IIAP Compilation of Supreme Court-

Decided Cases on Non-Life Insurance

Volume One

FIRE INSURANCE

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 CONTENTS

I. Cancellation of Policy
A. Malayan Insurance Co., Inc. vs. Cruz Arnaldo, 1987

II. Condition No. 3

A. Geagonia vs. Court of Appeals, 1995
B. Pacific Banking Corp. vs. Court of Appeals, 1988
C. New Life Enterprises vs. Court of Appeals, 1992

III. Earthquake Endorsement

A. Gulf Resorts Inc. vs. Philippine Charter Insurance Corp., 2005

IV. Fraud
A. Verendia vs. Court of Appeals, 1993

V. Insurable Interest
A. Tai Tong Chuache & Co. vs. Insurance Commission, 1988
B. Cha vs. Court of Appeals, 1997
C. Rizal Surety & Insurance Co. vs. Court of Appeals, 2000
D. Gaisano Cagayan Inc. vs. Insurance Company of North America, 2006

VI. Misdescription in the policy

A. American Home Assurance Co. vs. Tantuco Enterprises, Inc., 2001

VII. Open Policy

A. Development Insurance Corp. vs. Intermediate Appellate Court, 1986

VIII. Payment of premium

A. Makati Tuesday Condominium Corp vs. Court of Appeals, 1992
B. Tibay vs. Court of Appeals, 1996
C. UCPB General Insurance Co., Inc. vs. Masagana Telamart, Inc., 1999
D. UCPB General Insurance Co., Inc. vs. Masagana Telamart Inc., 2001

IX. Prescriptive Period

A. Sun Insurance Office Ltd. vs. Court of Appeals, 1991

X. Proof of Loss
A. Noda vs. Cruz Arnaldo, 1987
B. Country Bankers Insurance Corp. vs. Lianga Bay and Community Multi-Purpose
Cooperative, 2002
C. DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network Inc.,
2006
XI. Subrogation
A. Cebu Shipyard and Engineering Works, Inc. vs. William Lines, Inc., 1999

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I. CANCELLATION OF POLICY

Malayan Insurance Co., Inc. vs. Cruz Arnaldo, G.R. No. L-67835 October 12, 1987

A valid cancellation must, therefore, require concurrence of the following conditions:

(1) There must be prior notice of cancellation to the insured;
(2) The notice must be based on the occurrence, after the effective date of the policy, of one
or more of the grounds mentioned;
(3) The notice must be (a) in writing, (b) mailed, or delivered to the named insured, (c) at the
address shown in the policy;
(4) It must state (a) which of the grounds mentioned in Section 64 is relied upon and (b) that
upon written request of the insured, the insurer will furnish the facts on which the
cancellation is based.

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FIRST DIVISION

G.R. No. L-67835 October 12, 1987

MALAYAN INSURANCE CO., INC. (MICO), petitioner,

vs.
GREGORIA CRUZ ARNALDO, in her capacity as the INSURANCE COMMISSIONER, and
CORONACION PINCA, respondents.

DECISION

CRUZ, J.:

When a person's house is razed, the fire usually burns down the efforts of a lifetime and forecloses hope
for the suddenly somber future. The vanished abode becomes a charred and painful memory. Where
once stood a home, there is now, in the sighing wisps of smoke, only a gray desolation. The dying
embers leave ashes in the heart.

For peace of mind and as a hedge against possible loss, many people now secure fire insurance. This is
an aleatory contract. By such insurance, the insured in effect wagers that his house will be burned, with
the insurer assuring him against the loss, for a fee. If the house does burn, the insured, while losing his
house, wins the wagers. The prize is the recompense to be given by the insurer to make good the loss
the insured has sustained.

It would be a pity then if, having lost his house, the insured were also to lose the payment he expects to
recover for such loss. Sometimes it is his fault that he cannot collect, as where there is a defect imputable
to him in the insurance contract. Conversely, the reason may be an unjust refusal of the insurer to
acknowledge a just obligation, as has happened many times.

In the instant case the private respondent has been sustained by the Insurance Commission in her claim
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for compensation for her burned property. The petitioner is now before us to dispute the decision, on the
ground that there was no valid insurance contract at the time of the loss.

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The chronology of the relevant antecedent facts is as follows:

On June 7, 1981, the petitioner (hereinafter called (MICO) issued to the private respondent, Coronacion
Pinca, Fire Insurance Policy No. F-001-17212 on her property for the amount of P14,000.00 effective July
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22, 1981, until July 22, 1982.

On October 15,1981, MICO allegedly cancelled the policy for non-payment, of the premium and sent the
corresponding notice to Pinca. 3

On December 24, 1981, payment of the premium for Pinca was received by DomingoAdora, agent of
MICO. 4

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On January 15, 1982, Adora remitted this payment to MICO,together with other payments.

On January 18, 1982, Pinca's property was completely burned. 6

On February 5, 1982, Pinca's payment was returned by MICO to Adora on the ground that her policy had
been cancelled earlier. But Adora refused to accept it. 7

In due time, Pinca made the requisite demands for payment, which MICO rejected. She then went to the
Insurance Commission. It is because she was ultimately sustained by the public respondent that the
petitioner has come to us for relief.

From the procedural viewpoint alone, the petition must be rejected. It is stillborn.

The records show that notice of the decision of the public respondent dated April 5, 1982, was received
by MICO on April 10, 1982. 8 On April 25, 1982, it filed a motion for reconsideration, which was denied on
June 4, 1982. 9 Notice of this denial was received by MICO on June 13, 1982, as evidenced by Annex "1"
duly authenticated by the Insurance Commission. 10 The instant petition was filed with this Court on July
2, 1982. 11

The position of the petition is that the petition is governed by Section 416 0f the Insurance Code giving it
thirty days wthin which to appeal by certiorari to this Court. Alternatively, it also invokes Rule 45 of the
Rules of Court. For their part, the public and private respondents insist that the applicable law is B.P. 129,
which they say governs not only courts of justice but also quasi-judicial bodies like the Insurance
Commission. The period for appeal under this law is also fifteen days, as under Rule 45.

The pivotal date is the date the notice of the denial of the motion for reconsideration was received by
MICO.

MICO avers this was June 18, 1982, and offers in evidence its Annex "B," 12 which is a copy of the Order
of June 14, 1982, with a signed rubber-stamped notation on the upper left-hand corner that it was
received on June 18, 1982, by its legal department. It does not indicate from whom. At the bottom,
significantly, there is another signature under which are the ciphers "6-13-82," for which no explanation
has been given.
13
Against this document, the private respodent points in her Annex "1," the authenticated copy of the
same Order with a rubber-stamped notation at the bottom thereof indicating that it was received for the
Malayan Insurance Co., Inc. by J. Gotladera on "6-13-82." The signature may or may not habe been
written by the same person who signed at the bottom of the petitioner's Annex "B."

Between the two dates, the court chooses to believe June 13, 1982, not only because the numbers "6-13-
82" appear on both annexes but also because it is the date authenticated by the administrative division of

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the Insurance Commission. Annex "B" is at worst self-serving; at best, it might only indicate that it was
received on June 18, 1982, by the legal department of MICO, after it had been received earlier by some
other of its personnel on June 13, 1982. Whatever the reason for the delay in transmitting it to the legal
department need not detain us here.

Under Section 416 of the Insurance Code, the period for appeal is thirty days from notice of the decision
of the Insurance Commission. The petitioner filed its motion for reconsideration on April 25, 1981, or
fifteen days such notice, and the reglementary period began to run again after June 13, 1981, date of its
receipt of notice of the denial of the said motion for reconsideration. As the herein petition was filed on
July 2, 1981, or nineteen days later, there is no question that it is tardy by four days.

Counted from June 13, the fifteen-day period prescribed under Rule 45, assuming it is applicable, would
end on June 28, 1982, or also four days from July 2, when the petition was filed.

If it was filed under B.P. 129, then, considering that the motion for reconsideration was filed on the
fifteenth day after MICO received notice of the decision, only one more day would have remained for it to
appeal, to wit, June 14, 1982. That would make the petition eighteen days late by July 2.

Indeed, even if the applicable law were still R.A. 5434, governing appeals from administrative bodies, the
petition would still be tardy. The law provides for a fixed period of ten days from notice of the denial of a
seasonable motion for reconsideration within which to appeal from the decision. Accordingly, that ten-day
period, counted from June 13, 1982, would have ended on June 23, 1982, making the petition filed on
July 2, 1982, nine days late.

Whichever law is applicable, therefore, the petition can and should be dismissed for late filing.

On the merits, it must also fail. MICO's arguments that there was no payment of premium and that the
policy had been cancelled before the occurence of the loss are not acceptable. Its contention that the
claim was allowed without proof of loss is also untenable.

The petitioner relies heavily on Section 77 of the Insurance Code providing that:

SEC. 77. An insurer is entitled to payment of the premium as soon as the thing is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies.

The above provision is not applicable because payment of the premium was in fact eventually made in
this case. Notably, the premium invoice issued to Pinca at the time of the delivery of the policy on June 7,
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1981 was stamped "Payment Received" of the amoung of P930.60 on "12-24-81" by Domingo Adora.
This is important because it suggests an understanding between MICO and the insured that such
payment could be made later, as agent Adora had assured Pinca. In any event, it is not denied that this
payment was actually made by Pinca to Adora, who remitted the same to MICO.

The payment was made on December 24, 1981, and the fire occured on January 18, 1982. One wonders:
suppose the payment had been made and accepted in, say, August 1981, would the commencement
date of the policy have been changed to the date of the payment, or would the payment have retroacted
to July 22, 1981? If MICO accepted the payment in December 1981 and the insured property had not
been burned, would that policy not have expired just the same on July 22, 1982, pursuant to its original
terms, and not on December 24, 1982?

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It would seem from MICO's own theory, that the policy would have become effective only upon payment,
if accepted and so would have been valid only from December 24, 1981m but only up to July 22, 1981,
according to the original terms. In others words, the policy would have run for only eight months although
the premium paid was for one whole year.

It is not disputed that the preium was actually paid by Pinca to Adora on December 24, 1981, who
received it on behalf of MICO, to which it was remitted on January 15, 1982. What is questioned is the
validity of Pinca's payment and of Adora's authority to receive it.

MICO's acknowledgment of Adora as its agent defeats its contention that he was not authorized to
receive the premium payment on its behalf. It is clearly provided in Section 306 of the Insurance Code
that:

SEC. 306. xxx xxx xxx

Any insurance company which delivers to an insurance agant or insurance broker a

policy or contract of insurance shall be demmed to have authorized such agent or broker
to receive on its behalf payment of any premium which is due on such policy or contract
of insurance at the time of its issuance or delivery or which becomes due thereon.

And it is a well-known principle under the law of agency that:

Payment to an agent having authority to receive or collect payment is equivalent to

payment to the principal himself; such payment is complete when the money delivered is
into the agent's hands and is a discharge of the indebtedness owing to the principal. 15

There is the petitioner's argument, however, that Adora was not authorized to accept the premium
payment because six months had elapsed since the issuance by the policy itself. It is argued that this
prohibition was binding upon Pinca, who made the payment to Adora at her own riskl as she was bound
to first check his authority to receive it. 16

MICO is taking an inconsistent stand. While contending that acceptance of the premium payment was
prohibited by the policy, it at the same time insists that the policy never came into force because the
premium had not been paid. One surely, cannot have his cake and eat it too.

We do not share MICO's view that there was no existing insurance at the time of the loss sustained by
Pinca because her policy never became effective for non-payment of premium. Payment was in fact
made, rendering the policy operative as of June 22, 1981, and removing it from the provisions of Article
77, Thereafter, the policy could be cancelled on any of the supervening grounds enumerated in Article 64
(except "nonpayment of premium") provided the cancellation was made in accordance therewith and with
Article 65.

Section 64 reads as follows:

SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except
upon prior notice thereof to the insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective date of the policy, of one or more
of the following:

(a) non-payment of premium;

(b) conviction of a crime arising out of acts increasing the hazard insured against;

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 (c) discovery of fraud or material misrepresentation;

(d) discovery of willful, or reckless acts or commissions increasing the hazard insured
against;

(e) physical changes in the property insured which result in the property becoming
uninsurable;or

(f) a determination by the Commissioner that the continuation of the policy would violate
or would place the insurer in violation of this Code.

As for the method of cancellation, Section 65 provides as follows:

SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing,
mailed or delivered to the named insured at the address shown in the policy, and shall
state (a) which of the grounds set forth in section sixty-four is relied upon and (b) that,
upon written request of the named insured, the insurer will furnish the facts on which the
cancellation is based.

A valid cancellation must, therefore, require concurrence of the following conditions:

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(1) There must be prior notice of cancellation to the insured;

(2) The notice must be based on the occurrence, after the effective date of the policy, of one or more of
the grounds mentioned; 18

(3) The notice must be (a) in writing, (b) mailed, or delivered to the named insured, (c) at the address
shown in the policy; 19

(4) It must state (a) which of the grounds mentioned in Section 64 is relied upon and (b) that upon written
request of the insured, the insurer will furnish the facts on which the cancellation is based. 20

MICO's claims it cancelled the policy in question on October 15, 1981, for non-payment of premium. To
support this assertion, it presented one of its employees, who testified that "the original of the
endorsement and credit memo" presumably meaning the alleged cancellation "were sent the
assured by mail through our mailing section" 21 However, there is no proof that the notice, assuming it
complied with the other requisites mentioned above, was actually mailed to and received by Pinca. All
MICO's offers to show that the cancellation was communicated to the insured is its employee's testimony
that the said cancellation was sent "by mail through our mailing section." without more. The petitioner
then says that its "stand is enervated (sic) by the legal presumption of regularity and due performance of
duty." 22 (not realizing perhaps that "enervated" means "debilitated" not "strengthened").

On the other hand, there is the flat denial of Pinca, who says she never received the claimed cancellation
and who, of course, did not have to prove such denial Considering the strict language of Section 64 that
no insurance policy shall be cancelled except upon prior notice, it behooved MICO's to make sure that the
cancellation was actually sent to and received by the insured. The presumption cited is unavailing against
the positive duty enjoined by Section 64 upon MICO and the flat denial made by the private respondent
that she had received notice of the claimed cancellation.

It stands to reason that if Pinca had really received the said notice, she would not have made payment on
the original policy on December 24, 1981. Instead, she would have asked for a new insurance, effective
on that date and until one year later, and so taken advantage of the extended period. The Court finds that
if she did pay on that date, it was because she honestly believed that the policy issued on June 7, 1981,

7
was still in effect and she was willing to make her payment retroact to July 22, 1981, its stipulated
commencement date. After all, agent Adora was very accomodating and had earlier told her "to call him
up any time" she was ready with her payment on the policy earlier issued. She was obviously only
reciprocating in kind when she paid her premium for the period beginning July 22, 1981, and not
December 24, 1981.

MICO's suggests that Pinca knew the policy had already been cancelled and that when she paid the
premium on December 24, 1981, her purpose was "to renew it." As this could not be done by the agent
alone under the terms of the original policy, the renewal thereof did not legally bind MICO. which had not
ratified it. To support this argument, MICO's cites the following exchange:

Q: Now, Madam Witness, on December 25th you made the alleged payment. Now, my
question is that, did it not come to your mind that after the lapse of six (6) months, your
policy was cancelled?

A: I have thought of that but the agent told me to call him up at anytime.

Q: So if you thought that your policy was already intended to revive cancelled policy?

A: Misleading, Your Honor.

Hearing Officer: The testimony of witness is that, she thought of that.

Q: I will revise the question. Now, Mrs. Witness, you stated that you thought the policy
was cancelled. Now, when you made the payment of December 24, 1981, your intention
was to revive the policy if it was already cancelled?

A: Yes, to renew it. 23

A close study of the above transcript will show that Pinca meant to renew the policy if it had really been
already cancelled but not if it was still effective. It was all conditional. As it has not been shown that there
was a valid cancellation of the policy, there was consequently no need to renew it but to pay the premium
thereon. Payment was thus legally made on the original transaction and it could be, and was, validly
received on behalf of the insurer by its agent Adora. Adora. incidentally, had not been informed of the
cancellation either and saw no reason not to accept the said payment.

The last point raised by the petitioner should not pose much difficulty. The valuation fixed in fire insurance
policy is conclusive in case of total loss in the absence of fraud, 24 which is not shown here. Loss and its
amount may be determined on the basis of such proof as may be offered by the insured, which need not
be of such persuasiveness as is required in judicial proceedings. 25 If, as in this case, the insured files
notice and preliminary proof of loss and the insurer fails to specify to the former all the defects thereof and
without unnecessary delay, all objections to notice and proof of loss are deemed waived under Section 90
of the Insurance Code.
26
The certification issued by the Integrated National Police, Lao-ang, Samar, as to the extent of Pinca's
loss should be considered sufficient. Notably,MICO submitted no evidence to the contrary nor did it even
question the extent of the loss in its answer before the Insurance Commission. It is also worth observing
that Pinca's property was not the only building bumed in the fire that razed the commercial district of Lao-
27
ang, Samar, on January 18, 1982.

There is nothing in the Insurance Code that makes the participation of an adjuster in the assessment of
the loss imperative or indespensable, as MICO suggests. Section 325, which it cites, simply speaks of the
licensing and duties of adjusters.

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We see in this cases an obvious design to evade or at least delay the discharge of a just obligation
through efforts bordering on bad faith if not plain duplicity, We note that the motion for reconsideration
was filed on the fifteenth day from notice of the decision of the Insurance Commission and that there was
a feeble attempt to show that the notice of denial of the said motion was not received on June 13, 1982,
to further hinder the proceedings and justify the filing of the petition with this Court fourteen days after
June 18, 1982. We also look askance at the alleged cancellation, of which the insured and MICO's agent
himself had no knowledge, and the curious fact that although Pinca's payment was remitted to MICO's by
its agent on January 15, 1982, MICO sought to return it to Adora only on February 5, 1982, after it
presumably had learned of the occurrence of the loss insured against on January 18, 1982. These
circumstances make the motives of the petitioner highly suspect, to say the least, and cast serious doubts
upon its candor and bona fides.

WHEREFORE, the petition is DENIED. The decision of the Insurance Commission dated April 10, 1981,
and its Order of June 4, 1981, are AFFIRMED in full, with costs against the petitioner. This decision is
immediately executory.

SO ORDERED.

Teehankee, C.J., Narvasa and Paras, JJ., concur.

Gancayco, J, is on leave.

Footnotes
1 I.C. Case No. 2698.
2 Rollo, p. 2.
3 Ibid., p. 3.
4 Decision, p. 6.
5 Ibid.
6 Id., p. 19, Rollo, pp. 3, 38.
7 Rollo, pp. 3-4.
8 Ibid., p. 41.
9 Annex "B", Petition; Rollo, p. 34.
10 Rollo, p. 106.
11 Ibid., pp. 2, 95, 100.
12 Id., p.58.
13 Id., p. 106.
14 Id., pp. 12-13, 31; Original Records. p. 7.
15 Maryland Casualty Co. v. U.S. 342, 64 ed 291, 13 Am. Jur. 2d. p. 630:
16 Memorandum for the Petitioner, p. 8.
17 Insurance Code, Sec. 64.
18 Ibid.
19 Id., Sec. 65.
20 Id.
21 Memorandum for the Petitioner, p. 12.
22 Ibid., p. 13.
23 Id., pp. 13-14.
24 Insurance Code, Secs. 171 and 156; Harding v. Commercial Union Insurance Co., Phil. 484.
25 Insurance Code, Sec. 89.
26 Exh. "C".
27 riginal Records, p. 9.

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II. CONDITION NO. 3

Geagonia vs. Court of Appeals, G.R. No. 114427 February 6, 1995

Pacific Banking Corp. vs. Court of Appeals, G.R. No. L-41014 November 28, 1988
New Life Enterprises vs. Court of Appeals, G.R. No. 94071 March 31, 1992

Condition 3 is a condition which is not proscribed by law. Its incorporation in the policy is allowed
by Section 75 of the Insurance Code which provides that "[a] policy may declare that a violation of
specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not
avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies
and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or
"other insurance" clause and has been upheld as valid and as a warranty that no other insurance
exists. Its violation would thus avoid the policy. However, in order to constitute a violation, the other
insurance must be upon same subject matter, the same interest therein, and the same risk.

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FIRST DIVISION

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner,

vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DECISION

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:

Zenco Sales, Inc. P55,698.00

F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)

P392,130.50

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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.

In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as its
principal defense the violation of Condition 3 of the policy.

In its decision of 21 June 1993, 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.

11
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 Fire
Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions insurances

is belied by his letter to petitioner [of 18 January 1991. The body of the letter reads as
follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision requiring me to inform your
office about my prior insurance under FGA-28146 and F-CEB-24758. Your representative
did not mention about said requirement at the time he was convincing me to insure with
you. If he only die or even inquired if I had other existing policies covering my
establishment, I would have told him so. You will note that at the time he talked to me
until I decided to insure with your company the two policies aforementioned were already
in effect. Therefore I would have no reason to withhold such information and I would have
desisted to part with my hard earned peso to pay the insurance premiums [if] I know I
could not recover anything.

Sir, I am only an ordinary businessman interested in protecting my investments. The

actual value of my stocks damaged by the fire was estimated by the Police Department to
be P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the fire, shows my
merchandise inventory was already some P595,455.75. . . . These will support my claim
that the amount claimed under the three policies are much below the value of my stocks
lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that there
were other insurances taken on the stock-in-trade and seriously puts in question his
credibility.

12
His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition.
He contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or
excess of jurisdiction:

A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE

COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED
RESPECT AND EVEN FINALITY BY THE COURTS;

B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT

PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND

C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST

THE PRIVATE RESPONDENT.

The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior
knowledge of the two insurance policies issued by the PFIC when he obtained the fire insurance policy
from the private respondent, thereby, for not disclosing such fact, violating Condition 3 of the policy, and
(b) if he had, whether he is precluded from recovering therefrom.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was not
offered in evidence and thus should not have been considered in deciding the case. However, as
correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has
attained the status of a judicial admission and since its due execution and authenticity was not denied by
the other party, the petitioner is bound by it even if it were not introduced as an independent evidence. 13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit
admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted in
the challenged decision of the Court of Appeals. These divergent findings of fact constitute an exception
to the general rule that in petitions for review under Rule 45, only questions of law are involved and
findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His
letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to
the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a
written admission made ante litem motam. It was, indeed, incredible that he did not know about the prior
policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No.
F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law.
Its incorporation in the policy is allowed by Section 75 of the Insurance Code 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

13
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
21
the proceeds.

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest
may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the
insurer but not made a party to the contract himself. Hence, any act of the mortgagor which defeats his
right will also defeat the right of the mortgagee. 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

14
 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
31
therein is rarely understood by ordinary laymen.

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free
from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a)
the prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.

The first conclusion is supported by the portion of the condition referring to other insurance "covering any
of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby
insured," and the portion regarding the insured's declaration on the subheading CO-INSURANCE that the
co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where
the same person is insured by several insurers separately in respect of the same subject and interest. As
earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are
distinct and separate. Since the two policies of the PFIC do not cover the same interest as that covered
by the policy of the private respondent, no double insurance exists. The 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.

Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.

15
Footnotes
1 Annex "A" of Petition; Rollo, 18-26. Per Associate Justice Vicente V. Mendoza, concurred in by Associate
Justices Jesus M. Elbinias and Lourdes K. Tayao-Jaguros.
2 Exhibit "1"; Original Records (OR) (CA-G.R. SP. No. 31916), 34.
3 Exhibit "4"; Annex "C" of Petition; OR (CA-G.R. SP No. 31916), 27.
4 Exhibits "2" and "3"; Annexes "F" and "G," Id., 45-46.
5 Annex "E," Id.; Rollo, 38.
6 Annex "L," Id.; OR (CA-G.R. SP No. 31916), 66.
7 Annex "E" of Petition; Rollo, 43.
8 Annex "D," Id.; Id., 32.
9 Annex "G," Id.; Id., 47.
10 Annex "H" of Petition; Rollo, 52.
11 Annex "A," Id.; Id., 18.
12 It is specifically referred to in paragraph 7 of the complaint. Rollo, 40.
13 Philippine Bank of Communications vs. Court of Appeals, 195 SCRA 567 [1991].
14 Tolentino vs. De Jesus, 56 SCRA 167 [1974]; Remalante vs. Tibe, 158 SCRA 138 [1988].
15 P.D. No. 1460.
16 MARIA CLARA L. CAMPOS, Insurance (1983 ed.) citing General Insurance & Surety Corp. vs. Ng Hua, 106
Phil. 1117 [1960]; Petitioner Insurance & Surety Corp. vs. Yap, 61 SCRA 426 [1974]; Union Manufacturing Co.,
Inc. vs. Philippine Guaranty Co., Inc., 47 SCRA 271 [1972].
17 Id., JOHN F. DOBBYN, Insurance Law in a Nutshell 204 (2d ed. 1989.)
18 COUCH on Insurance 2d 24:68 (1960 ed.).
19 Id., 24:69.
20 Id., 24:72.
21 WILLIAM R. VANCE, Handbook on the Law on Insurance 773-774 (3rd ed.)
22 Id., 775.
23 COUCH, op cit., 24:72.
24 VANCE, op cit., 775.
25 COUCH, op cit., 23:36.
26 Supra note 16.
27 Supra note 16.
28 55 Phil. 329, 334 [1930].
29 2 TEODORICO C. MARTIN, Commentaries and Jurisprudence on the Philippine Commercial Laws, 143
(1986 rev. ed.).
30 Trinidad vs. Orient Protective Assurance Association, 67 Phil. 181 [1939].
31 CAMPOS, op cit., 12.
32 Pioneer Insurance and Surety Corp. vs. Yap, supra note 16.

----------

SECOND DIVISION

G.R. No. L-41014 November 28, 1988

PACIFIC BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and ORIENTAL ASSURANCE CORPORATION, respondents.

DECISION

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.

16
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
accede to the latter's demand as the former is awaiting the final report of the insurance adjuster, H.H.
Bayne 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 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

17
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;

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.

18
 (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 PROPERTY INSURED.

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

19
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).

20
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).<rellanolw>

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

21
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.

Melencio-Herrera, (Chairman), Padilla, Sarmiento and Regalado, JJ., concur.

Footnotes
* Penned by Hon. Magno S. Gatmaitan, then Associate Justice, Court of Appeals, with the
concurrence of then Associate Justices Hon. Efren I. Plana & Francisco Ma. Chanco, and Hon.
Crisolito Pascual & Hon. Sixto A. Domondon, then Associate Justices, dissenting.

** Penned by Hon. Jose L. Moya, then Presiding Judge, CFI of Manila, Branch X.

----------

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.

DECISION

22
REGALADO, J.:
1
This appeal by certiorari seeks the nullification of the decision 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 Enterprises with 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 in the amount of P300,000.00 (Renewed under Renewal Certificate No.
41997) An additional insurance was issued by the same company on November 12, 1981
under Fire Insurance Policy No. 71547 in the amount of P700,000.00.

On February 8, 1982, Equitable Insurance 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 in the morning of October 19, 1982, the stocks in the trade inside said
building were insured against fire in the total amount of P1,550,000.00. According to the
certification issued by the Headquarters, Philippine Constabulary /Integrated National
Police, Camp Crame, the cause of fire was electrical in nature. According to the plaintiffs,
the building and the stocks inside were burned. After the fire, Julian Sy went to the agent
of Reliance Insurance whom he asked to accompany him to the office of the company so
that he can file his claim. He averred that in support of his claim, he submitted the fire
clearance, 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
insurance companies denied plaintiffs' claim for payment.

In its letter of denial dated March 9, 1983, (Exhibit "C" No. 8-84) Western Guaranty
Corporation through Claims Manager Bernard S. Razon told the plaintiff that his claim "is
denied for breach of policy conditions." Reliance Insurance purveyed the same message
in its letter dated November 23, 1982 and signed by Executive Vice-President Mary Dee
Co (Exhibit "C" No. 7-84) which said that "plaintiff's claim is denied for breach of policy
conditions." The letter of denial received by the plaintiff from Equitable 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 certain policy
conditions were violated, therefore, we regret, we have to deny your claim, as it is hereby
denied in its entirety."

23
 In relation to the case against Reliance Surety and Insurance Company, a certain Atty.
Serafin D. Dator, acting in behalf of the plaintiff, sent a letter dated February 13, 1983
(Exhibit "G-l" No 7-84) to Executive 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-President Mary Dee Co informed Atty. Dator
that Julian Sy violated Policy Condition No. "3" which requires the insured to give notice
3
of any insurance or insurances already effected covering the stocks in trade.

Because of the denial of their claims for payment by the three (3) insurance companies, petitioner filed
separate civil actions against the former before the Regional Trial Court of Lucena City, which cases were
consolidated for 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
against the defendant Equitable Insurance Corporation ordering the latter to pay the
former the sum of Two Hundred Thousand (P200,000.00) Pesos and considering that
payment of the claim of the insured has been unreasonably denied, pursuant to Sec. 244
of the Insurance Code, defendant is further ordered to pay the plaintiff attorney's fees in
the amount of Twenty Thousand (P20,000.00) Pesos. 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 14, 1983, (91st day from November 16, 1982, when Sworn
Statement of Fire Claim was received from the insured) until they are fully paid;

2. In Civil Case No. 7-84, judgment is rendered for the plaintiff Julian Sy and against the
defendant Reliance Surety and Insurance Co., Inc., ordering the latter to pay the former
the sum of P1,000,000.00 (P300,000.00 under Policy No. 69135 and P700,000.00 under
Policy No. 71547) and considering that payment of the claim of the insured has been
unreasonably denied, pursuant to Sec. 244 of the Insurance Code, defendant 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 February 14, 1983, (91st day from
November 16, 1982 when Sworn Statement of Fire Claim 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
against the defendant Western Guaranty Corporation ordering the latter to pay the sum of
P350,000.00 to the Consolidated Bank and Trust Corporation, Lucena Branch, Lucena
City, as stipulated on the face of Policy No. 37201, and considering that payment of the
aforementioned sum of money has been unreasonably denied, pursuant to Sec. 244 of
the Insurance Code, defendant is further ordered to pay the plaintiff attorney's fees in the
amount of 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 indemnity 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 crux wherein is whether or not Conditions Nos. 3 and 27 of the insurance contracts were violated by
petitioners thereby resulting in their forfeiture of all the benefits thereunder.

24
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, 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 on 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
5
loss or damage not more than P200,000.00.

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
6
trade for the loss of which compensation is claimed by petitioners. The policy issued by respondent
Western Guaranty Corporation (Western) did not declare respondent Reliance Surety and Insurance Co.,
Inc. (Reliance) and respondent Equitable Insurance Corporation (Equitable) as co-insurers on the same
stocks, while Reliance's Policies covering the same stocks did not likewise declare Western and
Equitable as such co-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 Reliance in the total amount of P1,000,000.00. 7

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 insurance coverage and that they were not informed about the requirement that such other or
additional insurance should be stated 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 likewise been 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 the 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 the conclusion of the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawn from the mere fact that Yap Kam Chuan was an agent for
both companies which also had the same insurance claims adjuster. Availment of the services of the
same agents and adjusters by different companies is a common practice in the insurance business and
such facts do not warrant the speculative conclusion of the trial court.

25
Furthermore, when the words and language of documents 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
10
the policy are ambiguous, equivocal, or uncertain. The parties must abide by the terms of the contract
because such terms constitute the measure of the insurer's liability and compliance therewith is a
11
condition precedent to the insured's right of recovery from the insurer.

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed
liberally in favor of the insured and strictly against the insurer company, yet contracts of insurance, like
other contracts, are to be construed according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense. 12 Moreover, obligations arising from contracts have the force of
law between the contracting parties and should be complied with 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
14
terms of the policy is implied from his failure to express any disagreement with what is provided for. It
may be true that the majority 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 in his 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 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.

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 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 stipulations 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 stipulations, 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 unrevealed insurances, the insured
had been guilty of a false declaration; a clear misrepresentation and a vital one because

26
 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 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 of other 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
need merely to turn to Policy Condition No. 15 thereof, which reads in part:

15. . . . if any false declaration be made or used in support thereof, . . . all benefits under
this Policy shall be forfeited . . . . 19

Additionally, insofar as the liability of respondent Reliance is concerned, it is not denied that the complaint
for recovery was filed in court by petitioners only on January 31, 1984, or after more than one (1) year
had elapsed from petitioners' receipt of the insurers' letter of denial on November 29, 1982. Policy
Condition No. 27 of their insurance contract with Reliance provides:

27. Action or suit clause. If a claim be made and rejected and an action or suit be not
commenced either in the Insurance Commission or any court of competent jurisdiction of
notice of such rejection, or in case of arbitration taking place as provided herein, within
twelve (12) months after due notice of the award made by the arbitrator or arbitrators or
umpire, then the claim shall for all purposes be deemed to have been abandoned and
shall not thereafter be recoverable hereunder. 20

On this point, the trial court ruled:

. . . However, because of the peculiar circumstances of this case, we hesitate in

concluding that plaintiff's right to ventilate his claim in court has been barred by reason of
the time constraint provided in the insurance contract. It is evident that after the plaintiff
had received the letter of denial, he still found it necessary to be informed of the specific
causes or reasons for the denial of his claim, reason for which his lawyer, Atty. Dator
deemed it wise to send a letter of inquiry to the defendant which was answered by
defendant's Executive Vice-President in a letter dated March 30, 1983, . . . . Assuming,
gratuitously, that the letter of Executive 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

27
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 contained in an insurance policy that claims must be presented within
one year after rejection is not merely a procedural requirement but an important
matter essential to a prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the evidence as to the
origin and cause of destruction have not yet disappeared.

In enunciating the above-cited principle, this Court had definitely settled the rationale for
the necessity of bringing suits against the Insurer within one year from the rejection of the
claim. The contention of the respondents that the one-year prescriptive period does not
start to run until the petition for reconsideration had been resolved by the insurer, runs
counter to the declared purpose for requiring that an action or suit be filed in the
Insurance Commission or in a court of competent jurisdiction from the denial of the claim.
To uphold respondents' contention would contradict and defeat the very principle which
this Court had laid down. Moreover, it can easily be used by insured persons as a
scheme or device to waste time until any evidence which may be considered against
them is destroyed.

xxx xxx xxx

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection",
the same cannot be taken to mean the rejection of a petition for reconsideration as
insisted by respondents. Such was clearly not the meaning contemplated by this Court.
The insurance policy in said case provides that the insured should file his claim first, with
the carrier and then with the insurer. The "final rejection" being referred to in said case is
the rejection by the insurance company. 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) months 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" sufficient to relax the enforcement of the one-year
prescriptive period and we, therefore, hold that petitioners' claim was definitely filed out of time.

WHEREFORE, finding no cogent reason to disturb the judgment of respondent Court of Appeals, the
same is hereby AFFIRMED.

SO ORDERED.

Melencio-Hererra and Nocon, JJ., concur.

Paras, J., took no part.

Padilla, J., took no part.

28
Footnotes
1 Justice Serafin V.C. Guingona, ponente, with Justices Gloria C. Paras and Bonifacio A. Cacdac, Jr., concurring
Rollo, 51.
2 Per Judge Hoover S. Abling.
3 Rollo, 34-36.
4 Ibid., 32-33.
5 Exhibits "20-c", "18-b", "14-b"; Folder of Exhibit, 20, 29, 31.
6 Memorandum for Petitioners, 13.
7 Rollo, 35.
8 Memorandum for the Petitioners, 13.
9 Marina Port Services, Inc. vs. Iniego, et al., 181 SCRA 304 (1990).
10 Pan Malayan Insurance Corporation vs. Court of Appeals, et al., 184 SCRA 54 (1990).
11 Perla Compania de Seguros, Inc. vs. Court of Appeals, et al., 185 SCRA 741 (1990).
12 Sun Insurance Office, Ltd. vs. Court of Appeals, et al., 195 SCRA 193 (1991).
13 Article 1159, Civil Code.
14 Ang Giok Chip, etc. vs. Springfield Fire & Marine Insurance Company, 56 SCRA 375 (1931).
15 Vance on Insurance, 1951 ed., 257; Memorandum for the Petitioners, 22.
16 TSN, February 11, 1986, 28.
17 61 SCRA 426 (1974), citing General Insurance & Surety Corporation vs. Ng Hua, 106 Phil. 1117, 1119-1120
(1960).
18 168 SCRA 1 (1988).
19 Exhibits "20-d", "18-e, "14-e"; Folder of Exhibits, 21, 30, 33.
20 Exhibit "14-f"; Folder of Exhibits, 33.
21 Rollo, 49.
22 Sun Insurance Office, Ltd. vs. Court of Appeals, et al., supra, Fn. 12.

29
III. EARTHQUAKE ENDORSEMENT

Gulf Resorts Inc. vs. Philippine Charter Insurance Corp.,, G.R. No. 156167 May 16, 2005

It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other. All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character.

----------

SECOND DIVISION
G.R. No. 156167. May 16, 2005

GULF RESORTS, INC., petitioner,

vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.

DECISION

PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION.
Petitioner assails the appellate court decision[1] which dismissed its two appeals and affirmed the
judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its
earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties
within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the
two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties
in said resort insured originally with the American Home Assurance Company (AHAC-AIU). In
the first four insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and
1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss
from earthquake shock was extended only to plaintiffs two swimming pools, thus, earthquake
shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and two (2) swimming pools only (Exhs.
C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2) swimming pools only
(Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs favor
Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G
also G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1,
D-1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the
time of issue read that plaintiff renewed its policy with AHAC (AIU) for the period of March 14,
1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which carried the entry

30
 under Endorsement/Warranties at Time of Issue, which read Endorsement to Include
Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14 (Exhs. 6-A
and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-
4568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy
to be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of
March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I);
that in the computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in
question, contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the
premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-
B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs.
C, D, E, F, G and H) and in Policy No. 31944 issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured to the company of the sum
included additional premium the Company agrees, notwithstanding what is stated in
the printed conditions of this policy due to the contrary, that this insurance covers loss
or damage to shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D
and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16,
1990 an earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by
Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort
were damaged.[2]

31
After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim,
then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and
[3]
Surveyors, Inc. On July 30, 1990, respondent, through its adjuster, requested petitioner to submit
various documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc.,
[4] [5]
through its Vice-President A.R. de Leon, rendered a preliminary report finding extensive damage
caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that
[6]
except for the swimming pools, all affected items have no coverage for earthquake shocks. On August
[7]
11, 1990, petitioner filed its formal demand for settlement of the damage to all its properties in the Agoo
Playa Resort. On August 23, 1990, respondent denied petitioners claim on the ground that its insurance
[8]
policy only afforded earthquake shock coverage to the two swimming pools of the resort. Petitioner and
[9] [10]
respondent failed to arrive at a settlement. Thus, on January 24, 1991, petitioner filed a complaint
with the regional trial court of Pasig praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties,
with interest thereon, as computed under par. 29 of the policy (Annex B) until fully
paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
[11]
5.) Costs.
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril
of earthquake shock, the same premium it paid against earthquake shock only on the two
swimming pools in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G).
From this fact the Court must consequently agree with the position of defendant that the
endorsement rider (Exhibit 7-C) means that only the two swimming pools were insured against
earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the
language used in an insurance contract or application is such as to create ambiguity the same
should be resolved against the party responsible therefor, i.e., the insurance company which
prepared the contract. To the mind of [the] Court, the language used in the policy in litigation is
clear and unambiguous hence there is no need for interpretation or construction but only
application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had
earthquake shock coverage and were heavily damaged by the earthquake which struck on July
16, 1990. Defendant having admitted that the damage to the swimming pools was appraised by
defendants adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay
plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that
defendant is liable only for the damage caused to the two (2) swimming pools and that
defendant has made known to plaintiff its willingness and readiness to settle said liability, there
is no basis for the grant of the other damages prayed for by plaintiff. As to the counterclaims of
defendant, the Court does not agree that the action filed by plaintiff is baseless and highly
speculative since such action is a lawful exercise of the plaintiffs right to come to Court in the
honest belief that their Complaint is meritorious. The prayer, therefore, of defendant for
damages is likewise denied.

32
 WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two
(2) swimming pools, with interest at 6% per annum from the date of the filing of the Complaint
until defendants obligation to plaintiff is fully paid.
[13]
No pronouncement as to costs.
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
[14]
Appeals based on the following assigned errors:
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO
THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it
attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not
convinced that the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-
appellant had with AHAC (AIU) and upon which the subject insurance contract with Philippine
Charter Insurance Corporation is said to have been based and copied (Exh. I), covered an
extended earthquake shock insurance on all the insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for
the imposition of interest 24% on the insurance claim and 6% on loss of income allegedly
amounting to P4,280,000.00. Since the defendant-appellant has expressed its willingness to
pay the damage caused on the two (2) swimming pools, as the Court a quo and this Court
correctly found it to be liable only, it then cannot be said that it was in default and therefore
liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that
the award thereof is subject to the sound discretion of the court. Thus, if such discretion is well-
exercised, it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July
18, 2002). Moreover, being the award thereof an exception rather than a rule, it is necessary for
the court to make findings of facts and law that would bring the case within the exception and
justify the grant of such award (Country Bankers Insurance Corp. v. Lianga Bay and Community
Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that
the plaintiff-appellants action is not baseless and highly speculative, We find that the
Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues: [16]

33
 A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS
FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not
only the swimming pools. It used the words any property insured by this policy, and it should be
interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the
body of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
[17]
Agreement On Long Term Policies.
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it
deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate expression of the agreement of the contracting
parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner
and against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools
from the coverage for the risk of fire. It should not be used to limit the respondents liability for earthquake
shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the
extended coverage. The premium for the earthquake shock coverage was already included in the
premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake
shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner
told respondent that it wanted an exact replica of its latest insurance policy from American Home
Assurance Company (AHAC-AIU), which covered all the resorts properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it was
covered for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc.,
likewise requested petitioner to submit the necessary documents for its building claims and other repair
costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised
Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the
facts upon which this petition is based.
[18]
On the other hand, respondent made the following counter arguments:

34
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage
against earthquake shock to petitioners insured properties other than on the two swimming pools.
Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against earthquake
shock. From 1988 until 1990, the provisions in its policy were practically identical to its earlier policies,
[19]
and there was no increase in the premium paid. AHAC-AIU, in a letter by its representative Manuel C.
Quijano, categorically stated that its previous policy, from which respondents policy was copied, covered
only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only
covered earthquake shock damage on the two swimming pools. The amount was the same amount paid
by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional
premium was paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the
two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner, respondent copied its policy from the AHAC-
AIU policy provided by petitioner. Although the first five policies contained the said qualification in their
riders title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J.
Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make the policy
incomplete, nor did it broaden the scope of the endorsement whose descriptive title was merely
enumerated. Any ambiguity in the policy can be easily resolved by looking at the other provisions,
specially the enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item 5
P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that
only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two swimming pools as Item
3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for
coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the qualifier ANY instead of ALL to
describe the property covered was done deliberately to enable the parties to specify the properties
included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in
the earthquake shock coverage. Petitioners own evidence shows that it only required respondent to
follow the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this
requirement. Respondents only deviation from the agreement was when it modified the provisions
regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the
old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect
the parties clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any
deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be
considered to be in default, and therefore, it is not liable for interest.

35
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake
[20]
shock only)
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS
INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF
5% OR 7 % OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO
CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . .
. . . additional premium the Company agrees, notwithstanding what is stated in the printed
conditions of this Policy to the contrary, that this insurance covers loss or damage (including
loss or damage by fire) to any of the property insured by this Policy occasioned by or through or
in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be
hereby expressly varied) and that any reference therein to loss or damage by fire should be
deemed to apply also to loss or damage occasioned by or through or in consequence of
[24]
Earthquake.
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured
properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.[25] All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on the
earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock
coverage to the two swimming pools only.

36
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. Thus, an
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.[26]
(Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
[27]
against a specified peril. In fire, casualty, and marine insurance, the premium payable becomes a debt
as soon as the risk attaches.[28] In the subject policy, no premium payments were made with regard to
earthquake shock coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is consistent with the history
of petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy
during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock
was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there
is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two
swimming pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for
the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course
subject to your instruction, is that not correct?

37
 A. Yes, sir. The final action is still with us although they can recommend what insurance to
take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989,
did you give written instruction to Forte Insurance Agency advising it that the earthquake
shock coverage must extend to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to
that effect of extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there
was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that
correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with
respect to your instructions that all properties must be covered again by earthquake shock
endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company
marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement
has no more limitation referring to the two swimming pools only, I was contented already that
the previous limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA
Warranty & Annual Payment Agreement on Long Term Policies[29] to the insurance policy as proof of
the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy
is subject, as required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage
to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the
testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously
marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review
of (sic) these six (6) policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on the basis
on (sic) the wordings indicated in Exhibits C to H respectively what was the extent of the

38
 coverage [against] the peril of earthquake shock as provided for in each of the six (6)
policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in
each of the six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in
the Clauses and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For
swimming pools we do cover earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other
things other than swimming pool? You are covering building? They are covered by a general
insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we
can issue earthquake shock solely but that the moment I see this, the thing that comes to my
mind is either insuring a swimming pool, foundations, they are normally affected by
earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F
inclusive [remained] its coverage against earthquake shock to two (2) swimming pools only
but that Exhibits G and H respectively entend the coverage against earthquake shock to all
the properties indicated in the respective schedules attached to said policies, what can you
say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of
it. I assure you that this one covers the two swimming pools with respect to earthquake
shock endorsement. Based on it, if we are going to look at the premium there has been no
change with respect to the rates. Everytime (sic) there is a renewal if the intention of the
insurer was to include the earthquake shock, I think there is a substantial increase in the
premium. We are not only going to consider the two (2) swimming pools of the other as

39
 stated in the policy. As I see, there is no increase in the amount of the premium. I must say
that the coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do
some computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was
placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed
to during your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2)
swimming pools was deleted from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a
company underwriter, we do not cover. . it was inadvertent because of the previous policies
that we have issued with no specific attachments, premium rates and so on. It was
inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to
the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the
earthquake shock endorsement included all its properties in the resort. Respondent only insured the
properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you
tell Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from
Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this
American Home Insurance Policy No. 206-4568061-9.

40
 Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be
charging will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions
and scope of coverage of Exhibits I and H sometime in the third week of March, 1990 or
thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings
as well as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the
policy wordings and rates were copied from the insurance policy I sent them but it was only
when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy
at any time between those indicated in Exhibit I and those indicated in Exhibit H
respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock
which I understood before that this provision will have to be placed here because this
particular provision under the peril of earthquake shock only is requested because this is an
insurance policy and therefore cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty.
Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors,
Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake shock
covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of
coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the
insurance coverage policy and it was indicated under Item 3 specifically that the coverage is
only for earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I
relayed to him what I had found out in the policy and he confirmed to me indeed only Item 3
which were the two swimming pools have coverage for earthquake shock.
xxx

41
 Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for
the swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found
out that under Item 3 it was specific on the wordings that on the two swimming pools only,
then enclosed in parenthesis (against the peril[s] of earthquake shock only), and secondly,
when I examined the summary of premium payment only Item 3 which refers to the
swimming pools have a computation for premium payment for earthquake shock and all the
other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
[31]
favor of the insured and strictly against the insurer company which usually prepares it. A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the
other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts have held
that in these type of contracts, the parties do not bargain on equal footing, the weaker party's participation
being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the
weaker party whom the courts of justice must protect.[32] Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured. [33]
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.[34] Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the
claims of contending parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were presumed to have
assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it
did not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is
reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities
in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter
Insurance Corporation as long as it will follow the same or exact provisions of the previous
insurance policy we had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the
American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically
told him that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-
9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9
in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in
the replacement cost endorsement, but the principal provisions of the policy remained essentially similar
to AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this

42
case as the parties intent to limit the coverage of the policy to the two swimming pools only is not
[37]
ambiguous.
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

Footnotes
[1] th
The decision was penned by Justice Jose L. Sabio, Jr., of the 10 Division of the Court of Appeals.
[2]
Rollo, pp. 10-12.
[3]
Original Records, p. 50.
[4]
Vice-President for the Fire, Engineering and Allied Claims Division.
[5]
Original Records, pp. 44-48.
[6]
Original Records, p. 47.
[7]
Id., p. 49.
[8]
Id., p. 50.
[9]
Id., pp. 50-54.
[10]
Id., pp. 1-7.
[11]
Id., pp. 6-7.
[12]
Original Records, pp. 28-42.
[13]
Original Records, pp. 400-401.
[14]
CA Rollo, p. 42.
[15]
CA Rollo, pp. 184-186.
[16]
Rollo, p. 402.
[17]
Rollo, pp. 408-409.
[18]
Rollo, pp. 348-395.
[19]
Exhibit 9.
[20]
Original Records, p. 17.
[21]
Original Records, p. 17.
[22]
Original Records, p. 68.
[23]
Rollo, p. 70.
[24]
Original Records, p. 71.
[25]
Ruiz v. Sheriff of Manila, 34 SCRA 83 (1970); National Union Fire Insurance Company of Pittsburg v. Stolt-
Nielsen Philippines, Inc., 184 SCRA 682 (1990).
[26]
See Vance, pp. 1-2, cited in Agbayani, Commercial Laws of the Philippines, vol. 2, (1986), p. 6; Philamcare
Health Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002).
[27]
43 Am. Jur. 2d 878.
[28]
De Leon, Hector S., The Insurance Code of the Philippines (1992), p. 194.
[29]
Exhibits I and I-2.
[30]
The underwriter for Phil-American Insurance Corporation (formerly AIU) who reviewed the Agoo Playa Resort
insurance policies.
[31]
Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 (1990); Verendia v. Court of Appeals, 217
SCRA 417 (1993).
[32]
Philippine National Bank v. Court of Appeals, 196 SCRA 536 (1991).
[33]
Verendia v. Court of Appeals, 217 SCRA 417 (1993); New Life Enterprises v. Court of Appeals, 207 SCRA
669 (1992); Sun Insurance Office, Ltd. v. Court of Appeals, 211 SCRA 554 (1992).
[34]
Pan American World Airways, Inc. v. Rapadas, 209 SCRA 67 (1992); BPI Credit Corporation v. Court of
Appeals, 204 SCRA 601 (1991); Serra v. Court of Appeals, 229 SCRA 60 (1994).
[35]
40 SCRA 624 (1971).
[36]
Testimony of the vice president for corporate affairs and corporate secretary of petitioner, TSN, September
23, 1991.
[37]
Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978); Tan v. Court of Appeals, 174 SCRA 403 (1989).

43
IV. FRAUD

Verendia vs. Court of Appeals, G.R. No. 75605 January 22, 1993

Verendia failed to live by the terms of the policy, specifically Section 13 thereof which is
expressed in terms that are clear and unambiguous, that all benefits under the policy shall be
forfeited "If the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in
his behalf to obtain any benefit under the policy". Verendia, having presented a false declaration
to support his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits
therein by virtue of Section 13 of the policy in the absence of proof that Fidelity waived such
provision (Pacific Banking Corporation vs. Court of Appeals, supra).

----------

THIRD DIVISION

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,

vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.

G.R. No. 76399 January 22, 1993

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,

vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.

B.L. Padilla for petitioner.

Sabino Padilla, Jr. for Fidelity & Surety, Co.

DECISION

MELO, J.:

The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety Insurance
Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876 effective between
June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential building located at Tulip
Drive, Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the
Monte de Piedad & Savings Bank. Verendia also insured the same building with two other companies,
namely, The Country Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May
12, 1981, and The Development Insurance for P400,000.00 under Policy No. F-48867 expiring on June
30, 198l.

While the three fire insurance policies were in force, the insured property was completely destroyed by
fire on the early morning of December 28, 1980. Fidelity was accordingly informed of the loss and despite
demands, refused payment under its policy, thus prompting Verendia to file a complaint with the then

44
Court of First Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus
attorney's fees and litigation expenses. The complaint was later amended to include Monte de Piedad as
an "unwilling defendant" (P. 16, Record).

Answering the complaint, Fidelity, among other things, averred that the policy was avoided by reason of
over-insurance; that Verendia maliciously represented that the building at the time of the fire was leased
under a contract executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo
Garcia who was the lessee.

On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of
Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the policy
was also violated by Verendia in that the insured failed to inform Fidelity of his other insurance coverages
with Country Bankers Insurance and Development Insurance.

Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on March 31,
1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court
reversed for the following reasons: (a) there was no misrepresentation concerning the lease for the
contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy
contract requiring Verendia to give notice to Fidelity of other contracts of insurance was waived by Fidelity
as shown by its conduct in attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).

Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of directly filing a
motion for reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a motion for
extension of 3 days within which to file a motion for reconsideration. The motion for extension was not
filed on April 19, 1986 which was the 15th day after receipt of the decision because said 15th day was a
Saturday and of course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion for
extension was granted by the appellate court on April 30, 1986 (p. 15. ibid.), but Fidelity had in the
meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.).

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the ground
that the motion for extension was filed out of time because the 15th day from receipt of the decision which
fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate
Court has personnel receiving pleadings even on Saturdays.

The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration
was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein docketed as G.R. No.
75605 was initiated. Subsequently, or more specifically on October 21, 1986, the appellate court denied
Fidelity's motion for reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition for
review on certiorari now docketed as G.R. No. 76399. The two petitions, inter-related as they are, were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

Before we can even begin to look into the merits of the main case which is the petition for review on
certiorari, we must first determine whether the decision of the appellate court may still be reviewed, or
whether the same is beyond further judicial scrutiny. Stated otherwise, before anything else, inquiry must
be made into the issue of whether Fidelity could have legally asked for an extension of the 15-day
reglementary period for appealing or for moving for reconsideration.

As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the pendency
of a motion for extension of time to perfect an appeal does not suspend the running of the period sought
to be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in
Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King
(20 SCRA 1120 [1967]).

45
The above cases notwithstanding and because the Rules of Court do not expressly prohibit the filing of a
motion for extension of time to file a motion for reconsideration in regard to a final order or judgment,
magistrates, including those in the Court of Appeals, held sharply divided opinions on whether the period
for appealing which also includes the period for moving to reconsider may be extended. The matter was
not definitely settled until this Court issued its Resolution in Habaluyas Enterprises, Inc. vs. Japson (142
SCRA [1986]), declaring that beginning one month from the promulgation of the resolution on May 30,
1986

. . . the rule shall be strictly enforced that no motion for extension of time to file a motion
for new trial or reconsideration shall be filed . . . (at p. 212.)

In the instant case, the motion for extension was filed and granted before June 30, 1986, although, of
course, Verendia's motion to expunge the motion for reconsideration was not finally disposed until July
22, 1986, or after the dictum in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion
for extension came before its formal proscription under Habaluyas, for which reason we now turn our
attention to G.R. No. 76399.

Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract of lease
submitted by Verendia to support his claim on the fire insurance policy constitutes a false declaration
which would forfeit his benefits under Section 13 of the policy and (b) whether or not, in submitting the
subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's claim in the amount
stated in said receipt. 1

Verging on the factual, the issue of the veracity or falsity of the lease contract could have been better
resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the jurisdiction of
this Court is limited to the review of errors of law. The appellate court's findings of fact are, therefore,
conclusive upon this Court except in the following cases: (1) when the conclusion is a finding grounded
entirely on speculation, surmises, or conjectures; (2) when the inference made is manifestly absurd,
mistaken, or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when
the judgment is premised on a misapprehension of facts; (5) when the findings of fact are conflicting; and
(6) when the Court of Appeals in making its findings went beyond the issues of the case and the same
are contrary to the admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA
433 [1991]). In view of the conflicting findings of the trial court and the appellate court on important issues
in these consolidated cases and it appearing that the appellate court judgment is based on a
misapprehension of facts, this Court shall review the evidence on record.

The contract of lease upon which Verendia relies to support his claim for insurance benefits, was entered
into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a
couple of days after the effectivity of the insurance policy. When the rented residential building was razed
to the ground on December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within
the premises. However, according to the investigation report prepared by Pat. Eleuterio M. Buenviaje of
the Antipolo police, the building appeared to have "no occupant" and that Mr. Roberto Garcia was "renting
on the otherside (sic) portion of said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo Garcia,
whom he considered as the real lessee, was occupying the building when it was burned (TSN, July 27,
1982, p.10).

Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to
locate him. Robert Garcia then executed an affidavit before the National Intelligence and Security
Authority (NISA) to the effect that he was not the lessee of Verendia's house and that his signature on the
contract of lease was a complete forgery. Thus, on the strength of these facts, the adjuster submitted a
report dated December 4, 1981 recommending the denial of Verendia's claim (Exh. "2").

46
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease contract.
According to Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had been paying the
rentals all the while. Verendia, however, failed to explain why Marcelo had to sign his cousin's name
when he in fact was paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse.
Fidelity's conclusions on these proven facts appear, therefore, to have sufficient bases; Verendia
concocted the lease contract to deflect responsibility for the fire towards an alleged "lessee", inflated the
value of the property by the alleged monthly rental of P6,500 when in fact, the Provincial Assessor of
Rizal had assessed the property's fair market value to be only P40,300.00, insured the same property
with two other insurance companies for a total coverage of around P900,000, and created a dead-end for
the adjuster by the disappearance of Robert Garcia.

Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific Banking
Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions constitute the measure of
the insurer's liability and compliance therewith is a condition precedent to the insured's right to recovery
from the insurer (Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991], citing Perla
Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of
adhesion, an insurance contract should be liberally construed in favor of the insured and strictly against
the insurer company which usually prepares it (Western Guaranty Corporation vs. Court of Appeals, 187
SCRA 652 [1980]).

Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease
contract to support his claim under Fire Insurance Policy No. F-18876, the terms of the policy should be
strictly construed against the insured. Verendia failed to live by the terms of the policy, specifically Section
13 thereof which is expressed in terms that are clear and unambiguous, that all benefits under the policy
shall be forfeited "If the claim be in any respect fraudulent, or if any false declaration be made or used in
support thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his
behalf to obtain any benefit under the policy". Verendia, having presented a false declaration to support
his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of
Section 13 of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking
Corporation vs. Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia,
reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and demand the
most abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).

There is also no reason to conclude that by submitting the subrogation receipt as evidence in court,
Fidelity bound itself to a "mutual agreement" to settle Verendia's claims in consideration of the amount of
P142,685.77. While the said receipt appears to have been a filled-up form of Fidelity, no representative of
Fidelity had signed it. It is even incomplete as the blank spaces for a witness and his address are not
filled up. More significantly, the same receipt states that Verendia had received the aforesaid amount.
However, that Verendia had not received the amount stated therein, is proven by the fact that Verendia
himself filed the complaint for the full amount of P385,000.00 stated in the policy. It might be that there
had been efforts to settle Verendia's claims, but surely, the subrogation receipt by itself does not prove
that a settlement had been arrived at and enforced. Thus, to interpret Fidelity's presentation of the
subrogation receipt in evidence as indicative of its accession to its "terms" is not only wanting in rational
basis but would be substituting the will of the Court for that of the parties.

WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then Intermediate Appellate Court under review is REVERSED and
SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.

SO ORDERED.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

47
Footnotes
1 Fidelity appears to have agreed with the appellate court that it had waived Verendia's failure to abide by policy
condition No. 3 on disclosure of other insurance policies by its failure to assign it as an error in the petition in
G.R. No. 76399. It must have likewise realized the futility of assigning it as an error because on the first page of
the policy the following is typewritten: "Other insurances allowed, the amounts to be declared in the event of loss
or when required."

48
V. INSURABLE INTEREST

Tai Tong Chuache & Co. vs. Insurance Commission, G.R. No. L-55397 February 29, 1988
Cha vs. Court of Appeals, G.R. No. 124520. August 18, 1997
Rizal Surety & Insurance Co. vs. Court of Appeals, G.R. No. 112360. July 18, 2000
Gaisano Cagayan Inc. vs. Insurance Company of North America, G.R. No. 147839 June 8,
2006

A non-life insurance policy is primarily a contract of indemnity. Insurable interest in the property
insured must exist at the time the insurance takes effect and at the time the loss occurs. The basis of
such requirement of insurable interest in property insured is based on sound public policy: to prevent
a person from taking out an insurance policy on property upon which he has no insurable interest and
collecting the proceeds of said policy in case of loss of the property.

----------

FIRST DIVISION

G.R. No. L-55397 February 29, 1988

TAI TONG CHUACHE & CO., petitioner,

vs.
THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION,
respondents.

DECISION

GANCAYCO, J.:

This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC
1 2
Case #367 dismissing the complaint for recovery of the alleged unpaid balance of the proceeds of the
Fire Insurance Policies issued by herein respondent insurance company in favor of petitioner-intervenor.

The facts of the case as found by respondent Insurance Commission are as follows:

Complainants acquired from a certain Rolando Gonzales a parcel of land and a building
located at San Rafael Village, Davao City. Complainants assumed the mortgage of the
building in favor of S.S.S., which building was insured with respondent S.S.S. Accredited
Group of Insurers for P25,000.00.

On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the
amount of P100,000.00. To secure the payment of the loan, a mortgage was executed
over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A").
On April 25, 1975, Arsenio Chua, representative of Thai Tong Chuache & Co. insured the
latter's interest with Travellers Multi-Indemnity Corporation for P100,000.00 (P70,000.00
for the building and P30,000.00 for the contents thereof) (Exhibit "A-a," contents thereof)
(Exhibit "A-a").

49
 On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit
"A"), covering the building for P50,000.00 with respondent Zenith Insurance Corporation.
On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured
from respondent Philippine British Assurance Company, covering the same building for
P50,000.00 and the contents thereof for P70,000.00.

On July 31, 1975, the building and the contents were totally razed by fire.

Adjustment Standard Corporation submitted a report as follows

xxx xxx xxx

... Thus the apportioned share of each company is as follows:

Policy Company Risk Insures Pays

No..

MIRO Zenith Building P50,000 P17,610.93

F- Insurance
02500

Corp.

F- Phil. Household 70,000 24,655.31

84590

British

Assco.
Co.

Inc. FFF & F5 50,000 39,186.10

Policy Company Risk Insures Pays

No.

FIC- SSSAccre
15381

dited
Group

of Building P25,000 P8,805.47

Insurers

Totals P195,000 P90,257.81

We are showing hereunder another apportionment of the loss which includes the
Travellers Multi-Indemnity policy for reference purposes.

Policy Company Risk Insures Pays

No.

MIRO/ Zenith

F- Insurance
02500

Corp. Building P50,000 P11,877.14

50
 F- Phil.
84590

British

Assco. I-Building 70,000 16,628.00

Co.

II-
Building

FFF & PE 50,000 24,918.79

PVC- SSS Accredited

15181

Group of

Insurers Building 25,000 5,938.50

F-599 Insurers I-Ref 30,000 14,467.31

DV

Multi II-Building 70,000 16,628.00

Totals P295.000 P90,257.81

Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents, Zenith
Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their corresponding
shares of the loss. Complainants were paid the following: P41,546.79 by Philippine British Assurance Co.,
P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par.
6. Amended Complaint). Demand was made from respondent Travellers Multi-Indemnity for its share in
the loss but the same was refused. Hence, complainants demanded from the other three (3) respondents
the balance of each share in the loss based on the computation of the Adjustment Standards Report
excluding Travellers Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith Insurance:
P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused, hence, this action.

In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the material
allegations in the complaint, but denied liability on the ground that the claim of the complainants had
already been waived, extinguished or paid. Both companies set up counterclaim in the total amount of P
91,546.79.

Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter of
July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount of P
5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22, 1975.

Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its
special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the furniture
and building of complainants was secured by a certain Arsenio Chua, mortgage creditor, for the purpose
of protecting his mortgage credit against the complainants; that the said policy was issued in the name of
Azucena Palomo, only to indicate that she owns the insured premises; that the policy contains an
endorsement in favor of Arsenio Chua as his mortgage interest may appear to indicate that insured was
Arsenio Chua and the complainants; that the premium due on said fire policy was paid by Arsenio Chua;
that respondent Travellers is not liable to pay complainants.

On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of the
fire Insurance Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity.

51
Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not entitled
to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of the insured
premises and that the complainants, spouses Pedro and Azucena Palomo, had already paid in full their
3
mortgage indebtedness to the intervenor.

As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the
ground that the insurance policy subject of the complaint was taken out by Tai Tong Chuache &
Company, petitioner herein, for its own interest only as mortgagee of the insured property and thus
complainant as mortgagors of the insured property have no right of action against herein respondent. It
likewise dismissed petitioner's complaint in intervention in the following words:

We move on the issue of liability of respondent Travellers Multi-Indemnity to the

Intervenor-mortgagee. The complainant testified that she was still indebted to Intervenor
in the amount of P100,000.00. Such allegation has not however, been sufficiently proven
by documentary evidence. The certification (Exhibit 'E-e') issued by the Court of First
Instance of Davao, Branch 11, indicate that the complainant was Antonio Lopez Chua
4
and not Tai Tong Chuache & Company.

From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was
likewise denied hence, the present petition.

It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in
the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one entitled to the
insurance proceeds and not Tai Tong Chuache & Company.

This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from
considering the manner it was written. 5 As correctly pointed out by respondent insurance commission in
their comment, the decision did not pronounce that it was Arsenio Lopez Chua who has insurable interest
over the insured property. Perusal of the decision reveals however that it readily absolved respondent
insurance company from liability on the basis of the commissioner's conclusion that at the time of the
occurrence of the peril insured against petitioner as mortgagee had no more insurable interest over the
insured property. It was based on the inference that the credit secured by the mortgaged property was
already paid by the Palomos before the said property was gutted down by fire. The foregoing conclusion
was arrived at on the basis of the certification issued by the then Court of First Instance of Davao, Branch
II that in a certain civil action against the Palomos, Antonio Lopez Chua stands as the complainant and
not petitioner Tai Tong Chuache & Company.

We find the petition to be impressed with merit. It is a well known postulate that the case of a party is
constituted by his own affirmative allegations. Under Section 1, Rule 131 6 each party must prove his own
affirmative allegations by the amount of evidence required by law which in civil cases as in the present
case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the affirmative
of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain
favorable judgment. 7 Thus, petitioner who is claiming a right over the insurance must prove its case.
Likewise, respondent insurance company to avoid liability under the policy by setting up an affirmative
defense of lack of insurable interest on the part of the petitioner must prove its own affirmative
allegations.

It will be recalled that respondent insurance company did not assail the validity of the insurance policy
taken out by petitioner over the mortgaged property. Neither did it deny that the said property was totally
razed by fire within the period covered by the insurance. Respondent, as mentioned earlier advanced an
affirmative defense of lack of insurable interest on the part of the petitioner that before the occurrence of
the peril insured against the Palomos had already paid their credit due the petitioner. Respondent having
admitted the material allegations in the complaint, has the burden of proof to show that petitioner has no
insurable interest over the insured property at the time the contingency took place. Upon that point, there

52
is a failure of proof. Respondent, it will be noted, exerted no effort to present any evidence to substantiate
its claim, while petitioner did. For said respondent's failure, the decision must be adverse to it.

However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance

company from liability on the basis of the certification issued by the then Court of First Instance of Davao,
Branch II, that in a certain civil action against the Palomos, Arsenio Lopez Chua stands as the
complainant and not Tai Tong Chuache. From said evidence respondent commission inferred that the
credit extended by herein petitioner to the Palomos secured by the insured property must have been paid.
Such is a glaring error which this Court cannot sanction. Respondent Commission's findings are based
upon a mere inference.

The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as
evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It has been held
in a long line of cases that when the creditor is in possession of the document of credit, he need not prove
non-payment for it is presumed. 8 The validity of the insurance policy taken b petitioner was not assailed
by private respondent. Moreover, petitioner's claim that the loan extended to the Palomos has not yet
been paid was corroborated by Azucena Palomo who testified that they are still indebted to herein
petitioner. 9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena
Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its representative in
its own behalf. From the above premise respondent concluded that the obligation secured by the insured
property must have been paid.

The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed out that
the action must be brought in the name of the real party in interest. We agree. However, it should be
borne in mind that petitioner being a partnership may sue and be sued in its name or by its duly
authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not
questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the
partnership was corroborated by respondent insurance company. 11 Thus Chua as the managing partner
of the partnership may execute all acts of administration 12 including the right to sue debtors of the
partnership in case of their failure to pay their obligations when it became due and demandable. Or at the
very least, Chua being a partner of petitioner Tai Tong Chuache & Company is an agent of the
partnership. Being an agent, it is understood that he acted for and in behalf of the firm. 13 Public
respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as personal creditor of
spouses Palomo has no basis.

The respondent insurance company having issued a policy in favor of herein petitioner which policy was
of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to
prove the allegation of lack of insurable interest on the part of the petitioner, respondent insurance
company is and must be held liable.

IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER
judgment is rendered order private respondent Travellers Multi-Indemnity Corporation to pay petitioner
the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs against said private
respondent.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Grio-Aquino, JJ., concur.

Footnotes

1 Penned by Commissioner Gregoria Cruz-Arnaldo

53
 2 Filed by Pedro Palomo and Azucena Palomo.
3 Pages 30-34, Rollo.
4 Pages 35-36, Rollo.
5 See Supra.
6 Revised Rules of Court.
7 Vol. 6, Moran, Revised Rules of Court, Page 4,1980 Ed.
8 Veloso vs. Veloso, 8 Phil. 83; Merchant vs. International Banking Corporation, 9 Phil. 554; Miller vs. Jones, 9
Phil. 648; Chua vs. Vargas, 11 Phil. 219; Gana va. Sheriff of Laguna, et al., 32 Phil. 236.
9 Pages 4, 6, Decision, I.C. Case No. 367.
10 Revised Rules of Court.
11 Page 4, Decision, Supra. (Respondent referred to the petitioner and Arsenio Lopez Chua interchangeably).
12 Art. 1800 Civil Code.
13 Bachrach vs. a Protectors, 37 Phil. 441, 1918.

----------

FIRST DIVISION

G.R. No. 124520. August 18, 1997

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

DECISION

PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of
respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on
5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the leased premises
without first obtaining the written consent and approval of the LESSOR. If the
LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the
policy is deemed assigned and transferred to the LESSOR for its own benefit; x x xi[1]
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire their merchandise inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written
consent of private respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the insurance
contract (between the Cha spouses and United) be paid directly to CKS, based on its lease

54
 contract with Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision*
ordering therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha
spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorneys fees and costs of
suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a
**
decision dated 11 January 1996, affirming the trial court decision, deleting however the awards
for exemplary damages and attorneys fees. A motion for reconsideration by United was denied
on 29 March 1996.
In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE
CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF
PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
ii[2]
THE RESPONDENT CORPORATION.
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the lease
contract entered into between CKS and the Cha spouses is valid insofar as it provides that any fire
insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased
premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the prior
written of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public order or public policy.iii[3]
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist at
the time the insurance takes effect and at the time the loss occurs.iv[4] The basis of such requirement of

55
insurable interest in property insured is based on sound public policy: to prevent a person from taking out
an insurance policy on property upon which he has no insurable interest and collecting the proceeds of
said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which
is void under Section 25 of the Insurance Code, which provides:
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether
the person insured has or has not any interest in the property insured, or that the policy shall be
received as proof of such interest, and every policy executed by way of gaming or wagering, is
void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise
inside the leased premises under the provisions of Section 17 of the Insurance Code which provide.
Section 17. The measure of an insurable interest in property is the extent to which the
insured might be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary
of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest
over said merchandise remains with the insured, the Cha spouses. The automatic assignment of the
policy to CKS under the provision of the lease contract previously quoted is void for being contrary to law
and/or public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo
Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the property
insured.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha spouses obtained a
fire insurance policy over their own merchandise, without the consent of CKS, is a separate and distinct
issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and
Stella Uy-Cha.
SO ORDERED.
Bellosillo, Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.

----------

THIRD DIVISION

G.R. No. 112360. July 18, 2000

RIZAL SURETY & INSURANCE COMPANY, petitioner,

vs.
COURT OF APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul and set
aside the July 15, 1993 Decision [1] and October 22, 1993 Resolution [2] of the Court of Appeals [3] in CA-
G.R. CV NO. 28779, which modified the Ruling [4] of the Regional Trial Court of Pasig, Branch 161, in Civil
Case No. 46106.

56
The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy
No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One Million (P1,000,000.00)
Pesos and eventually increased to One Million Five Hundred Thousand (P1,500,000.00) Pesos, covering
the period from August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and location thereof, read:

"On stocks of finished and/or unfinished products, raw materials and supplies of every
kind and description, the properties of the Insureds and/or held by them in trust, on
commission or on joint account with others and/or for which they (sic) responsible in case
of loss whilst contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own Compound at
MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES,
BLOCK NO. 601.

xxx...............xxx...............xxx

Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under galvanized
iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo
assembly plant, offices, warehouse and caretaker's quarters.

'Bounds in front partly by one-storey concrete building under galvanized iron roof
occupied as canteen and guardhouse, partly by building of two and partly one storey
constructed of concrete below, timber above undergalvanized iron roof occupied as
garage and quarters and partly by open space and/or tracking/ packing, beyond which is
the aforementioned Magdalo Street; on its right and left by driveway, thence open
spaces, and at the rear by open spaces. [5]

The same pieces of property insured with the petitioner were also insured with New India Assurance
Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion of its four-
span building and partly gutting the left and right sections thereof. A two-storey building (behind said four-
span building) where fun and amusement machines and spare parts were stored, was also destroyed by
the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India Assurance
Company but to no avail.

On May 26, 1982, private respondent brought against the said insurance companies an action for
collection of sum of money and damages, docketed as Civil Case No. 46106 before Branch 161 of the
then Court of First Instance of Rizal; praying for judgment ordering Rizal Insurance and New India to pay
the amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's fees, exemplary damages,
expenses of litigation of P50,000.00 and costs of suit. [6]

Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the contents of
the four-span building, which was partly burned, and not the damage caused by the fire on the two-storey
annex building. [7]

On January 4, 1990, the trial court rendered its decision; disposing as follows:

57
 "ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co., Ltd.;

(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic)
Knitting Mills, Inc. the amount of P826, 500.00 representing the actual value of the losses
suffered by it; and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED." [8]

Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting Mills, Inc.,
went to the Court of Appeals, which came out with its decision of July 15, 1993 under attack, the decretal
portion of which reads:

"WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED
in that defendant New India Assurance Company has and is hereby required to pay
plaintiff-appellant the amount of P1,818,604.19 while the other Rizal Surety has to pay
the plaintiff-appellant P470,328.67, based on the actual losses sustained by plaintiff
Transworld in the fire, totalling P2,790,376.00 as against the amounts of fire insurance
coverages respectively extended by New India in the amount of P5,800,000.00 and Rizal
Surety and Insurance Company in the amount of P1,500,000.00.

No costs.

SO ORDERED. [9]

On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed to this
Court theorizing inter alia that the private respondent could not be compensated for the loss of the fun
and amusement machines and spare parts stored at the two-storey building because it (Transworld) had
no insurable interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New India
Assurance Company Ltd. vs. Court of Appeals).

Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for Reconsideration
before the Court of Appeals, and on October 22, 1993, the Court of Appeals reconsidered its decision of
July 15, 1993, as regards the imposition of interest, ruling thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the
imposition of legal interest is concerned, that, on the assessment against New India
Assurance Company on the amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26, 1982 when the
complaint was filed until payment is made. The rest of the said decision is retained in all
other respects.

[10]
SO ORDERED."

Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the present
Petition, contending that:

58
 I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING
WHERE THE BULK OF THE BURNED PROPERTIES WERE STORED, WAS
INCLUDED IN THE COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL
SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT

CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN
IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE PREMISES
OCCUPIED BY TRANSWORLD, WHERE THE INSURED PROPERTIES WERE
LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.

III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD
ACTED IN PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY
UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO PAY TO
RIZAL SURETY MORAL AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS
ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11,
[11]
CIVIL CODE).

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the
main building (four-span), [12] and did not include those stored in the two-storey annex building. On the
other hand, the private respondent theorized that the so called "annex" was not an annex but was actually
an integral part of the four-span building [13] and therefore, the goods and items stored therein were
covered by the same fire insurance policy.

Resolution of the issues posited here hinges on the proper interpretation of the stipulation in subject fire
insurance policy regarding its coverage, which reads:

"xxx contained and/or stored during the currency of this Policy in the premises occupied
by them forming part of the buildings situate (sic) within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit its coverage
to what were stored in the four-span building. As opined by the trial court of origin, two requirements must
concur in order that the said fun and amusement machines and spare parts would be deemed protected
by the fire insurance policy under scrutiny, to wit:

"First, said properties must be contained and/or stored in the areas occupied by
Transworld and second, said areas must form part of the building described in the policy
xxx" [14]

'Said building of four-span lofty one storey in height with mezzanine

portions is constructed of reinforced concrete and hollow blocks and/or
concrete under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly plant, offices,
ware house and caretaker's quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings by the Court of Appeals are
conclusive on the parties and not reviewable by this Court, and the same carry even more weight when
the Court of Appeals has affirmed the findings of fact arrived at by the lower court. [15]

In the case under consideration, both the trial court and the Court of Appeals found that the so called
"annex " was not an annex building but an integral and inseparable part of the four-span building

59
described in the policy and consequently, the machines and spare parts stored therein were covered by
the fire insurance in dispute. The letter-report of the Manila Adjusters and Surveyor's Company, which
petitioner itself cited and invoked, describes the "annex" building as follows:

"Two-storey building constructed of partly timber and partly concrete hollow blocks under
g.i. roof which is adjoining and intercommunicating with the repair of the first right span of
the lofty storey building and thence by property fence wall." [16]

Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with
[17]
the "first right span of the lofty storey building", formed part thereof, and meets the requisites for
compensability under the fire insurance policy sued upon.

So also, considering that the two-storey building aforementioned was already existing when subject fire
insurance policy contract was entered into on January 12, 1981, having been constructed sometime in
[18]
1978, petitioner should have specifically excluded the said two-storey building from the coverage of the
fire insurance if minded to exclude the same but if did not, and instead, went on to provide that such fire
insurance policy covers the products, raw materials and supplies stored within the premises of
respondent Transworld which was an integral part of the four-span building occupied by Transworld,
knowing fully well the existence of such building adjoining and intercommunicating with the right section
of the four-span building.

After a careful study, the Court does not find any basis for disturbing what the lower courts found and
arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has created a
doubt regarding the portions of the building insured thereby. Article 1377 of the New Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal Surety
Insurance Company, whose lawyer or managers drafted the fire insurance policy contract under scrutiny.
Citing the aforecited provision of law in point, the Court in Landicho vs. Government Service Insurance
System, [19] ruled:

"This is particularly true as regards insurance policies, in respect of which it is settled that
the 'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x x x are
to be construed strictly and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment to the insured,
especially where forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that
the 'insured usually has no voice in the selection or arrangement of the words employed
and that the language of the contract is selected with great care and deliberation by
experts and legal advisers employed by, and acting exclusively in the interest of, the
insurance company.' (44 C.J.S., p. 1174)."" [20]

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company, Inc. vs. Vda.
[21]
De Songco, to wit:

"'This rigid application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared 'agreements' that the weaker
party may not change one whit, his participation in the 'agreement' being reduced to the
alternative to 'take it or leave it' labelled since Raymond Saleilles 'contracts by

60
 adherence' (contrats [sic] d'adhesion), in contrast to these entered into by parties
bargaining on an equal footing, such contracts (of which policies of insurance and
international bills of lading are prime example) obviously call for greater strictness and
vigilance on the part of courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the unwary (New Civil Code,
[22]
Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'"

The issue of whether or not Transworld has an insurable interest in the fun and amusement machines
and spare parts, which entitles it to be indemnified for the loss thereof, had been settled in G.R. No. L-
111118, entitled New India Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New
India from the decision of the Court of Appeals under review, was denied with finality by this Court on
February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises, precludes the relitigation of a
particular fact or issue in another action between the same parties based on a different claim or cause of
action. "xxx the judgment in the prior action operates as estoppel only as to those matters in issue or
points controverted, upon the determination of which the finding or judgment was rendered. In fine, the
previous judgment is conclusive in the second case, only as those matters actually and directly
controverted and determined and not as to matters merely involved therein." [23]

Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs. Court of
Appeals, [24] held that the issue of negligence of the shipping line, which issue had already been passed
upon in a case filed by one of the insurers, is conclusive and can no longer be relitigated in a similar case
filed by another insurer against the same shipping line on the basis of the same factual circumstances.
Ratiocinating further, the Court opined:

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been
negligent, or so negligent as to have proximately caused the collision between them, was
an issue that was actually, directly and expressly raised, controverted and litigated in
C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the
'Don Carlos' to have been negligent rather than the 'Yotai Maru' and, as already noted,
that Decision was affirmed by this Court in G.R. No. L-48839 in a Resolution dated 6
December 1987. The Reyes Decision thus became final and executory approximately
two (2) years before the Sison Decision, which is assailed in the case at bar, was
promulgated. Applying the rule of conclusiveness of judgment, the question of which
vessel had been negligent in the collision between the two (2) vessels, had long been
settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R. Private
respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B., J.
and that of this Court. The Court of Appeals fell into clear and reversible error when it
[25]
disregarded the Decision of this Court affirming the Reyes Decision."

The controversy at bar is on all fours with the aforecited case. Considering that private respondent's
insurable interest in, and compensability for the loss of subject fun and amusement machines and spare
parts, had been adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779,
and by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994, the same can no longer
be relitigated and passed upon in the present case. Ineluctably, the petitioner, Rizal Surety Insurance
Company, is bound by the ruling of the Court of Appeals and of this Court that the private respondent has
an insurable interest in the aforesaid fun and amusement machines and spare parts; and should be
indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the amount of P470,328.67, it being
the total loss and damage suffered by Transworld for which petitioner Rizal Insurance is liable. [26]

61
All things studiedly considered and viewed in proper perspective, the Court is of the irresistible
conclusion, and so finds, that the Court of Appeals erred not in holding the petitioner, Rizal Surety
Insurance Company, liable for the destruction and loss of the insured buildings and articles of the private
respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993, of the
Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

Footnotes
[1]
Annex "A"; Rollo, pp. 27-49.
[2]
Annex "B"; Rollo, pp. 51- 52.
[3]
Special Tenth Division; composed of Associate Justices: Cezar D. Francisco (Ponente), Gloria C. Paras
(Chairman), and Ricardo P. Galvez (Member)
[4]
Penned by Judge Efren D. Villanueva.
[5]
Decision, Annex "A"; Rollo, pp. 28-29.
[6]
Rollo, p. 59.
[7]
Rollo, p. 62.
[8]
Decision, Rollo, pp. 78-79.
[9]
Decision, Rollo, p. 49.
[10]
Resolution, Rollo, p. 52.
[11]
Petition, Rollo, pp. 12-13.
[12]
Answer, Rollo, p. 62.
[13]
Rollo, p. 76.
[14]
Rollo, p. 77.
[15]
Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999; citing: Meneses vs. Court of Appeals,
246 SCRA 162, p.171; Coca Cola Bottlers Phil., Inc vs. Court of Appeals, 229 SCRA 533; and Binalay vs.
Manalo, 195 SCRA 374.
[16]
Petitioner, Rollo, p. 17.
[17]
Rollo, p. 17.
[18]
Decision, Rollo, p. 69.
[19]
44 SCRA 7.
[20]
Ibid., pp. 12-13, citing: Calanoc vs. Court of Appeals, 98 Phil. 79, 84. See, also, H.E. Heacock Co. vs.
Macondray, 42, Phil. 205; Rivero vs. Robe, 54 Phil. 982; Asturias Sugar Central vs. The Pure Cane Molasses
Co., 57 Phil. 519; Gonzales vs. La Previsora Filipina, 74 Phil. 165; Del Rosario vs. The Equitable Insurance, 620
O.G. 5400, 5403-04.
[21]
25 SCRA 70.
[22]
Ibid., p. 75.
[23]
Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA 201, p. 209; citing: Tingson vs. Court
of Appeals, 49 SCRA 429.
[24]
Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, supra.
[25]
Ibid., pp. 210-211.
[26]
Rollo, p. 43.

----------

FIRST DIVISION

G.R. No. 147839 June 8, 2006

62
GAISANO CAGAYAN, INC. Petitioner,
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

1
Before the Court is a petition for review on certiorari of the Decision dated October 11, 2000 of the Court
of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the
Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action
for damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc.
(petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc.
(LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI
separately obtained from respondent fire insurance policies with book debt endorsements. The insurance
policies provide for coverage on "book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the Insured anywhere in the
2
Philippines." The policies defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this Policy." 3 The policies also
provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of
the merchandise sold and delivered by the Insured which are outstanding at the date of
loss for a period in excess of six (6) months from the date of the covering invoice or
actual delivery of the merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after
the close of every calendar month all amount shown in their books of accounts as unpaid
and thus become receivable item from their customers and dealers. x x x 4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the
items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by IMC
and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and
LSPI filed with respondent their claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of
ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event or force
majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract

63
committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI
never communicated to it that they insured their properties; that it never consented to paying the claim of
the insured.6

7
At the pre-trial conference the parties failed to arrive at an amicable settlement. Thus, trial on the merits
ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint. 8 It held that the
fire was purely accidental; that the cause of the fire was not attributable to the negligence of the
petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since the
sales invoices state that "it is further agreed that merely for purpose of securing the payment of purchase
price, the above-described merchandise remains the property of the vendor until the purchase price is
fully paid", IMC and LSPI retained ownership of the delivered goods and must bear the loss.
9
Dissatisfied, petitioner appealed to the CA. On October 11, 2000, the CA rendered its decision setting
aside the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new
one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to

the insured Inter Capitol Marketing Corporation, plus legal interest from the time of
demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to

the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully
paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity
and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso
contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule
that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the loss
under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery of
the lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the right
to go against petitioner; that, being a fire insurance with book debt endorsements, what was insured was
11
the vendor's interest as a creditor.

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11,
2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE
WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN
THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

64
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT. 14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be
over credit since an insurance "on credit" belies not only the nature of fire insurance but the express
terms of the policies; that it was not credit that was insured since respondent paid on the occasion of the
loss of the insured goods to fire and not because of the non-payment by petitioner of any obligation; that,
even if the insurance is deemed as one over credit, there was no loss as the accounts were not yet due
since no prior demands were made by IMC and LSPI against petitioner for payment of the debt and such
demands came from respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI
assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to
keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the
ready-made clothing materials since it failed to overcome the presumption of liability under Article 126516
of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide stringent
measures of caution, care and maintenance on its property because electric wires do not usually short
circuit unless there are defects in their installation or when there is lack of proper maintenance and
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the
CA is limited to reviewing questions of law which involves no examination of the probative value of the
18
evidence presented by the litigants or any of them. The Supreme Court is not a trier of facts; it is not its
function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate court
are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved
by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of facts are conflicting; (6) when in making its findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the
findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.

65
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred
in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI
since such insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various customers
23
and dealers of the Insured anywhere in the Philippines." ; and defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered
under this Policy."24 Nowhere is it provided in the questioned insurance policies that the subject of the
insurance is the goods sold and delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read
into it any alleged intention of the parties, the terms are to be understood literally just as they appear on
the face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with
petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the
goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment
of the purchase price the above described merchandise remains the property of the vendor until the
purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the
time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is
27
borne by the buyer. Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest
is not determined by concept of title, but whether insured has substantial economic interest in the
28
property.

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or
personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril
might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable

66
interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is
requisite to the existence of such an interest, it is sufficient that the insured is so situated with reference to
the property that he would be liable to loss should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a benefit from its existence or would
suffer loss from its destruction.30 Indeed, a vendor or seller retains an insurable interest in the property
sold so long as he has any interest therein, in other words, so long as he would suffer by its destruction,
as where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to the
unpaid accounts appearing in their Books of Account 45 days after the time of the loss covered by the
policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of the
Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation
consists in the payment of money, the failure of the debtor to make the payment even by reason of a
fortuitous event shall not relieve him of his liability. 33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even
in case of fortuitous event. It does not apply when the obligation is pecuniary in nature. 34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that
the object thereof is designated merely by its class or genus without any particular designation or physical
segregation from all others of the same class, the loss or destruction of anything of the same kind even
without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the
obligation.35 This rule is based on the principle that the genus of a thing can never perish. Genus
nunquan perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of
37
any specific property of the debtor.

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case.
What is relevant here is whether it has been established that petitioner has outstanding accounts with
IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show
39
that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E" is the
40
check voucher evidencing payment to IMC. Exhibit "F" is the subrogation receipt executed by IMC in
favor of respondent upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the
41
insurance company of the insurance claim. Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance

67
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary
weight can be given to Exhibit "F Levi Strauss", 42 a letter dated April 23, 1991 from petitioner's General
Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It
only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which
LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with
the MODIFICATION that the order to pay the amount of P535,613.00 to respondent is DELETED for lack
of factual basis.

No pronouncement as to costs.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson

(On Leave)
CONSUELO YNARES-SANTIAGO ROMEO J. CALLEJO, SR.
Associate Justice Asscociate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.

ARTEMIO V. PANGANIBAN
Chief Justice

68
Footnotes
1
Penned by Associate Justice Portia Alio-Hormachuelos and concurred in by Associate Justices Angelina
Sandoval-Gutierrez (now Associate Justice of this Court) and Elvi John S. Asuncion.
2
Records, pp. 146, 190.
3
Id. at pp. 149 and 200; Exhibits "A-3-a" and "E-2-a Levi Strauss".
4
Id., Exhibits "A-3" and "E-2 Levi Strauss".
5
Id. at 1.
6
Id. at 63.
7
Id. at 93.
8
Id. at 540.
9
CA rollo, p. 18.
10
Id. at 101-102.
11
Id. at 98-100.
12
Id. at 105.
13
Id. at 135.
14
Rollo, p. 36.
15
Id. at 28 (Petition), 132 (Memorandum).
16
Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other natural calamity.
17
Rollo, pp. 105 (Comment), 153 (Memorandum).
18
Spouses Hanopol v. Shoemart, Incorporated, 439 Phil. 266, 277 (2002); St. Michael's Institute v. Santos, 422
Phil. 723, 737 (2001).
19
Go v. Court of Appeals, G.R. No. 158922, May 28, 2004, 430 SCRA 358, 364; Spouses Hanopol v. Shoemart,
Incorporated, supra.
20
Custodio v. Corrado, G.R. No. 146082, July 30, 2004, 435 SCRA 500, 511; Spouses Hanopol v. Shoemart,
Incorporated, supra.
21
The Insular Life Assurance Company, Ltd. v. Court of Appeals, G.R. No. 126850, April 28, 2004, 428 SCRA
79, 86; Aguirre v. Court of Appeals, G.R. No. 122249, January 29, 2004, 421 SCRA 310, 319.
22
De Mesa v. Court of Appeals, 375 Phil. 432, 443 (1999).
23
Records, pp. 146, 190.
24
Id.
25
First Fil-Sin Lending Corporation v. Padillo, G.R. No. 160533, January 12, 2005, 448 SCRA 71, 76; Azarraga
v. Rodriguez, 9 Phil. 637 (1908).
26
Records, at the back of pp. 151-173; Exhibits "C" to "C-22".
27
See Lawyers Cooperative Publishing Co. v. Tabora, 121 Phil. 737, 741 (1965).
28
Aetna Ins. Co. v. King, 265 So 2d 716, cited in 43 Am Jur 2d 943.
29
43 Am Jur 2d 943.
30
Id.
31
43 Am Jur 2d 962.
32
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen were inevitable.
33
CA Decision, p. 11; CA rollo, p. 100.
34
Lawyers Cooperative Publishing v. Tabora, supra note 27, at 741.
35
Jurado, Comments and Jurisprudence on Obligations and Contracts (1993), pp. 289-290. See also Republic of
the Philippines v. Grijaldo, 122 Phil. 1060, 1066 (1965); De Leon v. Soriano, 87 Phil. 193, 196 (1950).
36
Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91 Phil. 861, 865 (1952). See
also Republic of the Philippines v. Grijaldo, supra; De Leon v. Soriano, supra.
37
Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956).
38
Records, pp. 151-173.
39
Id. at 182.
40
Id. at 183.
41
Delsan Transport Lines, Inc. v. Court of Appeals, 420 Phil. 824, 834 (2001); Philippine American General
Insurance Company, Inc. v. Court of Appeals, 339 Phil. 455, 466 (1997).
42
Records, p. 201.

69
VI. MISDESCRIPTION IN THE POLICY

American Home Assurance Co. vs. Tantuco Enterprises, Inc., G.R. No. 138941. October 8, 2001

In construing the words used descriptive of a building insured, the greatest liberality is shown by the
courts in giving effect to the insurance. In view of the custom of insurance agents to examine
buildings before writing policies upon them, and since a mistake as to the identity and character of the
building is extremely unlikely, the courts are inclined to consider that the policy of insurance covers
any building which the parties manifestly intended to insure, however inaccurate the description may
be.

----------

FIRST DIVISION
G.R. No. 138941. October 8, 2001
AMERICAN HOME ASSURANCE COMPANY, petitioner,
vs.
TANTUCO ENTERPRISES, INC., respondent.

DECISION
PUNO, J.:

Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals in CA-G.R.
CV No. 52221 promulgated on January 14, 1999, which affirmed in toto the Decision of the Regional Trial
Court, Branch 53, Lucena City in Civil Case No. 92-51 dated October 16, 1995.
Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns
two oil mills. Both are located at its factory compound at Iyam, Lucena City. It appears that respondent
commenced its business operations with only one oil mill. In 1988, it started operating its second oil mill.
The latter came to be commonly referred to as the new oil mill.
The two oil mills were separately covered by fire insurance policies issued by petitioner American Home
Assurance Co., Philippine Branch.[1] The first oil mill was insured for three million pesos (P3,000,000.00)
[2]
under Policy No. 306-7432324-3 for the period March 1, 1991 to 1992. The new oil mill was insured for
[3]
six million pesos (P6,000,000.00) under Policy No. 306-7432321-9 for the same term. Official receipts
indicating payment for the full amount of the premium were issued by the petitioner's agent. [4]
A fire that broke out in the early morning of September 30,1991 gutted and consumed the new oil mill.
Respondent immediately notified the petitioner of the incident. The latter then sent its appraisers who
inspected the burned premises and the properties destroyed. Thereafter, in a letter dated October 15,
1991, petitioner rejected respondents claim for the insurance proceeds on the ground that no policy was
issued by it covering the burned oil mill. It stated that the description of the insured establishment referred
to another building thus: Our policy nos. 306-7432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M) extend
insurance coverage to your oil mill under Building No. 5, whilst the affected oil mill was under Building No.
14. [5]

70
A complaint for specific performance and damages was consequently instituted by the respondent with
the RTC, Branch 53 of Lucena City. On October 16, 1995, after trial, the lower court rendered a Decision
finding the petitioner liable on the insurance policy thus:
WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay
plaintiff:
(a) P4,406,536.40 representing damages for loss by fire of its insured property with interest
at the legal rate;
(b) P80,000.00 for litigation expenses;
(c) P300,000.00 for and as attorneys fees; and
(d) Pay the costs.
[6]
SO ORDERED.
Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld the same in a
Decision promulgated on January 14, 1999, the pertinent portion of which states:
WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial
courts Decision dated October 16, 1995 is hereby AFFIRMED in toto.
SO ORDERED. [7]
Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a Resolution
promulgated on June 10, 1999.
Hence, the present course of action, where petitioner ascribes to the appellate court the following errors:
(1) The Court of Appeals erred in its conclusion that the issue of non-payment of the premium
was beyond its jurisdiction because it was raised for the first time on appeal. [8]
(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances
Warranty' of the policy. [9]
(3) With due respect, the conclusion of the Court of Appeals giving no regard to the parole
evidence rule and the principle of estoppel is erroneous. [10]
The petition is devoid of merit.
The primary reason advanced by the petitioner in resisting the claim of the respondent is that the burned
oil mill is not covered by any insurance policy. According to it, the oil mill insured is specifically described
in the policy by its boundaries in the following manner:
Front: by a driveway thence at 18 meters distance by Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.
Left: Adjoining thence an imperfect wall by Bldg. No. 4.
Rear: by an open space thence at 8 meters distance.
However, it argues that this specific boundary description clearly pertains, not to the burned oil mill, but to
the other mill. In other words, the oil mill gutted by fire was not the one described by the specific
boundaries in the contested policy.
What exacerbates respondents predicament, petitioner posits, is that it did not have the supposed wrong
description or mistake corrected. Despite the fact that the policy in question was issued way back in 1988,
or about three years before the fire, and despite the Important Notice in the policy that Please read and
examine the policy and if incorrect, return it immediately for alteration, respondent apparently did not call
petitioners attention with respect to the misdescription.

71
By way of conclusion, petitioner argues that respondent is barred by the parole evidence rule from
presenting evidence (other than the policy in question) of its self-serving intention (sic) that it intended
really to insure the burned oil mill, just as it is barred by estoppel from claiming that the description of the
insured oil mill in the policy was wrong, because it retained the policy without having the same corrected
before the fire by an endorsement in accordance with its Condition No. 28.
These contentions can not pass judicial muster.
In construing the words used descriptive of a building insured, the greatest liberality is shown by the
[11]
courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings
before writing policies upon them, and since a mistake as to the identity and character of the building is
extremely unlikely, the courts are inclined to consider that the policy of insurance covers any building
[12]
which the parties manifestly intended to insure, however inaccurate the description may be.
Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what
the parties manifestly intended to insure was the new oil mill. This is obvious from the categorical
statement embodied in the policy, extending its protection:
On machineries and equipment with complete accessories usual to a coconut oil mill including
stocks of copra, copra cake and copra mills whilst contained in the new oil mill building, situate
(sic) at UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED. [13]
(emphasis supplied.)
If the parties really intended to protect the first oil mill, then there is no need to specify it as new.
Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts
and leave uncovered its second one. As mentioned earlier, the first oil mill is already covered under
Policy No. 306-7432324-4 issued by the petitioner. It is unthinkable for respondent to obtain the other
policy from the very same company. The latter ought to know that a second agreement over that same
realty results in its overinsurance.
The imperfection in the description of the insured oil mills boundaries can be attributed to a
misunderstanding between the petitioners general agent, Mr. Alfredo Borja, and its policy issuing clerk,
who made the error of copying the boundaries of the first oil mill when typing the policy to be issued for
the new one. As testified to by Mr.Borja:
Atty. G. Camaligan:
Q: What did you do when you received the report?
A: I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to cover the
new oil mill that is why when I presented the existing policy of the old policy, the policy issuing
clerk just merely (sic) copied the wording from the old policy and what she typed is that the
description of the boundaries from the old policy was copied but she inserted covering the
new oil mill and to me at that time the important thing is that it covered the new oil mill
because it is just within one compound and there are only two oil mill[s] and so just enough,
I had the policy prepared. In fact, two policies were prepared having the same date one for the
[14]
old one and the other for the new oil mill and exactly the same policy period, sir. (emphasis
supplied)
It is thus clear that the source of the discrepancy happened during the preparation of the written contract.
These facts lead us to hold that the present case falls within one of the recognized exceptions to the
parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to
the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express
the true intent and agreement of the parties thereto. [15] Here, the contractual intention of the parties
cannot be understood from a mere reading of the instrument. Thus, while the contract explicitly stipulated
that it was for the insurance of the new oil mill, the boundary description written on the policy concededly
pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting evidence
aliunde, which will explain the imperfection and clarify the intent of the parties.

72
Anent petitioners argument that the respondent is barred by estoppel from claiming that the description of
the insured oil mill in the policy was wrong, we find that the same proceeds from a wrong assumption.
Evidence on record reveals that respondents operating manager, Mr. Edison Tantuco, notified Mr. Borja
(the petitioners agent with whom respondent negotiated for the contract) about the inaccurate description
in the policy. However, Mr. Borja assured Mr. Tantuco that the use of the adjective new will distinguish
the insured property. The assurance convinced respondent that, despite the impreciseness in the
specification of the boundaries, the insurance will cover the new oil mill. This can be seen from the
testimony on cross of Mr. Tantuco:
"ATTY. SALONGA:
Q: You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the policy
contents.(sic)
Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly the
boundaries of the property insured by the insurance policy Exhibit A, will you tell us as the
manager of the company whether the boundaries stated in Exhibit A-2 are the boundaries of the
old (sic) mill that was burned or not.
A: It was not, I called up Mr. Borja regarding this matter and he told me that what is important
is the word new oil mill. Mr. Borja said, as a matter of fact, you can never insured (sic) one
property with two (2) policies, you will only do that if you will make to increase the amount and it is
by indorsement not by another policy, sir." [16]
We again stress that the object of the court in construing a contract is to ascertain the intent of the parties
to the contract and to enforce the agreement which the parties have entered into. In determining what the
parties intended, the courts will read and construe the policy as a whole and if possible, give effect to all
the parts of the contract, keeping in mind always, however, the prime rule that in the event of doubt, this
doubt is to be resolved against the insurer. In determining the intent of the parties to the contract, the
courts will consider the purpose and object of the contract. [17]
In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal policy for its
failure to pay the full amount of the premium and breach of the Fire Extinguishing Appliances Warranty.
The amount of the premium stated on the face of the policy was P89,770.20. From the admission of
respondents own witness, Mr. Borja, which the petitioner cited, the former only paid it P75,147.00,
leaving a difference of P14,623.20. The deficiency, petitioner argues, suffices to invalidate the policy, in
accordance with Section 77 of the Insurance Code. [18]
The Court of Appeals refused to consider this contention of the petitioner. It held that this issue was
raised for the first time on appeal, hence, beyond its jurisdiction to resolve, pursuant to Rule 46, Section
18 of the Rules of Court. [19]
Petitioner, however, contests this finding of the appellate court. It insists that the issue was raised in
paragraph 24 of its Answer, viz.:
24. Plaintiff has not complied with the condition of the policy and renewal certificate that the
renewal premium should be paid on or before renewal date.
Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who acknowledged
that the paid amount was lacking by P14,623.20 by reason of a discount or rebate, which rebate under
Sec. 361 of the Insurance Code is illegal.
The argument fails to impress. It is true that the asseverations petitioner made in paragraph 24 of its
Answer ostensibly spoke of the policys condition for payment of the renewal premium on time and
respondents non-compliance with it. Yet, it did not contain any specific and definite allegation that
respondent did not pay the premium, or that it did not pay the full amount, or that it did not pay the
amount on time.
Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings,
the question of the supposed inadequate payment was never raised. Most significant to point, petitioner

73
fatally neglected to present, during the whole course of the trial, any witness to testify that respondent
indeed failed to pay the full amount of the premium. The thrust of the cross-examination of Mr. Borja, on
the other hand, was not for the purpose of proving this fact. Though it briefly touched on the alleged
deficiency, such was made in the course of discussing a discount or rebate, which the agent apparently
gave the respondent. Certainly, the whole tenor of Mr. Borjas testimony, both during direct and cross
examinations, implicitly assumed a valid and subsisting insurance policy. It must be remembered that he
was called to the stand basically to demonstrate that an existing policy issued by the petitioner covers the
burned building.
Finally, petitioner contends that respondent violated the express terms of the Fire Extinguishing
Appliances Warranty. The said warranty provides:
WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as
mentioned below shall be maintained in efficient working order on the premises to which
insurance applies:
- PORTABLE EXTINGUISHERS
- INTERNAL HYDRANTS
- EXTERNAL HYDRANTS
- FIRE PUMP
- 24-HOUR SECURITY SERVICES
BREACH of this warranty shall render this policy null and void and the Company shall no longer
be liable for any loss which may occur. [20]
Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified
therein. The breach occurred when the respondent failed to install internal fire hydrants inside the burned
building as warranted. This fact was admitted by the oil mills expeller operator, Gerardo Zarsuela.
Again, the argument lacks merit. We agree with the appellate courts conclusion that the aforementioned
warranty did not require respondent to provide for all the fire extinguishing appliances enumerated
therein. Additionally, we find that neither did it require that the appliances are restricted to those
mentioned in the warranty. In other words, what the warranty mandates is that respondent should
maintain in efficient working condition within the premises of the insured property, fire fighting equipments
such as, but not limited to, those identified in the list, which will serve as the oil mills first line of defense
in case any part of it bursts into flame.
To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be
found the following devices: numerous portable fire extinguishers, two fire hoses, [21] fire hydrant, [22] and
[23]
an emergency fire engine. All of these equipments were in efficient working order when the fire
occurred.
It ought to be remembered that not only are warranties strictly construed against the insurer, but they
should, likewise, by themselves be reasonably interpreted. [24] That reasonableness is to be ascertained in
light of the factual conditions prevailing in each case. Here, we find that there is no more need for an
internal hydrant considering that inside the burned building were: (1) numerous portable fire
extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a connection to one of the
external hydrants.
IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant petition is hereby
DISMISSED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Pardo, and Ynares-Santiago, JJ., concur.
Kapunan, J., on official leave.

74
FOOTNOTES
[1]
Rollo, p. 50.

[2]
Rollo, p. 18.
[3]
Article 1409(i), Civil Code.
[4]
Section 19, Insurance Code.
[5]
Exhibit H, Folder of Exhibit, p. 35.
[6]
Decision, Civil Case No. 92-15, RTC, Branch 53, Lucena City, p.14; Original Record, p. 168.
[7]
Decision, CA-G.R. CV No. 52221, p. 6; Rollo, p. 32.
[8]
Verified Petition for Review, p. 99; Rollo, p. 17.
[9]
Petition, p.11; Rollo, p.19.
[10]
Petition, p.14; Rollo, p. 23.
[11]
See Martinez, Philippine Insurance Code Annotated, p. 324, citing Richard vs. Ins. Co., 27 N.W. 586 (1886),
which gives the following illustration: A policy upon a school house was held sufficient to identify the building
insured in which a school was kept, although it was not an ordinary school house; the term store was held to be
a sufficient description of a building used as a restaurant and bakery.
[12]
Vance on Insurance, p. 816-817.
[13]
Exhibit C-2, Folder of Exhibits, p. 24.
[14]
TSN, March 31, 1993, pp. 31-32.
[15]
Rule 130, Section 9, Rules of Court.
[16]
TSN, April 20, 1993, pp. 25-26.
[17]
Vance on Insurance 809 (3rd ed., 1951).
[18]
The provision states:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an
insurance company is valid and binding unless and until the premium thereof has been paid, except in the case
of a life or an industrial life policy whenever the grace period provision applies.
[19]
Now Rule 44, Section 15 of the 1997 Rules of Civil Procedure:
Sec. 15. Questions that may be raised on appeal. - Whether or not the appellant has filed a motion for new trial
in the court below, he may include in his assignment of errors any question of law or fact that has been raised in
the court below and which is within the issues framed by the parties.
[20]
Exhibit C-4-C, Folder of Exhibits, p. 29.
[21]
Exhibits T, T-1 and T-13, Folder of Exhibits, pp. 73 and 77.
[22]
Exhibit T-12, Folder of Exhibits, p. 77.
[23]
Exhibit T-14, Folder of Exhibits, p. 77.
[24]
See Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 98 Phil. 85 (1955).

75
VII. OPEN POLICY

Development Insurance Corp. vs. Intermediate Appellate Court, G.R. No. 71360 July 16,
1986

As defined in the aforestated provision, which is now Section 60 of the Insurance Code, "an
open policy is one in which the value of the thing insured is not agreed upon but is left to be
ascertained in case of loss. " This means that the actual loss, as determined, will represent the
total indemnity due the insured from the insurer except only that the total indemnity shall not
exceed the face value of the policy.

----------

FIRST DIVISION

G.R. No. 71360 July 16, 1986

DEVELOPMENT INSURANCE CORPORATION, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, and PHILIPPINE UNION REALTY DEVELOPMENT
CORPORATION, respondents.

Balgos & Perez Law Offices for petitioner.

Agustin M. Sundiam for private respondent.

CRUZ, J.:

A fire occurred in the building of the private respondent and it sued for recovery of damages from the
petitioner on the basis of an insurance contract between them. The petitioner allegedly failed to answer
on time and was declared in default by the trial court. A judgment of default was subsequently rendered
on the strength of the evidence submitted ex parte by the private respondent, which was allowed full
recovery of its claimed damages. On learning of this decision, the petitioner moved to lift the order of
default, invoking excusable neglect, and to vacate the judgment by default. Its motion was denied. It then
went to the respondent court, which affirmed the decision of the trial court in toto. The petitioner is now
before us, hoping presumably that it will fare better here than before the trial court and the Intermediate
Appellate Court. We shall see.

On the question of default, the record argues mightily against it. It is indisputable that summons was
served on it, through its senior vice-president, on June 19,1980. On July 14, 1980, ten days after the
expiration of the original 15-day period to answer (excluding July 4), its counsel filed an ex parte motion
for an extension of five days within which to file its answer. On July 18, 1980, the last day of the
requested extension-which at the time had not yet been granted-the same counsel filed a second motion
for another 5-day extension, fourteen days after the expiry of the original period to file its answer. The trial
court nevertheless gave it five days from July 14, 1980, or until July 19, 1980, within which to file its
answer. But it did not. It did so only on July 26, 1980, after the expiry of the original and extended periods,
or twenty-one days after the July 5, deadline. As a consequence, the trial court, on motion of the private
respondent filed on July 28, 1980, declared the petitioner in default. This was done almost one month
later, on August 25, 1980. Even so, the petitioner made no move at all for two months thereafter. It was

76
only on October 27, 1980, more than one month after the judgment of default was rendered by the trial
court on September 26, 1980, that it filed a motion to lift the order of default and vacate the judgment by
1
default.

The pattern of inexcusable neglect, if not deliberate delay, is all too clear. The petitioner has slumbered
2
on its right and awakened too late. While it is true that in Trajano v. Cruz, which it cites, this Court
declared "that judgments by default are generally looked upon with disfavor," the default judgment in that
case was set aside precisely because there was excusable neglect, Summons in that case was served
through "an employee in petitioners' office and not the person in-charge," whereas in the present case
summons was served on the vice-president of the petitioner who however refused to accept it.
Furthermore, as Justice Guerrero noted, there was no evidence showing that the petitioners in Trajano
intended to unduly delay the case.

Besides, the petitioners in Trajano had a valid defense against the complaint filed against them, and this
justified a relaxation of the procedural rules to allow full hearing on the substantive issues raised. In the
instant case, by contrast, the petitioner must just the same fail on the merits even if the default orders
were to be lifted. As the respondent Court observed, "Nothing would be gained by having the order of
default set aside considering the appellant has no valid defense in its favor." 3

The petitioner's claim that the insurance covered only the building and not the elevators is absurd, to say
the least. This Court has little patience with puerile arguments that affront common sense, let alone basic
legal principles with which even law students are familiar. The circumstance that the building insured is
seven stories high and so had to be provided with elevators-a legal requirement known to the petitioner
as an insurance company-makes its contention all the more ridiculous.

No less preposterous is the petitioner's claim that the elevators were insured after the occurrence of the
fire, a case of shutting the barn door after the horse had escaped, so to speak. 4 This pretense merits
scant attention. Equally undeserving of serious consideration is its submission that the elevators were not
damaged by the fire, against the report of The arson investigators of the INP 5 and, indeed, its own
expressed admission in its answer 6 where it affirmed that the fire "damaged or destroyed a portion of the
7th floor of the insured building and more particularly a Hitachi elevator control panel." 7

There is no reason to disturb the factual findings of the lower court, as affirmed by the Intermediate
Appellate Court, that the heat and moisture caused by the fire damaged although they did not actually
burn the elevators. Neither is this Court justified in reversing their determination, also factual, of the value
of the loss sustained by the private respondent in the amount of P508,867.00.

The only remaining question to be settled is the amount of the indemnity due to the private respondent
under its insurance contract with the petitioner. This will require an examination of this contract, Policy No.
RY/F-082, as renewed, by virtue of which the petitioner insured the private respondent's building against
8
fire for P2,500,000.00.

The petitioner argues that since at the time of the fire the building insured was worth P5,800,000.00, the
private respondent should be considered its own insurer for the difference between that amount and the
face value of the policy and should share pro rata in the loss sustained. Accordingly, the private
respondent is entitled to an indemnity of only P67,629.31, the rest of the loss to be shouldered by it alone.
In support of this contention, the petitioner cites Condition 17 of the policy, which provides:

If the property hereby insured shall, at the breaking out of any fire, be collectively of
greater value than the sum insured thereon then the insured shall be considered as being
his own insurer for the difference, and shall bear a ratable proportion of the loss
accordingly. Every item, if more than one, of the policy shall be separately subject to this
condition.

77
However, there is no evidence on record that the building was worth P5,800,000.00 at the time of the
loss; only the petitioner says so and it does not back up its self-serving estimate with any independent
corroboration. On the contrary, the building was insured at P2,500,000.00, and this must be considered,
by agreement of the insurer and the insured, the actual value of the property insured on the day the fire
occurred. This valuation becomes even more believable if it is remembered that at the time the building
was burned it was still under construction and not yet completed.

The Court notes that Policy RY/F-082 is an open policy and is subject to the express condition that:

Open Policy

This is an open policy as defined in Section 57 of the Insurance Act. In the event of loss,
whether total or partial, it is understood that the amount of the loss shall be subject to
appraisal and the liability of the company, if established, shall be limited to the actual
loss, subject to the applicable terms, conditions, warranties and clauses of this Policy,
and in no case shall exceed the amount of the policy.

As defined in the aforestated provision, which is now Section 60 of the Insurance Code, "an open policy is
one in which the value of the thing insured is not agreed upon but is left to be ascertained in case of loss.
" This means that the actual loss, as determined, will represent the total indemnity due the insured from
the insurer except only that the total indemnity shall not exceed the face value of the policy.

The actual loss has been ascertained in this case and, to repeat, this Court will respect such factual
determination in the absence of proof that it was arrived at arbitrarily. There is no such showing. Hence,
applying the open policy clause as expressly agreed upon by the parties in their contract, we hold that the
private respondent is entitled to the payment of indemnity under the said contract in the total amount of
P508,867.00.

The refusal of its vice-president to receive the private respondent's complaint, as reported in the sheriff's
return, was the first indication of the petitioner's intention to prolong this case and postpone the discharge
of its obligation to the private respondent under this agreement. That intention was revealed further in its
subsequent acts-or inaction-which indeed enabled it to avoid payment for more than five years from the
filing of the claim against it in 1980. The petitioner has temporized long enough to avoid its legitimate
responsibility; the delay must and does end now.

WHEREFORE, the appealed decision is affirmed in full, with costs against the petitioner.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera and Paras, JJ., concur.

Footnotes
1 Record on Appeal, pp. 2-3
2 80 SCRA 712.
3 Decision, p. 8.
4 Rollo, pp. 110-111; p. 115.
5 Exh. E.
6 Rollo, p. 50.
7 Rollo, p. 52.
8 Exh. I.

78
VIII. PAYMENT OF PREMIUM

Makati Tuesday Condominium Corp vs. Court of Appeals, G.R. No. 95546 November 6,
1992
Tibay vs. Court of Appeals, G.R. No. 119655 May 24, 1996
UCPB General Insurance Co., Inc. vs. Masagana Telamart, Inc., G.R. No. 137172. June 15,
1999
UCPB General Insurance Co., Inc. vs. Masagana Telamart Inc., G.R. No. 137172. April 4,
2001

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to
the validity of the contract, We are not prepared to rule that the request to make installment payments
duly approved by the insurer, would prevent the entire contract of insurance from going into effect
despite payment and acceptance of the initial premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely
precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does
not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary
to morals, good customs, public order or public policy (De Leon, the Insurance Code, at p. 175). So is
an understanding to allow insured to pay premiums in installments not so proscribed. At the very
least, both parties should be deemed in estoppel to question the arrangement they have voluntarily
accepted.

----------

FIRST DIVISION

G.R. No. 95546 November 6, 1992

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American
International Underwriters (Phils.), Inc., respondent.

DECISION

BELLOSILLO, J.:

This case involves a purely legal question: whether payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as
the Insurance Code, as amended, which provides:

Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no

79
 policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies.

Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by
American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany
Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building
and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total premium of
P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and
16 November 1982, all of which were accepted by private respondent.

On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596,
which replaced and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The
premium in the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3
August 1983, 9 September 1983, and 21 November 1983. All payments were likewise accepted by
private respondent.

On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance
Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy,
petitioner made two installment payments, both accepted by private respondent, the first on 6 February
1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to
pay the balance of the premium.

Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.

In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-
9210651. It explained that it discontinued the payment of premiums because the policy did not contain a
credit clause in its favor and the receipts for the installment payments covering the policy for 1984-85, as
well as the two (2) previous policies, stated the following reservations:

2. Acceptance of this payment shall not waive any of the company rights to deny liability
on any claim under the policy arising before such payments or after the expiration of the
credit clause of the policy; and

3. Subject to no loss prior to premium payment. If there be any loss such is not covered.

Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It
then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its
answer with amended counterclaim, sought the refund of P924,206.10 representing the premium
payments for 1982-85.

After some incidents, petitioner and private respondent moved for summary judgment.

On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following
findings:

While it is true that the receipts issued to the defendant contained the aforementioned
reservations, it is equally true that payment of the premiums of the three aforementioned
policies (being sought to be refunded) were made during the lifetime or term of said
policies, hence, it could not be said, inspite of the reservations, that no risk attached
under the policies. Consequently, defendant's counterclaim for refund is not justified.

80
 As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of
the reservation in the receipts ordinarily issued by the plaintiff on premium payments the
only plausible conclusion is that plaintiff has no right to demand their payment after the
lapse of the term of said policy on March 1, 1985. Therefore, the defendant was justified
in refusing to pay the same. 1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a
decision 2 modifying that of the trial court by ordering herein petitioner to pay the balance of the premiums
due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the
denial of the counterclaim. The appellate court thus explained

The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the
entire premium. Here, the parties herein agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years, the
second and third policies being a renewal/replacement for the previous one. And the
insured never informed the insurer that it was terminating the policy because the terms
were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract as valid and binding
upon payment of the first premium. Otherwise, we would allow the insurer to renege on
its liability under the contract, had a loss incurred (sic) before completion of payment of
the entire premium, despite its voluntary acceptance of partial payments, a result
eschewed by a basic considerations of fairness and equity.

To our mind, the insurance contract became valid and binding upon payment of the first
premium, and the plaintiff could not have denied liability on the ground that payment was
not made in full, for the reason that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982,
1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as
amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss for
occurring before payment of premiums.

It argues that where the premiums is not actually paid in full, the policy would only be effective if there is
an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code.
The absence of an express acknowledgment in the policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said premiums on or before the effective dates of said policies
rendered them invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance
upon mere partial payment of the premiums because under Sec. 77 of the Insurance Code, no contract of
insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement
to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the
alleged invalid insurance policies.

We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that petitioner and private respondent intended subject insurance policies to be binding and
effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer

81
to continue collecting and accepting the premiums, although paid on installments, and later deny liability
on the lame excuse that the premiums were not prepared in full.

We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and
conclusion of the appellate court contained in its Resolution denying the motion to reconsider its Decision

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

condition to the validity of the contract, We are not prepared to rule that the request to
make installment payments duly approved by the insurer, would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the initial
premium or first installment. Section 78 of the Insurance Code in effect allows waiver by
the insurer of the condition of prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive evidence of payment so far as to
make the policy binding despite the fact that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement granting credit extension, and
such an agreement is not contrary to morals, good customs, public order or public policy
(De Leon, the Insurance Code, at p. 175). So is an understanding to allow insured to pay
premiums in installments not so proscribed. At the very least, both parties should be
deemed in estoppel to question the arrangement they have voluntarily accepted. 4

The reliance by petitioner on Arce vs. Capital Surety and Insurance

Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar. In
Arce, no payment was made by the insured at all despite the grace period given. In the case before Us,
petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of
the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it
refused to pay the balance.

It appearing from the peculiar circumstances that the parties actually intended to make three (3)
insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation
to pay the balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP-
9210651) in March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire
and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer
was exposed to the risk insured for any period, however brief or momentary.

WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs
against petitioner.

SO ORDERED.

Cruz, Padilla and Grio-Aquino, JJ., concur.

Medialdea, J., is on leave.

Footnotes
1 Rollo, p. 85.
2 Penned by Mme. Justice Minerva P. Gonzaga-Reyes, concurred by Mr. Justice Ricardo J. Francisco and Mme.
Justice Salome A. Montoya.
3 Decision, pp. 6-7; Rollo, pp. 36-37.
4 Rollo, pp. 41-42.
5 No. L-28501, September 30, 1982, 117 SCRA 63.

82
 ----------

FIRST DIVISION

G.R. No. 119655 May 24, 1996

SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M.
RORALDO, VIRGILIO M. RORALDO, MYRNA M. RORALDO and ROSABELLA M. RORALDO,
petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.

DECISION

BELLOSILLO, J.:

May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?

On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued
Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their two-storey
residential building located at 5855 Zobel Street, Makati City, together with all their personal effects
therein. The insurance was for P600,000.00 covering the period from 23 January 1987 to 23 January
1988. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta Tibay only paid P600.00
thus leaving a considerable balance unpaid.

On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10 March
1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with FORTUNE a claim
on the fire insurance policy. Her claim was accordingly referred to its adjuster, Goodwill Adjustment
Services, Inc. (GASI), which immediately wrote Violeta requesting her to furnish it with the necessary
documents for the investigation and processing of her claim. Petitioner forthwith complied. On 28 March
1987 she signed a non-waiver agreement with GASI to the effect that any action taken by the companies
or their representatives in investigating the claim made by the claimant for his loss which occurred at
5855 Zobel Roxas, Makati on March 8, 1987, or in the investigating or ascertainment of the amount of
actual cash value and loss, shall not waive or invalidate any condition of the policies of such companies
held by said claimant, nor the rights of either or any of the parties to this agreement, and such action shall
not be, or be claimed to be, an admission of liability on the part of said companies or any of them. 1

In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition No.
2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance Commission
proved futile. On 3 March 1988 Violets and the other petitioners sued FORTUNE for damages in the
amount of P600,000.00 representing the total coverage of the fire insurance policy plus 12% interest per
annum, P100,000.00 moral damages, and attorney's fees equivalent to 20% of the total claim.

On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of
the insured building and personal properties in the amount of P600,000.00 plus interest at the legal rate
of 6% per annum from the filing of the complaint until full payment, and attorney's fees equivalent to 20%
2
of the total amount claimed plus costs of suit.

83
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable
to plaintiff-appellees therein but ordering defendant-appellant to return to the former the premium of
3
P2,983.50 plus 12% interest from 10 March 1987 until full payment.

Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the
appellate court, FORTUNE remains liable under the subject fire insurance policy in spite of the failure of
petitioners to pay their premium in full.

We find no merit in the petition; hence, we affirm the Court of Appeals.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. 4 The consideration is the premium,
which must be paid at the time and in the way and manner specified in the policy, and if not so paid, the
policy will lapse and be forfeited by its own terms. 5

The pertinent provisions in the Policy on premium read

THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the Company
in accordance with Policy Condition No. 2 of the total premiums by the insured as
stipulated above for the period aforementioned for insuring against Loss or Damage by
Fire or Lightning as herein appears, the Property herein described . . .

2. This policy including any renewal thereof and/or any endorsement thereon is not in
force until the premium has been fully paid to and duly receipted by the Company in the
manner provided herein.

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

broker or Company official, shall be deemed invalid and of no effect.

xxx xxx xxx

Except only in those specific cases where corresponding rules and regulations which are
or may hereafter be in force provide for the payment of the stipulated premiums in
periodic installments at fixed percentage, it is hereby declared, agreed and warranted
that this policy shall be deemed effective, valid and binding upon the Company only when
the premiums therefor have actually been paid in full and duly acknowledged in a receipt
signed by any authorized official or representative/agent of the Company in such manner
as provided herein. (emphasis supplied). 6

Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only been
partially paid and the balance paid only after the peril insured against has occurred, the insurance
contract did not take effect and the insured cannot collect at all on the policy. This is fully supported by
Sec. 77 of the Insurance Code which provides

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies (emphasis supplied).

Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been
paid." This leads us to the manner of payment envisioned by the law to make the insurance policy

84
operative and binding. For whatever judicial construction may be accorded the disputed phrase must
ultimately yield to the clear mandate of the law. The principle that where the law does not distinguish the
court should neither distinguish assumes that the legislature made no qualification on the use of a general
word or expression. In Escosura v. San Miguel Brewery, Inc., 7 the Court through Mr. Justice Jesus G.
Barrera, interpreting the phrase "with pay" used in connection with leaves of absence with pay granted to
employees, ruled

. . . the legislative practice seems to be that when the intention is to distinguish between
full and partial payment, the modifying term is used . . .

Citing C.A. No. 647 governing maternity leaves of married women in government, R. A. No. 679
regulating employment of women and children, R.A. No. 843 granting vacation and sick leaves to
judges of municipal courts and justices of the peace, and finally, Art. 1695 of the New Civil Code
providing that every househelp shall be allowed four (4) days vacation each month, which laws
simply stated "with pay," the Court concluded that it was undisputed that in all these laws the
phrase "with pay" used without any qualifying adjective meant that the employee was entitled to
full compensation during his leave of absence.

Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial payment of
the premium due and the express stipulation thereof to the contrary, petitioners rely heavily on the 1967
case of Philippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc. 8 where the Court through Mr.
Justice Arsenio P. Dizon sustained the ruling of the trial court that partial payment of the premium made
the policy effective during the whole period of the policy. In that case, the insurance company
commenced action against the insured for the unpaid balance on a fire insurance policy. In its defense
the insured claimed that nonpayment of premium produced the cancellation of the insurance contract.
Ruling otherwise the Court held

It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by
appellee and delivered to appellant, and that on September 22 of the same year, the
latter paid to the former the sum of P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no doubt at all that, as between the
insurer and the insured, there was not only a perfected contract of insurance but a
partially performed one as far as the payment of the agreed premium was concerned.
Thereafter the obligation of the insurer to pay the insured the amount, for which the policy
was issued in case the conditions therefor had been complied with, arose and became
binding upon it, while the obligation of the insured to pay the remainder of the total
amount of the premium due became demandable.

The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual
scenario is different. In Phoenix it was the insurance company that sued for the balance of the premium,
i.e., it recognized and admitted the existence of an insurance contract with the insured. In the case before
us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is not in force until the
premium has been fully paid and duly receipted by the Company . . . Resultantly, it is correct to say that in
Phoenix a contract was perfected upon partial payment of the premium since the parties had not
otherwise stipulated that prepayment of the premium in full was a condition precedent to the existence of
a contract.

In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the
premium without any other precondition to its enforceability as in the instant case, the insurer in effect had
shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its right to
collect premium, or exact specific performance from the insured. This is not so here. By express
agreement of the parties, no vinculum juris or bond of law was to be established until full payment was
effected prior to the occurrence of the risk insured against.

85
 9
In Makati Tuscany Condominium Corp. v. Court of Appeals the parties mutually agreed that the
premiums could be paid in installments, which in fact they did for three (3) years, hence, this Court
refused to invalidate the insurance policy. In giving effect to the policy, the Court quoted with approval the
Court of Appeals

The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the
entire premium. Here, the parties . . . agreed to make the premiums payable in
installments, and there is no pretense that the parties never envisioned to make the
insurance contract binding between them. It was renewed for two succeeding years, the
second and third policies being a renewal/replacement for the previous one. And the
insured never informed the insurer that it was terminating the policy because the terms
were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the parties may not
agree to make the insurance contract valid and binding without payment of premiums,
there is nothing in said section which suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider the contract as valid and binding
upon
payment of the first premium. Otherwise we would allow the insurer to renege on its
liability under the contract, had a loss incurred (sic) before completion of payment of the
entire premium, despite its voluntary acceptance of partial payments, a result eschewed
by basic considerations of fairness and equity . . .

These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or
implied, of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in
Phoenix, and expressly, by agreeing to make premiums payable in installments as in Tuscany. But
contrary to the stance taken by petitioners, there is no waiver express or implied in the case at bench.
Precisely, the insurer and the insured expressly stipulated that (t)his policy including any renewal thereof
and/or any indorsement thereon is not in force until the premium has been fully paid to and duly receipted
by the Company . . . and that this policy shall be deemed effective, valid and binding upon the Company
only when the premiums therefor have actually been paid in full and duly acknowledged.

Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of the
Insurance Code the payment of partial premium by the assured in this particular instance should not be
considered the payment required by the law and the stipulation of the parties. Rather, it must be taken in
the concept of a deposit to be held in trust by the insurer until such time that the full amount has been
tendered and duly receipted for. In other words, as expressly agreed upon in the contract, full payment
must be made before the risk occurs for the policy to be considered effective and in force.

Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever
resulted from the fractional payment of premium. The insurance contract itself expressly provided that the
policy would be effective only when the premium was paid in full. It would have been altogether different
were it not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be insured by
FORTUNE under the terms of its policy and they freely opted to adhere thereto.

Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the
10
intention of the parties as expressed in the policy. Courts have no other function but to enforce the
same. The rule that contracts of insurance will be construed in favor of the insured and most strongly
against the insurer should not be permitted to have the effect of making a plain agreement ambiguous
11
and then construe it in favor of the insured. Verily, it is elemental law that the payment of premium is
requisite to keep the policy of insurance in force. If the premium is not paid in the manner prescribed in
the policy as intended by the parties the policy is ineffective. Partial payment even when accepted as a

86
partial payment will not keep the policy alive even for such fractional part of the year as the part payment
bears to the whole payment. 12

Applying further the rules of statutory construction, the position maintained by petitioners becomes even
13
more untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of Appeals,
speaks only of two (2) statutory exceptions to the requirement of payment of the entire premium as a
prerequisite to the validity of the insurance contract. These exceptions are: (a) in case the insurance
coverage relates to life or industrial life (health) insurance when a grace period applies, and (b) when the
insurer makes a written acknowledgment of the receipt of premium, this acknowledgment being declared
by law to be then conclusive evidence of the premium payment. 14

A maxim of recognized practicality is the rule that the expressed exception or exemption excludes others.
Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates to exclude
other exceptions; conversely, those which are not within the enumerated exceptions are deemed included
in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the law has
not expressly excepted partial payments, there is no valid and binding contract. Hence, in the absence of
clear waiver of prepayment in full by the insurer, the insured cannot collect on the proceeds of the policy.

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance
is primarily a risk distributing device, a mechanism by which all members of a group exposed to a
particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses
occur due to exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of
being compelled upon the happening of the contingency to pay the entire sum agreed upon, and the
insured, that of parting with the amount required as premium, without receiving anything therefor in case
the contingency does not happen. To ensure payment for these losses, the law mandates all insurance
companies to maintain a legal reserve fund in favor of those claiming under their policies. 15 It should be
understood that the integrity of this fund cannot be secured and maintained if by judicial fiat partial
offerings of premiums were to be construed as a legal nexus between the applicant and the insurer
despite an express agreement to the contrary. For what could prevent the insurance applicant from
deliberately or wilfully holding back full premium payment and wait for the risk insured against to transpire
and then conveniently pass on the balance of the premium to be deducted from the proceeds of the
insurance? Worse, what if the insured makes an initial payment of only 10%, or even 1%, of the required
premium, and when the risk occurs simply points to the proceeds from where to source the balance? Can
an insurance company then exist and survive upon the payment of 1%, or even 10%, of the premium
stipulated in the policy on the basis that, after all, the insurer can deduct from the proceeds of the
insurance should the risk insured against occur?

Interpreting the contract of insurance stringently against the insurer but liberally in favor of the insured
despite clearly defined obligations of the parties to the policy can be carried out to extremes that there is
the danger that we may, so to speak, "kill the goose that lays the golden egg." We are well aware of
insurance companies falling into the despicable habit of collecting premiums promptly yet resorting to all
kinds of excuses to deny or delay payment of just insurance claims. But, in this case, the law is manifestly
on the side of the insurer. For as long as the current Insurance Code remains unchanged and partial
payment of premiums is not mentioned at all as among the exceptions provided in Sees. 77 and 78, no
policy of insurance can ever pretend to be efficacious or effective until premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment and full satisfaction. 16 It must be emphasized
here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance
firms are enabled to offer the assurance of security to the public at favorable rates. But once payment of
premium is left to the whim and caprice of the insured, as when the courts tolerate the payment of a mere
P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the balance to be

87
paid even after the risk insured against has occurred, as petitioners have done in this case, on the
principle that the strength of the vinculum juris is not measured by any specific amount of premium
payment, we will surely wreak havoc on the business and set to naught what has taken actuarians
centuries to devise to arrive at a fair and equitable distribution of risks and benefits between the insurer
and the insured.

The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of
statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their
liability and to impose whatever conditions they deem best upon their obligations not inconsistent with
1
public policy. 7 The validity of these limitations is by law passed upon by the Insurance Commissioner
who is empowered to approve all forms of policies, certificates or contracts of insurance which insurers
intend to issue or deliver. That the policy contract in the case at bench was approved and allowed
issuance simply reaffirms the validity of such policy, particularly the provision in question.

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24 March
1995 is AFFIRMED.

SO ORDERED.

Kapunan and Hermosisima, Jr., JJ., concur.

Separate Opinions

VITUG, J., dissenting:

Does a mere partial payment of the premium on a fire insurance policy render it efficacious? In the
affirmative, is the contract in force conformably with its full face value, or is it merely pro tanto effective?
These issues are sought by the parties to be addressed in the instant petition for review.

The policy here involved was made out on 22 January 1987 by private respondent Fortune Life and
General Insurance Co., Inc. ("Fortune"), in favor of "Violeta R. Tibay and/or Nicolas Roraldo" against the
risk of fire on their 2-storey building. The insurance was for P600,000.00 covering the period from 23
January 1987 to 23 January 1988. Petitioner Violeta Tibay made, on 23 January 1987, a partial payment
of P600.00 out of the total agreed premium of P2,983.50 on the policy.

On 08 March 1987, the insured building was totally gutted by fire. Petitioner Violeta made full payment of
the premium two days later, or on 10 March 1987, the same date that she filed a claim on the insurance
policy. The payment was nevertheless accepted by Fortune. The insurance claim was referred to
Fortune's adjuster, Goodwill Adjustment Services, Inc. ("GASI"), which thereupon wrote petitioners for the
necessary documents to commence the investigation and the processing of the claim. Petitioners
furnished GASI with, among other things, the proof of loss.

Fortune, in the end, refused to pay the loss stating that it was not liable under the policy, the agreed
premium not having been paid in full at the time of loss. Then, in a letter dated 11 June 1987, Fortune
formally denied petitioner Violeta's claim for these reasons: (a) violation of Policy Condition No. 2; and (b)
violation of Section 77 of the Insurance Code.

Petitioner Violeta referred the matter to the Insurance Commission; no settlement, however, was reached
in that office.

88
Ultimately, on 03 March 1988, petitioners filed their complaint against Fortune.

On 19 July 1990, the trial court ruled in favor of petitioners and held private respondent Fortune liable.

On appeal interposed by Fortune, respondent Court of Appeals, in its decision of 24 March 1995,
reversed the trial court; thus:

WHEREFORE, the Decision appealed from is hereby REVERSED with MODIFICATION

in that defendant-appellant Fortune Life & General Insurance Co. Inc. is declared not
liable to plaintiff-appellees Tibay et al. under the subject fire insurance policy; however,
said defendant-appellant is ORDERED to return to plaintiff-appellees the paid premium in
the amount of P2,983.50, plus 12% interest counted from 10 March 1987 until fully paid.
1
No costs.

The appellate court justified its reversal of the trial court's decision on the following ratiocination:

Promptness of payment is essential in the business of life insurance. All the calculations
of the company are based on the hypothesis of prompt payments. They not only calculate
on the receipt of the premiums when due, but on the compounding interest upon them. It
is on this basis that they are enabled to offer assurance at the favorable rates they do.
(Constantino vs. Asia Life Insurance Co., 87 SCRA 248) Taking this principle, and the
above stipulation in the contract into account, the failure of appellants to fully pay their
premium prevented the contract of insurance from becoming binding an Fortune.

Further, it is elementary that contract of insurance is uberrimae fidae and demand the
most abundant good faith. (Velasco us. Apostol, G.R. No. 44588, 173 SCRA 228,
[1989]). Violeta made a full payment of the premium two days after the building insured
was destroyed by the fire. On the same day, Violeta filed a claim based on the fire policy.
This series of acts is tainted with misrepresentation and violates the uberrimae fidae
principle of insurance contract.

The act of Fortune in referring the claim to GASI does not constitute estoppel. Violeta had
entered into a "Non-Waiver Agreement" with the adjuster on March 28, 1987 which
permitted Fortune to claim non-payment of premium as a defense to defeat the claim of
Tibay notwithstanding its referral of the claim to the adjuster. 2

Hence, the petition for review.

I see merit in the petition. Section 77 of the Insurance Code reads:

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding
unless and until the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies.

The payment of premium, subject to the stated exceptions, is deemed by the foregoing provisions
to be an element essential to establish the juridical relation between the insurer and the insured.
Observe, however, that the law neither requires, nor measures the strength of the vinculum juris
by, any specific amount of premium payment. It should thus be enough that payment on the
premium, partly or in full, is made by the insured which the insurer accepts. In fine, it is either that
a juridical tie exists (by such payment) or that it is not extant at all (by an absence thereof). Once

89
 the juridical relation comes into being, the full efficacy, not merely pro tanto, of the insurance
contract naturally follows. Verily, not only is there an insurance perfected but also a partially
3
performed contract. In case of loss, recovery on the basis of the full contract value, less the
unpaid premium can accordingly be had; 4 conversely, if no loss occurs, the insurer can demand
the payment of the unpaid balance of the premium. The insured, on the one hand, cannot avoid
the obligation of paying the balance of the premium while the insurer, upon the other hand,
cannot treat the contract as valid only for the purpose of collecting premiums and as invalid for
the purpose of indemnity. 5

Nor would the non-payment of the balance due result in an AUTOMATIC cancellation of the insurance
contract; otherwise, the effect would be to place exclusively in the hands of one of the contracting parties
6
the right to decide whether the contract should stand or not in possible disregard of the MUTUALITY OF
7
CONTRACTS RULE. Instead, the parties should be able to demand from each other the performance of
whatever obligations they had assumed or, if desired, sue timely for the rescission of the contract. 8 In the
meanwhile, the contract endures, and an occurrence of the risk insured against triggers the insurer's
9
liability. Forthwith, legal compensation arises under the pertinent provisions of the Civil Code under
which the mutual debts are, to the extent of the concurrent amount, extinguished by mere operation of
law.

The net result, such as in the case at bench, is that the insurer's liability to the insured would simply be
reduced by the balance of the premium still due from the latter. Thus, it becomes TOTALLY
INCONSEQUENTIAL whether the insured still remits or no longer remits payment of the balance of the
premium, the insurer's liability theretofore having already attached.

Fortune calls attention to the following provisions of the insurance policy, to wit:

This Policy of Insurance Witnesseth, That only after payment to the Company in
accordance with Policy Condition No. 2 of the total premiums by the insured as stipulated
above for the period afore-mentioned for insuring against Loss or Damage by Fire or
Lightning as herein appears, the Property herein described, and contained, or described
herein, and not elsewhere, in the sum or several sums opposite thereto.

xxx xxx xxx

2. This policy including any renewal thereof and/or any endorsement thereon is not in
force until the premium has been fully paid to and duly receipted by the Company in the
manner provided herein.

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

broker or Company official, shall be deemed invalid and of no effect.

No payment in respect of any premium shall be deemed to be payment to the Company

unless a printed form of receipt for the same signed by an official or duly appointed Agent
of the Company shall have been given to the insured, except when such printed receipt is
not available at the time of payment and the Company or its representative accepts the
premium in which case a temporary receipt other than the printed form may be issued in
lieu thereof.

Except only in those specific cases where corresponding rules and regulations which not
are or may hereafter be in force provide for the payment of the stipulated premiums in
periodic installments at fixed percentage, it is hereby declared, agreed and warranted
that this policy shall be deemed effective, valid and binding upon the Company only when
the premiums therefor have actually been paid in full and duly acknowledged in a receipt

90
 signed by any authorized official or representative/agent of the Company in such manner
as provided herein. 10 (Emphasis supplied.)

It must here be noted that the insured HAD MADE, and the insurer HAD ACCEPTED, a partial
premium payment on the policy weeks before the risk insured against took place.

An insurance is an aleatory contract which, unlike a conditional agreement whose efficacy is dependent
on stated condition, is at once effective upon its perfection although the occurrence of a condition or
event may later dictate the demandability of certain obligations thereunder. Founded on the autonomy of
contracts, the parties, of course, are generally not prevented from imposing conditions that alone could
trigger the contract's obligatory force. These conditions, however, must not be contrary to law, morals,
11
good customs, public order or public policy.

To say that the provisions in the policy issued by Fortune, i.e., that the insurance shall not "be . . . in force
until the premium has been fully paid," and that it "shall be deemed effective, valid and binding upon the
company only when the premiums therefor have actually been paid in full and duly acknowledged,"
override the efficaciousness of the insurance contract despite the payment and acceptance 12 of a part of
the premium would be opposed not only to the precepts heretofore adverted to on the correct application
of Section 77, but also to the intent and spirit of Section 78, of the Insurance Code

An acknowledgment in a policy or contract of insurance of the receipt of premium is

conclusive evidence of its payment, so far as to make the policy binding, notwithstanding
any stipulation therein that it shall not be binding until the premium is actually paid.
(emphasis supplied.)

which, like the aforequoted Section 77 of the Code, is not dependent on how much premium has
been paid.

It seems quite clear to me that on the day premium payment is made by the insured, albeit only a portion
of it, so long as it is accepted by the insurer, the insurance coverage becomes effective and binding, any
stipulation in the policy to the contrary notwithstanding. The insurer is not without recourse; all that it
needs is not to accept, if it wants to, any premium payment of less than full. But if it does accept payment,
reason dictates that it should not be allowed to deny the insurance contract upon which very existence
that payment is predicated.

Accordingly, I vote for the reversal of the decision appealed from and the reinstatement of the ruling of the
trial court.

Padilla, J., concurs.

Footnotes

1 Memorandum for Respondent Fortune Life and General Insurance Co., Inc., p. 2; Rollo, p. 79.
2 Rollo, pp. 17-18.
3 Id., p. 22; CA Decision penned by Justice Jesus M. Elbinias with Justices Lourdes K. Tayao-Jaguros and B. A.
Adefuin-De la Cruz concurring.
4 Sec. 2, par. (1), The Insurance Code (P.D. No. 612, as amended), prom. 18 December 1974.
5 Glaraga v. Sun Life Assurance Co., 49 Phil. 737 (1926).
6 Rollo, pp. 44-45.
7 114 Phil. 225, 229 (1962).
8 No. L-22684, 31 August 1967, 20 SCRA 1271, 1272.
9 G.R. No. 95546, 6 November 1992, 215 SCRA 462, 466.
10 Habaz v. Employers' Fire Insurance Co., 243 F2d 784; Mercury Insurance Co. v. McClellan, 225 SW2d 931.
11 Rew v. Beneficial Standard Life Insurance Co., 250 P2d 956.

91
 12 See Klein v. Avemco Insurance Co., 216 S. E. 2d 479, 481 citing Clifton v. Insurance Co., 84 S. E. 817.
13 G R. No. 102253, 2 June 1995, 244 SCRA 744, 747.
14 Secs. 77 and 78. Sec. 78 provides that (a)n acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until the premium is actually paid.
15 Sec. 11, 12 and 13, Title 5, The Insurance Code.
16 Vance, Handbook on the Law on Insurance, 3d Ed., p. 319.
17 Fortune Insurance and Surety Co., Inc. v. Court of Appeals, G.R. No. 115278, 23 May 1995, 224 SCRA 308,
317.
VITUG, J., dissenting:
1 Rollo. p. 22.
2 Rollo, p. 21.
3 See Phil. Phoenix Surety and Insurance Co., Inc. vs. Woodworks Inc., 20 SCRA 1271.
4 See Note 9.
5 See Insurance Law and Practice by John Appleman. Vol. 15 p. 331.
6 Commentaries and Jurisprudence on Philippine Commercial Laws by Teodorico C. Martin, Vol. 2, 1986 ed. pp.
118-119.
7 Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.
8 See Footnote 6.
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other:
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy commenced by third persons and
communicated in due time to the debtor.
10 Rollo, pp. 44-45.
11 Art. 1306. The contracting parties may establish such stipulations, clauses. terms and conditions as they may
deem convenient, provided they are not contrary to laws, morals, good customs public order or public policy.
12 An insurer is bound by the acts or representations of its agents in the usual course of business.

----------

FIRST DIVISION
G.R. No. 137172. June 15, 1999

UCPB GENERAL INSURANCE CO., INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

DECISION
PARDO, J.:

[1]
The case is an appeal via certiorari seeking to set aside the decision of the Court of Appeals,
affirming with modification that of the Regional Trial Court, Branch 58, Makati, ordering petitioner to pay
respondent the sum of P18,645,000.00, as the proceeds of the insurance coverage of respondent's
property razed by fire; 25% of the total amount due as attorney's fees and P25,000.00 as litigation
expenses, and costs.
The facts are undisputed and may be related as follows:

92
 On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's various
property described therein against fire, for the period from May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not to renew them upon expiration of
their terms on May 22, 1992. Petitioner advised respondent's broker, Zuellig Insurance Brokers, Inc. of its
intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the policies at the
address stated in the policies.
On June 13, 1992, fire razed respondent's property covered by three of the insurance policies
petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5) manager's
checks in the total amount of P225,753.95, representing premium for the renewal of the policies from May
22, 1992 to May 22, 1993. No notice of loss was filed by respondent under the policies prior to July 14,
1992.
On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of the insured
property razed by fire.
On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's checks that
it tendered, and at the same time rejected respondent's claim for the reasons (a) that the policies had
expired and were not renewed, and (b) that the fire occurred on June 13, 1992, before respondent's
tender of premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a civil
complaint against petitioner for recovery of P18,645,000.00, representing the face value of the policies
covering respondent's insured property razed by fire, and for attorney's fees. [2]
On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an answer to the
complaint. It alleged that the complaint "fails to state a cause of action"; that petitioner was not liable to
respondent for insurance proceeds under the policies because at the time of the loss of respondent's
property due to fire, the policies had long expired and were not renewed. [3]
After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered decision,
the dispositive portion of which reads:
"WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant, as follows:
"(1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of P225,753.95
(refused by the defendant) as full payment of the corresponding premiums for the replacement-renewal
policies for Exhibits A, B, C, D and E;
"(2) Declaring plaintiff to have fully complied with its obligation to pay the premium thereby rendering
the replacement-renewal policy of Exhibits A, B, C, D and E effective and binding for the duration May 22,
1992 until May 22, 1993; and, ordering defendant to deliver forthwith to plaintiff the said replacement-
renewal policies;
"(3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and August 9,
1991 to August 9, 1992, respectively; and
"(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing the latter's
claim for indemnity under Exhibits A, B & C and/or its replacement-renewal policies; (b) 25% of the total
amount due as and for attorney's fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the
costs of suit.
"All other claims and counterclaims asserted by the parties are denied and/or dismissed, including
plaintiff's claim for interests.

93
 "SO ORDERED.
"Makati, Metro-Manila, March 10, 1993.
"ZOSIMO Z. ANGELES
[4]
Judge.
In due time, petitioner appealed to the Court of Appeals. [5]
On September 7, 1998, the Court of Appeals promulgated its decision [6] affirming that of the
Regional Trial Court with the modification that item No. 3 of the dispositive portion was deleted, and the
award of attorney's fees was reduced to 10% of the total amount due. [7]
The Court of Appeals held that following previous practise, respondent was allowed a sixty (60) to
ninety (90) day credit term for the renewal of its policies, and that the acceptance of the late premium
payment suggested an understanding that payment could be made later.
Hence, this appeal.
By resolution adopted on March 24, 1999, we required respondent to comment on the petition, not to
file a motion to dismiss within ten (10) days from notice. [8] On April 22, 1999, respondent filed its
comment. [9]
Respondent submits that the Court of Appeals correctly ruled that no timely notice of non-renewal
was sent. The notice of non-renewal sent to broker Zuellig which claimed that it verbally notified the
insurance agency but not respondent itself did not suffice. Respondent submits further that the Court of
Appeals did not err in finding that there existed a sixty (60) to ninety (90) days credit agreement between
UCPB and Masagana, and that, finally, the Supreme Court could not review factual findings of the lower
court affirmed by the Court of Appeals. [10]
We give due course to the appeal.
The basic issue raised is whether the fire insurance policies issued by petitioner to the respondent
covering the period May 22, 1991 to May 22, 1992, had expired on the latter date or had been extended
or renewed by an implied credit arrangement though actual payment of premium was tendered on a later
date after the occurrence of the risk (fire) insured against.
The answer is easily found in the Insurance Code. No, an insurance policy, other than life, issued
originally or on renewal, is not valid and binding until actual payment of the premium. Any agreement to
the contrary is void. [11] The parties may not agree expressly or impliedly on the extension of credit or time
to pay the premium and consider the policy binding before actual payment.
The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, [12] cited by the Court of Appeals, is not
applicable. In that case, payment of the premium was in fact actually made on December 24, 1981, and
the fire occurred on January 18, 1982. Here, the payment of the premium for renewal of the policies was
tendered on July 13, 1992, a month after the fire occurred on June 13, 1992. The assured did not even
give the insurer a notice of loss within a reasonable time after occurrence of the fire.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
in CA-G.R. CV No. 42321. In lieu thereof, the Court renders judgment dismissing respondent's complaint
and petitioner's counterclaims thereto filed with the Regional Trial Court, Branch 58, Makati City, in Civil
Case No. 92-2023. Without costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Melo, Kapunan, and Ynares-Santiago, JJ., concur.

FOOTNOTES
[1]
In CA-G.R. CV No. 42321, promulgated on September 7, 1998. Alio-Hormachuelos, J., ponente, Guerrero

94
 and Villarama, Jr., JJ., concurring.
[2]
RTC Original Record, pp. 1-10.
[3]
RTC Original Record, pp. 103-117.
[4]
RTC Original record, pp. 454-466.
[5]
Docketed as CA-G.R. CV No. 42321.
[6]
Alio-Hormachuelos, J., ponente, Guerrero and Villarama, Jr. JJ., concurring.
[7]
Petition, Annex A, Rollo, pp. 38-54.
[8]
Rollo, p. 72.
[9]
Rollo, pp. 73-106.
[10]
Comment, Rollo, on p. 84.
[11]
Section 77, Insurance Code of the Philippines; Valenzuela vs. Court of Appeals, 191 SCRA 1; South Sea
Surety and Insurance Co., Inc. vs. Court of Appeals, 244 SCRA 744; Tibay vs. Court of Appeals, 275 SCRA 126.
[12]
154 SCRA 672.

----------

EN BANC
G.R. No. 137172. April 4, 2001

UCPB GENERAL INSURANCE CO. INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

RESOLUTION
DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision [1] of the
Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent
to consign the sum of P225,753.95 as full payment of the premiums for the renewal of the five insurance
policies on Respondents properties; (b) declaring the replacement-renewal policies effective and binding
from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as
indemnity for the burned properties covered by the renewal-replacement policies. The modification
consisted in the (1) deletion of the trial courts declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the award of the attorneys fees from 25% to 10% of
the total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are summarized by the Court
of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies
(Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991
to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties located at 2410-2432 and
2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and
defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of
P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No.
62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana
made its formal demand for indemnification for the burned insured properties. On the same day,
defendant returned the five (5) manager's checks stating in its letter (Exhibit "R"/"8", Record, p.
192) that it was rejecting Masagana's claim on the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed for another term;

95
 b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took place last June
13, 1992, or before tender of premium payment."

(Record, p. 5)
Hence Masagana filed this case.
The Court of Appeals disagreed with Petitioners stand that Respondents tender of payment of the
premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond the
effective date of renewal as provided under Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the end
of the policy period mails or delivers to the assured at the address shown in the policy notice of
its intention not to renew the policy or to condition its renewal upon reduction of limits or
elimination of coverages, the assured shall be entitled to renew the policy upon payment of the
premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had
procured insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day
credit term for the renewal of the policies. Such a practice had existed up to the time the claims were
filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on
May 7, 1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No.
4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from
May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was collected
by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V"
and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from
May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only
on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but premium was
paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-1"). Fire Insurance Policy
No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7,
1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1").
Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990
was issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic]
under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering
risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's
sister company) dated December 10, 1988 but premium therefor was paid only on February 15,
1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was
issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for
insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire
Insurance Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17,
1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990
(Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989
but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303
was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989
under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15,
1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the following circumstances constitute preponderant
proof that no timely notice of non-renewal was made by Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350) from Ultramar

96
 Reinsurance Brokers that plaintiffs reinsurance facility had been confirmed up to 67.5% only on
April 15, 1992 as indicated on Exhibit 11. Apparently, the notice of non-renewal (Exhibit 7,
Record, p. 320) was sent not earlier than said date, or within 45 days from the expiry dates of
the policies as provided under Policy Condition No. 26; (2) Defendant insurer unconditionally
accepted, and issued an official receipt for, the premium payment on July 1[3], 1992 which
indicates defendant's willingness to assume the risk despite only a 67.5% reinsurance
cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to investigate
plaintiffs claim as shown by the letter dated July 17, 1992 (Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be whether the fire insurance policies
issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 had
been extended or renewed by an implied credit arrangement though actual payment of premium was
tendered on a later date and after the occurrence of the (fire) risk insured against. We resolved this issue
in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of
Appeals [2]; South Sea Surety and Insurance Co., Inc. v. Court of Appeals [3]; and Tibay v. Court of
Appeals. [4] Accordingly, we reversed and set aside the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own findings of facts, which are not in accord with those of
the trial court and the Court of Appeals. The courts below correctly found that no notice of non-renewal
was made within 45 days before 22 May 1992, or before the expiration date of the fire insurance policies.
Thus, the policies in question were renewed by operation of law and were effective and valid on 30 June
1992 when the fire occurred, since the premiums were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the
extension of credit or time to pay the premium nor consider a policy binding before actual payment. It
urges the Court to take judicial notice of the fact that despite the express provision of Section 77 of the
Insurance Code, extension of credit terms in premium payment has been the prevalent practice in the
insurance industry. Most insurance companies, including Petitioner, extend credit terms because Section
77 of the Insurance Code is not a prohibitive injunction but is merely designed for the protection of the
parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of a policy
notwithstanding non-payment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of
Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on the 60-
to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days after the due
dates. By extending credit and habitually accepting payments 60 to 90 days from the effective dates of
the policies, it has implicitly agreed to modify the tenor of the insurance policy and in effect waived the
provision therein that it would pay only for the loss or damage in case the same occurred after payment of
the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It argues that both the trial
court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to
Respondent a notice of non-renewal and sent by personal delivery a copy thereof to Respondents
broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the notice of non-
renewal. A reading of Section 66 of the Insurance Code readily shows that in order for an insured to be
entitled to a renewal of a non-life policy, payment of the premium due on the effective date of renewal
should first be made. Respondents argument that Section 77 is not a prohibitive provision finds no
authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for
reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed duly
established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies
were annually renewed.

97
 2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the
premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all
that the notice sent by ordinary mail was received by Respondent, and the copy thereof
allegedly sent to Zuellig was ever transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid
by Respondent within the 60- to 90-day credit term and were duly accepted and received by
Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978
(P.D. No. 1460) must be strictly applied to Petitioners advantage despite its practice of granting a 60- to
90-day credit term for the payment of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18
December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the
Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read:
SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the peril insured against, unless there is clear agreement to grant the insured credit
extension of the premium due. No policy issued by an insurance company is valid and binding
unless and until the premium thereof has been paid. (Underscoring supplied)
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an
agreement to extend the period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of
premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, [5]
wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments
of the premium and partial payment has been made at the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the premiums were paid on installments.
The records clearly show that the petitioners and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered payment of the premiums.
The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those
three years, the insurer accepted all the installment payments. Such acceptance of payments
speaks loudly of the insurers intention to honor the policies it issued to petitioner. Certainly,
basic principles of equity and fairness would not allow the insurer to continue collecting and
accepting the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.

98
 Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its decision:
While the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not prepared to rule that the request to make
installment payments duly approved by the insurer would prevent the entire contract of
insurance from going into effect despite payment and acceptance of the initial premium or first
installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the
condition of prepayment by making an acknowledgment in the insurance policy of receipt of
premium as conclusive evidence of payment so far as to make the policy binding despite the
fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating
that the policy is valid even if premiums are not paid, but does not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good
customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is an
understanding to allow insured to pay premiums in installments not so prescribed. At the very
least, both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a
credit term within which to pay the premiums. That agreement is not against the law, morals, good
customs, public order or public policy. The agreement binds the parties. Article 1306 of the Civil Code
provides:
ART. 1306. The contracting parties may establish such stipulations clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of
premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section,
since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77.
WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a
new one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a
reversible error was committed by the Court of Appeals in its challenged decision, which is hereby
AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.

Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr., and
Sandoval-Gutierrez, JJ., concur.
Vitug, J., Please see separate opinion.
Melo, J., I join the dissents of Justices Vitug and Pardo.
Pardo, J., I dissent. See attached.
Puno and Quisumbing, JJ., I join the dissent of J. Pardo.

FOOTNOTES
[1]
Rollo, 38.

99
[2]
191 SCRA 1 [1990].
[3]
244 SCRA 744 [1995].
[4]
257 SCRA 126 [1996] (erroneously stated in the decision as 275 SCRA, 126).
[5]
215 SCRA 463 [1992].

100
IX. PRESCRIPTIVE PERIOD

Sun Insurance Office Ltd. vs. Court of Appeals, G.R. No. 89741 March 13, 1991

The right of the insured to the payment of his loss accrues from the happening of the
loss. However, the cause of action in an insurance contract does not accrue until the
insured's claim is finally rejected by the insurer. This is because before such final
rejection there is no real necessity for bringing suit.

----------

SECOND DIVISION

G.R. No. 89741 March 13, 1991

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
COURT OF APPEALS and EMILIO TAN, respondents.

Alfonso Felix, Jr., for petitioner.

William B. Devilles for private respondent.

DECISION

PARAS, J.:

This is a petition for review on certiorari of the June 20, 1989 decision 1 of the Court of Appeals in CA-
G.R. SP. Case No. 13848 affirming the November 3, 1987 and January 14, 1988 orders of the Regional
Trial Court 2 of Iloilo, Branch 27, in Civil Case No. 16817, denying the motion to dismiss and the
subsequent motion for reconsideration; and the August 22, 1989 resolution of the same court denying the
motion for reconsideration.

On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a P300,000.00
property insurance policy to cover his interest in the electrical supply store of his brother housed in a
building in Iloilo City. Four (4) days after the issuance of the policy, the building was burned including the
insured store. On August 20, 1983, Tan filed his claim for fire loss with petitioner, but on February 29,
1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan wrote petitioner, seeking
reconsideration of the denial of his claim. On September 3, 1985, Tan's counsel wrote the Insurer
inquiring about the status of his April 3, 1984 request for reconsideration. Petitioner answered the letter
on October 11, 1985, advising Tan's counsel that the Insurer's denial of Tan's claim remained unchanged,
enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985 (response to petition for
reconsideration). On November 20, 1985, Tan filed Civil Case No. 16817 with the Regional Trial Court of
Iloilo, Branch 27 but petitioner filed a motion to dismiss on the alleged ground that the action had already
prescribed. Said motion was denied in an order dated November 3, 1987; and petitioner's motion for
reconsideration was also denied in an order dated January 14, 1988.

101
Petitioner went to the Court of Appeals and sought the nullification of the said Nov. 3, 1987 and January
14, 1988 orders, but the Court of Appeals, in its June 20, 1989 decision denied the petition and held that
the court a quo may continue until its final termination.

A motion for reconsideration was filed, but the same was denied by the Court of Appeals in its resolution
of August 22, 1989 (Rollo, pp. 42-43).

Hence, the instant petition.

The Second Division of this Court, in its resolution of December 18, 1989 resolved to give due course to
the petition and to require the parties to submit simultaneous memoranda (Ibid., p. 56).

Petitioner raised two (2) issues which may be stated in substance, as follows:

WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION

INTERRUPTS THE TWELVE (12) MONTHS PRESCRIPTIVE PERIOD TO CONTEST
THE DENIAL OF THE INSURANCE CLAIM; and

II

WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED FINAL

ONLY IF IT CONTAINS WORDS TO THE EFFECT THAT THE DENIAL IS FINAL.

The answer to the first issue is in the negative.

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed
liberally in favor of the insured and strictly against the insurer company, yet, contracts of insurance, like
other contracts, are to be construed according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense (Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 [1988]).

Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the parties,
reads:

27. Action or suit clause If a claim be made and rejected and an action or suit be not
commenced either in the Insurance Commission or in any court of competent jurisdiction
within twelve (12) months from receipt of notice of such rejection, or in case of arbitration
taking place as provided herein, within twelve (12) months after due notice of the award
made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be
deemed to have been abandoned and shall not thereafter be recoverable hereunder.

As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken and
understood in its plain, ordinary and popular sense pursuant to the above-cited principle laid down by this
Court.

Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984 (Rollo,
pp. 50-52), admitted that he received a copy of the letter of rejection on April 2, 1984. Thus, the 12-month
prescriptive period started to run from the said date of April 2, 1984, for such is the plain meaning and
intention of Section 27 of the insurance policy.

102
While the question of whether or not the insured was definitely advised of the rejection of his claim
through the letter (Rollo, pp. 48-49) of petitioner dated February 29, 1984, may arise, the certainty of the
denial of Tan's claim was clearly manifested in said letter, the pertinent portion of which reads:

We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz, Iloilo
City.

We now have the report of our adjusters and after a thorough and careful review of the
same and the accompanying documents at hand, we are rejecting, much to our regrets,
liability for the claim under our policies for one or more of the following reasons:

1. xxx xxx xxx

2. xxx xxx xxx

For your information, we have referred all these matters to our lawyers for their opinion
as to the compensability of your claim, particularly referring to the above violations. It is
their opinion and in fact their strong recomendation to us to deny your claim. By this
letter, we do not intend to waive or relinquish any of our rights or defenses under our
policies of insurance.

It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire Insurance
Co., (2 SCRA 945 [1961]), to wit:

The condition contained in an insurance policy that claims must be presented within one
year after rejection is not merely a procedural requirement but an important matter
essential to a prompt settlement of claims against insurance companies as it demands
that insurance suits be brought by the insured while the evidence as to the origin and
cause of destruction have not yet disappeared.

In enunciating the above-cited principle, this Court had definitely settled the rationale for the necessity of
bringing suits against the Insurer within one year from the rejection of the claim. The contention of the
respondents that the one-year prescriptive period does not start to run until the petition for
reconsideration had been resolved by the insurer, runs counter to the declared purpose for requiting that
an action or suit be filed in the Insurance Commission or in a court of competent jurisdiction from the
denial of the claim. To uphold respondents' contention would contradict and defeat the very principle
which this Court had laid down. Moreover, it can easily be used by insured persons as a scheme or
device to waste time until any evidence which may be considered against them is destroyed.

It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the
Insurance Code, which states that:

Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time
for commencing an action thereunder to a period of less than one year from the time
when the cause of action accrues, is void.

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent's view, two rulings of this Court have been cited, namely, the case of
Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where the Court held:

103
 The right of the insured to the payment of his loss accrues from the happening of the
loss. However, the cause of action in an insurance contract does not accrue until the
insured's claim is finally rejected by the insurer. This is because before such final
rejection there is no real necessity for bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding
that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff
and a correlated obligation of the defendant in violation of the said legal right, the cause
of action does not accrue until the party obligated (surety) refuses, expressly or impliedly,
to comply with its duty (in this case to pay the amount of the bond).

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured's
cause of action or his right to file a claim either in the Insurance Commission or in a court of competent
jurisdiction commences from the time of the denial of his claim by the Insurer, either expressly or
impliedly.

But as pointed out by the petitioner insurance company, the rejection referred to should be construed as
the rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a
resolution of a petition for reconsideration, such should have been expressly stipulated.

Thus, to allow the filing of a motion for reconsideration to suspend the running of the prescriptive period of
twelve months, a whole new body of rules on the matter should be promulgated so as to avoid any
conflict that may be brought by it, such as:

a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it
be supported by arguments/affidavits/material evidence;

b) how many petitions for reconsideration should be permitted?

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the same cannot
be taken to mean the rejection of a petition for reconsideration as insisted by respondents. Such was
clearly not the meaning contemplated by this Court. The Insurance policy in said case provides that the
insured should file his claim, first, with the carrier and then with the insurer. The "final rejection" being
referred to in said case is the rejection by the insurance company.

PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and SET
ASIDE, and Civil Case No. 16817 filed with the Regional Trial Court is hereby DISMISSED.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

Footnotes
1 Penned by Justice Jesus M. Elbinias, and concurred in by Associate Justices Luis A. Javellana and Emeterio
C. Cui.
2 Penned by Judge Julian Ereno.

104
X. PROOF OF LOSS

Noda vs. Cruz Arnaldo, G.R. No. L-57322 June 22, 1987
Country Bankers Insurance Corp. vs. Lianga Bay and Community Multi-Purpose
Cooperative, G.R. No. 136914. January 25, 2002
DBP Pool of Accredited Insurance Companies vs. Radio Mindanao Network Inc.,
G.R. NO. 147039 January 27, 2006

While the insurer, and the Insurance Commissioner for that matter, have the right to reject
proofs of loss if they are unsatisfactory, they may not set up for themselves an arbitrary
standard of satisfaction. Substantial compliance with the requirements will always be deemed
sufficient.

----------

SECOND DIVISION

G.R. No. L-57322 June 22, 1987

NORMAN NODA, petitioner,

vs.
HONORABLE GREGORIA CRUZ-ARNALDO, in her capacity as Insurance Commissioner, and
ZENITH INSURANCE CORPORATION, respondents.

Redentor G. Guyala for petitioner.

Carpio, Layawan, Suarez & Associates Law Offices for private respondent ZIC.

German C. Alejandria for respondent Insurance Commissioner.

DECISION

FERNAN, J.:

This is a petition to review the decision of the Insurance Commissioner in I.C. No. 1070, entitled "Norman
Noda vs. Zenith Insurance Corporation" regarding the enforcement of two fire insurance policies.

In 1977, petitioner Norman R. Noda obtained from respondent Zenith Insurance Corporation, through its
general agent, Alico General Insurance Agency, two fire insurance policies: [1] No. F-03724 with a face
value of P30,000 covering the goods and stocks in trade in his business establishment at the market site
in Mangagoy, Bislig, Surigao del Sur for the period from March 3, 1977 to March 3, 1978 and [2] No. F-
03734 with a face value in the aggregate amount of P100,000 for the period from May 10, 1977 to May
10, 1978 and consisting of Item 1 for P40,000 on household furniture, fixtures, fittings and other personal
effects, and Item 2 for P60,000 on stocks in trade usual to petitioner's retail business situated in a two-
storey building at 039 Barreda St., also in Mangagoy, Bislig, Surigao del Sur, the ground floor of which
the petitioner used as store and the second floor as family quarters. 1

105
While both policies were in force, fire destroyed petitioner's insured properties at the market site on
September 5, 1977 and at Barreda St. on November 9, 1977. When petitioner failed to obtain indemnity
on his claims from respondent Zenith, he filed a complaint with the Insurance Commission on October 6,
1978 praying that respondent company be ordered to pay him "the sum of P130,000 representing the
value of the two [2] policies insured by respondent with interest at 12% per annum, plus damages,
attorney's fees and other expenses of litigation. ... 2

In its answer Zenith interposed that petitioner had no cause of action; that Policy No. F-03724 was not in
full force and effect at the time of the fire because the premium on the policy was not paid; that Zenith's
liability under Policy No. F-03734, if any, was limited to P15,472.50 in view of the co-insurance; and that
petitioner failed to substantiate his claim as to the value of the goods reputedly destroyed by fire and
consequently, Zenith could not be held answerable for the same. 3

While the case was pending with the Insurance Commission, Zenith, on March 4, 1980, settled petitioner I
s fire loss claim under Item 1 of Policy No. 03734 in the amount of P15,472.50. 4

On March 3, 1981, the Insurance Commissioner rendered the assailed decision. Brushing aside as
unfounded Zenith's allegation that Policy No. F-03734 was ineffectual because of non-payment of
premium, respondent Commissioner allowed petitioner to recover under said policy and ordered Zenith to
pay him the amount of P20,000 with legal interest from the date the complaint was filed, including P1,000
as attorney's fees but excluding the actual, moral and exemplary damages prayed for. 5 As for petitioner's
claim under Policy No. F-03734, she held that in view of the payment of P15,472.50 to petitioner, Zenith
had fully discharged its liability under said policy which covered furniture, fixtures, fittings and other
personal belongings of petitioner.

It must be noted that in allowing recovery under Policy No. F-03734, respondent Commissioner placed
much weight on the final report prepared by Dela Merced Adjustment Corporation, an independent fire,
marine and casualty adjuster contracted by Zenith to investigate the claims of its various policyholders.
Said report concluded that "the sound value of P26,666.67 represent[ed] the whole loss and damage"
incurred by petitioner, but with the application of the three-fourths loss clause, Zenith's liability was
reduced to P20,000. 6

Maintaining that respondent Commissioner failed to take into account that there were two separate items
under Policy No. F-03734 and that his P60,000 claim under Item 2, covering stocks in trade at Barreda
Street, still remained unresolved despite payment to him of P15,472.50, petitioner asked for a
reconsideration. Upon its denial, petitioner filed the instant petition for certiorari contending that the
Insurance Commissioner erred [1] in finding that with Zenith's payment of P15,472.50 under Policy No. F-
03734, that aspect of petitioner's claim had been fully settled, leaving only the claim of P30,000 under
Policy No. 03724 unsatisfied; [2] in denying petitioner's demand for P60,000 under Item 2 of Policy No. F-
03734 and [3] in not awarding in favor of petitioner exemplary damages for Zenith's unjustified and
wanton refusal to pay petitioner's claim under the said two insurance contracts. Petitioner did not dispute
in his appeal the award of P20,000 under Policy No. F-03724 and the denial of actual and moral
damages.

Zenith has admitted in its comment on the petition that its payment of P15,472.50 was only in satisfaction
of petitioner's claim under Item 1 of Policy No. F-03734. What is now in contention before us is petitioner's
claim under Item 2 of that policy which respondent Commissioner rejected because petitioner allegedly
relied merely on the report of Zenith's adjuster without bothering to produce supporting documents
indicating that he had made several purchases and suffered immense losses by reason of the fire.

We find that respondent Commissioner acted with grave abuse of discretion when she denied petitioner's
claim for indemnity under Policy No. F-03734 because of what she perceived as insufficient proof.

106
To prove the existence of the stocks in trade covered by Policy No. F-03734, petitioner offered his
7
testimony and that of his wife as well as documentary exhibits. The foregoing evidence for petitioner
preponderantly showed the presence of some P590,000 worth of goods in his retail store during the fire of
November 9, 1977.

While the insurer, and the Insurance Commissioner for that matter, have the right to reject proofs of loss if
they are unsatisfactory, they may not set up for themselves an arbitrary standard of satisfaction.
8
Substantial compliance with the requirements will always be deemed sufficient.

More significantly, this Court has observed that respondent Zenith introduced in evidence the final report
on Policy No. F-03734 submitted by its own adjuster, Dela Merced Adjustment Corporation. 9 Respondent
Commissioner however ignored such report, reasoning that with regard to Item 2 of Policy No. F-03734
the claim for loss of the stocks in trade was not successfully proven in view of petitioner's failure to
present evidence; that the adjuster's report deserved scant consideration since the allegations therein
were not substantiated, and that said report did not even make a recommendation for payment.

We disagree. A scrutiny of the abovementioned adjuster's report reveals that together with the formal
demand for full indemnity, petitioner submitted his income tax return for 1978, purchase invoices,
certification from his suppliers as to his purchases, and other supporting papers. The report even took
into account the appraisals of the other adjusters and concluded that the total loss sustained by petitioner
in his household effects and stocks in trade reached P379,302.12. But after apportioning said amount
among petitioner's six different in surers [the co-insurance being known to Zenith], the liability of Zenith
was placed at P60,592.10. It therefore recommended that Zenith pay the petitioner the amount of P60,
592.10.

Indeed, petitioner had every reason to expect that respondent Commissioner would give equal weight
and credence to the adjuster's report [on Policy No. F-03734] as she had done with the other. After all,
said document was offered as evidence by Zenith itself and could very well be considered as an
admission of its liability up to the amount recommended. It would have been pointless for Zenith to have
introduced said report as its evidence if it did not agree with its findings and ultimate proposals. Being in
the nature of an admission against interest, it is the best evidence which affords the greatest certainty of
the facts in dispute. 10 Respondent Commissioner should not have perfunctorily dismissed that particular
evidence as a worthless piece of paper.

We are convinced that petitioner has satisfactorily established his claim for indemnity under Policy No. F-
03734. In that respect, judgment was improperly rendered against him and the same must accordingly be
modified.

The denial of petitioner's demand for exemplary damages by respondent Commissioner must, however,
be sustained. There is no showing that Zenith, in contesting payment, had acted in a wanton, oppressive
11
or malevolent manner to warrant the imposition of corrective damages.

WHEREFORE, judgment is hereby rendered ordering respondent Zenith Insurance Corporation to pay
petitioner Norman R. Noda the sum of P60,592.10 with legal interest from the filing of the complaint until
full payment, but deducting therefrom the amount of P15,472.50 which it had earlier paid to petitioner.

SO ORDERED.

Gutierrez, Jr., Paras, Padilla, Bidin and Cortes, JJ., concur.

Footnotes
1 Rollo, p. 22.
2 Rollo, p. 20.

107
 3 Rollo, pp. 23-25.
4 Rollo, p. 38.
5 Rollo, p. 31.
6 Exh. 3, Rollo, p. 29.
7 Exh. C to C-44, E to E-3 and F to I-135.
8 Vance, Handbook on the Law of Insurance, 3rd Edition, p. 897.
9 Exh. 4, Rollo, pp. 39 and 41.
10 See Unson vs. Court of Appeals, L-25084, May 16, 1983, 122 SCRA 95.
11 Articles 2229 and 2232, Civil Code.

----------

SECOND DIVISION
G.R. No. 136914. January 25, 2002

COUNTRY BANKERS INSURANCE CORPORATION, petitioner,

vs.
LIANGA BAY AND COMMUNITY MULTI-PURPOSE COOPERATIVE, INC., respondent.

DECISION
DE LEON, JR., J.:

[1] [2]
Before us is a petition for review on certiorari of the Decision of the Court of Appeals dated December
[3]
29, 1998 in CA-G.R. CV Case No. 36902 affirming in toto the Decision dated December 26, 1991 of the
Regional Trial Court of Lianga, Surigao del Sur, Branch 28, in Civil Case No. L-518 which ordered
petitioner Country Bankers Insurance Corporation to fully pay the insurance claim of respondent Lianga
Bay and Community Multi-Purpose Cooperative, Inc., under Fire Insurance Policy No. F-1397, for loss
sustained as a result of the fire that occurred on July 1, 1989 in the amount of Two Hundred Thousand
Pesos (P200,000.00), with interest at twelve percent (12%) per annum from the date of filing of the
complaint until fully paid, as well as Fifty Thousand Pesos (P50,000.00) as actual damages, Fifty
Thousand Pesos (P50,000.00) as exemplary damages, Five Thousand Pesos (P5,000.00) as litigation
expenses, Ten Thousand Pesos (P10,000.00) as attorneys fees, and the costs of suit.
The facts are undisputed:
The petitioner is a domestic corporation principally engaged in the insurance business wherein it
undertakes, for a consideration, to indemnify another against loss, damage or liability from an unknown or
contingent event including fire while the respondent is a duly registered cooperative judicially declared
insolvent and represented by the elected assignee, Cornelio Jamero.
It appears that sometime in 1989, the petitioner and the respondent entered into a contract of fire
insurance. Under Fire Insurance Policy No. F-1397, the petitioner insured the respondents stocks-in-
trade against fire loss, damage or liability during the period starting from June 20, 1989 at 4:00 p.m. to
June 20, 1990 at 4:00 p.m., for the sum of Two Hundred Thousand Pesos (P200,000.00).
On July 1, 1989, at or about 12:40 a.m., the respondents building located at Barangay Diatagon, Lianga,
Surigao del Sur was gutted by fire and reduced to ashes, resulting in the total loss of the respondents
stocks-in-trade, pieces of furnitures and fixtures, equipments and records.
Due to the loss, the respondent filed an insurance claim with the petitioner under its Fire Insurance Policy
No. F-1397, submitting: (a) the Spot Report of Pfc. Arturo V. Juarbal, INP Investigator, dated July 1, 1989;
(b) the Sworn Statement of Jose Lomocso; and (c) the Sworn Statement of Ernesto Urbiztondo.
The petitioner, however, denied the insurance claim on the ground that, based on the submitted

108
documents, the building was set on fire by two (2) NPA rebels who wanted to obtain canned goods, rice
and medicines as provisions for their comrades in the forest, and that such loss was an excepted risk
under paragraph No. 6 of the policy conditions of Fire Insurance Policy No. F-1397, which provides:
This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly, of any of the following occurrences, namely:
xxx xxx xxx
(d) Mutiny, riot, military or popular uprising, insurrection, rebellion, revolution, military or
usurped power.
Any loss or damage happening during the existence of abnormal conditions (whether
physical or otherwise) which are occasioned by or through or in consequence, directly or
indirectly, of any of said occurrences shall be deemed to be loss or damage which is not
covered by this insurance, except to the extent that the Insured shall prove that such loss or
damage happened independently of the existence of such abnormal conditions.
Finding the denial of its claim unacceptable, the respondent then instituted in the trial court the complaint
for recovery of loss, damage or liability against petitioner. The petitioner answered the complaint and
reiterated the ground it earlier cited to deny the insurance claim, that is, that the loss was due to NPA
rebels, an excepted risk under the fire insurance policy.
In due time, the trial court rendered its Decision dated December 26, 1991 in favor of the respondent,
declaring that:
Based on its findings, it is therefore the considered opinion of this Court, as it so holds,
that the defenses raised by defendant-Country Bankers has utterly crumbled on account of its
inherent weakness, incredibility and unreliability, and after applying those helpful tools like
common sense, logic and the Courts honest appraisal of the real and actual situation obtaining
in this area, such defenses remains (sic) unimpressive and unconvincing, and therefore, the
defendant-Country Bankers has to be irreversibly adjudged liable, as it should be, to plaintiff-
Insolvent Cooperative, represented in this action by its Assignee, Cornelio Jamero, and thus,
ordering said defendant-Country Bankers to pay the plaintiff-Insolvent Cooperative, as follows:
1. To fully pay the insurance claim for the loss the insured-plaintiff sustained as a result of the
fire under its Fire Insurance Policy No. F-1397 in its full face value of P200,000.00 with
interest of 12% per annum from date of filing of the complaint until the same is fully paid;
2. To pay as and in the concept of actual or compensatory damages in the total sum of
P50,000.00;
3. To pay as and in the concept of exemplary damages in the total sum of P50,000.00;
4. To pay in the concept of litigation expenses the sum of P5,000.00;
5. To pay by way of reimbursement the attorneys fees in the sum of P10,000.00; and
6. To pay the costs of the suit.
For being unsubstantiated with credible and positive evidence, the counterclaim is
dismissed.
IT IS SO ORDERED.
Petitioner interposed an appeal to the Court of Appeals. On December 29, 1998, the appellate court
affirmed the challenged decision of the trial court in its entirety. Petitioner now comes before us via the
[4]
instant petition anchored on three (3) assigned errors, to wit:
1. THE HONORABLE COURT OF APPEALS FAILED TO APPRECIATE AND GIVE
CREDENCE TO THE SPOT REPORT OF PFC. ARTURO JUARBAL (EXH. 3) AND THE

109
 SWORN STATEMENT OF JOSE LOMOCSO (EXH. 4) THAT THE RESPONDENTS
STOCK-IN-TRADE WAS BURNED BY THE NPA REBELS, HENCE AN EXCEPTED RISK
UNDER THE FIRE INSURANCE POLICY.
2. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER LIABLE FOR
12% INTEREST PER ANNUM ON THE FACE VALUE OF THE POLICY FROM THE FILING
OF THE COMPLAINT UNTIL FULLY PAID.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THE PETITIONER LIABLE
FOR ACTUAL AND EXEMPLARY DAMAGES, LITIGATION EXPENSES, ATTORNEYS
FEES AND COST OF SUIT.
A party is bound by his own affirmative allegations. This is a well-known postulate echoed in Section 1 of
Rule 131 of the Revised Rules of Court. Each party must prove his own affirmative allegations by the
amount of evidence required by law which in civil cases, as in this case, is preponderance of evidence, to
[5]
obtain a favorable judgment.
In the instant case, the petitioner does not dispute that the respondents stocks-in-trade were insured
against fire loss, damage or liability under Fire Insurance Policy No. F- 1397 and that the respondent lost
its stocks-in-trade in a fire that occurred on July 1, 1989, within the duration of said fire insurance. The
petitioner, however, posits the view that the cause of the loss was an excepted risk under the terms of the
fire insurance policy.
Where a risk is excepted by the terms of a policy which insures against other perils or hazards, loss from
such a risk constitutes a defense which the insurer may urge, since it has not assumed that risk, and from
this it follows that an insurer seeking to defeat a claim because of an exception or limitation in the policy
has the burden of proving that the loss comes within the purview of the exception or limitation set up. If a
proof is made of a loss apparently within a contract of insurance, the burden is upon the insurer to prove
that the loss arose from a cause of loss which is excepted or for which it is not liable, or from a cause
[6]
which limits its liability. Stated elsewise, since the petitioner in this case is defending on the ground of
non-coverage and relying upon an exemption or exception clause in the fire insurance policy, it has the
[7]
burden of proving the facts upon which such excepted risk is based, by a preponderance of evidence.
But petitioner failed to do so.
The petitioner relies on the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo as well as on the
Spot Report of Pfc. Arturo V. Juarbal dated July 1, 1989, more particularly the following statement therein:
xxx investigation revealed by Jose Lomocso that those armed men wanted to get can goods
and rice for their consumption in the forest PD investigation further disclosed that the
perpetrator are member (sic) of the NPA PD end x x x
A witness can testify only to those facts which he knows of his personal knowledge, which means
[8]
those facts which are derived from his perception. Consequently, a witness may not testify as to
what he merely learned from others either because he was told or read or heard the same. Such
testimony is considered hearsay and may not be received as proof of the truth of what he has
learned. Such is the hearsay rule which applies not only to oral testimony or statements but also to
[9]
written evidence as well.
The hearsay rule is based upon serious concerns about the trustworthiness and reliability of hearsay
evidence inasmuch as such evidence are not given under oath or solemn affirmation and, more
importantly, have not been subjected to cross-examination by opposing counsel to test the perception,
memory, veracity and articulateness of the out-of-court declarant or actor upon whose reliability on which
[10]
the worth of the out-of-court statement depends.
Thus, the Sworn Statements of Jose Lomocso and Ernesto Urbiztondo are inadmissible in evidence, for
being hearsay, inasmuch as they did not take the witness stand and could not therefore be cross-
examined.

110
 [11]
There are exceptions to the hearsay rule, among which are entries in official records. To be admissible
in evidence, however, three (3) requisites must concur, to wit:
(a) that the entry was made by a public officer, or by another person specially enjoined by law to
do so;
(b) that it was made by the public officer in the performance of his duties, or by such other
person in the performance of a duty specially enjoined by law; and
(c) that the public officer or other person had sufficient knowledge of the facts by him stated,
[12]
which must have been acquired by him personally or through official information.
The third requisite was not met in this case since no investigation, independent of the statements
gathered from Jose Lomocso, was conducted by Pfc. Arturo V. Juarbal. In fact, as the petitioner itself
[13]
pointed out, citing the testimony of Pfc. Arturo Juarbal, the latters Spot Report was based on the
personal knowledge of the caretaker Jose Lomocso who witnessed every single incident surrounding the
facts and circumstances of the case. This argument undeniably weakens the petitioners defense, for the
Spot Report of Pfc. Arturo Juarbal relative to the statement of Jose Lomocso to the effect that NPA rebels
allegedly set fire to the respondents building is inadmissible in evidence, for the purpose of proving the
truth of the statements contained in the said report, for being hearsay.
The said Spot Report is admissible only insofar as it constitutes part of the testimony of Pfc. Arturo V.
Juarbal since he himself took the witness stand and was available for cross-examination. The portions of
his Spot Report which were of his personal knowledge or which consisted of his perceptions and
conclusions are not hearsay. The rest of the said report relative to the statement of Jose Lomocso may
be considered as independently relevant statements gathered in the course of Juarbals investigation and
[14]
may be admitted as such but not necessarily to prove the truth thereof.
The petitioners evidence to prove its defense is sadly wanting and thus, gives rise to its liability to the
respondent under Fire Insurance Policy No. F-1397. Nonetheless, we do not sustain the trial courts
imposition of twelve percent (12%) interest on the insurance claim as well as the monetary award for
actual and exemplary damages, litigation expenses and attorneys fees for lack of legal and valid basis.
Concerning the application of the proper interest rates, the following guidelines were set in Eastern
[15]
Shipping Lines, Inc. v. Court of Appeals and Mercantile Insurance Co., Inc.:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts, is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the measure
of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established

111
 with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
In the said case of Eastern Shipping, the Court further observed that a forbearance in the context of the
usury law is a contractual obligation of lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay a loan or debt then due and payable.
Considering the foregoing, the insurance claim in this case is evidently not a forbearance of money,
goods or credit, and thus the interest rate should be as it is hereby fixed at six percent (6%) computed
from the date of filing of the complaint.
We find no justification for the award of actual damages of Fifty Thousand Pesos (P50,000.00). Well-
entrenched is the doctrine that actual, compensatory and consequential damages must be proved, and
[16]
cannot be presumed. That part of the dispositive portion of the Decision of the trial court ordering the
petitioner to pay actual damages of Fifty Thousand Pesos (P50,000.00) has no basis at all. The
justification, if any, for such an award of actual damages does not appear in the body of the decision of
the trial court. Neither is there any testimonial and documentary evidence on the alleged actual damages
of Fifty Thousand Pesos (P50,000.00) to warrant such an award. Thus, the same must be deleted.
Concerning the award of exemplary damages for Fifty Thousand Pesos (P50,000.00), we likewise find no
legal and valid basis for granting the same. Article 2229 of the New Civil Code provides that exemplary
damages may be imposed by way of example or correction for the public good. Exemplary damages are
imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a
negative incentive to curb socially deleterious actions. They are designed to permit the courts to mould
behavior that has socially deleterious consequences, and its imposition is required by public policy to
suppress the wanton acts of an offender. However, it cannot be recovered as a matter of right. It is based
entirely on the discretion of the court. We find no cogent and valid reason to award the same in the case
at bar.
[17]
With respect to the award of litigation expenses and attorneys fees, Article 2208 of the New Civil Code
enumerates the instances where such may be awarded and, in all cases, it must be reasonable, just and
equitable if the same were to be granted. Attorneys fees as part of damages are not meant to enrich the
winning party at the expense of the losing litigant. They are not awarded every time a party prevails in a
[18]
suit because of the policy that no premium should be placed on the right to litigate. The award of
attorneys fees is the exception rather than the general rule. As such, it is necessary for the court to make
findings of facts and law that would bring the case within the exception and justify the grant of such
award. We find none in this case to warrant the award by the trial court of litigation expenses and
attorneys fees in the amounts of Five Thousand Pesos (P5,000.00) and Ten Thousand Pesos
(P10,000.00), respectively, and therefore, the same must also be deleted.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest on the adjudged principal
amount of Two Hundred Thousand Pesos (P200,000.00) shall be six percent (6%) per annum computed
from the date of filing of the Complaint in the trial court. The awards in the amounts of Fifty Thousand
Pesos (P50,000.00) as actual damages, Fifty Thousand Pesos (P50,000.00) as exemplary damages,
Five Thousand Pesos (P5,000.00) as litigation expenses, and Ten Thousand Pesos (P10,000.00) as
attorneys fees are hereby DELETED. Costs against the petitioner.

112
 SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

FOOTNOTES
[1]
Penned by Associate Justice Jesus M. Elbinias and concurred in by Associate Justices Eugenio S. Labitoria
and Marina L. Buzon, Rollo, pp. 25-29.
[2]
Fourth Division.
[3]
Penned by Judge Bernardo V. Saludares, Rollo, pp. 31-52.
[4]
Rollo, p. 12.
[5]
Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366, 372 [1988]; Summit Guaranty &
Insurance Co., Inc. v. Court of Appeals, 110 SCRA 241, 249 [1981] citing 20 Am. Jur. 142; Paris-Manila Perfume
Co. v. Phoenix Assurance Co., 49 Phil. 753 [1926].
[6]
44 Am Jur 2d Insurance 1938.
[7]
44 Am Jur 2d Insurance 2021.
[8]
Section 36 of Rule 130 of the Revised Rules of Court.
[9]
D.M. Consunji, Inc. v. Court of Appeals and Maria J. Juego, G.R. No. 137873, April 20, 2001, pp. 3-4 citing
31A C.J.S. Evidence 194 and Philippine Home Assurance Corp. v. Court of Appeals, 257 SCRA 468, 479
[1996].
[10]
Section 216 [2], Gilbert, Law Summaries on Evidence, cited in Remedial Law, Vol. V: Revised Rules on
Evidence, Oscar M. Herrera, 1999 Edition, p. 565.
[11]
Section 44 of Rule 130 of the Revised Rules of Court provides:
Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a
person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein
stated.
[12]
Africa v. Caltex (Phil.), Inc., 16 SCRA 448, 452 [1966].
[13]
Rollo, pp. 16-17.
[14]
Rodriguez v. Court of Appeals, 273 SCRA 607, 618 [1997].
[15]
234 SCRA 78, 95-97 [1994].
[16]
Eduardo P. Lucas v. Spouses Maximo C. Royo and Corazon B. Royo, G.R. No. 136185, October 30, 2000, p.
9; Integrated Packaging Corporation v. Court of Appeals, 333 SCRA 170, 179 [2000]; Lucena v. Court of
Appeals, 313 SCRA 47, 61-62 [1999].
[17]
Art. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:
1) When exemplary damages are awarded;
2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
3) In criminal cases of malicious prosecution against the plaintiff;
4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just
and demandable claim;
6) In actions for legal support;
7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
8) In actions for indemnity under workmens compensation and employers liability laws;
9) In a separate civil action to recover civil liability arising from a crime;
10)When at least double judicial costs are awarded;
11)In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation
should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
[18]
Ibaan Rural Bank, Inc. v. Court of Appeals, 321 SCRA 88, 95 [1999].

----------

FIRST DIVISION

113
G.R. NO. 147039 January 27, 2006

DBP POOL OF ACCREDITED INSURANCE COMPANIES, Petitioner,

vs.
RADIO MINDANAO NETWORK, INC., Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

This refers to the petition for certiorari under Rule 45 of the Rules of Court seeking the review of the
Decision1 dated November 16, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 56351, the
dispositive portion of which reads:

Wherefore, premises considered, the appealed Decision of the Regional Trial Court of Makati City,
Branch 138 in Civil Case No. 90-602 is hereby AFFIRMED with MODIFICATION in that the interest rate is
hereby reduced to 6% per annum.

Costs against the defendants-appellants.

SO ORDERED.2

The assailed decision originated from Civil Case No. 90-602 filed by Radio Mindanao Network, Inc.
(respondent) against DBP Pool of Accredited Insurance Companies (petitioner) and Provident Insurance
Corporation (Provident) for recovery of insurance benefits. Respondent owns several broadcasting
stations all over the country. Provident covered respondents transmitter equipment and generating set for
the amount of P13,550,000.00 under Fire Insurance Policy No. 30354, while petitioner covered
respondents transmitter, furniture, fixture and other transmitter facilities for the amount of P5,883,650.00
under Fire Insurance Policy No. F-66860.

In the evening of July 27, 1988, respondents radio station located in SSS Building, Bacolod City, was
razed by fire causing damage in the amount of P1,044,040.00. Respondent sought recovery under the
two insurance policies but the claims were denied on the ground that the cause of loss was an excepted
risk excluded under condition no. 6 (c) and (d), to wit:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly, of any of the following consequences, namely:

(c) War, invasion, act of foreign enemy, hostilities, or warlike operations (whether war be declared
or not), civil war.

(d) Mutiny, riot, military or popular rising, insurrection, rebellion, revolution, military or usurped
power.3

The insurance companies maintained that the evidence showed that the fire was caused by members of
the Communist Party of the Philippines/New Peoples Army (CPP/NPA); and consequently, denied the
claims. Hence, respondent was constrained to file Civil Case No. 90-602 against petitioner and Provident.

After trial on the merits, the Regional Trial Court of Makati, Branch 138, rendered a decision in favor of
respondent. The dispositive portion of the decision reads:

114
 IN VIEW THEREOF, judgment is rendered in favor of plaintiff. Defendant Provident Insurance
Corporation is directed to pay plaintiff the amount of P450,000.00 representing the value of the
destroyed property insured under its Fire Insurance Policy plus 12% legal interest from March 2,
1990 the date of the filing of the Complaint. Defendant DBP Pool Accredited Insurance
Companies is likewise ordered to pay plaintiff the sum of P602,600.00 representing the value of
the destroyed property under its Fire Insurance Policy plus 12% legal interest from March 2,
1990.

SO ORDERED.4

Both insurance companies appealed from the trial courts decision but the CA affirmed the decision, with
the modification that the applicable interest rate was reduced to 6% per annum. A motion for
reconsideration was filed by petitioner DBP which was denied by the CA per its Resolution dated January
30, 2001.5

6
Hence, herein petition by DBP Pool of Accredited Insurance Companies, with the following assignment
of errors:

Assignment of Errors

THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT THERE WERE NO
SUFFICIENT EVIDENCE SHOWING THAT THE APPROXIMATELY TENTY [sic] (20) ARMED MEN
WHO CUSED [sic] THE FIRE AT RESPONDENTS RMN PROPERTY AT BACOLOD CITY WERE
MEMBERS OF THE CPP-NPA.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT ADJUDGED THAT RESPONDENT RMN
CANNOT BEHELD [sic] FOR DAMAGES AND ATTORNEYS FEES FOR INSTITUTING THE PRESENT
ACTION AGAINST THE PETITIONER UNDER ARTICLES 21, 2208, 2229 AND 2232 OF THE CIVIL
CODE OF THE PHILIPPINES.7

Petitioner assails the factual finding of both the trial court and the CA that its evidence failed to support its
allegation that the loss was caused by an excepted risk, i.e., members of the CPP/NPA caused the fire. In
upholding respondents claim for indemnity, the trial court found that:

The only evidence which the Court can consider to determine if the fire was due to the intentional act
committed by the members of the New Peoples Army (NPA), are the testimony [sic] of witnesses Lt. Col.
Nicolas Torres and SPO3 Leonardo Rochar who were admittedly not present when the fire occurred.
Their testimony [sic] was [sic] limited to the fact that an investigation was conducted and in the course of
the investigation they were informed by bystanders that "heavily armed men entered the transmitter
house, poured gasoline in (sic) it and then lighted it. After that, they went out shouting "Mabuhay ang
NPA" (TSN, p. 12., August 2, 1995). The persons whom they investigated and actually saw the burning of
the station were not presented as witnesses. The documentary evidence particularly Exhibits "5" and "5-
C" do not satisfactorily prove that the author of the burning were members of the NPA. Exhibit "5-B" which
is a letter released by the NPA merely mentions some dissatisfaction with the activities of some people in
8
the media in Bacolod. There was no mention there of any threat on media facilities.

The CA went over the evidence on record and sustained the findings of the trial court, to wit:

To recapitulate, defendants-appellants presented the following to support its claim, to wit: police blotter of
the burning of DYHB, certification of the Negros Occidental Integrated National Police, Bacolod City
regarding the incident, letter of alleged NPA members Celso Magsilang claiming responsibility for the
burning of DYHB, fire investigation report dated July 29, 1988, and the testimonies of Lt. Col. Nicolas
Torres and SFO III Leonardo Rochas. We examined carefully the report on the police blotter of the

115
burning of DYHB, the certification issued by the Integrated National Police of Bacolod City and the fire
investigation report prepared by SFO III Rochas and there We found that none of them categorically
stated that the twenty (20) armed men which burned DYHB were members of the CPP/NPA. The said
documents simply stated that the said armed men were believed to be or suspected of being members
of the said group. Even SFO III Rochas admitted that he was not sure that the said armed men were
members of the CPP-NPA, thus:

In fact the only person who seems to be so sure that that the CPP-NPA had a hand in the burning of
DYHB was Lt. Col. Nicolas Torres. However, though We found him to be persuasive in his testimony
regarding how he came to arrive at his opinion, We cannot nevertheless admit his testimony as
conclusive proof that the CPP-NPA was really involved in the incident considering that he admitted that
he did not personally see the armed men even as he tried to pursue them. Note that when Lt. Col. Torres
was presented as witness, he was presented as an ordinary witness only and not an expert witness.
Hence, his opinion on the identity or membership of the armed men with the CPP-NPA is not admissible
in evidence.

Anent the letter of a certain Celso Magsilang, who claims to be a member of NPA-NIROC, being an
admission of person which is not a party to the present action, is likewise inadmissible in evidence under
Section 22, Rule 130 of the Rules of Court. The reason being that an admission is competent only when
9
the declarant, or someone identified in legal interest with him, is a party to the action.

The Court will not disturb these factual findings absent compelling or exceptional reasons. It should be
stressed that a review by certiorari under Rule 45 is a matter of discretion. Under this mode of review, the
jurisdiction of the Court is limited to reviewing only errors of law, not of fact. 10

Moreover, when supported by substantial evidence, findings of fact of the trial court as affirmed by the CA
are conclusive and binding on the parties,11 which this Court will not review unless there are exceptional
circumstances. There are no exceptional circumstances in this case that would have impelled the Court to
depart from the factual findings of both the trial court and the CA.

Both the trial court and the CA were correct in ruling that petitioner failed to prove that the loss was
caused by an excepted risk.

Petitioner argues that private respondent is responsible for proving that the cause of the damage/loss is
covered by the insurance policy, as stipulated in the insurance policy, to wit:

Any loss or damage happening during the existence of abnormal conditions (whether physical or
otherwise) which are occasioned by or through in consequence directly or indirectly, of any of the said
occurrences shall be deemed to be loss or damage which is not covered by the insurance, except to the
extent that the Insured shall prove that such loss or damage happened independently of the existence of
such abnormal conditions.

In any action, suit or other proceeding where the Companies allege that by reason of the provisions of
this condition any loss or damage is not covered by this insurance, the burden of proving that such loss or
damage is covered shall be upon the Insured.12

An insurance contract, being a contract of adhesion, should be so interpreted as to carry out the purpose
for which the parties entered into the contract which is to insure against risks of loss or damage to the

116
goods. Limitations of liability should be regarded with extreme jealousy and must be construed in such a
13
way as to preclude the insurer from noncompliance with its obligations.

The "burden of proof" contemplated by the aforesaid provision actually refers to the "burden of evidence"
(burden of going forward).14 As applied in this case, it refers to the duty of the insured to show that the
loss or damage is covered by the policy. The foregoing clause notwithstanding, the burden of proof still
rests upon petitioner to prove that the damage or loss was caused by an excepted risk in order to escape
any liability under the contract.

Burden of proof is the duty of any party to present evidence to establish his claim or defense by the
amount of evidence required by law, which is preponderance of evidence in civil cases. The party,
whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of proof to obtain a
15
favorable judgment. For the plaintiff, the burden of proof never parts. For the defendant, an affirmative
defense is one which is not a denial of an essential ingredient in the plaintiffs cause of action, but one
16
which, if established, will be a good defense i.e. an "avoidance" of the claim.

Particularly, in insurance cases, where a risk is excepted by the terms of a policy which insures against
other perils or hazards, loss from such a risk constitutes a defense which the insurer may urge, since it
has not assumed that risk, and from this it follows that an insurer seeking to defeat a claim because of
an exception or limitation in the policy has the burden of proving that the loss comes within the
purview of the exception or limitation set up. If a proof is made of a loss apparently within a contract of
insurance, the burden is upon the insurer to prove that the loss arose from a cause of loss which is
excepted or for which it is not liable, or from a cause which limits its liability.17

Consequently, it is sufficient for private respondent to prove the fact of damage or loss. Once respondent
makes out a prima facie case in its favor, the duty or the burden of evidence shifts to petitioner to
controvert respondents prima facie case.18 In this case, since petitioner alleged an excepted risk, then
the burden of evidence shifted to petitioner to prove such exception. It is only when petitioner has
sufficiently proven that the damage or loss was caused by an excepted risk does the burden of evidence
shift back to respondent who is then under a duty of producing evidence to show why such excepted risk
does not release petitioner from any liability. Unfortunately for petitioner, it failed to discharge its
primordial burden of proving that the damage or loss was caused by an excepted risk.

Petitioner however, insists that the evidence on record established the identity of the author of the
damage. It argues that the trial court and the CA erred in not appreciating the reports of witnesses Lt. Col
Torres and SFO II Rochar that the bystanders they interviewed claimed that the perpetrators were
members of the CPP/NPA as an exception to the hearsay rule as part of res gestae.

A witness can testify only to those facts which he knows of his personal knowledge, which means those
facts which are derived from his perception.19 A witness may not testify as to what he merely learned from
others either because he was told or read or heard the same. Such testimony is considered hearsay and
may not be received as proof of the truth of what he has learned. The hearsay rule is based upon serious
concerns about the trustworthiness and reliability of hearsay evidence inasmuch as such evidence are
not given under oath or solemn affirmation and, more importantly, have not been subjected to cross-
examination by opposing counsel to test the perception, memory, veracity and articulateness of the out-
of-court declarant or actor upon whose reliability on which the worth of the out-of-court statement
20
depends.

Res gestae, as an exception to the hearsay rule, refers to those exclamations and statements made by
either the participants, victims, or spectators to a crime immediately before, during, or after the
commission of the crime, when the circumstances are such that the statements were made as a
spontaneous reaction or utterance inspired by the excitement of the occasion and there was no
opportunity for the declarant to deliberate and to fabricate a false statement. The rule in res gestae

117
applies when the declarant himself did not testify and provided that the testimony of the witness who
heard the declarant complies with the following requisites: (1) that the principal act, the res gestae, be a
startling occurrence; (2) the statements were made before the declarant had the time to contrive or devise
a falsehood; and (3) that the statements must concern the occurrence in question and its immediate
attending circumstances.21

The Court is not convinced to accept the declarations as part of res gestae. While it may concede that
these statements were made by the bystanders during a startling occurrence, it cannot be said however,
that these utterances were made spontaneously by the bystanders and before they had the time to
contrive or devise a falsehood. Both SFO III Rochar and Lt. Col. Torres received the bystanders
statements while they were making their investigations during and after the fire. It is reasonable to
assume that when these statements were noted down, the bystanders already had enough time and
opportunity to mill around, talk to one another and exchange information, not to mention theories and
speculations, as is the usual experience in disquieting situations where hysteria is likely to take place. It
cannot therefore be ascertained whether these utterances were the products of truth. That the utterances
may be mere idle talk is not remote.

At best, the testimonies of SFO III Rochar and Lt. Col. Torres that these statements were made may be
considered as independently relevant statements gathered in the course of their investigation, and are
admissible not as to the veracity thereof but to the fact that they had been thus uttered. 22

23
Furthermore, admissibility of evidence should not be equated with its weight and sufficiency.
Admissibility of evidence depends on its relevance and competence, while the weight of evidence
pertains to evidence already admitted and its tendency to convince and persuade.24 Even assuming that
the declaration of the bystanders that it was the members of the CPP/NPA who caused the fire may be
admitted as evidence, it does not follow that such declarations are sufficient proof. These declarations
should be calibrated vis--vis the other evidence on record. And the trial court aptly noted that there is a
need for additional convincing proof, viz.:

The Court finds the foregoing to be insufficient to establish that the cause of the fire was the intentional
burning of the radio facilities by the rebels or an act of insurrection, rebellion or usurped power. Evidence
that persons who burned the radio facilities shouted "Mabuhay ang NPA" does not furnish logical
conclusion that they are member [sic] of the NPA or that their act was an act of rebellion or insurrection.
Additional convincing proof need be submitted. Defendants failed to discharge their responsibility to
25
present adequate proof that the loss was due to a risk excluded.

While the documentary evidence presented by petitioner, i.e., (1) the police blotter; (2) the certification
from the Bacolod Police Station; and (3) the Fire Investigation Report may be considered exceptions to
the hearsay rule, being entries in official records, nevertheless, as noted by the CA, none of these
documents categorically stated that the perpetrators were members of the CPP/NPA. 26 Rather, it was
stated in the police blotter that: "a group of persons accompanied by one (1) woman all believed to be
27
CPP/NPA more or less 20 persons suspected to be CPP/NPA," while the certification from the
Bacolod Police station stated that " some 20 or more armed men believed to be members of the New
Peoples Army NPA,"28 and the fire investigation report concluded that "(I)t is therefore believed by this
Investigating Team that the cause of the fire is intentional, and the armed men suspected to be members
of the CPP/NPA where (sic) the ones responsible "29 All these documents show that indeed, the
"suspected" executor of the fire were believed to be members of the CPP/NPA. But suspicion alone is not
sufficient, preponderance of evidence being the quantum of proof.

All told, the Court finds no reason to grant the present petition.

WHEREFORE, the petition is DISMISSED. The Court of Appeals Decision dated November 16, 2000 and
Resolution dated January 30, 2001 rendered in CA-G.R. CV No. 56351 are AFFIRMED in toto.

118
SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairman

CONSUELO YNARES-SANTIAGO ROMEO J. CALLEJO, SR.

Associate Justice Asscociate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was assigned to the writer of the opinion of
the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes
1
Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices Romeo J. Callejo, Sr. (now a
Member of this Court) and Juan Q. Enriquez, concurring.
2
CA rollo, p. 214.
3
Records, p. 135.
4
Id., pp. 758-759.
5
CA rollo, p. 231.
6
Provident did not file a motion for reconsideration with the CA or a petition for review on certiorari with this
Court.
7
Rollo, p. 12.
8
Records, p. 758.
9
CA rollo, pp. 213-214.
10
Salvador vs. Court of Appeals, G.R. No. 124899, March 30, 2004, 426 SCRA 433, 443.
11
Agas vs. Sabico, G.R. No. 156447, April 26, 2005, 457 SCRA 263, 273.
12
Records, p. 135.
13
Malayan Insurance Corporation vs. Court of Appeals, 336 Phil. 977, 989 (1997).
14
Taada vs. Angara, 338 Phil. 546, 597 (1997).
15
Jison vs. Court of Appeals, 350 Phil. 138, 173 (1998).
16
Supreme Transliner Inc. vs. Court of Appeals, 421 Phil. 692, 698 (2001).
17
Country Bankers Insurance Corp. vs. Lianga Bay and Community Multi-Purpose Cooperative, Inc., 425 Phil.
511, 519 (2002).
18
Jison vs. Court of Appeals, supra.
19
Rules of Court, Rule 130, Section 36.
20
Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Cooperative, supra.
21
People vs. Mansueto, 391 Phil. 611, 630 (2000).
22
Peole vs. Velasquez, G.R. Nos. 132635 & 14387275, February 21, 2001, 352 SCRA 455, 476.
23
People vs. Manhuyod, Jr., 352 Phil. 866, 885 (1998).
24
People vs. Navarro, 357 Phil. 1010, 1031 (1998).

119
25
Records, p. 758.
26
CA rollo, p. 213.
27
Records, p. 451.
28
Id., p. 452.
29
Id., p. 461.

120
XI. SUBROGATION

Cebu Shipyard and Engineering Works, Inc. vs. William Lines, Inc., G.R. No. 132607. May 5,
1999
The intention of the parties to make each other a co-assured under an insurance policy is to be
gleaned principally from the insurance contract or policy itself and not from any other contract or
agreement because the insurance policy denominates the assured and the beneficiaries of the
insurance. It is axiomatic that when the terms of a contract are clear its stipulations control.

----------

THIRD DIVISION
G.R. No. 132607. May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, INC.,
respondents.

DECISION
PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a
reversal of the decision of the Court of Appeals [1] which affirmed the decision of the trial court of origin
finding the petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for
damages to the private respondent, William Lines, Inc., and to the insurer, Prudential Guarantee
Assurance Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business
of dry-docking and repairing of marine vessels while the private respondent, Prudential Guarantee and
Assurance, Inc. (Prudential), also a domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It was the owner of M/V Manila City, a
luxury passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time of the
unfortunate occurrence sued upon, subject vessel was insured with Prudential for P45,000,000.00 pesos
for hull and machinery. The Hull Policy included an Additional Perils (INCHMAREE) Clause covering
loss of or damage to the vessel through the negligence of, among others, ship repairmen. The Policy
provided as follows:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to
Vessel directly caused by the following:
xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers
are not an Assured hereunder.
xxx

121
 provided such loss or damage has not resulted from want of due diligence by the
Assured, the Owners or Managers of the Vessel, of any of them. Masters, Officers, Crew
or Pilots are not to be considered Owners within the meaning of this Clause should they
[2]
hold shares in the Vessel.
Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairers Legal
Liability Insurance Policy. The policy was for P10 million only, under the limited liability clause, to wit:
7. Limit of Liability
The limit of liability under this insurance, in respect of any one accident or series of
accidents, arising out of one occurrence, shall be [P10 million], including liability for costs
and expense which are either:
(a) incurred with the written consent of the underwriters hereon; or
(b) awarded against the Assured. [3]
On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in
Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and
CSEW to discuss the work to be undertaken on the M/V Manila City.
The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:
10. The Contractor shall replace at its own work and at its own cost any work or material
which can be shown to be defective and which is communicated in writing within one (1)
month of redelivery of the vessel or if the vessel was not in the Contractors Possession,
the withdrawal of the Contractors workmen, or at its option to pay a sum equal to the
cost of such replacement at its own works. These conditions shall apply to any such
replacements.
11. Save as provided in Clause 10, the Contractor shall not be under any liability to the
Customer either in contract or for delict or quasi-delict or otherwise except for negligence
and such liability shall itself be subject to the following overriding limitations and
exceptions, namely:
(a) The total liability of the Contractor to the Customer (over and above the liability to
replace under Clause 10) or of any sub-contractor shall be limited in respect of any defect
or event (and a series of accidents arising out of the same defect or event shall constitute
one defect or event) to the sum of Pesos Philippine Currency One Million only.
(b) In no circumstance whatsoever shall the liability of the Contractor or any Sub-
Contractor include any sum in respect of loss of profit or loss of use of the vessel or
damages consequential on such loss of use.
xxx
20. The insurance on the vessel should be maintained by the customer and/or
owner of the vessel during the period the contract is in effect. [4]
While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the
master, officers and crew of M/V Manila City stayed in the vessel, using their cabins as living quarters.
Other employees hired by William Lines to do repairs and maintenance work on the vessel were also
present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and sank,
resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the

122
fire which broke out in M/V Manila City was caused by CSEWs negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter
had paid William Lines, Inc. the value of the hull and machinery insurance on the M/V Manila City. As a
result of such payment Prudential was subrogated to the claim of P45 million, representing the value of
the said insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendant, ordering the latter:
1. To pay unto plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the
amount of Forty-five Million (P45 million) Pesos, with interest at the legal rate until full
payment is made;
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven
Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of income of M/V
MANILA CITY, with interest at the legal rate until full payment is made;
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million)
as payment, in addition to what it received from the insurance company to fully cover the
injury or loss, in order to replace the M/V MANILA CITY, with interest at the legal rate
until full payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven
Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic) oil on board
the vessel when she was completely gutted by fire at defendant, Cebu Shipyards quay,
with interest at the legal rate until full payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos (P3,054,677.95)
as payment for the spare parts and materials used in the M/V MANILA CITY during dry-
docking with interest at the legal rate until full payment is made;
6. To pay unto plaintiff William Lines, Inc. the sum of Five Hundred Thousand
(P500,000.00) Pesos in moral damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000,000.00) Pesos in attorneys fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency
of the appeal, CSEW and William Lines presented a Joint Motion for Partial Dismissal with prejudice, on
the basis of the amicable settlement inked between Cebu Shipyard and William Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and
William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard
and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee and Assurance,
Inc., the subrogee, the sum of P45 Million, with interest at the legal rate until full payment
is made, as contained in the decision of Civil Case No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeals Resolution dated February 13,
1998, CSEW found its way to this court via the present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT
CSEW HAD MANAGEMENT AND SUPERVISORY CONTROL OF THE M/V MANILA
CITY AT THE TIME THE FIRE BROKE OUT.

123
 II. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE
DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.
III. THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY
LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED ON FINDINGS OF
FACT NOT SUPPORTED BY EVIDENCE.
IV. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING
CSEWS EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.
V. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT
PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.
VI. ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF
SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE OF
ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS, THE COURT OF
APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE
CONTRACTUAL PROVISIONS LIMITING CSEWS LIABILITY FOR NEGLIGENCE TO A
MAXIMUM OF P1 MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE
RULINGS OF THIS HONORABLE COURT.
Petitioners version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave dock. It was
then transferred to the docking quay of CSEW where the remaining repair to be done was the replating of
the top of Water Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB
General Services. Tank Top No. 12 was at the rear section of the vessel, on level with the flooring of the
crew cabins located on the vessels second deck.
At around seven o clock in the morning of February 16, 1991, the JNB workers trimmed and cleaned the
tank top framing which involved minor hotworks (welding/cutting works). The said work was completed at
about 10:00 a. m. The JNB workers then proceeded to rig the steel plates, after which they had their
lunch break. The rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed smoke coming from the
passageway along the crew cabins. When one of the workers, Mr. Casas, proceeded to the passageway
to ascertain the origin of the smoke, he noticed that smoke was gathering on the ceiling of the
passageway but did not see any fire as the crew cabins on either side of the passageway were locked.
He immediately sought out the proprietor of JNB, Mr. Buenavista, and the Safety Officer of CSEW, Mr.
Aves, who sounded the fire alarm. CSEWs fire brigade immediately responded as well as the other fire
fighting units in Metro Cebu. However, there were no WLI representative, officer or crew to guide the
firemen inside the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue Fire
Department, Cordova Fire Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW,
the fire was not controlled until 2:00 a.m. of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel and fire again
broke out. Then the huge amounts of water pumped into the vessel, coupled with the strong current,
caused the vessel to tilt until it capsized and sank
When M/V Manila City capsized, steel and angle bars were noticed to have been newly welded along the
port side of the hull of the vessel, at the level of the crew cabins. William Lines did not previously apply for
a permit to do hotworks on the said portion of the ship as it should have done pursuant to its work order
with CSEW. [5]
Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner :
At around eleven o clock in the morning of February 16, 1991, the Chief Mate of M/V Manila City was
inspecting the various works being done by CSEW on the vessel, when he saw that some workers of

124
CSEW were cropping out steel plates on Tank Top No. 12 using acetylene, oxygen and welding torch. He
also observed that the rubber insulation wire coming out of the air-conditioning unit was already burning,
prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12. The vessels
reeferman reported such occurence to the Chief Mate who immediately assembled the crew members to
put out the fire. When it was too hot for them to stay on board and seeing that the fire cannot be
controlled, the vessels crew were forced to withdraw from CSEWs docking quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential
Guarantee, William Lines filed a claim for constructive total loss, and after a thorough investigation of the
surrounding circumstances of the tragedy, Prudential Guarantee found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P45 million pesos representing
the total value of M/V Manila Citys hull and machinery insurance. [6]
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages to the
respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioners
submission that the finding of negligence by the Court of Appeals is not supported by the evidence on
record, and contrary to what the Court of Appeals found, petitioner did not have management and control
over M/V Manila City. Although it was brought to the premises of CSEW for annual repair, William Lines,
Inc. retained control over the vessel as the ship captain remained in command and the ships crew were
still present. While it imposed certain rules and regulations on William Lines, it was in the exercise of due
diligence and not an indication of CSEWs exclusive control over subject vessel. Thus, CSEW maintains
that it did not have exclusive control over the M/V Manila City and the trial court and the Court of Appeals
erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the
Court of Appeals are conclusive on the parties and are not reviewable by this Court. They are entitled to
great weight and respect, even finality, especially when, as in this case, the Court of Appeals affirmed the
factual findings arrived at by the trial court. [7] When supported by sufficient evidence, findings of fact by
the Court of Appeals affirming those of the trial court, are not to be disturbed on appeal. The rationale
behind this doctrine is that review of the findings of fact of the Court of Appeals is not a function that the
Supreme Court normally undertakes. [8]
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which
caused the total loss of subject M/V Manila City was due to the negligence of the employees and workers
of CSEW. Both courts found that the M/V Manila City was under the custody and control of petitioner
CSEW, when the ill-fated vessel caught fire. The decisions of both the lower court and the Court of
Appeals set forth clearly the evidence sustaining their finding of actionable negligence on the part of
CSEW. This factual finding is accorded great weight and is conclusive on the parties. The court discerns
no basis for disturbing such finding firmly anchored on enough evidence. As held in the case of Roblett
Industrial Construction Corporation vs. Court of Appeals, in the absence of any showing that the trial
court failed to appreciate facts and circumstances of weight and substance that would have altered its
conclusion, no compelling reason exists for the Court to impinge upon matters more appropriately within
its province. [9]
Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of
fact cannot be entertained. The finding of negligence by the Court of Appeals is a question which this
Court cannot look into as it would entail going into factual matters on which the finding of negligence was
based. Such an approach cannot be allowed by this Court in the absence of clear showing that the case
[10]
falls under any of the exceptions to the well-established principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by
reason of the negligence of the workers of CSEW, when the said vessel was under the exclusive custody
and control of CSEW is accordingly upheld. Under the circumstances of the case, the doctrine of res ipsa
loquitur applies. For the doctrine of res ipsa loquitur to apply to a given situation, the following conditions

125
must concur: (1) the accident was of a kind which does not ordinarily occur unless someone is negligent;
and (2) that the instrumentality or agency which caused the injury was under the exclusive control of the
person charged with negligence.
The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny.
First, the fire that occurred and consumed M/V Manila City would not have happened in the ordinary
course of things if reasonable care and diligence had been exercised. In other words, some negligence
must have occurred. Second, the agency charged with negligence, as found by the trial court and the
Court of Appeals and as shown by the records, is the herein petitioner, Cebu Shipyard and Engineering
Works, Inc., which had control over subject vessel when it was docked for annual repairs. So also, as
found by the regional trial court, other responsible causes, including the conduct of the plaintiff, and third
persons, are sufficiently eliminated by the evidence. [11]
What is more, in the present case the trial court found direct evidence to prove that the workers and/or
employees of CSEW were remiss in their duty of exercising due diligence in the care of subject vessel.
The direct evidence substantiates the conclusion that CSEW was really negligent. Thus, even without
applying the doctrine of res ipsa loquitur, in light of the direct evidence on record, the ineluctable
conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc., was negligent and
consequently liable for damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the
inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and origin of the
fire. Petitioner maintains that the Court of Appeals erred in disregarding the testimonies of the fire
experts, Messrs. David Grey and Gregory Michael Southeard, who testified on the probable origin of the
fire in M/V Manila City. Petitioner avers that since the said fire experts were one in their opinion that the
fire did not originate in the area of Tank Top No. 12 where the JNB workers were doing hotworks but on
the crew accommodation cabins on the portside No. 2 deck, the trial court and the Court of Appeals
should have given weight to such finding based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they may have probative value,
reception in evidence of expert testimonies is within the discretion of the court. Section 49, Rule 130 of
the Revised Rules of Court, provides:
SEC. 49. Opinion of expert witness. - The opinion of a witness on a matter requiring special
knowledge, skill, experience or training which he is shown to possess, may be received in
evidence.
The word may signifies that the use of opinion of an expert witness as evidence is a prerogative of the
courts. It is never mandatory for judges to give substantial weight to expert testimonies. If from the facts
and evidence on record, a conclusion is readily ascertainable, there is no need for the judge to resort to
expert opinion evidence. In the case under consideration, the testimonies of the fire experts were not the
only available evidence on the probable cause and origin of the fire. There were witnesses who were
actually on board the vessel when the fire occurred. Between the testimonies of the fire experts who
merely based their findings and opinions on interviews and the testimonies of those present during the
fire, the latter are of more probative value. Verily, the trial court and the Court of Appeals did not err in
giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the
rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk
and (2) it is a co-assured under the Marine Hull Insurance Policy.
It is petitioners submission that the loss of M/V Manila City or damage thereto is expressly excluded from
the coverage of the insurance because the same resulted from want of due diligence by the Assured,
Owners or Managers which is not included in the risks insured against. Again, this theory of petitioner is
bereft of any factual or legal basis. It proceeds from a wrong premise that the fire which gutted subject
vessel was caused by the negligence of the employees of William Lines, Inc. To repeat, the issue of who
between the parties was negligent has already been resolved against Cebu Shipyard and Engineering
Works, Inc. Upon proof of payment by Prudential to William Lines, Inc., the former was subrogated to the

126
right of the latter to indemnification from CSEW. As aptly ruled by the Court of Appeals, the law on the
matter is succinct and clear, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss, the aggrieved party shall
be entitled to recover the deficiency from the person causing the loss or injury. [12]
Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William
Lines, Inc., paid the latter the total amount covered by its insurance policy, it was subrogated to the right
of the latter to recover the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under
the subject insurance policy. To buttress its stance that it is a co-assured, petitioner placed reliance on
Clause 20 of of the Work Order which states:
20. The insurance on the vessel should be maintained by the customer and/or owner
of the vessel during the period the contract is in effect. [13]
According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk of loss
of the vessel while under drydock or repair and to such extent, it is benefited and effectively constituted
as a co-assured under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in
the sense that it requires William Lines to maintain insurance on the vessel during the period of dry-
docking or repair. Concededly, such a stipulation works to the benefit of CSEW as the shiprepairer.
However, the fact that CSEW benefits from the said stipulation does not automatically make it as a co-
assured of William Lines. The intention of the parties to make each other a co-assured under an
insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any
other contract or agreement because the insurance policy denominates the assured and the beneficiaries
of the insurance. The hull and machinery insurance procured by William Lines, Inc. from Prudential
named only William Lines, Inc. as the assured. There was no manifestation of any intention of William
Lines, Inc. to constitute CSEW as a co-assured under subject policy. It is axiomatic that when the terms of
a contract are clear its stipulations control. [14] Thus, when the insurance policy involved named only
William Lines, Inc. as the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to
vessel directly caused by the following:
xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers
are not an Assured hereunder. [15] (emphasis supplied)
As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy,
it would nullify any claim of William Lines, Inc. from Prudential for any loss or damage caused by the
negligence of CSEW. Certainly, no shipowner would agree to make a shiprepairer a co-assured under
such insurance policy; otherwise, any claim for loss or damage under the policy would be invalidated.
Such result could not have been intended by William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines, Inc.,
by stipulation in the Contract or Work Order its liability is limited to One Million (P1,000,000.00) Pesos
only, and Prudential a mere subrogee of William Lines, Inc., should only be entitled to collect the sum
stipulated in the said contract.
Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as

127
binding as an ordinary contract, the Court recognizes instances when reliance on such contracts cannot
be favored especially where the facts and circumstances warrant that subject stipulations be disregarded.
[16]
Thus, in ruling on the validity and applicability of the stipulation limiting the liability of CSEW for
negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the nature of
the provision sought to be enforced should be considered, bearing in mind the principles of equity and fair
play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity and sustainability of the claim of William Lines, Inc., for
a total loss, Prudential conducted its own inquiry. Upon thorough investigation by its hull surveyor, M/V
[17]
Manila City was found to be beyond economical salvage and repair. The evaluation of the average
[18]
adjuster also reported a constructive total loss. The said claim of William Lines, Inc., was then found to
be valid and compensable such that Prudential paid the latter the total value of its insurance claim.
Furthermore, it was ascertained that the replacement cost of the vessel (the price of a vessel similar to
[19]
M/V Manila City), amounts to Fifty-five Million (P55,000,000.00) Pesos.
Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has
been sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One
Million Pesos only. As aptly held by the trial court, it is rather unconscionable if not overstrained. To
allow CSEW to limit its liability to One Million Pesos notwithstanding the fact that the total loss suffered by
the assured and paid for by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would
sanction the exercise of a degree of diligence short of what is ordinarily required because, then, it would
not be difficult for petitioner to escape liability by the simple expedient of paying an amount very much
lower than the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3,
1997, and Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

FOOTNOTES
[1]
Penned by Associate Justice Emeterio Cui and concurred in by Associate Justices Corona Ibay Somera and
Oswaldo D. Agcaoili.
[2]
Rollo, p.20
[3]
Ibid., p.21
[4]
Supra, pp. 19-20
[5]
Petition, Rollo, pp.25-32
[6]
Comment on the Petition, Rollo, pp.147-150
[7]
Meneses vs. Court of Appeals, 246 SCRA 162; Tay Chun Suy vs. Court of Appeals, 229 SCRA 151; First
Philippine International Bank vs. CA, 252 SCRA 259; Fortune Motors Phils. Corp vs. CA, 267 SCRA 653
[8]
Inland Trailways Inc. vs. CA, 255 SCRA 178
[9]
266 SCRA 71
[10]
Instances when the findings of fact of the trial court and/or Court of Appeals may be reviewed by the
Supreme Court are: (1) when the conclusion is a finding grounded entirely on speculation, surmises and
conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) where there is a
grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings
of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case
and the same is contrary to the admissions of both appellant and appellee; (7) the findings are contrary to those
of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondents; and (10) the finding of fact of the Court of Appeals is premised on the supposed
absence of evidence and is contradicted by the evidence on record. (Misa vs. Court of Appeals, 212 SCRA 217)
[11]
Rollo, p.120
[12]
Civil Code of the Philippines

128
[13]
Rollo, p.20
[14]
Article 1370, Civil Code.
[15]
Ibid.
[16]
Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA 48. See also Sweet Lines, Inc. vs. Teves, 83 SCRA
361 and Pan American World Airways, Inc. vs. Rapadas, et al., 209 SCRA 67.
[17]
RTC decision, p. 14 (page 214 of Rollo)
[18]
Ibid.
[19]
Ibid., p.12 (page 212 of Rollo)

129