Areola v CA G.R. No.

95641 September 22, 1994

J. Romero

Facts:
Prudential Guarantee cancelled Areolas personal accident insurance on the grounds that the
latter failed to pay his premiums 7 months after issuing the policy. Areola was supposed to pay
the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of
P110.25 and 2% premium tax of P29.40. The statement of account had a stipulation not
considering it a receipt. It also reminded the customer to ask for a receipt after payment. There
was also a stipulation calling for a demand for a provisional receipt after payment to an agent. A
provisional receipt was sent to petitioner telling him that the provisional receipt would be
confirmed by an official one. The company then cancelled the policy for non-payment of
premiums. After being surprised, Areola confronted a company agent and demanded
an officialreceipt. The latter told him that it was a mistake, but never gave him an official receipt.
Areola sent a letter demanding that he be reinstated or he would file for damages if his demand
was not met. The company then told him that his payments werent in full yet. The company
replied to Areola by telling him that there was reason to believe that no payment has been made
since no official receipt was issued. The company then told him that they would still hold him
under the policy. The company then confirmed that he paid the premium and that they would
extend the policy by one year.
Thereby, the company offered to reinstate same policy it had previously cancelled and even
proposed to extend its lifetime on finding that the cancellation was erroneous and that the
premiums were paid in full by petitioner-insured but were not remitted by the
company's branch manager, Mr. Malapit.
However, they were too late for Areola already filed an action for breach of contract in the trial
court.
The companys defense lay in rectifying its omission; hence, there was no breach of contract.
The court ruled in favor of Areola and asked Prudential to pay 250,000 pesos in moral and
exemplary damages. The court held that the company was in bad faith in cancelling the policy.
Had the insured met an accident at that time, he wouldnt be covered by the policy.
This ruling was challenged on appeal by respondent insurance company, denying bad faith in
unilaterally cancelling the policy. The AC absolved Prudential on the grounds that it was not
motivated by negligence, malice or bad faith in cancelling subject policy. Rather, the
cancellation of the insurance policy was based on what the existing records showed. The court
even added that the errant manager who didnt remit the profits was forced to resign. Areola
then filed for a petition in the Supreme Court.

Issue:
1. Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to
payment of damages?
2. Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent
insurance company, in an effort to rectify such error, obliterate whatever liability for damages it
may have to bear, thus absolving it?
Held: Yes. No. Petition granted.

Ratio:
1. Petitioner alleged that the managers misappropriation of his premium payments is the
proximate cause of the cancellation of the insurance policy. Subsequent reinstatement could not
possibly absolve respondent insurance company from liability, due to the breach of contract. He
contended that damage had already been done.
Prudential averred that the equitable relief sought by petitioner-insured was granted to the filing
of the complaint, petitioner-insured is left without a cause of action. Reinstatement effectively
restored petitioner-insured to all his rights under the policy.
The court held that Malapit's fraudulent act of misappropriating the premiums paid by petitioner-
insured is directly imputable to respondent insurance company. A corporation, such as
respondent insurance company, acts solely thru its employees. The latters' acts are considered
as its own. Malapit represented its interest and acted in its behalf. His act of receiving the
premiums collected is well within the province of his authority. Thus, his receipt of said
premiums is receipt by private respondent insurance company who, by provision of law is bound
by the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
Malapit's failure to remit the premiums he received cannot constitute a defense for private
respondent insurance company; no exoneration from liability could result therefrom. The fact
that private respondent insurance company was itself defrauded due to the anomalies that took
place does not free the same from its obligation to petitioner Areola. As held in Prudential Bank
v. Court of Appeals
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course
of dealings of the officers in their representative capacity but not for acts outside the scope of
their authority. Accordingly, a banking corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent acting within the general scope
of his authority even though the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person.
Prudential is liable for damages for the fraudulent acts committed by Malapit. Reinstating the
insurance policy can not obliterate the injury inflicted. A contract of insurance creates reciprocal
obligations for both insurer and insured. Reciprocal obligations are those which arise from the
same cause and in which each party is both a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other.
2. Due to the agreement to enter into a contract of insurance where Prudential promised to
extend protection to petitioner-insured against the risk insured, there was
a debtor creditor relation ship between the two parties. Under Article 1191, the injured party is
given a choice between fulfillment or rescission of the obligation in case one of the obligors fails
to complywith what is incumbent upon him. However, said article entitles the injured party to
payment of damages, regardless of whether he demands fulfillment or rescission of the
obligation.
The damages would be nominal because the insurance company took steps to rectify
the contract . There was also no actual or substantial damage inflicted. Nominal damages are
"recoverable where a legal right is technically violated and must be vindicated against an
invasion that has produced no actual present loss of any kind, or where there has been abreach
of contract and no substantial injury or actual damages whatsoever have been or can be
shown.

Insurance Case Digest: Areola V. CA (1994)

G.R. No. 95641 September 22, 1994

Lessons Applicable: Binding Effect of Payment (Insurance)

Laws Applicable: Art. 1910,Article 1191

FACTS:

December 17, 1984: Prudential Guarantee And Assurance, Inc. issued collector's provisional receipt
amounting to P1,609.65
June 29, 1985: 7 months after the issuance of petitioner Santos Areola's Personal Accident
Insurance Policy, Prudential Guarantee And Assurance, Inc. unilaterally cancelled it for failing to pay
his premiums through its manager Teofilo M. Malapit
Shocked by the cancellation of the policy, Santos approached Carlito Ang, agent of Prudential and
demanded the issuance of an official receipt. Ang told Santos that it was a mistake and assured its
rectification.
July 15, 1985: Santos demanded the same terms and same rate increase as when he paid the
provincial receipt but Malapit insisted that the partial payment he made was exhausted and that he
should pay the balance or his policy will cease to operate
July 25, 1985 : Assistant Vice-President Mariano M. Ampil III apologized
August 6, 1985 had filed a complaint for breach of contract with damages before the lower court
August 13, 1985: Santos received through Carlito Ang the leeter of Assistant Vice-President Mariano
M. Ampil III finding error on their part since premiums were not remitted Malapit, proposed to
extend its lifetime to December 17, 1985
RTC: favored Santos - Prudential in Bad Faith
CA: Reversed - not motivated by negligence, malice or bad faith in cancelling subject policy
ISSUE: W/N the Areolas can file against damages despite the effort to rectify the cancellation

HELD: YES. RTC reinstated

Malapit's fraudulent act of misappropriating the premiums paid is beyond doubt directly imputable
to Prudential
Art. 1910. The principal must comply with all the obligations which the agent may have contracted
within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when
he ratifies it expressly or tacitly.
Subsequent reinstatement could not possibly absolve Prudential there being an obvious breach of
contract
a contract of insurance creates reciprocal obligations for both insurer and insured
Article 1191
choice between fulfillment or rescission of the obligation in case one of the obligors fails to comply
with what is incumbent upon him
entitles the injured party to payment of damages, regardless of whether he demands fulfillment or
rescission of the obligation
Nominal damages are "recoverable where a legal right is technically violated and must be vindicated
against an invasion that has produced no actual present loss of any kind, or where there has been a
breach of contract and no substantial injury or actual damages whatsoever have been or can be
shown.