31: G.R. No.

124520 August 18, 1997

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners, vs. COURT
OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of
respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private
respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and
effects placed at any stall or store or space in the leased premises without first obtaining the
written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without
the consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its
own benefit; . . . 1
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by fire
the merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the United
Insurance Co., Inc. (hereinafter United) without the written consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote
the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the Cha
spouses and United) be paid directly to CKS, based on its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering therein
defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00 as
exemplary damages, P20,000.00 as attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated 11 January
1996, affirming the trial court decision, deleting however the awards for exemplary damages and
attorney's fees. A motion for reconsideration by United was denied on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN
THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT IS
NULL AND VOID FOR BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY

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

Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary of
the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest
over said merchandise remains with the insured, the Cha spouses. The automatic assignment of the policy
to CKS under the provision of the lease contract previously quoted is void for being contrary to law and/or
public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and
Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds of the
fire insurance policy to a person (CKS) who has no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses obtained a
fire insurance policy over their own merchandise, without the consent of CKS, is a separate and distinct
issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and
Stella Uy-Cha.
SO ORDERED.
Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
Footnotes
1 Rollo, p. 50.
* Penned by Judge Roberto M. Lagman.
** Penned by Justice Conchita Carpio-Morales with Justices Fidel P. Purisima and Fermin A.
Matin, Jr., concurring.
2 Rollo, p. 18.
3 Article 1409(i), Civil Code.
4 Section 19, Insurance Code.

32- G.R. No. 113899 October 13, 1999

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner, vs. COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated May 17, 1993, of
the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate
court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance
claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial
court's decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorney's fees and litigation expenses in the complaint and counterclaim, with costs against
the defendant and dismissing the complaint in respect to the plaintiffs, other than the
widow-beneficiary, for lack of cause of action. 3
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for
membership in the group life insurance plan. In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high
blood pressure, cancer, diabetes, lung; kidney or stomach disorder or any
other physical impairment?

Answer: No. If so give details _____________.

8. Are you now, to the best of your knowledge, in good health?
Answer: [x] Yes [ ] NO.

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to
the extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred (P86,200.00)
pesos.1wphi1.nt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP submitted
a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy
when he applied for an insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did
not disclose he had been suffering from hypertension, which caused his death. Allegedly, such nondisclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a complaint
with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific Performance
with Damages." 5 During the trial, Dr. Hernando Mejia, who issued the death certificate, was called to
testify. Dr. Mejia's findings, based partly from the information given by the respondent widow, stated that
Dr. Leuterio complained of headaches presumably due to high blood pressure. The inference was not
conclusive because Dr. Leuterio was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against
Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present
petition. Petitioners interposed the following assigned errors:
1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO
THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY
TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION
INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF
ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY
TO DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO
SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANTAPPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO. 6

Synthesized below are the assigned errors for our resolution:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the
widow of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio
concealed that he had hypertension, which would vitiate the insurance
contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the
amount of eighty six thousand, two hundred (P86,200.00) pesos without proof
of the actual outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in
interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of
Appeals affirmed the trial court's judgment, Grepalife was held liable to pay the proceeds of insurance
contract in favor of DBP, the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to
this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the
"mortgage redemption insurance," is a device for the protection of both the mortgagee and the mortgagor.
On the part of the mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from
such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. 7 In a similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death; the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness. 8 Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss payable to the mortgagee,
the insurance is on the mortgagor's interest, and the mortgagor continues to be a party to the contract. In
this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such losspayable clause does not make the mortgagee a party to the contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to
a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does
not cease to be a party to the original contract, and any act of his, prior to the loss, which
would otherwise avoid the insurance, will have the same effect, although the property is in
the hands of the mortgagee, but any act which, under the contract of insurance, is to be
performed by the mortgagor, may be performed by the mortgagee therein named, with the
same effect as if it had been performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance,
the policy stating that: "In the event of the debtor's death before his indebtedness with the Creditor [DBP]
shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies
designated by the debtor." 10 When DBP submitted the insurance claim against petitioner, the latter denied
payment thereof, interposing the defense of concealment committed by the insured. Thereafter, DBP

collected the debt from the mortgagor and took the necessary action of foreclosure on the residential lot of
private respondent. 11 In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co. 12 we held:
Insured, being the person with whom the contract was made, is primarily the proper person
to bring suit thereon. * * * Subject to some exceptions, insured may thus sue, although the
policy is taken wholly or in part for the benefit of another person named or unnamed, and
although it is expressly made payable to another as his interest may appear or otherwise. *
* * Although a policy issued to a mortgagor is taken out for the benefit of the mortgagee and
is made payable to him, yet the mortgagor may sue thereon in his own name, especially
where the mortgagee's interest is less than the full amount recoverable under the policy, * *
*.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the policy
for the purpose of collection, or has assigned as collateral security any judgment he may
obtain. 13
And since a policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover it whatever the insured might
have recovered,14 the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to
annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had
hypertension, which might have caused his death. Concealment exists where the assured had knowledge
of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should
communicate it to the assured, but he designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as supported by
the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia's technical diagnosis
of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the widow's
declaration that her husband had "possible hypertension several years ago" should not be considered as
hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy on
the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr.
Leuterio's any previous hospital confinement. 16 Dr. Leuterio's death certificate stated that hypertension
was only "the possible cause of death." The private respondent's statement, as to the medical history of
her husband, was due to her unreliable recollection of events. Hence, the statement of the physician was
properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in good
health and that he had not consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate
that the former died of cerebral hemorrhage, probably secondary to hypertension. From this
report, the appellant insurance company refused to pay the insurance claim. Appellant
alleged that the insured had concealed the fact that he had hypertension.

Contrary to appellant's allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insured's widow who was not
even sure if the medicines taken by Dr. Leuterio were for hypertension, the appellant had
not proven nor produced any witness who could attest to Dr. Leuterio's medical history . . .
xxx xxx xxx
Appellant insurance company had failed to establish that there was concealment made by
the insured, hence, it cannot refuse payment of the claim. 17
The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract.18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the
duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In the
case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to
pay the proceeds of the insurance.1wphi1.nt
And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no
evidence as to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the
mortgagor's death. Hence, for private respondent's failure to establish the same, the action for specific
performance should be dismissed. Petitioner's claim is without merit. A life insurance policy is a valued
policy. 20 Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the coverage of his insurance, which states that:
The policy states that upon receipt of due proof of the Debtor's death during the terms of
this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtor's death before his indebtedness with the creditor shall have been
fully paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor
and the balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies
designated by the debtor."22 (Emphasis omitted)
However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private
respondent's memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of
mortgagor's outstanding loan. Considering this supervening event, the insurance proceeds shall inure to
the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not
unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot
collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly
belong to Dr. Leuterio's heirs represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R.
CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance proceeds
amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's indebtedness to
Development Bank of the Philippines. Costs against petitioner.1wphi1.nt
SO ORDERED.
Mendoza, Buena and De Leon, Jr., JJ., concur.
Bellosillo, J, on official leave.

35- G.R. No. 147839

June 8, 2006

GAISANO CAGAYAN, INC. Petitioner, vs. INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated October 11, 2000 of the Court
of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the
Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for
damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner);
and the CA Resolution dated April 11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc.
(LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI
separately obtained from respondent fire insurance policies with book debt endorsements. The insurance
policies provide for coverage on "book debts in connection with ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines." 2 The
policies defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45
days after the time of the loss covered under this Policy." 3 The policies also provide for the following
conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for a
period in excess of six (6) months from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close
of every calendar month all amount shown in their books of accounts as unpaid and thus become
receivable item from their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the
items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by IMC
and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and
LSPI filed with respondent their claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of

ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event or force
majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract
committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI
never communicated to it that they insured their properties; that it never consented to paying the claim of
the insured.6
At the pre-trial conference the parties failed to arrive at an amicable settlement. 7 Thus, trial on the merits
ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint. 8 It held that the fire
was purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner;
that it has not been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices
state that "it is further agreed that merely for purpose of securing the payment of purchase price, the
above-described merchandise remains the property of the vendor until the purchase price is fully paid",
IMC and LSPI retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA. 9 On October 11, 2000, the CA rendered its decision setting
aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is
entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully
paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured
Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity
and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the
general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the
time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the right
to go against petitioner; that, being a fire insurance with book debt endorsements, what was insured was
the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11,
2001.13
Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE OVER
CREDIT.

10

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE INSTANT
CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER ART.
2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be
over credit since an insurance "on credit" belies not only the nature of fire insurance but the express terms
of the policies; that it was not credit that was insured since respondent paid on the occasion of the loss of
the insured goods to fire and not because of the non-payment by petitioner of any obligation; that, even if
the insurance is deemed as one over credit, there was no loss as the accounts were not yet due since no
prior demands were made by IMC and LSPI against petitioner for payment of the debt and such demands
came from respondent only after it had already paid IMC and LSPI under the fire insurance policies. 15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI
assumed the risk of loss when they secured fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment
between respondent and its insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to
keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the
ready-made clothing materials since it failed to overcome the presumption of liability under Article
126516 of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide
stringent measures of caution, care and maintenance on its property because electric wires do not usually
short circuit unless there are defects in their installation or when there is lack of proper maintenance and
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the
CA is limited to reviewing questions of law which involves no examination of the probative value of the
evidence presented by the litigants or any of them. 18 The Supreme Court is not a trier of facts; it is not its
function to analyze or weigh evidence all over again. 19 Accordingly, findings of fact of the appellate court
are generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by
this Court, such as: (1) when the findings are grounded entirely on speculation, surmises or conjectures;
(2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse
of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts
are conflicting; (6) when in making its findings the CA went beyond the issues of the case, or its findings
are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary
to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; and (11) when the CA manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred
in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI
since such insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.

11

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines." 23 ; and defined book debts as the "unpaid account
still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this
Policy."24 Nowhere is it provided in the questioned insurance policies that the subject of the insurance is the
goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
into it any alleged intention of the parties, the terms are to be understood literally just as they appear on
the face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with
petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the
goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment
of the purchase price the above described merchandise remains the property of the vendor until the
purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure performance
by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such
delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is
borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest
is not determined by concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or
personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable
interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is
requisite to the existence of such an interest, it is sufficient that the insured is so situated with reference to
the property that he would be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its existence or would
suffer loss from its destruction.30Indeed, a vendor or seller retains an insurable interest in the property sold

12

so long as he has any interest therein, in other words, so long as he would suffer by its destruction, as
where he has a vendor's lien. 31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid
accounts appearing in their Books of Account 45 days after the time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 32 of the
Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation
consists in the payment of money, the failure of the debtor to make the payment even by reason of a
fortuitous event shall not relieve him of his liability. 33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even
in case of fortuitous event. It does not apply when the obligation is pecuniary in nature. 34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that
the object thereof is designated merely by its class or genus without any particular designation or physical
segregation from all others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the
obligation.35 This rule is based on the principle that the genus of a thing can never perish. Genus nunquan
perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific
property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case.
What is relevant here is whether it has been established that petitioner has outstanding accounts with IMC
and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22" 38 show
that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the
check voucher evidencing payment to IMC. Exhibit "F" 40 is the subrogation receipt executed by IMC in favor
of respondent upon receipt of the insurance proceeds. All these documents have been properly identified,
presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not
only the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle
the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of
the insurance claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207 of the
Civil Code which provides:
Art. 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. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary
weight can be given to Exhibit "F Levi Strauss", 42 a letter dated April 23, 1991 from petitioner's General
Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It
only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which

13

LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATIONthat the order to pay the amount of P535,613.00 to respondent is DELETED for lack of
factual basis.
No pronouncement as to costs.
SO ORDERED.
Footnotes
16

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that
the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the
provisions of Article 1165. This presumption does not apply in case of earthquake, flood, storm, or
other natural calamity.

36-G.R. No. 166245

April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner, vs. THE PHILIPPINE AMERICAN
LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case

14

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the
inaction of the insurer on the insurance application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into
an agreement denominated as Creditor Group Life Policy No. P-1920 2 with petitioner Eternal Gardens
Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased burial lots from
it on installment basis would be insured by Philamlife. The amount of insurance coverage depended upon
the existing balance of the purchased burial lots. The policy was to be effective for a period of one year,
renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted
to the Assured for the unpaid balance of his loan with the Assured, and is accepted for Life
Insurance coverage by the Company on its effective date is eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00. However, a
declaration of good health shall be required for all Lot Purchasers as part of the application. The
Company reserves the right to require further evidence of insurability satisfactory to the Company
in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid
balance of his loan (including arrears up to but not exceeding 2 months) as reported by the Assured
to the Company or the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the
Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with
the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not
approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with
a copy of the application of each purchaser, and the amounts of the respective unpaid balances of all
insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter dated
December 29, 1982,4containing a list of insurable balances of its lot buyers for October 1982. One of those
included in the list as "new business" was a certain John Chuang. His balance of payments was PhP
100,000. On August 2, 1984, Chuang died.

15

Eternal sent a letter dated August 20, 1984 5 to Philamlife, which served as an insurance claim for Chuangs
death. Attached to the claim were the following documents: (1) Chuangs Certificate of Death; (2)
Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to submit the following
documents relative to its insurance claim for Chuangs death: (1) Certificate of Claimant (with form
attached); (2) Assureds Certificate (with form attached); (3) Application for Insurance accomplished and
signed by the insured, Chuang, while still living; and (4) Statement of Account showing the unpaid balance
of Chuang before his death.
Eternal transmitted the required documents through a letter dated November 14, 1984, 7 which was
received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance claim.
This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25,
1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20,
1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of P100,000.00
each. No application for Group Insurance was submitted in our office prior to his death on August 2,
1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability
provision, "a declaration of good health shall be required for all Lot Purchasers as party of the
application." We cite further the provision on Effective Date of Coverage under the policy which
states that "there shall be no insurance if the application is not approved by the Company." Since
no application had been submitted by the Insured/Assured, prior to his death, for our approval but
was submitted instead on November 15, 1984, after his death, Mr. John Uy Chuang was not covered
under the Policy. We wish to point out that Eternal Gardens being the Assured was a party to the
Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for insurance
coverage shall have been met. We will however, return all the premiums which have been paid in
behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money
against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL,
against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00,
representing the proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully
paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.

16

The RTC found that Eternal submitted Chuangs application for insurance which he accomplished before his
death, as testified to by Eternals witness and evidenced by the letter dated December 29, 1982, stating,
among others: "Encl: Phil-Am Life Insurance Application Forms & Cert." 10 It further ruled that due to
Philamlifes inaction from the submission of the requirements of the group insurance on December 29,
1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the premiums during the
same period, Philamlife was deemed to have approved Chuangs application. The RTC said that since the
contract is a group life insurance, once proof of death is submitted, payment must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810
is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternals
letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application
form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application form,
Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore determined by
this Honorable Court, or has decided it in a way not in accord with law or with the applicable
jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife before the
death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the
CA and first level courts, considering their findings of facts are conclusive and binding on this Court.
However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of
facts are conflicting; (6) when in making its findings the [CA] went beyond the issues of the case, or
its findings are contrary to the admissions of both the appellant and the appellee; (7) when the
findings [of the CA] are contrary to the trial court; (8) when the findings are conclusions
without citation of specific evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of evidence and contradicted by
the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain relevant
facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.12 (Emphasis supplied.)

17

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review
them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was
apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of
the insurance application which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such
stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments. Such
receipt is an admission by Philamlife against its own interest. 13 The burden of evidence has shifted to
Philamlife, which must prove that the letter did not contain Chuangs insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as
received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies is
groundless. The trial court is in the best position to determine the reliability and credibility of the
witnesses, because it has the opportunity to observe firsthand the witnesses demeanor, conduct, and
attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court,
unless some facts or circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of
Chuang was, as shown by the testimony of Edilberto Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and the
original of this is submitted to Philamlife together with the monthly remittances and the second
copy is remained or retained with the marketing department of Eternal Gardens.
Atty. Miranda:

18

We move to strike out the answer as it is not responsive as counsel is merely asking for the location
and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that payment
together with the new clients all the originals I see to it before I sign the transmittal letter the
originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled out
the application form, these are minor inconsistencies that do not affect the credibility of the witnesses.
Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of
witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that the
testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions
evidence as a whole or reflect on the witnesses honesty. The test is whether the testimonies agree
on essential facts and whether the respective versions corroborate and substantially coincide with
each other so as to make a consistent and coherent whole.18
In the present case, the number of copies of the insurance application that Chuang executed is not at
issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with
the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not
approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became effective

19

upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve
the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latters interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by
the insurer. A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be
construed liberally in favor of the insured and strictly against the insurer. 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.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:
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. 20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a partys
purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is
created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the
insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date
of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the insurer on the insurance application must not work to
prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination
of the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience
in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts
of adhesion containing technical terms and conditions of the industry, confusing if at all understandable to
laypersons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are
imbued with public interest that must be considered whenever the rights and obligations of the insurer and
the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance
companies must be obligated to act with haste upon insurance applications, to either deny or approve the
same, or otherwise be bound to honor the application as a valid, binding, and effective insurance
contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810
isREVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138
is MODIFIED. Philamlife is hereby ORDERED:

20

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy
of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the
time of extra-judicial demand by Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision
on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from
June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.

21