [sic] THE
FIRE AT RESPONDENTS RMN PROPERTY AT BACOLOD CITY WERE MEMBERS OF THE CPP-NPA.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED THAT RESPONDENT RMN
CANNOT BEHELD [sic] FOR DAMAGES AND ATTORNEYS FEES FOR INSTITUTING THE PRESENT
ACTION AGAINST THE PETITIONER UNDER ARTICLES 21, 2208, 2229 AND 2232 OF THE CIVIL CODE OF
THE PHILIPPINES.
Petitioner assails the factual finding of both the trial court and the CA that its evidence failed to support its allegation
that the loss was caused by an excepted risk, i.e., members of the CPP/NPA caused the fire. In upholding respondents
claim for indemnity, the trial court found that:
The only evidence which the Court can consider to determine if the fire was due to the intentional act committed by
the members of the New Peoples Army (NPA), are the testimony [sic] of witnesses Lt. Col. Nicolas Torres and SPO3
Leonardo Rochar who were admittedly not present when the fire occurred. Their testimony [sic] was [sic] limited to
the fact that an investigation was conducted and in the course of the investigation they were informed by bystanders
that "heavily armed men entered the transmitter house, poured gasoline in (sic) it and then lighted it. After that, they
went out shouting "Mabuhay ang NPA" (TSN, p. 12., August 2, 1995). The persons whom they investigated and
actually saw the burning of the station were not presented as witnesses. The documentary evidence particularly
Exhibits "5" and "5-C" do not satisfactorily prove that the author of the burning were members of the NPA. Exhibit "5-

B" which is a letter released by the NPA merely mentions some dissatisfaction with the activities of some people in the
media in Bacolod. There was no mention there of any threat on media facilities.
The CA went over the evidence on record and sustained the findings of the trial court, to wit:
To recapitulate, defendants-appellants presented the following to support its claim, to wit: police blotter of the burning
of DYHB, certification of the Negros Occidental Integrated National Police, Bacolod City regarding the incident, letter
of alleged NPA members Celso Magsilang claiming responsibility for the burning of DYHB, fire investigation report
dated July 29, 1988, and the testimonies of Lt. Col. Nicolas Torres and SFO III Leonardo Rochas. We examined
carefully the report on the police blotter of the burning of DYHB, the certification issued by the Integrated National
Police of Bacolod City and the fire investigation report prepared by SFO III Rochas and there We found that none of
them categorically stated that the twenty (20) armed men which burned DYHB were members of the CPP/NPA. The
said documents simply stated that the said armed men were believed to be or suspected of being members of the
said group. Even SFO III Rochas admitted that he was not sure that the said armed men were members of the CPPNPA, thus:

In fact the only person who seems to be so sure that that the CPP-NPA had a hand in the burning of DYHB was Lt.
Col. Nicolas Torres. However, though We found him to be persuasive in his testimony regarding how he came to arrive
at his opinion, We cannot nevertheless admit his testimony as conclusive proof that the CPP-NPA was really involved
in the incident considering that he admitted that he did not personally see the armed men even as he tried to pursue
them. Note that when Lt. Col. Torres was presented as witness, he was presented as an ordinary witness only and not
an expert witness. Hence, his opinion on the identity or membership of the armed men with the CPP-NPA is not
admissible in evidence.
Anent the letter of a certain Celso Magsilang, who claims to be a member of NPA-NIROC, being an admission of
person which is not a party to the present action, is likewise inadmissible in evidence under Section 22, Rule 130 of the
Rules of Court. The reason being that an admission is competent only when the declarant, or someone identified in
legal interest with him, is a party to the action.
The Court will not disturb these factual findings absent compelling or exceptional reasons. It should be stressed that a
review by certiorari under Rule 45 is a matter of discretion. Under this mode of review, the jurisdiction of the Court is
limited to reviewing only errors of law, not of fact.
Moreover, when supported by substantial evidence, findings of fact of the trial court as affirmed by the CA are
conclusive and binding on the parties, which this Court will not review unless there are exceptional circumstances.
There are no exceptional circumstances in this case that would have impelled the Court to depart from the factual
findings of both the trial court and the CA.
Both the trial court and the CA were correct in ruling that petitioner failed to prove that the loss was caused by an
excepted risk.
Petitioner argues that private respondent is responsible for proving that the cause of the damage/loss is covered by the
insurance policy, as stipulated in the insurance policy, to wit:

Any loss or damage happening during the existence of abnormal conditions (whether physical or otherwise) which are
occasioned by or through in consequence directly or indirectly, of any of the said occurrences shall be deemed to be
loss or damage which is not covered by the insurance, except to the extent that the Insured shall prove that such loss or
damage happened independently of the existence of such abnormal conditions.
In any action, suit or other proceeding where the Companies allege that by reason of the provisions of this condition
any loss or damage is not covered by this insurance, the burden of proving that such loss or damage is covered shall be
upon the Insured.
An insurance contract, being a contract of adhesion, should be so interpreted as to carry out the purpose for which the
parties entered into the contract which is to insure against risks of loss or damage to the goods. Limitations of liability

should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from
noncompliance with its obligations.
The "burden of proof" contemplated by the aforesaid provision actually refers to the "burden of evidence" (burden of
going forward). As applied in this case, it refers to the duty of the insured to show that the loss or damage is covered by
the policy. The foregoing clause notwithstanding, the burden of proof still rests upon petitioner to prove that the
damage or loss was caused by an excepted risk in order to escape any liability under the contract.
Burden of proof is the duty of any party to present evidence to establish his claim or defense by the amount of
evidence required by law, which is preponderance of evidence in civil cases. The party, whether plaintiff or defendant,
who asserts the affirmative of the issue has the burden of proof to obtain a favorable judgment. For the plaintiff, the
burden of proof never parts. For the defendant, an affirmative defense is one which is not a denial of an essential
ingredient in the plaintiffs cause of action, but one which, if established, will be a good defense i.e. an "avoidance"
of the claim.
Particularly, in insurance cases, where a risk is excepted by the terms of a policy which insures against other perils or
hazards, loss from such a risk constitutes a defense which the insurer may urge, since it has not assumed that risk, and
from this it follows that an insurer seeking to defeat a claim because of an exception or limitation in the policy
has the burden of proving that the loss comes within the purview of the exception or limitation set up. If a proof
is made of a loss apparently within a contract of insurance, the burden is upon the insurer to prove that the loss arose
from a cause of loss which is excepted or for which it is not liable, or from a cause which limits its liability.
Consequently, it is sufficient for private respondent to prove the fact of damage or loss. Once respondent makes out a
prima facie case in its favor, the duty or the burden of evidence shifts to petitioner to controvert respondents prima
facie case. In this case, since petitioner alleged an excepted risk, then the burden of evidence shifted to petitioner to
prove such exception. It is only when petitioner has sufficiently proven that the damage or loss was caused by an
excepted risk does the burden of evidence shift back to respondent who is then under a duty of producing evidence to
show why such excepted risk does not release petitioner from any liability. Unfortunately for petitioner, it failed to
discharge its primordial burden of proving that the damage or loss was caused by an excepted risk.
Petitioner however, insists that the evidence on record established the identity of the author of the damage. It argues
that the trial court and the CA erred in not appreciating the reports of witnesses Lt. Col Torres and SFO II Rochar that
the bystanders they interviewed claimed that the perpetrators were members of the CPP/NPA as an exception to the
hearsay rule as part of res gestae.
A witness can testify only to those facts which he knows of his personal knowledge, which means those facts which
are derived from his perception. A witness may not testify as to what he merely learned from others either because he
was told or read or heard the same. Such testimony is considered hearsay and may not be received as proof of the truth
of what he has learned. The hearsay rule is based upon serious concerns about the trustworthiness and reliability of
hearsay evidence inasmuch as such evidence are not given under oath or solemn affirmation and, more importantly,
have not been subjected to cross-examination by opposing counsel to test the perception, memory, veracity and
articulateness of the out-of-court declarant or actor upon whose reliability on which the worth of the out-of-court
statement depends.
Res gestae, as an exception to the hearsay rule, refers to those exclamations and statements made by either the
participants, victims, or spectators to a crime immediately before, during, or after the commission of the crime, when
the circumstances are such that the statements were made as a spontaneous reaction or utterance inspired by the
excitement of the occasion and there was no opportunity for the declarant to deliberate and to fabricate a false
statement. The rule in res gestae applies when the declarant himself did not testify and provided that the testimony of
the witness who heard the declarant complies with the following requisites: (1) that the principal act, the res gestae, be
a startling occurrence; (2) the statements were made before the declarant had the time to contrive or devise a
falsehood; and (3) that the statements must concern the occurrence in question and its immediate attending
circumstances.
The Court is not convinced to accept the declarations as part of res gestae. While it may concede that these statements
were made by the bystanders during a startling occurrence, it cannot be said however, that these utterances were made
spontaneously by the bystanders and before they had the time to contrive or devise a falsehood. Both SFO III
Rochar and Lt. Col. Torres received the bystanders statements while they were making their investigations during and

after the fire. It is reasonable to assume that when these statements were noted down, the bystanders already had
enough time and opportunity to mill around, talk to one another and exchange information, not to mention theories and
speculations, as is the usual experience in disquieting situations where hysteria is likely to take place. It cannot
therefore be ascertained whether these utterances were the products of truth. That the utterances may be mere idle talk
is not remote.
At best, the testimonies of SFO III Rochar and Lt. Col. Torres that these statements were made may be considered as
independently relevant statements gathered in the course of their investigation, and are admissible not as to the veracity
thereof but to the fact that they had been thus uttered.
Furthermore, admissibility of evidence should not be equated with its weight and sufficiency. Admissibility of
evidence depends on its relevance and competence, while the weight of evidence pertains to evidence already admitted
and its tendency to convince and persuade. Even assuming that the declaration of the bystanders that it was the
members of the CPP/NPA who caused the fire may be admitted as evidence, it does not follow that such declarations
are sufficient proof. These declarations should be calibrated vis--vis the other evidence on record. And the trial court
aptly noted that there is a need for additional convincing proof, viz.:
The Court finds the foregoing to be insufficient to establish that the cause of the fire was the intentional burning of the
radio facilities by the rebels or an act of insurrection, rebellion or usurped power. Evidence that persons who burned
the radio facilities shouted "Mabuhay ang NPA" does not furnish logical conclusion that they are member [sic] of the
NPA or that their act was an act of rebellion or insurrection. Additional convincing proof need be submitted.
Defendants failed to discharge their responsibility to present adequate proof that the loss was due to a risk excluded.
While the documentary evidence presented by petitioner, i.e., (1) the police blotter; (2) the certification from the
Bacolod Police Station; and (3) the Fire Investigation Report may be considered exceptions to the hearsay rule, being
entries in official records, nevertheless, as noted by the CA, none of these documents categorically stated that the
perpetrators were members of the CPP/NPA. Rather, it was stated in the police blotter that: "a group of persons
accompanied by one (1) woman all believed to be CPP/NPA more or less 20 persons suspected to be CPP/NPA,"
while the certification from the Bacolod Police station stated that " some 20 or more armed men believed to be
members of the New Peoples Army NPA," and the fire investigation report concluded that "(I)t is therefore believed
by this Investigating Team that the cause of the fire is intentional, and the armed men suspected to be members of the
CPP/NPA where (sic) the ones responsible "All these documents show that indeed, the "suspected" executor of the
fire were believed to be members of the CPP/NPA. But suspicion alone is not sufficient, preponderance of evidence
being the quantum of proof.
All told, the Court finds no reason to grant the present petition.
WHEREFORE, the petition is DISMISSED. The Court of Appeals Decision dated November 16, 2000 and
Resolution dated January 30, 2001 rendered in CA-G.R. CV No. 56351 are AFFIRMED in toto.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 151890

June 20, 2006

PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,

vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 151991

June 20, 2006

TRANS-ASIA SHIPPING LINES, INC., petitioner,

vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
DECISION
CHICO-NAZARIO, J:
This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner Prudential Guarantee and
Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R.
No. 151991, assailing the Decision dated 6 November 2001 of the Court of Appeals in CA G.R. CV No. 68278, which
reversed the Judgment dated 6 June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City in Civil Case No.
CEB-20709. The 29 January 2002 Resolution of the Court of Appeals, denying PRUDENTIALs Motion for
Reconsideration and TRANS-ASIAs Partial Motion for Reconsideration of the 6 November 2001 Decision, is likewise
sought to be annulled and set aside.
The Facts
The material antecedents as found by the court a quo and adopted by the appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of premiums,
defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and machinery arising from perils,
inter alia, of fire and explosion for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to July 1,
1994. This is evidenced by Marine Policy No. MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the
policy was in force, a fire broke out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. On October
26, 1993 plaintiff [TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to subsequently notify
defendant [PRUDENTIAL] as to the full amount of the claim upon final survey and determination by average adjuster
Richard Hogg International (Phil.) of the damage sustained by reason of fire. An adjusters report on the fire in
question was submitted by Richard Hogg International together with the U-Marine Surveyor Report (Exhibits "4" to
"4-115").
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust receipt", a portion of
which read (sic):
"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION ONLY
(P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable only in the event and to the
extent that any net recovery is made by Trans-Asia Shipping Corporation, from any person or persons, corporation or
corporations, or other parties, on account of loss by any casualty for which they may be liable occasioned by the 25
October 1993: Fire on Board." (Exhibit "4")
In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiffs claim (Exhibit "5"). The letter reads:
"After a careful review and evaluation of your claim arising from the above-captioned incident, it has been ascertained
that you are in breach of policy conditions, among them "WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED". Accordingly, we regret to advise that your claim is not compensable and hereby DENIED."
This was followed by defendants letter dated 21 July 1997 requesting the return or payment of the P3,000,000.00
within a period of ten (10) days from receipt of the letter (Exhibit "6").
Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint for Sum of Money against
PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709, wherein TRANS-ASIA sought
the amount of P8,395,072.26 from PRUDENTIAL, alleging that the same represents the balance of the indemnity due
upon the insurance policy in the total amount of P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per
annum citing Section 243 of Presidential Decreee No. 1460, otherwise known as the "Insurance Code," as amended.
In its Answer, PRUDENTIAL denied the material allegations of the Complaint and interposed the defense that
TRANS-ASIA breached insurance policy conditions, in particular: "WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED." PRUDENTIAL further alleged that it acted as facts and law require and incurred no liability

to TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its claim has been effectively waived and/or
abandoned, or it is estopped from pursuing the same. By way of a counterclaim, PRUDENTIAL sought a refund of
P3,000,000.00, which it allegedly advanced to TRANS-ASIA by way of a loan without interest and without prejudice
to the final evaluation of the claim, including the amounts of P500,000.00, for survey fees and P200,000.00,
representing attorneys fees.
The Ruling of the Trial Court
On 6 June 2000, the court a quo rendered Judgment finding for (therein defendant) PRUDENTIAL. It ruled that a
determination of the parties liabilities hinged on whether TRANS-ASIA violated and breached the policy conditions
on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It interpreted the provision to mean that
TRANS-ASIA is required to maintain the vessel at a certain class at all times pertinent during the life of the policy.
According to the court a quo, TRANS-ASIA failed to prove compliance of the terms of the warranty, the violation
thereof entitled PRUDENTIAL, the insured party, to rescind the contract.
Further, citing Section 107 of the Insurance Code, the court a quo ratiocinated that the concealment made by TRANSASIA that the vessel was not adequately maintained to preserve its class was a material concealment sufficient to avoid
the policy and, thus, entitled the injured party to rescind the contract. The court a quo found merit in PRUDENTIALs
contention that there was nothing in the adjustment of the particular average submitted by the adjuster that would show
that TRANS-ASIA was not in breach of the policy. Ruling on the denominated loan and trust receipt, the court a quo
said that in substance and in form, the same is a receipt for a loan. It held that if TRANS-ASIA intended to receive the
amount of P3,000,000.00 as advance payment, it should have so clearly stated as such.
The court a quo did not award PRUDENTIALs claim for P500,000.00, representing expert survey fees on the ground
of lack of sufficient basis in support thereof. Neither did it award attorneys fees on the rationalization that the instant
case does not fall under the exceptions stated in Article 2208 of the Civil Code. However, the court a quo granted
PRUDENTIALs counterclaim stating that there is factual and legal basis for TRANS-ASIA to return the amount of
P3,000,000.00 by way of loan without interest.
The decretal portion of the Judgment of the RTC reads:
WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a cause of action.
On defendants counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing the loan extended to
it by the defendant, within a period of ten (10) days from and after this judgment shall have become final and
executory.
The Ruling of the Court of Appeals
On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001, reversed the 6 June
2000 Judgment of the RTC.
On the issue of TRANS-ASIAs alleged breach of warranty of the policy condition CLASSED AND CLASS
MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the non-compensability of the
loss had the burden of proof to show that TRANS-ASIA breached the warranty, which burden it failed to discharge.
PRUDENTIAL cannot rely on the lack of certification to the effect that TRANS-ASIA was CLASSED AND CLASS
MAINTAINED as its sole basis for reaching the conclusion that the warranty was breached. The Court of Appeals
opined that the lack of a certification does not necessarily mean that the warranty was breached by TRANS-ASIA.
Instead, the Court of Appeals considered PRUDENTIALs admission that at the time the insurance contract was
entered into between the parties, the vessel was properly classed by Bureau Veritas, a classification society recognized
by the industry. The Court of Appeals similarly gave weight to the fact that it was the responsibility of Richards Hogg
International (Phils.) Inc., the average adjuster hired by PRUDENTIAL, to secure a copy of such certification to
support its conclusion that mere absence of a certification does not warrant denial of TRANS-ASIAs claim under the
insurance policy.
In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-ASIA to be a rider
which, while contained in the policy, was inserted by PRUDENTIAL without the intervention of TRANS-ASIA. As
such, it partakes of a nature of a contract dadhesion which should be construed against PRUDENTIAL, the party
which drafted the contract. Likewise, according to the Court of Appeals, PRUDENTIALs renewal of the insurance

policy from noon of 1 July 1994 to noon of 1 July 1995, and then again, until noon of 1 July 1996 must be deemed a
waiver by PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.
Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction between
PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan. The Court of Appeals concluded that
TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00 to PRUDENTIAL based on its finding that
the aforesaid amount was PRUDENTIALs partial payment to TRANS-ASIAs claim under the policy. Finally, the
Court of Appeals denied TRANS-ASIAs prayer for attorneys fees, but held TRANS-ASIA entitled to double interest
on the policy for the duration of the delay of payment of the unpaid balance, citing Section 244 of the Insurance Code.
Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:
WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is ALLOWED and the
Judgment appealed from REVERSED. The P3,000,000.00 initially paid by appellee Prudential Guarantee Assurance
Incorporated to appellant Trans-Asia and covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to be in
partial settlement of the loss suffered by appellant and covered by Marine Policy No. MH93/1363 issued by appellee.
Further, appellee is hereby ORDERED to pay appellant the additional amount of P8,395,072.26 representing the
balance of the loss suffered by the latter as recommended by the average adjuster Richard Hogg International
(Philippines) in its Report, with double interest starting from the time Richard Hoggs Survey Report was completed,
or on 13 August 1996, until the same is fully paid.
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for Reconsideration and Partial
Motion for Reconsideration thereon, respectively, which motions were denied by the Court of Appeals in the
Resolution dated 29 January 2002.
The Issues
Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No. 151890, relying on the
following grounds, viz:
I.
THE AWARD IS GROSSLY UNCONSCIONABLE.
II.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY TRANS-ASIA OF A
MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD THE BURDEN OF
PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE EMBODIED IN THE
INSURANCE POLICY CONTRACT WAS A MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE POLICY
CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH OF THE WARRANTY BY
TRANS-ASIA.

VI.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT" EXECUTED BY
TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF.
VII.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL OF THE
FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART OF PRUDENTIAL OF ANY
VIOLATION BY TRANS-ASIA OF THE WARRANTY.
VIII.
THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING THAT
PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL TO
PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13 AUGUST 1996, UNTIL [THE] SAME IS
FULLY PAID.
Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review docketed as
G.R. No. 151991, raising the following grounds for the allowance of the petition, to wit:
I.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEYS FEES TO PETITIONER
TRANS-ASIA ON THE GROUND THAT SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN
ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON THE PART OF RESPONDENT
PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-ASIAS INSURANCE CLAIM.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001 SHOULD BE
CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT
THE RATE OF 24% PER ANNUM.
In our Resolution of 2 December 2002, we granted TRANS-ASIAs Motion for Consolidation of G.R. Nos. 151890
and 151991; hence, the instant consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising from the
subject insurance contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL arising from the transaction
between the parties as evidenced by a document denominated as "Loan and Trust Receipt," dated 29 May 1995; and
(3) the amount of interest to be imposed on the liability, if any, of either or both parties.
Ruling of the Court
Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not questions of fact, may be
raised. This rule may be disregarded only when the findings of fact of the Court of Appeals are contrary to the findings
and conclusions of the trial court, or are not supported by the evidence on record. In the case at bar, we find an
incongruence between the findings of fact of the Court of Appeals and the court a quo, thus, in our determination of the
issues, we are constrained to assess the evidence adduced by the parties to make appropriate findings of facts as are
necessary.
I.
A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy condition on
WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in the subject insurance
contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express and material
warranty in the subject insurance contract, i.e., Marine Insurance Policy No. MH93/1363, specifically Warranty Clause

No. 5 thereof, which stipulates that the insured vessel, "M/V ASIA KOREA" is required to be CLASSED AND
CLASS MAINTAINED. According to PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of the
fire, "M/V ASIA KOREA" was in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA under
the policy, the violation of which entitled PRUDENTIAL to rescind the contract under Sec. 74 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIALs Senior Manager
of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of his testimony on direct examination is
reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was taken?
A It was eventually determined that there was a breach of the policy condition, and basically there is a breach of policy
warranty condition and on that basis the claim was denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as Exhibits "1", "1-A"
series, please point to the warranty in the policy which you said was breached or violated by the plaintiff which
constituted your basis for denying the claim as you testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy below the printed
words: "Clauses, Endorsements, Special Conditions and Warranties," below this are several typewritten clauses and the
witness pointed out in particular the clause reading: "Warranted Vessel Classed and Class Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class warranty, it must be
entered in the classification society.
COURT
Slowly.
WITNESS
(continued)
A A classification society is an organization which sets certain standards for a vessel to maintain in order to maintain
their membership in the classification society. So, if they failed to meet that standard, they are considered not members
of that class, and thus breaching the warranty, that requires them to maintain membership or to maintain their class on
that classification society. And it is not sufficient that the member of this classification society at the time of a loss,
their membership must be continuous for the whole length of the policy such that during the effectivity of the policy,
their classification is suspended, and then thereafter, they get reinstated, that again still a breach of the warranty that
they maintained their class (sic). Our maintaining team membership in the classification society thereby maintaining
the standards of the vessel (sic).
ATTY. LIM
Q Can you mention some classification societies that you know?
A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification Society, The Philippine
Registration of Ships Society, China Classification, NKK and Company Classification Society, and many others, we
have among others, there are over 20 worldwide.
At the outset, it must be emphasized that the party which alleges a fact as a matter of defense has the burden of proving
it. PRUDENTIAL, as the party which asserted the claim that TRANS-ASIA breached the warranty in the policy, has
the burden of evidence to establish the same. Hence, on the part of PRUDENTIAL lies the initiative to show proof in
support of its defense; otherwise, failing to establish the same, it remains self-serving. Clearly, if no evidence on the

alleged breach of TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA would be successful in
claiming on the policy. It follows that PRUDENTIAL bears the burden of evidence to establish the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to show proof of
loss, and the coverage thereof, in the subject insurance policy. However, in the course of trial in a civil case, once
plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to controvert
plaintiffs prima facie case, otherwise, a verdict must be returned in favor of plaintiff. TRANS-ASIA was able to
establish proof of loss and the coverage of the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of
evidence shifted to PRUDENTIAL to counter TRANS-ASIAs case, and to prove its special and affirmative defense
that TRANS-ASIA was in violation of the particular condition on CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in discharging the burden of
evidence that TRANS-ASIA breached the subject policy condition on CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio Fernandez, made a
categorical admission that at the time of the procurement of the insurance contract in July 1993, TRANS-ASIAs
vessel, "M/V Asia Korea" was properly classed by Bureau Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia Korea was classed
at the time (sic) policy was procured perthe (sic) insurance was procured that Exhibit "1" on 1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas.
As found by the Court of Appeals and as supported by the records, Bureau Veritas is a classification society recognized
in the marine industry. As it is undisputed that TRANS-ASIA was properly classed at the time the contract of insurance
was entered into, thus, it becomes incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA
as being properly CLASSED by Bureau Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL
failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack of a certification in PRUDENTIALs records to
the effect that TRANS-ASIAs "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED at the time of the
occurrence of the fire cannot be tantamount to the conclusion that TRANS-ASIA in fact breached the warranty
contained in the policy. With more reason must we sustain the findings of the Court of Appeals on the ground that as
admitted by PRUDENTIAL, it was likewise the responsibility of the average adjuster, Richards Hogg International
(Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-ASIA cannot be gleaned from
the average adjusters survey report, or adjustment of particular average per "M/V Asia Korea" of the 25 October 1993
fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that, "the violation of a
material warranty, or other material provision of a policy on the part of either party thereto, entitles the other to
rescind." It is generally accepted that "[a] warranty is a statement or promise set forth in the policy, or by reference
incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether the
insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer." However,
it is similarly indubitable that for the breach of a warranty to avoid a policy, the same must be duly shown by the party
alleging the same. We cannot sustain an allegation that is unfounded. Consequently, PRUDENTIAL, not having shown
that TRANS-ASIA breached the warranty condition, CLASSED AND CLASS MAINTAINED, it remains that
TRANS-ASIA must be allowed to recover its rightful claims on the policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL CLASSED AND
CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same.

The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA breached the warranty
provision on CLASSED AND CLASS MAINTAINED, underscored that PRUDENTIAL can be deemed to have made
a valid waiver of TRANS-ASIAs breach of warranty as alleged, ratiocinating, thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive years, from noon
of 01 July 1994 to noon of 01 July 1995, and then again until noon of 01 July 1996. This renewal is deemed a waiver
of any breach of warranty.
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal policies are deemed a
waiver of TRANS-ASIAs alleged breach, averring herein that the subsequent policies, designated as MH94/1595 and
MH95/1788 show that they were issued only on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a
request to TRANS-ASIA that it be furnished a copy of the certification specifying that the insured vessel "M/V Asia
Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL posits that it came to know of the breach by
TRANS-ASIA of the subject warranty clause only on 21 April 1997. On even date, PRUDENTIAL sent TRANS-ASIA
a letter of denial, advising the latter that their claim is not compensable. In fine, PRUDENTIAL would have this Court
believe that the issuance of the renewal policies cannot be a waiver because they were issued without knowledge of the
alleged breach of warranty committed by TRANS-ASIA.
We are not impressed. We do not find that the Court of Appeals was in error when it held that PRUDENTIAL, in
renewing TRANS-ASIAs insurance policy for two consecutive years after the loss covered by Policy No. MH93/1363,
was considered to have waived TRANS-ASIAs breach of the subject warranty, if any. Breach of a warranty or of a
condition renders the contract defeasible at the option of the insurer; but if he so elects, he may waive his privilege and
power to rescind by the mere expression of an intention so to do. In that event his liability under the policy continues
as before. There can be no clearer intention of the waiver of the alleged breach than the renewal of the policy insurance
granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous by PRUDENTIALs lack of proof to support its allegation that
the renewals of the policies were taken only after a request was made to TRANS-ASIA to furnish them a copy of the
certificate attesting that "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. Notwithstanding
PRUDENTIALs claim that no certification was issued to that effect, it renewed the policy, thereby, evidencing an
intention to waive TRANS-ASIAs alleged breach. Clearly, by granting the renewal policies twice and successively
after the loss, the intent was to benefit the insured, TRANS-ASIA, as well as to waive compliance of the warranty.
The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as raised by the
PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively alter the result for the reasons that:
(1) PRUDENTIAL was not able to discharge the burden of evidence to show that TRANS-ASIA committed a breach,
thereof; and (2) assuming arguendo the commission of a breach by TRANS-ASIA, the same was shown to have been
waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction between the parties
evidenced by a document denominated as "Loan and Trust Receipt," dated 29 May 1995 constituted partial payment on
the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The same was
evidenced by a transaction receipt denominated as a "Loan and Trust Receipt," dated 29 May 1995, reproduced
hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025
P3,000,000.00
Check No. PCIB066755

May 29, 1995

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE MILLION
ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353, repayable only in the event and to the
extent that any net recovery is made by TRANS ASIA SHIPPING CORP., from any person or persons, corporation or

corporations, or other parties, on account of loss by any casualty for which they may be liable, occasioned by the 25
October 1993: Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND ASSURANCE INC.
whatever recovery we may make and deliver to it all documents necessary to prove our interest in said property. We
also hereby agree to promptly prosecute suit against such persons, corporation or corporations through whose
negligence the aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence, in our
own name, but at the expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND
ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties evidenced a loan of
P3,000,000.00 which it granted to TRANS-ASIA, and not an advance payment on the policy or a partial payment for
the loss. It further submits that it is a customary practice for insurance companies in this country to extend loans
gratuitously as part of good business dealing with their assured, in order to afford their assured the chance to continue
business without embarrassment while awaiting outcome of the settlement of their claims. According to
PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate to it whatever rights and/or actions TRANS-ASIA
may have against third persons, and it cannot by no means be taken that by virtue thereof, PRUDENTIAL was granted
irrevocable power of attorney by TRANS-ASIA, as the sole power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction between the parties as evidenced by the "Loan and
Trust Receipt" is that of an advance payment by PRUDENTIAL of TRANS-ASIAs claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law Act No. 2427 of the
Philippine Legislature during the American Regime. The Insurance Act was lifted verbatim from the law of California,
except Chapter V thereof, which was taken largely from the insurance law of New York. Therefore, ruling case law in
that jurisdiction is to Us persuasive in interpreting provisions of our own Insurance Code. In addition, the application
of the adopted statute should correspond in fundamental points with the application in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt that the money was
intended as a loan does not detract from its real character as payment of claim, thus:
"The receipt of money by the insured employers from a surety company for losses on account of forgery of drafts by
an employee where no provision or repayment of the money was made except upon condition that it be recovered from
other parties and neither interest nor security for the asserted debts was provided for, the money constituted the
payment of a liability and not a mere loan, notwithstanding recitals in the written receipt that the money was intended
as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that appellant is obligated to
hand over to appellee "whatever recovery (Trans Asia) may make and deliver to (Prudential) all documents necessary
to prove its interest in the said property." For all intents and purposes therefore, the money receipted is payment under
the policy, with Prudential having the right of subrogation to whatever net recovery Trans-Asia may obtain from third
parties resulting from the fire. In the law on insurance, subrogation is an equitable assignment to the insurer of all
remedies which the insured may have against third person whose negligence or wrongful act caused the loss covered
by the insurance policy, which is created as the legal effect of payment by the insurer as an assignee in equity. The loss
in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer. It
has been referred to as the doctrine of substitution and rests on the principle that substantial justice should be attained
regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties
without regard to form.
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences that the real nature of
the transaction between the parties was that the amount of P3,000,000.00 was not intended as a loan whereby TRANSASIA is obligated to pay PRUDENTIAL, but rather, the same was a partial payment or an advance on the policy of the
claims due to TRANS-ASIA.

First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by PRUDENTIAL, subrogating
the former to the extent of "any net recovery made by TRANS ASIA SHIPPING CORP., from any person or persons,
corporation or corporations, or other parties, on account of loss by any casualty for which they may be liable,
occasioned by the 25 October 1993: Fire on Board."
Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly prosecute suit
against such persons, corporation or corporations through whose negligence the aforesaid loss was caused or who may
otherwise be responsible therefore, with all due diligence" in its name, the prosecution of the claims against such third
persons are to be carried on "at the expense of and under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC." The clear import of the phrase "at the expense of and under the exclusive
direction and control" as used in the "Loan and Trust Receipt" grants solely to PRUDENTIAL the power to prosecute,
even as the same is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely an agent of
PRUDENTIAL, the principal, in the prosecution of the suit against parties who may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay PRUDENTIAL is highly
speculative and contingent, i.e., only in the event and to the extent that any net recovery is made by TRANS-ASIA
from any person on account of loss occasioned by the fire of 25 October 1993. The transaction, therefore, was made to
benefit TRANS-ASIA, such that, if no recovery from third parties is made, PRUDENTIAL cannot be repaid the
amount. Verily, we do not think that this is constitutive of a loan. The liberality in the tenor of the "Loan and Trust
Receipt" in favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was a form of an advance
payment on TRANS-ASIAs claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the balance of the loss
suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid claims covered by
Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorneys fees equivalent to
10% of P8,395,072.26.
The Court of Appeals denied the grant of attorneys fees. It held that attorneys fees cannot be awarded absent a
showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIAs claim, notwithstanding that the
rejection was erroneous. According to the Court of Appeals, attorneys fees can be awarded only in the cases
enumerated in Article 2208 of the Civil Code which finds no application in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorneys fees and other expenses incurred
by the insured after a finding by the Insurance Commissioner or the Court, as the case may be, of an unreasonable
denial or withholding of the payment of the claims due. Moreover, the law imposes an interest of twice the ceiling
prescribed by the Monetary Board on the amount of the claim due the insured from the date following the time
prescribed in Section 242 or in Section 243, as the case may be, until the claim is fully satisfied. Finally, Section 244
considers the failure to pay the claims within the time prescribed in Sections 242 or 243, when applicable, as prima
facie evidence of unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing of bad faith in order that attorneys fees be granted.
As earlier stated, under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created
by failure of the insurer to pay the claim within the time fixed in both Sections 242 and 243 of the Insurance Code. As
established in Section 244, by reason of the delay and the consequent filing of the suit by the insured, the insurers shall
be adjudged to pay damages which shall consist of attorneys fees and other expenses incurred by the insured.
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the
Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the
insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be
adjudged to pay damages which shall consist of attorneys fees and other expenses incurred by the insured person by
reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the

Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two
hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided,
That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay or refusal in the
payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show that there was an
unreasonable delay by PRUDENTIAL in the payment of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26
October 1993, a day after the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of claim. On
13 August 1996, the adjuster, Richards Hogg International (Phils.), Inc., completed its survey report recommending the
amount of P11,395,072.26 as the total indemnity due to TRANS-ASIA. On 21 April 1997, PRUDENTIAL, in a letter
addressed to TRANS-ASIA denied the latters claim for the amount of P8,395,072.26 representing the balance of the
total indemnity. On 21 July 1997, PRUDENTIAL sent a second letter to TRANS-ASIA seeking a return of the amount
of P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of money against
PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing the balance of the proceeds of the
insurance claim.
As can be gleaned from the foregoing, there was an unreasonable delay on the part of PRUDENTIAL to pay TRANSASIA, as in fact, it refuted the latters right to the insurance claims, from the time proof of loss was shown and the
ascertainment of the loss was made by the insurance adjuster. Evidently, PRUDENTIALs unreasonable delay in
satisfying TRANS-ASIAs unpaid claims compelled the latter to file a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as attorneys fees to
TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten percent (10%) of P8,395,072.26. In the
case of Cathay Insurance, Co., Inc. v. Court of Appeals, where a finding of an unreasonable delay under Section 244 of
the Insurance Code was made by this Court, we grant an award of attorneys fees equivalent to ten percent (10%) of
the total proceeds. We find no reason to deviate from this judicial precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest
in accordance with Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling prescribed by the Monetary
Board due the insured, from the date following the time prescribed in Section 242 or in Section 243, as the case may
be, until the claim is fully satisfied. In the case at bar, we find Section 243 to be applicable as what is involved herein
is a marine insurance, clearly, a policy other than life insurance.
Section 243 is hereunder reproduced:
SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy other than life
insurance policy, shall be paid within thirty days after proof of loss is received by the insurer and ascertainment of the
loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such
ascertainment is not had or made within sixty days after such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at
the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the
ground that the claim is fraudulent.
As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board except when the failure or refusal of the insurer to pay was founded on the
ground that the claim is fraudulent.
D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted to mean 24% per
annum.
PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS-ASIA in the assailed
Decision of 6 November 2001. It is PRUDENTIALs stance that the award is extortionate and grossly
unsconscionable. In support thereto, PRUDENTIAL makes a reference to TRANS-ASIAs prayer in the Complaint

filed with the court a quo wherein the latter sought, "interest double the prevailing rate of interest of 21% per annum
now obtaining in the banking business or plus 42% per annum pursuant to Article 243 of the Insurance Code x x x."
The contention fails to persuade. It is settled that an award of double interest is lawful and justified under Sections 243
and 244 of the Insurance Code. In Finman General Assurance Corporation v. Court of Appeals, this Court held that the
payment of 24% interest per annum is authorized by the Insurance Code. There is no gainsaying that the term "double
interest" as used in Sections 243 and 244 can only be interpreted to mean twice 12% per annum or 24% per annum
interest, thus:
The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per centum per annum
(12%) as prescribed by the Monetary Board in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the Usury
Law; so that when Sections 242, 243 and 244 of the Insurance Code provide that the insurer shall be liable to pay
interest "twice the ceiling prescribed by the Monetary Board", it means twice 12% per annum or 24% per annum
interest on the proceeds of the insurance.
E. The payment of double interest should be counted from 13 September 1996.
The Court of Appeals, in imposing double interest for the duration of the delay of the payment of the unpaid balance
due TRANS-ASIA, computed the same from 13 August 1996 until such time when the amount is fully paid. Although
not raised by the parties, we find the computation of the duration of the delay made by the appellate court to be
patently erroneous.
To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the delay at the rate of twice
the ceiling prescribed by the Monetary Board. Significantly, Section 243 mandates the payment of any loss or damage
for which an insurer may be liable, under any policy other than life insurance policy, within thirty days after proof of
loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration. It is clear that under Section 243, the insurer has until the 30th day after proof
of loss and ascertainment of the loss or damage to pay its liability under the insurance, and only after such time can the
insurer be held to be in delay, thereby necessitating the imposition of double interest.
In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was completed by the
adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996. PRUDENTIAL had thirty days from 13 August
1996 within which to pay its liability to TRANS-ASIA under the insurance policy, or until 13 September 1996.
Therefore, the double interest can begin to run from 13 September 1996 only.
IV.
A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged in section III herein,
computed from the time of finality of judgment until the full satisfaction thereof in conformity with this Courts ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals.
This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, inscribed the rule of thumb in the application of interest
to be imposed on obligations, regardless of their source. Eastern emphasized beyond cavil that when the judgment of
the court awarding a sum of money becomes final and executory, the rate of legal interest, regardless of whether the
obligation involves a loan or forbearance of money, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of credit.
We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the finality of judgment
until the full satisfaction thereof must be imposed on the total amount of liability adjudged to PRUDENTIAL. It is
clear that the interim period from the finality of judgment until the satisfaction of the same is deemed equivalent to a
forbearance of credit, hence, the imposition of the aforesaid interest.
Fallo
WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No. 151991 is GRANTED,
thus, we award the grant of attorneys fees and make a clarification that the term "double interest" as used in the 6
November 2001 Decision of the Court of Appeals in CA GR CV No. 68278 should be construed to mean interest at the
rate of 24% per annum, with a further clarification, that the same should be computed from 13 September 1996 until

fully paid. The Decision and Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001
and 29 January 2002, respectively, are, thus, MODIFIED in the following manner, to wit:
1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26, representing the
balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363;
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of attorneys fees
equivalent to 10% of the amount of P8,395,072.26;
3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest
at the rate of 24% per annum to be computed from 13 September 1996 until fully paid; and
4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged as
abovestated in paragraphs (1), (2), and (3) herein, computed from the time of finality of judgment until the full
satisfaction thereof.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 125678

March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner
Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble,
diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).
The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was
issued Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient
benefits" such as annual physical examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990,
then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00
per disability.
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center
(MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the
benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement
was void. According to petitioner, there was a concealment regarding Ernanis medical history. Doctors at the MMC
allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to
his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about
P76,000.00.

After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was
admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home
again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to
bring him back to the Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages
against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked
for reimbursement of her expenses plus moral damages and attorneys fees. After trial, the lower court ruled against
petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos,
ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount
of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and
absolved petitioner Reverente. Petitioners motion for reconsideration was denied. Hence, petitioner brought the
instant petition for review, raising the primary argument that a health care agreement is not an insurance contract;
hence the "incontestability clause" under the Insurance Code does not apply.
Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a
member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement
without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover,
since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer,
petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least
two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may
damnify a person having an insurable interest against him, may be insured against. Every person has an insurable
interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a
pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of
which death or illness might delay or prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own
health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.
Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated
contingent, the health care provider must pay for the same to the extent agreed upon under the contract.

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the
application for health coverage, petitioners required respondents husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health to furnish any and all information relative
to any hospitalization, consultation, treatment or any other medical advice or examination. Specifically, the Health
Care Agreement signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to
this application are full, complete and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied for is actually paid during
the lifetime and good health of proposed Members; that no information acquired by any Representative of
PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician
is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information
acquired by him in his professional capacity upon any question affecting the eligibility for health care
coverage of the Proposed Members and that the acceptance of any Agreement issued on this application shall
be a ratification of any correction in or addition to this application as stated in the space for Home Office
Endorsement. (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the
applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or
that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any
hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy of this authorization shall
be as valid as the original. (Underscoring ours)
Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:
Failure to disclose or misrepresentation of any material information by the member in the application or
medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from
the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid. An
undisclosed or misrepresented information is deemed material if its revelation would have resulted in the
declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or
benefits applied for.
The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This
largely depends on opinion rather than fact, especially coming from respondents husband who was not a medical
doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive
will not avoid a policy even though they are untrue. Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will
not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon
such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and
one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief,
that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his
knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.
(Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.
Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty
to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with
or without the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the
liability of the health care provider attaches once the member is hospitalized for the disease or injury covered by the
agreement or whenever he avails of the covered benefits which he has prepaid.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance."
The right to rescind should be exercised previous to the commencement of an action on the contract. In this case, no
rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to
furnish facts on which cancellation is based.
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations
on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party
which prepared the contract the insurer. By reason of the exclusive control of the insurance company over the terms
and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in
favor of the insured, especially to avoid forfeiture. This is equally applicable to Health Care Agreements. The
phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of
the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is
to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.
Anent the incontestability of the membership of respondents husband, we quote with approval the following findings
of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve
months from the date of issuance of the Agreement within which to contest the membership of the patient if he
had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of
diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no
longer lie.
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of
their marriage, the deceased was previously married to another woman who was still alive. The health care agreement
is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is
not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement.
The records adequately prove the expenses incurred by respondent for the deceaseds hospitalization, medication and
the professional fees of the attending physicians. WHEREFORE, in view of the foregoing, the petition is DENIED.
The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 119176

March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE
COMPANY, INC.) and THE COURT OF APPEALS, respondents.
KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of
Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax
Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a
domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business.
In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate
Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of
life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The
clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on
the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a
total par value of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00.
Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book
value.1wphi1.nt
Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a)
P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by
respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The
computation of the deficiency documentary stamp taxes is as follows:
On Policies Issued:

Total policy issued during the year

P1,360,054,000.00

Documentary stamp tax due thereon

(P1,360,054,000.00 divided by P200.00
multiplied by P0.35)

P 2,380,094.50

Less: Payment

P 1,915,495.75

Deficiency

Add: Compromise Penalty

P 464,598.75

300.00
-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court
of Tax Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock
dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and
P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of
Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are
considered withdrawn.
SO ORDERED.
Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals
promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance

policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the
correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by
the shares. The dispositive portion of the Court of Appeals decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the
deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the
Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum of
P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement.
SO ORDERED.
A motion for reconsideration of the decision having been denied, both the Commissioner of Internal Revenue and
private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R.
No. 118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the
deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present
petition questioning that portion of the Court of Appeals decision which invalidated the deficiency assessment on the
insurance policy, attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE
AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS
NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND
SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON
THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE
ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS
RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A
SINGULAR TRANSACTION.
Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan
agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or
property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had
or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title,
by the person making, signing, issuing, accepting, or transferring the same wherever the document is made,
signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the
property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That
whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party
thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis
for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National
Internal Revenue Code which states in part:
The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National
Internal Revenue Code which states in part:
Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by
whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or
lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred
pesos per fractional part thereof, of the amount insured by any such policy.
Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the
main agreement and involves another transaction; and that, while no new policy was issued, the original policy was
essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase
clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in
order.
The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the
insurance policy and that the "automatic increase clause" is an integral part of that policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of
insurance is set forth. Section 50 of the same Code provides that the policy, which is required to be in printed form,
may contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the

contract of insurance. It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is
considered part of such policy or contract of insurance.
The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause
was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the
"junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance
contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took
effect in 1984 when the assured reached a certain age.
It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or
transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under
Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is
the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase
clause" embodied in the policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of
its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus,
the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the
automatic increase clause because it was already determinable at the time the transaction was entered into and formed
part of the policy.
The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181, by which
the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation.
In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive
obligation, but still a part of the insurance sold to which private respondent was liable for the payment of the
documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original
insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder
Policy."
Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited, tax laws
cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the
amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should
not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the
law requiring that the tax be computed on the basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE
insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner
imposed on private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under
the policy issued by respondent.
SO ORDERED.
Davide, Jr., C.J. and Ynares-Santiago, J., concur.
Puno, J., on official leave.