Republic of the Philippines accede to the latter's demand as the former is awaiting
SUPREME COURT the final report of the insurance adjuster, H.H. Bayne
Manila
SECOND DIVISION
G.R. No. L-41014 November 28, 1988
PACIFIC BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and ORIENTAL ASSURANCE
CORPORATION, respondents.
Flores, Ocampo, Dizon and Domingo Law Office for
petitioner.
Cabochan and Reyes Law Office for respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision
of respondent Court of Appeals * in CA-G.R. No. 41735-
R, entitled "Pacific Banking Corporation vs. Oriental
Assurance Corporation", which set aside the decision of
the Court of First Instance (CFI) of Manila, ** which had
in turn granted the complaint for a sum of money in
Civil Case No. 56889.
As gathered from the records, the undisputed facts of
this case are as follows:
On October 21,1963, Fire Policy No. F-3770 (Exhibit
"A"), an open policy, was issued to the Paramount Shirt
Manufacturing Co. (hereinafter referred to as the
insured, for brevity), by which private respondent
Oriental Assurance Corporation bound itself to
indemnify the insured for any loss or damage, not
exceeding P61,000.00, caused by fire to its property
consisting of stocks, materials and supplies usual to a
shirt factory, including furniture, fixtures, machinery
and equipment while contained in the ground, second
and third floors of the building situated at number 256
Jaboneros St., San Nicolas, Manila, for a period of one
year commencing from that date to October 21, 1964.
The insured was at the time of the issuance of the
policy and is up to this time, a debtor of petitioner in
the amount of not less than Eight Hundred Thousand
Pesos (P800,000.00) and the goods described in the
policy were held in trust by the insured for the
petitioner under thrust receipts (Record on Appeal, p.
4).
Said policy was duly endorsed to petitioner as
mortgagee/ trustor of the properties insured, with the
knowledge and consent of private respondent to the
effect that "loss if any under this policy is payable to
the Pacific Banking Corporation".
On January 4, 1964, while the aforesaid policy was in
full force and effect, a fire broke out on the subject
premises destroying the goods contained in its ground
and second floors (Record on Appeal, p.5)
On January 24, 1964, counsel for the petitioner sent a
letter of demand to private respondent for indemnity
due to the loss of property by fire under the
endorsement of said policy (Brief for Plaintiff-Appellee,
pp. 16-17).
On January 28, 1964, private respondent informed
counsel for the petitioner that it was not yet ready to
Adjustment Company (Brief for Plaintiff-Appellee, pp.
17-18).
On March 25, 1964, the said insurance adjuster notified
counsel for the petitioner that the insured under the
policy had not filed any claim with it, nor submitted
proof of loss which is a clear violation of Policy
Condition No.11, and for which reason, determination
of the liability of private respondent could not be had
(Supra, pp. 19-20).
On April 24, 1964, petitioner's counsel replied to
aforesaid letter asking the insurance adjuster to verify
from the records of the Bureau of Customs the entries
of merchandise taken into the customs bonded
warehouse razed by fire as a reliable proof of loss
(Supra, pp. 21-22). For failure of the insurance
company to pay the loss as demanded, petitioner
(plaintiff therein) on April 28, 1 964, filed in the court a
quo an action for a sum of money against the private
respondent, Oriental Assurance Corporation, in the
principal sum of P61,000.00 issued in favor of
Paramount Shirt Manufacturing Co. (Record on Appeal,
pp. 1-36).
On May 25, 1964, private respondent raised the
following defenses in its answer to wit: (a) lack of
formal claim by insured over the loss and (b)
premature filing of the suit as neither plaintiff nor
insured had submitted any proof of loss on the basis of
which defendant would determine its liability and the
amount thereof, either to the private respondent or its
ad . adjuster H.H. Bayne Adjustment Co., both in
violation of Policy Condition No.11 (Record on Appeal,
pp. 37-38).
At the trial, petitioner presented in evidence Exhibit
"H", which is a communication dated December 22,
1965 of the insurance adjuster, H.H. Bayne Adjustment
Co. to Asian Surety Insurance Co., Inc., revealing
undeclared co-insurances with the
following: P30,000.00 with Wellington Insurance;
P25,000. 00 with Empire Surety and P250,000.00 with
Asian Surety; undertaken by insured Paramount on the
same property covered by its policy with private
respondent whereas the only co-insurances declared in
the subject policy are those of P30,000.00 with
Malayan P50,000.00 with South Sea and P25.000.00
with Victory (Brief for the Defendant pp. 13-14).
It will be noted that the defense of fraud and/or
violation of Condition No. 3 in the Policy, in the form of
non-declaration of co-insurances which was not
pleaded in the answer was also not pleaded in the
Motion to Dismiss.
At any rate, on June 30, 1967, the trial court denied
private respondent's motion on the ground that the
defense of lack of proof of loss or defects therein was
raised for the first time after the commencement of the
suit and that it must be deemed to have waived the
requirement of proof of loss (Sections 83 and 84,
Insurance Act; Record on Appeal, p. 61).
On September 9, 1967, the case was considered
submitted for decision from which order private
respondent filed a motion for reconsideration to set the
case or further reception of private respondent's
additional evidence, "in order to prove that 'insured has
committed a violation of condition No. 3 of the policy in
relation to the other Insurance Clause.' " (Record on
Appeal, pp. 61-69).
On September 30,1967, the case was set for the
continuation of the hearing for the reception merely of
the testimony of Alejandro Tan Gatue, Manager of the
Adjustment Co., over the vehement opposition of the
petitioner (Record on Appeal, p. 129).
On April 18, 1 968, the trial court rendered a decision
adjudging private respondent liable to the petitioner
under the said contract of insurance, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby
rendered ordering the defendant to pay
the plaintiff P61,000.00, with interest at
the rate of 8% per annum from January
4, 1964, to April 28, 1964, and 12%
from April 29, 1964, until the amount is
fully paid, P6,100.00, as attorney's
fees, and the costs.
SO ORDERED. (Record on Appeal, pp.
140-141)
On appeal, the Court of Appeals reversed the decision
of the trial court (Decision promulgated on April 23,
1975, Rollo, pp. 21-33).
Petitioner filed a motion for reconsideration of the said
decision of the respondent Court of Appeals, but this
was denied on July 3,1975 for lack of merit (Rollo, pp.
54-67), resulting in this petition with the following
assigned errors;
I PROPERTY INSURED.
RESPONDENT COURT OF APPEALS
COMMITTED A GRAVE ERROR OF LAW
IN CONCLUDING FRAUD FROM THE
BARE FACT THAT THE INSURED
PARAMOUNT PROCURED ADDITIONAL
INSURANCES OTHER THAN THOSE
STATED IN THE POLICY IN SPITE OF THE
EXISTENCE OF CONTRARY
PRESUMPTIONS AND ADMITTED FACT
AND CIRCUMSTANCES WHICH NEGATE
THE CORRECTNESS OF SAID
CONCLUSION.
(a) The respondent Court did not
consider the legal presumption against
the existence of fraud, which should be
established with such quantum of proof
as is required for any crime.
(b) The record of the case is bereft of
proof of such fraud.
(c) The private respondent insurer did
not even plead or in anywise raise
fraud as a defense in its answer or
motion to dismiss and, therefore, it
should have been considered waived.
(d) The total amount of insurance
procured by the insured from the
different companies amounted to
hardly onehalf () of the value of the
goods insured.
II
RESPONDENT COURT ERRED IN NOT
HOLDING THAT CONSIDERING THE
VOTING ON THE PARTICULAR
QUESTION OF FRAUD, THE FINDING OF
THE TRIAL COURT THEREON SHOULD
BE CONSIDERED AFFIRMED.
III
THE CONCURRING OPINION OF MR.
JUSTICE CHANCO IS LEGALLY
ERRONEOUS IN HOLDING THAT THE
ACTION WAS PREMATURELY BROUGHT
BECAUSE THE REQUIRED CLAIM UNDER
THE INSURANCE LAW HAS NOT BEEN
FILED, NOTWITHSTANDING THE
LETTER, (EXHIBIT "C") OF PETITIONER-
APPELLANT'S LAWYER WHICH IS A
SUBSTANTIAL COMPLIANCE OF THE
LEGAL REQUIREMENTS AND NOT
HOLDING THAT PRIVATE RESPONDENT
INSURER HAD ALREADY WAIVED THE
SUPPOSED DEFECTS IN THE CLAIM
FILED BY PETITIONER-APPELLANT FOR
ITS FAILURE TO CALL THE ATTENTION
OF THE LAYER TO SUCH ALLEGED
DEFECTS AND FOR ENDORSING THE
CLAIM TO ITS ADJUSTER FOR
PROCESSING.
IV
RESPONDENT COURT OF APPEALS
COMMITTED A GRAVE ERROR OF LAW
IN NOT INTERPRETING THE PROVISIONS
OF THE POLICY LIBERALLY IN FAVOR OF
THE HEREIN PETITIONER-APPELLANT,
WHO IS NOT THE INSURED BUT ONLY
THE ASSIGNEE/MORTGAGEE OF THE
V
RESPONDENT COURT OF APPEALS
COMMITTED A GRAVE ERROR OF LAW
IN DISMISSING THE CASE AND IN NOT
AFFIRMING THE APPEALED DECISION
OF THE TRIAL COURT. (Brief for
Petitioners, pp. 1-3)
The crux of the controversy centers on two points: (a)
unrevealed co-insurances which violated policy
conditions No. 3 and (b) failure of the insured to file the
required proof of loss prior to court action. Policy
Condition No. 3 explicitly provides:
3. The Insured shall give notice to the
Company of any insurance 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 benefit under this
policy shall be forfeited. (Record on
Appeal, p. 12)
It is not disputed that the insured failed to reveal
before the loss three other insurances. As found by the
Court of Appeals, by reason of said unrevealed
insurances, the insured had been guilty of a false
declaration; a clear misrepresentation and a vital one
because where the insured had been asked to reveal
but did not, that was deception. Otherwise stated, had
the insurer known that there were many co-insurances,
it could have hesitated or plainly desisted from
entering into such contract. Hence, the insured was
guilty of clear fraud (Rollo, p. 25).
Petitioner's contention that the allegation of fraud is
but a mere inference or suspicion is untenable. In fact,
concrete evidence of fraud or false declaration by the
insured was furnished by the petitioner itself when the
facts alleged in the policy under clauses "Co-
Insurances Declared" and "Other Insurance Clause" are
materially different from the actual number of co-
insurances taken over the subject property.
Consequently, "the whole foundation of the contract
fails, the risk does not attach and the policy never
becomes a contract between the parties.
Representations of facts are the foundation of the
contract and if the foundation does not exist, the
superstructure does not arise. Falsehood in such
representations is not shown to vary or add to the
contract, or to terminate a contract which has once
been made, but to show that no contract has ever
existed (Tolentino, Commercial Laws of the Philippines,
p. 991, Vol. II, 8th Ed.) A void or inexistent contract is
one which has no force and effect from the very
beginning, as if it had never been entered into, and
which cannot be validated either by time or by
ratification Tongoy v. C.A., 123 SCRA 99 [1983]; Avila v.
C.A. 145 SCRA [1986]).
As the insurance policy against fire expressly required
that notice should be given by the insured of other
insurance upon the same property, the total absence of
such notice nullifies the policy (Sta. Ana v. Commercial
Union Assurance Co., 55 Phil. 333 [1930]; Union
Manufacturing Co., Inc. vs. Philippine Guaranty Co.,
Inc., 47 SCRA 276 [1972]; Pioneer Ins. & Surety Corp.,
v. Yap, 61 SCRA 432 [1974]).
The argument that notice of co-insurances may be
made orally is preposterous and negates policy
condition No. 20 which requires every notice and other
communications to the insurer to be written or printed.
Petitioner points out that Condition No. 3 in the policy
in relation to the "other insurance clause" supposedly
to have been violated, cannot certainly defeat the right
of the petitioner to recover the insurance as
mortgagee/assignee. Particularly referring to the
mortgage clause of the policy, petitioner argues that
considering the purpose for which the endorsement or
assignment was made, that is, to protect the
mortgagee/assignee against any untoward act or
omission of the insured, it would be absurd to hold that
petitioner is barred from recovering the insurance on
account of the alleged violation committed by the
insured (Rollo, Brief for the petitioner, pp, 33-35).
It is obvious that petitioner has missed all together the
import of subject mortgage clause which specifically
provides:
Mortgage Clause
Loss, if any, under this policy, shall be
payable to the PACIFIC BANKING
CORPORATION Manila
mortgagee/trustor as its interest may
appear, it being hereby understood and
agreed that this insurance as to the
interest of the mortgagee/trustor only
herein, shall not be invalidated by any
act or neglectexcept fraud or
misrepresentation, or arsonof the
mortgagor or owner/trustee of the
property insured; provided, that in case
the mortgagor or owner/ trustee
neglects or refuses to pay any
premium, the mortgagee/ trustor shall,
on demand pay the same. (Rollo, p. 26)
The paragraph clearly states the exceptions to the
general rule that insurance as to the interest of the
mortgagee, cannot be invalidated; namely: fraud, or
misrepresentation or arson. As correctly found by the
Court of Appeals, concealment of the aforecited
co-insurances can easily be fraud, or in the very least,
misrepresentation (Rollo, p. 27).
Undoubtedly, it is but fair and just that where the
insured who is primarily entitled to receive the
proceeds of the policy has by its fraud and/or
misrepresentation, forfeited said right, with more
reason petitioner which is merely claiming as indorsee
of said insured, cannot be entitled to such proceeds.
Petitioner further stressed that fraud which was not
pleaded as a defense in private respondent's answer or
motion to dismiss, should be deemed to have been
waived.
It will be noted that the fact of fraud was tried by
express or at least implied consent of the parties.
Petitioner did not only object to the introduction of
evidence but on the contrary, presented the very
evidence that proved its existence.
Be that as it may, it is established that the Supreme
Court has ample authority to give beyond the
pleadings where in the interest of justice and the
promotion of public policy, there is a need to make its
own finding to support its conclusion. Otherwise stated,
the Court can consider a fact which surfaced only after
trial proper (Maharlika Publishing Corp. v. Tagle, 142
SCRA 561 [1986]).
Generally, the cause of action on the policy accrues
when the loss occurs, But when the policy provides
that no action shall be brought unless the claim is first
presented extrajudicially in the manner provided in the
policy, the cause of action will accrue from the time the
insurer finally rejects the claim for payment (Eagle Star
Insurance v. Chia Yu, 55 Phil 701 [1955]).
In the case at bar, policy condition No. 11 specifically
provides that the insured shall on the happening of any
loss or damage give notice to the company and shall
within fifteen (15) days after such loss or damage
deliver to the private respondent (a) a claim in writing
giving particular account as to the articles or goods
destroyed and the amount of the loss or damage and
(b) particulars of all other insurances, if any. Likewise,
insured was required "at his own expense to produce,
procure and give to the company all such further
particulars, plans, specifications, books, vouchers,
invoices, duplicates or copies thereof, documents,
proofs and information with respect to the claim".
(Record on Appeal, pp. 18-20).
The evidence adduced shows that twenty-four (24)
days after the fire, petitioner merely wrote letters to
private respondent to serve as a notice of loss,
thereafter, the former did not furnish the latter
whatever pertinent documents were necessary to
prove and estimate its loss. Instead, petitioner shifted
upon private respondent the burden of fishing out the
necessary information to ascertain the particular
account of the articles destroyed by fire as well as the
amount of loss. It is noteworthy that private
respondent and its adjuster notified petitioner that
insured had not yet filed a written claim nor submitted
the supporting documents in compliance with the
requirements set forth in the policy. Despite the notice,
the latter remained unheedful. Since the required claim
by insured, together with the preliminary submittal of
relevant documents had not been complied with, it
follows that private respondent could not be deemed to
have finally rejected petitioner's claim and therefore
the latter's cause of action had not yet arisen.
Compliance with condition No. 11 is a requirement sine
qua non to the right to maintain an action as prior
thereto no violation of petitioner's right can be
attributable to private respondent. This is so, as before
such final rejection, there was no real necessity for
bringing suit. Petitioner should have endeavored to file
the formal claim and procure all the documents,
papers, inventory needed by private respondent or its
adjuster to ascertain the amount of loss and after
compliance await the final rejection of its claim.
Indeed, the law does not encourage unnecessary
litigation (Eagle Star Insurance Co., Ltd., et al. v. Chia
Yu, p. 701, supra).<re||an1w>
Verily, petitioner prematurely filed Civil Case No. 56889
and dismissal thereof was warranted under the
circumstances. 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 as against the insurer company (Eagle Star
Insurance Co., Ltd., et al. v. Chia Yu, p. 702, supra;
Taurus Taxi Co., Inc. v. The Capital Ins. & Surety Co.,
Inc., 24 SCRA 458 [1968]; National Power Corp. v. CA,
145 SCRA 533 [1986]), 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 (Young v.
Midland Textile Ins. Co., 30 Phil. 617 [1919]; Union
Manufacturing Co., Inc. v. Phil. Guaranty Co., Inc., p.
277 supra; Pichel v. Alonzo, III SCRA 341 [1982];
Gonzales v. CA, 124 SCRA 630 [1983]; GSIS v. CA, 145
SCRA 311 [1986]; Herrera v. Petrophil Corp., 146 SCRA
385 [1986]).
Contracts of insurance are contracts of indemnity upon
the terms and conditions specified in the policy. The
parties have a right to impose such reasonable
conditions at the time of the making of the contract as
they may deem wise and necessary. The agreement
has the force of law between the parties. The terms of
the policy constitute the measure of the insurer's
liability, and in order to recover, the insured must show
himself within those terms. The compliance of the
insured with the terms of the policy is a condition
precedent to the light of recovery (Stokes v. Malayan
Insurance Co., Inc., 127 SCRA 766 [1984]).
It appearing that insured has violated or failed to
perform the conditions under No. 3 and 11 of the
contract, and such violation or want of performance
has not been waived by the insurer, the insured cannot
recover, much less the herein petitioner. Courts are not
permitted to make contracts for the parties; the
function and duty of the courts is simply to enforce and
carry out the contracts actually made (Young v. Midland
Textile Ins. Co., 30 Phil. 617 [1915]; Union
Manufacturing Co. Inc. v. Phil. Guaranty Co. Inc., p.
276 supra).
Finally, the established rule in this jurisdiction that
findings of fact of the Court of Appeals when supported
by substantial evidence, are not reviewable on appeal
by certiorari, deserves reiteration. Said findings of the
appellate court are final and cannot be disturbed by
the Supreme Court except in certain cases Lereos v.
CA, 117 SCRA 395 [1985]; Dalida v. CA, 117 SCRA 480
[1982] Director of Lands v. CA, 117 SCRA 346 [1982];
Montesa v. CA, 117 SCRA 770 [1982]; Sacay v.
Sandiganbayan, 142 SCRA 609 [1986]; Guita v. CA, 139
SCRA 576 [1985]; Manlapaz v. CA, 147 SCRA 238-239
[1987]).
PREMISES CONSIDERED, the petition is DISMISSED for
lack of merit, and the decision appealed from is
AFFIRMED. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-36232 December 19, 1974
PIONEER INSURANCE AND SURETY
CORPORATION, petitioner-appellant,
vs.
OLIVA YAP, represented by her attorney-in-fact,
CHUA SOON POON respondent-appellee.
Eriberto D. Ignacio for petitioner-appellant.
Paculdo, Miranda, Marquez, Sibal & Associates for
respondent-appellee.
FERNANDEZ, J.:p
This is an appeal by certiorari from the decision of the
Court of Appeals dated December 16, 1972, in CA-G.R.
No. 36669-R, affirming the judgment of the Court of
First Instance of Manila (Branch VI) in Civil Case No.
54508, which latter court declared plaintiff Oliva Yap,
herein respondent, entitled to recover from defendant
Pioneer Insurance & Surety Corporation, herein
petitioner, the full amount of the damage inquired in
Policy No. 4219, which is P25,000.00, plus 12% of said
sum from the date of filing of the complaint until full
payment, in addition to the sum of P6,000.00 for
attorney's fees, and costs.
Respondent Oliva Yap was the owner of a store in a
two-storey building located at No. 856 Juan Luna
Street, Manila, where in 1962 she sold shopping bags
and footwear, such as shoes, sandals and step-ins.
Chua Soon Poon Oliva Yap's son-in-law, was in charge
of the store.
On April 19, 1962, respondent Yap took out Fire
Insurance Policy No. 4216 from petitioner Pioneer
Insurance & Surety Corporation with a face value of
P25,000.00 covering her stocks, office furniture,
fixtures and fittings of every kind and description.
Among the conditions in the policy executed by the
parties are the following:
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.
(emphasis supplied)
It is understood that, except as may be
stated on the face of this policy there is
no other insurance on the property
hereby covered and no other insurance
is allowed except by the consent of the
Company endorsed hereon. Any false
declaration or breach or this condition
will render this policy null and void.
At the time of the insurance on April 19, 1962 of Policy
No. 4219 in favor of respondent Yap, an insurance
policy for P20,000.00 issued by the Great American
Insurance Company covering the same properties was
noted on said policy as co-insurance (Annex "1-E").
Later, on August 29, 1962, the parties executed Exhibit
"1-K", as an endorsement on Policy No. 4219, stating:
It is hereby declared and agreed that
the co-insurance existing at present
under this policy is as follows:
P20,000.00 Northwest Ins., and not
as originally stated. (emphasis
supplied)
Except as varied by this endorsement,
all other terms and conditions remain
unchanged.
Still later, or on September 26, 1962, respondent Oliva
Yap took out another fire insurance policy for
P20,000.00 covering the same properties, this time
from the Federal Insurance Company, Inc., which new
policy was, however, procured without notice to and
the written consent of petitioner Pioneer Insurance &
Surety Corporation and, therefore, was not noted as a
co-insurance in Policy No. 4219.
At dawn on December 19, 1962, a fire broke out in the
building housing respondent Yap's above-mentioned
store, and the said store was burned. Respondent Yap
filed an insurance claim, but the same was denied in
petitioner's letter of May 17, 1963 (Exhibit "G"), on the
ground of "breach and/or violation of any and/or all
terms and conditions" of Policy No. 4219.
On July 17, 1963, Oliva Yap filed with the Court of First
Instance of Manila the present complaint, asking,
among others, for payment of the face value of her fire
insurance policy. In its answer, petitioner alleged that
no property belonging to plaintiff Yap and covered by
the insurance policy was destroyed by the fire; that
Yap's claim was filed out of time; and that Yap took out
an insurance policy from another insurance company
without petitioner's knowledge and/or endorsement, in
violation of the express stipulations in Policy No. 4219,
hence, all benefits accruing from the policy were
deemed forfeited.
As already stated at the beginning of this opinion, the
trial court decided for plaintiff Oliva Yap; and its
judgment was affirmed in full by the Court of Appeals.
The vital issue in this appeal is whether or not
petitioner should be absolved from liability on Fire
Insurance Policy No. 4219 on account of any violation
by respondent Yap of the co-insurance clause therein.
In resolving this problem, the Court of Appeals stated
in its decision:
5. The plaintiff-appellee has not
violated the other insurance clause
(Exhibit 1-F) of the insurance Policy No.
4219 that would justify the defendant-
appellant, as insurer, to avoid its
liability thereunder. It appears on the
face of said policy that a co-insurance
in the amount of P20,000.00 was
secured from the Great American
Insurance and was declared by the
plaintiff-appellee and recognized by the
defendant-appellant. This was later on
substituted for the same amount and
secured by the Federal Insurance
Company. Chua Soon Poon on being
cross-examined by counsel for the
defendant-appellant, declared that the
Great American Insurance policy was
cancelled because of the difference in
the premium and the same was
changed for that of the Federal (t.s.n.,
hearing of December 1, 1964, pp. 35-
36). Contrary to the assertion of the
defendant-appellant, the Great
American Insurance policy was not
substituted by the Northwest Insurance
policy. As admitted by the defendant-
appellant in its brief (p. 48), the fire
insurance policy issued by the Great
American Insurance Company for
P20,000.00 (Exhibit 1-E) was cancelled
on August 29, 1962. On the other hand,
the fire insurance policy issued by the
Northwest Insurance & Surety
Company for P20,000.00 (Exhibit 1-K)
was taken out on July 23, 1962. How
then can the Northwest Insurance
policy issued on July 23, 1962, be
considered as having substituted the
Great American policy which was
cancelled only on August 29, 1962?
The defendant-appellant can be
considered to have waived the formal
requirement of indorsing the policy of
co-insurance since there was
absolutely no showing that it was not
aware of said substitution and
preferred to continue the policy
(Gonzales La O vs. Yek Tong Lin Fire and
Marine Insurance Co., 55 Phil. 386).
Even assuming that the defendant-
appellant did not indorse the Federal
Insurance policy, there is no question
that the same was only a substitution
and did not in any way increase the
amount of the declared co-insurance.
In other words, there was no increase
in the risk assumed by the defendant-
appellant.
We do not agree with the conclusion of the Court of
Appeals.
There was a violation by respondent Oliva Yap of the
co-insurance clause contained in Policy No. 4219 that
resulted in the avoidance of petitioner's liability. The
insurance policy for P20,000.00 issued by the Great
American Insurance Company covering the same
properties of respondent Yap and duly noted on Policy
No. 4219 as c-insurance, ceased, by agreement of the
parties (Exhibit "1-L"), to be recognized by them as a
co-insurance policy. The Court of Appeals says that the
Great American Insurance policy was substituted by
the Federal Insurance policy for the same amount, and
because it was a mere case of substitution, there was
no necessity for its endorsement on Policy No. 4219.
This finding, as well as reasoning, suffers from several
flaws. There is no evidence to establish and prove such
a substitution. If anything was substituted for the Great
American Insurance policy, it could only be the
Northwest Insurance policy for the same amount of
P20,000.00. The endorsement (Exhibit "1-K") quoted
above shows the clear intention of the parties to
recognize on the date the endorsement was made
(August 29, 1962), the existence of only one co-
insurance, and that is the Northwest Insurance policy,
which according to the stipulation of the parties during
the hearing, was issued on August 20, 1962 (t.s.n.,
January 12, 1965, pp. 3-4) and endorsed only on
August 20, 1962. The finding of the Court of Appeals
that the Great American Insurance policy was
substituted by the Federal Insurance policy is
unsubstantiated by the evidence of record and indeed
contrary to said stipulation and admission of
respondent, and is grounded entirely on speculation,
surmises or conjectures, hence, not binding on the
Supreme Court. 1
The Court of Appeals would consider petitioner to have
waived the formal requirement of endorsing the policy
of co-insurance "since there was absolutely no showing
that it was not aware of said substitution and preferred
to continue the policy." The fallacy of this argument is
that, contrary to Section 1, Rule 131 of the Revised
Rules of Court, which requires each party to prove his
own allegations, it would shift to petitioner,
respondent's burden of proving her proposition that
petitioner was aware of the alleged substitution, and
with such knowledge preferred to continue the policy.
Respondent Yap cites Gonzales La O vs. Yek Tong Lin
Fire and Marine Insurance Co., Ltd. 2 to justify the
assumption but in that case, unlike here, there was
knowledge by the insurer of violations of the contract,
to wit: "If, with the knowledge of the existence of other
insurances which the defendant deemed violations of
the contract, it has preferred to continue the policy, its
action amounts to a waiver of the annulment of the
contract ..." A waiver must be express. If it is to be
implied from conduct mainly, said conduct must be
clearly indicative of a clear intent to waive such right.
Especially in the case at bar where petitioner is
assumed to have waived a valuable right, nothing less
than a clear, positive waiver, made with full knowledge
of the circumstances, must be required.
By the plain terms of the policy, other insurance
without the consent of petitioner would ipso facto avoid
the contract. It required no affirmative act of election
on the part of the company to make operative the
clause avoiding the contract, wherever the specified
conditions should occur. Its obligations ceased, unless,
being informed of the fact, it consented to the
additional insurance.
The validity of a clause in a fire insurance policy to the
effect that the procurement of additional insurance
without the consent of the insurer renders ipso
facto the policy void is well-settled:
In Milwaukee Mechanids' Lumber Co.,
vs. Gibson, 199 Ark. 542, 134 S. W. 2d
521, 522, a substantially identical
clause was sustained and enforced, the
court saying: "The rule in this state and
practically all of the states is to the
effect that a clause in a policy to the
effect that the procurement of
additional insurance without the
consent of the insurer renders the
policy void is a valid provision. The
earlier cases of Planters Mutual
Insurance Co., vs. Green, 72 Ark. 305,
80 S.W. 92, are to the same effect."
And see Vance, Insurance, 2nd Ed.,
725. (Reach vs. Arkansas Farmers Mut.
Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S.
W. 2d 48, 49.)
2. Where a policy contains a clause
providing that the policy shall be void if
insured has or shall procure any other
insurance on the property, the
procurement of additional insurance
without the consent of the insurer
avoids the policy." (Planters' Mut. Ins.
Ass'n vs. Green [Supreme Court of
Arkansas, March 19, 1904] 80 S.W.
151.)
3. The policy provided that it should be
void in case of other insurance "without
notice and consent of this company. ..."
It also authorized the company to
terminate the contract at any time, at
its option, by giving notice and
refunding a ratable proportion of the
premium. Held, that additional
insurance, unless consented to, or
unless a waiver was shown, ipso
facto avoided the contract, and the fact
that the company had not, after notice
of such insurance, cancelled the policy,
did not justify the legal conclusion that
it had elected to allow it to continue in
force." (Johnson vs. American Fire Ins.,
Co., [Supreme Court of Minnesota, Aug.
12, 1889] 43 N.W., 59)
The aforecited principles have been applied in this
jurisdiction in General Insurance & Surety Corporation
vs. Ng Hua 3. There, the policy issued by the General
Insurance & Surety Corporation in favor of respondent
Ng Hua contained a provision identical with the
provisions in Policy No. 4219 quoted above. 4 This
Court, speaking thru Justice Cesar P. Bengson, in
reversing the judgment of the Court of Appeals and
absolving the insurer from liability under the policy,
held:
... And considering the terms of the
policy which required the insured to
declare other insurances, the
statement in question must be deemed
to be a statement (warranty) binding
on both insurer and insured, that there
were no other insurance on the
property. ...
The annotation then, must be deemed
to be a warranty that the property was
not insured by any other policy.
Violation thereof entitled the insurer to
rescind. (Sec. 69, Insurance Act.) Such
misrepresentation is fatal in the light of
our views in Santa Ana vs. Commercial
Union Assurance Company, Ltd., 55
Phil. 329. The materiality of non-
disclosure of other insurance policies is
not open to doubt.
Furthermore, even if the annotations
were overlooked the defendant insurer
would still be free from liability because
there is no question that the policy
issued by General Indemnity has
not been stated in nor endorsed
on Policy No. 471 of defendant. And as
stipulated in the above-quoted
provisions of such policy "all benefit
under this policy shall be forfeited.
(Emphasis supplied)
The obvious purpose of the aforesaid requirement in
the policy is to prevent over-insurance and thus avert
the perpetration of fraud. The public, as well as the
insurer, is interested in preventing the situation in
which a fire would be profitable to the insured.
According to Justice Story: "The insured has no right to
complain, for he assents to comply with all the
stipulation on his side, in order to entitle himself to the
benefit of the contract, which, upon reason or principle,
he has no right to ask the court to dispense with the
performance of his own part of the agreement, and yet
to bind the other party to obligations, which, but for
those stipulation would not have been entered into." 5
In view of the above conclusion, We deem it
unnecessary to consider the other defenses interposed
by petitioner.
WHEREFORE, the appealed judgment of the Court of
Appeals is reversed and set aside, and the petitioner
absolved from all liability under the policy. Costs
against private respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 94071 March 31, 1992

NEW LIFE ENTERPRISES and JULIAN

SY, petitioners,
vs.
HON. COURT OF APPEALS, EQUITABLE
INSURANCE CORPORATION, RELIANCE SURETY
AND INSURANCE CO., INC. and WESTERN
GUARANTY CORPORATION, respondents.

REGALADO, J.:
This appeal by certiorari seeks the nullification of the
decision 1 of respondent Court of Appeals in CA-G.R. CV
No. 13866 which reversed the decision of the Regional
Trial Court, Branch LVII at Lucena City, jointly deciding
Civil Cases Nos. 6-84, 7-84 and 8-84 thereof and
consequently ordered the dismissal of the aforesaid
actions filed by herein petitioners.
The undisputed background of this case as found
by the court a quo and adopted by respondent court,
being sustained by the evidence on record, we hereby
reproduce the same with approval. 2
The antecedents of this case show that
Julian Sy and Jose Sy Bang have
formed a business partnership in the
City of Lucena. Under the business
name of New Life Enterprises, the
partnership engaged in the sale
of construction
materials at its place of business, a two
storey building situated at Iyam,
Lucena City. The facts show that Julian
Sy insured the stocks in trade of New
Life Enterpriseswith Western Guaranty
Corporation, Reliance Surety and
Insurance. Co., Inc., and Equitable
Insurance Corporation.
On May 15, 1981, Western Guaranty
Corporation
issued Fire Insurance Policy No. 37201
in the amount of P350,000.00. This
policy was renewed on May, 13, 1982.
On July 30,1981, Reliance Surety and
Insurance Co., Inc. issued Fire
Insurance Policy No. 69135 inthe
amount of P300,000.00 (Renewed
under Renewal
Certificate No. 41997) An additional
insurancewas issued by the same comp
any on
November 12, 1981 under Fire Insuranc
e Policy No. 71547 in the amount of
P700,000.00.
On February 8, 1982, Equitable Insuran
ce
Corporation issued Fire Insurance Policy
No. 39328 in the amount of
P200,000.00.
Thus when the building occupied by the
New Life Enterprises
was gutted by fire at about 2:00
o'clock inthe morning of October 19, 19
82, the stocks in the
trade inside said building were insured
against
firein the total amount of P1,550,000.0
0.
According to the certification issued by
the Headquarters,Philippine
Constabulary /Integrated National
Police,
Camp Crame, the cause of fire was
electrical innature. According to the pla
intiffs,
the building and the stocks inside were
burned.
After the fire, JulianSy went to the agen
t of
Reliance Insurance whom he asked to a
ccompany him to the
office of thecompany so that he can file
his claim. He averred that in support of
his claim, he
submitted the fireclearance, the
insurance policies and inventory
of stocks. He further testified that the
three insurance companies are sister
companies, and as a matter of
fact when he was following-
up his claim with Equitable Insurance,
the Claims Manager told him to go first
to Reliance
Insurance and if said company
agrees to pay, they would also pay.
The same treatment was given him
by the other insurance
companies. Ultimately, the three insura
nce companies denied plaintiffs' claim
for payment.
In its
letter of denial dated March 9, 1983,
(Exhibit "C" No. 8-
84) Western Guaranty Corporationthrou
gh Claims Manager Bernard S. Razon to
ld the plaintiff that his claim "is
denied for breach of policyconditions."
Reliance Insurance purveyed the same
message in its letter dated November
23, 1982and signed by Executive Vice-
President Mary Dee
Co (Exhibit "C" No. 7-84) which said tha
t "plaintiff's
claim is denied for breach of policy
conditions."
The letter of denial received by the
plaintiff fromEquitable Insurance
Corporation (Exhibit "C" No. 6-84) was
of the same tenor, as said letter dated
February 22, 1983, and signed by Vice-
President
Elma R. Bondad, said "we find that cert
ain
policyconditions were violated, therefor
e, we regret,
we have to deny your claim, as it is
hereby denied in its entirety."
In relation to the case against Reliance
Surety and Insurance Company, a certa
in Atty. Serafin D.Dator, acting in behalf
of the
plaintiff, sent a letter dated February 1
3, 1983 (Exhibit "G-l" No 7-
84) toExecutive Vice-President Mary
Dee Co asking that he
be informed as to the specific policy
conditions allegedly
violated by the plaintiff. In her reply-
letter dated March
30, 1983, Executive Vice-PresidentMary
Dee Co informed Atty.
Dator that Julian Sy violated Policy
Condition No.
"3" which requires theinsured
to give notice of any insurance or insur
ances already effected covering the
stocks in trade. 3
Because of the denial of
their claims for payment by the three (3) insurance
companies, petitioner filed separate
civilactions against the former before the Regional Trial
Court of Lucena City, which cases were consolidated fo
r trial,
and thereafter the court below rendered its decision on
December 19, l986 with the following disposition:
WHEREFORE, judgment in the above-
entitled cases is rendered in the
following manner, viz:
1. In Civil Case No. 6-84, judgment
is rendered for the
plaintiff New Life Enterprises and again
st the defendant Equitable Insurance
Corporation
ordering the latter to pay the former
the sum of
TwoHundred Thousand (P200,000.00) P
esos and
considering that payment of the claim
of the insured hasbeen unreasonably d
enied, pursuant to Sec. 244 of the Insur
ance Code, defendant is further ordere
dto pay the plaintiff attorney's fees in
the amount of Twenty Thousand
(P20,000.00)
Pesos. All sums ofmoney to be paid by
virtue
hereof shall bear interest at 12% per
annum (pursuant
to Sec. 244 of theInsurance Code) from
February 14, 1983, (91st day from Nov
ember 16,
1982, when Sworn Statementof Fire
Claim
was received from the insured) until th
ey are fully paid;
2. In Civil Case No. 7-
84, judgment is rendered for the plainti
ff Julian Sy and against
the defendantReliance Surety and Insur
ance Co.,
Inc., ordering the latter to pay the form
er the sum
of P1,000,000.00(P300,000.00 under Po
licy
No. 69135 and P700,000.00 under Polic
y No. 71547)
and considering thatpayment of the cla
im of the
insured has been unreasonably denied,
pursuant to
Sec. 244 of theInsurance Code, defend
ant is further ordered
to pay the plaintiff the amount of
P100,000.00 as attorney's fees.
All sums of money to
be paid by virtue hereof shall
bear interest at 12% per
annum (pursuant to Sec.
244 of the Insurance Code) from Februa
ry 14, 1983,
(91st day from November 16,
1982 when SwornStatement of Fire Clai
m was received from the insured) until
they are fully paid;
3. In Civil Case No. 8-84, judgment is
rendered for
the plaintiff New Life Enterprises and a
gainst thedefendant Western Guaranty
Corporation ordering
the latter to pay the sum of P350,000.0
0 ot likewise declare Western and Equitable as such co-
to theConsolidated Bank and Trust Corp
oration,
Lucena Branch, Lucena City, as stipulat
ed on the
face ofPolicy No. 37201, and considerin
g that payment of the
aforementioned sum of money has bee
n Reliance in the total amount of P1,000,000.00. 7
unreasonably denied, pursuant to Sec.
244 of the Insurance Code,
defendant is further ordered to pay the
plaintiff attorney's fees in the amount o
f P35,000.00.
All sums of money to be paid
by virtue hereof shall bear interest at
12% per annum (pursuant to Sec. 244
of the Insurance
Code) from February 5, 1982, (91st day
from 1st week of November 1983 when
insured filed formal claim for full indem
nity according to adjuster
Vetremar Dela Merced) until they are
fully paid. 4
As aforestated, respondent Court of Appeals reversed
said judgment of the trial court, hence this petition the
cruxwherein is whether or not Conditions Nos. 3
and 27 of
the insurance contracts were violated by petitioners th
ereby resulting in
their forfeiture of all the benefits thereunder.
Condition No. 3 of said insurance policies, otherwise
known as
the "Other Insurance Clause," is uniformly contained
in all the aforestated
insurance contracts of herein petitioners, as follows:
3. The insured
shall give notice to the Company
of any insurance or insurances already
effected, orwhich
may subsequently be effected,
covering any of the property or
properties
consisting of stocks intrade, goods in pr
ocess
and/or inventories only hereby insured,
and unless
such notice be given andthe particulars
of such
insurance or insurances be stated there
in or endorsed on this policy pursuant
to Section 50 of the Insurance
Code, by or on behalf of the Company
before the occurrence of any loss orda
mage, 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 loss or damage not moretha
n P200,000.00. 5
Petitioners admit that the respective insurance policies
issued by private respondents did not state or endorse
thereon
the other insurance coverage obtained or subsequently
effected on the same stocks in trade for the loss of
which compensation is claimed by
petitioners. 6 The policy
issued by respondent Western Guaranty Corporation(W
estern) did not
declare respondent Reliance Surety and Insurance Co.,
Inc. (Reliance) and respondent Equitable Insurance
Corporation (Equitable) as co-insurers on the same stoc
ks,
while Reliance's Policies covering the same stocks didn
insurers. It is
further admitted by petitioners that Equitable's policy
stated "nil" in the space thereon requiring indication of
any co-insurance although there were three (3) policies
subsisting on the same stocks in trade
at the time of the loss, namely, that of Western in
the amount of P350,000.00 and two (2) policies of
In other words, the coverage by other insurance or co-
insurance effected
or subsequently arranged by petitioners were
neither stated nor endorsed in the policies of the three
(3) private respondents, warranting forfeiture of all
benefits thereunder if we are to follow the express
stipulation in the aforequoted Policy Condition No. 3.
Petitioners contend that they are not to be blamed for
the omissions,
alleging that insurance agent Leon Alvarez (for
Western) and Yap Kam Chuan (for
Reliance and Equitable) knew about the existence of
the additional insurancecoverage and that they were
not informed about the requirement that such other or
additional insurance should bestated in the
policy, as they have not even read policies. 8 These
contentions cannot pass judicial muster.
The terms of the contract are clear and unambiguous.
The insured is specifically required to disclose to the
insurer any other insurance and its
particulars which he may have effected on the
same subject matter. The knowledge of such insurance
by the insurer's agents, even assuming the acquisition
thereof by the former, is not the "notice" that
would estop the insurers from denying the claim.
Besides, the so-called theory of imputed knowledge,
that is, knowledge of the agent is
knowledge of the principal, aside from being
of dubious applicability here has likewisebeen roundly
refuted by respondent court whose factual findings we
find acceptable.
Thus, it points out that while petitioner Julian Sy
claimed that he had informed insurance agent Alvarez
regarding the co-insurance on the property, he
contradicted
himself by inexplicably claiming that he had not read th
e terms of the policies; that
Yap Dam Chuan could not likewise have obtained such
knowledge for the same reason, aside from the fact
that the insurance with Western was obtained before
those of
Reliance and Equitable; and that theconclusion of
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawnfrom the
mere fact that Yap Kam Chuan was
an agent for both companies which also had the
same insuranceclaims adjuster. Availment of the
services of the same agents and adjusters by different
companies is a
commonpractice in the insurance business and such
facts do not warrant the speculative conclusion of the
trial court.
Furthermore, when the words and language of docume
nts are clear and plain or readily understandable by an
ordinary reader thereof, there is absolutely no room for
interpretation or construction anymore. 9 Courts are not
allowed to make contracts
for the parties; rather, they will intervene
only when the terms of the policy are ambiguous,
equivocal,
or uncertain. 10 The parties must abide by the
terms of the contract because such terms constitute th
e situation in which a fire would be
measure ofthe insurer's liability and compliance therew
ith is a
condition precedent to the insured's right of recovery
from the insurer. 11
While it is a cardinal principle of insurance law that a
policy or contract
of insurance is to be construed liberally
infavor of the insured and strictly against the insurer
company, yet contracts of insurance, like other contrac
ts, are to be construed according to
the sense and meaning of the terms which
the parties themselves have used. If suchterms are
clear and
unambiguous, they must be taken and understood
in their plain, ordinary and popular sense. 12Moreover,
obligations arising from contracts have the force of law
between
the contracting parties and should be compliedwith in
good faith. 13
Petitioners should be aware of the fact that a party is
not relieved of the duty to exercise the ordinary care
and prudence that would be exacted in relation to
other contracts. The conformity of the insured to the
terms of the policy is implied from his failure to
express any disagreement with
what is provided for. 14 It may be true that
themajority rule, as cited by petitioners, is that injured
persons may accept policies without reading them, and
that this is not negligence per se. 15 But, this is not
without any exception. It is and was incumbent
upon petitioner Sy to read the insurance contracts, and
this can be reasonably expected
of him considering that he has been a businessman
since 1965 16 and the contract concerns indemnity in
case of loss inhis money-making trade of which
important
consideration he could not have been unaware as it
was pre-in case of loss in his money-making trade of
which important consideration he could not have been
unaware as it was precisely the reason for his procuring
the same.
We reiterate our pronouncement in Pioneer Insurance
and Surety Corporation vs. Yap: 17
...
And considering the terms of the policy
which required the insured to declare o
ther insurances, thestatement in questi
on must be deemed to be a statement
(warranty) binding on both insurer and
insured, that there were no other
insurance on the property. . . .
The annotation then, must be deemed
to be a warranty that the property was
not insured by any other policy.
Violation thereof entitled the insurer to
rescind (Sec. 69, Insurance
Act). Such misrepresentation is fatal in
the light of our views in Santa Ana vs.
Commercial Union Assurance
Company, Ltd., 55 Phil. 329.
The materiality of non-disclosure of
other insurance policies is not open to
doubt.
xxx xxx xxx
The obvious purpose of the aforesaid
requirement in the policy
is to prevent over-insurance and thus
avert the perpetration of
fraud. The public, as well as the
insurer, is interested in preventing the
profitable to the insured. According to
Justice Story: "The insured has
no right to complain, for he assents to
comply with all the stipulations on
his side, in order to entitlehimself to th
e
benefit of the contract, which, upon rea
son or principle, he
has no right to ask the court to
dispense with the
performance of his own part of the
agreement, and yet to
bind the other party to
obligations, which, but for those stipula
tions, would not have been entered
into."
Subsequently, in the case of Pacific Banking
Corporation vs. Court of Appeals, et al., 18 we held:
It is not disputed that
the insured failed to reveal before the
loss three other insurances. As found
by the Court
of Appeals, by reason of said unreveale
d insurances, the insured had been
guilty of a
falsedeclaration; a clear misrepresentat
ion and a vital one because where
the insured had been asked to reveal
but did not, that was deception. Otherw
ise stated, had the
insurer known that there were many
co-insurances, it could
have hesitated or plainly desisted from
entering into such contract.
Hence, theinsured was guilty of clear fr
aud (Rollo, p. 25).
Petitioner's contention that the allegati
on of fraud is but
a mere inference or suspicion is untena
ble. In fact,
concrete evidence of fraud or false
declaration by
the insured was furnished by the
petitioner itself when the facts
alleged in the policy under clauses "Co-
Insurances Declared" and
"Other InsuranceClause" are materially
different from the actual number of co-
insurances taken over
the subjectproperty. Consequently, "the
whole foundation of the contract fails,
the
risk does not attach and thepolicy neve
r becomes a contract between the
parties." Representations of facts are
the foundation ofthe contract and if
the foundation does not
exist, the superstructure does
not arise. Falsehood in suchrepresentati
ons is not shown to vary
or add to the contract, or to terminate
a contract which has
oncebeen made, but to
show that no contract has ever
existed (Tolentino, Commercial Laws of
thePhilippines, p.
991, Vol. II, 8th Ed.,) A void or inexisten
t contract is one which has no
force and effectfrom the very
beginning, as if it had
never been entered into, and which
cannot be validated either bytime or by
ratification
(Tongoy vs. C.A., 123 SCRA 99 (1983);
Avila v. C.A., 145 SCRA, 1986).
As the insurance policy against fire
expressly required that notice should
be given by
the insured ofother insurance upon the
same property, the total absence of
such notice nullifies the policy.
To further warrant and justify the forfeiture of the
benefits under the insurance contracts involved, we ne
ed
merely toturn to Policy Condition No. 15 thereof, which
reads in part:
15. . . .
if any false declaration be made or
used
in support thereof, . . . all benefits unde
r this Policy shall be forfeited . . . . 19
Additionally, insofar as the liability of respondent
Reliance is concerned, it is not denied that the complai
nt for recovery was filed in court by petitioners only on
January 31, 1984, or after more than one (1) year had
elapsedfrom petitioners' receipt of the insurers' letter o
f
denial on November 29, 1982. Policy Condition No. 27 o
f their insurance contract with Reliance provides:
27. Action or suit
clause. If a claim be made and reject
ed and an action or suit be not comme
nced
either in the Insurance Commission or
any court of competent jurisdiction of n
otice of such
rejection, orin case of arbitration taking
place
as provided herein, within twelve (12)
months after due
notice of theaward made by the arbitra
tor or arbitrators
or umpire, then the claim shall for all
purposes be
deemedto have been abandoned and s
hall not thereafter be recoverable
hereunder. 20
On this point, the trial court ruled:
. . . However, because of the peculiar
circumstances of this case, we hesitate
in concluding thatplaintiff's right to ven
tilate his claim in court has been barred
by reason of the time constraint provid
ed in the insurance contract. It is
evident that after the plaintiff had recei
ved
the letter of denial, he stillfound it nece
ssary to be informed of the specific cau
ses or reasons for
the denial of his claim, reasonfor which
his lawyer, Atty. Dator
deemed it wise to send a
letter of inquiry to the defendant which
wasanswered by
defendant's Executive Vice-President in
a letter
dated March 30, 1983, . . . . Assuming,
gratuitously, that the letter of Executiv
e Vice-President Mary Dee Co dated
March 30, 1983, was
received by plaintiff
on the same date, the period
of limitation should
start to run only from said date in the
spirit of fair play and equity. . . . 21
We have perforce to reject this theory of the court
below for being contrary to what we have heretofore
declared:
It is important to note the principle laid
down by this Court in the case of Ang
vs. Fulton Fire Insurance Co. (2
SCRA 945 [1961]) to wit:
The condition containe
d in an insurance policy
that claims must be pre
sented within one year
after rejection is not me
rely a procedural requir
ement but an important
matter essential to a
 prompt of respondent Court of Appeals, the same ishereby AFFI
settlement of claims RMED.
against insurance
companies as it SO ORDERED.
demandsthat insurance
suits be brought by
the insured while the e
vidence as to the
origin andcause of dest
ruction have not yet
disappeared.

In enunciating the above-cited principle

, this Court had definitely
settled the rationale for the
necessityof bringing suits against the In
surer
within one year from the rejection of th
e claim. The contention
ofthe respondents that the one-year pr
escriptive period does
not start to run until the petition forrec
onsideration had been resolved by the i
nsurer, runs counter to the declared pu
rpose for requiringthat an Republic of the Philippines
action or suit be filed in the Insurance SUPREME COURT
Commission or in a court of competent Manila
jurisdiction fromthe denial of the claim.
To uphold respondents' contention FIRST DIVISION
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 G.R. No. 114427 February 6, 1995
waste time
until any evidence which may be consi ARMANDO GEAGONIA, petitioner,
dered against them is destroyed. vs.
COURT OF APPEALS and COUNTRY BANKERS
xxx xxx xxx INSURANCE CORPORATION, respondents.

While in the Eagle Star case (96

Phil. 701),
this Court uses the phrase "final rejecti
on", the
samecannot be taken to mean the reje
ction of a petition
for reconsideration as insisted by
respondents.
Suchwas clearly not the meaning conte
mplated by this Court. The insurance p
olicy in said
case providesthat the insured should fil
e 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. 22
Furthermore,
assuming arguendo that petitioners felt the
legitimate need to be clarified as to the policy condition
violated, there was a considerable lapse of time from
their receipt of the insurer's clarificatory letter dated
March 30, 1983, up to the time the complaint was
filed in court on January 31, 1984. The one-
year prescriptive period was yet
to expire on November 29, 1983, or about eight (8) mo
nths from the
receipt of the clarificatory letter, but petitioners let the
period lapse without bringing their action in court.
We accordingly find no "peculiar circumstances" suffici
ent to relax the enforcement of the one-
Zenco Sales, Inc.
year prescriptive period and
we, therefore, hold that petitioners' claim was
definitely filed out of time.
F. Legaspi Gen. Merchandise
WHEREFORE, finding no cogent reason to disturb the
judgment
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is
the decision 1 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 2 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:
P55,698.00
86,432.50

ng Textiles 250,000.00 (on credit)
In its answer, 7 the private respondent specifically
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. GA-28146 and No. GA-28144,
for P100,000.00 each, issued by the Cebu Branch of
the Philippines First Insurance Co., Inc.
(hereinafter PFIC). 3 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. 4
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 5 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" 6 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.
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, 8 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 9 having been denied by the Insurance
Commission in its resolution of 20 August 1993, 10 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, 11 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 taken on the stock-in-trade and
Fire Policy No. 1462. . . . seriously puts in question his credibility.

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;]
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:

xxx xxx xxx A . . . WHEN IT REVERSED THE

FINDINGS OF FACTS OF THE
Please be informed that INSURANCE COMMISSION, A QUASI-
I have no knowledge of JUDICIAL BODY CHARGED WITH THE
the provision requiring DUTY OF DETERMINING INSURANCE
me to inform your CLAIM AND WHOSE DECISION IS
office about my ACCORDED RESPECT AND EVEN
prior insurance under FINALITY BY THE COURTS;
FGA-28146 and F-CEB-
24758. Your B . . . WHEN IT CONSIDERED AS
representative did not EVIDENCE MATTERS WHICH WERE NOT
mention about said PRESENTED AS EVIDENCE DURING THE
requirement at the time HEARING OR TRIAL; AND
he was convincing me
to insure with you. If he C . . . WHEN IT DISMISSED THE
only die or even CLAIM OF THE PETITIONER HEREIN
inquired if I had other AGAINST THE PRIVATE RESPONDENT.
existing policies
covering my
establishment, I would The chief issues that crop up from the first and third
have told him so. You grounds are (a) whether the petitioner had prior
will note that at the knowledge of the two insurance policies issued by the
time he talked to me PFIC when he obtained the fire insurance policy from
until I decided to insure the private respondent, thereby, for not disclosing such
with your company the fact, violating Condition 3 of the policy, and (b) if he
two policies had, whether he is precluded from recovering
aforementioned were therefrom.
already in effect.
Therefore I would have The second ground, which is based on the Court of
no reason to withhold Appeals' reliance on the petitioner's letter of
such information and I reconsideration of 18 January 1991, is without merit.
would have desisted to The petitioner claims that the said letter was not
part with my hard offered in evidence and thus should not have been
earned peso to pay the considered in deciding the case. However, as correctly
insurance premiums [if] pointed out by the Court of Appeals, a copy of this
I know I could not letter was attached to the petitioner's complaint in I.C.
recover anything. Case No. 3440 as Annex "M" thereof and made integral
part of the complaint. 12 It has attained the status of a
Sir, I am only an judicial admission and since its due execution and
ordinary businessman authenticity was not denied by the other party, the
interested in protecting petitioner is bound by it even if it were not introduced
my investments. The as an independent evidence. 13
actual value of my
stocks damaged by the As to the first issue, the Insurance Commission found
fire was estimated by that the petitioner had no knowledge of the previous
the Police Department two policies. The Court of Appeals disagreed and found
to be P1,000,000.00 otherwise in view of the explicit admission by the
(Please see xerox copy petitioner in his letter to the private respondent of 18
of Police Report Annex January 1991, which was quoted in the challenged
"A"). My Income decision of the Court of Appeals. These divergent
Statement as of findings of fact constitute an exception to the general
December 31, 1989 or rule that in petitions for review under Rule 45, only
five months before the questions of law are involved and findings of fact by
fire, shows my the Court of Appeals are conclusive and binding upon
merchandise inventory this Court. 14
was already some
P595,455.75. . . . These We agree with the Court of Appeals that the petitioner
will support my claim knew of the prior policies issued by the PFIC. His letter
that the amount of 18 January 1991 to the private respondent
claimed under the conclusively proves this knowledge. His testimony to
three policies are much the contrary before the Insurance Commissioner and
below the value of my which the latter relied upon cannot prevail over a
stocks lost. written admission made ante litem motam. It was,
indeed, incredible that he did not know about the prior
xxx xxx xxx policies since these policies were not new or original.
Policy No. GA-28144 was a renewal of Policy No. F-
The letter contradicts private 24758, while Policy No. GA-28146 had been renewed
respondent's pretension that he did not twice, the previous policy being F-24792.
know that there were other insurances
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 15 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. 16 However, in order to constitute a violation, the
other insurance must be upon same subject matter,
the same interest therein, and the same risk. 17
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. 18 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. 19 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. 20 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. 21
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. 22 This kind of policy covers only such
interest as the mortgagee has at the issuing of the
policy. 23
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. 24 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. 25
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 26 or in Pioneer Insurance &
Surety Corp. vs. Yap, 27 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. 28 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. 29 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. 30 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. 31
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 non-disclosure 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. 32

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.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17436 January 31, 1962
EQUITABLE INSURANCE AND CASUALTY COMPANY,
INC., plaintiff-appellee,
vs.
RURAL INSURANCE AND SURETY COMPANY,
INC., defendant-appellant.
K. V. Faylona and M. R. Nadres for plaintiff-appellee.
Gunlao, Laxamana and Aquino for defendant-appellant.
BARRERA, J.:
On May 26, 1959, plaintiff Equitable Insurance and
Casualty Company, Inc. filed with the Court of First
Instance of Manila a complaint (Civil Case No. 40282)
against defendant Rural Insurance and Surety
Company, Inc. alleging, as first cause of action, that on
November 11, 1957, plaintiff and defendant entered
into a reciprocal facultative reinsurance agreement,
wherein they agreed to cede to each other, by way of
facultative reinsurance on policies of insurance or
reinsurance issued by their respective fire insurance
departments on risks situated in the Philippines,
subject to the stipulations of the agreement; that
pursuant to said agreement, plaintiff on January 29,
1958, reinsured for P2,000.00 with defendant as per
Reinsurance Application No. 58/038 and accepted by
defendant on the same date, the stock covered by fire
insurance Policy No. 5880 issued by plaintiff in behalf
of Messrs. Jaen Bermers' Cooperative Marketing
Association, Inc.: that on July 4, 1958, the stock insured
and covered by said Policy No. 5880 was burned, and
the share of the loss assumed by defendant as per
reinsurance agreement was computed at P2,024.87
including adjuster's fee, for which plaintiff sent to
defendant for payment by the latter, a statement of
account dated March 12, 1959; that despite repeated
demands by plaintiff, defendant refused and failed to
pay the sum of P2,024.87. On the second cause of
action, plaintiff on March 24, 1958 reinsured in the sum
of P2,000.00 with defendant as per Reinsurance
Application No. 58/115 and accepted by defendant on
the same date, stock covered by fire insurance Policy
No. 6026, issued by plaintiff in behalf of Electric and
Lamp Supplies (Mr. Pedro Casipe); that on October 13,
1958, said stock was burned and the share of loss
assumed by defendant as per reinsurance agreement
with plaintiff was computed at P1,334.80 including
adjuster's fee, for which plaintiff likewise sent a
statement of account dated February 4, 1959, to
defendant with the request that the same be paid; that
notwithstanding repeated demands, defendant refused
and failed to pay plaintiffs; and that for defendant's
failure to pay its share of the losses assumed by it,
plaintiff has been compelled to institute the present
action and to incur attorney's fees and expenses of
litigation amounting to P500.00. Plaintiff prayed for
judgment ordering the defendant to pay said sums of
P2,024.80 and P1,334.80 with legal interest thereon
from the date of the filing of the complaint until fully
paid, P500.00 as attorney's fees, and the costs of the
suit.
On June 9, 1959, defendant filed a motion to dismiss
said complaint, on the ground that it states no cause of
action, as pursuant to Article VIII of the Reinsurance
Agreement between the parties, before a court action
can be brought, the parties agreed to submit all
disputes to a board of arbitrators. To this motion,
plaintiff duly filed an opposition. On June 16, 1959, the
court denied said motion to dismiss for lack of merit
and required defendant to answer.
On June 20, 1959, defendant flied its answer alleging
as affirmative defenses that paragraph 3, Article III of
the Reciprocal Reinsurance Agreement between the
parties is controlled by Article VIII thereof, that the
nature of the agreement is "self-liquidating between
the parties" the reinsurer becoming a reinsured, and
the reinsured becoming reinsurer; and that said
agreement has not yet been abrogated, so that
plaintiff's liability to defendant is not yet known, nor
the liability of defendant to plaintiff. Defendant prayed
that the complaint be dismissed and that plaintiff be
ordered to pay to it attorney's fees in the sum of
P700.00 and the costs of the suit.1wph1.t
On July 8, 1959, plaintiff filed a motion for judgment on
the pleadings, which was opposed by defendant on July
13. On July 15, 1959, the court issued an order denying
said motion.
Instead of going into a formal hearing, the parties on
August 12, 1959, submitted the case for decision on
the following stipulation of facts:
1. That the defendant admits the allegations
contained in paragraphs 1, 2, 3, 4 and all other
allegations of the complaint, including the
letter of the Assistant Insurance Commissioner,
addressed to Miss Anunciacion Aznar, President
of the Rural Insurance & Surety Co., dated May
4, 1959, which reads as follows: .
"MADAM:
"We are enclosing herewith copy of the self-
explanatory letter of Mr. S. A. Santos, General
Manager of the above-subject company, dated
April 11, 1959, with the request that we be
favored with your comments thereon at an
early date.
"Kindly give your preferential attention hereto."
2. That plaintiff admits that the issues and/or
dispute subject of the present complaint were
not submitted to a Board of Arbitrators and
umpire, as provided in paragraph VIII of Annex
'A' to the complaint, but instead the matter
was referred to the Insurance Commissioner as
evidenced by the letter of said office quoted
above." (Emphasis supplied.) .
On October 16, 1959, the court rendered a decision the
dispositive part of which reads: .
 IN VIEW OF ALL THE FOREGOING, judgment is
hereby rendered in favor of the plaintiff
Equitable Insurance & Casualty Co., Inc. and
against the defendant Rural Insurance & Surety
Co., Inc., ordering the latter to pay to the
former the sum of P2,024.87, under the first
cause of action, with legal interest from the
date of the filing of the complaint until fully
paid; the sum of P1,334.80, under the second
cause of action with legal interest from the
date of the filing of the complaint, until fully
paid; plus the further sum of P500.00 as
attorney's fees and the costs of the suit.
From this decision, defendant appealed to the Court of
Appeals which elevated the case to us, no question of
fact being involved.
Under his first assignment of error, defendant-appellant
insists that the trial court erred in failing to rule that
plaintiff-appellee has no causes of action against it, the
matter not having been referred to the decision of two
arbitrators or umpire, which, it is claimed, is the
condition precedent agreed upon in Article VIII of the
Reinsurance Agreement entered into between the
parties, to wit: .
ARTICLE VIII
In the event of any question arising as to the
meaning of, or any way connected with or
relating to this Agreement, whether before or
after its termination, the parties shall endeavor
to arrive at a satisfactory compromise by
amicable settlement rather than by court
action. The dispute shall be referred to the
decision of two arbitrators, of whom one shall
be appointed in writing by each of the parties
within thirty (30) days after having been
required so to do by the other party in writing,
and in case of disagreement between the
arbitrators, to the decision of the umpire to be
appointed by them in writing before entering
on the reference. Each party shall submit its
case with all particulars within thirty days after
their appointment. The seat of arbitration shall
be in Manila, Philippines, and the expenses of
arbitration shall be borne in equal proportion
by the parties. The decision of the arbitrators
or umpire, as the case may be, shall be final
and binding on both the Company and the
Reinsurer. The arbitrators and umpire shall not
be bound by the strict rules of evidence and by
judicial formalities in making the award.
It is contended that this agreement, not being contrary
to law, moral or public policy but, on the other hand,
dictated by 'wisdom and propriety in insurance
contracts because losses by fire can duly be
determined by competent men who have technical
knowledge on how to determine losses by fire", non-
compliance therewith is fatal to the claim of plaintiff-
appellee.
We find no merit in this contention. Under the
abovequoted provision of the Reinsurance Agreement,
it would seem clear that the requirement of submitting
for decision to two arbitrators or an umpire the matter
of losses by fire or the liability of the parties thereto
arises only if and when the same is disputed by one of
the parties. It does not appear in the instant case that
appellant did dispute appellee's claims. Consequently,
appellant may not invoke said provision in avoidance of
its liability to appellee. On this point, the trial court
correctly made the following observations, to which we
fully agree and adopt as our own: .
It is true that paragraph (Article VIII) of said
Reciprocal Facultative Reinsurance Agreement
required that 'in the event of any question
arising as to the meaning of, or any way
connected with or relating to this Agreement,
whether before or after its termination, the
parties shall endeavor to arrive at a
satisfactory compromise by amicable
settlement rather than by court action'; and
that the dispute should be referred to the
decision of two arbitrators and umpire, as
provided, therein. However, in this particular
case, there is absolutely no dispute between
the two parties, because in the stipulation of
facts, the defendant has admitted that plaintiff
has paid its liability to the insured as per its fire
insurance policies specified in the two causes
of action of the complaint. Defendant has,
likewise, admitted its liability as reinsurer
under the Reciprocal Facultative Reinsurance
Agreement (Annex "A" to the complaint) to pay
to the plaintiff its proportional shares, the
amounts of which are not disputed. Indeed,
according to the complaint as admitted by the
defendant, statements of account as to the
amounts of its share as reinsurer and, for all
that appears, said defendant has never
questioned the correctness of said amounts. It
is, likewise, admitted by the defendant in the
stipulation of facts, that because of its failure
to pay said amounts, the plaintiff, on April 11,
1959, complained to the Assistant Insurance
Commissioner, for official intervention, but said
defendant has continued to ignore plaintiff's
demands for reimbursement under the
reinsurance policies.
Moreover, as decided by the Court of Appeals
in the case of Buenaventura Maligad v. United
Assurance Co., Inc., 55 O.G. 6041:
If in the course of the settlement of a loss, the
action of the company or its agents amounts to
a refusal to pay, the company will be deemed
to have waived the condition precedent with
reference to arbitration and a suit upon the
policy will lie. (Chang v. Assurance Corporation,
8 Phil. 399.) Emphasis supplied.
In the second and last assignment of error, appellant
claims that "the court a quo erred in failing to rule that
in a facultative obligation the right to choose an
alternative remedy lies only with the debtor, who in
this case is the herein defendant-appellant", and in
support thereof, cites Article 1206 of the new Civil
Code.
We find no connection whatsoever between this article
and the agreement subject of this action, except the
word "facultative" used in both. The term "facultative"
is used in reinsurance contracts, and it is so used in
this particular case, merely to define the right of the
reinsurer to accept or not to accept participation in the
risk insured. But once the share is accepted, as it was
in the case at bar, the obligation is absolute and the
liability assumed thereunder can be discharged by one
and only way payment of the share of the losses.
There is no alternative nor substitute prestation.
WHEREFORE, finding no error in the judgment appealed
from of the trial court, the same is hereby affirmed,
with costs against the defendant-appellant. So ordered.
 renewed on or after July 16, 1959, or even if issued or
renewed before the said date, but their reinsurance
was effected, only thereafter, are not exempt from the
margin fee, even if the reinsurance treaty under which
they are reinsured was approved by the Central Bank
before July 16, 1959." So stated, the case calls into
question the applicability of Section 3 of the Margin
Law (Republic Act 2609, approved on July 16, 1959)
which exempts certain obligations from payment of the
margin fee, thus:

Sec. 3. The provisions of this Act shall not apply

to the liquidation of drafts drawn under letters
of credit nor of contractual obligations calling
for payment of foreign exchange issued,
approved and outstanding as of the date this
Act takes effect and the extension thereof, with
the same terms and conditions as the original
contractual obligations: Provided, That the
repayment of loans contracted by the
government of the Philippines with foreign
governments and/or private banks and the
importation of machineries and equipment by
provinces, cities or municipalities for the
exclusive use in the operation of public utilities
fully-owned and maintained by them shall
likewise be exempted from the operation of this
Act.

Appropriate to state here is that except as otherwise

in the law stated the Margin Law subjects all sales of
foreign exchange by the Central Bank and its
authorized agent banks to a uniform margin of not
more than forty per cent (40%) over the banks' selling
rates. 1 The Monetary Board is empowered to fix the
margin "at such rate as it may deem necessary to
effectively curtail any excessive demand upon the
international reserve." 2 Such margin, however, "shall
not be changed oftener than once a year except upon
the recommendation of the National Economic Council
and the approval of the President." 3 The Monetary
Board has pegged the margin fee at 25%. 4

Following are the facts that gave rise to the present

controversy:

On January 1, 1950, Philippine American Life Insurance

Company [Philamlife], a domestic life insurance
corporation, and American International Reinsurance
Company [Airco] of Pembroke, Bermuda, a corporation
organized under the laws of the Republic of Panama,
entered into an agreement reinsurance treaty
which provides in its paragraph 1, Article I, the
following:

Republic of the Philippines Art. I. On and after the 1st day of January 1950,
SUPREME COURT the Ceding Company [Philamlife] agrees to
Manila reinsure with AIRCO the entire first excess of
such life insurance on the lives of persons as
EN BANC may be written by the Ceding Company under
direct application over and above its maximum
G.R. No. L-19255 January 18, 1968 limit of retention for life insurance, and AIRCO
binds itself, subject to the terms and provisions
of this agreement, to accept such reinsurances
THE PHILIPPINE AMERICAN LIFE INSURANCE on the same terms and for an amount not
COMPANY, petitioner, exceeding its maximum limit for automatic
vs. acceptance of life reinsurance. . . .
THE AUDITOR GENERAL, respondent.
By the third paragraph of the same Article I, it is also
Lim, Macias, De la Rosa and Salonga for petitioner. stipulated that even though Philamlife "is already on a
Office of the Solicitor General and J. Respicio for risk for its maximum retention under policies previously
respondent. issued, when new policies are applied for and issued
[Philamlife] can cede automatically any amount, within
SANCHEZ, J.: the limits . . . specified, on the same terms on which it
would be willing to accept the risk for its own account,
Broadly stated, petitioner's appeal challenges the if it did not already have its limit of retention."
correctness of the Auditor General's ruling that
"[r]emittance of premia on insurance policies issued or
Reinsurances under said reinsurance treaty of January
1, 1950 may also be had facultatively upon other cases
pursuant to Article II thereof, whereby Airco's liability
begins from acceptance of the risk. These cases
include those set forth in paragraph 2 of the treaty's
Article I which expressly excludes from automatic
reinsurance the following: (a) any application for life
insurance with Philamlife which, together with other
papers containing information as to insurability of the
risk, shows that "the total amount of life insurance
(including accidental death benefit) applied for to or
already issued by all companies [other life insurance
companies which had previously accepted the risk]
exceeds the equivalent of Five Hundred Thousand
Dollars ($500,000) United States currency," and (b) any
life on which Philamlife 'retains for its own account less
than its regular maximum limit of retention for the age,
sex, plan, rating and occupation of the risk.'
Every life insurance policy reinsured under the
aforecited agreement "shall be upon the yearly
renewable term plan for the amount at risk under the
policy reinsured." 5
Philamlife agrees to pay premiums for all reinsurances
"on an annual premium basis." 6
It is conceded that no question ever arose with respect
to the remittances made by Philamlife to Airco before
July 16, 1959, the date of approval of the Margin Law.
The Central Bank of the Philippines collected the sum
of P268,747.48 as foreign exchange margin on
Philamlife remittances to Airco purportedly totalling
$610,998.63 and made subsequent to July 16, 1959.
Philamlife subsequently filed with the Central Bank a
claim for the refund of the above sum of P268,747.48.
The ground therefor was that the reinsurance
premiums so remitted were paid pursuant to the
January 1, 1950 reinsurance treaty, and, therefore,
were pre-existing obligations expressly exempt from
the margin fee.
On June 7, 1960, the Monetary Board in line with the
opinion of its Acting Legal Counsel resolved that
"reinsurance contracts entered into and approved by
the Central Bank before July 17, 1959 are exempt from
the payment of the 25% foreign exchange margin,
even if remittances thereof are made after July 17,
1959," because such remittances "are only made in the
implementation of a mother contract, a continuing
contract, which is the reinsurance treaty." 7
The foregoing resolution notwithstanding, the Auditor
of the Central Bank, on April 19, 1961, refused to pass
in audit Philamlife's claim for refund.
On May 17, 1961, Philamlife sought reconsideration
with the Auditor General.
On October 24, 1961, the request for reconsideration
was denied. The Auditor General in effect expressed
the view that the existence of the reinsurance treaty of
January 1, 1950 did not place reinsurance premia on
reinsurance effected on or after the approval of the
Margin Law on July 17, 1959 out of the reach of said
statute. 8
Hence, the present petition for review.
1. The thrust of petitioner's argument is that the
premia remitted were in pursuance of its reinsurance
treaty with Airco of January 1, 1950, a contract
antedating the Margin Law, which took effect only on
July 16, 1959.
But the validity of such claim must be tested by the
provisions of Section 3 of the Margin Law quoted earlier
in this opinion. Said Section 3 expressly withholds the
enforcement of the provisions of said Act on
"contractual obligations calling for payment of foreign
exchange issued approved and outstanding as of the
date this Act takes effect and the extension thereof,
with the same terms and conditions as the original
contractual obligations."
True, the reinsurance treaty precedes the Margin Law
by over nine years. Nothing in that treaty, however,
obligates Philamlife to remit to Airco a fixed, certain,
and obligatory sum by way of reinsurance premiums.
All that the reinsurance treaty provides on this point is
that Philamlife "agrees to reinsure." The treaty speaks
of a probability; not a reality. For, without reinsurance,
no premium is due. Of course, the reinsurance treaty
lays down the duty to remit premiums if any
reinsurance is effected upon the covenants in that
treaty written. So it is that the reinsurance treaty per
se cannot give rise to a contractual obligation calling
for the payment of foreign exchange "issued, approved
and outstanding as of the date this Act [Republic Act
2609] takes effect."
For an exemption to come into play, there must be a
reinsurance policy or, as in the reinsurance treaty
provided, a "reinsurance cession" 9 which may be
automatic or facultative. 10
There should not be any misapprehension as to the
distinction between a reinsurance treaty, on the one
hand, and a reinsurance policy or a reinsurance
cession, on the other. The concept of one and the other
is well expressed thus:
. . . A reinsurance policy is thus a contract of
indemnity one insurer makes with another to
protect the first insurer from a risk it has
already assumed. . . . In contradistinction a
reinsurance treaty is merely an agreement
between two insurance companies whereby
one agrees to cede and the other to
accept reinsurance business pursuant to
provisions specified in the treaty. The practice
of issuing policies by insurance companies
includes, among other things, the issuance of
reinsurance policies on standard risks and also
on substandard risks under special
arrangements. The lumping of the different
agreements under a contract has resulted in
the term known to the insurance world as
"treaties." Such a treaty is, in fact, an
agreement between insurance companies to
cover the different situations described.
Reinsurance treaties and reinsurance policies
are not synonymous. Treaties are
contracts for insurance; reinsurance policies or
cessions . . . are contracts of insurance. 11
Philamlife's obligation to remit reinsurance premiums
becomes fixed and definite upon the execution of the
reinsurance cession. Because, for every life insurance
policy ceded to Airco, Philamlife agrees to pay
premium. 12 It is only after a reinsurance cession is
made that payment of reinsurance premium may be
exacted, as it is only after Philamlife seeks to remit that
reinsurance premium that the obligation to pay the
margin fee arises.
Upon the premise that the margin fee of P268,747.48
was collected on remittances made on reinsurance
effected on or after the Margin Law took effect, refund
thereof does not come within the coverage of the
exemption circumscribed in Section 3 of the said law.
2. Nor will the argument that the Margin Law impairs
the obligations of contract constitutionally
proscribed under the reinsurance treaty, carry the
day for petitioner.
Petitioner's point is that if the Margin Law were,
applied, it "would have paid much more to have the
continuing benefit of reinsurance of its risks than it has
been required to do so by the reinsurance treaty in
question" and that "the theoretical equality between
the contracting parties . . . would be disturbed and one
of them placed at a distinct disadvantage in relation to
the other."
This pose at once loses potency on the face of the rule
long recognized that, existing laws form part of the
contract "as the measure of the obligation to perform
them by the one party and the right acquired by the
other." 13 Stated otherwise, "[t]he obligation does not
inhere and subsist in the contract itself, propio vigore,
but in the law applicable to the contract." 14 Indeed,
Article 1315 of the Civil Code gives out the precept that
parties to a perfected contract "are bound . . . to all the
consequences which, according to their nature, may be
in keeping with . . . law."
Accordingly, when petitioner entered into the
reinsurance treaty of January 1, 1950 with Airco, it did
so with the understanding that the municipal laws of
the Philippines at the time said treaty was executed,
became an unwritten condition thereof. Such municipal
laws constitute part of the obligations of contract. It is
in this context that we say that Republic Act 265, the
Central Bank Act, enacted on June 15, 1948 previous
to the date of the reinsurance treaty became a part
of the obligations of contract created by the latter. And
under Republic Act 265, reasonable restrictions may be
imposed by the State through the Central Bank on all
foreign exchange transactions "in order to protect the
international reserve of the Central Bank during an
exchange crisis." 15 The Margin Law is nothing more
than a supplement to the Central Bank Act; it is a
reasonable restriction on transactions in foreign
exchange. It, too, is an additional arm given, the
Central Bank to attain its objectives, to wit: (1) "[t]o
maintain monetary stability in the Philippines;" and (2)
"[t]o preserve the international value of the peso and
the convertibility of the peso into other freely
convertible currencies." 16 On top of all these is that
that statute was enacted in a background of
"dangerously low international reserves." 17
The following explanatory note by the Committee on
Banks, Currency and Corporations on House Bill No.
3663, which later became the Margin Law, Republic Act
2609, is expressive of the purpose of the law, namely,
to reduce the excessive demand on and prevent
further decline of our international reserves, viz:
The international reserves of the Philippines
have reached such a low level as to require
remedial action beyond that provided in
Republic Act No. 265, inspite of exchange
controls which have been in force since 1949.
The decline in the level of our international
reserves has persisted. The means and the
measures presently authorized in the Charter
of the Central Bank for dealing with the
balance of payments problem have been found
inadequate.
The purpose of this Bill is to provide the Central
Bank with an additional instrument for
effectively coping with the problem and
achieving domestic and international stability
of our currency. The additional instrument of
Central Bank action provided for by this bill
consists of a cost restriction on all imports, as
well as invisibles, to reduce the excessive
demand for foreign exchange. The proceeds
that may accrue to the Central Bank from the
margin will be distributed in accordance with
the provisions of section 41 of the Bank's
Charter.
That some such law as Republic Act 2609 was
envisioned by the contracting parties, Philamlife and
Airco, when the January 1, 1950 reinsurance treaty was
executed, may be gleaned from the provisions of
Article VI of said treaty whereunder "[e]xcept in those
instances where AIRCO is taxed directly and
independently on premiums collected by it from the
Ceding Company, AIRCO shall reimburse the Ceding
Company for the tax paid on reinsurance premiums
paid AIRCO by the Ceding Company which are not
allowed the Ceding Company, as a deduction in the
statement of the Ceding Company."
Petitioner complains that reinsurance contracts abroad
would be made impractical by the imposition of the
25% margin fee. Reasons there are which should deter
us from giving in to this view. First, there is no concrete
evidence that such imposition of the 25% margin fee is
unreasonable. Second, if really continuance of the
existing reinsurance treaty becomes unbearable that
contract itself provides that petitioner may
potestatively write finis thereto on ninety days' written
notice. 18 In truth, petitioner is not forced to continue its
reinsurance treaty indefinitely with Airco.
3. Another roadblock is astride petitioner's route to
refund.
To maintain domestic and international stability in
currency is a primary concern of the State; it is in
pursuance of the constitutional mandate, in the
preamble ordained to "promote the general welfare"; it
is a matter of public policy. This could mean action to
forestall a currency debacle, to improve the low
international reserve, or to conserve and even increase
such reserve.
The Margin Law, Republic Act 2609, it is well to
remember, is a remedial currency measure. It was thus
passed to reduce as far as is practicable the excessive
demand for foreign exchange. Petitioner's stand that
because it had a continuing though revocable
reinsurance treaty with Airco, all remittances of
reinsurance premia made by it to its foreign reinsurer
should be withdrawn from the operation of the Margin
Law, we are constrained to state, is at war with the
State's economic policy of preserving the stability of
our currency. Petitioner may not, in the words of the
Solicitor General, "tie the hands of the State and render
it powerless to impose certain margin or cost
restrictions on its remittances of reinsurance premia in
foreign exchange to fall due as policies become
reinsurable under said treaty, whenever such
remittances would constitute an excessive demand on
our international reserves."
Viewed from this focal point, there cannot be an
impairment of the obligation of contracts. For, the State
may, through its police power, adopt whatever
economic policy may reasonably be deemed to
promote public welfare, and to enforce that policy by
legislation adapted to its purpose. 19 We have, in Abe
vs. Foster Wheeler Corporation, 20 declared that: "The
freedom of contract, under our system of government,
is not meant to be absolute. The same is understood to
be subject to reasonable legislative regulation aimed at
the promotion of publicity health, morals, safety and
welfare. In other words, the constitutional guaranty of
non-impairment of obligations of contract is limited by
the exercise of the police power of the State, in the
interest of public health, safety, morals and general
welfare." It has been said, and we believe correctly,
that "the economic interests of the State may justify
the exercise of its continuing and dominant protective
power notwithstanding interference with
contracts." 21 It bears repetition to state at this point
that the Margin Law is part of the economic
"Stabilization Program" of the country. 22
Tersely put then, "the [constitutional] obligation of
contracts provision does not bar a proper exercise of
the state's police power." 23 Nebia vs. New
York, 24 reasons out that: "Under our form of
government the use of property and the making of
contracts are normally matters of private and not of
public concern. The general rule is that both shall be
free of governmental interference. But neither property
rights nor contract rights are absolute; for government
cannot exist if the citizen may at will use his property
to the detriment of his fellows, or exercise his freedom
of contract to work them harm. Equally fundamental
with the private right is that of the public to regulate it
in the common interest." As emphatic, if not more, is
the following from Norman vs. Baltimore & Ohio
Railroad Company, 25 thus: "Contracts, however
express, cannot fetter the constitutional authority of
the Congress. Contracts may create rights of property,
but when contracts deal with a subject matter which
lies within the control of the Congress, they have a
congenital infirmity. Parties cannot remove their
transactions from the reach of dominant constitutional
power by making contracts about them." More. In
another case, pronouncement was made that: "Not
only are existing laws read into contracts in order to fix
obligations as between the parties, but the reservation
of essential attributes of sovereign power is also read
into contracts as a postulate of the legal order. The
policy of protecting contracts against impairment
presupposes the maintenance of a government by
virtue of which contractual relations are worthwhile
a government which retains adequate authority to
secure the peace and good order of society." 26
For the reasons given, the petition for review is hereby
denied, and the ruling of the Auditor General of
October 24, 1961 denying refund is hereby affirmed.
Costs against petitioner. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Separate Opinions
FERNANDO, J., concurring:
Let me make clear at the outset that I join the rest of
my colleagues in giving assent to the opinion of the
Court distinguished by the usual high standard
invariably associated with the pen of Justice Sanchez.
No possible objection exists either as to the statement
of the legal issue posed or the result arrived at.
This opinion deals solely with the possible
unconstitutional application of Section 3 of the Law in
view of the command of the non-impairment clause. It
is undeniable that the claim made by petitioner
Philamlife as to its applicability cannot be sustained. It
is equally accurate to affirm that "the State may,
through its police power, adopt whatever economic
policy may reasonably be deemed to promote public
welfare, and to enforce that policy by legislation
adapted to its purpose." In that sense necessarily, the
guarantee against non-impairment as the majority
opinions so aptly state "does not bar a proper exercise
of the police power."
Such a statement provokes further thought. It cannot
be said without rendering nugatory the constitutional
guarantee of non-impairment, and for that matter both
the equal protection and due process clauses which
equally serve to protect property rights, that at the
mere invocation of the police power, the objection on
non-impairment grounds automatically loses force.
Here, as in other cases where governmental authority
may trench upon property rights, the process of
balancing, adjustment or harmonization is called for.
It is not then the formulation of the applicable
constitutional principle which, as above stated, has
been set forth with clarity and accuracy that invites
further scrutiny. It is rather the process by which the
disposition of a controversy whenever the protection of
the contract clause is sought that, to my mind, needs
additional emphasis. Hence this concurring opinion.
1. The Constitution provides: No law impairing the
obligation of contracts shall be passed. 1 The above
constitutional provision is self-explanatory. This Court
had occasion once to look upon it as implementing the
constitutional right to freedom of contract. 2 A similar
provision exists in the Constitution of the United States
as a restriction against any state legislation of that
character. 3 It serves as an added protection to property
rights. That such is its aim and intent is made clear by
an excerpt from the opinion of Chief Justice Hughes in
the leading case of Home Building & Loan Association
v. Blaisdell: 4 "In the construction of the contract clause,
the debates in the Constitutional Convention are of
little aid. But the reasons which led to the adoption of
that clause, and of the other prohibitions of section 10
of article 1, are not left in doubt and have frequently
been described with eloquent emphasis. The
widespread distress following the revolutionary period
and the plight of debtors had called forth in the States
an ignoble array of legislative schemes for the defeat
of creditors and the invasion of contractual obligations.
Legislative interferences had been so numerous and
extreme that the conference essential to prosperous
trade had been undermined and the utter destruction
of credit was threatened. "The sober people of America
was convinced that some 'thorough reform' was
needed which would 'inspire a general prudence and
industry, and give a regular course to the business of
society.' The Federalist, No. 44. It was necessary to
interpose the restraining power of a central authority in
order to secure the foundations even of 'private faith.'"
The framers of the Constitutional Convention chose to
incorporate such a provision in our Constitution. Our
people voiced their agreement. It should not be
reduced to a barren form of words.
2. Rutter v. Esteban5 lends support to such an
approach. In that leading case, the continued operation
and enforcement of the Moratorium Act 6 which allowed
an eight-year period of grace for the payment of pre-
war obligations on the part of debtors who suffered as
a consequence of World War II was, in a 1953 decision,
held "unreasonable and oppressive, and should not be
prolonged a minute longer" for being violative of the
constitutional provision prohibiting the impairment of
the obligation of contracts "and, therefore, . . . should
be declared null and void and without effect." 7 This is
one conspicuous instance then, where notwithstanding
the admission earlier in the opinion that police power
could be relied upon to sustain its validity at the time
of its enactment in 1948, in view of the serious
economic condition faced by the country upon
liberation and the state of penury that then affidavit
afflicted a greater portion of the Filipino people, could
by 1953 be rightfully considered as an infringement of
the non-impairment clause, as the economy had in the
meanwhile considerably changed for the better. There
is no clearer instance then of the process of
harmonization and balancing which is incumbent upon
the judiciary to undertake whenever a regulatory
measure under the police power is assailed as violative
of constitutional guarantees, whether of non-
impairment, due process or equal protection, all of
which are intended to safeguard property rights.
In the opinion of Justice Bautista Angelo in Rutter v.
Esteban, there was this categorical declaration: "There
are at least three cases where the Supreme Court of
the United States declared the moratorium laws
violative of the contract clause of the Constitution
because the period granted to debtors as a relief was
found unwarranted by the contemplated
emergency." 8 Further on, in his opinion, was the
following: "In addition, we may cite leading state court
decisions which practically involved the same ruling
and which reflect the tendency of the courts towards
legislation involving modification of mortgage or
monetary contracts which contains provisions that are
deemed unreasonable or oppressive." 9
It may be out of excess caution, but I fell that no such
overtone or nuance should be considered as emanating
from our decision today, the effect of which would be
to diminish the force and cogency of the Rutter holding
insofar as the continued vitality of the non-impairment
clause in appropriate situations is concerned.
3. The opinion of the Court is strengthened and fortified
by a citation of three leading decisions of the United
States Supreme Court, Home Building & Loan
Association v. Blaisdell,10 Nebbia v. New York,11 and
Norman v. Baltimore and Ohio Railroad Co. 12
All of the above decisions reflect the view that an
enactment of a police power measure does not per
se call for the overruling of objections based on either
due process or non-impairment grounds. There must be
that balancing, or adjustment, or harmonization of the
conflicting claims posed by an exercise of state
regulatory power on the one hand and assertion of
rights to property, whether of natural or of juridical
persons, on the other. That is the only way by which
the constitutional guarantees may serve the high ends
that call for their inclusion in the Constitution and thus
effectively preclude any abusive exercise of
governmental authority.1wph1.t has reasonable relation to a legitimate end. If it is an
Parenthetically, it may be observed that the above
three decisions, the Blaisdell case upholding the
validity of the Minnesota Mortgage Moratorium Law,
the Nebbia case sustaining the constitutionality of a
price-fixing statute to protect the dairy industry of New
York dealing as it does with such a vital but perishable
commodity, as milk, and the Norman decision affirming
a lower court decree, deciding that the Joint Resolution
of June 5, 1933 of the American Congress to the effect,
that, a requirement as a payment in gold or in a
particular kind of coin or currency is against public
policy and that every obligation theretofore or
thereafter incurred should be discharged upon
payment, dollar for dollar, in any coin or currency
which at the time of payment is legal tender for public
and private debts, all deal with emergency legislation
necessitated by the grave economic situation then
confronting the United States in the thirties, faced as
she was with a major business depression. The Margin
Law, 13 which called for interpretation in this case was
likewise a response to an economic problem, perhaps
not as grave but sufficiently serious in character.
But enough of generalities. In the opinion of the
Blaisdell case, penned by the then Chief Justice
Hughes, there was this understandable stress on
balancing or harmonizing, which is called for in
litigations of this character. Thus: "The policy of
protecting contracts against impairment presupposes
the maintenance of a government by virtue of which
contractual relations are worthwhile a government
which retains adequate authority to secure the peace
and good order of society. This principle of harmonizing
the constitutional prohibition with the necessary
residium of state power has had progressive
recognition in the decisions of this Court." 14 Also to the
same effect: "Undoubtedly, whatever is reserved of
state power must be consistent with the fair intent of
the constitutional limitation of that power. The reserved
power cannot be construed so as to destroy the
limitation, nor is the limitation to be construed to
destroy the reserved power in its essential aspects.
They must be construed in harmony with its other. This
principle precludes a construction which would permit
the State to adopt as its policy the repudiation of debts
or the destruction of contracts or the denial of means
to enforce them. But it does not follow that conditions
may not arise in which a temporary restraint of
enforcement may be consistent with the spirit and
purpose of the constitutional provision and thus be
found to be within the range of the reserved power of
the State to protect the vital interests of the
community." 15 Further on, Chief Justice Hughes likewise
stated: "It is manifest from this review of our decisions
that there has been a growing appreciation of public
needs and of the necessity of finding ground for a
rational compromise between individual rights and
public welfare." 16
It was also Chief Justice Hughes, who spoke for the
Court in Norman v. Baltimore and Ohio Railroad Co.
What was emphasized there by him reflected with
fidelity this particular approach. Thus: "Despite the
wide range of the discussion at the bar and the
earnestness with which the arguments against the
validity of the Joint Resolution have been pressed,
these contentions necessarily are brought, under the
dominant principles to which we have referred, to a
single and narrow point. That point is whether the gold
clauses do constitute an actual interference with the
monetary policy of the Congress in the light of its broad
power to determine that policy. Whether they may be
deemed to be such an interference depends upon an
appraisement of economic conditions and upon
determinations of questions of fact. With respect to
those conditions and determinations, the Congress is
entitled to its own judgment. We may inquire whether
its action is arbitrary or capricious, that is whether it
appropriate means to such an end, the decision of the
Congress as to the degree of the necessity for the
adoption of that means, is final." 17
It was Justice Roberts' turn to announce the opinion of
the Court of Nebbia v. New York. According to him: "The
Fifth Amendment, in the field of federal activity, and
the Fourteenth, as respects State action, do not
prohibit governmental regulation for the public welfare.
They merely condition the exertion of the admitted
power, by securing that the end shall be accomplished
by methods consistent with due process. And the
guaranty of due process, as has often been held,
demands only that the law shall not be unreasonable,
arbitrary or capricious, and that the means selected
shall have a real and substantial relation to the object
sought to be attained. It results that a regulation valid
for one sort of business, or in given circumstances,
may be invalid for another sort, or for the same
business under other circumstances, because the
reasonableness of each regulation depends upon the
relevant facts." 18 That a process of balancing or
harmonization is the medium through which the
requirement of reasonableness could be met was
stressed later in his opinion by Justice Roberts in these
words: "It is clear that there is no closed class or
category of business affected with a public interest,
and the function of courts in the application of the Fifth
and Fourteenth Amendments is to determine in each
case whether circumstances vindicate the challenged
regulation as a reasonable exertion of governmental
authority or condemn it as arbitrary or discriminatory.
The phrase 'affected with a public interest' can, in the
nature of things, mean no more than that an industry,
for adequate reason, is subject to control for the public
good." 19

4. If emphasis be therefore laid, as this concurring

opinion does, on the pressing and inescapable need for
such an approach whenever a possible collision
between state authority and an assertion of
constitutional right to property may exist, it is not to
depart from what sound constitutional orthodoxy
dictates. It is rather to abide by what it compels. In
litigations of this character then, perhaps much more
so than in other disputes, where there is a reliance on a
constitutional provision, the judiciary cannot escape
what Holmes fitly referred to as the sovereign
prerogative of choice, the exercise of which might
possibly be impugned if there be no attempt, however
light, at such an effort of adjusting or reconciling the
respective claims of state regulatory power and
constitutionally protected rights.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23447 July 31, 1970

FIELDMEN'S INSURANCE CO., INC., petitioner,
vs.
ASIAN SURETY & INSURANCE, CO., INC. and THE
HONORABLE COURT OF APPEALS, respondents.
Jalandoni, Jamir, Bengzon, Villegas & Zarraga for
respondents.
MAKALINTAL, J.:
Appeal by certiorari from a decision of the Court of
Appeals.
On various dates between April 11, 1960 and
January 9, 1961 the Asian Surety & Insurance
Company, Inc. and the Fieldmen's insurance Company,
Inc. entered into seven (7) reinsurance agreements or
treaties 1 under the general terms of which the former,
as the ceding company undertook to cede to the latter,
as the reinsuring company, a specified portion of the
amount of insurance underwritten by ASIAN upon
payment to FIELDMEN'S of a proportionate share of the
gross rate of the premium applicable with respect to
each cession after deducting a commission. Said
agreements or treaties were to, take effect from certain
specific dates and were to be in force until cancelled by
either party upon previous notice of at least three (3)
months by registered mail to the other party, the
cancellation to take effect as of the 31st of December
of the year in which the notice was given.
On September 19, 1961 FIELDMEN'S, by means of
registered mail, served notice to ASIAN of the former's
desire to be relieved from all participation in its various
treaties with the latter effective December 31, 1961.
This communication, although admittedly received by
ASIAN on September 25, 1961, did not elicit any reply
from ASIAN.
On December 7, 1961 FIELDMEN'S sent another letter
to ASIAN expressing regrets at alleged violations
committed by the latter with respect to the various
treaties between them; in the same letter, FIELDMENS
reiterated its position that it would consider itself "no
longer at risk for any reinsurance and/or cession" given
by ASIAN which might be in force on December 31,
1961. Not having received any formal reply from
ASIAN, FIELDMEN'S sent anew a letter on February 17,
1962 reminding ASIAN of the December 7 letter
regarding the cancellation of all the reinsurance
treaties and cessions as of December 31, 1961. At the
same time FIELDMEN'S requested ASIAN to submit its
final accounting of all cessions made to the former for
the preceding months when the reinsurance
agreements were in force.
Meanwhile one of the risks reinsured with FIELDMENS
under Cession No. 61-87, Policy No. RI-1236, issued in
favor of the Government Service Insurance System,
became a liability when the insured property was
burned on February 16, 1962. Since the policy was
issued on July 1, 1961, it was supposed to expire on
July 1, 1962. 2 The next day, February 17, ASIAN
immediately notified FIELDMEN'S of said fire loss. And
on February 26, 1962 ASIAN sent its reply stating,
among other things, as follows:
... we beg to reiterate that your letter
of December 7, 1961, terminating said
treaties by December 31, 1961, is not
in accordance with the terms thereof,
since there was no prior three months'
notice. However, considering the
attitude express (sic) in your aforesaid
letter of December 7, 1961, we are
willing to waive provision that said
treaties may be cancelled on December
31st of any year, and will consider
them cancelled at the end of three (3)
months from December 7, 1961, by
which time we shall be able to render
the final accounting you desire.
FIELDMEN'S, relying on the sufficiency of its notice of
termination dated September 19, 1961 and obviously
bent on avoiding its liability under the reinsurance
agreements with ASIAN, filed a petition for declaratory
relief with the Court of First Instance of Manila to seek
a declaration that all the reinsurance contracts entered
into between them had terminated as of December 31,
1961 and to obtain an order directing ASIAN to render
final accounting of the transactions between them with
respect to said reinsurance treaties as of the cut-off
date.
In its answer below ASIAN denied having received
FIELDMEN'S letter dated September 19, 1961, and
argued that even assuming it did, FIELDMEN'S could
not have terminated the reinsurance treaties as of
December 31, 1961 because the letter was merely an
expression of FIELDMEN'S desire to cancel the treaties
and not a formal notice of cancellation as
contemplated in their reinsurance agreements. By way
of special defense Asian contended that even if the
September 19 letter were considered sufficient notice
of cancellation thereby rendering the reinsurance
agreements terminated as of December 31, 1961
the liability of FIELDMEN'S with respect to policies or
cessions issued under two of the said agreements
(marked as Annexes A and B) prior to their cancellation
continued to have full force and effect until the stated
expiry dates of such policies or cession.
On December 4, 1962 the trial court rendered a
decision declaring six 3 of the seven 4 insurance
agreements in question cancelled as of December 31,
1961. At the same time, it upheld ASIAN'S position that
all cessions of reinsurance made by it to FIELDMEN'S
prior to the cancellation of the reinsurance treaties
continued in full force and effect until expiry dates. The
same decision also ordered FIELDMEN'S to make an
accounting of its business transactions with ASIAN
within 30 days, and to pay the costs.
On Appeal to the Court of Appeals, the decision of the
trial court was substantially affirmed, with the slight
modification that the order for accounting was
eliminated, without prejudice to the filing of a proper
action between the parties for that purpose.
The cancellation as of December 31, 1961 of the
reinsurance treaties involved in this case is not now in
issue. It was declared by both the trial court and the
Court of Appeals, and has not been challenged here.
The main controversy between the parties is on the
question of whether or not said cancellation had the
effect of terminating also the liability of FIELDMEN'S as
reinsurer with respect to policies or cessions issued
prior to the termination of the principal reinsurance
contracts or treaties.
Of the six reinsurance contracts under consideration
two contain provisions, which clearly and expressly
recognize the continuing effectivity of policies ceded
under them for reinsurance notwithstanding the
cancellation of the contracts themselves. Thus, as
already noted hereinabove, Article 10 of the Facultative
Obligatory Reinsurance Treaty Fire (Annex A to the
petition below) provides "that in the event of
termination of this Agreement ..., the liability of the
Fieldmen's under current cessions shall continue in full
force and effect until their natural expiry ...;" and the
4th paragraph of Article VI of the Personal Accident
Reinsurance Treaty (Annex B to the petition below)
states:
 4. On the termination of this
Agreement from any cause whatever,
the liability of the REINSURER
(Fieldmen's) under any current cession
including any amounts due to be ceded
under the terms of this Agreement and
which are not cancelled in the ordinary
course of business shall continue in full
force until their expiry unless the
COMPANY (Asian) shall, prior to the
thirty-first December next following
such notice, elect to withdraw the
existing cessions ....
may be predicated. If anything, the thrust of said
decision is that ASIAN was not guilty of any substantial
breach of the contracts which would warrant such a
step. And this Conclusion, being factual in nature, is
binding and conclusive upon this Court.
WHEREFORE, the decision appealed from is affirmed
insofar as it refers to the Facultative-Obligatory,
Reinsurance Treaty and the Personal Accident
Reinsurance Treaty are concerned, and modified with
respect to the others by declaring the issues
concerning them as moot and academic. No
pronouncement as to costs.

Insofar as the two reinsurance agreements with the

express stipulations aforequoted are concerned there is
clearly no merit in FIELDMEN'S claim that their
cancellation carried with it ipso facto the termination of
all reinsurance cessions thereunder. Such cessions
continued to be in force until their respective dates of
expiration. Since it was under one of said agreements,
namely, the Facultative Obligatory Reinsurance Treaty-
Fire, that the reinsurance cession corresponding to the
GSIS policy had been made, FIELDMEN'S cannot avoid
liability which arose by reason of the burning of the
insured property.

With respect to the other four agreements, it would

seem that the petition for declaratory relief is moot,
and that no useful purpose would be served by defining
the respective rights and obligations of the parties
thereunder. The said agreements have been cancelled,
and it does not appear that any claim by or liability in
favor of the insured has actually arisen under any of
the reinsurance cessions made prior to such
cancellation. Future conflicts of the same nature as
those which have motivated the present action can of
course be obviated by using mare precise and definite
terminology in the reinsurance agreements which the
parties may enter into henceforth.

It is significant to note in this connection: (1) that in

ASIAN'S answer to the petition below, particularly to
the allegation in paragraph III concerning the right of
either party to terminate the reinsurance agreements
upon at least three months' notice, such termination to
take effect on the 31st of December of the year in
which notice was given, ASIAN made express reference
only to the provisions in the two agreements marked as
Annexes A and B to the petition that "the liability of
FIELDMEN'S under any current cession ... shall continue
in full force and effect until their natural expiry ...; (2)
that the same provisions, and no other, were relied
upon as a special defense on the question of
FIELDMEN'S continued liability; and (3) that in ASIAN'S
prayer for relief in its answer it was only with respect to
those two agreements that ASIAN asked for a
declaration that the cessions on reinsurance issued
prior to their cancellation would continue in full force
and effect until their natural expiry. In other words,
ASIAN was quite willing that no similar declaration be
made by the Court with respect to the other
agreements, obviously because no risk reinsured
pursuant thereto had become an actual liability. And
since those agreements had been cancelled as of
December 31, 1961, there is no point in the prayer for
declaratory judgment concerning them.

FIELDMEN'S insists on its alternative prayer that all

cessions under the six reinsurance agreements be
declared rescinded by reason of certain violations
thereof, as stated by FIELDMEN'S in its letter of
December 7, 1961.

This action, however, is not one for rescission but

merely for declaratory relief, and the petition contains
no averments which would constitute grounds for
rescission. Neither are there any findings of fact in the
decision of the Court of Appeals upon which rescission

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-29508 June 27, 1973
ARTEX DEVELOPMENT CO., INC., plaintiff-appellee,
vs.
WELLINGTON INSURANCE CO., INC., defendant-
appellant.
Norberto J. Quisumbing for plaintiff-appellee.
William R. Veto for defendant-appellant.
TEEHANKEE, J.:
In this appeal from the decision of the court of first
instance of Rizal at Caloocan city, the Court reiterates
the establish doctrine that a third party not privy to a
contract that contains no stipulations pour autrui in its
favor may not sue enforcement of the contract.
Hence, in this case where the lower court ordered
defendant insurer to pay plaintiff-insured the balance
of the insured property loss of P3,624,683.43 and its
ascertained business interruption loss of P1,748,460.00
with interest and attorney's fees, the Court affirms the
correctness of the lower court's ruling that it is no
defense for the insurer as against insured that the
insurer had obtained reinsurance from other companies
to cover its liability.
Defendant-appellant's lone assignment of error that
lower court should have ruled instead "that plaintiff-
appellant cause of action (as insured) should have
been directed against the reinsurers and not against
defendant-appellant" is manifestly untenable since
there is no privity of contract between the insured and
the reinsurers. Plaintiff-appellee insured can only move
for enforcement of its insurance contract with
its insurer, the defendant-appellant.
Unless there is a specific grant in, or assignment
of, reinsurance contract in favor of the insured or a
manifest intention of the contracting parties to the
insurance contrary to grant such benefit or favor to
the insured, not being privy to
the reinsurance contract, has no cause of action
against the reinsurer. It is expressly provided in section
91 the Insurance Act 1 that "(T)he original insured has
no interest in a contract of insurance."
The lower court's judgment of April 2, 1968 was
rendered the basis of the parties' stipulation of facts
and there is dispute as to the property and business
interruption loss of the insured as thus determined nor
as to the partial payment made by defendant-insurer
that have greatly reduced the amount still due and
owing under the judgment under appeal.
Briefly, the trial court found that from the evidence and
stipulation of facts presented, it appears that the
defendant, Wellington Insurance Co., Inc. insured for
P24,346,509.00 the buildings, stocks and machinery of
plaintiff Artex Development Co., Inc., against loss or
damage by fire or lighting (Exh. A) upon payment by
plaintiff of the corresponding premiums; that on August
2, 1963, said properties were insured for an additional
sum of P833,034.00 (Exh. A-1) that on May 12, 1963
defendant insured plaintiff against business
interruption (use and occupancy) for P5,200,000.00
(Exh. B); that on September 22, 1963, the buildings,
stocks and machineries of plaintiff's spinning
department were burned; that notice of the loss and
damage was given the defendant, and the loss was
referred to the H. H. Bayne Adjustment Co. and the
Allied Adjustment Co.; that as per report of the
adjusters, the total property loss of the plaintiff was the
sum of P10,106,554.40 and the total business
interruption loss was P3,000,000.00; that defendant
has paid to the plaintiff the sum of P6,481,870.07 of
the property loss suffered by plaintiff and
P1,864,134.08 on its business interruption loss, leaving
a balance of P3,624,683.43 and P1,748,460.00,
respectively." 2
On May 29, 1969, counsel for plaintiff-appellee filed a
manifestation dated April 10, 1969, bearing the
conformity of plaintiff itself under the signature of its
president, Domingo G. Castillo, as follows:
MANIFESTATION
Plaintiff-appellee, through counsel,
respectfully manifests that, in view of
the Deeds of Discharge dated 10 April
1969 and Collateral Agreement dated
10 April 1969, hereto attached as
Annexes "A" and "B", the only
remaining liability subject of litigation
shall be that proportion of the loss
reinsured with or through Alexander
and Alexander, Inc. of New York, U.S.A.,
namely, P397,813.00 the rest having
been paid and settled per the said
deeds Annexes "A" and "B".
Quezon City for Manila, 10 April 1969.
(Signed) NORBERTO J. QUISUMBING
Counsel for Plaintiff-Appellant P.O. Box
No. 226, Manila.
CONFORME:
ARTEX DEVELOPMENT CO., INC.
By:
(Signed) DOMINGO G. CASTILLO
President 3
The amended documents recited further that:
 1. Artex hereby acknowledges receipt
of the sum of P3,600,000.00 in
Philippine currency paid by Minet on
behalf itself and Willington and Minet &
Co. in full and final settlement of all
any claims Artex may have against
Willington, Minet and Minet Co. in
respect of the losses resulting from the
said fire of 22nd September 1963 the
Policies of Insurance and the Contracts
Reinsurance specified in the said Deeds
of Discharge and discharge Willington,
Minet and Minet & Co. jointly and
severally from all actions, proceedings,
claims, demands, costs and expenses
in respect thereof including the said
judgment obtained in the Court of First
Instance of Rizal and additionally Artex
waives in favor of Minet and Minet &
Co. Artex's right of recourse against
them under Article 1177 of the Civil
Code of the Philippines. 4
Upon the parties' joint motion dated May 22, 1969 for
temporary suspension of the proceedings by virtue of
such payment, the Court per its resolution of June 30,
1969 resolve to suspend the proceedings until July 30,
1969. 5 The Court also noted defendant-appellant's
manifestation dated June 18, 1969, to the effect that
"the statement in plaintiff-appellee' Manifestation that
the only remaining amount of its claimant subject of
litigation is the proportion of the loss reinsured wit
Alexander and Alexander, Inc. of New York, U.S.A. in
the amount of P397,813.00 because the reinsurers of
defendant-appellant made additional partial payments,
is true and correct but without prejudice to the legal
question presented in defendant-appellant's brief." 6
Thereafter, plaintiff-appellee filed on August 8, 1969 its
brief, and prayed for affirmance of the appealed
judgment with modification, as follows:
In the light of the foregoing discussion,
the lower court did not commit any
error in its appealed decision, which
must accordingly be sustained and
affirmed. It is however respectfully
prayed that the same be modified as to
the amount of liability adjudged
against defendant appellant in favor of
plaintiff-appellee, in accordance with
their Collateral Agreement executed by
them on April 10, 1969 (Annex "B", of
manifestation of the same date, filed in
this Court on 29 May 1969), which
should now be fixed at P397,813.00,
plus of course 12% interest per annum
thereof for late payment until 10 April
1969, attorney's fees of 15% of the
recovery, expenses of litigation and
costs of suit, already adjudged by the
lower court, no writ of execution to
issue however on any adjudged liability
until after three (3) years from 10 April
1969, pursuant to the same 'Collateral
Agreement of the parties.
On the sole issue of law raised by defendant-appellant
in its brief, the Court finds, as above indicated, that no
single clause in the reinsurance contracts has been
cited by defendant-insurer that would justify its claim
that they contained a stipulation pour autrui in favor of
plaintiff-insured, and whereby "plaintiff-appellee is
deemed to have agreed to look solely to the reinsurers
for indemnity in case of loss." 7
Article 1311 of our Civil Code expresses the universal
rule that "Contracts take effect only between the
parties, their assigns and heirs" (with the heir being
"not liable beyond the value of the property he
received from the decedent,") and provides for the
exception of stipulations pour autrui or in favor of a
third person not a party to the contract, in this wise:
If a contract should contain some
stipulation in favor of a third person, he
may demand its fulfillment provided he
communicated his acceptance to the
obligor before its revocation. A mere
incidental benefit or interest of a
person is not sufficient. The contracting
parties must have clearly and
deliberately conferred favor upon a
third person. (Art. 1311, Civil Code,
second paragraph)
The Court has a since the early case of Uy Tam vs.
Leonard 8 that the "intent of the contracting parties to
benefit third party by means of such stipulations pour
autrui must clearly expressed, and hence, a clause in a
contractor's executed solely in favor of the City of
Manila and condition pay for all labor and materials
cannot be construed stipulation pour autrui available to
materialmen who supplied certain materials to the
contractor for use in the performance of the latter's
contract with the city.
In Bonifacio Bros, Inc. vs. Mora 9 the Court reiterated
same established doctrine, holding that the clause in a
motor vehicle insurance policy authorizing the owner of
damaged vehicle to contract for its repair does not
mean that the repairman may collect the cost of the
repair directly the insurer, there being no clause "from
which we can infer that there is an obligation on the
part of the insurance company to pay the cost of
repairs directly to them,' and that the mortgagee of the
car (expressly named in the insure policy as beneficiary
of any loss payable thereunder) had better right than
the repairman to the insurance proceeds.
Plaintiff-insured, not being a party or privy to
defendant insurer's reinsurance contracts, therefore,
could not directly demand enforcement of such
insurance contracts. Defendant-appellant's contention
that the insured should be deemed have agreed to
look solely to the reinsurers for indemnity case of loss,
since it was evident that with its mere P500,000. paid-
up capital stock, it had to secure reinsurance coverage
the over P24-million fire insurance coverage of the
policy issued by it to plaintiff-insured, is manifestly
untenable.
Assuming that plaintiff-insured could avail of the
reinsurance contracts and directly sue the reinsurers
for payment of the loss, still such assumption would
not in any way affect or cancel out defendant-insurer's
direct contractual liability to plaintiff-insured under the
insurance policy to indemnify plaintiff for the property
losses. Plaintiff's right as insured to sue defendant as
insurer directly and solely would thereby not be
affected or curtailed in any way, without prejudice to
defendant in turn filing a third party complaint or
separate suit against its reinsurers: Thus, in Naga
Development Corp. vs. Court of Appeals 10 the Court
held that the contractor remain liable to the supplier
for materials delivered, notwithstanding arrangements
made on its GSIS loan for the GSIS to issue treasury
warrants on account of such loan, directly in favor of
the supplier, since "such an arrangement obviously
cannot destroy or modify the direct legal responsibility
of the (contractor) to the (supplier) to pay for what the
latter gave and rendered to the former."
On April 4, 1973, plaintiff-appellee filed a manifestation
informing the Court that in Republic of the Philippines
vs. Wellington Insurance Co., Inc., docketed as Civil
Case No. 88046 of the court of first instance of Manila,
an order was issued on September 18, 1972 for the
'Liquidation of said insurance company, herein
defendant-appellant; that the Insurance Commissioner
was designated receiver and as such issued on
November 4, 1972 an order for the filing of claims
against said defendant; that accordingly plaintiff filed
its verified statement of claim wherein it asked the
Insurance Commissioner "to move to dismiss the
above-entitled appeal as filed only for delay."
Requested by the Court to file their comments,
defendant through counsel admitted the fact of
liquidation proceedings but denied any dilatory motive
in its appeal, stating that "although it does not raise
any issue of fact in (this) appeal, yet the question of
law raised (herein) is of first impression in this
jurisdiction" and of "utmost importance" to insurance
companies taking out reinsurance policies.
The Insurance Commissioner, in her manifestation of
May 18, 1973, confirmed the fact of her taking over
"title to all property, contracts, rights of action and all
of the records of the (defendant) insurance company"
as liquidator pursuant to section 175-B of the Insurance
claiming the sole right-now to officially represent and
act for defendant company and asserting "exclusive
jurisdiction determine this claim" even as against this
Court according to her, should be deemed to have
"ceased to jurisdiction over the subject of this pending
action," but at the same time not moving to dismiss
the appeal, as suggest plaintiff, and instead
manifesting that "the Insurance Commissioner is
absolutely without any knowledge information
sufficient to form a belief as to the truth veracity of
Plaintiff Appellee's imputation to Defendant-Appellant
that the latter had filed the above-entitled a only for
delay." 11
Since the claim at bar of plaintiff against defendant
merely for the balance of a proven undisputed claim
(as amount) long tried and decided as per the trial
court judgment of April 2, 1968 before the liquidation
order issued only last year on September 18, 1972
the Court has herein resolved and disposed of the sole
issue of law raised in the appeal. Plaintiff's judgment
claim as now judiciary determined will have to be
satisfied in compliance with requirements of the
Insurance Act governing distribution assets, priorities
of payments of proven claims, etc., insurance
companies under liquidation and with prior
authorization of the court in the liquidation proceeding
pending in the Manila court of first instance.
ACCORDINGLY, as prayed for by plaintiff-appellee in
brief, the judgment of the lower court is affirmed, with
the modification that the remaining liability of
defendant appellant to plaintiff-appellee in accordance
with the "collateral agreement" of April 10, 1969 is
fixed at P397,813.00 with twelve (12%) percent
interest per annum until 10 April 1969, attorney's fees
of fifteen (15%) percent of the recovery, and cost of
suit.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22042 August 17, 1967
DIONISIA, EULOGIO, MARINA, GUILLERMO and
NORBERTO all surnamed GUINGON, plaintiffs-
appellees,
vs.
ILUMINADO DEL MONTE, JULIO AGUILAR and
CAPITAL INSURANCE and SURETY CO.,
INC., defendants.
CAPITAL INSURANCE and SURETY CO.,
INC., defendant-appellant.
Generoso Almario and Associates for plaintiffs-
appellees.
Achacoso and Associates for defendant-appellant.
BENGZON, J.P., J.:
Julio Aguilar owned and operated several jeepneys in
the City of Manila among which was one with plate
number PUJ-206-Manila, 1961. He entered into a
contract with the Capital Insurance & Surety Co., Inc.
insuring the operation of his jeepneys against
accidents with third-party liability. As a consequence
thereof an insurance policy was executed by the
Capital Insurance & Surety Co., Inc., the pertinent
provisions of which in so far as this case is concerned
contains the following:
Section II LIABILITY TO THE PUBLIC
1. The Company, will, subject to the limits of
liability, indemnify the Insured in the event of
accident caused by or arising out of the use of
the Motor Vehicle/s or in connection with the
loading or unloading of the Motor Vehicle/s,
against all sums including claimant's costs and
expenses which the Insured shall become
legally liable to pay in respect of:
a. death of or bodily injury to any
person
b. damage to property
During the effectivity of such insurance policy on
February 20, 1961 Iluminado del Monte, one of the
drivers of the jeepneys operated by Aguilar, while
driving along the intersection of Juan Luna and Moro
streets, City of Manila, bumped with the jeepney
abovementioned one Gervacio Guingon who had just
alighted from another jeepney and as a consequence
the latter died some days thereafter.
A corresponding information for homicide thru reckless
imprudence was filed against Iluminado del Monte, who
pleaded guilty. A penalty of four months imprisonment
was imposed on him.
As a corollary to such action, the heirs of Gervacio
Guingon filed an action for damages praying that the
sum of P82,771.80 be paid to them jointly and
severally by the defendants, driver Iluminado del
Monte, owner and operator Julio Aguilar, and the
Capital Insurance & Surety Co., Inc. For failure to
answer the complaint, Del Monte and Aguilar were
declared in default. Capital Insurance & Surety Co., Inc.
answered, alleging that the plaintiff has no cause of
action against it. During the trial the following facts
were stipulated:
COURT: The Court wants to find if there is a
stipulation in the policy whereby the insured is
insured against liability to third persons who
are not passengers of jeeps.
ALMARIO: As far as I know, in my honest belief,
there is no particularization as to the
passengers, whether the passengers of the
jeep insured or a passenger of another jeep or
whether it is a pedestrian. With those, we can
submit the stipulation.
SIMBULAN: I admit that. (T.s.n., p. 21, Jan. 23,
1962; p. 65 Rec. on Appeal)
On August 27, 1962, the Court of First Instance of
Manila rendered its judgment with the following
dispositive portion:
WHEREFORE, judgment is rendered sentencing
Iluminado del Monte and Julio Aguilar jointly
and severally to pay plaintiffs the sum of
P8,572.95 as damages for the death of their
father, plus P1,000.00 for attorney's fees plus
costs.
The defendant Capital Insurance and Surety
Co., Inc. is hereby sentenced to pay the
plaintiffs the sum of Five Thousand (P5,000.00)
Pesos plus Five Hundred (P500.00) Pesos as
attorney's fees and costs. These sums of
P5,000.00 and P500.00 adjudged against
Capital Insurance and Surety Co., Inc. shall be
applied in partial satisfaction of the judgment
rendered against Iluminado del Monte and Julio
Aguilar in this case.
SO ORDERED.
The case was appealed to the Court of Appeals which
appellate court on September 30, 1963 certified the
case to Us because the appeal raises purely questions
of law.
The issues raised before Us in this appeal are (1) As the
company agreed to indemnify the insured Julio Aguilar,
is it only the insured to whom it is liable? (2) Must Julio
Aguilar first show himself to be entitled to indemnity
before the insurance company may be held liable for
the same? (3) Plaintiffs not being parties to the
insurance contract, do they have a cause of action
against the company; and (4) Does the fact that the
insured is liable to the plaintiffs necessarily mean that
the insurer is liable to the insured?
In the discussion of the points thus raised, what is
paramount is the interpretation of the insurance
contract with the aim in view of attaining the objectives
for which the insurance was taken. The Rules of Court
provide that parties may be joined either as plaintiffs or
defendants, as the right to relief in respect to or arising
out of the same transactions is alleged to exist (Sec. 6,
Rule 3). The policy, on the other hand, contains a
clause stating:
E. Action Against Company
No action shall lie against the Company unless,
as a condition precedent thereto, the Insured
shall have fully complied with all of the terms
of this Policy, nor until the amount of the
Insured's obligation to pay shall have been
finally determined either by judgment against
the Insured after actual trial or by written
agreement of the Insured, the claimant, and
the Company.
Any person or organization or the legal
representative thereof who has secured such
judgment or written agreement shall thereafter
be entitled to recover under this policy to the
extent of the insurance afforded by the Policy.
Nothing contained in this policy shall give any
person or organization any right to join the
Company as a co-defendant in any action
against the Insured to determine the Insured's
liability.
Bankruptcy or insolvency of the Insured or of
the Insured's estate shall not relieve the
Company of any of its obligations hereunder.
Appellant contends that the "no action" clause in the
policy closes the avenue to any third party which may
be injured in an accident wherein the jeepney of the
insured might have been the cause of the injury of
third persons, alleging the freedom of contracts. Will
the mere fact that such clause was agreed upon by the
parties in an insurance policy prevail over the Rules of
Court which authorizes the joining of parties plaintiffs
or defendants?
The foregoing issues raise two principal: questions: (1)
Can plaintiffs sue the insurer at all? (2) If so, can
plaintiffs sue the insurer jointly with the insured?
The policy in the present case, as aforequoted, is one
whereby the insurer agreed to indemnify the insured
"against all sums . . . which the Insured shall become
legally liable to pay in respect of: a. death of or bodily
injury to any person . . . ." Clearly, therefore, it is one
for indemnity against liability;1 from the fact then that
the insured is liable to the third person, such third
person is entitled to sue the insurer.1wph1.t
The right of the person injured to sue the insurer of the
party at fault (insured), depends on whether the
contract of insurance is intended to benefit third
persons also or only the insured. And the test applied
has been this: Where the contract provides for
indemnity against liability to third persons, then third
persons to whom the insured is liable, can sue the
insurer. Where the contract is for indemnity against
actual loss or payment, then third persons cannot
proceed against the insurer, the contract being solely
to reimburse the insured for liability actually
discharged by him thru payment to third persons, said
third persons' recourse being thus limited to the
insured alone.2
The next question is on the right of the third person to
sue the insurer jointly with the insured. The policy
requires, as afore-stated, that suit and final judgment
be first obtained against the insured; that only
"thereafter" can the person injured recover on the
policy; it expressly disallows suing the insurer as a co-
defendant of the insured in a suit to determine the
latter's liability. As adverted to before, the query is
which procedure to follow that of the insurance
policy or the Rules of Court.
The "no action" clause in the policy of insurance cannot
prevail over the Rules of Court provision aimed at
avoiding multiplicity of suits. In a case squarely on the
point, American Automobile Ins. Co. vs. Struwe, 218
SW 534 (Texas CCA), it was held that a "no action"
clause in a policy of insurance cannot override
procedural rules aimed at avoidance of multiplicity of
suits. We quote:
Appellants filed a plea in abatement on the
grounds that the suit had been prematurely
brought against the insurance company, and
that it had been improperly joined with Zunker,
as said insurance company, under the terms of
the policy, was only liable after judgment had
been awarded against Zunker. . . .
* * * That plea was properly overruled, because
under the laws of Texas a dual suit will always
be avoided whenever all parties can have a fair
trial when joined in one suit. Appellee, had he
so desired, could have prosecuted his claim to
judgment as against Zunker and then have
sued on that judgment against the insurance
company, but the law does not make it
imperative that he should do so, but would
permit him to dispose of the whole matter in
one suit.
 The rule has often been announced in Texas
that when two causes of action are connected
with each other, or grow out of the same
transaction, they may be properly joined, and
in such suit all parties against whom the
plaintiff asserts a common or an alternative
liability may be joined as defendants. . . . Even
if appellants had presented any plea in
abatement as to joinder of damages arising
from a tort with those arising from a contract, it
could not, under the facts of this case, be
sustained, for the rule is that a suit may
include an action for breach of contract and
one for tort, provided they are connected with
each other or grew out of the same transaction.

Similarly, in the instant suit, Sec. 5 of Rule 2 on "Joinder

of causes of action" and Sec. 6 of Rule 3 on "Permissive
joinder of parties" cannot be superseded, at least with
respect to third persons not a party to the contract, as Republic of the Philippines
herein, by a "no action" clause in the contract of SUPREME COURT
insurance. Manila

Wherefore, the judgment appealed from is affirmed in FIRST DIVISION

toto. Costs against appellant. So ordered.
G.R. No. L-41432 July 30, 1979

IVOR ROBERT DAYTON GIBSON, petitioner,

vs.
HON. PEDRO A. REVILLA, in his official capacity
as Presiding Judge of Branch XIII, Court of First
Instance of Rizal, and LEPANTO CONSOLIDATED
MINING COMPANY, respondents.

Quasha, Asperilla, Ancheta, Valmonte, Pe;a & Marcos

for petitioner.

Sycip, Salazar, Feliciano, Hernandez & Castillo for

respondents.

GUERRERO, J.:1wph1.t

This is a petition for review 1 seeking to set aside the

Order of the Court of First Instance of Rizal Branch XIII,
presided by respondent Judge Pedro A. Revilla, in Civil
Case No. 20046 entitled "Lepanto Consolidated Mining
Company versus Malayan Insurance Company, Inc."
denying the motion of the petitioner Ivor Robert Dayton
Gibson for leave to intervene in said case, and to order
the respondent Judge to admit him as intervenor
therein.

The antecedent facts of this case are as follows:

Lepanto Consolidated Mining Company (hereinafter

referred to as Lepanto) filed on September 27, 1974 in
the Court of First Instance of Rizal, Branch XIII a
complaint with a plea for preliminary mandatory
injunction against Malayan Insurance Company, Inc.,
(hereinafter referred to as Malayan), docketed as Civil
Case No. 20046 seeking the following relief:t.
hqw

(a) upon the firing of this complaint, a

writ of preliminary mandatory
injunction be issued directing
defendant to advance to plaintiff an
interest-free loan of P1,831,695.75;
and

(b) upon trial on the merits t.

hqw
 (i) an accounting or In November, 1971, a cargo of concentrates was
average adjustments shipped by Lepanto on the M/V Hermosa at Poro, San
be made for the Fernando, La Union destined for Tacoma, Washington.
liquidation of the During the sea voyage, while the vessel was in the
general average losses, Northern Pacific Ocean south of Japan on or about Nov.
damages and expenses 11, 1971, it encountered heavy weather and rough
arising from the marine seas which caused it to roll, pitch and vibrate heavily
accidents subject of so that certain shifting boards in the vessel broke and
this action and the part of the cargo shifted transversely, thereby causing
determination of the a list. The vessel deviated to Moji, Japan and after the
contributions due from shifting boards were repaired and/or replaced, it
subject cargoes under proceeded on its trip to Tacoma, but about the end of
the Policy; the month, the ship once again met with strong winds,
monsoon rains, severe winter and very rough seas and
(ii) defendant be it roiled, pitched and vibrated heavily so other shifting
ordered to pay plaintiff boards broke and part of the cargo also shifted causing
the amounts under a heavier list. The captain of the boat, fearing that the
item (i) above, with vessel might sink, sailed to Osaka and unloaded the
interest thereon at the cargo. Expenses were incurred by Lepanto relative to
rate of 12% per annum, the cargo while in Japan but eventually the cargo was
from February 20, 1972 transhipped to Tacoma via another vessel.
as to the cargo's
contribution relative to Also in November, 1971, another cargo of concentrates
the 'Hermonsa' and was shipped by Lepanto on board the MIV General
from March 27, 1972 as Aguinaldo at Poro, San Fernando, La Union and
to the cargo's destined for Tacoma, Washington. Similarly, during the
contribution relative to sea voyage on or about November 30, 1971 in the
the 'General Northern Pacific Ocean southeast of Japan, it met with
Aguinaldo;' heavy weather and rough seas, causing it to pitch, roll
and vibrate heavily so that certain shifting boards in
(iii) the amount of the vessel broke and part of the cargo shifted
P1,831,695.75 as transversely which caused the listing of the vessel The
interest-free loan due captain, fearing also that the vessel The captain,
plaintiff from defendant fearing also that the vessel might sink, sailed for
be declared repayable Miyako, Japan, unloaded the cargo and expenses were
upon and only to the incurred relative to the cargo while in Japan.
extent of any Thereafter, the cargo was transhipped to Tacoma on
corresponding recovery board another vessel.
from the owners of the
'Hermosa' and 'General Lepanto notified Malayan and another insurer,
Aguinaldo; ... Commercial Union in London in November and
December, 1971 of the accidents. Formal claims under
Lepanto also sought payment of interest on delayed the open policy were also filed by Lepanto with
loan amounts, exemplary damages of at least Malayan in March and July, 1972 upon the conclusion of
P500,000.00, attorney's fees and other litigation the voyages and the determination of the shortweight.
expenses, and other cumulative and/or alternative
reliefs as may be lawful, just or equitable in the The claims were denied by Malayan tentatively at first
premises. claiming that it needed time to determine whether or
not the marine accidents resulted from the inherent
The civil suit thus instituted by Lepanto against vice or nature of the cargo and finally Malayan rejected
Malayan was founded on the fact that on Sept. 9, 1971, Lepanto's insurance claim for the reason that the
Malayan issued Marine Open Policy No. LIDC-MOP- cargoes were inherently vicious on loading and such
001/71 covering an shipments of copper, gold and condition caused the listing of the vessel.
silver concentrates in bulk from Poro, San Fernando, La
Union to Tacoma, Washington or to other places in the Hence, the complaint filed by Lepanto against Malayan
United States which Lepanto may make on and after in Civil Case No. 20046 for the interest-free loan to
August 1, 1971 and until the cancellation of the policy Lepanto as stipulated in the policy computed at
upon thirty (30) days' written notice. Thereafter, P1,831,695.75.
Malayan obtained reinsurance abroad through
Sedgwick, Collins & Co., Limited, a London insurance Malayan filed a motion to dismiss the case on three
brokerage. The Memorandum of Insurance issued by grounds: 1. that the instant case has been brought in
Sedgwick to Malayan on September 24, 1971 listed the name of other than the real party in interest; 2.
three groups of underwriters or re-insurers and their that the complaint states no cause of action; and 3.
reinsurance interest are as follows: t.hqw that the claim set forth in the complaint has been
extinguished.
Lloyds 62.808%
Companies (I.L.U.) On December 4, 1974, Malayan's motion to dismiss
34.705% was denied. On January 17, 1975, Malayan filed its
Other Answers incorporating as part of its special and
Companies 2.487% affirmative defenses the following allegations: t.
100.000% hqw

At the top of the list of underwriting members of Lloyds (5) Defendant acted in good faith in
is Syndicate No. 448, assuming 2.48% of the risk rejecting plaintiff's insurance claims,
assumed by the reinsurer, which syndicate number not only because of the circumstances
petitioner Ivor Robert Dayton Gibson claims to be and reasons set forth in the preceding
himself. sub-paragraphs (1) to (4) which
defendant had been reasonably led to
 believe by reports of reputed experts
and/or by legal advice as justifying
rejection, but also because, as plaintiff
had been repeatedly told, it is under
constraint, on one hand, by customs of
the insurance trade to adhere to the
decisions of the lead insurers, and on
another hand, by its contract with its
reinsurer which among others, prohibit
settlement of the reinsured claims
without the reinsurer's assent.
On January 27, 1975, Lepanto filed its reply. On January
30, 1975, the Court denied Lepanto's motion for
mandatory preliminary injunction "without prejudice to
reconsider the said motion after the pre-trial of this
case shall have been concluded." On March 19, 1975,
the first pre-trial conference was held and on March 25,
1975, the parties filed their Stipulation of Facts and
Issues, which Stipulations was approved en toto in the
trial court's order of April 1, 1975.
Subsequently, pre-trial conferences were held on April
3, 1975, May 21, 1975, and June 19, 1975 when
Lepanto concluded its evidence. Defendant through
counsel reserved its right to make a formal offer of its
evidence at the continuation of the hearing scheduled
on July 16, 1975.
Then on June 25, 1975, petitioner Ivor Robert Dayton
Gibson filed a motion to intervene as defendant, which
motion is as follows: t.hqw
MOTION TO INTERVENE
COMES NOW Ivor Robert Dayton
Gibson, Reinsurer in the above-entitled
case, through undersigned counsel,
and to this Honorable Court
respectfully & Heges that:
1. Movant is of legal age, a British
citizen, with address at Lloyd's Lime
Street, London, EC 3;
2. Movant is the leading re-insurer of
the risks and liabilities assumed by
defendant Malayan Insurance Co., Inc.
in a contract of marine insurance
involving two (2) separate shipments of
copper' concentrates aboard the MV
"Hermosa" and the MV "General
Aguinaldo" shipped by Lepanto
Consolidated Mining Co., Inc. to
American Smelting & Refining Co. from
Poro Point, San Fernando, La Union, to
Tacoma, Washington for which
defendant issued Policy No. LIDC-MOP-
001/71 dated September 9, 1971, in
the amount of 20% of the declared
value of each shipment but not to
exceed US $2,000,000 per shipment.
3. Prior to these two shipments and
after defendant Malayan contracted
with Lepanto to insure these two (2)
copper concentrates shipments against
risks of loss and damage, defendant
Malayan in turn, re-insured its liabilities
for losses and damages in accordance
with the terms of their reinsurance
contract.
4. After the defendant Malayan filed
Answer to this suit, movant was
informed that defendant made express
reservations "to file in due time a third-
party complaint against the lead
insurers and/or its reinsurers" (par.
XVIII, Answer).
5. Movant has a legal interest in the
subject matter of litigation in that he
stands to be held liable to pay on its re-
insurance contract should judgment be
rendered requiring the defendant to
pay the claim of the plaintiff.
6. To avoid multiplicity of suits and
allow all parties who have any relation
to the cause of action, whether legally
or in equity, to ventilate expeditiously
every issue relevant to the suit, it is
respectfully submitted that movant be
allowed to intervene as a defendant in
the interest of justice.
7. By the very nature of a contract of
reinsurance and considering that the
reinsurer is obliged "to pay as may be
paid thereon" (referring to the original
policies), although this is subject to
other stipulations and conditions of the
re-insurance contract, it will serve
better the ends of justice if a full
disclosure of all pertinent facts and
issues is made with the participation of
the movant at this trial where his
interests have been and are already
inevitably at stake.
Counsel for the movant submitted the foregoing motion
for the consideration and resolution of the Court on
June 30, 1975. The motion to intervene was opposed
by Lepanto on the following grounds: 1. Movant Ivor
Robert Dayton Gibson has no legal interest in the
matter in litigation or in the success of either plaintiff
or defendant; 2. Movant is estopped by his laches from
intervening in this action; 3. The intervention is
intended for delay and if allowed, win unduly delay the
proceedings between plaintiff and defendant; and 4.
The rights, if any, of movant are not prejudiced by the
present suit and win be fully protected in a separate
action against him and his co-insurers by defendant
herein.
Replying to Lepanto's opposition, movant Ivor Robert
Dayton Gibson contended that 1. Contrary to
oppositors contention, movant Gibson has a legal
interest in the matter in litigation because a contract of
reinsurance between the defendant Malayan Insurance
Company, Inc. and the movant herein is a contract of
indemnity against liability, and not merely against
damage, and therefore, movant has a direct and
immediate interest in the success of defendant
Malayan Insurance Company, Inc.; 2. Neither estoppel
nor laches applies to the movant since the motion to
intervene was filed seasonably on June 25, 1975 during
the period of introduction of evidence by defendant
Malayan; 3. The intervention is not intended for delay;
movant is merely asserting a legal right or interest in
the pending case with the request for opportunity to
appear and be joined so that he could protect or assert
such right or interest; and 4. The filing of an
independent and separate suit proposed by the plaintiff
is condemned by the basic and fundamental principles
against multiplicity of suits.
On July 26, 1975, Lepanto filed a Rejoinder to the
movant's "Reply to Opposition." On July 28, 1975,
Malayan made a manifestation that it had no objection
to the "Motion to Intervene" of Ivor Robert Dayton
Gibson and on July 31, 1975, movant made a Sur-
Rejoinder to Lepanto's Rejoinder.
On August 18, 1975, the Court a quo resolved to deny
the Motion for Intervention in the following: t.
hqw
ORDER
Ivor Robert Dayton Gibson, thru
counsel, has presented before this
Court a motion to intervene on June 25,
1975. In his motion, he alleges that he
is a British citizen with address at
Lloyd's Lime Street, London, EC3; that
he is the leading re-insurer of the risks
and liabilities assumed by defendant
Malayan Insurance Company, Inc. in
the contract of marine insurance
involving the shipments subject of the
instant suit. He further contends that
he has a legal interest in the subject
matter of litigation for he stands liable
on his reinsurances contract should
judgment be rendered against the
defendant and that this intervention
would avoid a multiplicity of suits.
Plaintiff vigorously opposed the motion
contending that movant Ivor Robert
Dayton Gibson has no legal interest in
the matter in litigation or in the
success of either parties in this suit;
that he is estopped by laches; that the
intervention is intended for delay and
will unduly delay the proceedings
between plaintiff and defendant; and
that movant will not be prejudiced by
the present suit and can be fully
protected in any separate action which
defendant may file against him and his
co-insurers.
Considering the grounds of the
opposition, the Court believes that the
third and fourth grounds raised in the
opposition appear highly meritorious.
Since movant Ivor Robert Dayton
Gibson appears to be only one of
several re-insurers of the risks and
liabilities assumed by Malayan
Insurance Company, Inc., it is highly
probable that other re-insurers may
likewise intervene. This would definitely
disrupt the trial between plaintiff and
defendant, the principal protagonists in
this suit. To allow the intervention
would certainly unduly delay the
proceedings between plaintiff and
defendant especially at this stage
where plaintiff had already rested its
case. It would also compound the
issues as more parties and more
matters will have to be litigated. At any
rate, Ivor Robert Dayton Gibson may
protect whatever interest he has in a
separate action.
IN VIEW OF ALL THE FOREGOING, the
Court resolves to deny the motion for
intervention.
SO ORDERED.
Pasig, Rizal, August 18, 1975. t.
hqw
(SGD) PEDRO
Judge facts which satisfy the requirements of the statute
Not satisfied with the denial of his Motion to Intervene,
petitioner now comes before Us seeking to set aside
the order of denial and to order the respondent Judge
to admit him as intervenor. By resolution of this Court
dated November 17, 1975, the petition was denied due
course for lack of merit, but upon petitioner's motion
for reconsideration, the petition was allowed in the
Resolution of February 18, 1976, treating it as a special
civil action.
The principal issue is whether the lower court
committed reversible error in refusing the intervention
of petitioner Ivor Robert Dayton Gibson in the suit
between Lepanto and Malayan.
We lay down the law on Intervention as found in Sec. 2,
Rule 12 of the Rules of Court: t.hqw
Section 2. Intervention. A person
may, before or during a trial, be
permitted by the court, in its discretion,
to intervene in an action, if he has legal
interest in the matter in litigation, or in
the success of either of the parties or
an interest against both, or when he is
so situated as to be adversely affected
by a distribution or other disposition of
property in the custody of the court or
of an officer thereof.
(a) Motion for intervention. A person
desiring to intervene shall file a motion
for leave of court with notice upon all
the parties to the action.
(b) Discretion of court. In allowing or
disallowing a motion for intervention,
the court, in the exercise of discretion,
shall consider whether or not the
intervention will unduly delay or
prejudice the adjudication of the rights
of the original parties and whether or
not the intervenor's rights may be fully
protected in a separate proceeding.
(c) Complaint or answer in intervention.
The intervention shall be made by
complaint filed and served in a regular
form, and may be answered as if it
were an original complaint; but where
intervenor unites with the defendant in
resisting the claims of the plaintiff, the
intervention may be made in the form
of an answer to the complaint,
(d) Time. Unless a different period is
fixed by the court, the complaint or
answer in intervention shall be filed
within ten (10) days from notice of the
order permitting such intervention.
According to pertinent jurisprudence, the term
"intervention" refers to the proceeding by which one
not originally a party to an action is permitted, on his
own application, to appear therein and join one of the
original parties in maintaining the action or defense, or
to assert a claim or defense against some or all of the
parties to the proceeding as originally instituted. Such
a third party may, upon the discretion of the court,
become a party to a pending proceedings between
others for the protection of some rights or interest
alleged by him to be affected by such proceedings. 2
Intervention is not a matter of absolute right but may
be permitted
by the court when the applicant shows
A. REVILLA
authorizing intervention. 3 Under our rules of Court,
what qualifies a person to intervene is his possession of
a legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against
both; or when he is so situated as to be adversely
affected by a distribution or other disposition of
property in the custody of the court or an officer
thereof. 4 As regards the legal interest as qualifying
factor, tills Court has ruled that such interest must be
of a direct and immediate character so that the
intervenor wig either gain or lose by the direct legal
operation of the judgment. The interest must be actual
and material, a concern which is more than mere
curiosity, or academic or sentimental desire; it must
not be indirect and contingent, indirect and remote,
conjectural, consequential or collateral. 5However,
notwithstanding the presence of a legal interest,
permission to intervene is subject to the sound
discretion of the court, the exercise of which is limited
by considering I 'whether or not the intervention will
unduly delay or prejudice the adjudication of the rights
of the original parties and whether or not the
intervenor's rights may be fully protected in a separate
proceeding. 6 Once judicial discretion is exercised, the
action of the court cannot be reviewed or controlled by
mandamus however erroneous it may be, except only
when there is an arbitrary or capricious exercise of
discretion, in which case, the fault is correctible by
mandamus if there be no other adequate and speedy
remedy. 7
As may be noted in the questioned Order, respondent
Judge denied the Motion to Intervene on the last two
grounds of Lepanto's Opposition, namely: "3. The
intervention is intended for delay and if allowed, will
unduly delay the proceedings between plaintiff and
defendant; and 4. The rights, if any, of movant are not
prejudiced by the present suit and will be fully
protected in a separate action against him and his co-
insurers by defendant herein.
Respondent Judge, reasoning out his Order, ruled that
"(s)ince movant Ivor Robert Dayton Gibson appears to
be only one of several co-insurers of the risks and
liabilities assumed by Malayan Insurance Company,
Inc., it is highly probable that other re-insurers may
likewise intervene. This would definitely disrupt the
trial between plaintiff and defendant, the principal
protagonists in this suit. To allow the intervention would
certainly unduly delay the proceedings between
plaintiff and defendant especially at this stage where
plaintiff had already rested its case. It would also
compound the issues as more parties and more
matters will have to be litigated. At any rate, Ivor
Robert Dayton Gibson may protect whatever interest
he has in a separate action."
In his petition, petitioner submits that the respondent
Judge, in refusing to permit/allow him to intervene in
Civil Case No. 20046, incorrectly interpreted and/or
appreciated the purpose/intent of the pertinent rules of
procedure that govern intervention of parties in a given
action and that the respondent Judge erred: (1) In
concluding that to allow the intervention of herein
petitioner "would definitely disrupt the trial" and
"would certainly unduly delay the proceedings," when
such apprehension appears to be clearly immaterial in
determining when intervention is proper or not; (2) In
viewing the alleged availability of another recourse on
the part of herein petitioner to protect his interest, i.e.
separate action, as an added justification to deny his
intervention, despite the fact that the applicable rule of
procedure in this regard (Section 2, Rule 12) does not
preclude intervention even if another separate action is
appropriate and for available; and (3) In its obvious
disregard of the very rule (Section 2, Rule 12) precisely
designed to apply on cases where intervention is
sought, thereby departing from the accepted and usual
procedure under the premises.
After carefully considering the arguments of both the
petitioner and Lepanto, the facts and circumstances
obtaining in the case at bar and applying Rule 12, Sec.
2 of the Rules of Court and the doctrines enunciated by
the Supreme Court on the matter, We rule that the
respondent Judge committed no error of law in denying
petitioner's Motion to Intervene. And neither has he
abused his discretion in his denial of petitioner's Motion
for Intervention.
It is quite crystal clear that the questioned Order of the
respondent Court was based strictly and squarely on
Section 2(b) of Rule 12 which specifically directs the
Court in allowing or disallowing a motion for
intervention in the exercise of discretion to consider
whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original
parties and whether or not the intervenor's rights may
be fully protected in a separate proceeding. The
Court a quo has specifically and correctly complied
with the Rule's mandate and We cannot fault the
respondent Judge therefore.
We reject the contention of the petitioner that the
question regarding delay in the adjudication of the
rights of the original contending parties, while
recognized as factors in allowing or disallowing
intervention, should assume a secondary role to the
primary and imperative requirement that the legal
interest of the would-be intervenor in the matter under
litigation must be clearly shown and that once the legal
interest of the would be intervenor is clearly shown, the
fact that his intervention may work to delay a little the
main conflict between the parties should not by itself
justify the denial of intervention.
Petitioner's contention is untenable. The first paragraph
of Section 2, Rule 12 prescribes the time to intervene
and also who may intervene, that is, one who has legal
interest in the matter in litigation, or in the success of
either of the parties or an interest against both or when
he is so situated as to be adversely affected by a
distribution or other disposition of property in the
custody of the court or of an officer thereof Paragraph
(b) of the same section directs what matter are to be
considered in exercising discretion to snow or disallow
a motion for intervention, which are whether or not the
intervention will unduly delay or prejudice the
adjudication of the rights of the original parties and
whether or not the intervenor's rights may be fully
protected in a separate proceeding. Clearly, for the
Court to permit intervention, it must be shown that
movant is possession of legal interest in the matter in
litigation or otherwise qualified under the first
paragraph of Section 2, and the Court must also
consider the matters mentioned in paragraph (b)
thereof. The latter are not and should not be taken as
secondary to the former for both must concur since
they are equally important, requisite and necessary for
consideration in the exercise of discretion by the Court
to allow or disallow intervention. We cannot invest nor
render primary or secondary importance to either of
these requirements for the law does not make any
distinction. Each case must be decided according to its
facts and merits, subject to the discretion of the Court.
From the particular facts and circumstances of the case
at bar, We are satisfied that the respondent Judge has
not abused his discretion in denying petitioner's Motion
to Intervene. We agree with the holding of the
respondent Court that since movant Ivor Robert Dayton
Gibson appears to be only one of several re-insurers of
the risks and liabilities assumed by Malayan Insurance
Company, Inc., it is highly probable that other re-
insurers may likewise intervene. The record shows that
aside from the petitioner there are sixty-three (63)
other syndicate members of Lloyds, the twenty-six (26)
companies in the " I.L.U. " group holding a 34.705 %
reinsurance interest and the two (2) "Other
Companies" holding the balance of the reinsurances, as
listed in Annex "A", Sur-Rejoinder to Lepanto's
Rejoinder, pp. 136-138, Records. The high probability
that these other re-insurers like the petitioner herein
may likewise intervene if the latter's motion is granted
is not an arbitrary assumption of the Court. Considering
petitioner's assertion that he will have the opportunity
to show, among others, that the losses and damages
purportedly sustained by Lepanto occurred not from
the perils of the seas but from perils of the ships; that
Lepanto is not the real party in interest; that it has no
cause of action; and, neither has it complied with its
obligations under the policy which makes the filing of
the complaint premature (p. 118, Records, Reply to
Opposition) if petitioner is allowed to intervene, We
hold that there is good and sufficient basis for the
Court a quo to declare that. the trial between Lepanto
and Malayan would be definitely disrupted and would
certainly unduly delay the proceedings between the
parties especially at the stage where Lepanto had
already rested its case and that the issues would also
be compounded as more parties and more matters will
have to be litigated. In other words, the Court's
discretion is justified and reasonable.
We also hold that respondent Judge committed no
reversible error in further sustaining the fourth ground
of Lepanto's Opposition to the Motion to Intervene that
the rights, if any, of petitioner are not prejudiced by the
present suit and win be fully protected in a separate
action against him and his co-insurers by Malayan.
Petitioner contends that this rights would not be fully
protected in a separate proceeding because "(a)
decision in favor of Lepanto, declaring Malayan liable
on its insurance policies would necessarily and
injuriously affect the interests of petitioner, (which)
interest as a re-insurer of Malayan's risk is not only
inchoate but material, direct and immediate and for
such interest to be in any manner prejudiced without
first giving petitioner a chance to be heard would be
violative of due process. Upon the other hand, a
decision in favor of Malayan, recognizing it as not liable
under its insurance policies, could subject petitioner to
the danger of having to admit that Malayan had not
breached its insurance contract with the entity (Lloyds)
of which petitioner is the leading syndicate member."
(Petitioner's Memorandum p. 230, Records). Petitioner
also asserts that "by the very nature of a contract of
reinsurance and considering that the re-insurer is
obliged 'to pay as may be paid thereon' (referring to
the original policies), although this is subject to other
stipulations and conditions of the reinsurance contract,
it will serve better the ends of justice if a full disclosure
of all pertinent facts and issues is made with the
participation of the movant at this trial where his
interests have been and are already inevitably at
stake." (Petition, p. 18, Records).
On the contrary, Lepanto insists that petitioner win
have his day in court and his rights can be fully
protected in a separate proceeding. According to
Lepanto, if it loses the case against Malayan, petitioner
cannot possibly be liable to Malayan for indemnity on
the reinsurances. If Lepanto wins, then petitioner, the
sixty-three (63) other syndicate members of Lloyds, the
twenty-six (26) companies in the "I.L.U." group holding
a 34.705% reinsurance interest and the two (2) "Other
Companies" holding the balance of the reinsurances
are free either to pay Malayan or to resist Malayan and
thus force Malayan to sue in whatever country most of
them, qualitatively and not quantitatively, may be
served with summons.
Petitioner's contention that he has to pay once Malayan
is finally adjudged to pay Lepanto because of the very
nature of a contract of reinsurance and considering
that the re-insurer is obliged 'to pay as may be paid
thereon' (referring to the original policies), although
this is subject to other stipulations and conditions of
the reinsurance contract, is without merit. The general
rule in the law of reinsurance is that the re-insurer is
entitled to avail itself of every defense which the re-
insured (which is Malayan) might urge in an action by
the person originally insured (which is Lepanto).
Specifically, the rule is stated thus t.hqw
Sec. 1238. In an action on a contract
of reinsurance, as a general rule the
reinsurer is entitled to avail itself of
every defense which the reinsured
might urge in an action by the person
originally insured; ...
The same rule is stated otherwise in 44 An-L Jur. 2d,
Sec. 1862, p. 793, as follows: t.hqw
Moreover, where an action is brought
against the reinsurer by the reinsured,
the former may assert any defense that
the latter might have made in an action
on the policy of original insurance.
(Eagle Ins. Co. vs. Lafayette, Ins. Co., 9
Ind. 443)
As to the effect of the clause "to pay as may be paid
thereon" contained in petitioner's re-insurance
contract, Arnould, on the Law of Marine Insurance and
Average, 13th Ed., Vol. 1, Section 327, p. 315, states
the rule, thus: t.hqw
It has been decided that this clause
does not preclude the reinsurer from
insisting upon proper proof that a loss
strictly within the terms of the original
policy has taken place.
This clause does not enable the original
underwriter to recover from his re-
insurer to an extent beyond the
subscription of the latter.
It is significant and revealing that petitioner himself
admits in his Memorandum, p. 231, Records, that "(o)f
course, petitioner, if finally sued in London, (he) could
avail himself of remedies available to him." He adds
that "such a procedure, if not entirely time-consuming,
would actually beg the issue on hand. Petitioner
believes that his defenses on the claims ventilated in
the court a quo can be appreciated only here;
elsewhere in view of the peculiar circumstances
surrounding Lepanto's claims the basic issue win be
obfuscated and perhaps even obliterated by arguments
on procedural niceties." However, such a procedural
problem is no legal ground to compel allowance of and
insist on his intervention.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition
is hereby dismiss. No costs.
SO ORDERED.