[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.

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. TIANO WAS HERE

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:
"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 TIANO WAS HERE 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.

SO ORDERED."[10]

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

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,
CIVIL CODE).[11]
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 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 the "first right span of
the lofty storey building",[17] 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 1978,[18] 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. De Songco, [21] 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
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, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'" [22]

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 disregarded the Decision of this Court affirming the Reyes Decision."[25]

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]
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, TIANO WAS HERE 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.

G.R. NO. L-54171 OCTOBER 28, 1980

JEWEL VILLACORTA, ASSISTED BY HER HUSBAND, GUERRERO VILLACORTA, PETITIONER,

VS.
THE INSURANCE COMMISSION AND EMPIRE INSURANCE COMPANY, RESPONDENTS.

TEEHANKEE, Acting C.J.:

The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and holds that where the insured's car is
wrongfully taken without the insured's consent from the car service and repair shop to whom it had been entrusted for check-up
and repairs (assuming that such taking was for a joy ride, in the course of which it was totally smashed in an accident), respondent
insurer is liable and must pay insured for the total loss of the insured vehicle under the theft clause of the policy.

The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent insurance commission are as
follows:

Complainant [petitioner] was the owner of a Colt Lancer, Model 1976, insured with respondent company under Private Car Policy
No. MBI/PC-0704 for P35,000.00 Own Damage; P30,000.00 Theft; and P30,000.00 Third Party Liability, effective May 16,
1977 to May 16, 1978. On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for general check-up and
repairs. On May 11, 1978, while it was in the custody of the Sunday Machine Works, the car was allegedly taken by six (6) persons
and driven out to Montalban, Rizal. While travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal,
the car figured in an accident, hitting and bumping a gravel and sand truck parked at the right side of the road going south. As a
consequence, the gravel and sand truck veered to the right side of the pavement going south and the car veered to the right side of
the pavement going north. The driver, Benito Mabasa, and one of the passengers died and the other four sustained physical injuries.
The car, as well, suffered extensive damage. Complainant, thereafter, filed a claim for total loss with the respondent company but
claim was denied. Hence, complainant, was compelled to institute the present action.

The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire Insurance Company admittedly
undertook to indemnify the petitioner-insured against loss or damage to the car (a) by accidental collision or overturning, or collision
or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, self-
ignition or lightning or burglary, housebreaking or theft; and (c) by malicious act.

Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the total loss of the vehicle against
private respondent, sustaining respondent insurer's contention that the accident did not fall within the provisions of the policy
either for the Own Damage or Theft coverage, invoking the policy provision on "Authorized Driver" clause.1

Respondent commission upheld private respondent's contention on the "Authorized Driver" clause in this wise: "It must be observed
that under the above-quoted provisions, the policy limits the use of the insured vehicle to two (2) persons only, namely: the insured
himself or any person on his (insured's) permission. Under the second category, it is to be noted that the words "any person' is
qualified by the phrase

... on the insured's order or with his permission.' It is therefore clear that if the person driving is other than the insured, he must
have been duly authorized by the insured, to drive the vehicle to make the insurance company liable for the driver's negligence.
Complainant admitted that she did not know the person who drove her vehicle at the time of the accident, much less consented to
the use of the same (par. 5 of the complaint). Her husband likewise admitted that he neither knew this driver Benito Mabasa (Exhibit
'4'). With these declarations of complainant and her husband, we hold that the person who drove the vehicle, in the person of
Benito Mabasa, is not an authorized driver of the complainant. Apparently, this is a violation of the 'Authorized Driver' clause of the
policy.

Respondent commission likewise upheld private respondent's assertion that the car was not stolen and therefore not covered by the
Theft clause, ruling that "The element of 'taking' in Article 308 of the Revised Penal Code means that the act of depriving another of
the possession and dominion of a movable thing is coupled ... with the intention. at the time of the 'taking', of withholding it with
the character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been shown a felonious intent
upon the part of the taker of the car, and the intent must be an intent permanently to deprive the insured of his car," and that "Such
was not the case in this instance. The fact that the car was taken by one of the residents of the Sunday Machine Works, and the
withholding of the same, for a joy ride should not be construed to mean 'taking' under Art. 308 of the Revised Penal Code. If at all
there was a 'taking', the same was merely temporary in nature. A temporary taking is held not a taking insured against (48 A LR 2d.,
page 15)."

The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence and the law.

First, respondent commission's ruling that the person who drove the vehicle in the person of Benito Mabasa, who, according to its
finding, was one of the residents of the Sunday Machine Works, Inc. to whom the car had been entrusted for general check-up and
repairs was not an "authorized driver" of petitioner-complainant is too restrictive and contrary to the established principle that
insurance contracts, being contracts of adhesion where the only participation of the other party is the signing of his signature or his
"adhesion" thereto, "obviously call for greater strictness and vigilance on the part of courts of justice with a view of protecting the
weaker party from abuse and imposition, and prevent their becoming traps for the unwary. 2

The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a person other than the insured
owner, who drives the car on the insured's order, such as his regular driver, or with his permission, such as a friend or member of
the family or the employees of a car service or repair shop must be duly licensed drivers and have no disqualification to drive a
motor vehicle.

A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key to the shop owner and
employees who are presumed to have the insured's permission to drive the car for legitimate purposes of checking or road-testing
the car. The mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized
purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized driver" clause has
been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license.

The situation is no different from the regular or family driver, who instead of carrying out the owner's order to fetch the children
from school takes out his girl friend instead for a joy ride and instead wrecks the car. There is no question of his being an "authorized
driver" which allows recovery of the loss although his trip was for a personal or illicit purpose without the owner's authorization.

Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause, not the "authorized driver"
clause, that applies), where a car is admittedly as in this case unlawfully and wrongfully taken by some people, be they employees of
the car shop or not to whom it had been entrusted, and taken on a long trip to Montalban without the owner's consent or
knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308 of the Revised Penal Code, viz. "Who
are liable for theft. Theft is committed by any person who, with intent to gain but without violence against or intimidation of
persons nor force upon things, shall take personal property of another without the latter's consent," for purposes of recovering the
loss under the policy in question.

The Court rejects respondent commission's premise that there must be an intent on the part of the taker of the car "permanently to
deprive the insured of his car" and that since the taking here was for a "joy ride" and "merely temporary in nature," a "temporary
taking is held not a taking insured against."

The evidence does not warrant respondent commission's findings that it was a mere "joy ride". From the very investigator's report
cited in its comment, 3 the police found from the waist of the car driver Benito Mabasa Bartolome who smashed the car and was
found dead right after the incident "one cal. 45 Colt. and one apple type grenade," hardly the materials one would bring along on a
"joy ride". Then, again, it is equally evident that the taking proved to be quite permanent rather than temporary, for the car was
totally smashed in the fatal accident and was never returned in serviceable and useful condition to petitioner-owner.

Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy ride", the Court sustains as the
better view that which holds that when a person, either with the object of going to a certain place, or learning how to drive, or
enjoying a free ride, takes possession of a vehicle belonging to another, without the consent of its owner, he is guilty of theft
because by taking possession of the personal property belonging to another and using it, his intent to gain is evident since he derives
therefrom utility, satisfaction, enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that the use of
a thing constitutes gain and Cuello Calon who calls it "hurt de uso. " 4

The insurer must therefore TIANO WAS HERE indemnify the petitioner-owner for the total loss of the insured car in the sum of
P35,000.00 under the theft clause of the policy, subject to the filing of such claim for reimbursement or payment as it may have as
subrogee against the Sunday Machine Works, Inc.

ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing private respondent to pay petitioner
the sum of P35,000.00 with legal interest from the filing of the complaint until full payment is made and to pay the costs of suit.

SO ORDERED.

[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) under Policy No. 306-7432324-3 for the period March
1, 1991 to 1992.[2] The new oil mill was insured for six million pesos (P6,000,000.00) under Policy No. 306-7432321-9 for the same
term.[3] 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]
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.

SO ORDERED.[6]

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.
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 courts in giving effect to the
insurance.[11] 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. [12]
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 old one and the other for the new oil mill and exactly the same policy period, sir.[14] (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.
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 TIANO WAS HERE 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 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 an emergency fire engine.[23] 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.

[G.R. NO. 119599. MARCH 20, 1997]

MALAYAN INSURANCE CORPORATION, PETITIONER, VS. THE HON. COURT OF APPEALS AND TKC MARKETING
CORPORATION, RESPONDENTS.

DECISION
ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G.R. No. 43023[1] which affirmed, with
slight modification, the decision of the Regional Trial Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean meal which was
loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the
port of Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance Corporation for which it issued two
(2) Marine Cargo Policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both
dated September 1989.
While the vessel was docked in TIANO WAS HERE Durban, South Africa on September 11, 1989 enroute to Manila, the civil
authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a result, private respondent
notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount of US$916,886.66,
representing the dollar equivalent on the policies, for non-delivery of the cargo. Private respondent likewise sought the assistance of
petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private respondent,
accordingly, advised petitioner that it might tranship the cargo and requested an extension of the insurance coverage until actual
transhipment, which extension was approved upon payment of additional premium. The insurance coverage was extended under
the same terms and conditions embodied in the original policies while in the process of making arrangements for the transhipment
of the cargo from Durban to Manila, covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or a total of
P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to Manila and another twenty
days for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to US$448,806.09 (or its peso
equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private respondent's loss after the proceeds
of the sale were deducted from the original claim of $916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was an excepted risk
under the marine insurance policies. This prompted private respondent to file a complaint for damages praying that aside from its
claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the loan it obtained to finance the
shipment totalling P942,269.30. In addition, private respondent asked for moral damages amounting to P200,000.00, exemplary
damages amounting to P200,000.00 and attorney's fees equivalent to 30% of what will be awarded by the court.
The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance claim, consequential
and liquidated damages amounting to P1,024,233.88, exemplary damages amounting to P100,000.00, reimbursement in the amount
equivalent to 10% of whatever is recovered as attorney's fees as well as the costs of the suit. On private respondent's motion for
reconsideration, petitioner was also required to further pay interest at the rate of 12% per annum on all amounts due and owing to
the private respondent by virtue of the lower court decision counted from the inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause 12 of the policies
issued to private respondent, the same became automatically covered under subsection 1.1 of Section 1 of the Institute War
Clauses. The arrests, restraints or detainments contemplated in the former clause were those effected by political or executive acts.
Losses occasioned by riot or ordinary judicial processes were not covered therein. In other words, arrest, restraint or detainment
within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil
authorities, such as what happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or the F.C. &
S. Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and the consequent adoption or institution of the
Institute War Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the former policy became one
of the covered risks.
The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss compensable, not only
under the Institute War Clause but also under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read
in relation to Section 130 of the Insurance Code and as held in Williams v. Cole.[2]
Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from completing the
voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner continued until the goods could have
been transhipped. But due to the perishable nature of the goods, it had to be promptly sold to minimize loss. Accordingly, the sale of
the goods being reasonable and justified, it should not operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies.

2. In ruling that there was constructive total loss over the cargo.

3. In ruling that petitioner was in bad faith in declining private respondent's claim.

4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable since the term "arrest"
refers to "political or executive acts" and does not include a loss caused by riot or by ordinary judicial process as in this case; (b) the
deletion of the Free from Capture or Seizure Clause would leave the assured covered solely for the perils specified by the wording of
the policy itself; (c) the rationale for the exclusion of an arrest pursuant to judicial authorities is to eliminate collusion between
unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which private respondent may have incurred was in the nature and
form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not by arrest, detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the arrest of the vessel
was not a compensable risk under the policies issued. In fact, petitioner supported private respondent by accommodating the
latter's request for an extension of the insurance coverage, notwithstanding that it was then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner did not raise as an
issue the award of exemplary damages. It cannot now, for the first time, raise the same before this Court. Likewise, petitioner
cannot submit for the first time on appeal its argument that it was wrong for the Court of Appeals to have ruled the way it did based
on facts that would need inquiry into the evidence. Even if inquiry into the facts were possible, such was not necessary because the
coverage as ruled upon by the Court of Appeals is evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against it because the rule
is that any ambiguity is to be taken contra proferentum. Risk policies should be construed reasonably and in a manner as to make
effective the intentions and expectations of the parties. It added that the policies clearly stipulate that they cover the risks of non-
delivery of an entire package and that it was petitioner itself that invited and granted the extensions and collected premiums
thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in relation to the
excluded risks or warranty specifically stated therein.
By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils of the sea" to
encompass the wide and varied range of risks that were covered.[3] The subject policies contain the "Perils" clause which is a
standard form in any marine insurance policy. Said clause reads:

"Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take upon them in this voyage; they
are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings
of the Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation, condition, or quality soever,
Barratry of the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt, detriment, or damage
of the said goods and merchandise or any part thereof . AND in case of any loss or misfortune it shall be lawful to the ASSURED, their
factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and
merchandises, and ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY,
will contribute according to the rate and quantity of the sum herein INSURED. AND it is expressly declared and agreed that no acts of
the Insurer or Insured in recovering, saving, or preserving the Property insured shall be considered as a Waiver, or Acceptance of
Abandonment. And it is agreed by the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect
as the surest Writing or Policy of INSURANCE made in LONDON. And so the said MALAYAN INSURANCE COMPANY, INC., are
contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and Chattel, to the ASSURED, his or their
Executors, Administrators, or Assigns, for the true Performance of the Premises; confessing themselves paid the Consideration due
unto them for this INSURANCE at and after the rate arranged." (Underscoring supplied)

The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is specifically referred to as
Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus:

"Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat; also
from the consequences of hostilities and warlike operations, whether there be a declaration of war or not; but this warranty shall
not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire
unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a
collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power and for the purpose of
this warranty 'power' includes any authorities maintaining naval, military or air forces in association with power.

Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance."
(Underscoring supplied)

However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses (Cargo) was deemed
incorporated which, in subsection 1.1 of Section 1, provides:

"1. This insurance covers:

1.1 The risks excluded from the standard form of English Marine Policy by the clause warranted free of capture, seizure, arrest,
restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or
not; but this warranty shall not exclude collision, contact with any fixed or floating object (other than a mine or torpedo), stranding,
heavy weather or fire unless caused directly (and independently of the nature on voyage or service which the vessel concerned or, in
the case of a collision any other vessel involved therein is performing) by a hostile act by or against a belligerent power; and for the
purpose of this warranty 'power' includes any authority maintaining naval, military or air forces in association with a power. Further
warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy."

According to petitioner, TIANO WAS HERE the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses
(Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike operations if this Court
strictly construes the heading of the said Clauses. However, it also claims that the parties intended to include arrests, etc. even if it
were not the result of hostilities or warlike operations. It further claims that on the strength of jurisprudence on the matter, the
term "arrests" would only cover those arising from political or executive acts, concluding that whether private respondent's claim is
anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by
judicial authorities is an excluded risk.[4]
This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it assumed the risk of
arrest caused solely by executive or political acts of the government of the seizing state and thereby excludes "arrests" caused by
ordinary legal processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the Court of
Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed included among the covered risks.
This interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses provided that "this insurance
covers the risks excluded from the Standard Form of English Marine Policy by the clause 'Warranted free of capture, seizure, arrest,
etc. x x x'" or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the
Standard Form of English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the covered risk simply
because the F.C. & S. Clause under the Institute War Clauses can only be operative in case of hostilities or warlike operations on
account of its heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that ". . . Although the F.C. &
S. Clause may have originally been inserted in marine policies to protect against risks of war, (see generally G. Gilmore & C. Black,
The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, x x x"[5] In fact, petitioner itself averred that subsection 1.1 of
Section 1 of the Institute War Clauses included "arrest" even if it were not a result of hostilities or warlike operations.[6] In this
regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process, logically,
such "arrest" would now become a covered risk under subsection 1.1 of Section 1 of the Institute War Clauses, regardless of
whether or not said "arrest" by civil authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to eliminate
the risks of warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or warlike operations x x
x"[7] In the same vein, it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to
warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection
1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of hostilities or warlike
operations."[8]
This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the policy in order to
avoid being liable for private respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned by executive or
political acts of government which is interpreted as not referring to those caused by ordinary legal processes as contained in the
"Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political acts of the government
and naturally, also those caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of Section 1 of the Institute
War Clauses which now includes in the coverage risks of arrest due to executive or political acts of a government but then still
excludes "arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said Clauses should also have included
"arrests" previously excluded from the coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the
policy nonsensical, should, by all means, be avoided. [9]Likewise, it must be borne in mind that such contracts are invariably prepared
by the companies and must be accepted by the insured in the form in which they are written. [10] Any construction of a marine policy
rendering it void should be avoided.[11] Such policies will, therefore, be construed strictly against the company in order to avoid a
forfeiture, unless no other result is possible from the language used. [12]
If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract by special proviso,
exception, or exemption, it should express such limitation in clear and unmistakable language. [13] Obviously, the deletion of the F.C.
& S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) gave rise to
ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly indicated as an exception in the subject policies,
there would have been no controversy with respect to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly against the company. [14] Even an express
exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose benefit the exception
is introduced.[15]
An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract which is,
to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of
language in the policy.[16] Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is
adopted.[17]
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in
favor of the insured, where the contract or policy is prepared by the insurer. [18] A contract of insurance, being a contract of adhesion,
par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor
of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its obligations. [19]
In view of the foregoing, this Court sees no need to discuss the other issues presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

MALAYAN INSURANCE CO., G.R. No. 172156 INC.,[1]Petitioner, Present:

QUISUMBING, J., - versus - Chairperson, CARPIO, CARPIO MORALES, TINGA, and VELASCO, JR., JJ. REGIS BROKERAGE CORP.,
Respondent. Promulgated: November 23, 2007

DECISION
TINGA, J.:

We consider whether an insurer, in an action for recoupment instituted in its capacity as the subrogee of the insured, may be
conferred favorable relief even if it failed to introduce in evidence the insurance contract or policy, or even allege the existence nay
recite the substance and attach a copy of such document in the complaint. The answer is as self-evident as meets the eye.
This Petition for Review under Rule 45 was filed by petitioner Malayan Insurance Co., Inc. (Malayan), [2] assailing the
Decision[3] dated 23 December 2005 of the Court of Appeals in C.A. G.R. SP No. 90505, as well as its Resolution [4] dated 5 April 2006
denying petitioners motion for reconsideration.

The facts require little elaboration. Around 1 February 1995, Fasco Motors Group loaded 120 pieces of motors on board China
Airlines Flight 621 bound for Manila from the United States. The cargo was to be delivered to consignee ABB Koppel, Inc. (ABB
Koppel).[5] When the cargo arrived at the Ninoy Aquino International Airport, it was discharged without exception and forwarded to
Peoples Aircargo & Warehousing Corp.s (Paircargos) warehouse for temporary storage pending release by the Bureau of Customs.
Paircargo remained in possession of the cargo until 7 March 1995, at which point respondent Regis Brokerage Corp. (Regis)
withdrew the cargo and delivered the same to ABB Koppel at its warehouse. [6] When the shipment arrived at ABB Koppels
warehouse, it was discovered that only 65 of the 120 pieces of motors were actually delivered and that the remaining 55 motors,
valued at US$2,374.35, could not be accounted for.[7]

The shipment was purportedly insured with Malayan by ABB Koppel. Demand was first made upon Regis and Paircargo for payment
of the value of the missing motors, but both refused to pay. [8] Thus, Malayan paid ABB Koppel the amount of P156,549.55 apparently
pursuant to its insurance agreement, and Malayan was on that basissubrogated to the rights of ABB Koppel against Regis and
Paircargo.[9] On 24 June 1996, Malayan filed a complaint for damages against Regis and Paircargo with the Metropolitan Trial Court
(MeTC) of Manila, Branch 9. In the course of trial, Malayan presented Marine Risk Note No. RN-0001-19832 (Marine Risk Note)
dated 21 March 1995 as proof that the cargo was insured by Malayan.[10]

The MeTC rendered a Decision[11] dated 25 May 2001 adjudging Regis alone liable to Malayan in the amount of P156,549.00 as
actual damages, P15,000.00 as attorneys fees, and costs of suits. With the exception of the award of attorneys fees, the MeTC
decision was affirmed on appeal to the Regional Trial Court (RTC) of Manila, through a Decision dated 28 February 2005.[12]

Regis filed a petition for review with the Court of Appeals seeking the reversal of the MeTC and RTC decisions. On 23 December
2005, the Court of Appeals promulgated its decision vacating the RTC judgment and ordering the dismissal of Malayans complaint.
The central finding that formed the Court of Appeals decision was that the Marine Risk Note presented as proof that the cargo was
insured was invalid.[13] It was observed that the Marine Risk Note was procured from Malayan only on 21 March 1995, when in fact
the insured, ABB Koppel, had learned of the partial loss of the motors as early as 7 March 1995.[14] The appellate court noted that
under Section 3 of the Insurance Code, the past event which may be insured against must be unknown to the parties and so for that
reason the insurance contract in this case violated Section 3. The Court of Appeals further ruled that the due execution and
authenticity of the subrogation receipt presented before the trial court by Malayan were not duly proven since the signatories
thereto were not presented by Malayan before the trial court to identify their signatures thereon, and neither was evidence
presented to establish the genuineness of such signatures. [15]
Malayan filed a motion for reconsideration with the Court of Appeals where it contended that the Marine Risk Note is an open policy
per Marine Open Cargo Policy No. OPEN POLICY-0001-00410 issued
before February 1, 1995.[16] The motion was denied by the appellate court, [17] which pointed out that Malayan did not present the
aforecited marine open cargo policy as would indicate the date of its issuance. [18]

Hence, the present petition instituted by Malayan. According to Malayan, the lost cargo was insured not only by the Marine Risk
Note but by the anteceding Marine Insurance Policy No. M/OP/95/0001-410 (Marine Insurance Policy) which it issued in favor of
ABB Koppel on 20 January 1995, or many days before the motors were transported to Manila. A copy of the Marine Insurance Policy
was attached to the present petition, but it is clear and no pretense was made that said policy had not been presented at the trial.

The key arguments raised before us by Malayan flow from the existence of the Marine Insurance Policy. Pains are taken to establish
that there existed as between Malayan and ABB Koppel an open policy under Section 60 of the Insurance Code, wherein the value of
the thing insured is not agreed upon but left to be ascertained in case of loss, and that the Marine Risk Note was nothing but a
determination of the value of the thing insured pursuant to the open policy as established by the Marine Insurance
Policy. Unfortunately for Malayan, the Court could not attribute any evidentiary weight to the Marine Insurance Policy.

It is elementary that this Court is not a trier of facts. We generally refer to the trial court and the Court of Appeals on matters
relating to the admission and evaluation of the evidence. In this case, while the trial courts and the Court of Appeals arrived at
differing conclusions, we essentially agree with the Court of Appeals analysis of Malayans cause of action, and its ordained result. It
appeared that at the very instance the Marine Risk Note was offered in evidence, Regis already posed its objection to the admission
of said document on the ground that such was immaterial, impertinent and irrelevant to this case because the same was issued
on March 21, 1995 which is after the occurrence of the loss on February 1, 1995.[19] Because the trial courts failed to duly consider
whether the Marine Risk Note sufficiently established a valid insurance covering the subject motors, the Court of Appeals acted
correctly in the exercise of its appellate jurisdiction in setting aside the appealed decisions.

Tellingly, Malayans argument before this Court is not that the Court of Appeals erred in its evaluation of the Marine Risk Note
following that documents terms alone, but that the appellate court could not consider the import of the purported Marine Insurance
Policy. Indeed, since no insurance policy was presented at the trial by Malayan, or even before the Court of Appeals,[20] there
certainly is no basis for this Court to admit or consider the same, notwithstanding Malayans attempt to submit such document to us
along with its present petition. As we recently held:

Similarly, petitioner in this case cannot "enervate" the COMELEC's findings by introducing new evidence before this Court,
which in any case is not a trier of facts, and then ask it to substitute its own judgment and discretion for that of the
COMELEC.

The rule in appellate procedure is that a factual question may not be raised for the first time on appeal, and documents
forming no part of the proofs before the appellate court will not be considered in disposing of the issues of an action. This is
true whether the decision elevated for review originated from a regular court or an administrative agency or quasi-judicial
body, and whether it was rendered in a civil case, a special proceeding, or a criminal case. Piecemeal presentation of
evidence is simply not in accord with orderly justice.[21]

Since the Marine Insurance Policy was never presented in evidence before the trial court or the Court of Appeals even, there is no
legal basis to consider such document in the resolution of this case, reflective as that document may have been of the pre-existence
of an insurance contract between Malayan and ABB Koppel even prior to the loss of the motors. In fact, it appears quite plain that
Malayans theory of the case it pursued before the trial court was that the perfected insurance contract which it relied upon as basis
for its right to subrogation was not the Marine Insurance Policy but the Marine Risk Note which, unlike the former, was actually
presented at the trial and offered in evidence. The Claims Processor of Malayan who testified in court in behalf of his employer
actually acknowledged that the proof that ABB Koppel insured the [shipment] to [Malayan] was the Marine Risk Note, and not the
Marine Insurance Policy.[22] Even the very complaint filed by Malayan before the MeTC stated that [t]he subject shipment was
insured by [Malayan] under Risk Note No. 0001-19832,[23] and not by the Marine Insurance Policy, which was not adverted to at all in
the complaint.[24]

Thus, we can only consider the Marine Risk Note in determining whether there existed a contract of insurance between ABB Koppel
and Malayan at the time of the loss of the motors. However, the very terms of the Marine Risk Note itself are quite damning. It is
dated 21 March 1995, or after the occurrence of the loss, and specifically states that Malayan ha[d] this day noted the above-
mentioned risk in your favor and hereby guarantee[s] that this document has all the force and effect of the terms and conditions in
the Corporations printed form of the standard Marine Cargo Policy and the Companys Marine Open Policy. It specifies that at risk
are the 120 pieces of motors which unfortunately had already been compromised as of the date of the Marine Risk Note itself. [25]

Certainly it would be obtuse for us to even entertain the idea that the insurance contract between Malayan and ABB Koppel was
actually constituted by the Marine Risk Note alone. We find guidance on this point in Aboitiz Shipping Corporation v. Philippine
American General Insurance, Co.,[26] where a trial court had relied on the contents of a marine risk note, not the insurance policy
itself, in dismissing a complaint. For this act, the Court faulted the trial court in [obviously mistaking] said Marine Risk Note as an
insurance policy when it is not.[27] The Court proceeded to characterize the marine risk note therein as an acknowledgment or
declaration of the private respondent confirming the specific shipment covered by its Marine Open Policy, the evaluation of the
cargo, and the chargeable premium,[28] a description that is reflective as well of the present Marine Risk Note, if not of marine risk
notes in this country in general.

Malayan correctly points out that the Marine Risk Note itself adverts to Marine Cargo Policy Number Open Policy-0001-00410 as
well as to the standard Marine Cargo Policy and the Companys Marine Open Policy. What the Marine Risk Note bears, as a matter of
evidence, is that it is not apparently the contract of insurance by itself, but merely a complementary or supplementary document to
the contract of insurance that may have existed as between Malayan and ABB Koppel. And while this observation may deviate from
the tenor of the assailed Court of Appeals Decision, it does not presage any ruling in favor of petitioner. Fundamentally, since
Malayan failed to introduce in evidence the Marine Insurance Policy itself as the main insurance contract, or even advert to said
document in the complaint, ultimately then it failed to establish its cause of action for restitution as a subrogee of ABB Koppel.

Malayans right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability of the respondent to ABB Koppel,
even though such liability will necessarily have to be established at the trial for Malayan to recover. Because Malayans right to
recovery derives from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it
inflicted by the respondents, it is critical that Malayan establish the legal basis of such right to subrogation by presenting the
contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot
survive.

Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance Policy. Ideally, this should have been
accomplished from the moment it filed the complaint. Since the Marine Insurance Policy was constitutive of the insurer-insured
relationship from which Malayan draws its right to subrogation, such document should have been attached to the complaint itself,
as provided for in Section 7, Rule 9 of the 1997 Rules of Civil Procedure:

SECTION 7. Action or defense based on document.Whenever an action or defense is based upon a written instrument or
document, the substance of such instrument or document shall be set forth in the pleading, and the original or a copy
thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said copy may
with like effect be set forth in the pleading.

Thus, in an action to enforce or rescind a written contract of lease, the lease contract is the basis of the action and therefore a copy
of the same must either be set forth in the complaint or its substance recited therein, attaching either the original or a copy to the
complaint.[29] The rule has been held to be imperative, mandatory and not merely directory, though must be given a reasonable
construction and not be extended in its scope so as to work injustice. [30] It was incumbent on Malayan, whose right of subrogation
derived from the Marine Insurance Policy, to set forth the substance of such contract in its complaint and to attach an original or a
copy of such contract in the complaint as an exhibit. Its failure to do so harbingers a more terminal defect than merely excluding the
Marine Insurance Policy as relevant evidence, as the failure actually casts an irremissible cloud on the substance of Malayans very
cause of action. Since Malayan alluded to an actionable document, the contract of insurance between it and ABB Koppel, as integral
to its cause of action against Regis and Paircargo, the contract of insurance should have been attached to the complaint.

It may be that there is no specific provision in the Rules of Court which prohibits the admission in evidence of an actionable
document in the event a party fails to comply with the requirement of the rule on actionable documents under Section 7, Rule
9.[31] Yet such qualification does not provide safe harbor for Malayan as it did not even present the Marine Insurance Policy at the
trial, relying instead on the Marine Risk Note only and by its lonesome to constitute the insurer-insured relationship between it and
ABB Koppel, or more precisely as stated in its Formal Offer of Evidence, to prove that the shipment subject of this case was covered
by an insurance policy with the plaintiffs.[32] Before the MeTC, Regis objected to the admission of the Marine Risk Note on the
ground of immateriality and irrelevance because it was issued on March 21, 1995 which is after the occurrence of the loss
on February 1, 1995.[33] The Court of Appeals upheld this objection of Regis as basis for the dismissal of the complaint. In our view,
Malayan may have not been of the precise belief that the Marine Risk Note is the insurance contract itself as even the purpose
stated in its Formal Offer may admit to an interpretation that alludes to an insurance policy with the plaintiffs that may stand
independent of the Marine Risk Note. Yet if that were so, it remains incomprehensible and inexcusable why Malayan neglected to
attach it to its complaint as required by Section 7, Rule 9, or even offer it in the Marine Insurance Policy which constitutes the
insurance contract as evidence before the trial court.

It cannot be denied from the only established facts that Malayan and ABB Koppel comported as if there was an insurance
relationship between them and documents exist that evince the presence of such legal relationship. But under these premises, the
very insurance contract emerges as the white elephant in the room an obdurate presence which everybody reacts to, yet legally
invisible as a matter of evidence since no attempt had been made to prove its corporeal existence in the court of law. It may seem
commonsensical to conclude anyway that there was a contract of insurance between Malayan and ABB Koppel since they obviously
behaved in a manner that indicates such relationship, yet the same conclusion could be had even if, for example, those parties
staged an elaborate charade to impress on the world the existence of an insurance contract when there actually was none. While
there is absolutely no indication of any bad faith of such import by Malayan or ABB Koppel, the fact that the commonsensical
conclusion can be drawn even if there was bad faith that convinces us to reject such line of thinking.

The Court further recognizes the danger as precedent should we sustain Malayans position, and not only because such a ruling
would formally violate the rule on actionable documents. Malayan would have us effectuate an insurance contract without having to
consider its particular terms and conditions, and on a blind leap of faith that such contract is indeed valid and subsisting. The
conclusion further works to the utter prejudice of defendants such as Regis or Paircargo since they would be deprived the
opportunity to examine the document that gives rise to the plaintiffs right to recover against them, or to raise arguments or
objections against the validity or admissibility of such document. If a legal claim is irrefragably sourced from an actionable
document, the defendants cannot be deprived of the right to examine or utilize such document in order to intelligently raise a
defense. The inability or refusal of the plaintiff to submit such document into evidence constitutes an effective denial of that right of
the defendant which is ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the plaintiffs
substantiation of its own cause of action.

Indeed, in the absence of any evidentiary consideration of the actual Marine Insurance Policy, the substance of Malayans right to
recovery as the subrogee of ABB Koppel is not duly confirmed. There can be no consideration of the particular terms and conditions
in the insurance contract that specifically give rise to Malayans right to be subrogated to ABB Koppel, or to such terms that may have
absolved Malayan from the duty to pay the insurance proceeds to that consignee. The particular date as to when such insurance
contract was constituted cannot be established with certainty without the contract itself, and that point is crucial since there can be
no insurance on a risk that had already occurred by the time the contract was executed. Since the documents in evidence and
testimonies allude to marine insurance or marine risk note, it also is a legitimate question whether the particular marine insurance
relationship between Malayan and ABB Koppel also covers cargo delivered not by ships at sea but by airplane flights, as had
occurred in this case. Only the actual policy itself could definitively settle such a question.

We can even note legitimate questions concerning the integrity or viability of the Marine Insurance Policy as belatedly presented
before this court. For one, Regis observes that the Marine Cargo Policy Number as denominated in the Risk Note reads: Open Policy-
0001-00410, while the copy of the Marine Insurance Policy submitted before us is numbered M/OP/95001-410. The variance may
ultimately be explainable, yet the non-presentation of the Marine Insurance Policy before the trial court precludes the due
evaluation of the reason for the difference in numbering.

All told, we hold that Malayan was not able to establish its cause of action as stated in its complaint, based as it was on its right to be
subrogated to ABB Koppel under the insurance contract which it failed to present as an actionable document, or as evidence before
the trial court. The result reached by the Court of Appeals the dismissal of the instant complaint is thus correct. As such, there is no
need to consider the other issues raised in the petition.

WHEREFORE, the petition is DENIED. Costs against petitioner.

SO ORDERED.

G.R. NO. 166245 APRIL 9, 2008

 ETERNAL GARDENS MEMORIAL PARK CORPORATION, PETITIONER,
VS.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, RESPONDENT.

DECISION

VELASCO, JR., J.:

The Case

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the November 26, 2004
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into an agreement
denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under
the policy, the clients of Eternal who purchased burial lots from it on installment basis would be insured by Philamlife. The amount
of insurance coverage depended upon the existing balance of the purchased burial lots. The policy was to be effective for a period of
one year, renewable on a yearly basis.

The relevant provisions of the policy are:

ELIGIBILITY.

Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the Assured for the unpaid
balance of his loan with the Assured, and is accepted for Life Insurance coverage by the Company on its effective date is eligible for
insurance under the Policy.

EVIDENCE OF INSURABILITY.

No medical examination shall be required for amounts of insurance up to P50,000.00. However, a declaration of good health shall be
required for all Lot Purchasers as part of the application. The Company reserves the right to require further evidence of insurability
satisfactory to the Company in respect of the following:

1. Any amount of insurance in excess of P50,000.00.

2. Any lot purchaser who is more than 55 years of age.

LIFE INSURANCE BENEFIT.

The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance of his loan (including arrears
up to but not exceeding 2 months) as reported by the Assured to the Company or the sum of P100,000.00, whichever is smaller.
Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the Policy.

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall
be no insurance if the application of the Lot Purchaser is not approved by the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with a copy of the application
of each purchaser, and the amounts of the respective unpaid balances of all insured lot purchasers. In relation to the instant
petition, Eternal complied by submitting a letter dated December 29, 1982, 4 containing a list of insurable balances of its lot buyers
for October 1982. One of those included in the list as "new business" was a certain John Chuang. His balance of payments was PhP
100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for Chuangs death. Attached to the
claim were the following documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating that Chuang is a
naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assureds Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to submit the following documents relative to its
insurance claim for Chuangs death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate (with form attached);
(3) Application for Insurance accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.

Eternal transmitted the required documents through a letter dated November 14, 1984, 7 which was received by Philamlife on
November 15, 1984.

After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance claim. This prompted Eternal to
demand from Philamlife the payment of the claim for PhP 100,000 on April 25, 1986. 8

In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20, 1986, 9 a portion of which
reads:

The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal Gardens Memorial Park in October 1982
for the total maximum insurable amount of P100,000.00 each. No application for Group Insurance was submitted in our office prior
to his death on August 2, 1984.

In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability provision, "a declaration of good
health shall be required for all Lot Purchasers as party of the application." We cite further the provision on Effective Date of
Coverage under the policy which states that "there shall be no insurance if the application is not approved by the Company." Since
no application had been submitted by the Insured/Assured, prior to his death, for our approval but was submitted instead on
November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal
Gardens being the Assured was a party to the Contract and was therefore aware of these pertinent provisions.

With regard to our acceptance of premiums, these do not connote our approval per se of the insurance coverage but are held by us
in trust for the payor until the prerequisites for insurance coverage shall have been met. We will however, return all the premiums
which have been paid in behalf of John Uy Chuang.

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money against Philamlife, docketed
as Civil Case No. 14736. The trial court decided in favor of Eternal, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE,
ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus
legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorneys fees.

SO ORDERED.

The RTC found that Eternal submitted Chuangs application for insurance which he accomplished before his death, as testified to by
Eternals witness and evidenced by the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life Insurance
Application Forms & Cert."10 It further ruled that due to Philamlifes inaction from the submission of the requirements of the group
insurance on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the premiums during
the same period, Philamlife was deemed to have approved Chuangs application. The RTC said that since the contract is a group life
insurance, once proof of death is submitted, payment must follow.

Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSED and SET ASIDE, and the
complaint is DISMISSED. No costs.

SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternals letter dated December 29,
1982. It further ruled that the non-accomplishment of the submitted application form violated Section 26 of the Insurance Code.
Thus, the CA concluded, there being no application form, Chuang was not covered by Philamlifes insurance.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of substance, not therefore determined by this Honorable Court, or has
decided it in a way not in accord with law or with the applicable jurisprudence, in holding that:

I. The application for insurance was not duly submitted to respondent PhilamLife before the death of John Chuang;

II. There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.

The Courts Ruling

As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the CA and first level courts,
considering their findings of facts are conclusive and binding on this Court. However, such rule is subject to exceptions, as
enunciated in Sampayan v. Court of Appeals:

(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension
of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the [CA] went beyond the issues of the case, or
its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings [of the CA] are contrary to
the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the
facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10) when the
findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the
Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.12(Emphasis supplied.)

In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review them.

Eternal claims that the evidence that it presented before the trial court supports its contention that it submitted a copy of the
insurance application of Chuang before his death. In Eternals letter dated December 29, 1982, a list of insurable interests of buyers
for October 1982 was attached, including Chuang in the list of new businesses. Eternal added it was noted at the bottom of said
letter that the corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was apparently
received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of the insurance application which was
signed by Chuang himself and executed before his death.

On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that Eternal must present
evidence showing that Philamlife received a copy of Chuangs insurance application.

The evidence on record supports Eternals position.

The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states that the insurance forms
for the attached list of burial lot buyers were attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of
the letter together with the attachments. Such receipt is an admission by Philamlife against its own interest. 13 The burden of
evidence has shifted to Philamlife, which must prove that the letter did not contain Chuangs insurance application. However,
Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs insurance application.

To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as received, the contents of
the letter are correct and accounted for.

Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies is groundless. The trial
court is in the best position to determine the reliability and credibility of the witnesses, because it has the opportunity to observe
firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and conclusive on
the appellate court, unless some facts or circumstances of weight and substance have been overlooked, misapprehended, or
misinterpreted,14 that, if considered, might affect the result of the case. 15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no overlooked facts of substance and
value.

Philamlife primarily claims that Eternal did not even know where the original insurance application of Chuang was, as shown by the
testimony of Edilberto Mendoza:

Atty. Arevalo:

Q Where is the original of the application form which is required in case of new coverage?

[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two copies of this form and the original of this is submitted to
Philamlife together with the monthly remittances and the second copy is remained or retained with the marketing department of
Eternal Gardens.

Atty. Miranda:

We move to strike out the answer as it is not responsive as counsel is merely asking for the location and does not [ask] for the
number of copy.

Atty. Arevalo:

Q Where is the original?

[Mendoza:]

A As far as I remember I do not know where the original but when I submitted with that payment together with the new clients all
the originals I see to it before I sign the transmittal letter the originals are attached therein.16

In other words, the witness admitted not knowing where the original insurance application was, but believed that the application
was transmitted to Philamlife as an attachment to a transmittal letter.

As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insurance application forms
were accomplished and the testimony of Mendoza on who actually filled out the application form, these are minor inconsistencies
that do not affect the credibility of the witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to
affect the credibility of witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that the
testimonies have been rehearsed.17

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions evidence as a whole or reflect on
the witnesses honesty. The test is whether the testimonies agree on essential facts and whether the respective versions
corroborate and substantially coincide with each other so as to make a consistent and coherent whole. 18

In the present case, the number of copies of the insurance application that Chuang executed is not at issue, neither is whether the
insurance application presented by Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are minor and do
not affect the credibility of Eternals witnesses.

However, the question arises as to whether Philamlife assumed the risk of loss without approving the application.

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life Policy No. P-1920 dated
December 10, 1980. In the policy, it is provided that:

EFFECTIVE DATE OF BENEFIT.

The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall
be no insurance if the application of the Lot Purchaser is not approved by the Company.

An examination of the above provision would show ambiguity between its two sentences. The first sentence appears to state that
the insurance coverage of the clients of Eternal already became effective upon contracting a loan with Eternal while the second
sentence appears to require Philamlife to approve the insurance contract before the same can become effective.

It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of the insured
and strictly against the insurer in order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v. Court of Appeals,
this Court held that:

Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in
favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion,
par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in
favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be
construed in such a way as to preclude the insurer from noncompliance with its obligations. 19 (Emphasis supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive control of the insurance
company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. 20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10, 1980, must be construed in
favor of the insured and in favor of the effectivity of the insurance contract.

On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a partys purchase of a memorial lot
on installment from Eternal, an insurance contract covering the lot purchaser is created and the same is effective, valid, and binding
until terminated by Philamlife by disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-
1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance
contract. Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice the insured; it cannot
be interpreted as a termination of the insurance contract. The termination of the insurance contract by the insurer must be explicit
and unambiguous.

As a final note, to characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best. Insurance
contracts are wholly prepared by the insurer with vast amounts of experience in the industry purposefully used to its advantage.
More often than not, insurance contracts are contracts of adhesion containing technical terms and conditions of the industry,
confusing if at all understandable to laypersons, that are imposed on those who wish to avail of insurance. As such, insurance
contracts are imbued with public interest that must be considered whenever the rights and obligations of the insurer and the
insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be obligated
to act with haste upon insurance applications, to either deny or approve the same, or otherwise be bound to honor the application
as a valid, binding, and effective insurance contract.21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810 is REVERSED and SET ASIDE. The
May 29, 1996 Decision of the Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of Chuang;

(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time of extra-judicial demand by
Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June 17, 1996 until full payment
of this award; and

(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.

SO ORDERED.

[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
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]

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 Surveyors, Inc.[3] 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., through its
Vice-President A.R. de Leon,[4] rendered a preliminary report[5] finding extensive damage caused by the earthquake to the clubhouse
and to the two swimming pools. Mr. de Leon stated that except for the swimming pools, all affected items have no coverage for
earthquake shocks.[6] On August 11, 1990, petitioner filed its formal demand[7] 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 policy only
afforded earthquake shock coverage to the two swimming pools of the resort. [8] Petitioner and respondent failed to arrive at a
settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] 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;
 5.) Costs.[11]

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.

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.

No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of Appeals based on the following
assigned errors:[14]

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]

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 Agreement On Long Term Policies.[17]
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.
On the other hand, respondent made the following counter arguments: [18]
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, and there was no increase in the premium paid. AHAC-AIU, in a letter[19] 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.
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 shock only) [20]
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 Earthquake.[24]

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.
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 against a specified peril. [27] 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?
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 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 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.
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

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 favor of the insured and strictly against the insurer
company which usually prepares it.[31] 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 case as the parties intent to limit the coverage of the policy to the two swimming pools only is not
ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is dismissed. No costs.
SO ORDERED.

G.R. NO. L-31845 APRIL 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, PETITIONER,

VS.
HONORABLE COURT OF APPEALS, RESPONDENTS.

G.R. NO. L-31878 APRIL 30, 1979

LAPULAPU D. MONDRAGON, PETITIONER,

VS.
HON. COURT OF APPEALS AND NGO HING, RESPONDENTS.

DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878, p.
58), because the petitioners in both cases seek similar relief, through these petitions for certiorari by way of appeal, from the
amended decision of respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance of Cebu,
ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay
plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the
complaint, and the sum of P1,077.75, without interest.

It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life Assurance Company
(hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life of his one-year
old daughter Helen Go. Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon, Branch Manager of
the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the
data on the application form which was signed by private respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as his commission for being a duly authorized agebt
of Pacific Life. Upon the payment of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to private respondent
Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the application form his strong
recommendation for the approval of the insurance application. Then on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said life insurance application for 20-year
endowment plan is not available for minors below seven years old, but Pacific Life can consider the same under the Juvenile Triple
Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company.

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon to private
respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the approval of the
20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially the Chinese, were asking for
such coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of bronchopneumonia.
Thereupon, private respondent sought the payment of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu, which rendered the adverse decision as earlier
refered to against both petitioners.

The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract of the life
insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health and physical condition of Helen
Go, which rendered void the aforesaid Exhibit E.

1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT. These conditions
state that:

A. If the Company or its agent, shan have received the premium deposit ... and the insurance application, ON or PRIOR to the date of
medical examination ... said insurance shan be in force and in effect from the date of such medical examination, for such period as is
covered by the deposit ..., PROVIDED the company shall be satisfied that on said date the applicant was insurable on standard rates
under its rule for the amount of insurance and the kind of policy requested in the application.

D. If the Company does not accept the application on standard rate for the amount of insurance and/or the kind of policy requested
in the application but issue, or offers to issue a policy for a different plan and/or amount ..., the insurance shall not be in force and in
effect until the applicant shall have accepted the policy as issued or offered by the Company and shall have paid the full premium
thereof. If the applicant does not accept the policy, the deposit shall be refunded.

E. If the applicant shall not have been insurable under Condition A above, and the Company declines to approve the application t he
insurance applied for shall not have been in force at any time and the sum paid be returned to the applicant upon the surrender of
this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a provisional or
temporary insurance contract and only upon compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the application and offers to issue a policy for a
different plan, the insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the deposit shall
be reftmded; and (3) that if the applicant is not ble according to the standard rates, and the company disapproves the application,
the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the applicant.

Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an acknowledgment, on behalf
of the company, that the latter's branch office had received from the applicant the insurance premium and had accepted the
application subject for processing by the insurance company; and that the latter will either approve or reject the same on the basis
of whether or not the applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the insurance application of
respondent Ngo Hing, the binding deposit receipt in question had never become in force at any time.

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure outright. As held by
this Court, where an agreement is made between the applicant and the agent, no liability shall attach until the principal approves
the risk and a receipt is given by the agent. The acceptance is merely conditional and is subordinated to the act of the company in
approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim
vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the
insurance application in question on the ground that it is not offering the twenty-year endowment insurance policy to children less
than seven years of age. What it offered instead is another plan known as the Juvenile Triple Action, which private respondent failed
to accept. In the absence of a meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing over the 20-
year endowment life insurance in the amount of P50,000.00 in favor of the latter's one-year old daughter, and with the non-
compliance of the abovequoted conditions stated in the disputed binding deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts, must be assented
to by both parties either in person or by their agents ... The contract, to be binding from the date of the application, must have been
a completed contract, one that leaves nothing to be dione, nothing to be completed, nothing to be passed upon, or determined,
before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement."
We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to him the
rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between the parties who had no meeting of their
minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware that said
company does not offer the life insurance applied for. When he filed the insurance application in dispute, private respondent was,
therefore, only taking the chance that Pacific Life will approve the recommendation of Mondragon for the acceptance and approval
of the application in question along with his proposal that the insurance company starts to offer the 20-year endowment insurance
plan for children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected the proposal and
recommendation. Secondly, having an insurable interest on the life of his one-year old daughter, aside from being an insurance
agent and an offense associate of petitioner Mondragon, private respondent Ngo Hing must have known and followed the progress
on the processing of such application and could not pretend ignorance of the Company's rejection of the 20-year endowment life
insurance application.

At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice Ruperto G. Martin
who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court which completely
reversed the original decision, the following:

Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the reply thereto of appellant
Mondragon reiterating the desire for applicant's father to have the application considered as one for a 20-year endowment plan was
ever duly communicated to Ngo; Hing, father of the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father
of the applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of appellant
Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate" and that it was the
latter who "insisted that the plan be placed on the 20-year endowment plan." Under these circumstances, it is inconceivable that
the progress in the processing of the application was not brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise Mondragon would not have asserted that it was Ngo Hing
himself who insisted on the application as originally filed, thereby implictly declining the offer to consider the application under the
Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was, Ngo Hing should only be presumed to know what kind
of policies are available in the company for minors below 7 years old. What he and Mondragon were apparently trying to do in the
premises was merely to prod the company into going into the business of issuing endowment policies for minors just as other
insurance companies allegedly do. Until such a definite policy is however, adopted by the company, it can hardly be said that it could
have been bound at all under the binding slip for a plan of insurance that it could not have, by then issued at all. (Amended Decision,
Rollo, pp- 52-53).

2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had deliberately
concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit supplied the required
essential data for the insurance application form, he was fully aware that his one-year old daughter is typically a mongoloid child.
Such a congenital physical defect could never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad faith,
withheld the fact materal to the risk to be assumed by the insurance compary. As an insurance agent of Pacific Life, he ought to
know, as he surely must have known. his duty and responsibility to such a material fact. Had he diamond said significant fact in the
insurance application fom Pacific Life would have verified the same and would have had no choice but to disapprove the application
outright.

The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor or openness
and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for the alone
but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or unintentional
the concealment entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al,
105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof.

We are thus constrained to hold that no insurance contract was perfected between the parties with the noncompliance of the
conditions provided in the binding receipt, and concealment, as legally defined, having been comraitted by herein private
respondent.

WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving petitioners
Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by respondent Court and
ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo Hing.
Costs against private respondent.
SO ORDERED.

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health
Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer,
liver disease, asthma or peptic ulcer? (If Yes, give details).[1]

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care
Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization benefits, whether
ordinary or emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability. [2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one
month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care
agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there
was a concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement
that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the
Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of
April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General
Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner
and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her
expenses plus moral damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus
interest, until the amount is fully paid to plaintiff who paid the same;

2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;

3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;

4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED.[3]

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner
Reverente.[4] Petitioners motion for reconsideration was denied.[5]Hence, petitioner brought the instant petition for review, raising
the primary argument that a health care agreement is not an insurance contract; hence the incontestability clause under the
Insurance Code[6]does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and hospitalization which a member may
immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also
points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an
insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of
one year, as compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does not apply,
as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which
is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where
the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a
similar risk; and
5. In consideration of the insurers promise, the insured pays a premium. [8]
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of
himself. Section 10 provides:

Every person has an insurable interest in the life and health:

(1) of himself, of his spouse and of his children;

(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;

(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness
might delay or prevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own health. The
health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.[9] Once the member incurs
hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay
for the same to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application for health
coverage, petitioners required respondents husband to sign an express authorization for any person, organization or entity that has
any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or
any other medical advice or examination.[10] Specifically, the Health Care Agreement signed by respondents husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are
full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of
health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode
of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by
any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is,
by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his
professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the
acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as
stated in the space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicants
medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________ to
give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination. This authorization is in connection with the application for health care coverage only. A
photographic copy of this authorization shall be as valid as the original. [12] (Underscoring ours)

Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or medical examination,
whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed material
if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee
for the benefit or benefits applied for.[13]

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely
depends on opinion rather than fact, especially coming from respondents husband who was not a medical doctor. Where matters of
opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though
they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if
there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the
rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the
insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that
which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such
case the intent to deceive the insurer is obvious and amounts to actual fraud. [15] (Underscoring ours)

The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract. [16] Concealment
as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense
by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is
hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of insurance. The right to
rescind should be exercised previous to the commencement of an action on the contract.[17] In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following
conditions:

1. Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;

3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on
which cancellation is based.[18]

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on liability,
courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.[19] Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract the
insurer.[20] By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract,
ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. [21] This is
equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar,
must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against
the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the trial
court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of
issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six
months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the
defense of concealment or misrepresentation no longer lie.[23]

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their
marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of
a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that
respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove
the expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the attending
physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14,
1995 is AFFIRMED.
SO ORDERED.
FIRST DIVISION

[G.R. No. 154514. July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP
MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., respondents.

DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision[2] dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no
violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship
Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation
(Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance. [3] Pioneer also issued receipts evidencing
payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters unpaid balance.
White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections
186[4] and 187[5] of the Insurance Code, while Pioneer violated Sections 299, [6] 300[7] and 301[8] in relation to Sections 302 and 303,
thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license because
it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club).
Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship
Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as
agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court distinguished between
P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of
Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT
SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS
ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS
AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the Philippines? (2)
Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business in the
Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance
Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the
definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals[10] as an association composed of shipowners in general
who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning
that the members incur in favor of third parties. It stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and
provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the Philippines. It
is merely an association of vessel owners who have come together to provide mutual protection against liabilities incidental to
shipowning.[11] Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsungwas the jurisdiction of the
court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes doing an insurance business or transacting an insurance business.
These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the
provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or
transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an insurance
business.[12]
The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be
performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances under which the
performance becomes requisite. It is not by what it is called. [13]
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. [14]
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a marine
adventure.[15] Section 99[16] of the Insurance Code enumerates the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In it, the
members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are
paid, and where the profits are divided among themselves, in proportion to their interest. [17] Additionally, mutual insurance
associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs. [18]
A P & I Club is a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the
members.[19] By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance
business.
The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated
by Section 187[20] of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments
in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the
calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license from the
Insurance Commission.
Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is
allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission. [21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special license?
Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration [22] issued by the Insurance
Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority [23] issued by the same
agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an agent/broker of
Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for Steamship
Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance,
or receive for services in obtaining insurance, any commission or other compensation from any insurance company doing business in
the Philippines or any agent thereof, without first procuring a license so to act from the Commissioner, which must be renewed
annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers. Regrettably, we are
not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the Decision
dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting
Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent, respectively. The petitioners prayer for the revocation of Pioneers
Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.
SO ORDERED.

PHILIPPINE HEALTH CARE G.R. No. 167330

PROVIDERS, INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,

CORONA,
- v e r s u s - CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.*

COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 18, 2009

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

RESOLUTION
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among
them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall endeavor
to make essential goods, health and other social services available to all the people at affordable cost. There shall be
priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008,
respectively, filed by petitioner Philippine Health Care Providers, Inc. [2]

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance organization to take care of the sick and disabled
persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the
organization. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated
or accredited by it.

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care agreement with the
members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner
filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No.
[231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed
that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a non-
life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled
and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist
from collecting the same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary
Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from
January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners health care
agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it is a health
maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner
and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but
an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration,
asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the
business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance
company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition that health
care services are not in the nature of an insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the
amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated under
Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered by Section
185.

(g) The agreements do not fall under the phrase other branch of insurance mentioned in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA[5] 9480 for the taxable year 2005 and all prior years. Therefore,
the questioned assessments on the DST are now rendered moot and academic.[6]

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 9480 [7] (also known as
the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year ending
December 31, 2005.[8]

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987. [9] It is engaged
in the dispensation of the following medical services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and
advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and
the like and

Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.[10]
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical
services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians,
medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians, i.e. those directly employed by it[11] or whose services are contracted by
it.[12] Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.[13] If and when a member avails of the benefits under the agreement, petitioner pays the
participating physicians and other health care providers for the services rendered, at pre-agreed rates.[14]

To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care
agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the
various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.

HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE

INSURANCE BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are
treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in
the transaction of the business.[15]

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine
whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable
for DST on its health care agreements.[16]

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not
doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory. [17] This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every word. [18]
From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document
must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the business
of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of 1995), an HMO is an entity that provides,
offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid
premium.[19] The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it
was not.

Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what constitutes doing an insurance business or
transacting an insurance business:

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an
insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, [21] have determined that HMOs
are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is not insurance.

Applying the principal object and purpose test, [22] there is significant American case law supporting the argument that a corporation
(such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services,
is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of Appeals of the District of Columbia Circuit
held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the
distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness or
accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members.
xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are
concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the
other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower
prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather
than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than
merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at
sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in
short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost
after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If
attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement
and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or
services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for
assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional
sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others
present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that
or something else to which it is related in the particular plan is its principal object purpose. [24] (Emphasis supplied)

In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of operation as a whole of the
corporation, it was service rather than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence
or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more
broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have
a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on
a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that
need. Unquestionably this is service of a high order and not indemnity. [26] (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v.
Horizon Blue Cross and Blue Shield of New Jersey[27] is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident insurers is that the former
undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the
schedule of rates contained in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render
services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service
corporations plan, not only will the subscribers be deprived of the protection which they might reasonably have
expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements
of the General Insurance Laws.

A participating provider of health care services is one who agrees in writing to render health care services to or for persons
covered by a contract issued by health service corporation in return for which the health service corporation agrees to
make payment directly to the participating provider.[28] (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical
services as needed, with payment made directly to the provider of these services. [29] In short, even if petitioner assumes the risk of
paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered
as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating
health providers would still be incidental to petitioners purpose of providing and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system
and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object.

In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep members
from developing medical conditions or diseases.[30] As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to minimize thepossibility of any assumption of risk on
its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a
medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but
these are incidental to the principal activity of providing them medical care. The insurance-like aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the principal purpose test used in the above-quoted U.S. cases, we are not saying that
petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those
cases. What we are stating is that, for the purpose of determining what doing an insurance business means, we have to scrutinize
the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.[32]

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not
supervised by the Insurance Commission but by the Department of Health. [33] In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance business.This determination of the commissioner
must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was
explained in Nestle Philippines, Inc. v. Court of Appeals:[34]

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society
and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the
accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing
a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[35] the Court stressed that executive
officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of
the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much
weight to the government agency officials charged with the implementation of the law, their competence, expertness,
experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret. [36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT

CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997
Section 185 states that DST is imposed on all policies of insurance or obligations of the nature of indemnity for loss, damage, or
liability. In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are
therefore insurance contracts:

It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional
fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will
incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of
sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and
laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event
which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled
to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the
stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot
be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services
even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the
costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the
other members of the health care program. This is insurance. [37]

We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.[38] This is because taxation is a destructive power which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government. [39]Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically
provided.[40]

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life
insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax
provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO.
For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where
the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk and

5. In consideration of the insurers promise, the insured pays a premium.[41]

Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an
insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an
insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance
contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments,
it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the
lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify
against loss and damage resulting from the defense of actions for malpractice. [42] (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with, there is no
loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the
member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by
the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the
agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is
the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates.
The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any
third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms indemnify or
indemnity presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray,
routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not
confined to the happening of a contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an
insurer. Citing Jordan, the Court determined that the primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services. [44] Since indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract
of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish
it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a
need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn
a reasonable return on its investment.But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also
known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of
premium is calculated on the basis of assumptions made relative to the insured.[45]

However, assuming that petitioners commitment to provide medical services to its members can be construed as an acceptance of
the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioners objective
is to provide medical services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance contract within
the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE
AGREEMENTS OF HMOS

Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section 185
of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and
health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189
(otherwise known as the Internal Revenue Law of 1904)[46] enacted on July 2, 1904 and became effective on August 1, 1904. Except
for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of
stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or
for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be
written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen
hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity,
employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except
life, marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to
internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section
30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657
(Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No.
2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal
revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the
provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section
234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198. And
under Section 23 of EO[47] 273 dated July 25, 1987, it was again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision
was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 9243[48] but Section 185
was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation
in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However,
there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as
1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.[49]

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the
DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were
enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been
the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had
many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO. [50]

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care
agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the
context of the provision.

THE POWER TO TAX IS NOT

THE POWER TO DESTROY

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power that it was once opined that the power to tax involves the power to
destroy.[52]

Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth of P259
million.[54] Respondent never disputed these assertions.Given the realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to
encourage private enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is
counter-productive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the
majority of our people.[59]

PETITIONERS TAX LIABILITY

WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and
academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its
net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.[61]

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax
involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in
2005 and the preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however,
is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances
amounting to tax fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480. [63] There is
no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished by its
availment of the tax amnesty under RA 9480.

IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the
CA[64] in CIR v. Philippine National Bank[65] that a health care agreement of Philamcare Health Systems is not an insurance contract
for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine
National Bank (G.R. No. 148680).[66]Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on
the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case.
When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has
already become final.[67] When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained. [68] But what is
its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata.[69] However, if
other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted that a previous case, CIR v. Baier-Nickel[71] involving the same parties and
the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter case because the two cases involved
different subject matters as they were concerned with the taxable income of different taxable years.[72]

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment
is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief
Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section
4(3) of Article VIII speaks of a decision.[73] Indeed, as a rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care agreement
was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not
even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the
fact that petitioners health care agreements are not subject to DST.
A FINAL NOTE

Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any
legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage
earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more
efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services),
including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other
medical expenses brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the
State in achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.[74] Its imposition will elevate the cost of health
care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is REVERSED andSET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.

MALAYAN INSURANCE CO., INC., G.R. No. 194320

Petitioner, Promulgated:
- versus -
February 1, 2012
RODELIO ALBERTO and

ENRICO ALBERTO REYES,

Respondents.

DECISION

VELASCO, JR., J.:

The Case

Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and set aside the July 28, 2010 Decision [1] of the
Court of Appeals (CA) and its October 29, 2010 Resolution [2] denying the motion for reconsideration filed by petitioner Malayan
Insurance Co., Inc. (Malayan Insurance). The July 28, 2010 CA Decision reversed and set aside the Decision [3] dated February 2, 2009
of the Regional Trial Court, Branch 51 in Manila.

The Facts

At around 5 oclock in the morning of December 17, 1995, an accident occurred at the corner of EDSA and Ayala Avenue, Makati City,
involving four (4) vehicles, to wit: (1) a Nissan Bus operated by Aladdin Transit with plate number NYS 381; (2) an Isuzu Tanker with
plate number PLR 684; (3) a Fuzo Cargo Truck with plate number PDL 297; and (4) a Mitsubishi Galant with plate number TLM 732.[4]

Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer 1 Alfredo M. Dungga (SPO1 Dungga), the
Isuzu Tanker was in front of the Mitsubishi Galant with the Nissan Bus on their right side shortly before the vehicular incident. All
three (3) vehicles were at a halt along EDSA facing the south direction when the Fuzo Cargo Truck simultaneously bumped the rear
portion of the Mitsubishi Galant and the rear left portion of the Nissan Bus. Due to the strong impact, these two vehicles were
shoved forward and the front left portion of the Mitsubishi Galant rammed into the rear right portion of the Isuzu Tanker. [5]

Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance Policy No. PV-025-00220 in favor of First
Malayan Leasing and Finance Corporation (the assured), insuring the aforementioned Mitsubishi Galant against third party liability,
own damage and theft, among others. Having insured the vehicle against such risks, Malayan Insurance claimed in its Complaint
dated October 18, 1999 that it paid the damages sustained by the assured amounting to PhP 700,000. [6]

Maintaining that it has been subrogated to the rights and interests of the assured by operation of law upon its payment to the latter,
Malayan Insurance sent several demand letters to respondents Rodelio Alberto (Alberto) and Enrico Alberto Reyes (Reyes), the
registered owner and the driver, respectively, of the Fuzo Cargo Truck, requiring them to pay the amount it had paid to the
assured. When respondents refused to settle their liability, Malayan Insurance was constrained to file a complaint for damages for
gross negligence against respondents.[7]

In their Answer, respondents asserted that they cannot be held liable for the vehicular accident, since its proximate cause was the
reckless driving of the Nissan Bus driver.They alleged that the speeding bus, coming from the service road of EDSA, maneuvered its
way towards the middle lane without due regard to Reyes right of way. When the Nissan Bus abruptly stopped, Reyes stepped hard
on the brakes but the braking action could not cope with the inertia and failed to gain sufficient traction. As a consequence, the Fuzo
Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in front of it. The Nissan Bus, on
the other hand, sideswiped the Fuzo Cargo Truck, causing damage to the latter in the amount of PhP 20,000. Respondents also
controverted the results of the Police Report, asserting that it was based solely on the biased narration of the Nissan Bus driver. [8]
After the termination of the pre-trial proceedings, trial ensued. Malayan Insurance presented the testimony of its lone witness, a
motor car claim adjuster, who attested that he processed the insurance claim of the assured and verified the documents submitted
to him. Respondents, on the other hand, failed to present any evidence.

In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled in favor of Malayan Insurance and declared
respondents liable for damages. The dispositive portion reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff against defendants jointly and severally to pay plaintiff
the following:

1. The amount of P700,000.00 with legal interest from the time of the filing of the complaint;

2. Attorneys fees of P10,000.00 and;

3. Cost of suit.

SO ORDERED.[9]

Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No. 93112. In its Decision dated July 28, 2010, the CA
reversed and set aside the Decision of the trial court and ruled in favor of respondents, disposing:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the assailed Decision dated 2 February
2009 REVERSED and SET ASIDE. The Complaint dated 18 October 1999 is hereby DISMISSED for lack of merit. No costs.

SO ORDERED.[10]

The CA held that the evidence on record has failed to establish not only negligence on the part of respondents, but also compliance
with the other requisites and the consequent right of Malayan Insurance to subrogation. [11] It noted that the police report, which has
been made part of the records of the trial court, was not properly identified by the police officer who conducted the on-the-spot
investigation of the subject collision. It, thus, held that an appellate court, as a reviewing body, cannot rightly appreciate firsthand
the genuineness of an unverified and unidentified document, much less accord it evidentiary value. [12]

Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a police report is a prima facie evidence of the
facts stated in it. And inasmuch as they never questioned the presentation of the report in evidence, respondents are deemed to
have waived their right to question its authenticity and due execution.[13]

In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration. Hence, Malayan Insurance filed the instant
petition.

The Issues

In its Memorandum[14] dated June 27, 2011, Malayan Insurance raises the following issues for Our consideration:

I. WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE POLICE REPORT SINCE THE POLICE
INVESTIGATOR WHO PREPARED THE SAME DID NOT ACTUALLY TESTIFY IN COURT THEREON.
II. WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS IMPAIRED AND/OR DEFICIENT.

On the other hand, respondents submit the following issues in its Memorandum [15] dated July 7, 2011:

I. WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR FAILURE OF MALAYAN INSURANCE TO
OVERCOME THE BURDEN OF PROOF REQUIRED TO ESTABLISH THE NEGLIGENCE OF RESPONDENTS.
II. WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN INSURANCE ARE SUFFICIENT TO CLAIM FOR THE
AMOUNT OF DAMAGES.
III. WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS PASSED COMPLIANCE AND REQUISITES AS
PROVIDED UNDER PERTINENT LAWS.
Essentially, the issues boil down to the following: (1) the admissibility of the police report; (2) the sufficiency of the evidence to
support a claim for gross negligence; and (3) the validity of subrogation in the instant case.

Our Ruling

The petition has merit.

Admissibility of the Police Report

Malayan Insurance contends that, even without the presentation of the police investigator who prepared the police report, said
report is still admissible in evidence, especially since respondents failed to make a timely objection to its presentation in
evidence.[16] Respondents counter that since the police report was never confirmed by the investigating police officer, it cannot be
considered as part of the evidence on record.[17]

Indeed, under the rules of evidence, a witness can testify only to those facts which the witness knows of his or her personal
knowledge, that is, which are derived from the witness own perception. [18] Concomitantly, a witness may not testify on matters
which he or she merely learned from others either because said witness was told or read or heard those matters. [19] Such testimony
is considered hearsay and may not be received as proof of the truth of what the witness has learned. This is known as the hearsay
rule.[20]

As discussed in D.M. Consunji, Inc. v. CA,[21] Hearsay is not limited to oral testimony or statements; the general rule that excludes
hearsay as evidence applies to written, as well as oral statements.

There are several exceptions to the hearsay rule under the Rules of Court, among which are entries in official records. [22] Section 44,
Rule 130 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.

In Alvarez v. PICOP Resources,[23] this Court reiterated the requisites for the admissibility in evidence, as an exception to the
hearsay rule of entries in official records, thus: (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 or her 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 or her stated, which must have been acquired by the public officer or other person
personally or through official information.

Notably, the presentation of the police report itself is admissible as an exception to the hearsay rule even if the police investigator
who prepared it was not presented in court, as long as the above requisites could be adequately proved.[24]

Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared the report, and he did so in the performance of
his duty. However, what is not clear is whether SPO1 Dungga had sufficient personal knowledge of the facts contained in his
report. Thus, the third requisite is lacking.

Respondents failed to make a timely objection to the police reports presentation in evidence; thus, they are deemed to have waived
their right to do so.[25] As a result, the police report is still admissible in evidence.

Sufficiency of Evidence

Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck, bumped the rear of the Mitsubishi Galant, he is
presumed to be negligent unless proved otherwise. It further contends that respondents failed to present any evidence to overturn
the presumption of negligence.[26] Contrarily, respondents claim that since Malayan Insurance did not present any witness who shall
affirm any negligent act of Reyes in driving the Fuzo Cargo truck before and after the incident, there is no evidence which would
show negligence on the part of respondents.[27]

We agree with Malayan Insurance. Even if We consider the inadmissibility of the police report in evidence, still, respondents cannot
evade liability by virtue of the res ipsa loquitur doctrine. The D.M. Consunji, Inc. case is quite elucidating:
Petitioners contention, however, loses relevance in the face of the application of res ipsa loquitur by the CA. The effect of
the doctrine is to warrant a presumption or inference that the mere fall of the elevator was a result of the person having
charge of the instrumentality was negligent. As a rule of evidence, the doctrine of res ipsa loquitur is peculiar to the law of
negligence which recognizes that prima facie negligence may be established without direct proof and furnishes a substitute
for specific proof of negligence.

The concept of res ipsa loquitur has been explained in this wise:

While negligence is not ordinarily inferred or presumed, and while the mere happening of an accident or injury will not
generally give rise to an inference or presumption that it was due to negligence on defendants part, under the doctrine
of res ipsa loquitur, which means, literally, the thing or transaction speaks for itself, or in one jurisdiction, that the thing
or instrumentality speaks for itself, the facts or circumstances accompanying an injury may be such as to raise a
presumption, or at least permit an inference of negligence on the part of the defendant, or some other person who is
charged with negligence.

x x x where it is shown that the thing or instrumentality which caused the injury complained of was under the control
or management of the defendant, and that the occurrence resulting in the injury was such as in the ordinary course of
things would not happen if those who had its control or management used proper care, there is sufficient evidence, or,
as sometimes stated, reasonable evidence, in the absence of explanation by the defendant, that the injury arose from
or was caused by the defendants want of care.

One of the theoretical bases for the doctrine is its necessity, i.e., that necessary evidence is absent or not available.

The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the instrumentality
which causes the injury either knows the cause of the accident or has the best opportunity of ascertaining it and that
the plaintiff has no such knowledge, and therefore is compelled to allege negligence in general terms and to rely upon
the proof of the happening of the accident in order to establish negligence. The inference which the doctrine permits is
grounded upon the fact that the chief evidence of the true cause, whether culpable or innocent, is practically accessible
to the defendant but inaccessible to the injured person.

It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a plaintiff, without knowledge of the
cause, reaches over to defendant who knows or should know the cause, for any explanation of care exercised by the
defendant in respect of the matter of which the plaintiff complains. The res ipsa loquitur doctrine, another court has
said, is a rule of necessity, in that it proceeds on the theory that under the peculiar circumstances in which the doctrine
is applicable, it is within the power of the defendant to show that there was no negligence on his part, and direct proof
of defendants negligence is beyond plaintiffs power. Accordingly, some courts add to the three prerequisites for the
application of the res ipsa loquitur doctrine the further requirement that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no knowledge or means of knowledge as to the cause of the accident, or that
the party to be charged with negligence has superior knowledge or opportunity for explanation of the accident.

The CA held that all the requisites of res ipsa loquitur are present in the case at bar:

There is no dispute that appellees husband fell down from the 14th floor of a building to the basement while he was
working with appellants construction project, resulting to his death. The construction site is within the exclusive control
and management of appellant. It has a safety engineer, a project superintendent, a carpenter leadman and others who
are in complete control of the situation therein. The circumstances of any accident that would occur therein are
peculiarly within the knowledge of the appellant or its employees. On the other hand, the appellee is not in a position
to know what caused the accident. Res ipsa loquitur is a rule of necessity and it applies where evidence is absent or not
readily available, provided the following requisites are present: (1) the accident was of a kind which does not ordinarily
occur unless someone is negligent; (2) the instrumentality or agency which caused the injury was under the exclusive
control of the person charged with negligence; and (3) the injury suffered must not have been due to any voluntary
action or contribution on the part of the person injured. x x x.

No worker is going to fall from the 14th floor of a building to the basement while performing work in a construction
site unless someone is negligent[;] thus, the first requisite for the application of the rule of res ipsa loquitur is present.
As explained earlier, the construction site with all its paraphernalia and human resources that likely caused the injury is
under the exclusive control and management of appellant[;] thus[,] the second requisite is also present. No
contributory negligence was attributed to the appellees deceased husband[;] thus[,] the last requisite is also present.
All the requisites for the application of the rule of res ipsa loquitur are present, thus a reasonable presumption or
inference of appellants negligence arises. x x x.
Petitioner does not dispute the existence of the requisites for the application of res ipsa loquitur, but argues that the
presumption or inference that it was negligent did not arise since it proved that it exercised due care to avoid the
accident which befell respondents husband.

Petitioner apparently misapprehends the procedural effect of the doctrine. As stated earlier, the defendants negligence is
presumed or inferred when the plaintiff establishes the requisites for the application of res ipsa loquitur. Once the plaintiff
makes out a prima facie case of all the elements, the burden then shifts to defendant to explain. The presumption or
inference may be rebutted or overcome by other evidence and, under appropriate circumstances a disputable
presumption, such as that of due care or innocence, may outweigh the inference. It is not for the defendant to explain or
prove its defense to prevent the presumption or inference from arising. Evidence by the defendant of say, due care, comes
into play only after the circumstances for the application of the doctrine has been established. [28]

In the case at bar, aside from the statement in the police report, none of the parties disputes the fact that the Fuzo Cargo Truck hit
the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in front of it. Respondents, however, point to the
reckless driving of the Nissan Bus driver as the proximate cause of the collision, which allegation is totally unsupported by any
evidence on record. And assuming that this allegation is, indeed, true, it is astonishing that respondents never even bothered to file
a cross-claim against the owner or driver of the Nissan Bus.

What is at once evident from the instant case, however, is the presence of all the requisites for the application of the rule of res ipsa
loquitur. To reiterate, res ipsa loquituris a rule of necessity which applies where evidence is absent or not readily available. As
explained in D.M. Consunji, Inc., it is partly based upon the theory that the defendant in charge of the instrumentality which causes
the injury either knows the cause of the accident or has the best opportunity of ascertaining it and that the plaintiff has no such
knowledge, and, therefore, is compelled to allege negligence in general terms and to rely upon the proof of the happening of the
accident in order to establish negligence.

As mentioned above, the requisites for the application of the res ipsa loquitur rule are the following: (1) the accident was of a kind
which does not ordinarily occur unless someone is negligent; (2) the instrumentality or agency which caused the injury was under
the exclusive control of the person charged with negligence; and (3) the injury suffered must not have been due to any voluntary
action or contribution on the part of the person injured. [29]

In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the Mitsubishi Galant unless someone is negligent.
Also, the Fuzo Cargo Truck was under the exclusive control of its driver, Reyes. Even if respondents avert liability by putting the
blame on the Nissan Bus driver, still, this allegation was self-serving and totally unfounded. Finally, no contributory negligence was
attributed to the driver of the Mitsubishi Galant. Consequently, all the requisites for the application of the doctrine of res ipsa
loquitur are present, thereby creating a reasonable presumption of negligence on the part of respondents.

It is worth mentioning that just like any other disputable presumptions or inferences, the presumption of negligence may be
rebutted or overcome by other evidence to the contrary. It is unfortunate, however, that respondents failed to present any evidence
before the trial court. Thus, the presumption of negligence remains. Consequently, the CA erred in dismissing the complaint for
Malayan Insurances adverted failure to prove negligence on the part of respondents.

Validity of Subrogation

Malayan Insurance contends that there was a valid subrogation in the instant case, as evidenced by the claim check voucher [30] and
the Release of Claim and Subrogation Receipt[31] presented by it before the trial court. Respondents, however, claim that the
documents presented by Malayan Insurance do not indicate certain important details that would show proper subrogation.

As noted by Malayan Insurance, respondents had all the opportunity, but failed to object to the presentation of its evidence. Thus,
and as We have mentioned earlier, respondents are deemed to have waived their right to make an objection. As this Court held
in Asian Construction and Development Corporation v. COMFAC Corporation:

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard
such evidence. We note that ASIAKONSTRUCTs counsel of record before the trial court, Atty. Bernard Dy, who actively
participated in the initial stages of the case stopped attending the hearings when COMFAC was about to end its
presentation. Thus, ASIAKONSTRUCT could not object to COMFACs offer of evidence nor present evidence in its defense;
ASIAKONSTRUCT was deemed by the trial court to have waived its chance to do so.

Note also that when a party desires the court to reject the evidence offered, it must so state in the form of a timely
objection and it cannot raise the objection to the evidence for the first time on appeal. Because of a partys failure to
timely object, the evidence becomes part of the evidence in the case. Thereafter, all the parties are considered bound by
any outcome arising from the offer of evidence properly presented.[32] (Emphasis supplied.)

Bearing in mind that the claim check voucher and the Release of Claim and Subrogation Receipt presented by Malayan Insurance are
already part of the evidence on record, and since it is not disputed that the insurance company, indeed, paid PhP 700,000 to the
assured, then there is a valid subrogation in the case at bar. As explained in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and
Surety Corporation:

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is
substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The
principle covers a situation wherein an insurer has paid a loss under an insurance policy is entitled to all the rights and
remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full
substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor
could employ to enforce payment.

We have held that payment by the insurer to the insured operates as an equitable assignment to the insurer of all the
remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the
insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and
to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.[33]

Considering the above ruling, it is only but proper that Malayan Insurance be subrogated to the rights of the assured.

WHEREFORE, the petition is hereby GRANTED. The CAs July 28, 2010 Decision and October 29, 2010 Resolution in CA-G.R. CV No.
93112 are hereby REVERSED and SET ASIDE. The Decision dated February 2, 2009 issued by the trial court in Civil Case No. 99-95885
is hereby REINSTATED.

No pronouncement as to cost.

SO ORDERED.

DE LEON, JR., J.: G.R. NO. 127897 NOVEMBER 15, 2001

DELSAN TRANSPORT LINES, INC., PETITIONER,

VS.
THE HON. COURT OF APPEALS AND AMERICAN HOME ASSURANCE CORPORATION, RESPONDENTS.

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals in CA-G.R. CV No. 39836 promulgated on June
17, 1996, reversing the decision of the Regional Trial Court of Makati City, Branch 137, ordering petitioner to pay private respondent
the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and
the Resolution2 dated January 21, 1997 which denied the subsequent motion for reconsideration.

The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the petitioner, Delsan
Transport Lines, Inc., for a period of one year whereby the said common carrier agreed to transport Caltexs industrial fuel oil from
the Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner took on board its vessel, MT Maysun
2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was
insured with the private respondent, American Home Assurance Corporation.

On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City. Unfortunately, the vessel sank in the early morning of
August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel oil.

Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five Pesos and Fifty-
Seven Centavos (P5,096,635.67) representing the insured value of the lost cargo. Exercising its right of subrogation under Article
2207 of the New Civil Code, the private respondent demanded of the petitioner the same amount it paid to Caltex.1wphi1.nt
Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint with the Regional Trial
Court of Makati City, Branch 137, for collection of a sum of money. After the trial and upon analyzing the evidence adduced, the trial
court rendered a decision on November 29, 1990 dismissing the complaint against herein petitioner without pronouncement as to
cost. The trial court found that the vessel, MT Maysum, was seaworthy to undertake the voyage as determined by the Philippine
Coast Guard per Survey Certificate Report No. M5-016-MH upon inspection during its annual dry-docking and that the incident was
caused by unexpected inclement weather condition or force majeure, thus exempting the common carrier (herein petitioner) from
liability for the loss of its cargo.3

The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals. The appellate court gave credence to the
weather report issued by the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA for brevity)
which showed that from 2:00 oclock to 8:oo oclock in the morning on August 16, 1986, the wind speed remained at 10 to 20 knots
per hour while the waves measured from .7 to two (2) meters in height only in the vicinity of the Panay Gulf where the subject vessel
sank, in contrast to herein petitioners allegation that the waves were twenty (20) feet high. In the absence of any explanation as to
what may have caused the sinking of the vessel coupled with the finding that the same was improperly manned, the appellate court
ruled that the petitioner is liable on its obligation as common carrier 4 to herein private respondent insurance company as subrogee
of Caltex. The subsequent motion for reconsideration of herein petitioner was denied by the appellate court.

Petitioner raised the following assignments of error in support of the instant petition, 5 to wit:

I THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT.

II THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL PRESUMPTION THAT THE VESSEL MT
"MAYSUN" WAS SEAWORTHY.

III THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN THE CASE OF HOME INSURANCE
CORPORATION V. COURT OF APPEALS.

Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance Code of the Philippines, which states
that in every marine insurance upon a ship or freight, or freightage, or upon any thin which is the subject of marine insurance there
is an implied warranty by the shipper that the ship is seaworthy. Consequently, the insurer will not be liable to the assured for any
loss under the policy in case the vessel would later on be found as not seaworthy at the inception of the insurance. It theorized that
when private respondent paid Caltex the value of its lost cargo, the act of the private respondent is equivalent to a tacit recognition
that the ill-fated vessel was seaworthy; otherwise, private respondent was not legally liable to Caltex due to the latters breach of
implied warranty under the marine insurance policy that the vessel was seaworthy.

The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not seaworthy on the ground that the
marine officer who served as the chief mate of the vessel, Francisco Berina, was allegedly not qualified. Under Section 116 of the
Insurance Code of the Philippines, the implied warranty of seaworthiness of the vessel, which the private respondent admitted as
having been fulfilled by its payment of the insurance proceeds to Caltex of its lost cargo, extends to the vessels complement.
Besides, petitioner avers that although Berina had merely a 2nd officers license, he was qualified to act as the vessels chief officer
under Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In fact, all the crew and
officers of MT Maysun were exonerated in the administrative investigation conducted by the Board of Marine Inquiry after the
subject accident.6

In any event, petitioner further avers that private respondent failed, for unknown reason, to present in evidence during the trial of
the instant case the subject marine cargo insurance policy it entered into with Caltex. By virtue of the doctrine laid down in the case
of Home Insurance Corporation vs. CA,7 the failure of the private respondent to present the insurance policy in evidence is allegedly
fatal to its claim inasmuch as there is no way to determine the rights of the parties thereto.

Hence, the legal issues posed before the Court are:

I Whether or not the payment made by the private respondent to Caltex for the insured value of the lost cargo amounted to an
admission that the vessel was seaworthy, thus precluding any action for recovery against the petitioner.

II Whether or not the non-presentation of the marine insurance policy bars the complaint for recovery of sum of money for lack of
cause of action.
We rule in the negative on both issues.

The payment made by the private respondent for the insured value of the lost cargo operates as waiver of its (private respondent)
right to enforce the term of the implied warranty against Caltex under the marine insurance policy. However, the same cannot be
validly interpreted as an automatic admission of the vessels seaworthiness by the private respondent as to foreclose recourse
against the petitioner for any liability under its contractual obligation as a common carrier. The fact of payment grants the private
respondent subrogatory right which enables it to exercise legal remedies that would otherwise be available to Caltex as owner of the
lost cargo against the petitioner common carrier. 8 Article 2207 of the New civil Code provides that:

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.

The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity
adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to pay.9 It is not dependent
upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment by the
insurance company of the insurance claim.10 Consequently, the payment made by the private respondent (insurer) to Caltex
(assured) operates as an equitable assignment to the former of all the remedies which the latter may have against the petitioner.

From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence in
the vigilance over the goods and for the safety of passengers transported by them, according to all the circumstance of each
case.11 In the event of loss, destruction or deterioration of the insured goods, common carriers shall be responsible unless the same
is brought about, among others, by flood, storm, earthquake, lightning or other natural disaster or calamity. 12 In all other cases, if
the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence. 13

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, petitioner attributes the sinking of MT
Maysun to fortuitous even or force majeure. From the testimonies of Jaime Jarabe and Francisco Berina, captain and chief mate,
respectively of the ill-fated vessel, it appears that a sudden and unexpected change of weather condition occurred in the early
morning of August 16, 1986; that at around 3:15 oclock in the morning a squall ("unos") carrying strong winds with an approximate
velocity of 30 knots per hour and big waves averaging eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun
causing it to tilt, take in water and eventually sink with its cargo. 14 This tale of strong winds and big waves by the said officers of the
petitioner however, was effectively rebutted and belied by the weather report 15 from the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the independent government agency charged with monitoring weather and sea
conditions, showing that from 2:00 oclock to 8:00 oclock in the morning on August 16, 1986, the wind speed remained at ten (10)
to twenty (20) knots per hour while the height of the waves ranged from .7 to two (2) meters in the vicinity of Cuyo East Pass and
Panay Gulf where the subject vessel sank. Thus, as the appellate court correctly ruled, petitioners vessel, MT Maysun, sank with its
entire cargo for the reason that it was not seaworthy. There was no squall or bad weather or extremely poor sea condition in the
vicinity when the said vessel sank.

The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and Francisco Berina, ship captain and chief
mate, respectively, of the said vessel, could not be expected to testify against the interest of their employer, the herein petitioner
common carrier.

Neither may petitioner escape liability by presenting in evidence certificates16 that tend to show that at the time of dry-docking and
inspection by the Philippine Coast Guard, the vessel MT Maysun, was fit for voyage. These pieces of evidence do not necessarily take
into account the actual condition of the vessel at the time of the commencement of the voyage. As correctly observed by the Court
of appeals:

At the time of dry-docking and inspection, the ship may have appeared fit. The certificates issued, however, do not negate the
presumption of unseaworthiness triggered by an unexplained sinking. Of certificates issued in this regard, authorities are likewise
clear as to their probative value, (thus):

Seaworthiness relates to a vessels actual condition. Neither the granting of classification or the issuance of certificates established
seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62).
And also:

Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy the vessel owners obligation. Also
securing the approval of the shipper of the cargo, or his surveyor, of the condition of the vessel or her stowage does not establish
due diligence if the vessel was in fact unseaworthy, for the cargo owner has no obligation in relation to seaworthiness. (Ibid.)17

Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine Inquiry merely concerns their respective
administrative liabilities. It does not in any way operate to absolve the petitioner common carrier from its civil liabilities. It does not
in any way operate to absolve the petitioner common carrier from its civil liability arising from its failure to observe extraordinary
diligence in the vigilance over the goods it was transporting and for the negligent acts or omissions of its employees, the
determination of which properly belongs to the courts.18 In the case at bar, petitioner is liable for the insured value of the lost cargo
of industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or negligence as common
carrier19 occasioned by the unexplained sinking of its vessel, MT Maysun, while in transit.

Anent the second issue, it is our view and so hold that the presentation in evidence of the marine insurance policy is not
indispensable in this case before the insurer may recover from the common carrier the insured value of the lost cargo in the exercise
of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of herein private
respondent as insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim. 20

The presentation of the insurance policy was necessary in the case of Home Insurance Corporation v. CA21 (a case cited by petitioner)
because the shipment therein (hydraulic engines) passed through several stages with different parties involved in each stage. First,
from the shipper to the port of departure; second, from the port of departure to the M/S Oriental Statesman; third, from the M/S
Oriental Statesman to the M/S Pacific Conveyor; fourth, from the M/S Pacific Conveyor to the port or arrival; fifth, from the port of
arrival to the arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay Brokerage Co., Inc. (private respondent
therein); and lastly, from the hauler to the consignee. We emphasized in that case that in the absence of proof of stipulations to the
contrary, the hauler can be liable only for any damage that occurred from the time it received the cargo until it finally delivered it to
the consignee. Ordinarily, it cannot be held responsible for the handling of the cargo before it actually received it. The insurance
contract, which was not presented in evidence in that case would have indicated the scope of the insurers liability, if any, since no
evidence was adduced indicating at what stage in the handling process the damage to the cargo was sustained.

Hence, our ruling on the presentation of the insurance policy in the said case of Home Insurance Corporation is not applicable to the
case at bar. In contrast, there is no doubt that the cargo of industrial fuel oil belonging to Caltex, in the case at bar, was lost while on
board petitioners vessel, MT Maysun, which sank while in transit in the vicinity of Panay Gulf and Cuyo East Pass in the early
morning of August 16, 1986.

WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court of Appeals in CA-G.R. CV No. 39836
is AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. 159213, July 03, 2013

VECTOR SHIPPING CORPORATION AND FRANCISCO SORIANO, Petitioners, v. AMERICAN HOME ASSURANCE COMPANY AND
SULPICIO LINES, INC., Respondents.

DECISION

BERSAMIN, J.:

Subrogation under Article 2207 of the Civil Code gives rise to a cause of action created by law. For purposes of the law on the
prescription of actions, the period of limitation is ten years.

The Case
Vector Shipping Corporation (Vector) and Francisco Soriano appeal the decision promulgated on July 22, 2003,1 whereby the Court
of Appeals (CA) held them jointly and severally liable to pay P7,455,421.08 to American Home Assurance Company (respondent) as
and by way of actual damages on the basis of respondent being the subrogee of its insured Caltex Philippines, Inc. (Caltex).

Antecedents

Vector was the operator of the motor tanker M/T Vector, while Soriano was the registered owner of the M/T Vector. Respondent is
a domestic insurance corporation.2

On September 30, 1987, Caltex entered into a contract of affreightment3 with Vector for the transport of Caltexs petroleum cargo
through the M/T Vector. Caltex insured the petroleum cargo with respondent for P7,455,421.08 under Marine Open Policy No. 34-
5093-6.4 In the evening of December 20, 1987, the M/T Vector and the M/V Doa Paz, the latter a vessel owned and operated by
Sulpicio Lines, Inc., collided in the open sea near Dumali Point in Tablas Strait, located between the Provinces of Marinduque and
Oriental Mindoro. The collision led to the sinking of both vessels. The entire petroleum cargo of Caltex on board the M/T Vector
perished.5 On July 12, 1988, respondent indemnified Caltex for the loss of the petroleum cargo in the full amount of P7,455,421.08.6

On March 5, 1992, respondent filed a complaint against Vector, Soriano, and Sulpicio Lines, Inc. to recover the full amount of
P7,455,421.08 it paid to Caltex (Civil Case No. 92-620).7 The case was raffled to Branch 145 of the Regional Trial Court (RTC) in
Makati City.

On December 10, 1997, the RTC issued a resolution dismissing Civil Case No. 92-620 on the following grounds

This action is upon a quasi-delict and as such must be commenced within four 4 years from the day they may be brought. [Art. 1145
in relation to Art. 1150, Civil Code] From the day [the action] may be brought means from the day the quasi-delict occurred.
[Capuno v. Pepsi Cola, 13 SCRA 663]

The tort complained of in this case occurred on 20 December 1987. The action arising therefrom would under the law prescribe,
unless interrupted, on 20 December 1991.

When the case was filed against defendants Vector Shipping and Francisco Soriano on 5 March 1992, the action not having been
interrupted, had already prescribed.

Under the same situation, the cross-claim of Sulpicio Lines against Vector Shipping and Francisco Soriano filed on 25 June 1992 had
likewise prescribed.

The letter of demand upon defendant Sulpicio Lines allegedly on 6 November 1991 did not interrupt the [tolling] of the prescriptive
period since there is no evidence that it was actually received by the addressee. Under such circumstances, the action against
Sulpicio Lines had likewise prescribed.

Even assuming that such written extra-judicial demand was received and the prescriptive period interrupted in accordance with Art.
1155, Civil Code, it was only for the 10-day period within which Sulpicio Lines was required to settle its obligation. After that period
lapsed, the prescriptive period started again. A new 4-year period to file action was not created by the extra-judicial demand; it
merely suspended and extended the period for 10 days, which in this case meant that the action should be commenced by 30
December 1991, rather than 20 December 1991.

Thus, when the complaint against Sulpicio Lines was filed on 5 March 1992, the action had prescribed.

PREMISES CONSIDERED, the complaint of American Home Assurance Company and the cross-claim of Sulpicio Lines against Vector
Shipping Corporation and Francisco Soriano are DISMISSED.

Without costs.

SO ORDERED.
Respondent appealed to the CA, which promulgated its assailed decision on July 22, 2003 reversing the RTC.9 Although thereby
absolving Sulpicio Lines, Inc. of any liability to respondent, the CA held Vector and Soriano jointly and severally liable to respondent
for the reimbursement of the amount of P7,455,421.08 paid to Caltex, explaining

The resolution of this case is primarily anchored on the determination of what kind of relationship existed between Caltex and M/V
Dona Paz and between Caltex and M/T Vector for purposes of applying the laws on prescription. The Civil Code expressly provides
for the number of years before the extinctive prescription s[e]ts in depending on the relationship that governs the parties.

After a careful perusal of the factual milieu and the evidence adduced by the parties, We are constrained to rule that the
relationship that existed between Caltex and M/V Dona Paz is that of a quasi-delict while that between Caltex and M/T Vector is
culpa contractual based on a Contract of Affreightment or a charter party.

On the other hand, the claim of appellant against M/T Vector is anchored on a breach of contract of affreightment. The appellant
averred that M/T Vector committed such act for having misrepresented to the appellant that said vessel is seaworthy when in fact it
is not. The contract was executed between Caltex and M/T Vector on September 30, 1987 for the latter to transport thousands of
barrels of different petroleum products. Under Article 1144 of the New Civil Code, actions based on written contract must be
brought within 10 years from the time the right of action accrued. A passenger of a ship, or his heirs, can bring an action based on
culpa contractual within a period of 10 years because the ticket issued for the transportation is by itself a complete written contract
(Peralta de Guerrero vs. Madrigal Shipping Co., L 12951, November 17, 1959). Viewed with reference to the statute of limitations, an
action against a carrier, whether of goods or of passengers, for injury resulting from a breach of contract for safe carriage is one on
contract, and not in tort, and is therefore, in the absence of a specific statute relating to such actions governed by the statute fixing
the period within which actions for breach of contract must be brought (53 C.J.S. 1002 citing Southern Pac. R. Co. of Mexico vs.
Gonzales 61 P. 2d 377, 48 Ariz. 260, 106 A.L.R. 1012).

Considering that We have already concluded that the prescriptive periods for filing action against M/V Doa Paz based on quasi
delict and M/T Vector based on breach of contract have not yet expired, are We in a position to decide the appeal on its merit.

We say yes.

Article 2207 of the Civil Code on subrogation is explicit that 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 should be subrogated to the rights of the insured against the wrongdoer or the person who has violated the
contract. Undoubtedly, the herein appellant has the rights of a subrogee to recover from M/T Vector what it has paid by way of
indemnity to Caltex.

WHEREFORE, foregoing premises considered, the decision dated December 10, 1997 of the RTC of Makati City, Branch 145 is hereby
REVERSED. Accordingly, the defendant-appellees Vector Shipping Corporation and Francisco Soriano are held jointly and severally
liable to the plaintiff-appellant American Home Assurance Company for the payment of P7,455,421.08 as and by way of actual
damages.

SO ORDERED.

Respondent sought the partial reconsideration of the decision of the CA, contending that Sulpicio Lines, Inc. should also be held
jointly liable with Vector and Soriano for the actual damages awarded.11 On their part, however, Vector and Soriano immediately
appealed to the Court on September 12, 2003.12 Thus, on October 1, 2003, the CA held in abeyance its action on respondents
partial motion for reconsideration pursuant to its internal rules until the Court has resolved this appeal.13

Issues

The main issue is whether this action of respondent was already barred by prescription for bringing it only on March 5, 1992. A
related issue concerns the proper determination of the nature of the cause of action as arising either from a quasi-delict or a breach
of contract.

The Court will not pass upon whether or not Sulpicio Lines, Inc. should also be held jointly liable with Vector and Soriano for the
actual damages claimed.

Ruling
The petition lacks merit.

Vector and Soriano posit that the RTC correctly dismissed respondents complaint on the ground of prescription. They insist that this
action was premised on a quasi-delict or upon an injury to the rights of the plaintiff, which, pursuant to Article 1146 of the Civil
Code, must be instituted within four years from the time the cause of action accrued; that because respondents cause of action
accrued on December 20, 1987, the date of the collision, respondent had only four years, or until December 20, 1991, within which
to bring its action, but its complaint was filed only on March 5, 1992, thereby rendering its action already barred for being
commenced beyond the four-year prescriptive period;14 and that there was no showing that respondent had made extrajudicial
written demands upon them for the reimbursement of the insurance proceeds as to interrupt the running of the prescriptive period.

We concur with the CAs ruling that respondents action did not yet prescribe. The legal provision governing this case was not Article
1146 of the Civil Code,16 but Article 1144 of the Civil Code, which states:

Article 1144. The following actions must be brought within ten years from the time the cause of action
accrues:cralavvonlinelawlibrary

(1) Upon a written contract;chanroblesvirtualawlibrary

(2) Upon an obligation created by law;chanroblesvirtualawlibrary

(3) Upon a judgment.

We need to clarify, however, that we cannot adopt the CAs characterization of the cause of action as based on the contract of
affreightment between Caltex and Vector, with the breach of contract being the failure of Vector to make the M/T Vector
seaworthy, as to make this action come under Article 1144 (1), supra. Instead, we find and hold that that the present action was not
upon a written contract, but upon an obligation created by law. Hence, it came under Article 1144 (2) of the Civil Code. This is
because the subrogation of respondent to the rights of Caltex as the insured was by virtue of the express provision of law embodied
in Article 2207 of the Civil Code, to wit:

Article 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. (Emphasis supplied)

The juridical situation arising under Article 2207 of the Civil Code is well explained in Pan Malayan Insurance Corporation v. Court of
Appeals,17 as follows:

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is destroyed or
damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will be
subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to pay.
Payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter may have
against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it
grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by
the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213;
Firemans Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323].18

Verily, the contract of affreightment that Caltex and Vector entered into did not give rise to the legal obligation of Vector and
Soriano to pay the demand for reimbursement by respondent because it concerned only the agreement for the transport of Caltexs
petroleum cargo. As the Court has aptly put it in Pan Malayan Insurance Corporation v. Court of Appeals, supra, respondents right
of subrogation pursuant to Article 2207, supra, was not dependent upon, nor d[id] it grow out of, any privity of contract or upon
written assignment of claim [but] accrue[d] simply upon payment of the insurance claim by the insurer.

Considering that the cause of action accrued as of the time respondent actually indemnified Caltex in the amount of P7,455,421.08
on July 12, 1988,19 the action was not yet barred by the time of the filing of its complaint on March 5, 1992,20 which was well
within the 10-year period prescribed by Article 1144 of the Civil Code.
The insistence by Vector and Soriano that the running of the prescriptive period was not interrupted because of the failure of
respondent to serve any extrajudicial demand was rendered inconsequential by our foregoing finding that respondents cause of
action was not based on a quasi-delict that prescribed in four years from the date of the collision on December 20, 1987, as the RTC
misappreciated, but on an obligation created by law, for which the law fixed a longer prescriptive period of ten years from the
accrual of the action.

Still, Vector and Soriano assert that respondent had no right of subrogation to begin with, because the complaint did not allege that
respondent had actually paid Caltex for the loss of the cargo. They further assert that the subrogation receipt submitted by
respondent was inadmissible for not being properly identified by Ricardo C. Ongpauco, respondents witness, who, although
supposed to identify the subrogation receipt based on his affidavit, was not called to testify in court; and that respondent presented
only one witness in the person of Teresita Espiritu, who identified Marine Open Policy No. 34-5093-6 issued by respondent to Caltex.

We disagree with petitioners assertions. It is undeniable that respondent preponderantly established its right of subrogation. Its
Exhibit C was Marine Open Policy No. 34-5093-6 that it had issued to Caltex to insure the petroleum cargo against marine peril.22 Its
Exhibit D was the formal written claim of Caltex for the payment of the insurance coverage of P7,455,421.08 coursed through
respondents adjuster.23 Its Exhibits E to H were marine documents relating to the perished cargo on board the M/V Vector that
were processed for the purpose of verifying the insurance claim of Caltex.24 Its Exhibit I was the subrogation receipt dated July 12,
1988 showing that respondent paid Caltex P7,455,421.00 as the full settlement of Caltexs claim under Marine Open Policy No. 34-
5093-6.25 All these exhibits were unquestionably duly presented, marked, and admitted during the trial.26 Specifically, Exhibit C was
admitted as an authentic copy of Marine Open Policy No. 34-5093-6, while Exhibits D, E, F, G, H and I, inclusive, were admitted as
parts of the testimony of respondents witness Efren Villanueva, the manager for the adjustment service of the Manila Adjusters and
Surveyors Company.

Consistent with the pertinent law and jurisprudence, therefore, Exhibit I was already enough by itself to prove the payment of
P7,455,421.00 as the full settlement of Caltexs claim.28 The payment made to Caltex as the insured being thereby duly
documented, respondent became subrogated as a matter of course pursuant to Article 2207 of the Civil Code. In legal
contemplation, subrogation is the substitution of another person in the place of the creditor, to whose rights he succeeds in
relation to the debt; and is independent of any mere contractual relations between the parties to be affected by it, and is broad
enough to cover every instance in which one party is required to pay a debt for which another is primarily answerable, and which in
equity and conscience ought to be discharged by the latter.

Lastly, Vector and Soriano argue that Caltex waived and abandoned its claim by not setting up a cross-claim against them in Civil
Case No. 18735, the suit that Sulpicio Lines, Inc. had brought to claim damages for the loss of the M/V Doa Paz from them, Oriental
Assurance Company (as insurer of the M/T Vector), and Caltex; that such failure to set up its cross-claim on the part of Caltex, the
real party in interest who had suffered the loss, left respondent without any better right than Caltex, its insured, to recover anything
from them, and forever barred Caltex from asserting any claim against them for the loss of the cargo; and that respondent was
similarly barred from asserting its present claim due to its being merely the successor-in-interest of Caltex.

The argument of Vector and Soriano would have substance and merit had Civil Case No. 18735 and this case involved the same
parties and litigated the same rights and obligations. But the two actions were separate from and independent of each other. Civil
Case No. 18735 was instituted by Sulpicio Lines, Inc. to recover damages for the loss of its M/V Doa Paz. In contrast, this action was
brought by respondent to recover from Vector and Soriano whatever it had paid to Caltex under its marine insurance policy on the
basis of its right of subrogation. With the clear variance between the two actions, the failure to set up the cross-claim against them
in Civil Case No. 18735 is no reason to bar this action.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated on July 22, 2003; and
ORDERS petitioners to pay the costs of suit.

SO ORDERED.
 G.R. NO. L-27427 APRIL 7, 1976

FIREMAN'S FUND INSURANCE COMPANY AND FIRESTONE TIRE AND RUBBER COMPANY OF THE PHILIPPINES, PLAINTIFFS-
APPELLANTS,
VS.
JAMILA & COMPANY, INC. AND FIRST QUEZON CITY INSURANCE CO., INC., DEFENDANTS-APPELLEES.

AQUINO, J.:

Fireman's Fund and Insurance Company (Fireman's Fund for short) and Firestone Tire and Rubber Company of the Philippines
appealed from the order dated October 18, 1966 of the Court of First Instance of Manila, dismissing their complaint against Jamila &
Co., Inc. (hereinafter called Jamila) for the recovery of the sum of P11,925.00 plus interest, damages and attorney's fees (Civil Case
No. 65658).

The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security Agency contracted to supply security guards to
Firestone; that Jamila assumed responsibility for the acts of its security guards; that First Quezon City Insurance Co., Inc. executed a
bond in the sum of P20,000.00 to guarantee Jamila's obligations under that contract; that on May 18, 1963 properties of Firestone
valued at P11,925.00 were lost allegedly due to the acts of its employees who connived with Jamila's security guard; that Fireman's
Fund, as insurer, paid to Firestone the amount of the loss; that Fireman's Fund was subrogated to Firestone's right to get
reimbursement from Jamila, and that Jamila and its surety, First Quezon City Insurance Co., Inc., failed to pay the amount of the loss
in spite of repeated demands.

Upon defendants' motions, the lower court in its order of July 22, 1966 dismissed the complaint as to Jamila on the ground that
there was no allegation that it had consented to the subrogation and, therefore, Fireman's Fund had no cause of action against it.

In the same order the lower court dismissed the complaint as to First Quezon City Insurance Co., Inc. on the ground of res judicata. It
appears that the same action was previously filed in Civil Case No. 56311 which was dismiss because of the failure of the same
plaintiffs and their counsel to appear at the pre trial.

Firestone and Fireman's Fund moved for the reconsideration of the order of dismissal. The lower court on September 3, 1966 set
aside its order of dismissal. It sustained plaintiffs' contention that there was no res judicataas to First Quezon City Insurance Co., Inc.
because Civil Case No. 56311 was dismissed without prejudice. Later, First Quezon City Insurance Co., Inc. filed its answer to the
complaint.

However, due to inadvertence, the lower court did not state in its order of September 3, 1966 why it set aside its prior order
dismissing the complaint with respect to Jamila.

What is now to be recounted shows the lack of due care on the part of the lower court and the opposing lawyers in their
management of the case. Such lack of due care has given the case a farcical ambiance and might partially explain the long delay in its
adjudication.

Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory without any reason therefor, filed a motion for
reconsideration. It had originally moved for the dismissal of the complaint on the ground of lack of cause of action. Its contention
was based on two grounds, to wit: (1) that the complaint did not allege that Firestone, pursuant to the contractual stipulation
quoted in the complaint, had investigated the loss and that Jamila was represented in the investigation and (2) that Jamila did not
consent to the subrogation of Fireman's Fund to Firestone's right to get reimbursement from Jamila and its surety. The lower court
in its order of dismissal had sustained the second ground.

Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked the first ground which had never been passed
upon by the lower court. Firestone and Fireman's Fund in their opposition joined battle, in a manner of speaking, on that first
ground.

But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration, completely ignored that first
ground. It reverted to the second ground which was relied upon in its order of September 3, 1966. The lower court reiterated its
order of July 22, 1966 that Fireman's Fund had no cause of action against Jamila because Jamila did not consent to the subrogation.
The court did not mention Firestone, the co-plaintiff of Fireman's Fund.
At this juncture, it may be noted that motions for reconsideration become interminable when the court's orders follow a seesaw
pattern. That phenomenon took place in this case.

Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of October 18, 1966 on the ground
that Fireman's Fund Insurance Company was suing on the basis of legal subrogation whereas the lower court erroneously predicated
its dismissal order on the theory that there was no conventional subrogation because the debtor's consent was lacking.

The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the
contract".

The lower court denied plaintiffs' motion. They filed a second motion for reconsideration. In that motion they sensibly called the
lower court's attention to the fact that the issue of subrogation was of no moment because Firestone, the subrogor, is a party-
plaintiff and could sue directly Jamila in its own right. Without resolving that contention, the lower court denied plaintiffs' second
motion for reconsideration.

In this appeal Firestone and Fireman's Fund contend that the trial court's dismissal of their complaint is contrary to the
aforementioned article 2207 which provides for legal subrogation.

Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires the debtor's consent; that legal subrogation
takes place in the cases mentioned in article 1302 of the Civil Code and the instant case is not among the three cases enumerated in
that article, and that there could be no subrogation in this case because according to the plaintiffs the contract between. Jamila and
Firestone was entered into on June 1, 1965 but the loss complained of occurred on May 18, 1963.

With respect to the factual point raised by Jamila, it should be stated that plaintiffs' counsel gratuitously alleged in their brief that
Firestone and Jamila entered into a "contract of guard services" on June 1, 1965. That allegation, which was uncalled for because it is
not found in the complaint, created confusion which heretofore did not exist. No copy of the contract was annexed to the
complaint.

That confusing statement was an obvious error since it was expressly alleged in the complaint that the loss occurred on May
18, 1963. The fact that such an error was committed is another instance substantiating our previous observation that plaintiffs'
counsel had not exercised due care in the presentation of his case.

The issue is whether the complaint of Firestone and Fireman's Fund states a cause of action against Jamila.

We hold that Firestone is really a nominal, party in this case. It had already been indemnified for the loss which it had sustained.
Obviously, it joined as a party-plaintiff in order to help Fireman's Fund to recover the amount of the loss from Jamila and First
Quezon City Insurance Co., Inc. Firestone had tacitly assigned to Fireman's Fund its cause of action against Jamila for breach of
contract. Sufficient ultimate facts are alleged in the complaint to sustain that cause of action.

On the other hand, Fireman's Fund's action against Jamila is squarely sanctioned by article 2207. As the insurer, Fireman's Fund is
entitled to go after the person or entity that violated its contractual commitment to answer for the loss insured against (Cf.
Philippine Air Lines, Inc. vs. Heald Lumber Co., 101 Phil. 1032; Rizal Surety & Insurance Co. vs. Manila Railroad Company, L-24043,
April 25, 1968, 23 SCRA 205).

The trial court erred in applying to this case the rules on novation. The plaintiffs in alleging in their complaint that Fireman's Fund
"became a party in interest in this case by virtue of a subrogation right given in its favor by" Firestone, were not relying on the
novation by change of creditors as contemplated in articles 1291 and 1300 to 1303 of the Civil Code but rather on article 2207.

Article 2207 is a restatement of a settled principle of American jurisprudence. Subrogation has been referred to as the doctrine of
substitution. It "is an arm of equity that may guide or even force one to pay a debt for which an obligation was incurred but which
was in whole or in part paid by another" (83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State Compensation
Insurance Fund, 209 Pac. 2d 55).
"Subrogation is founded on principles of justice and equity, and its operation is governed by principles of equity. It rests on the
principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and
perfect justice between all the parties without regard to form"(83 C.J.S. 579- 80)

Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of
the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person
whose. negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U. S. 294, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or
compensation, it becomes the loss of the insurer (44 Am. Jur. 2d 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St.
382).

"Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the
insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal
assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance
company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which
the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or
upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity (Shambley v. Jobe-Blackley
Plumbing and Heating Co., 264 N. C. 456,142 SE 2d 18).

Whether the plaintiffs would be able to prove their cause of action against Jamila is another question.

Finding the trial court's order of dismissal to be legally untenable, the same is set aside with costs against defendant-appellee Jamila
& Co., Inc.

SO ORDERED.

G.R. NO. L-52732 AUGUST 29, 1988

F.F. CRUZ AND CO., INC., PETITIONER,

VS.
THE COURT OF APPEALS, GREGORIO MABLE AS SUBSTITUTED BY HIS WIFE LUZ ALMONTE MABLE AND CHILDREN DOMING,
LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME, ANTONIO, AND BERNARDO ALL SURNAMED MABLE, RESPONDENTS.

CORTES, J.:

This petition to review the decision of the Court of Appeals puts in issue the application of the common law doctrine of res ipsa
loquitur.

The essential facts of the case are not disputed.

The furniture manufacturing shop of petitioner in Caloocan City was situated adjacent to the residence of private respondents.
Sometime in August 1971, private respondent Gregorio Mable first approached Eric Cruz, petitioner's plant manager, to request that
a firewall be constructed between the shop and private respondents' residence. The request was repeated several times but they
fell on deaf ears. In the early morning of September 6, 1974, fire broke out in petitioner's shop. Petitioner's employees, who slept in
the shop premises, tried to put out the fire, but their efforts proved futile. The fire spread to private respondents' house. Both the
shop and the house were razed to the ground. The cause of the conflagration was never discovered. The National Bureau of
Investigation found specimens from the burned structures negative for the presence of inflammable substances.

Subsequently, private respondents collected P35,000.00 on the insurance on their house and the contents thereof.

On January 23, 1975, private respondents filed an action for damages against petitioner, praying for a judgment in their favor
awarding P150,000.00 as actual damages, P50,000.00 as moral damages, P25,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs. The Court of First Instance held for private respondents:
WHEREFORE, the Court hereby renders judgment, in favor of plaintiffs, and against the defendant:

1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for damages suffered by said plaintiffs for the loss of
their house, with interest of 6% from the date of the filing of the Complaint on January 23, 1975, until fully paid;

2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss of plaintiffs' furnitures, religious images,
silverwares, chinawares, jewelries, books, kitchen utensils, clothing and other valuables, with interest of 6% from date of the filing of
the Complaint on January 23, 1975, until fully paid;

3. Ordering the defendant to pay to the plaintiffs the sum of P5,000.00 as moral damages, P2,000.00 as exemplary damages, and
P5,000.00 as and by way of attorney's fees;

4. With costs against the defendant;

5. Counterclaim is ordered dismissed, for lack of merit. [CA Decision, pp. 1-2; Rollo, pp. 29-30.]

On appeal, the Court of Appeals, in a decision promulgated on November 19, 1979, affirmed the decision of the trial court but
reduced the award of damages:

WHEREFORE, the decision declaring the defendants liable is affirmed. The damages to be awarded to plaintiff should be reduced to
P70,000.00 for the house and P50,000.00 for the furniture and other fixtures with legal interest from the date of the filing of the
complaint until full payment thereof. [CA Decision, p. 7; Rollo, p. 35.]

A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution dated February 18, 1980. Hence,
petitioner filed the instant petition for review on February 22, 1980. After the comment and reply were filed, the Court resolved to
deny the petition for lack of merit on June 11, 1980.

However, petitioner filed a motion for reconsideration, which was granted, and the petition was given due course on September 12,
1980. After the parties filed their memoranda, the case was submitted for decision on January 21, 1981.

Petitioner contends that the Court of Appeals erred:

1. In not deducting the sum of P35,000.00, which private respondents recovered on the insurance on their house, from the award of
damages.

2. In awarding excessive and/or unproved damages.

3. In applying the doctrine of res ipsa loquitur to the facts of the instant case.

The pivotal issue in this case is the applicability of the common law doctrine of res ipsa loquitur, the issue of damages being merely
consequential. In view thereof, the errors assigned by petitioner shall be discussed in the reverse order.

1. The doctrine of res ipsa loquitur, whose application to the instant case petitioner objects to, may be stated as follows:

Where the thing which caused the injury complained of is shown to be under the management of the defendant or his servants and
the accident is such as in the ordinary course of things does not happen if those who have its management or control use proper
care, it affords reasonable evidence, in the absence of explanation by the defendant, that the accident arose from want of care.
[Africa v. Caltex (Phil.), Inc., G.R. No. L-12986, March 31, 1966, 16 SCRA 448.]

Thus, in Africa, supra, where fire broke out in a Caltex service station while gasoline from a tank truck was being unloaded into an
underground storage tank through a hose and the fire spread to and burned neighboring houses, this Court, applying the doctrine
of res ipsa loquitur, adjudged Caltex liable for the loss.

The facts of the case likewise call for the application of the doctrine, considering that in the normal course of operations of a
furniture manufacturing shop, combustible material such as wood chips, sawdust, paint, varnish and fuel and lubricants for
machinery may be found thereon.
It must also be noted that negligence or want of care on the part of petitioner or its employees was not merely presumed. The Court
of Appeals found that petitioner failed to construct a firewall between its shop and the residence of private respondents as required
by a city ordinance; that the fire could have been caused by a heated motor or a lit cigarette; that gasoline and alcohol were used
and stored in the shop; and that workers sometimes smoked inside the shop [CA Decision, p. 5; Rollo, p. 33.]

Even without applying the doctrine of res ipsa loquitur, petitioner's failure to construct a firewall in accordance with city ordinances
would suffice to support a finding of negligence.

Even then the fire possibly would not have spread to the neighboring houses were it not for another negligent omission on the part
of defendants, namely, their failure to provide a concrete wall high enough to prevent the flames from leaping over it. As it was the
concrete wall was only 2-1/2 meters high, and beyond that height it consisted merely of galvanized iron sheets, which would
predictably crumble and melt when subjected to intense heat. Defendant's negligence, therefore, was not only with respect to the
cause of the fire but also with respect to the spread thereof to the neighboring houses.[Africa v. Caltex (Phil.), Inc., supra; Emphasis
supplied.]

In the instant case, with more reason should petitioner be found guilty of negligence since it had failed to construct a firewall
between its property and private respondents' residence which sufficiently complies with the pertinent city ordinances. The failure
to comply with an ordinance providing for safety regulations had been ruled by the Court as an act of negligence [Teague v.
Fernandez, G.R. No. L-29745, June 4, 1973, 51 SCRA 181.]

The Court of Appeals, therefore, had more than adequate basis to find petitioner liable for the loss sustained by private
respondents.

2. Since the amount of the loss sustained by private respondents constitutes a finding of fact, such finding by the Court of Appeals
should not be disturbed by this Court [M.D. Transit & Taxi Co., Inc. v. Court of Appeals, G.R. No. L-23882, February 17, 1968, 22 SCRA
559], more so when there is no showing of arbitrariness.

In the instant case, both the CFI and the Court of Appeals were in agreement as to the value of private respondents' furniture and
fixtures and personal effects lost in the fire (i.e. P50,000.00). With regard to the house, the Court of Appeals reduced the award to
P70,000.00 from P80,000.00. Such cannot be categorized as arbitrary considering that the evidence shows that the house was built
in 1951 for P40,000.00 and, according to private respondents, its reconstruction would cost P246,000.00. Considering the
appreciation in value of real estate and the diminution of the real value of the peso, the valuation of the house at P70,000.00 at the
time it was razed cannot be said to be excessive.

3. While this Court finds that petitioner is liable for damages to private respondents as found by the Court of Appeals, the fact that
private respondents have been indemnified by their insurer in the amount of P35,000.00 for the damage caused to their house and
its contents has not escaped the attention of the Court. Hence, the Court holds that in accordance with Article 2207 of the Civil Code
the amount of P35,000.00 should be deducted from the amount awarded as damages. Said article provides:

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 is subrogated to the rights of the insured
against the wrongdoer or the person who violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (Emphasis
supplied.]

The law is clear and needs no interpretation. Having been indemnified by their insurer, private respondents are only entitled to
recover the deficiency from petitioner.

On the other hand, the insurer, if it is so minded, may seek reimbursement of the amount it indemnified private respondents from
petitioner. This is the essence of its right to be subrogated to the rights of the insured, as expressly provided in Article 2207. Upon
payment of the loss incurred by the insured, the insurer is entitled to be subrogated pro tanto to any right of action which the
insured may have against the third person whose negligence or wrongful act caused the loss [Fireman's Fund Insurance Co. v. Jamila
& Co., Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323.]

Under Article 2207, the real party in interest with regard to the indemnity received by the insured is the insurer [Phil. Air Lines, Inc.
v. Heald Lumber Co., 101 Phil. 1031, (1957).] Whether or not the insurer should exercise the rights of the insured to which it had
been subrogated lies solely within the former's sound discretion. Since the insurer is not a party to the case, its identity is not of
record and no claim is made on its behalf, the private respondent's insurer has to claim his right to reimbursement of the P35,000.00
paid to the insured.

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED with the following modifications as
to the damages awarded for the loss of private respondents' house, considering their receipt of P35,000.00 from their insurer: (1)
the damages awarded for the loss of the house is reduced to P35,000.00; and (2) the right of the insurer to subrogation and thus
seek reimbursement from petitioner for the P35,000.00 it had paid private respondents is recognized.

SO ORDERED.

G.R. NO. L-18965 OCTOBER 30, 1964

COMPAIA MARITIMA, PETITIONER,

VS.
INSURANCE COMPANY OF NORTH AMERICA, RESPONDENT.

BAUTISTA ANGELO, J.:

Sometime in October, 1952, Macleod and Company of the Philippines contracted by telephone the services of the Compaia
Maritima, a shipping corporation, for the shipment of 2,645 bales of hemp from the former's Sasa private pier at Davao City to
Manila and for their subsequent transhipment to Boston, Massachusetts, U.S.A. on board the S.S. Steel Navigator. This oral contract
was later on confirmed by a formal and written booking issued by Macleod's branch office in Sasa and handcarried to Compaia
Maritima's branch office in Davao in compliance with which the latter sent to Macleod's private wharf LCT Nos. 1023 and 1025 on
which the loading of the hemp was completed on October 29, 1952. These two lighters were manned each by a patron and an
assistant patron. The patrons of both barges issued the corresponding carrier's receipts and that issued by the patron of Barge No.
1025 reads in part:

Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND COMPANY OF PHILIPPINES, Sasa Davao, for
transhipment at Manila onto S.S. Steel Navigator.

FINAL DESTINATION: Boston.

Thereafter, the two loaded barges left Macleod's wharf and proceeded to and moored at the government's marginal wharf in the
same place to await the arrival of the S.S. Bowline Knot belonging to Compaia Maritima on which the hemp was to be loaded.
During the night of October 29, 1952, or at the early hours of October 30, LCT No. 1025 sank, resulting in the damage or loss of 1,162
bales of hemp loaded therein. On October 30, 1952, Macleod promptly notified the carrier's main office in Manila and its branch in
Davao advising it of its liability. The damaged hemp was brought to Odell Plantation in Madaum, Davao, for cleaning, washing,
reconditioning, and redrying. During the period from November 1-15, 1952, the carrier's trucks and lighters hauled from Odell to
Macleod at Sasa a total of 2,197.75 piculs of the reconditioned hemp out of the original cargo of 1,162 bales weighing 2,324 piculs
which had a total value of 116,835.00. After reclassification, the value of the reconditioned hemp was reduced to P84,887.28, or a
loss in value of P31,947.72. Adding to this last amount the sum of P8,863.30 representing Macleod's expenses in checking, grading,
rebating, and other fees for washing, cleaning and redrying in the amount of P19.610.00, the total loss adds up to P60,421.02.

All abaca shipments of Macleod, including the 1,162 bales loaded on the carrier's LCT No. 1025, were insured with the Insurance
Company of North America against all losses and damages. In due time, Macleod filed a claim for the loss it suffered as above stated
with said insurance company, and after the same had been processed, the sum of P64,018.55 was paid, which was noted down in a
document which aside from being a receipt of the amount paid, was a subrogation agreement between Macleod and the insurance
company wherein the former assigned to the latter its rights over the insured and damaged cargo. Having failed to recover from the
carrier the sum of P60,421.02, which is the only amount supported by receipts, the insurance company instituted the present action
on October 28, 1953. After trial, the court a quo rendered judgment ordering the carrier to pay the insurance company the sum of
P60,421.02, with legal interest thereon from the date of the filing of the complaint until fully paid, and the costs. This judgment was
affirmed by the Court of Appeals on December 14, 1960. Hence, this petition for review.

The issues posed before us are: (1) Was there a contract of carriage between the carrier and the shipper even if the loss occurred
when the hemp was loaded on a barge owned by the carrier which was loaded free of charge and was not actually loaded on the S.S.
Bowline Knot which would carry the hemp to Manila and no bill of lading was issued therefore?; (2) Was the damage caused to the
cargo or the sinking of the barge where it was loaded due to a fortuitous event, storm or natural disaster that would exempt the
carrier from liability?; (3) Can respondent insurance company sue the carrier under its insurance contract as assignee of Macleod in
spite of the fact that the liability of the carrier as insurer is not recognized in this jurisdiction?; (4) Has the Court of Appeals erred in
regarding Exhibit NNN-1 as an implied admission by the carrier of the correctness and sufficiency of the shipper's statement of
accounts contrary to the burden of proof rule?; and (5) Can the insurance company maintain this suit without proof of its personality
to do so?

1. This issue should be answered in the affirmative. As found by the Court of Appeals, Macleod and Company contracted by
telephone the services of petitioner to ship the hemp in question from the former's private pier at Sasa, Davao City, to Manila, to be
subsequently transhipped to Boston, Massachusetts, U.S.A., which oral contract was later confirmed by a formal and written
booking issued by the shipper's branch office, Davao City, in virtue of which the carrier sent two of its lighters to undertake the
service. It also appears that the patrons of said lighters were employees of the carrier with due authority to undertake the
transportation and to sign the documents that may be necessary therefor so much so that the patron of LCT No. 1025 signed the
receipt covering the cargo of hemp loaded therein as follows: .

Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND COMPANY OF PHILIPPINES, Sasa Davao, for
transhipment at Manila onto S.S. Steel Navigator.

FINAL DESTINATION: Boston.

The fact that the carrier sent its lighters free of charge to take the hemp from Macleod's wharf at Sasa preparatory to its loading
onto the ship Bowline Knot does not in any way impair the contract of carriage already entered into between the carrier and the
shipper, for that preparatory step is but part and parcel of said contract of carriage. The lighters were merely employed as the first
step of the voyage, but once that step was taken and the hemp delivered to the carrier's employees, the rights and obligations of the
parties attached thereby subjecting them to the principles and usages of the maritime law. In other words, here we have a complete
contract of carriage the consummation of which has already begun: the shipper delivering the cargo to the carrier, and the latter
taking possession thereof by placing it on a lighter manned by its authorized employees, under which Macleod became entitled to
the privilege secured to him by law for its safe transportation and delivery, and the carrier to the full payment of its freight upon
completion of the voyage.

The receipt of goods by the carrier has been said to lie at the foundation of the contract to carry and deliver, and if actually no goods
are received there can be no such contract. The liability and responsibility of the carrier under a contract for the carriage of goods
commence on their actual delivery to, or receipt by, the carrier or an authorized agent. ... and delivery to a lighter in charge of a
vessel for shipment on the vessel, where it is the custom to deliver in that way, is a good delivery and binds the vessel receiving the
freight, the liability commencing at the time of delivery to the lighter. ... and, similarly, where there is a contract to carry goods from
one port to another, and they cannot be loaded directly on the vessel and lighters are sent by the vessel to bring the goods to it, the
lighters are for the time its substitutes, so that the bill of landing is applicable to the goods as soon as they are placed on the lighters.
(80 C.J.S., p. 901, emphasis supplied)

... The test as to whether the relation of shipper and carrier had been established is, Had the control and possession of the cotton
been completely surrendered by the shipper to the railroad company? Whenever the control and possession of goods passes to the
carrier and nothing remains to be done by the shipper, then it can be said with certainty that the relation of shipper and carrier has
been established. Railroad Co. v. Murphy, 60 Ark. 333, 30 S.W. 419, 46 A. St. Rep. 202; Pine Bluff & Arkansas River Ry. v. MaKenzie,
74 Ark. 100, 86 S.W. 834; Matthews & Hood v. St. L., I.M. & S.R. Co., 123 Ark. 365, 185 S.W. 461, L.R.A. 1916E, 1194. (W.F. Bogart &
Co., et al. v. Wade, et al., 200 S.W. 148).

The claim that there can be no contract of affreightment because the hemp was not actually loaded on the ship that was to take it
from Davao City to Manila is of no moment, for, as already stated, the delivery of the hemp to the carrier's lighter is in line with the
contract. In fact, the receipt signed by the patron of the lighter that carried the hemp stated that he was receiving the cargo "in
behalf of S.S. Bowline Knot in good order and condition." On the other hand, the authorities are to the effect that a bill of lading is
not indispensable for the creation of a contract of carriage.

Bill of lading not indispensable to contract of carriage. As to the issuance of a bill of lading, although article 350 of the Code of
Commerce provides that "the shipper as well as the carrier of merchandise or goods may mutua-lly demand that a bill of lading is
not indispensable. As regards the form of the contract of carriage it can be said that provided that there is a meeting of the minds
and from such meeting arise rights and obligations, there should be no limitations as to form." The bill of lading is not essential to
the contract, although it may become obligatory by reason of the regulations of railroad companies, or as a condition imposed in the
contract by the agreement of the parties themselves. The bill of lading is juridically a documentary proof of the stipulations and
conditions agreed upon by both parties. (Del Viso, pp. 314-315; Robles vs. Santos, 44 O.G. 2268). In other words, the Code does not
demand, as necessary requisite in the contract of transportation, the delivery of the bill of lading to the shipper, but gives right to
both the carrier and the shipper to mutually demand of each other the delivery of said bill. (Sp. Sup. Ct. Decision, May 6, 1895).
(Martin, Philippine Commercial Laws, Vol. II, Revised Edition, pp. 12-13)

The liability of the carrier as common carrier begins with the actual delivery of the goods for transportation, and not merely with the
formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance.
Even where it is provided by statute that liability commences with the issuance of the bill of lading, actual delivery and acceptance
are sufficient to bind the carrier. (13 C.J.S., p. 288)

2. Petitioner disclaims responsibility for the damage of the cargo in question shielding itself behind the claim of force majeure or
storm which occurred on the night of October 29, 1952. But the evidence fails to bear this out.

Rather, it shows that the mishap that caused the damage or loss was due, not to force majeure, but to lack of adequate precautions
or measures taken by the carrier to prevent the loss as may be inferred from the following findings of the Court of Appeals:

Aside from the fact that, as admitted by appellant's own witness, the ill-fated barge had cracks on its bottom (pp. 18-19, t.s.n., Sept.
13, 1959) which admitted sea water in the same manner as rain entered "thru tank man-holes", according to the patron of LCT No.
1023 (exh. JJJ-4) conclusively showing that the barge was not seaworthy it should be noted that on the night of the nautical
accident there was no storm, flood, or other natural disaster or calamity. Certainly, winds of 11 miles per hour, although stronger
than the average 4.6 miles per hour then prevailing in Davao on October 29, 1952 (exh. 5), cannot be classified as storm. For
according to Beaufort's wind scale, a storm has wind velocities of from 64 to 75 miles per hour; and by Philippine Weather Bureau
standards winds should have a velocity of from 55 to 74 miles per hour in order to be classified as storm (Northern Assurance Co.,
Ltd. vs. Visayan Stevedore Transportation Co., CA-G.R. No. 23167-R, March 12, 1959).

The Court of Appeals further added: "the report of R. J. del Pan & Co., Inc., marine surveyors, attributes the sinking of LCT No. 1025
to the 'non-water-tight conditions of various buoyancy compartments' (exh. JJJ); and this report finds confirmation on the above-
mentioned admission of two witnesses for appellant concerning the cracks of the lighter's bottom and the entrance of the rain water
'thru manholes'." We are not prepared to dispute this finding of the Court of Appeals.

3. There can also be no doubt that the insurance company can recover from the carrier as assignee of the owner of the cargo for the
insurance amount it paid to the latter under the insurance contract. And this is so because since the cargo that was damaged was
insured with respondent company and the latter paid the amount represented by the loss, it is but fair that it be given the right to
recover from the party responsible for the loss. The instant case, therefore, is not one between the insured and the insurer, but one
between the shipper and the carrier, because the insurance company merely stepped into the shoes of the shipper. And since the
shipper has a direct cause of action against the carrier on account of the damage of the cargo, no valid reason is seen why such
action cannot be asserted or availed of by the insurance company as a subrogee of the shipper. Nor can the carrier set up as a
defense any defect in the insurance policy not only because it is not a privy to it but also because it cannot avoid its liability to the
shipper under the contract of carriage which binds it to pay any loss that may be caused to the cargo involved therein. Thus, we find
fitting the following comments of the Court of Appeals:

It was not imperative and necessary for the trial court to pass upon the question of whether or not the disputed abaca cargo was
covered by Marine Open Cargo Policy No. MK-134 isued by appellee. Appellant was neither a party nor privy to this insurance
contract, and therefore cannot avail itself of any defect in the policy which may constitute a valid reason for appellee, as the insurer,
to reject the claim of Macleod, as the insured. Anyway, whatever defect the policy contained, if any, is deemed to have been waived
by the subsequent payment of Macleod's claim by appellee. Besides, appellant is herein sued in its capacity as a common carrier,
and appellee is suing as the assignee of the shipper pursuant to exhibit MM. Since, as above demonstrated, appellant is liable to
Macleod and Company of the Philippines for the los or damage to the 1,162 bales of hemp after these were received in good order
and condition by the patron of appellant's LCT No. 1025, it necessarily follows that appellant is likewise liable to appellee who, as
assignee of Macleod, merely stepped into the shoes of and substi-tuted the latter in demanding from appellant the payment for the
loss and damage aforecited.

4. It should be recalled in connection with this issue that during the trial of this case the carrier asked the lower court to order the
production of the books of accounts of the Odell Plantation containing the charges it made for the loss of the damaged hemp for
verification of its accountants, but later it desisted therefrom on the claim that it finds their production no longer necessary. This
desistance notwithstanding, the shipper however pre-sented other documents to prove the damage it suffered in connection with
the cargo and on the strength thereof the court a quo ordered the carrier to pay the sum of P60,421.02. And after the Court of
Appeals affirmed this award upon the theory that the desistance of the carrier from producing the books of accounts of Odell
Plantation implies an admission of the correctness of the statements of accounts contained therein, petitioner now contends that
the Court of Appeals erred in basing the affirmance of the award on such erroneous interpretation.

There is reason to believe that the act of petitioner in waiving its right to have the books of accounts of Odell Plantation presented in
court is tantamount to an admission that the statements contained therein are correct and their verification not necessary because
its main defense here, as well as below, was that it is not liable for the loss because there was no contract of carriage between it and
the shipper and the loss caused, if any, was due to a fortuitous event. Hence, under the carrier's theory, the correctness of the
account representing the loss was not so material as would necessitate the presentation of the books in question. At any rate, even
if the books of accounts were not produced, the correctness of the accounts cannot now be disputed for the same is supported by
the original documents on which the entries in said books were based which were presented by the shipper as part of its evidence.
And according to the Court of Appeals, these documents alone sufficiently establish the award of P60,412.02 made in favor of
respondent.

5. Finally, with regard to the question concerning the personality of the insurance company to maintain this action, we find the same
of no importance, for the attorney himself of the carrier admitted in open court that it is a foreign corporation doing business in the
Philippines with a personality to file the present action.

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

G.R. NO. L-3581 SEPTEMBER 21, 1950

JAMES MCGUIRE, PLAINTIFF-APPELLEE,

VS.
THE MANUFACTURERS LIFE INSURANCE CO., DEFENDANT-APPELLANT.

OZAETA, J.:

This case was submitted to and decided by the Court of First Instance of Samar upon a stipulation of facts, from which it appears
that:

On August 18, 1932, the defendant issued an insurance policy on the life of Jaime McGuire for the sum of $5,000, and an additional
sum of $5,000 as double indemnity accident benefit, payable to the plaintiff as beneficiary. The insured paid the premiums on said
policy up to and including that due on July 19, 1940. On June 22, 1940, the insured secured from the defendant a loan of $760 on
said insurance policy. The insured failed to pay the loan with the interest thereon on January 1, 1941, when it became due, or on any
other date thereafter. He likewise failed to pay the premiums which fell due on July 19, 1941, as well as those payable thereafter.
Paragraphs 6, 7, and 8 of the stipulation of facts reads as follows:

(6) That upon the default of the insured to pay the premiums due on July 19, 1941, and subsequent ones, the defendant insurance
company applied the stipulation contained in clause 8 (Automatic Premium Loan) of the provisions of the policy Exhibit A and said
policy was carried on under said nonforfeiture clause of the policy up to and including March 1, 1942, the date said policy lapsed, as
shown in the letter of the defendant company of January 17, 1946, to plaintiff, a copy of which is hereto attached, marked Exhibit B
and is made a part hereof;

(7) That the insured Jaime McGuire died on August 4, 1943, in a motorcycle accident at Borongan, Samar, Philippines;

(8) That during the interim period between March 1, 1942, the date the policy lapsed, to August 4, 1943, the date of the death of the
insured, the insured attempted to reinstate the policy under the stipulation contained in clause 3 of the "Provisions" of the same but
his attempts failed because of his inability to communicate with defendant's branch office at Manila due to the then existence of
war and the occupation of the Philippines by enemy forces from January 1, 1942, to February, 1945.

Upon those facts the trial court rendered judgment in favor of the plaintiff, adjudging the defendant to pay to him the sum of
P20,000, minus the premiums due and unpaid up to the date of the death of the insured, with legal interest thereon from the date
of the filing of the complaint, and the costs.

The trial court considered erroneous paragraph 6 of the stipulation of facts above quoted to the effect that the policy in question
lapsed on March 1, 1942, for failure to pay the premiums due thereafter on account of the war, the trial court being of the opinion
that the war legally suspended the obligation of the insured to pay the premiums up to the time of the death of the insured, which
occurred during said war, citing the decision of the Court of Appeals to that effect in Gubagaras vs. West Coast Life Insurance
Company, CA-G. R. No. 1628, January 6, 1949.

According to the complaint, plaintiff's theory is that, although the policy lapsed on March 1, 1942, the insured had the privilege of
reinstating it so as to keep it in force up to the time of his death upon a written application within three years from the date of lapse
and upon production of evidence of insurability satisfactory to the company and the payment of all overdue premiums and any
other indebtedness to the company, but that the insured was unable to exercise that privilege because of the war. Adopting another
theory, the trial court held that it was unnecessary for the plaintiff to invoke the reinstatement clause of the policy because it had
not lapsed inasmuch as the failure to pay the premiums was due to the war.

Plaintiff's theory is untenable. Even if the insured had applied for reinstatement within three years after the policy had lapsed, his
right thereto was not absolute under the terms of the policy but discretionary on the part of the insurance company, which had the
right to deny the reinstatement if it was not satisfied as to the insurability of the insured and if the latter did not pay all overdue
premiums and all other indebtedness to the company. After the death of the insured the insurance company could not be compelled
to entertain an application for reinstatement of the policy because the conditions precedent to reinstatement could no longer be
determined and satisfied.

Aside from the error of the trial court in motu proprio setting aside the stipulation of fact that the policy had lapsed on March 1,
1942, its theory that the payment of premiums was legally suspended during the war is contrary to the decision of this court of
August 31, 1950, in Lopez de Constantino vs. Asia Life Insurance Company, and Peralta vs. Asia Life Insurance Company, G. R. Nos. L-
1669 and L-1670, supra, p. 248. In those cases we rejected the New York rule which holds that war between states in which the
parties reside suspends the contract of life insurance and that, upon tender of all premiums due by the insured or his representative
after the war was terminated, the contract revives and becomes fully operative; and adopted the United States rule which declares
that the contract is not merely suspended, but is abrogated by reason of nonpayment of premiums, since the time of the payments
is peculiarly of the essence of the contract. Speaking through Mr. Justice Bengzon, this court, after a review of various pertinent
cases, further said:

After pursuing the Insurance Act, we are firmly persuaded that the nonpayment of premiums is such a vital defense of insurance
companies that since the very beginning, said Act 2427 expressly preserved it, by providing that after the policy shall have been in
force for two years, it shall become incontestable (i. e., the insurer shall have no defense) except for fraud, nonpayment of
premiums, and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress recently amended this
section (Rep. Act 171), the defense of fraud was eliminated, while the defense of nonpayment was preserved. Thus the fundamental
character of the undertaking to pay premiums and high importance of the defense of nonpayment thereof, was specifically
recognized.

We reiterate the doctrine laid down in the Asia Life Insurance Company cases above cited.

It appears that the insured in the present case has used up all the reserve value of the policy in question thru loans in cash and the
application of the nonforfeiture clause by keeping the policy subsisting until March 1, 1942.

Reversing the judgment appealed from, we absolve the defendant-appellant from the complaint, with costs.

G.R. NO. 147839 JUNE 8, 2006

GAISANO CAGAYAN, INC. PETITIONER,

VS.
INSURANCE COMPANY OF NORTH AMERICA, RESPONDENT.

DECISION

AUSTRIA-MARTINEZ, J.:

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

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

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

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

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

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

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable because the property
covered by the insurance policies were destroyed due to fortuities event or force majeure; that respondent's right of subrogation
has no basis inasmuch as there was no breach of contract committed by it since the loss was due to fire which it could not prevent or
foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never consented to paying the claim
of the insured.6

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

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

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside the decision of the RTC.
The dispositive portion of the decision reads:

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

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured Inter Capitol Marketing
Corporation, plus legal interest from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal
interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and cost of the thing sold;
that loss of the goods in the fire must be borne by petitioner since the proviso contained in the sales invoices is an exception under
Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of
the thing at the time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery
of the lost goods but the payment of its unpaid account and as such the obligation to pay is not extinguished, even if the fire is
considered a fortuitous event; that by subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with
book debt endorsements, what was insured was the vendor's interest as a creditor. 11

Petitioner filed a motion for reconsideration 12 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.

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

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

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

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

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

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

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

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

The Court disagrees with petitioner's stand.

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

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

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

The Court is not persuaded.

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

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

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

xxxx

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

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

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Parenthetically,
under Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest
founded on existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.

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

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

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 32 of the Civil Code is misplaced. As
held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.

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

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

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

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

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

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

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in evidence. Thus,
there is no evidence that respondent has been subrogated to any right which 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.

G.R. NO. 85141 NOVEMBER 28, 1989

FILIPINO MERCHANTS INSURANCE CO., INC., PETITIONER,

VS.
COURT OF APPEALS AND CHOA TIEK SENG, RESPONDENTS.

REGALADO, J.:

This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the dispositive part of which reads:

WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino Merchants Insurance Company to pay
the plaintiff the sum of P51,568.62 with interest at legal rate from the date of filing of the complaint, and is modified with respect to
the third party complaint in that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party plaintiff the sum of
P25,471.80 with legal interest from the date of payment until the date of reimbursement, and (2) the third-party complaint against
third party defendant Compagnie Maritime Des Chargeurs Reunis is dismissed. 1

The facts as found by the trial court and adopted by the Court of Appeals are as follows:

This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel SS Bougainville and unloaded at
the Port of Manila on or about December 11, 1976 and seeks to recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has been insured by the defendant insurance company under Policy No.
M-2678. The defendant brought a third party complaint against third party defendants Compagnie Maritime Des Chargeurs Reunis
and/or E. Razon, Inc. seeking judgment against the third (sic) defendants in case Judgment is rendered against the third party
plaintiff. It appears from the evidence presented that in December 1976, plaintiff insured said shipment with defendant insurance
company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric tons of fishmeal in
new gunny bags of 90 kilos each from Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms. Actually,
what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were
unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge 105 bags were in bad order condition as jointly surveyed by the ship's agent and the
arrastre contractor. The condition of the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to
120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6- Razon. The cargo was also surveyed by the
arrastre contractor before delivery of the cargo to the consignee and the condition of the cargo on such delivery was reflected in E.
Razon's Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant's surveyor
has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a survey report Exhibit F with the
findings on the extent of shortage or loss on the bad order bags totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on
said computation the plaintiff made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A formal claim statement was also presented by the plaintiff against
the vessel dated December 21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay the claim.
Consequently, the plaintiff brought an action against said defendant as adverted to above and defendant presented a third party
complaint against the vessel and the arrastre contractor. 2

The court below, after trial on the merits, rendered judgment in favor of private respondent, the decretal portion whereof reads:

WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and against the defendant Filipino
Merchant's (sic) Insurance Co., ordering the defendants to pay the plaintiff the following amount:

The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;

On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs Reunis and third party defendant E.
Razon, Inc. are ordered to pay to the third party plaintiff jointly and severally reimbursement of the amounts paid by the third party
plaintiff with legal interest from the date of such payment until the date of such reimbursement.

Without pronouncement as to costs.3

On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the complaint is concerned and
modified the same with regard to the adjudication of the third-party complaint. A motion for reconsideration of the aforesaid
decision was denied, hence this petition with the following assignment of errors:

1. The Court of Appeals erred in its interpretation and application of the "all risks" clause of the marine insurance policy when it held
the petitioner liable to the private respondent for the partial loss of the cargo, notwithstanding the clear absence of proof of some
fortuitous event, casualty, or accidental cause to which the loss is attributable, thereby contradicting the very precedents cited by it
in its decision as well as a prior decision of the same Division of the said court (then composed of Justices Cacdac, Castro-Bartolome,
and Pronove);

2. The Court of Appeals erred in not holding that the private respondent had no insurable interest in the subject cargo, hence, the
marine insurance policy taken out by private respondent is null and void;

3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud in not disclosing the fact, it being bound
out of utmost good faith to do so, that it had no insurable interest in the subject cargo, which bars its recovery on the policy. 4

On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical meaning in insurance in that
before a claim can be compensable it is essential that there must be "some fortuity, " "casualty" or "accidental cause" to which the
alleged loss is attributable and the failure of herein private respondent, upon whom lay the burden, to adduce evidence showing
that the alleged loss to the cargo in question was due to a fortuitous event precludes his right to recover from the insurance policy.
We find said contention untenable.

The "all risks clause" of the Institute Cargo Clauses read as follows:

5. This insurance is against all risks of loss or damage to the subject-matter insured but shall in no case be deemed to extend to
cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject-matter insured. Claims
recoverable hereunder shall be payable irrespective of percentage. 5

An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind.
The terms "accident" and "accidental", as used in insurance contracts, have not acquired any technical meaning. They are construed
by the courts in their ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by chance or
fortuitously, without intention and design, and which is unexpected, unusual and unforeseen. An accident is an event that takes
place without one's foresight or expectation; an event that proceeds from an unknown cause, or is an unusual effect of a known
cause and, therefore, not expected. 6

The very nature of the term "all risks" must be given a broad and comprehensive meaning as covering any loss other than a willful
and fraudulent act of the insured. 7 This is pursuant to the very purpose of an "all risks" insurance to give protection to the insured in
those cases where difficulties of logical explanation or some mystery surround the loss or damage to property. 8 An "all asks" policy
has been evolved to grant greater protection than that afforded by the "perils clause," in order to assure that no loss can happen
through the incidence of a cause neither insured against nor creating liability in the ship; it is written against all losses, that is,
attributable to external causes. 9

The term "all risks" cannot be given a strained technical meaning, the language of the clause under the Institute Cargo Clauses being
unequivocal and clear, to the effect that it extends to all damages/losses suffered by the insured cargo except (a) loss or damage or
expense proximately caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or nature of the
subject matter insured.

Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an "all risks" policy the
burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured under an "all
risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the
cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the
coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company
has the burden of proving that the loss is caused by the risk excepted and for want of such proof, the company is liable.

Coverage under an "all risks" provision of a marine insurance policy creates a special type of insurance which extends coverage to
risks not usually contemplated and avoids putting upon the insured the burden of establishing that the loss was due to the peril
falling within the policy's coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly excludes
the loss from coverage. 12 A marine insurance policy providing that the insurance was to be "against all risks" must be construed as
creating a special insurance and extending to other risks than are usually contemplated, and covers all losses except such as arise
from the fraud of the insured. 13 The burden of the insured, therefore, is to prove merely that the goods he transported have been
lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils. To
impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the broad
protective purpose of "all risks" insurance.

In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer is liable under the
policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the authorities and jurisprudence it discussed

... it is believed that in the absence of any showing that the losses/damages were caused by an excepted peril, i.e. delay or the
inherent vice or nature of the subject matter insured, and there is no such showing, the lower court did not err in holding that the
loss was covered by the policy.

There is no evidence presented to show that the condition of the gunny bags in which the fishmeal was packed was such that they
could not hold their contents in the course of the necessary transit, much less any evidence that the bags of cargo had burst as the
result of the weakness of the bags themselves. Had there been such a showing that spillage would have been a certainty, there may
have been good reason to plead that there was no risk covered by the policy (See Berk vs. Style [1956] cited in Marine Insurance
Claims, Ibid, p. 125). Under an 'all risks' policy, it was sufficient to show that there was damage occasioned by some accidental cause
of any kind, and there is no necessity to point to any particular cause. 14

Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The agreement has the
force of law between the parties. The terms of the policy constitute the measure of the insurer's liability. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.15

Anent the issue of insurable interest, we uphold the ruling of the respondent court that private respondent, as consignee of the
goods in transit under an invoice containing the terms under "C & F Manila," has insurable interest in said goods.

Section 13 of the Insurance Code defines insurable interest in property 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. In
principle, anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its
destruction whether he has or has not any title in, or lien upon or possession of the property y. 16 Insurable interest in property may
consist in (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an
existing interest in that out of which the expectancy arises. 17

Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the subject of a
valid contract of insurance. His interest over the goods is based on the perfected contract of sale. 18The perfected contract of sale
between him and the shipper of the goods operates to vest in him an equitable title even before delivery or before be performed
the conditions of the sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the
determination of whether the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale even
without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance.

Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or required to
send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the purpose of transmission
to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The
Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since,
from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them. 20

C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods and freight
to the named destination. 21 It simply means that the seller must pay the costs and freight necessary to bring the goods to the
named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the
ship's rail in the port of shipment. 22

Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioners answer. It was neither an issue
agreed upon by the parties at the pre-trial conference nor was it raised during the trial in the court below. It is a settled rule that an
issue which has not been raised in the court a quo cannot be raised for the first time on appeal as it would be offensive to the basic
rules of fair play, justice and due process. 23 This is but a permuted restatement of the long settled rule that when a party
deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he will not be permitted
to change his theory on appeal because, to permit him to do so, would be unfair to the adverse party. 24

If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on the issue of insurable interest
raised by petitioner, it was to put at rest all doubts on the matter under the facts in this case and also to dispose of petitioner's third
assignment of error which consequently needs no further discussion.

WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of Appeals is AFFIRMED in toto.

SO ORDERED.

G.R. NO. 114427 FEBRUARY 6, 1995

ARMANDO GEAGONIA, PETITIONER,

VS.
COURT OF APPEALS AND COUNTRY BANKERS INSURANCE CORPORATION, RESPONDENTS.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision 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-146222 for P100,000.00. The period of the policy was from 22
December 1989 to 22 December 1990 and covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's
for men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the co-
insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows:

Zenco Sales, Inc. P55,698.00

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

P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance or insurances already affected, or which may subsequently be
effected, covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby
insured, and unless such notice be given and the particulars of such insurance or insurances be stated therein or endorsed in this
policy pursuant to Section 50 of the Insurance Code, by or on behalf of the Company before the occurrence of any loss or damage,
all benefits under this policy shall be deemed forfeited, provided however, that this condition shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not more than P200,000.00.

On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. The
petitioner's insured stock-in-trade were completely destroyed prompting him to file with the private respondent a claim under the
policy. On 28 December 1990, the private respondent denied the claim because it found that at the time of the loss the petitioner's
stocks-in-trade were likewise covered by fire insurance policies No. 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.

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.

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

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

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

B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR
TRIAL; AND

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

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

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18 January 1991,
is without merit. The petitioner claims that the said letter was not offered in evidence and thus should not have been considered in
deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 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 interest, either at the same or at separate
times. 18 The mortgagor's insurable interest covers the full value of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property.19 The mortgagee's insurable interest is to the extent of the debt, since the property is
relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest
is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may be
made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the mere
pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to the
mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause," containing a collateral independent
contract between the mortgagee and insurer, may be attached; or the policy, though by its terms payable absolutely to the
mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the
mortgagee acquires an equitable lien upon the proceeds. 21

In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the
mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract
himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. 22 This kind of policy
covers only such interest as the mortgagee has at the issuing of the policy. 23

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by
which the mortgagor is to pay the premiums upon such insurance. 24 It has been noted, however, that although the mortgagee is
himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and
obtains on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which reads:

Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the terms of this policy.

This is clearly a simple loss payable clause, not a standard mortgage clause.

It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. vs. Ng
Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances already effected, or which may subsequently be
effected covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or
insurances be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited.

or in the 1930 case of Santa Ana vs. Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects thereby assured must be declared
by the insured in writing and he must cause the company to add or insert it in the policy, without which such policy shall be null and
void, and the insured will not be entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622
does not absolutely declare void any violation thereof. It expressly provides that the condition "shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly
against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to secure
when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any construction which
would result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to construe
the policy in a manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently,
provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance policies should be construed most
strictly against those for whose benefits they are inserted, and most favorably toward those against whom they are intended to
operate. 30 The reason for this is that, except for riders which may later be inserted, the insured sees the contract already in its final
form and has had no voice in the selection or arrangement of the words employed therein. On the other hand, the language of the
contract was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of the
insurers and the technical language employed therein is rarely understood by ordinary laymen. 31

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

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

Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of loss
does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not exceeding
P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of "other
insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner
obtains insurance policies from two or more insurers in a total amount that exceeds the property's value, the insured may have an
inducement to destroy the property for the purpose of collecting the insurance. The public as well as the insurer is interested in
preventing a situation in which a fire would be profitable to the insured. 32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 31916 is SET ASIDE and
the decision of the Insurance Commission in Case No. 3340 is REINSTATED.

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.

G.R. NO. 105135 JUNE 22, 1995

SUNLIFE ASSURANCE COMPANY OF CANADA, PETITIONER,

VS.
THE HON. COURT OF APPEALS AND SPOUSES ROLANDO AND BERNARDA BACANI, RESPONDENTS.

QUIASON, J.:

This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the Decision dated
February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April 22, 1992, denying reconsideration
thereof.

We grant the petition.

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was issued Policy No. 3-
903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The designated beneficiary was his mother,
respondent Bernarda Bacani.

On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking the benefits
of the insurance policy taken by her son. Petitioner conducted an investigation and its findings prompted it to reject the claim.

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts relevant to the
issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total premiums paid in the
amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his application when he answered the following questions:

5. Within the past 5 years have you:

a) consulted any doctor or other health practitioner?

b) submitted to:

EGG?
X-rays?
blood tests?
other tests?

c) attended or been admitted to any hospital or other medical facility?

6. Have you ever had or sought advice for:

xxx xxx xxx

b) urine, kidney or bladder disorder? (Rollo, p. 53)

The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a certain Dr. Reinaldo D.
Raymundo of the Chinese General Hospital on February 1986, for cough and flu complications. The other questions were answered
in the negative (Rollo, p. 53).

Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at the Lung
Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to
urinalysis, ultra-sonography and hematology tests.

On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an action for specific
performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer with
counterclaim and a list of exhibits consisting of medical records furnished by the Lung Center of the Philippines.

On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment" where they manifested
that they "have no evidence to refute the documentary evidence of concealment/misrepresentation by the decedent of his health
condition (Rollo, p. 62).

Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents as well as allegations
regarding the health of the insured. Private respondents failed to oppose said request or reply thereto, thereby rendering an
admission of the matters alleged.

Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The dispositive portion
of the decision is reproduced as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, condemning the latter to pay the
former the amount of One Hundred Thousand Pesos (P100,000.00) the face value of insured's Insurance Policy No. 3903766, and the
Accidental Death Benefit in the amount of One Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the concept
of reasonable attorney's fees and costs of suit.

Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).

In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in good faith and
under a belief that they need not be disclosed. Moreover, it held that the health history of the insured was immaterial since the
insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court ruled that petitioner
cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the facts concealed by the insured.
It also sustained the finding of the trial court that matters relating to the health history of the insured were irrelevant since
petitioner waived the medical examination prior to the approval and issuance of the insurance policy. Moreover, the appellate court
agreed with the trial court that the policy was "non-medical" (Rollo, pp. 4-5).

Petitioner's motion for reconsideration was denied; hence, this petition.

II We reverse the decision of the Court of Appeals.

The rule that factual findings of the lower court and the appellate court are binding on this Court is not absolute and admits of
exceptions, such as when the judgment is based on a misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494
[1993]).

In weighing the evidence presented, the trial court concluded that indeed there was concealment and misrepresentation, however,
the same was made in "good faith" and the facts concealed or misrepresented were irrelevant since the policy was "non-medical".
We disagree.

Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the other, in good
faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other
has no means of ascertaining. Said Section provides:

A neglect to communicate that which a party knows and ought to communicate, is called concealment.

Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to
whom communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (The
Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health.

The information which the insured failed to disclose were material and relevant to the approval and issuance of the insurance policy.
The matters concealed would have definitely affected petitioner's action on his application, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application.

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld does not depend
on the state of mind of the insured. Neither does it depend on the actual or physical events which ensue.

Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized for two weeks
prior to filing his application for insurance, raises grave doubts about his bonafides. It appears that such concealment was deliberate
on his part.

The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts concealed, is
untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316 (1963), that " . . . the
waiver of a medical examination [in a non-medical insurance contract] renders even more material the information required of the
applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important
factor which the insurer takes into consideration in deciding whether to issue the policy or not . . . "

Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows the injured party to
rescind a contract of insurance where there is concealment, ineffective (See Vda. de Canilang v. Court of Appeals, supra).

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

WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.

SO ORDERED.

G.R. NO. L-4611 DECEMBER 17, 1955

QUA CHEE GAN, PLAINTIFF-APPELLEE,

VS.
LAW UNION AND ROCK INSURANCE CO., LTD., REPRESENTED BY ITS AGENT, WARNER, BARNES AND CO., LTD., DEFENDANT-
APPELLANT.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking to recover
the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon certain
bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during
the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance
rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows:

Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and

(e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the Insurance Act from September
26, 1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.

The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas Nos. 1 to 4)
in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee
dealth extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable
to the Philippine National Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940, the insurance stood
as follows:

Policy No. Property Insured Amount

2637164 (Exhibit "LL") Bodega No. 1 (Building) P15,000.00

Bodega No. 2 (Building) 10,000.00

2637165 (Exhibit "JJ")
Bodega No. 3 (Building) 25,000.00
 Bodega No. 4 (Building) 10,000.00

Hemp Press moved by steam engine 5,000.00

2637345 (Exhibit "X") Merchandise contents (copra and empty sacks of Bodega No. 1) 150,000.00

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit "GG") Merchandise contents (loose hemp) of Bodega No. 4 5,000.00

Total P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely
destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren. Plaintiff-appellee informed the insurer by telegram on the
same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and
photograph the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff having
submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the
Insurance Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire
had been deliberately caused by the insured or by other persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua Chee Pao, and some
employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed
warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit
WW). Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the
result noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed because the appellee
had managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for
breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X,
Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. The undernoted Appliances for the extinction of fire being kept on the premises insured hereby, and it being
declared and understood that there is an ample and constant water supply with sufficient pressure available at all seasons for the
same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the currency of this
policy, by reason whereof a discount of 2 1/2 per cent is allowed on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of building, protected, with
not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the hydrants being
supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the rate of not less than
200 gallons of water per minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men
to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have
eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the
municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called
fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the
very beginning, the appellant neverthless issued the policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire
hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of TAbaco, contrary to the requirements of
the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises;
and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is
moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was
entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of
Allowances" to which the policies were expressly made subject). The law, supported by a long line of cases, is expressed by American
Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if
insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract
inconsistent with the facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is charitable
enough to assume, in the absence of any TIANO WAS HERE showing to the contrary, that an insurance company intends to
executed a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at
its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a
binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his
money without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance
which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to the abhorent to fairminded men. It
would be to allow the company to treat the policy as valid long enough to get the preium on it, and leave it at liberty to repudiate it
the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after the insured
had incurred the expense of installing the two hydrants, the company collected the premiums and issued him a policy so worded
that it gave the insured a discount much smaller than that he was normaly entitledto. According to the "Scale of Allowances," a
policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall entitled the insured to a discount
of 7 1/2 per cent of the premium; while the existence of "hydrants, in compund" (regardless of number) reduced the allowance on
the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances
reduced the risk of loss. But the appellant company, in the particular case now before us, so worded the policies that while exacting
the greater number of fire hydrants and appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving
the insurance company a double benefit. No reason is shown why appellant's premises, that had been insured with appellant for
several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of
appellant's own scale of allowances. Such abnormal treatment of the insured strongly points at an abuse of the insurance company's
selection of the words and terms of the contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present case. It is
not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so
that a party may be, by reason of inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall
fraud or imposition on the insured.

Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. It is a well settled rule of law that an
insurer which with knowledge of facts entitling it to treat a policy as no longer in force, receives and accepts a preium on the policy,
estopped to take advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an action to recover for
a loss thereafter occurring and at the same time treat it as valid for the purpose of earning and collecting further premiums." (29
Am. Jur., 653, p. 657.)

It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered the policy void and
then to accept and retain premiums under such a void policy. Neither law nor good morals would justify such conduct and the
doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted aganst the prty that
caused them, 1the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called
for in the insured premises, since its initial expression, "the undernoted appliances for the extinction of fire being kept on the
premises insured hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of the existence of such
appliances which appellant cannot now contradict, should the parol evidence rule apply.
The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the appellant's
argument thereon is based on the assumption that the insured was bound to maintain no less than eleven hydrants (one per 150
feet of wall), which requirement appellant is estopped from enforcing. The supposed breach of the wter pressure condition is made
to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring
that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a
minute. The transcript shows, however, that Serra repeatedly refused and professed inability to estimate the rate of discharge of the
water, and only gave the "5-gallon per 3-second" rate because the insistence of appellant's counsel forced the witness to hazard a
guess. Obviously, the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof
lay on appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and drilled, from
time to give, altho not maintained as a permanently separate unit, which the warranty did not require. Anyway, it would be
unreasonable to expect the insured to maintain for his compound alone a fire fighting force that many municipalities in the Islands
do not even possess. There is no merit in appellant's claim that subordinate membership of the business manager (Co Cuan) in the
fire brigade, while its direction was entrusted to a minor employee unders the testimony improbable. A business manager is not
necessarily adept at fire fighting, the qualities required being different for both activities.

Under the second assignment of error, appellant insurance company avers, that the insured violated the "Hemp Warranty"
provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee admitted that there were 36 cans (latas)
of gasoline in the building designed as "Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that
gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The cause relied upon
by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300o
Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or
kerosene. And how many insured, it may well be wondered, are in a position to understand or determine "flash point below 003o
Fahrenheit. Here, again, by reason of the exclusive control of the insurance company over the terms and phraseology of the
contract, the ambiguity must be held strictly against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture
(44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts who know and can
anticipate the hearing and possible complications of every contingency. So long as insurance companies insist upon the use of
ambiguous, intricate and technical provisions, which conceal rather than frankly disclose, their own intentions, the courts must, in
fairness to those who purchase insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91
Wash. 324, LRA 1917A, 1237.)

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for which the policy was
procured (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).

We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly and unmistakably, in the
language and terms that the general public can readily understand, without resort to obscure esoteric expression (now derisively
termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561):

If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.

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 concentrations 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 Baloilles" contracts
by adherence" (con tracts 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 examples) obviously call for greater strictness and vigilance on
the part of courts of justice TIANO WAS HERE with a view to protecting the weaker party from abuses and imposition, and prevent
their becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942).

Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser tenido en cuenta que al
seguro es, practicamente un contrato de los llamados de adhesion y por consiguiente en caso de duda sobre la significacion de las
clausulas generales de una poliza redactada por las compafijas sin la intervencion alguna de sus clientes se ha de adoptar de
acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la
empresa aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but equally so for the insurer; in
fact, it is mere so for the latter, since its dominant bargaining position carries with it stricter responsibility.

Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental to his business, being no
more than a customary 2 day's supply for the five or six motor vehicles used for transporting of the stored merchandise (t. s. n., pp.
1447-1448). "It is well settled that the keeping of inflammable oils on the premises though prohibited by the policy does not void it if
such keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to the weight of
authority, even though there are printed prohibitions against keeping certain articles on the insured premises the policy will not be
avoided by a violation of these prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or
business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the
"Hemp Warranty" forbade storage only "in the building to which this insurance applies and/or in any building communicating
therewith", and it is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned
and where the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers, etc. demanded by them
was found unsubstantiated by the trial Court, and no reason has been shown to alter this finding. The insured gave the insurance
examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the
examined books in his possession. What does appear to have been rejected by the insured was the demand that he should submit
"a list of all books, vouchers, receipts and other records" (Age 4, Exhibit 9-c); but the refusal of the insured in this instance was well
justified, since the demand for a list of all the vouchers (which were not in use by the insured) and receipts was positively
unreasonable, considering that such listing was superfluous because the insurer was not denied access to the records, that the
volume of Qua Chee Gan's business ran into millions, and that the demand was made just after the fire when everything was in
turmoil. That the representatives of the insurance company were able to secure all the date they needed is proved by the fact that
the adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from
that submitted by the insured (Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal
case for arson. (Decision, Exhibit WW).

How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision of the arson case (Exhibit
WW) acquiting Qua Choc Gan, appellee in the present proceedings. The decision states (Exhibit WW, p. 11):

Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su existencia de copra y abaca en las
bodega al tiempo del incendio durante el periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que
Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este conclusion el ha
tenidoen cuenta el balance de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en relacion con sus
libros y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que no estan de acuerdo con los
precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer, the Court referred the
controversy to a government auditor, Apolonio Ramos; but the latter reached a different result from the other two. Not only that,
but Ramos reported two different valuations that could be reached according to the methods employed (Exhibit WW, p. 35):

La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar el comercio y la finanza, pero en el
caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los contadores
Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado las mismas partidas y los mismos libros dichos
contadores hayan de llegara dos conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la
comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha
dado lugar a dos resultados diferentes dependiendo del metodo que se emplea.

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer attempted to bolster its case with
alleged photographs of certain pages of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26-B)
and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained
unconvinced of the authenticity of those photographs, and rejected them, because they were not mentioned not introduced in the
criminal case; and considering the evident importance of said exhibits in establishing the motive of the insured in committing the
arson charged, and the absence of adequate explanation for their omission in the criminal case, we cannot say that their rejection in
the civil case constituted reversible error.
The next two defenses pleaded by the insurer, that the insured connived at the loss and that the fraudulently inflated the
quantity of the insured stock in the burnt bodegas, are closely related to each other. Both defenses are predicted on the
assumption that the insured was in financial difficulties and set the fire to defraud the insurance company, presumably in order to
pay off the Philippine National Bank, to which most of the insured hemp and copra was pledged. Both defenses are fatally
undermined by the established fact that, notwithstanding the insurer's refusal to pay the value of the policies the extensive
resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time; and if he was able to do so, no
motive appears for attempt to defraud the insurer. While the acquittal of the insured in the arson case is not res judicata on the
present civil action, the insurer's evidence, to judge from the decision in the criminal case, is practically identical in both cases and
must lead to the same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer
"cannot be materially less convincing than that required in order to convict the insured of the crime of arson"(Bachrach vs. British
American Assurance Co., 17 Phil. 536).

As to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire
claims, the insurer's case rests almost exclusively on the estimates, inferences and conclusionsAs to the defense that the burned
bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost
exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the
premises during and after the fire. His testimony, however, was based on inferences from the photographs and traces found after
the fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan
Department of the National Bank's Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the
contents of the bodegas shortly before the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the
veracity and accuracy of these witnesses, and the appellant insurer has failed to substantiate its charges aganst their character. In
fact, the insurer's repeated accusations that these witnesses were later "suspended for fraudulent transactions" without giving any
details, is a plain attempt to create prejudice against them, without the least support in fact.

Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp burned (t. s. n., pp. 1468,
1470), rebutted appellant's attacks on the refusal of the Court below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that the adjuster's calculations of the maximum contents of the destroyed
warehouses rested on the assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine
the space occupied by definite amounts of sacked copra. The error in the estimates thus arrived at proceeds from the fact that a
large amount of the insured's stock were in loose form, occupying less space than when kept in sacks; and from Stewart's obvious
failure to give due allowance for the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the
weight of the overlying stock, as shown by engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself
admitted that this was the first copra fire he had investigated); but it is clear that such errors render valueles Stewart's
computations. These were in fact twice passed upon and twice rejected by different judges (in the criminal and civil cases) and their
concordant opinion is practically conclusive.

The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the opinions stated therein were
based on ex parte investigations made at the back of the insured; and the appellant did not present at the trial the original
testimony and documents from which the conclusions in the report were drawn.lawphi1.net

Appellant insurance company also contends that the claims filed by the insured contained false and fraudulent statements that
avoided the insurance policy. But the trial Court found that the discrepancies were a result of the insured's erroneous interpretation
of the provisions of the insurance policies and claim forms, caused by his imperfect knowledge of English, and that the
misstatements were innocently made and without intent to defraud. Our review of the lengthy record fails to disclose reasons for
rejecting these conclusions of the Court below. For example, the occurrence of previous fires in the premises insured in 1939, altho
omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously
with them), KK and WW. Considering that all these claims were submitted to the smae agent, and that this same agent had paid the
loss caused by the 1939 fire, we find no error in the trial Court's acceptance of the insured's explanation that the omission in Exhibits
EE and FF was due to inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would pass
unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the hemo stock, was explained by the
insured as caused by his belief that he was entitled to include in the claim his expected profit on the 70 per cent of the hemp,
because the same was already contracted for and sold to other parties before the fire occurred. Compared with other cases of over-
valuation recorded in our judicial annals, the 20 per cent excess in the case of the insured is not by itself sufficient to establish
fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger
than the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins.
Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods
insured were inventoried at O13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar, duly explained by him to
the Court a quo, appears puny by comparison, and can not be regarded as "more than misstatement, more than inadvertence of
mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun Insurance Office, ante) that would
entitle the insurer to avoid the policy. It is well to note that the overchange of 20 per cent was claimed only on a part (70 per cent)
of the hemp stock; had the insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his copra,
hemp and buildings in the same proportion. This also applies to the alleged fraudulent claim for burned empty sacks, that was
likewise explained to our satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing must be wilful
and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not
authorize the collection of the expected profit under the terms of the polices, and the trial Court correctly deducte the same from its
award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs against the appellant. So
ordered.

G.R. NO. L-34200 SEPTEMBER 30, 1982

REGINA L. EDILLON, AS ASSISTED BY HER HUSBAND, MARCIAL EDILLON, PETITIONERS-APPELLANTS,

VS.
MANILA BANKERS LIFE INSURANCE CORPORATION AND THE COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON
CITY, RESPONDENTS-APPELLEES.

VASQUEZ, J.:

The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance Rizal, Branch V,
Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the private respondent insurance
corporation of the premium and the issuance of the corresponding certificate of insurance should be deemed a waiver of the
exclusionary condition of overage stated in the said certificate of insurance.

The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance corporation for
insurance coverage against accident and injuries. She filled up the blank application form given to her and filed the same with the
respondent insurance corporation. In the said application form which was dated April 15, 1969, she gave the date of her birth as July
11, 1904. On the same date, she paid the sum of P20.00 representing the premium for which she was issued the corresponding
receipt signed by an authorized agent of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said application and
the payment of the premium on the policy applied for, the respondent insurance corporation issued to Carmen O. Lapuz its
Certificate of Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.

On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular accident in the
North Diversion Road.

On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the policy, filed her claim
for the proceeds of the insurance, submitting all the necessary papers and other requisites with the private respondent. Her claim
having been denied, Regina L. Edillon instituted this action in the Court of First Instance of Rizal on August 27, 1969.

In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the Certificate of
Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are under the age of sixteen (16) years of
age or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty (60) years of age when she applied for the
insurance coverage, the policy was TIANO WAS HERE null and void, and no risk on the part of the respondent insurance
corporation had arisen therefrom.

The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the petitioner to pay
attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered the private
respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium on the insurancy policy. It was reasoned out
that a policy of insurance being a contract of adhesion, it was the duty of the insured to know the terms of the contract he or she is
entering into; the insured in this case, upon learning from its terms that she could not have been qualified under the conditions
stated in said contract, what she should have done is simply to ask for a refund of the premium that she paid. It was further argued
by the trial court that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured and strictly against
the insurer may not be applied in the present case in view of the peculiar facts and circumstances obtaining therein.
We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the insurance company.
Her application for insurance coverage which was on a printed form furnished by private respondent and which contained very few
items of information clearly indicated her age of the time of filing the same to be almost 65 years of age. Despite such information
which could hardly be overlooked in the application form, considering its prominence thereon and its materiality to the coverage
applied for, the respondent insurance corporation received her payment of premium and issued the corresponding certificate of
insurance without question. The accident which resulted in the death of the insured, a risk covered by the policy, occurred on May
31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was sufficient time for the private respondent
to process the application and to notice that the applicant was over 60 years of age and thereby cancel the policy on that ground if it
was minded to do so. If the private respondent failed to act, it is either because it was willing to waive such disqualification; or,
through the negligence or incompetence of its employees for which it has only itself to blame, it simply overlooked such fact. Under
the circumstances, the insurance corporation is already deemed in estoppel. It inaction to revoke the policy despite a departure
from the exclusionary condition contained in the said policy constituted a waiver of such condition, as was held in the case of "Que
Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an insurance policy which contained a
provision as to the installation of fire hydrants the number of which depended on the height of the external wan perimeter of the
bodega that was insured. When it was determined that the bodega should have eleven (11) fire hydrants in the compound as
required by the terms of the policy, instead of only two (2) that it had, the claim under the policy was resisted on that ground. In
ruling that the said deviation from the terms of the policy did not prevent the claim under the same, this Court stated the following:

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called
fire hydrants warranty, for the reason that knowing fully an that the number of hydrants demanded therein never existed from the
very beginning, the appellant nevertheless issued the policies in question subject to such warranty, and received the corresponding
premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claim now as void ab initio the
policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire
hydrants installed by Que Chee Gan and two others nearby, owned by the municipality of Tabaco, contrary to the requirements of
the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises;
and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made it
moreover rendered probable by its being a prerequisite for the fixing of the discount on the premium to which the insured was
entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See"'Scale of
Allowances" to which the policies were expressly made subject). The law, supported by a long line of cases, is expressed by American
Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if
insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract
inconsistent with the known facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is
charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid
contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and
this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract,
rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken is money without
consideration.' (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance
which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so
contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorent to fairminded men. It
would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate
it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).

A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which involved a
violation of the provision of the policy requiring the payment of premiums before the insurance shall become effective. The
company issued the policy upon the execution of a promissory note for the payment of the premium. A check given subsequent by
the insured as partial payment of the premium was dishonored for lack of funds. Despite such deviation from the terms of the
policy, the insurer was held liable.
Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the insurance premium within
thirty (30) days from the effective date of policy. By so doing, it has impliedly agreed to modify the tenor of the insurance policy and
in effect, waived the provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the
premium. Considering that the insurance policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted
the promissory note in payment of the premium. This rendered the policy immediately operative on the date it was delivered. The
view taken in most cases in the United States:

... is that although one of conditions of an insurance policy is that "it shall not be valid or binding until the first premium is paid", if it
is silent as to the mode of payment, promissory notes received by the company must be deemed to have been accepted in payment
of the premium. In other words, a requirement for the payment of the first or initial premium in advance or actual cash may be
waived by acceptance of a promissory note...

WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private respondent insurance
corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance
Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid, the further sum of TWO THOUSAND
(P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

SO ORDERED.

G.R. NO. L-16163 FEBRUARY 28, 1963

IGNACIO SATURNINO, IN HIS OWN BEHALF AND AS THE JUDICIAL GUARDIAN OF CARLOS SATURNINO, MINOR,PLAINTIFFS-
APPELLANTS,
VS.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, DEFENDANT-APPELLEE.

MAKALINTAL, J.:

Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to recover the sum of P5,000.00, corresponding to
the face value of an insurance policy issued by defendant on the life of Estefania A. Saturnino, and the sum of P1,500.00 as
attorney's fees. Defendant, now appellee, set up special defenses in its answer, with a counterclaim for damages allegedly sustained
as a result of the unwarranted presentation of this case. Both the complaint and the counterclaim were dismissed by the trial court;
but appellants were declared entitled to the return of the premium already paid; plus interest at 6% up to January 8, 1959, when a
check for the corresponding amount P359.65 was sent to them by appellee.

The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy dispenses with the medical
examination of the applicant usually required in ordinary life policies. However, detailed information is called for in the application
concerning the applicant's health and medical history. The written application in this case was submitted by Saturnino to appellee on
November 16, 1957, witnessed by appellee's agent Edward A. Santos. The policy was issued on the same day, upon payment of the
first year's premium of P339.25. On September 19, 1958 Saturnino died of pneumonia, secondary to influenza. Appellants here, who
are her surviving husband and minor child, respectively, demanded payment of the face value of the policy. The claim was rejected
and this suit was subsequently instituted.

It appears that two months prior to the issuance of the policy or on September 9, 1957, Saturnino was operated on for cancer,
involving complete removal of the right breast, including the pectoral muscles and the glands found in the right armpit. She stayed in
the hospital for a period of eight days, after which she was discharged, although according to the surgeon who operated on her she
could not be considered definitely cured, her ailment being of the malignant type.

Notwithstanding the fact of her operation Estefania A. Saturnino did not make a disclosure thereof in her application for insurance.
On the contrary, she stated therein that she did not have, nor had she ever had, among other ailments listed in the application,
cancer or other tumors; that she had not consulted any physician, undergone any operation or suffered any injury within the
preceding five years; and that she had never been treated for nor did she ever have any illness or disease peculiar to her sex,
particularly of the breast, ovaries, uterus, and menstrual disorders. The application also recites that the foregoing declarations
constituted "a further basis for the issuance of the policy."

The question at issue is whether or not the insured made such false representations of material facts as to avoid the policy. There
can be no dispute that the information given by her in her application for insurance was false, namely, that she had never had
cancer or tumors, or consulted any physician or undergone any operation within the preceding period of five years. Are the facts
then falsely represented material? The Insurance Law (Section 30) provides that "materiality is to be determined not by the event,
but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his
estimate of the proposed contract, or in making his inquiries." It seems to be the contention of appellants that the facts subject of
the representation were not material in view of the "non-medical" nature of the insurance applied for, which does away with the
usual requirement of medical examination before the policy is issued. The contention is without merit. If anything, the waiver of
medical examination renders even more material the information required of the applicant concerning previous condition of health
and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in
deciding whether to issue the policy or not. It is logical to assume that if appellee had been properly apprised of the insured's
medical history she would at least have been made to undergo medical examination in order to determine her insurability.

Appellants argue that due information concerning the insured's previous illness and operation had been given to appellees agent
Edward A. Santos, who filled the application form after it was signed in blank by Estefania A. Saturnino. This was denied by Santos in
his testimony, and the trial court found such testimony to be true. This is a finding of fact which is binding upon us, this appeal
having been taken upon questions of law alone. We do not deem it necessary, therefore, to consider appellee's additional argument,
which was upheld by the trial court, that in signing the application form in blank and leaving it to Edward A. Santos to fill (assuming
that to be the truth) the insured in effect made Santos her agent for that purpose and consequently was responsible for the errors in
the entries made by him in that capacity.

In the application for insurance signed by the insured in this case, she agreed to submit to a medical examination by a duly
appointed examiner of appellee if in the latter's opinion such examination was necessary as further evidence of insurability. In not
asking her to submit to a medical examination, appellants maintain, appellee was guilty of negligence, which precluded it from
finding about her actual state of health. No such negligence can be imputed to appellee. It was precisely because the insured had
given herself a clean bill of health that appellee no longer considered an actual medical checkup necessary.

Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself did not know, since her
doctor never told her, that the disease for which she had been operated on was cancer. In the first place the concealment of the fact
of the operation itself was fraudulent, as there could not have been any mistake about it, no matter what the ailment. Secondly, in
order to avoid a policy it is not necessary to show actual fraud on the part of the insured. In the case of Kasprzyk v. Metropolitan
Insurance Co., 140 N.Y.S. 211, 214, it was held:

Moreover, if it were the law that an insurance company could not depend a policy on the ground of misrepresentation, unless it
could show actual knowledge on the part of the applicant that the statements were false, then it is plain that it would be impossible
for it to protect itself and its honest policyholders against fraudulent and improper claims. It would be wholly at the mercy of any
one who wished to apply for insurance, as it would be impossible to show actual fraud except in the extremest cases. It could not
rely on an application as containing information on which it could act. There would be no incentive to an applicant to tell the truth.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court,
without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1wph1.t

In this jurisdiction a concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of insurance,
concealment being defined as "negligence to communicate that which a party knows and ought to communicate" (Sections 24 & 26,
Act No. 2427). In the case of Argente v. West Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law
of Insurance, 2nd ed., Vol. 3:

"The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into accepting the risk,
or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material
fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby
induced to estimate the risk upon a false basis that it does not exist."

The judgment appealed from, dismissing the complaint and awarding the return to appellants of the premium already paid, with
interest at 6% up to January 29, 1959, affirmed, with costs against appellants.
 G.R. NO. 92492 JUNE 17, 1993

THELMA VDA. DE CANILANG, PETITIONER,

VS.
HON. COURT OF APPEALS AND GREAT PACIFIC LIFE ASSURANCE CORPORATION, RESPONDENTS.

FELICIANO, J.:

On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from "sinus tachycardia." The
doctor prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the same
doctor again on 3 August 1982 and this time was found to have "acute bronchitis."

On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with respondent Great Pacific Life
Assurance Company ("Great Pacific") naming his wife, Thelma Canilang, as his beneficiary. 1 Jaime Canilang was issued ordinary life
insurance Policy No. 345163, with the face value of P19,700, effective as of 9 August 1982.

On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic anemia." 2 Petitioner, widow and
beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on 5 December 1983 upon the ground that the
insured had concealed material information from it.

Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of the insurance proceeds. During
the hearing called by the Insurance Commissioner, petitioner testified that she was not aware of any serious illness suffered by her
late husband3 and that, as far as she knew, her husband had died because of a kidney disorder. 4 A deposition given by Dr. Wilfredo
Claudio was presented by petitioner. There Dr. Claudio stated that he was the family physician of the deceased Jaime Canilang 5 and
that he had previously treated him for "sinus tachycardia" and "acute bronchitis." 6 Great Pacific for its part presented Dr. Esperanza
Quismorio, a physician
and a medical underwriter working for Great Pacific.7 She testified that the deceased's insurance application had been approved on
the basis of his medical declaration.8 She explained that as a rule, medical examinations are required only in cases where the
applicant has indicated in his application for insurance coverage that he has previously undergone medical consultation and
hospitalization.9

In a decision dated 5 November 1985, Insurance Commissioner Armando Ansaldo ordered Great Pacific to pay P19,700 plus legal
interest and P2,000.00 as attorney's fees after holding that:

1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it would not have affected Great Pacific's
decision to insure him;

2. Great Pacific had waived its right to inquire into the health condition of the applicant by the issuance of the policy despite the lack
of answers to "some of the pertinent questions" in the insurance application;

3. there was no intentional concealment on the part of the insured Jaime Canilang as he had thought that he was merely suffering
from a minor ailment and simple cold; 10 and

4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not concealment was intentionally made, was not
applicable to Canilang's case as that law became effective only on 1 June 1985.

On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the Insurance Commissioner and dismissed
Thelma Canilang's complaint and Great Pacific's counterclaim. The Court of Appealed found that the use of the word "intentionally"
by the Insurance Commissioner in defining and resolving the issue agreed upon by the parties at pre-trial before the Insurance
Commissioner was not supported by the evidence; that the issue agreed upon by the parties had been whether the deceased
insured, Jaime Canilang, made a material concealment as the state of his health at the time of the filing of insurance application,
justifying respondent's denial of the claim. The Court of Appeals also found that the failure of Jaime Canilang to disclose previous
medical consultation and treatment constituted material information which should have been communicated to Great Pacific to
enable the latter to make proper inquiries. The Court of Appeals finally held that the Ng Gan Zee case which had
involved misrepresentation was not applicable in respect of the case at bar which involves concealment.

Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging that:
1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that the issue in the case agreed upon
between the parties before the Insurance Commission is whether or not Jaime Canilang "intentionally" made material concealment
in stating his state of health;

2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions does not amount to fraud and private
respondent is deemed to have waived inquiry thereto. 11

The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as follows:

MEDICAL DECLARATION

I hereby declare that:

(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any medical or surgical advice/attention within the
last five (5) years.

(2) I have never been treated nor consulted a physician for a heart condition, high blood pressure, cancer, diabetes, lung, kidney,
stomach disorder, or any other physical impairment.

(3) I am, to the best of my knowledge, in good health.

EXCEPTIONS:

________________________________________________________________________________

GENERAL DECLARATION

I hereby declare that all the foregoing answers and statements are complete, true and correct. I hereby agree that if there be any
fraud or misrepresentation in the above statements material to the risk, the INSURANCE COMPANY upon discovery within two (2)
years from the effective date of insurance shall have the right to declare such insurance null and void. That the liabilities of the
Company under the said Policy/TA/Certificate shall accrue and begin only from the date of commencement of risk stated in the
Policy/TA/Certificate, provided that the first premium is paid and the Policy/TA/Certificate is delivered to, and accepted by me in
person, when I am in actual good health.

Signed at Manila his 4th day of August, 1992.

Illegible

Signature of Applicant. 12

We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of the medical declaration, he failed
to disclose in the appropriate space, under the caption "Exceptions," that he had twice consulted Dr. Wilfredo B. Claudio who had
found him to be suffering from "sinus tachycardia" and "acute bronchitis."

The relevant statutory provisions as they stood at the time Great Pacific issued the contract of insurance and at the time Jaime
Canilang died, are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into effect on 11 June 1978.
These provisions read as follows:

Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.

xxx xxx xxx

Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all factors within his knowledge which
are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining.
(Emphasis supplied)
Under the foregoing provisions, the information concealed must be information which the concealing party knew and "ought to
[have] communicate[d]," that is to say, information which was "material to the contract." The test of materiality is contained in
Section 31 of the Insurance Code of 1978 which reads:

Sec. 31. Materially is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his
inquiries. (Emphasis supplied)

"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per minute." 13 The symptoms of this condition
include pounding in the chest and sometimes faintness and weakness of the person affected. The following elaboration was offered
by Great Pacific and set out by the Court of Appeals in its Decision:

Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per minute. (Harrison' s Principles of Internal
Medicine, 8th ed. [1978], p. 1193.) It is, among others, a common reaction to heart disease, including myocardial infarction, and
heart failure per se. (Henry J.L. Marriot, M.D., Electrocardiography, 6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio
for treatment of Canilang's ailment on June 18, 1982, indicates the condition that said physician was trying to manage. Thus, he
prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anti-
convulsant, muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous heart. Such treatment could have
been a very material information to the insurer in determining the action to be take on Canilang's application for life insurance
coverage. 14

We agree with the Court of Appeals that the information which Jaime Canilang failed to disclose was material to the ability of Great
Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang disclosed his visits to his doctor, the
diagnosis made and medicines prescribed by such doctor, in the insurance application, it may be reasonably assumed that Great
Pacific would have made further inquiries and would have probably refused to issue a non-medical insurance policy or, at the very
least, required a higher premium for the same coverage. 15 The materiality of the information withheld by Great Pacific did not
depend upon the state of mind of Jaime Canilang. A man's state of mind or subjective belief is not capable of proof in our judicial
process, except through proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably
drawn. Neither does materiality depend upon the actual or physical events which ensue. Materiality relates rather to the "probable
and reasonable influence of the facts" upon the party to whom the communication should have been made, in assessing the risk
involved in making or omitting to make further inquiries and in accepting the application for insurance; that "probable and
reasonable influence of the facts" concealed must, of course, be determined objectively, by the judge ultimately.

The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v. Philippine-American Life Insurance
Company, 16 this Court held that:

. . . if anything, the waiver of medical examination [in a non-medical insurance contract] renders even more material the information
required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes
an important factor which the insurer takes into consideration in deciding whether to issue the policy or not . . . . 17 (Emphasis
supplied)

The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the insurer was not
"intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor ailment like a common cold.
Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is, throughout the time range material for present
purposes, provided that:

Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.

The preceding statute, Act No. 2427, as it stood from 1914 up to 1974, had provided:

Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance. (Emphasis
supplied)

Upon the other hand, in 1985, the Insurance Code of 1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (Emphasis
supplied)

The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional or
unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of concealment
which generate a right to rescind on the part of the injured party to "intentional concealments." This argument is not persuasive. As
a simple matter of grammar, it may be noted that "intentional" and "unintentional" cancel each other out. The net result therefore
of the phrase "whether intentional or unitentional" is precisely to leave unqualified the term "concealment." Thus, Section 27 of the
Insurance Code of 1978 is properly read as referring to "any concealment" without regard to whether such concealment is
intentional or unintentional. The phrase "whether intentional or unintentional" was in fact superfluous. The deletion of the phrase
"whether intentional or unintentional" could not have had the effect of imposing an affirmative requirement that a concealment
must be intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of
the phrase "whether intentional or unintentional" merely underscored the fact that all throughout (from 1914 to 1985), the statute
did not require proof that concealment must be "intentional" in order to authorize rescission by the injured party.

In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to communicate must
have been intentional rather than merely inadvertent. For Jaime Canilang could not have been unaware that his heart beat would at
times rise to high and alarming levels and that he had consulted a doctor twice in the two (2) months before applying for non-
medical insurance. Indeed, the last medical consultation took place just the day before the insurance application was filed. In all
probability, Jaime Canilang went to visit his doctor precisely because of the discomfort and concern brought about by his
experiencing "sinus tachycardia."

We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the concealment by issuing the
insurance policy notwithstanding Canilang's failure to set out answers to some of the questions in the insurance application. Such
failure precisely constituted concealment on the part of Canilang. Petitioner's argument, if accepted, would obviously erase Section
27 from the Insurance Code of 1978.

It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial before the Insurance
Commission that the relevant issue was whether or not Jaime Canilang had intentionally concealed material information from the
insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself dated 17 October 1984 and the Minutes of the Pre-
trial Conference dated 15 October 1984, which "readily shows that the word "intentional" does not appear in the statement or
definition of the issue in the said Order and Minutes." 18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of Appeals dated 16 October 1989 in
C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the costs.

SO ORDERED.

G.R. NO. L-30685 MAY 30, 1983

NG GAN ZEE, PLAINTIFF-APPELLEE,

VS.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, DEFENDANT-APPELLANT.

ESCOLIN, J.:

This is an appeal from the judgment of the Court of First Instance of Manila, ordering the appellant Asian-Crusader Life Assurance
Corporation to pay the face value of an insurance policy issued on the life of Kwong Nam the deceased husband of appellee Ng Gan
Zee. Misrepresentation and concealment of material facts in obtaining the policy were pleaded to avoid the policy. The lower court
rejected the appellant's theory and ordered the latter to pay appellee "the amount of P 20,000.00, with interest at the legal rate
from July 24, 1964, the date of the filing of the complaint, until paid, and the costs. "

The Court of Appeals certified this appeal to Us, as the same involves solely a question of law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the sum of P20,000.00, with his wife,
appellee Ng Gan Zee as beneficiary. On the same date, appellant, upon receipt of the required premium from the insured, approved
the application and issued the corresponding policy. On December 6, 1963, Kwong Nam died of cancer of the liver with metastasis.
All premiums had been religiously paid at the time of his death.

On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment of the face value of the policy.
On the same date, she submitted the required proof of death of the insured. Appellant denied the claim on the ground that the
answers given by the insured to the questions appealing in his application for life insurance were untrue.

Appellee brought the matter to the attention of the Insurance Commissioner, the Hon. Francisco Y. Mandamus, and the latter, after
conducting an investigation, wrote the appellant that he had found no material concealment on the part of the insured and that,
therefore, appellee should be paid the full face value of the policy. This opinion of the Insurance Commissioner notwithstanding,
appellant refused to settle its obligation.

Appellant alleged that the insured was guilty of misrepresentation when he answered "No" to the following question appearing in
the application for life insurance-

Has any life insurance company ever refused your application for insurance or for reinstatement of a lapsed policy or offered you a
policy different from that applied for? If, so, name company and date.

In its brief, appellant rationalized its thesis thus:

... As pointed out in the foregoing summary of the essential facts in this case, the insured had in January, 1962, applied for
reinstatement of his lapsed life insurance policy with the Insular Life Insurance Co., Ltd, but this was declined by the insurance
company, although later on approved for reinstatement with a very high premium as a result of his medical examination. Thus
notwithstanding the said insured answered 'No' to the [above] question propounded to him. ... 1

The lower court found the argument bereft of factual basis; and We quote with approval its disquisition on the matter-

On the first question there is no evidence that the Insular Life Assurance Co., Ltd. ever refused any application of Kwong Nam for
insurance. Neither is there any evidence that any other insurance company has refused any application of Kwong Nam for insurance.

... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong Nam's request for reinstatement and amendment of
his lapsed insurance policy on April 24, 1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes from said application for
reinstatement and amendment, Exh. 'L', that the amount applied for was P20,000.00 only and not for P50,000.00 as it was in the
lapsed policy. The amount of the reinstated and amended policy was also for P20,000.00. It results, therefore, that when on May 12,
1962 Kwong Nam answered 'No' to the question whether any life insurance company ever refused his application for reinstatement
of a lapsed policy he did not misrepresent any fact.

... the evidence shows that the application of Kwong Nam with the Insular Life Assurance Co., Ltd. was for the reinstatement and
amendment of his lapsed insurance policy-Policy No. 369531 -not an application for a 'new insurance policy. The Insular Life
Assurance Co., Ltd. approved the said application on April 24, 1962. Policy No. 369531 was reinstated for the amount of P20,000.00
as applied for by Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the Insular Life Assurance Co., Ltd. to Kwong Nam
in connection with said application for reinstatement and amendment. Such being the case, the Court finds that there is no
misrepresentation on this matter. 2

Appellant further maintains that when the insured was examined in connection with his application for life insurance, he gave the
appellant's medical examiner false and misleading information as to his ailment and previous operation. The alleged false
statements given by Kwong Nam are as follows:

Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been associated with ulcer of stomach. Tumor taken out
was hard and of a hen's egg size. Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now, claims he is
completely recovered.

To demonstrate the insured's misrepresentation, appellant directs Our attention to:

[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General Hospital on May 22, 1960, i.e., about
2 years before he applied for an insurance policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan had diagnosed the
patient's ailment as 'peptic ulcer' for which, an operation, known as a 'sub-total gastric resection was performed on the patient by
Dr. Pacifico Yap; and

[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from the patient's body was 'a portion
of the stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension.

On the bases of the above undisputed medical data showing that the insured was operated on for peptic ulcer", involving the
excision of a portion of the stomach, appellant argues that the insured's statement in his application that a tumor, "hard and of a
hen's egg size," was removed during said operation, constituted material concealment.

The question to be resolved may be propounded thus: Was appellant, because of insured's aforesaid representation, misled or
deceived into entering the contract or in accepting the risk at the rate of premium agreed upon?

The lower court answered this question in the negative, and We agree.

Section 27 of the Insurance Law [Act 2427] provides:

Sec. 27. Such party a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are
material to the contract, and which the other has not the means of ascertaining, and as to which he makes no warranty. 3

Thus, "concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assurer, but he designedly and intentionally withholds the same." 4

It has also been held "that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or the fact must
have been intentionally withheld." 5

Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of the Insurance Law, above-
quoted, nevertheless requires that fraudulent intent on the part of the insured be established to entitle the insurer to rescind the
contract. And as correctly observed by the lower court, "misrepresentation as a defense of the insurer to avoid liability is an
'affirmative' defense. The duty to establish such a defense by satisfactory and convincing evidence rests upon the defendant. The
evidence before the Court does not clearly and satisfactorily establish that defense."

It bears emphasis that Kwong Nam had informed the appellant's medical examiner that the tumor for which he was operated on was
"associated with ulcer of the stomach." In the absence of evidence that the insured had sufficient medical knowledge as to enable
him to distinguish between "peptic ulcer" and "a tumor", his statement that said tumor was "associated with ulcer of the stomach, "
should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Indeed, such
statement must be presumed to have been made by him without knowledge of its incorrectness and without any deliberate intent
on his part to mislead the appellant.

While it may be conceded that, from the viewpoint of a medical expert, the information communicated was imperfect, the same
was nevertheless sufficient to have induced appellant to make further inquiries about the ailment and operation of the insured.

Section 32 of Insurance Law [Act No. 24271 provides as follows:

Section 32. The right to information of material facts maybe waived either by the terms of insurance or by neglect to make inquiries
as to such facts where they are distinctly implied in other facts of which information is communicated.

It has been held that where, upon the face of the application, a question appears to be not answered at all or to be imperfectly
answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the
omission to answer more fully immaterial. 6

As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had such an important bearing on the question of
whether the defendant would undertake the insurance or not, the court cannot understand why the defendant or its medical
examiner did not make any further inquiries on such matters from the Chinese General Hospital or require copies of the hospital
records from the appellant before acting on the application for insurance. The fact of the matter is that the defendant was too eager
to accept the application and receive the insured's premium. It would be inequitable now to allow the defendant to avoid liability
under the circumstances."

Finding no reversible error committed by the trial court, the judgment appealed from is hereby affirmed, with costs against
appellant Asian-Crusader life Assurance Corporation.

SO ORDERED.

G.R. NO. L-12465 MAY 29, 1959

YU PANG CHENG ALIAS YU PANG CHING, PETITIONER,

VS.
THE COURT OF APPEALS, ET AL., RESPONDENTS..

BAUTISTA ANGELO, J.:

Plaintiff brought this action to collect from defendant the sum of P10,000.00, value of an insurance policy taken upon the life of one
Yu Pang Eng, plus interest thereon at the legal rate, the sum of P10,000.00 as moral damages the further sum of P3,000.00 as
attorney's fees, and the costs of action.

Defendant, in its answer, set up the defense that the insured was guilty of misrepresentation and concealment of material facts in
that he gave false and untruthful answers to certain questions asked him in his application for insurance which were material to the
risk insured against and have the effect of avoiding the insurance policy.

After trial, the court rendered judgment ordering defendant to pay plaintiff the sum of P10,000.00, with legal interest thereon from
the filing of the complaint, plus the sum of P2,000.00 as attorney's fees, and the costs of suit. On appeal, the Court of Appeals
reversed the decision of the trial court, holding that the insured was guilty of concealment of material facts which relieves defendant
from liability. Hence the present petition for review.

On September 5, 1950, Yu Pang Eng submitted parts II and III of his application for insurance consisting of the medical declaration
made by him to the medical examiner of defendant and the medical examiner's report. On September 7, he submitted part I of his
application which is the declaration made by him to an agent of defendant, and on September 8, based on said application, and
upon payment of the first premium in the sum of P591.70, defendant issued to the insured Policy No. 812858.

On December 27, 1950, the insured entered St. Luke's Hospital for medical treatment but he died on February 27, 1951. According
to the death certificate, he died of "infiltrating medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature, stomach
metastases spleen." Plaintiff, brother and beneficiary of the insured, demanded from the defendant the payment of the proceeds of
the insurance policy and when the demand was refused, he brought the present action.

The issue to be determined is whether the insured is guilty of concealment of some facts material to the risk insured against which
has the effect of avoiding the policy as found by respondent court.

The insured, in his application for insurance, particularly in his declarations to the examining physician, stated the following in
answering the questions propounded to him:

14. Have you ever had any of the following diseases or symptoms? Each question must be read and answered "Yes" or "No".

Gastritis, Ulcer of the Stomach or any disease of that organ? No.

Vertigo, Dizziness, Fainting-spells or Unconscious? No.

Cancer, Tumors or Ulcers of any kind? No.

15. Have you ever consulted any physician not included in any of the above answers? Give names and address or physicians list
ailments or accidents and date. No.
It appears that the insured entered the Chinese General Hospital for medical treatment on January 29, 1950 having stayed there up
to February 11, 1950. Upon entering the hospital, he complained of dizziness, anemia, abdominal pains and tarry stools, and in the
evening of his admission he had several abdominal pains and his discharges were with black tarry stools and felt dizzy and weak. The
history of his illness shows that the same "started a year ago as frequent dizziness." An X-Ray picture of his stomach was taken and
the diagnosis made of him by his doctors showed that his illness was "peptic ulcer, bleeding."

It should be noted that the insured's confinement in the Chinese General Hospital took place from January 29, 1950 to February 11,
1950, whereas his application for insurance wherein he stated his answer to the questions propounded to him by the examining
physician of defendant was submitted to defendant on September 5, 1950. It is apparent that when the insured gave his answers
regarding his previous ailment, particularly with regard to "Gastritis, Ulcer of the Stomach or any disease of that organ" and
"Vertigo, Dizziness, Fainting-spells or Unconsciousness", he concealed the ailment of which he was treated in the Chinese General,
Hospital which precisely has direct connection with the subject of the questions propounded. The negative answers given by the
insured regarding his previous ailment, or his concealment of the fact that he was hospitalized and treated for sometime of peptic
ulcer and had suffered from "dizziness, anemia, abdominal pains and tarry stools", deprived defendant of the opportunity to make
the necessary inquiry as to the nature of his past illness so that as it may form its estimate relative to the approval of his application.
Had defendant been given such opportunity, considering the previous illness of the insured as disclosed by the record of the Chinese
General Hospital, defendant would probably had never consented to the issuance of the policy in question. In fact, according to the
death certificate, the insured died of "infiltrating medullary carcinoma, Grade 4, advanced cardiac and of lesser curvature, stomach
metastases spleen", which may have direct connection with his previous illness.

Our Insurance law provides that " A neglect to communicate that which a party knows and ought to communicate, is called
concealment" (Section 25, Act No. 2427). Whether intentional or unintentional, the concealment entitles the insurer to rescind the
contract of insurance (Section 26). Our law even requires the insured to communicate to the insurer all facts within his knowledge
which are material to the contract and which the other party has not the means of ascertaining (Section 27), and the materiality is to
be determined not by the event but solely by the probable and reasonable influence of the facts upon the party to whom the
communication is due (Section 30).

In the case of Argente vs. West Coast Life Insurance Co., 51 Phil., 725 this Court said:

One ground for the rescission of a contract of insurance under the insurance Act is "a concealment", which in section 25 is defined
"A neglect to communicate that which a party knows and ought to communicate." Appellant argues that the concealment was
immaterial and insufficient to avoid the policy. We cannot agree. In an action on a life insurance policy where the evidence
conclusively shows that the answers to questions concerning diseases were untrue, the truth or falsity of the answers become the
determining factor. If the policy was procured by fraudulent representations, the contract of insurance apparently set forth therein
was never legally existent. It can fairly be assumed that had the true facts been disclosed by the assured, the insurance would never
have been granted.

Upon the foregoing reasons, we are persuaded to conclude that respondent court did err in declaring the policy ineffective on the
ground of concealment and in relieving appellee from liability thereunder.

Wherefore, the decision appealed from is affirmed, with costs against petitioner-appellant.

G.R. No. 20341 September 1, 1923

DOMINGO GARCIA and THE PHILIPPINE NATIONAL BANK, plaintiffs-appellees,

vs.

THE HONGKONG FIRE & MARINE INSURANCE CO., LTD., defendant-appellant.

William and Ferrier for appellant.

Roman Lacson for the appellee Bank.

Vicente de Vera for the other appellee.

STATEMENT

After formal pleas, the plaintiff's allege that on the 19th of March, 1918, in the City of Manila, the plaintiff, Domingo Garcia, then a
merchant and owner of a bazaar known as "Las Novedades" in the district of Legaspi, municipality and Province of Albay, entered
into a contract with the defendant whereby it insured his merchandise in the sum of P15,000 at a premium of P300 per annum; that
in consideration of such premium, the defendant issued its fire insurance policy No. 1951 in favor of the plaintiff, not on the
merchandise in the building, but on the building which contained the merchandise; that for such reason the policy does not contain
the true agreement and intent of the parties; that the plaintiff was not the owner of, and did not have any interest in, the building;
and that the policy was so issued through error, carelessness and negligence of the defendant.

That on august 30, 1919, Garcia executed a mortgage to the plaintiff Bank on the merchandise insured by the defendant, and that
with the consent of the defendant, the plaintiff endorsed the policy to the Bank; that on February 6, 1920, and while the policy was
in force and effect, a fire took place which destroyed the merchandise in the building of the value of P20,000, together with the
building itself; that demand was made upon the defendant for the payment of P15,000, as provided for in the policy, and that
payment was refused. Wherefore, plaintiffs pray judgment for that amount, with legal interest from the date of filing of the
complaint, and costs.

For answer, the defendant admits the formal allegations of the complaint, and denies generally and specifically all other allegations.

As a result of the trial, the lower court rendered judgment for the plaintiff, as prayed for in the complaint, from which the defendant
appeals and contends that the lower court erred in denying its motion to make the complaint more definite and certain; in
permitting Garcia over its objection to testify to the contents of certain documents; in refusing to strike them from the record; in
finding that the defendant, through its agent, knew that it was the merchandise which was insured and not the building; in failing to
find the plaintiffs, and Garcia in particular, guilty of negligence; in finding that the defendant committed error in making out the
policy to cover the building rather than the merchandise; in rendering the judgment; and in denying defendant's motion for a new
trial.

JOHNS, J.:

It appears that the policy was in the English language, of which the plaintiff Garcia is ignorant. When he received it he noticed that
the amount P15,000 was correct, and never personally made a further investigation. He was the exclusive owner of the merchandise
in the building which, at the time of the fire, was of the probable value of P20,000. He did not own or claim any interest in the
building. Desiring to have his merchandise insured for P15,000, he wrote a letter to "El Pilar," requesting that firm to have it insured,
as a result of which, the policy in questions was issued and delivered to him, and it was issued on the building with Garcia did not
own, and did not cover the merchandise which he did own. Desiring to obtain a loan from the Philippine National Bank, Garcia later
delivered and assigned the policy to the plaintiff Bank as collateral security for a loan. Upon receipt of the policy, and as one of the
conditions for the making of the loan, the Bank, through its manager, addressed the following letter to the agents of the defendant
on August 6, 1919:

We beg to advise that the merchandise insured by you against fire in favor of Mr. Domingo Garcia of Legaspi, Albay, P. I., for P15,000
for which you issued policy No. 1951, has been mortgaged to this bank together with the policy to secure a credit and loans not to
exceed P6,000 in all.

We would appreciate very much if you have our claims against the property and policy covering it, on account of the mortgage,
entered in your records and advise us accordingly.

Hoping to hear from you soon, we are,

Very truly yours,

This was answered by the agents August 14, 1919, as follows:

We beg to acknowledge receipt of your esteemed favor of the 6th inst., informing us that the Hongkong Fire Insurance Company,
Ltd.'s Policy in the name of Mr. Domingo Garcia, for the sum of P15,000 has been mortgaged to your goodselves. In order that this
transaction made by officially recorded, it will be necessary to make an endorsement upon the original policy, and we shall be glad,
therefore, if you will return this document to us as soon as convenient.
We are, Dear Sirs,

Yours faithfully.

August 18, 1919, the Bank wrote the following letter to the agents:

Complying with your request of the 13th ultimo, we beg to inclose herewith policy No. 1951 in favor of Mr. Domingo Garcia, Legaspi,
Albay, for P15,000, which has been mortgaged to this Bank to secure a credit and loan of not exceed P6,000 in all, for your proper
indorsement.

Trusting to have your prompt action in this matter, we are,

Very respectfully yours.

September 1, 1919, the agents wrote the Bank as follows:

We beg to acknowledge receipt of your favour of the 18th ultimo, enclosing Hongkong Fire Insurance Fire Insurance Co., Ltd.'s Policy
No. 1951, in the name of Mr. Domingo Garcia, and in accordance with your request have endorsed same in your favour, and beg to
return the document herewith. Please be good enough to acknowledge safe receipt in due course and oblige.

Yours faithfully.

It clearly appears that where the word "merchandise" was written in the letter of August 6th above quoted, some other word had
been previously written and erased, and the word "merchandise" was the written, as it now appears.

It is contended that when the letter was written, the Bank, which then had the possession of the policy, knew that it covered the
building and did not insure the merchandise. That, having such knowledge, it was the duty of the Bank to notify the defendant, and
having failed to do so, it cannot now contend that the policy was issued through a mistake. The fact remains that the defendant,
through its agents, received this letter, and that it recites:

We beg to advise that the merchandise insured by you against fire in favor of Mr. Domingo Garcia, etc.

That was a personal notice to the defendant of the fact that the policy was on the merchandise. It is pointed out that the Bank and
not the defendant then had the policy, and, for such reason, the Bank did not have notice of the error. Although the policy was in
possession of the Bank, the defendant had among its own records all of the data and information upon which the policy was issued,
and, as a matter of fact, its agents knew or should have known the kind of property insured.

It is possible that when the Bank wrote the letter, it knew of the error in the issuance of the policy. But that is a matter of inference
or conjecture only. Outside of the appearance of the letter itself, there is no evidence that the Bank had any acknowledge of the
error.

Garcia had his dealings with the officials of the branch Bank at Legaspi where he was doing business as a merchant, of which the
officials of that Bank had knowledge. Under such facts, the presumption of knowledge, if any, on the part of the Bank would be that
the policy was on the merchandise. Be that as it may, when the defendant received the letter from the Bank, it knew from its own
records that the policy was issued on the building, and, as a matter of fair dealing, it should have notified the Bank that the policy
was on the building. It will be noted that the letters in question were all written several months before the fire.

In the final analysis, Garcia wanted insurance upon a stock of goods, which he owned, and he received and paid for a policy on a
building, which he did not own, and while the policy was in force and effect, both the building, which he did not own, and the stock
of merchandise, which he did own, were completely destroyed by fire. Garcia was a well known merchant, and his merchandise was
in the building described in the policy.

For some unknown reason, the party who applied for the insurance at the instance and request of Garcia was not called as a
witness, and, as stated, that answer of the defendant is confined to general denial, and it did not offer any evidence.
In a well-written opinion, the trial court analyzed the evidence and made findings of fact upon which it rendered judgment for the
plaintiff. It is claimed that the letters and the copy of the telegram introduced in evidence were hearsay and not competent. If for no
other purpose, they were competent to show that Garcia wanted insurance on his merchandise and the reason why he wanted it.

The defense is purely technical, and is founded upon the contention that plaintiff cannot recover, because the policy covers loss on a
building, and does not cover loss of merchandise.

It is very apparent that a mistake was made in the issuance of the policy.

In its opinion the trial court says:

Under these circumstances it seems clear and manifest that the insured, as well as the manager of the National Bank at Legaspi, who
was interested in the policy, because the same secured a loan of P6,000 made to Domingo Garcia, and the corporation of Wise &
Co., Ltd., which represented the insurance company, have been in the belief that it was not the building but the merchandise that
was insured, for the reason that none of them paid attention to the context of the policy.

The opinion of the trial court further points out that, under the pleadings and proof, there is ground for the contention that the
plaintiff would be entitled to recover on the policy for the loss of the building.

All things considered, the judgment of the lower court is affirmed, with costs. So ordered.

G.R. NO. 119176 MARCH 19, 2002

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

VS.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (NOW JARDINE-CMA LIFE INSURANCE COMPANY, INC.) AND THE COURT OF
APPEALS, RESPONDENTS.

KAPUNAN, J.:

This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated
November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.

The facts of the case are undisputed.

Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic
corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to
1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing
feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a
certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary
stamp taxes due on the policy were paid by petitioner only on the initial sum assured.

In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value
of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00. Documentary stamp taxes
were paid based only on the par value of P5,000,000.00 and not on the book value.1wphi1.nt

Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75,
corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25
corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary
stamp taxes is as follows:

On Policies Issued:

Total policy issued during the year P1,360,054,000.00

 Documentary stamp tax due thereon
(P1,360,054,000.00 divided by P200.00
multiplied by P0.35) P 2,380,094.50

Less: Payment P 1,915,495.75

Deficiency P 464,598.75

Add: Compromise Penalty 300.00

-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax
Appeals, docketed as CTA Case No. 4583.

On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as
on the insurance policy. The dispositive portion of the CTAs decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total
of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from
collecting said deficiency documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.1

Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision
affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with
regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due
on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals
decision states:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on
the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is
ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued.
No costs pronouncement.

SO ORDERED.2

A motion for reconsideration of the decision having been denied, 3 both the Commissioner of Internal Revenue and private
respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private
respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the
stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the Court
of Appeals decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors:

THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND
THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE
AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.

THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE
ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS
RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION. 4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers,
and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied,
collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes
prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever
the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the
property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party
to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one
directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National Internal Revenue Code which states in part:

The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal
Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may
be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax
of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy.

Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main
agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued
when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency
assessment based on the additional insurance not covered in the main policy is in order.

The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the insurance policy
and that the "automatic increase clause" is an integral part of that policy.

The petition is impressed with merit.

Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is
set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word,
phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that
any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of
insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take
effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder
policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need
for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a
certain age.

It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and
the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount fixed in
policy, unless the interest of a person insured is susceptible of exact pecuniary measurement. 7 What then is the amount fixed in the
policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take
effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract.

Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity,
as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the
policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause because it was
already determinable at the time the transaction was entered into and formed part of the policy.

The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of
the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the
additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the insurance
sold to which private respondent was liable for the payment of the documentary stamp tax.

The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance
coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited, 10 tax laws cannot be
circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the amount insured (by
virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the
computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be
computed on the basis of the amount insured by the policy.

WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it affirmed the
decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the
amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by respondent.1wphi1.nt

SO ORDERED.

G.R. NO. 94071 MARCH 31, 1992

NEW LIFE ENTERPRISES AND JULIAN SY, PETITIONERS,

VS.
HON. COURT OF APPEALS, EQUITABLE INSURANCE CORPORATION, RELIANCE SURETY AND INSURANCE CO., INC. AND WESTERN
GUARANTY CORPORATION, RESPONDENTS.

REGALADO, J.:

This appeal by certiorari seeks the nullification of the decision 1 of respondent Court of Appeals in CA-G.R. CV No. 13866 which
reversed the decision of the Regional Trial Court, Branch LVII at Lucena City, jointly deciding Civil Cases Nos. 6-84, 7-84 and 8-84
thereof and consequently ordered the dismissal of the aforesaid actions filed by herein petitioners.

The undisputed background of this case as found by the court a quo and adopted by respondent court, being sustained by the
evidence on record, we hereby reproduce the same with approval. 2

The antecedents of this case show that Julian Sy and Jose Sy Bang have formed a business partnership in the City of Lucena. Under
the business name of New Life Enterprises, the partnership engaged in the sale of construction materials at its place of business, a
two storey building situated at Iyam, Lucena City. The facts show that Julian Sy insured the stocks in trade of New Life
Enterpriseswith Western Guaranty Corporation, Reliance Surety and Insurance. Co., Inc., and Equitable Insurance Corporation.

On May 15, 1981, Western Guaranty Corporation issued Fire Insurance Policy No. 37201 in the amount of P350,000.00. This policy
was renewed on May, 13, 1982.

On July 30,1981, Reliance Surety and Insurance Co., Inc. issued Fire Insurance Policy No. 69135 inthe amount of P300,000.00
(Renewed under Renewal Certificate No. 41997) An additional insurancewas issued by the same 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 inthe morning of October 19, 1982, the stocks in the trade inside said building were insured against
fire inthe 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 wentto the agent of
Reliance Insurance whom he asked to accompany him to the office of the company sothat 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, thethree insurance companies denied plaintiffs' claim for payment.

In its letter of denial dated March 9, 1983, (Exhibit "C" No. 8-

84) Western Guaranty Corporationthrough Claims Manager Bernard S. Razon told the plaintiff that his claim "is
denied for breach of policyconditions." Reliance Insurance purveyed the same message in its letter dated November 23,
1982and signed by Executive Vice-President Mary Dee Co (Exhibit "C" No. 7-84) which said that "plaintiff's
claim is denied for breach of policy conditions." The letter of denial received by the plaintiff fromEquitable Insurance
Corporation (Exhibit "C" No. 6-84) was of the same tenor, as said letter dated February 22, 1983, and signed by Vice-President
Elma R. Bondad, said "we find that certain policyconditions were violated, therefore, we regret, we have to deny your claim, as it is
hereby denied in its entirety."

In relation to the case against Reliance Surety and Insurance Company, a certain Atty. Serafin D.Dator, acting in behalf of the
plaintiff, sent a letter dated February 13, 1983 (Exhibit "G-l" No 7-84) toExecutive Vice-President Mary Dee Co asking that he
be informed as to the specific policy conditions allegedly violated by the plaintiff. In her reply-letter dated March
30, 1983, Executive Vice-PresidentMary Dee Co informed Atty. Dator that Julian Sy violated Policy Condition No.
"3" which requires theinsured to give notice of any insurance or insurances already effected covering the stocks in trade. 3

Because of the denial of their claims for payment by the three (3) insurance companies, petitioner filed separate
civilactions against the former before the Regional Trial Court of Lucena City, which cases were consolidated 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 TwoHundred Thousand (P200,000.00) Pesos and
considering that payment of the claim of the insured hasbeen unreasonably denied, pursuant to Sec. 244 of the Insurance Code, def
endant is further ordered topay the plaintiff attorney's fees in the amount of Twenty Thousand (P20,000.00)
Pesos. All sums ofmoney to be paid by virtue hereof shall bear interest at 12% per annum (pursuant
to Sec. 244 of theInsurance Code) from February 14, 1983, (91st day from November 16, 1982, when Sworn Statementof 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 defendantReliance 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 thatpayment of the claim of the
insured has been unreasonably denied, pursuant to Sec. 244 of theInsurance 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 SwornStatement 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 thedefendant Western Guaranty Corporation ordering
the latter to pay the sum of P350,000.00 to theConsolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the face ofPolicy 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 cruxwherein 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.

Condition No. 3 of said insurance policies, otherwise known as the "Other Insurance Clause," is uniformly contained
in all the aforestated insurance contracts of herein petitioners, as follows:

3. The insured shall give notice to the Company of any insurance or insurances already effected, orwhich
may subsequently be effected, covering any of the property or properties consisting of stocks intrade, goods in process
and/or inventories only hereby insured, and unless such notice be given andthe 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 ordamage, all benefits under this policy shall be deemed
forfeited, provided however, that this condition shall not apply when the total insurance or insurances in force at
the time of loss or damage not morethan P200,000.00. 5

Petitioners admit that the respective insurance policies issued by private respondents did not state or endorse thereon
the other insurance coverage obtained or subsequently effected on the same stocks in trade for the loss of which
compensation is claimed by petitioners. 6 The policy issued by respondent Western Guaranty Corporation(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 samestocks did not
likewise declare Western and Equitable as such co-insurers. It is further admitted by petitioners thatEquitable'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 ofP350,000.00 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 insurancecoverage and that they were not
informed about the requirement that such other or additional insurance should bestated in the
policy, as they have not even read policies.8 These contentions cannot pass judicial muster.

The terms of the contract are clear and unambiguous. The insured is specifically required to disclose to the insurer any other
insurance and its particulars which he may have effected on the same subject matter. The knowledge of such insurance
by the insurer's agents, even assuming the acquisition thereof by the former, is not the "notice" that would estop the insurers from
denying the claim. Besides, the so-called theory of imputed knowledge, that is, knowledge of the agent is
knowledge of the principal, aside from being of dubious applicability here has likewisebeen roundly
refuted by respondent court whose factual findings we find acceptable.

Thus, it points out that while petitioner Julian Sy claimed that he had informed insurance agent Alvarez regarding the co-insurance
on the property, he contradicted himself by inexplicably claiming that he had not read 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 theconclusion of
the trial court that Reliance and Equitable are "sister companies" is an unfounded conjecture drawnfrom the mere fact that Yap Kam
Chuan was an agent for both companies which also had the same insuranceclaims adjuster. Availment of the
services of the same agents and adjusters by different companies is a commonpractice in the insurance business and such facts
do not warrant the speculative conclusion of the trial court.

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

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally
infavor of the insured and strictly against the insurer company, yet contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves have used. If suchterms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense. 12Moreover,
obligations arising from contracts have the force of law between the contracting parties and should becomplied 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 terms of the
policy is implied from his failure to express any disagreement with what is provided for.14 It may be true that themajority rule, as
cited by petitioners, is that injured persons may accept policies without reading them, and that this is not negligence per se. 15 But,
this is not without any exception. It is and was incumbent upon petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a businessman since 196516 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, thestatement in question must be d
eemed 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.

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 entitlehimself 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 falsedeclaration; 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, theinsured 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 InsuranceClause" are materially different from the actual number of co-
insurances taken over the subjectproperty. Consequently, "the whole foundation of the contract fails, the
risk does not attach and thepolicy never becomes a contract between the parties." Representations of facts are the
foundation ofthe contract and if the foundation does not exist, the superstructure does
not arise. Falsehood in suchrepresentations is not shown to vary or add to the contract, or to terminate a contract which has
oncebeen made, but to show that no contract has ever existed (Tolentino, Commercial Laws of thePhilippines, p.
991, Vol. II, 8th Ed.,) A void or inexistent contract is one which has no force and effectfrom the very beginning, as if it had
never been entered into, and which cannot be validated either bytime or by ratification (Tongoy vs. C.A., 123 SCRA 99 (1983); Avila
v. C.A., 145 SCRA, 1986).

As the insurance policy against fire expressly required that notice should be given by the insured ofother insurance upon the same
property, the total absence of such notice nullifies the policy.

To further warrant and justify the forfeiture of the benefits under the insurance contracts involved, we need
merely toturn to Policy Condition No. 15 thereof, which reads in part:

15. . . . if any false declaration be made or used in support thereof, . . . all benefits 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
elapsedfrom 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, orin case of arbitration taking place as provided herein, within twelve (12) months after due
notice of theaward made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be
deemedto 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 thatplaintiff's right to ventilate his claim in court has been barred by reason of the time constraint provided in the insur
ance contract. It is evident that after the plaintiff had received
the letter of denial, he stillfound it necessary to be informed of the specific causes or reasons for
the denial of his claim, reasonfor which his lawyer, Atty. Dator deemed it wise to send a
letter of inquiry to the defendant which wasanswered by defendant's Executive Vice-President in a letter dated March 30, 1983, . . .
. Assuming,gratuitously, that the letter of 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

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 demandsthat insurance suits be brought by the insured while the evidence as to the
origin andcause of destruction have not yet disappeared.

In enunciating the above-cited principle, this Court had definitely settled the rationale for the
necessityof bringing suits against the Insurer within one year from the rejection of the claim. The contention
ofthe respondents that the one-year prescriptive period does
not start to run until the petition forreconsideration had been resolved by the insurer, runs counter to the declared purpose
for requiringthat an action or suit be filed in the Insurance Commission or in a court of competent
jurisdiction fromthe 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.

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the
samecannot be taken to mean the rejection of a petition for reconsideration as insisted by respondents.
Suchwas clearly not the meaning contemplated by this Court. The insurance policy in said case providesthat 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 ishereby AFFIRMED.

SO ORDERED.
 PHILIP S. YU, G.R. No. 154115Petitioner, - versus - AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ. HON.
COURT OF APPEALS, Second Division, and VIVECA LIM YU, Respondents. Promulgated: November 29, 2005

DECISION

TINGA, J.:

This treats of the petition for review on certiorari of the Court of Appeals Decision and Resolution in CA G.R. SP No. 66252 dated 30
April 2002[1] and 27 June 2002,[2] respectively, which set aside the Order of the Regional Trial Court (RTC) of Pasig City [3] dated 10
May 2001, declaring an application for insurance and an insurance policy as inadmissible evidence.

The facts of the case are undisputed.

On 15 March 1994, Viveca Lim Yu (private respondent) brought against her husband, Philip Sy Yu (petitioner), an action for legal
separation and dissolution of conjugal partnership on the grounds of marital infidelity and physical abuse. The case was filed before
the RTC of Pasig and raffled to Branch 158, presided by Judge Jose R. Hernandez.

During trial, private respondent moved for the issuance of a subpoena duces tecum and ad testificandum[4] to certain officers of
Insular Life Assurance Co. Ltd. to compel production of the insurance policy and application of a person suspected to be petitioners
illegitimate child.[5] The trial court denied the motion.[6] It ruled that the insurance contract is inadmissible evidence in view of
Circular Letter No. 11-2000, issued by the Insurance Commission which presumably prevents insurance companies/agents from
divulging confidential and privileged information pertaining to insurance policies. [7] It added that the production of the application
and insurance contract would violate Article 280[8] of the Civil Code and Section 5 of the Civil Registry Law, [9] both of which prohibit
the unauthorized identification of the parents of an illegitimate child. [10]Private respondent sought reconsideration of the Order, but
the motion was denied by the trial court.[11]

Aggrieved, private respondent filed a petition for certiorari before the Court of Appeals, imputing grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of Judge Hernandez in issuing the 10 May 2001 Order.[12] The Court of Appeals
summarized the issues as follows: (i) whether or not an insurance policy and its corresponding application form can be admitted as
evidence to prove a partys extra-marital affairs in an action for legal separation; and (ii) whether or not a trial court has the
discretion to deny a partys motion to attach excluded evidence to the record under Section 40, Rule 132 of the Rules of Court.[13]

According to the Court of Appeals, private respondent was merely seeking the production of the insurance application and contract,
and was not yet offering the same as part of her evidence. Thus, it declared that petitioners objection to the admission of the
documents was premature, and the trial courts pronouncement that the documents are inadmissible, precipitate. [14] The contents of
the insurance application and insurance documents cannot be considered as privileged information, the Court of Appeals added, in
view of the opinion of the Insurance Commissioner dated 4 April 2001 to the effect that Circular Letter No.11-2000 was never
intended to be a legal impediment in complying with lawful orders.[15]Lastly, the Court of Appeals ruled that a trial court does not
have the discretion to deny a partys privilege to tender excluded evidence, as this privilege allows said party to raise on appeal the
exclusion of such evidence.[16] Petitioner filed a motion for reconsideration but to no avail.

In the present petition, petitioner argues that the Court of Appeals blundered in delving into errors of judgment supposedly
committed by the trial court as if the petition filed therein was an ordinary appeal and not a special civil action. Further, he claims
that the Court of Appeals failed to show any specific instance of grave abuse of discretion on the part of the trial court in issuing the
assailed Order. Additionally, he posits that private respondent had already mooted her petition before the Court of Appeals when
she filed her formal offer of rebuttal exhibits, with tender of excluded evidence before the trial court. [17]

For her part, private respondent maintains that the details surrounding the insurance policy are crucial to the issue of petitioners
infidelity and his financial capacity to provide support to her and their children. Further, she argues that she had no choice but to
make a tender of excluded evidence considering that she was left to speculate on what the insurance application and policy ruled
out by the trial court would contain.[18]

A petition for certiorari under Rule 65 is the proper remedy to correct errors of jurisdiction and grave abuse of discretion
tantamount to lack or excess of jurisdiction committed by a lower court. [19] Where a respondent does not have the legal power to
determine the case and yet he does so, he acts without jurisdiction; where, being clothed with power to determine the case,
oversteps his authority as determined by law, he is performing a function in excess of jurisdiction.[20]

Petitioner claims that the Court of Appeals passed upon errors of judgment, not errors of jurisdiction, since it delved into the
propriety of the denial of the subpoena duces tecum and subpoena ad testificandum. The argument must fail.

While trial courts have the discretion to admit or exclude evidence, such power is exercised only when the evidence has been
formally offered.[21] For a long time, the Court has recognized that during the early stages of the development of proof, it is
impossible for a trial court judge to know with certainty whether evidence is relevant or not, and thus the practice of excluding
evidence on doubtful objections to its materiality should be avoided. [22] As well elucidated in the case of Prats & Co. v. Phoenix
Insurance Co.:[23]

Moreover, it must be remembered that in the heat of the battle over which he presides a judge of first instance may
possibly fall into error in judging of the relevancy of proof where a fair and logical connection is in fact shown. When such a
mistake is made and the proof is erroneously ruled out, the Supreme Court, upon appeal, often finds itself embarrassed and
possibly unable to correct the effects of the error without returning the case for a new trial, a step which this court is
always very loath to take. On the other hand, the admission of proof in a court of first instance, even if the question as to its
form, materiality, or relevancy is doubtful, can never result in much harm to either litigant, because the trial judge is
supposed to know the law; and it is its duty, upon final consideration of the case, to distinguish the relevant and material
from the irrelevant and immaterial. If this course is followed and the cause is prosecuted to the Supreme Court upon
appeal, this court then has all the material before it necessary to make a correct judgment.

In the instant case, the insurance application and the insurance policy were yet to be presented in court, much less formally offered
before it. In fact, private respondent was merely asking for the issuance of subpoena duces tecum and subpoena ad
testificandum when the trial court issued the assailed Order. Even assuming that the documents would eventually be declared
inadmissible, the trial court was not then in a position to make a declaration to that effect at that point. Thus, it barred the
production of the subject documents prior to the assessment of its probable worth. As observed by petitioners, the
assailed Order was not a mere ruling on the admissibility of evidence; it was, more importantly, a ruling affecting the proper conduct
of trial.[24]

Excess of jurisdiction refers to any act which although falling within the general powers of the judge is not authorized and is
consequently void with respect to the particular case because the conditions under which he was only authorized to exercise his
general power in that case did not exist and therefore, the judicial power was not legally exercised. [25] Thus, in declaring that the
documents are irrelevant and inadmissible even before they were formally offered, much less presented before it, the trial court
acted in excess of its discretion.
Anent the issue of whether the information contained in the documents is privileged in nature, the same was clarified and settled by
the Insurance Commissioners opinion that the circular on which the trial court based its ruling was not designed to obstruct lawful
court orders.[26]Hence, there is no more impediment to presenting the insurance application and policy.

Petitioner additionally claims that by virtue of private respondents tender of excluded evidence, she has rendered moot her petition
before the Court of Appeals since the move evinced that she had another speedy and adequate remedy under the law. The Court
holds otherwise.

Section 40, Rule 132 provides:

Sec.40. Tender of excluded evidence.If documents or things offered in evidence are excluded by the court, the offeror may
have the same attached to or made part of the record. If the evidence excluded is oral, the offeror may state for the record
the name and other personal circumstances of the witness and the substance of the proposed testimony.

It is thus apparent that before tender of excluded evidence is made, the evidence must have been formally offered before the court.
And before formal offer of evidence is made, the evidence must have been identified and presented before the court. While private
respondent made a Tender of Excluded Evidence, such is not the tender contemplated by the above-quoted rule, for obviously, the
insurance policy and application were not formally offered much less presented before the trial court. At most, said Tender of
Excluded Evidence was a manifestation of an undisputed fact that the subject documents were declared inadmissible by the trial
court even before these were presented during trial. It was not the kind of plain, speedy and adequate remedy which private
respondent could have resorted to instead of the petition for certiorari she filed before the Court of Appeals. It did not in any way
render the said petition moot.

WHEREFORE, premises considered, the petition is DENIED. The Decision dated 30 April 2002 and Resolution dated 27 June 2002 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. NO. L-38613 FEBRUARY 25, 1982

PACIFIC TIMBER EXPORT CORPORATION, PETITIONER,

VS.
THE HONORABLE COURT OF APPEALS AND WORKMEN'S INSURANCE COMPANY, INC., RESPONDENTS.

DE CASTRO, ** J.:

This petition seeks the review of the decision of the Court of Appeals reversing the decision of the Court of First Instance of Manila in
favor of petitioner and against private respondent which ordered the latter to pay the sum of Pll,042.04 with interest at the rate of
12% interest from receipt of notice of loss on April 15, 1963 up to the complete payment, the sum of P3,000.00 as attorney's fees
and the costs 1 thereby dismissing petitioner s complaint with costs. 2

The findings of the of fact of the Court of Appeals, which are generally binding upon this Court, Except as shall be indicated in the
discussion of the opinion of this Court the substantial correctness of still particular finding having been disputed, thereby raising a
question of law reviewable by this Court 3 are as follows:

March 19, l963, the plaintiff secured temporary insurance from the defendant for its exportation of 1,250,000 board feet of
Philippine Lauan and Apitong logs to be shipped from the Diapitan. Bay, Quezon Province to Okinawa and Tokyo, Japan. The
defendant issued on said date Cover Note No. 1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of
the WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved by the Office of the Insurance
Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2, 1963. The two marine policies
bore the numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces
of logs equivalent to 499,950 board feet. Policy No. 53 H0 1033 was for 853 pieces of logs equivalent to 695,548 board feet (Exhibit
C). The total cargo insured under the two marine policies accordingly consisted of 1,395 logs, or the equivalent of 1,195.498 bd. ft.

After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine policies Nos. 53 HO 1032 and 53 HO
1033, some of the logs intended to be exported were lost during loading operations in the Diapitan Bay. The logs were to be loaded
on the 'SS Woodlock' which docked about 500 meters from the shoreline of the Diapitan Bay. The logs were taken from the log pond
of the plaintiff and from which they were towed in rafts to the vessel. At about 10:00 o'clock a. m. on March 29, 1963, while the logs
were alongside the vessel, bad weather developed resulting in 75 pieces of logs which were rafted together co break loose from
each other. 45 pieces of logs were salvaged, but 30 pieces were verified to have been lost or washed away as a result of the
accident.

In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'appropriately 32 pieces of log's during loading
of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows:

April 4, 1963

Workmen's Insurance Company, Inc. Manila, Philippines

Gentlemen:

This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft. Philippine Lauan and Apitong Logs. We would
like to inform you that we have received advance preliminary report from our Office in Diapitan, Quezon that we have lost
approximately 32 pieces of logs during loading of the SS Woodlock.

We will send you an accurate report all the details including values as soon as same will be reported to us.

Thank you for your attention, we wish to remain.

Very respectfully yours,

PACIFIC TIMBER EXPORT CORPORATION

(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.

Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15, 1963, as shown by the stamp
impression appearing on the left bottom corner of said letter. The plaintiff subsequently submitted a 'Claim Statement demanding
payment of the loss under Policies Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G).

On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the loss and assess the damage.
The adjustment company submitted its 'Report on August 23, 1963 (Exhibit H). In said report, the adjuster found that 'the loss of 30
pieces of logs is not covered by Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of logs
loaded on board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the 1,250,000 bd. ft. covered by Cover Note 1010
insured for $70,000.00.

On September 14, 1963, the adjustment company submitted a computation of the defendant's probable liability on the loss
sustained by the shipment, in the total amount of Pl1,042.04 (Exhibit 4).

On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground they defendant's investigation
revealed that the entire shipment of logs covered by the two marines policies No. 53 110 1032 and 713 HO 1033 were received in
good order at their point of destination. It was further stated that the said loss may be considered as covered under Cover Note No.
1010 because the said Note had become 'null and void by virtue of the issuance of Marine Policy Nos. 53 HO 1032 and 1033'(Exhibit
J-1). The denial of the claim by the defendant was brought by the plaintiff to the attention of the Insurance Commissioner by means
of a letter dated March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas
observed that 'it is only fair and equitable to indemnify the insured under Cover Note No. 1010', and advised early settlement of the
said marine loss and salvage claim (Exhibit L).

On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their attorneys, the claim of the plaintiff is
being denied on the ground that the cover note is null and void for lack of valuable consideration (Exhibit M). 4

Petitioner assigned as errors of the Court of Appeals, the following:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK OF VALUABLE
CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT PREMIUMS FOR THE COMPREHENSIVE INSURANCE
COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT INCLUDED THE COVER NOTE WAS PAID BY
PETITIONER AND THAT NO SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM LIABILITY UNDER THE COVER
NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT
PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE
OF LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE INSURANCE ACT. 5

1. Petitioner contends that the Cover Note was issued with a consideration when, by express stipulation, the cover note is made
subject to the terms and conditions of the marine policies, and the payment of premiums is one of the terms of the policies. From
this undisputed fact, We uphold petitioner's submission that the Cover Note was not without consideration for which the
respondent court held the Cover Note as null and void, and denied recovery therefrom. The fact that no separate premium was paid
on the Cover Note before the loss insured against occurred, does not militate against the validity of petitioner's contention, for no
such premium could have been paid, since by the nature of the Cover Note, it did not contain, as all Cover Notes do not contain
particulars of the shipment that would serve as basis for the computation of the premiums. As a logical consequence, no separate
premiums are intended or required to be paid on a Cover Note. This is a fact admitted by an official of respondent company, Juan
Jose Camacho, in charge of issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).

At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement issued by private respondent
after the issuance of the two regular marine insurance policies, thereby leaving no account unpaid by petitioner due on the
insurance coverage, which must be deemed to include the Cover Note. If the Note is to be treated as a separate policy instead of
integrating it to the regular policies subsequently issued, the purpose and function of the Cover Note would be set at naught or
rendered meaningless, for it is in a real sense a contract, not a mere application for insurance which is a mere offer. 6

It may be true that the marine insurance policies issued were for logs no longer including those which had been lost during loading
operations. This had to be so because the risk insured against is not for loss during operations anymore, but for loss during transit,
the logs having already been safely placed aboard. This would make no difference, however, insofar as the liability on the cover note
is concerned, for the number or volume of logs lost can be determined independently as in fact it had been so ascertained at the
instance of private respondent itself when it sent its own adjuster to investigate and assess the loss, after the issuance of the marine
insurance policies.

The adjuster went as far as submitting his report to respondent, as well as its computation of respondent's liability on the insurance
coverage. This coverage could not have been no other than what was stipulated in the Cover Note, for no loss or damage had to be
assessed on the coverage arising from the marine insurance policies. For obvious reasons, it was not necessary to ask petitioner to
pay premium on the Cover Note, for the loss insured against having already occurred, the more practical procedure is simply to
deduct the premium from the amount due the petitioner on the Cover Note. The non-payment of premium on the Cover Note is,
therefore, no cause for the petitioner to lose what is due it as if there had been payment of premium, for non-payment by it was not
chargeable against its fault. Had all the logs been lost during the loading operations, but after the issuance of the Cover Note,
liability on the note would have already arisen even before payment of premium. This is how the cover note as a "binder" should
legally operate otherwise, it would serve no practical purpose in the realm of commerce, and is supported by the doctrine that
where a policy is delivered without requiring payment of the premium, the presumption is that a credit was intended and policy is
valid. 7

2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The law requires this ground of
delay to be promptly and specifically asserted when a claim on the insurance agreement is made. The undisputed facts show that
instead of invoking the ground of delay in objecting to petitioner's claim of recovery on the cover note, it took steps clearly
indicative that this particular ground for objection to the claim was never in its mind. The nature of this specific ground for resisting
a claim places the insurer on duty to inquire when the loss took place, so that it could determine whether delay would be a valid
ground upon which to object to a claim against it.

As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on April 15, 1963, was to set in
motion from July 1963 what would be necessary to determine the cause and extent of the loss, with a view to the payment thereof
on the insurance agreement. Thus it sent its adjuster to investigate and assess the loss in July, 1963. The adjuster submitted his
report on August 23, 1963 and its computation of respondent's liability on September 14, 1963. From April 1963 to July, 1963,
enough time was available for private respondent to determine if petitioner was guilty of delay in communicating the loss to
respondent company. In the proceedings that took place later in the Office of the Insurance Commissioner, private respondent
should then have raised this ground of delay to avoid liability. It did not do so. It must be because it did not find any delay, as this
Court fails to find a real and substantial sign thereof. But even on the assumption that there was delay, this Court is satisfied and
convinced that as expressly provided by law, waiver can successfully be raised against private respondent. Thus Section 84 of the
Insurance Act provides:

Section 84.Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of his or if he omits to
take objection promptly and specifically upon that ground.

From what has been said, We find duly substantiated petitioner's assignments of error.

ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is reinstated in toto with the
affirmance of this Court. No special pronouncement as to costs.

SO ORDERED.

G.R. NO. 71360 JULY 16, 1986

DEVELOPMENT INSURANCE CORPORATION, PETITIONER,

VS.
INTERMEDIATE APPELLATE COURT, AND PHILIPPINE UNION REALTY DEVELOPMENT CORPORATION, RESPONDENTS.

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 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 default.1

The pattern of inexcusable neglect, if not deliberate delay, is all too clear. The petitioner has slumbered on its right and awakened
too late. While it is true that in Trajano v. Cruz,2 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
INP5 and, indeed, its own expressed admission in its answer6 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 fire for P2,500,000.00. 8

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.

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.

G.R. NO. L-10305 FEBRUARY 28, 1961

LEE BOG & COMPANY, PLAINTIFF-APPELLEE,

VS.
THE HANOVER FIRE INSURANCE COMPANY OF THE CITY OF NEW YORK, ET AL., DEFENDANTS-APPELLANTS. REPUBLIC OF THE
PHILIPPINES, ET AL., INTERVENORS-APPELLEES.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Pangasinan holding defendants-appellants liable for the face value
of the fire insurance policies issued respectively by them, with numbers and for amounts as follows:

Policy
Issuing Company Amount
Number
1016372 Hanover Fire Insurance Company P55,000.00
2282 Alliance Ins. & Surety Co 22,000.00
3361 Empire Insurance Co 15,000.00
6741 Phil.American Gen. Ins. Co 20,000.00
17540945 Commercial Union Ass. Co. Ltd. 5,000.00
215634 British Traders Ins. Co. Ltd 5,000.00
47/21670 South British Ins. Co.Ltd 5,000.00
10PH-1180 Insurance Co. of North America 5,000.00
F-13140 Century Ins. Co., Inc 15,000.00
5864 People's Surety & Ins. Co 18,000.00
1016373 Hanover Fire Ins. Company 65,000.00
Total P230,000.00

The assured in these policies is plaintiff-appellee Lee Bog & Company. The insurance covered "stock of rice and palay (loose and/or
in sacks), the property of the assured or held by him in trust, on commission or on joint account with others and/or for which he is
responsible in case of loss", while contained during the currency of the policies in the building of the assured in Binalonan,
Pangasinan, otherwise known as the Binalonan, Pangasinan Rice Mill. There was a common "simple loss payable clause" in favor of
the Bureau of Commerce in all the policies issued by defendants-appellants, except Policy No. 1016373, issued by the Hanover Fire
Insurance Company, which also contained a "simple loss payable clause" but in favor of the People's Surety & Insurance Co., Inc. Said
clause provides that "loss, if any, under this policy, is payable to the Bureau of Commerce, Manila, as its interest may appear, subject
to the terms, conditions, clauses, and warranties of this policy." .
The Republic of the Philippines intervened in behalf of the Bureau of Commerce as trustee to receive payment in case of loss under
the first ten above-mentioned policies. Crispin A. Fernandez and Quirino C. Martinez also intervened as alleged depositors of the
appellee for the purpose of recovering from the latter and the appellants, jointly and severally, the value of their alleged deposits in
the aggregate sum of P8,390.00.

In this instant appeal, it is argued that the lower court erred in considering the claims on the bonded palay belonging to depositors
separately and independently from the claim on the unbonded palay belonging to the appellee because the policies sued upon were
concurrent and each and all of them covered, in their entirety, inseparably and indivisibly, the stock of rice and palay kept in the
insured's warehouse, whether belonging to the insured or to its depositors. As there is, however, a difference between bonded and
unbonded palay and one is distinct from the other, each subject must really be treated separately. The palay insured by the appellee
under the aforesaid ten policies included no more than such of the palay as the warehouse received as deposits. The palay insured
by the appellee payable to the Bureau of Commerce in case of loss covered only the palay that was received as deposits. This is the
object of the requirement of law that "every person licensed, under this Act, to engage in the business of receiving rice for storage
shall insure the rice as received and stored against fire." This is the very reason why plaintiff-appellee insured said palay. The
appellants cannot pretend that they and appellee were not aware of the fact that the subject matter of the insurance policies upon
which the intervenor-appellee is suing was solely the palay covered by the Bonded Warehouse Act. Upon the other hand, policy No.
1016373 issued by the Hanover Fire Insurance Company, which does not contain a clause common to the aforementioned ten
policies, referred only to the unbonded deposits of the appellee.

Under the second assignment of error, appellants contend that appellee has failed to establish its loss; that the claims were for
about three times the actual loss and therefore fraudulent; that appellee employed fraudulent means and devices to obtain undue
benefits under the policies by combining and commingling with sacks of rice and palay approximately the same quantity of rice bran
and/or rice husk; and that appellee had presented false supporting declarations.

Appellee's evidence of loss (Lee Bog's testimony, Exhibits M, M-1 to M-110, Exhibit R column C-19, the testimony found on pp. 147-
150, 204-207, 350, 549-550, t.s.n., Exhibits N, N-1) has satisfactorily established the amounts claimed. The quantity of bonded palay
lost and destroyed has been proved by the corresponding quedans (negotiable warehouse receipts), Exhibits M, M-1 to M-110 and
AQ. As shown by these receipts, the outstanding deposits as of May 3, 1953, after deducting the withdrawals, amounted to
659,513.5 kilos, which at 44 kilos a cavan, would be equivalent to 14,989 cavanes of palay. These figures tally with the quantity of
palay stated in the proof of loss covering the bonded palay.

As regards the unbonded palay or that belonging to the appellee, the amount of loss may verily be determined from the purchase of
palay and sales of milled rice that had been regularly recorded in the columnar cash book (Exhibit R) at the place of transaction by a
certified public accountant. After simple arithmetical processes, the remaining palay at the time of the fire would be 14,514.7
cavanes Appellants' argument that fraud is manifested by the fact that the quantity of palay is still short by 68.3 cavanes on the basis
of 14,583 cavanes stated in the proof of loss involves an insignificant error if due consideration is taken of the circumstance that it
does not exactly and necessarily take two cavanes of palay to mill a cavan of rice. The type of palay and the dryness of husks affect
the process.

Moreover, the testimony of the managing partner of the appellee company and of Agustin de Vera and Segismundo Millan, both
commercial agents of the Bureau of Commerce at the time assigned in Pangasinan, confirms the physical existence of the claimed
quantity of palay, as their estimates more or less approximate the actual loss. Naturally, numerical Precision may not be expected,
because those estimates were based merely on a physical observation of the big pile existing before the fire. It is sufficient that they
show little discrepancy with the figures recorded in the books of the appellee.

The mathematical computations of witnesses Filomeno and Magpili are "rough estimates" and therefore some allowance for such
technical factors as "staggering," "shrinkage" and "angle of repose" should be duly taken into account; and where said estimates do
not show too wide a difference, there would be no justification in discrediting appellee's claims.

We also overrule the contention that the appellee used fraudulent means or devices to obtain benefits under the policies. The
conclusion that, because the samples of the debris taken from the warehouse after the fire consisted of darak and rice husks, the
must have been contained in the sacks stored in the warehouse, is untenable. In the first place, it is not unusual to find such debris
because their unburned material formed the protective lining of the sacks of palay. Secondly, the samples were taken only from the
sides of the pile and not from its core. Thirdly, considering (as appellee argues) the size of the pile, 1,411.84 cubic meters, and the
time it took the fire to consume the mass of palay, the samples taken are too insignificant to be representative. Lastly, the motive
for such alleged fraud is missing. Appellee company was having a thriving business at the time of the fire.
In the light of the foregoing considerations, the decision appealed from is hereby affirmed with costs against appellants. So ordered.

G.R. No. L-15184 May 31, 1963

SAURA IMPORT & EXPORT CO., INC., plaintiff-appellant,

vs.
PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL BANK, defendants-appellees.

PAREDES, J.:

Instant case was certified by the Court of Appeals to Us, it appearing that the issues involved are purely of law.

On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel of land covered by T.C.T.
No. 40445 of the Registry of Deeds of Davao, issued in its name, to secure the payment of promissory note of P27,000.00 (Exhs. P, B-
2). On April 30, 1953, the mortgage was amended to guarantee an increased amount, bringing the total mortgaged debt to
P37,000.00 (Exhs. P-2, B-3). The provisions of the mortgaged contact, pertinent to the resolution of the present case, provide as
follows

2. . . . he shall insure the mortgaged property at all times against fire and earthquake for an amount and with such company
satisfactory to the Mortgagee, indorsing to the latter the corresponding policies; he shall keep the mortgaged property in good
condition, making repairs and protecting walls that may be necessary; . . .

Erected on the land mortgaged, was a building of strong materials owned by the mortgagor Saura Import & Export Co., Inc., which
had always been covered by insurance, many years prior to the mortgage contract. Pursuant to the requirement, Saura insured the
building and its contents with the Philippine International Surety, an insurance firm acceptable to mortgagee Bank, for P29,000.00
against fire for the period of one year from October 2, 1954. As required therefor, the insurance policy was endorsed to the
mortgagee PNB, in a Memo which states

Loss if any, payable to the Philippine National Bank as their interest may appear, subject to the terms, conditions and warranties of
this policy (Exh. A).

The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely thirteen (13) days after the issuance of the
fire insurance policy (October 2, 1954), the insurer cancelled the same, effective as of the date of issue (Exh. A-2). Notice of the
cancellation was given to appellee bank in writing, sent by Registered Mail and personally addressed to Fortunato Domingo, Branch
Manager of the appellee Bank's Davao Branch, and was received by the Bank on November 8, 1954. On April 6, 1955, the building
and its contents, worth P40,685.69 were burned. On April 11, 1955, Saura filed a claim with the Insurer and mortgagee Bank. Upon
the presentation of notice of loss with the PNB, Saura learned for the first time that the policy had previously been cancelled on
October 2, 1954, by the insurer, when Saura's folder in the Bank's filed was opened and the notice of cancellation (original and
duplicate) sent by the Insurer to the Bank, was found. Upon refusal of the Insurer Philippine International Surety to pay the amount
of the insurance, Civil Case No. 26847 was filed with the Manila CFI against the Insurer, and the PNB was later included as party
defendant, after it had refused to prosecute the case jointly with Saura Import & Export Co., Inc.

At the trial, it was established that neither the Insurer nor the mortgagee Bank informed the plaintiff Saura of the cancellation of the
policy. On April 30, 1957, the court a quo rendered the following judgment

. . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is no proof on the counterclaim of the
Philippines International Surety, the same is also dismissed.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court,
without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1wph1.t

A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was subsequently denied. The decision
rendered and the resolution denying the motion for reconsideration constitute the subject of the instant appeal by plaintiff Saura on
the three alleged errors, which converge on the correctness of the ruling, wholly dismissing the complaint absolving both the
insurance company and the bank from liability.
In the determination of liabilities of the parties herein, let us look into the general principles of insurance, in matters of cancellations
of policy by the insurer. Fire insurance policies and other contracts of insurance upon property, in addition to the common provision
for cancellation of the policy upon request of the insured, generally provide for cancellation by the insurer by notice to the insured
for a prescribed period, which is usually 5 days, and the return of the unearned portion of the premium paid by the insured, such
provision for cancellation upon notice being authorized by statutes in some jurisdiction, either specifically or as a provision of an
adopted standard form of policy. The purpose of provisions or stipulations for notice to the insured, is to prevent the cancellation of
the policy, without allowing the insured ample opportunity to negotiate for other insurance in its stead. The form and sufficiency of
a notice of cancellation is determined by policy provisions. In order to form the basis for the cancellation of a policy, notice to the
insured n not be in any particular form, in the absence of a statute or policy provision prescribing such form, and it is sufficient, so
long as it positively and unequivocally indicates to the insured, that it is the intention of the company that the policy shall cease to
be binding. Where the policy contains no provisions that a certain number of days notice shall be given, a reasonable notice and
opportunity to obtain other insurance must be given. Actual personal notice to the insured is essential to a cancellation under a
provision for cancellation by notice. The actual receipt by the insured of a notice of cancellation is universally recognized as a
condition precedent to a cancellation of the policy by the insurer, and consequently a letter containing notice of cancellation which
is mailed by the insurer but not received by the insured, is ineffective as cancellation (29 Am. Jur. pp. 732-741).

The policy in question (Exh. A), does not provide for the notice, its form or period. The Insurance Law, Act No. 2427, does not
likewise provide for such notice. This being the case, it devolves upon the Court to apply the generally accepted principles of
insurance, regarding cancellation of the insurance policy by the insurer. From what has been heretofore stated, actual notice of
cancellation in a clear and unequivocal manner, preferably in writing, in view of the importance of an insurance contract, should be
given by the insurer to the insured, so that the latter might be given an opportunity to obtain other insurance for his own protection.
The notice should be personal to the insured and not to and/or through any unauthorized person by the policy. In the case at bar,
the defendant insurance company, must have realized the paramount importance of sending a notice of cancellation, when it sent
the notice of cancellation of the policy to the defendant bank (as mortgagee), but not to the insured with which it (insurance
company) had direct dealing. It was the primary duty of the defendant-appellee insurance company to notify the insured, but it did
not. It should be stated that the house and its contents were burned on April 6, 1955, at the time when the policy was enforced
(October 2, 1954 to October 2, 1955); and that under the facts, as found by the trial court, to which We are bound, it is evident that
both the insurance company and the appellee bank failed, wittingly or unwittingly, to notify the insured appellant Saura of the
cancellation made.

Of course, the defendant insurance company contends that it gave notice to the defendant-appellee bank as mortgagee of the
property, and that was already a substantial compliance with its duty to notify the insured of the cancellation of the policy. But
notice to the bank, as far appellant herein is concerned, is not effective notice.

If a mortgage or lien exists against the property insured, and the policy contains a clause stating that loss, if any, shall be payable to
such mortgagee or the holder of such lien as interest may appear, notice of cancellation to the mortgagee or lienholder alone is
ineffective as a cancellation of the policy to the owner of the property. (Connecticut Ins. Co. v. Caumisar, 218 Ky. 378, 391 SW 776,
cited in 29 Am. Jur. p. 743).

Upon authority of the above case, therefore, the liability of the insurance company becomes a fact.

It may be argued that in the appeal brief of appellant, no error has been assigned against the insurance company and no prayer is
found therein asking that it be made liable. It must be noted, however, that the case was dismissed the lower court and the main
object of the appeal is to secure a reversal of the said judgment. This Court is clothed with ample authority to review matters, even if
they are not assigned as errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case.
Thus it was held:

While an assignment of error which is required by law or rule of court has been held essential to appellate review, only those
assigned will be considered, there are a number of cases which appear to accord to the appellate court a broad discretionary power
to waive the lack of proper assignment of errors and consider errors not assigned. And an unassigned error closely related to an
error properly assigned, or upon which the determination of the question raised by the error properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as error. (Hernandez v. Andal, 78 Phil. 198-199).

Although assigned errors apparently appear to be directed against the appellee bank alone, they in essence, seek a reversal of the
decision on dismissal, entered by the lower court, which in the main has for its purpose the finding of liability on the policy. In the
course of our examination of the records of the case, the decision and the errors assigned, We found that liability attached
principally the insurance company, for its failure to give notice of the cancellation of the policy to herein appellant itself.
Because of the conclusions reached, We find it unnecessary to discuss the errors assigned against appellee bank.

WHEREFORE, the decision appealed from is hereby reversed, and another is entered, condemning the defendant-appellee Philippine
International Surety Co., Inc., to pay Saura Import & Export Co., Inc., appellant herein, the sum of P29,000.00, the amount involved
in Policy No. 429, subject-matter of the instant case. Without costs.

G.R. NO. L-24833 SEPTEMBER 23, 1968

FIELDMEN'S INSURANCE CO., INC., PETITIONER,

VS.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. AND COURT OF APPEALS, RESPONDENTS.

FERNANDO, J.:

An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to escape liability under a common carrier insurance
policy on the pretext that what was insured, not once but twice, was a private vehicle and not a common carrier, the policy being
issued upon the insistence of its agent who discounted fears of the insured that his privately owned vehicle might not fall within its
terms, the insured moreover being "a man of scant education," finishing only the first grade. So it was held in a decision of the lower
court thereafter affirmed by respondent Court of Appeals. Petitioner in seeking the review of the above decision of respondent
Court of Appeals cannot be so sanguine as to entertain the belief that a different outcome could be expected. To be more explicit,
we sustain the Court of Appeals.

The facts as found by respondent Court of Appeals, binding upon us, follow: "This is a peculiar case. Federico Songco of
Floridablanca, Pampanga, a man of scant education being only a first grader ..., owned a private jeepney with Plate No. 41-289 for
the year 1960. On September 15, 1960, as such private vehicle owner, he was induced by Fieldmen's Insurance Company Pampanga
agent Benjamin Sambat to apply for a Common Carrier's Liability Insurance Policy covering his motor vehicle ... Upon paying an
annual premium of P16.50, defendant Fieldmen's Insurance Company, Inc. issued on September 19, 1960, Common Carriers
Accident Insurance Policy No. 45-HO- 4254 ... the duration of which will be for one (1) year, effective September 15, 1960 to
September 15, 1961. On September 22, 1961, the defendant company, upon payment of the corresponding premium, renewed the
policy by extending the coverage from October 15, 1961 to October 15, 1962. This time Federico Songco's private jeepney carried
Plate No. J-68136-Pampanga-1961. ... On October 29, 1961, during the effectivity of the renewed policy, the insured vehicle while
being driven by Rodolfo Songco, a duly licensed driver and son of Federico (the vehicle owner) collided with a car in the municipality
of Calumpit, province of Bulacan, as a result of which mishap Federico Songco (father) and Rodolfo Songco (son) died, Carlos Songco
(another son), the latter's wife, Angelita Songco, and a family friend by the name of Jose Manuel sustained physical injuries of
varying degree." 1

It was further shown according to the decision of respondent Court of Appeals: "Amor Songco, 42-year-old son of deceased Federico
Songco, testifying as witness, declared that when insurance agent Benjamin Sambat was inducing his father to insure his vehicle, he
butted in saying: 'That cannot be, Mr. Sambat, because our vehicle is an "owner" private vehicle and not for passengers,' to which
agent Sambat replied: 'whether our vehicle was an "owner" type or for passengers it could be insured because their company is not
owned by the Government and the Government has nothing to do with their company. So they could do what they please whenever
they believe a vehicle is insurable' ... In spite of the fact that the present case was filed and tried in the CFI of Pampanga, the
defendant company did not even care to rebut Amor Songco's testimony by calling on the witness-stand agent Benjamin Sambat, its
Pampanga Field Representative." 2

The plaintiffs in the lower court, likewise respondents here, were the surviving widow and children of the deceased Federico Songco
as well as the injured passenger Jose Manuel. On the above facts they prevailed, as had been mentioned, in the lower court and in
the respondent Court of Appeals.1awphl.nt

The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v. Law Union and Rock Insurance Co., Ltd., 3 with
Justice J. B. L. Reyes speaking for the Court. It is now beyond question that where inequitable conduct is shown by an insurance firm,
it is "estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured." 4

As much, if not much more so than the Qua Chee Gan decision, this is a case where the doctrine of estoppel undeniably calls for
application. After petitioner Fieldmen's Insurance Co., Inc. had led the insured Federico Songco to believe that he could qualify
under the common carrier liability insurance policy, and to enter into contract of insurance paying the premiums due, it could not,
thereafter, in any litigation arising out of such representation, be permitted to change its stand to the detriment of the heirs of the
insured. As estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall the innocent party
due to its injurious reliance, the failure to apply it in this case would result in a gross travesty of justice.

That is all that needs be said insofar as the first alleged error of respondent Court of Appeals is concerned, petitioner being adamant
in its far-from-reasonable plea that estoppel could not be invoked by the heirs of the insured as a bar to the alleged breach of
warranty and condition in the policy. lt would now rely on the fact that the insured owned a private vehicle, not a common carrier,
something which it knew all along when not once but twice its agent, no doubt without any objection in its part, exerted the utmost
pressure on the insured, a man of scant education, to enter into such a contract.

Nor is there any merit to the second alleged error of respondent Court that no legal liability was incurred under the policy by
petitioner. Why liability under the terms of the policy 5 was inescapable was set forth in the decision of respondent Court of Appeals.
Thus: "Since some of the conditions contained in the policy issued by the defendant-appellant were impossible to comply with under
the existing conditions at the time and 'inconsistent with the known facts,' the insurer 'is estopped from asserting breach of such
conditions.' From this jurisprudence, we find no valid reason to deviate and consequently hold that the decision appealed from
should be affirmed. The injured parties, to wit, Carlos Songco, Angelito Songco and Jose Manuel, for whose hospital and medical
expenses the defendant company was being made liable, were passengers of the jeepney at the time of the occurrence, and Rodolfo
Songco, for whose burial expenses the defendant company was also being made liable was the driver of the vehicle in question.
Except for the fact, that they were not fare paying passengers, their status as beneficiaries under the policy is recognized therein." 6

Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee Gan decision would reveal anew the weakness of
petitioner's contention. Thus: "Moreover, taking into account the well-known rule that ambiguities or obscurities must be strictly
interpreted against the party that caused them, the 'memo of warranty' invoked by appellant bars the latter from questioning the
existence of the appliances called for in the insured premises, since its initial expression, 'the undernoted appliances for the
extinction of fire being kept on the premises insured hereby, ... it is hereby warranted ...,' admits of interpretation as an admission of
the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply." 7

To the same effect is the following citation from the same leading case: "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 adherence' (contrats d'adhesion), in contrast to those entered
into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are
prime examples) 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. Article 24; Sent. of
Supreme Court of Spain, 13 Dec. 1934, 27 February 1942)." 8

The last error assigned which would find fault with the decision of respondent Court of Appeals insofar as it affirmed the lower court
award for exemplary damages as well as attorney's fees is, on its face, of no persuasive force at all.

The conclusion that inescapably emerges from the above is the correctness of the decision of respondent Court of Appeals sought to
be reviewed. For, to borrow once again from the language of the Qua Chee Gan opinion: "The contract of insurance is one of perfect
good faith (uberima fides) not for the insured alone,but equally so for the insurer; in fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter responsibility."9

This is merely to stress that while the morality of the business world is not the morality of institutions of rectitude like the pulpit and
the academe, it cannot descend so low as to be another name for guile or deception. Moreover, should it happen thus, no court of
justice should allow itself to lend its approval and support.1awphl.nt

We have no choice but to recognize the monetary responsibility of petitioner Fieldmen's Insurance Co., Inc. It did not succeed in its
persistent effort to avoid complying with its obligation in the lower court and the Court of Appeals. Much less should it find any
receptivity from us for its unwarranted and unjustified plea to escape from its liability.

WHEREFORE, the decision of respondent Court of Appeals of July 20, 1965, is affirmed in its entirety. Costs against petitioner
Fieldmen's Insurance Co., Inc.
 G.R. No. 151890 June 20, 2006

PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,

vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.

x- - - - - - - - - - - - - - - - - - - - - - - - - x

G.R. No. 151991 June 20, 2006

TRANS-ASIA SHIPPING LINES, INC., petitioner,

vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.

DECISION

CHICO-NAZARIO, J:

This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner Prudential Guarantee and Assurance, Inc.
(PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated
6 November 2001 of the Court of Appeals in CA G.R. CV No. 68278, which reversed the Judgment 2 dated 6 June 2000 of the Regional
Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January 2002 Resolution3 of the Court of Appeals, denying
PRUDENTIALs Motion for Reconsideration and TRANS-ASIAs Partial Motion for Reconsideration of the 6 November 2001 Decision,
is likewise sought to be annulled and set aside.

The Facts

The material antecedents as found by the court a quo and adopted by the appellate court are as follows:

Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of premiums, defendant
[PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and machinery arising from perils, inter alia, of fire and explosion
for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No.
MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the policy was in force, a fire broke out while [M/V Asia Korea was]
undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff [TRANS-ASIA] filed its notice of claim for damage sustained by
the vessel. This is evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to
subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim upon final survey and determination by average
adjuster Richard Hogg International (Phil.) of the damage sustained by reason of fire. An adjusters report on the fire in question was
submitted by Richard Hogg International together with the U-Marine Surveyor Report (Exhibits "4" to "4-115").

On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust receipt", a portion of which read (sic):

"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without
interest under Policy No. MH 93/1353 [sic], repayable only in the event and to the extent that any net recovery is made by Trans-
Asia Shipping Corporation, from any person or persons, corporation or corporations, or other parties, on account of loss by any
casualty for which they may be liable occasioned by the 25 October 1993: Fire on Board." (Exhibit "4")

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiffs claim (Exhibit "5"). The letter reads:

"After a careful review and evaluation of your claim arising from the above-captioned incident, it has been ascertained that you are
in breach of policy conditions, among them "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED". Accordingly, we regret to
advise that your claim is not compensable and hereby DENIED."

This was followed by defendants letter dated 21 July 1997 requesting the return or payment of the P3,000,000.00 within a period of
ten (10) days from receipt of the letter (Exhibit "6").4
Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of Money against PRUDENTIAL with the RTC
of Cebu City, docketed as Civil Case No. CEB-20709, wherein TRANS-ASIA sought the amount of P8,395,072.26 from PRUDENTIAL,
alleging that the same represents the balance of the indemnity due upon the insurance policy in the total amount of
P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per annum citing Section 2436 of Presidential Decreee No. 1460,
otherwise known as the "Insurance Code," as amended.

In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed the defense that TRANS-ASIA breached
insurance policy conditions, in particular: "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged
that it acted as facts and law require and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its
claim has been effectively waived and/or abandoned, or it is estopped from pursuing the same. By way of a counterclaim,
PRUDENTIAL sought a refund of P3,000,000.00, which it allegedly advanced to TRANS-ASIA by way of a loan without interest and
without prejudice to the final evaluation of the claim, including the amounts of P500,000.00, for survey fees and P200,000.00,
representing attorneys fees.

The Ruling of the Trial Court

On 6 June 2000, the court a quo rendered Judgment 8 finding for (therein defendant) PRUDENTIAL. It ruled that a determination of
the parties liabilities hinged on whether TRANS-ASIA violated and breached the policy conditions on WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED. It interpreted the provision to mean that TRANS-ASIA is required to maintain the vessel at a certain class
at all times pertinent during the life of the policy. According to the court a quo, TRANS-ASIA failed to prove compliance of the terms
of the warranty, the violation thereof entitled PRUDENTIAL, the insured party, to rescind the contract. 9

Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that the concealment made by TRANS-ASIA that the
vessel was not adequately maintained to preserve its class was a material concealment sufficient to avoid the policy and, thus,
entitled the injured party to rescind the contract. The court a quo found merit in PRUDENTIALs contention that there was nothing in
the adjustment of the particular average submitted by the adjuster that would show that TRANS-ASIA was not in breach of the
policy. Ruling on the denominated loan and trust receipt, the court a quo said that in substance and in form, the same is a receipt for
a loan. It held that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as advance payment, it should have so clearly
stated as such.

The court a quo did not award PRUDENTIALs claim for P500,000.00, representing expert survey fees on the ground of lack of
sufficient basis in support thereof. Neither did it award attorneys fees on the rationalization that the instant case does not fall under
the exceptions stated in Article 220811 of the Civil Code. However, the court a quo granted PRUDENTIALs counterclaim stating that
there is factual and legal basis for TRANS-ASIA to return the amount of P3,000,000.00 by way of loan without interest.

The decretal portion of the Judgment of the RTC reads:

WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a cause of action.

On defendants counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing the loan extended to it by the
defendant, within a period of ten (10) days from and after this judgment shall have become final and executory. 12

The Ruling of the Court of Appeals

On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001, reversed the 6 June 2000 Judgment of
the RTC.

On the issue of TRANS-ASIAs alleged breach of warranty of the policy condition CLASSED AND CLASS MAINTAINED, the Court of
Appeals ruled that PRUDENTIAL, as the party asserting the non-compensability of the loss had the burden of proof to show that
TRANS-ASIA breached the warranty, which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of certification to the
effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole basis for reaching the conclusion that the warranty was
breached. The Court of Appeals opined that the lack of a certification does not necessarily mean that the warranty was breached by
TRANS-ASIA. Instead, the Court of Appeals considered PRUDENTIALs admission that at the time the insurance contract was entered
into between the parties, the vessel was properly classed by Bureau Veritas, a classification society recognized by the industry. The
Court of Appeals similarly gave weight to the fact that it was the responsibility of Richards Hogg International (Phils.) Inc., the
average adjuster hired by PRUDENTIAL, to secure a copy of such certification to support its conclusion that mere absence of a
certification does not warrant denial of TRANS-ASIAs claim under the insurance policy.
In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-ASIA to be a rider which, while
contained in the policy, was inserted by PRUDENTIAL without the intervention of TRANS-ASIA. As such, it partakes of a nature of a
contract dadhesion which should be construed against PRUDENTIAL, the party which drafted the contract. Likewise, according to
the Court of Appeals, PRUDENTIALs renewal of the insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and then again,
until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.

Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction between PRUDENTIAL and
TRANS-ASIA as one of subrogation, instead of a loan. The Court of Appeals concluded that TRANS-ASIA has no obligation to pay back
the amount of P3,000.000.00 to PRUDENTIAL based on its finding that the aforesaid amount was PRUDENTIALs partial payment to
TRANS-ASIAs claim under the policy. Finally, the Court of Appeals denied TRANS-ASIAs prayer for attorneys fees, but held TRANS-
ASIA entitled to double interest on the policy for the duration of the delay of payment of the unpaid balance, citing Section 24413 of
the Insurance Code.

Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:

WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is ALLOWED and the Judgment appealed from
REVERSED. The P3,000,000.00 initially paid by appellee Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and
covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the loss suffered by appellant and
covered by Marine Policy No. MH93/1363 issued by appellee. Further, appellee is hereby ORDERED to pay appellant the additional
amount of P8,395,072.26 representing the balance of the loss suffered by the latter as recommended by the average adjuster
Richard Hogg International (Philippines) in its Report, with double interest starting from the time Richard Hoggs Survey Report was
completed, or on 13 August 1996, until the same is fully paid.

All other claims and counterclaims are hereby DISMISSED.

All costs against appellee.14

Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for Reconsideration and Partial Motion for
Reconsideration thereon, respectively, which motions were denied by the Court of Appeals in the Resolution dated 29 January 2002.

The Issues

Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No. 151890, relying on the following grounds,
viz:

I. THE AWARD IS GROSSLY UNCONSCIONABLE.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY,
NAMELY, WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD THE BURDEN OF PROVING THAT THE ASSURED,
TRANS-ASIA, VIOLATED A MATERIAL WARRANTY.

IV. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE EMBODIED IN THE INSURANCE POLICY CONTRACT
WAS A MERE RIDER.

V. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE POLICY CONSTITUTED A WAIVER ON THE
PART OF PRUDENTIAL OF THE BREACH OF THE WARRANTY BY TRANS-ASIA.

VI. THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE
ON THE POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF.

VII. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL OF THE FINDINGS OF RICHARDS HOGG IS
INDICATIVE OF A WAIVER ON THE PART OF PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA OF THE WARRANTY.
VIII. THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING THAT PRUDENTIAL "UNJUSTIFIABLY
REFUSED" TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13
AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review docketed as G.R. No. 151991,
raising the following grounds for the allowance of the petition, to wit:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEYS FEES TO PETITIONER TRANS-ASIA ON THE GROUND
THAT SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD
FAITH ON THE PART OF RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-ASIAS INSURANCE CLAIM.

II. THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE
INTEREST BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT THE RATE OF 24% PER ANNUM.16

In our Resolution of 2 December 2002, we granted TRANS-ASIAs Motion for Consolidation17 of G.R. Nos. 151890 and
151991;18 hence, the instant consolidated petitions.

In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising from the subject insurance
contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL arising from the transaction between the parties as evidenced by a
document denominated as "Loan and Trust Receipt," dated 29 May 1995; and (3) the amount of interest to be imposed on the
liability, if any, of either or both parties.

Ruling of the Court

Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not questions of fact, may be raised. 19 This
rule may be disregarded only when the findings of fact of the Court of Appeals are contrary to the findings and conclusions of the
trial court, or are not supported by the evidence on record. 20 In the case at bar, we find an incongruence between the findings of
fact of the Court of Appeals and the court a quo, thus, in our determination of the issues, we are constrained to assess the evidence
adduced by the parties to make appropriate findings of facts as are necessary.

I. A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy condition on WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED, as contained in the subject insurance contract.

In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express and material warranty in the subject
insurance contract, i.e., Marine Insurance Policy No. MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that
the insured vessel, "M/V ASIA KOREA" is required to be CLASSED AND CLASS MAINTAINED. According to PRUDENTIAL, on 25 October
1993, or at the time of the occurrence of the fire, "M/V ASIA KOREA" was in violation of the warranty as it was not CLASSED AND
CLASS MAINTAINED. PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA
under the policy, the violation of which entitled PRUDENTIAL to rescind the contract under Sec. 74 21 of the Insurance Code.

The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIALs Senior Manager of the Marine and
Aviation Division, Lucio Fernandez. The pertinent portions of his testimony on direct examination is reproduced hereunder, viz:

ATTY. LIM

Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was taken?

A It was eventually determined that there was a breach of the policy condition, and basically there is a breach of policy warranty
condition and on that basis the claim was denied.

Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as Exhibits "1", "1-A" series, please
point to the warranty in the policy which you said was breached or violated by the plaintiff which constituted your basis for denying
the claim as you testified.

A Warranted Vessel Classed and Class Maintained.

ATTY. LIM

Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy below the printed words:
"Clauses, Endorsements, Special Conditions and Warranties," below this are several typewritten clauses and the witness pointed out
in particular the clause reading: "Warranted Vessel Classed and Class Maintained."

COURT

Q Will you explain that particular phrase?

A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class warranty, it must be entered in the
classification society.

COURT

Slowly.

WITNESS

(continued)

A A classification society is an organization which sets certain standards for a vessel to maintain in order to maintain their
membership in the classification society. So, if they failed to meet that standard, they are considered not members of that class, and
thus breaching the warranty, that requires them to maintain membership or to maintain their class on that classification society.
And it is not sufficient that the member of this classification society at the time of a loss, their membership must be continuous for
the whole length of the policy such that during the effectivity of the policy, their classification is suspended, and then thereafter,
they get reinstated, that again still a breach of the warranty that they maintained their class (sic). Our maintaining team membership
in the classification society thereby maintaining the standards of the vessel (sic).

ATTY. LIM

Q Can you mention some classification societies that you know?

A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification Society, The Philippine Registration of
Ships Society, China Classification, NKK and Company Classification Society, and many others, we have among others, there are over
20 worldwide. 22

At the outset, it must be emphasized that the party which alleges a fact as a matter of defense has the burden of proving it.
PRUDENTIAL, as the party which asserted the claim that TRANS-ASIA breached the warranty in the policy, has the burden of
evidence to establish the same. Hence, on the part of PRUDENTIAL lies the initiative to show proof in support of its defense;
otherwise, failing to establish the same, it remains self-serving. Clearly, if no evidence on the alleged breach of TRANS-ASIA of the
subject warranty is shown, a fortiori, TRANS-ASIA would be successful in claiming on the policy. It follows that PRUDENTIAL bears the
burden of evidence to establish the fact of breach.

In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to show proof of loss, and the
coverage thereof, in the subject insurance policy. However, in the course of trial in a civil case, once plaintiff makes out a prima facie
case in his favor, the duty or the burden of evidence shifts to defendant to controvert plaintiffs prima facie case, otherwise, a
verdict must be returned in favor of plaintiff.23 TRANS-ASIA was able to establish proof of loss and the coverage of the loss, i.e., 25
October 1993: Fire on Board. Thereafter, the burden of evidence shifted to PRUDENTIAL to counter TRANS-ASIAs case, and to prove
its special and affirmative defense that TRANS-ASIA was in violation of the particular condition on CLASSED AND CLASS MAINTAINED.

We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in discharging the burden of evidence that
TRANS-ASIA breached the subject policy condition on CLASSED AND CLASS MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio Fernandez, made a categorical
admission that at the time of the procurement of the insurance contract in July 1993, TRANS-ASIAs vessel, "M/V Asia Korea" was
properly classed by Bureau Veritas, thus:

Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia Korea was classed at the time (sic)
policy was procured perthe (sic) insurance was procured that Exhibit "1" on 1st July 1993 (sic).

WITNESS

A I recall that they were classed.

ATTY. LIM

Q With what classification society?

A I believe with Bureau Veritas.24

As found by the Court of Appeals and as supported by the records, Bureau Veritas is a classification society recognized in the marine
industry. As it is undisputed that TRANS-ASIA was properly classed at the time the contract of insurance was entered into, thus, it
becomes incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA as being properly CLASSED by Bureau
Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL failed to support the allegation.

We are in accord with the ruling of the Court of Appeals that the lack of a certification in PRUDENTIALs records to the effect that
TRANS-ASIAs "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED at the time of the occurrence of the fire cannot be
tantamount to the conclusion that TRANS-ASIA in fact breached the warranty contained in the policy. With more reason must we
sustain the findings of the Court of Appeals on the ground that as admitted by PRUDENTIAL, it was likewise the responsibility of the
average adjuster, Richards Hogg International (Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-
ASIA cannot be gleaned from the average adjusters survey report, or adjustment of particular average per "M/V Asia Korea" of the
25 October 1993 fire on board.

We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that, "the violation of a material
warranty, or other material provision of a policy on the part of either party thereto, entitles the other to rescind." It is generally
accepted that "[a] warranty is a statement or promise set forth in the policy, or by reference incorporated therein, the untruth or
non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or non-
fulfillment, renders the policy voidable by the insurer." 25However, it is similarly indubitable that for the breach of a warranty to
avoid a policy, the same must be duly shown by the party alleging the same. We cannot sustain an allegation that is unfounded.
Consequently, PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition, CLASSED AND CLASS
MAINTAINED, it remains that TRANS-ASIA must be allowed to recover its rightful claims on the policy.

B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED,
PRUDENTIAL made a valid waiver of the same.

The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA breached the warranty provision on
CLASSED AND CLASS MAINTAINED, underscored that PRUDENTIAL can be deemed to have made a valid waiver of TRANS-ASIAs
breach of warranty as alleged, ratiocinating, thus:

Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive years, from noon of 01 July 1994
to noon of 01 July 1995, and then again until noon of 01 July 1996. This renewal is deemed a waiver of any breach of warranty.26

PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal policies are deemed a waiver of TRANS-
ASIAs alleged breach, averring herein that the subsequent policies, designated as MH94/1595 and MH95/1788 show that they were
issued only on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a request to TRANS-ASIA that it be furnished a
copy of the certification specifying that the insured vessel "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL
posits that it came to know of the breach by TRANS-ASIA of the subject warranty clause only on 21 April 1997. On even date,
PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that their claim is not compensable. In fine, PRUDENTIAL would
have this Court believe that the issuance of the renewal policies cannot be a waiver because they were issued without knowledge of
the alleged breach of warranty committed by TRANS-ASIA.27
We are not impressed. We do not find that the Court of Appeals was in error when it held that PRUDENTIAL, in renewing TRANS-
ASIAs insurance policy for two consecutive years after the loss covered by Policy No. MH93/1363, was considered to have waived
TRANS-ASIAs breach of the subject warranty, if any. Breach of a warranty or of a condition renders the contract defeasible at the
option of the insurer; but if he so elects, he may waive his privilege and power to rescind by the mere expression of an intention so
to do. In that event his liability under the policy continues as before. 28 There can be no clearer intention of the waiver of the alleged
breach than the renewal of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in
the years 1994 and 1995, respectively.

To our mind, the argument is made even more credulous by PRUDENTIALs lack of proof to support its allegation that the renewals
of the policies were taken only after a request was made to TRANS-ASIA to furnish them a copy of the certificate attesting that "M/V
Asia Korea" was CLASSED AND CLASS MAINTAINED. Notwithstanding PRUDENTIALs claim that no certification was issued to that
effect, it renewed the policy, thereby, evidencing an intention to waive TRANS-ASIAs alleged breach. Clearly, by granting the
renewal policies twice and successively after the loss, the intent was to benefit the insured, TRANS-ASIA, as well as to waive
compliance of the warranty.

The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as raised by the PRUDENTIAL in its
assignment of errors. Whether it is a rider will not effectively alter the result for the reasons that: (1) PRUDENTIAL was not able to
discharge the burden of evidence to show that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo the
commission of a breach by TRANS-ASIA, the same was shown to have been waived by PRUDENTIAL.

II. A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction between the parties evidenced by a
document denominated as "Loan and Trust Receipt," dated 29 May 1995 constituted partial payment on the policy.

It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The same was evidenced by a
transaction receipt denominated as a "Loan and Trust Receipt," dated 29 May 1995, reproduced hereunder:

LOAN AND TRUST RECEIPT

Claim File No. MH-93-025 May 29, 1995

P3,000,000.00
Check No. PCIB066755

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan
without interest, under Policy No. MH93/1353, repayable only in the event and to the extent that any net recovery is made by
TRANS ASIA SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on account of loss by any
casualty for which they may be liable, occasioned by the 25 October 1993: Fire on Board.

As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND ASSURANCE INC. whatever recovery we may
make and deliver to it all documents necessary to prove our interest in said property. We also hereby agree to promptly prosecute
suit against such persons, corporation or corporations through whose negligence the aforesaid loss was caused or who may
otherwise be responsible therefore, with all due diligence, in our own name, but at the expense of and under the exclusive direction
and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC.

TRANS-ASIA SHIPPING CORPORATION29

PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties evidenced a loan of P3,000,000.00 which it
granted to TRANS-ASIA, and not an advance payment on the policy or a partial payment for the loss. It further submits that it is a
customary practice for insurance companies in this country to extend loans gratuitously as part of good business dealing with their
assured, in order to afford their assured the chance to continue business without embarrassment while awaiting outcome of the
settlement of their claims.30 According to PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate to it whatever rights
and/or actions TRANS-ASIA may have against third persons, and it cannot by no means be taken that by virtue thereof, PRUDENTIAL
was granted irrevocable power of attorney by TRANS-ASIA, as the sole power to prosecute lies solely with the latter.

The Court of Appeals held that the real character of the transaction between the parties as evidenced by the "Loan and Trust
Receipt" is that of an advance payment by PRUDENTIAL of TRANS-ASIAs claim on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law Act No. 2427 of the Philippine
Legislature during the American Regime. The Insurance Act was lifted verbatim from the law of California, except Chapter V thereof,
which was taken largely from the insurance law of New York. Therefore, ruling case law in that jurisdiction is to Us persuasive in
interpreting provisions of our own Insurance Code. In addition, the application of the adopted statute should correspond in
fundamental points with the application in its country of origin x x x.

xxxx

Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt that the money was intended as a
loan does not detract from its real character as payment of claim, thus:

"The receipt of money by the insured employers from a surety company for losses on account of forgery of drafts by an employee
where no provision or repayment of the money was made except upon condition that it be recovered from other parties and neither
interest nor security for the asserted debts was provided for, the money constituted the payment of a liability and not a mere loan,
notwithstanding recitals in the written receipt that the money was intended as a mere loan."

What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that appellant is obligated to hand over to
appellee "whatever recovery (Trans Asia) may make and deliver to (Prudential) all documents necessary to prove its interest in the
said property." For all intents and purposes therefore, the money receipted is payment under the policy, with Prudential having the
right of subrogation to whatever net recovery Trans-Asia may obtain from third parties resulting from the fire. In the law on
insurance, subrogation is an equitable assignment to the insurer of all remedies which the insured may have against third person
whose negligence or wrongful act caused the loss covered by the insurance policy, which is created as the legal effect of payment by
the insurer as an assignee in equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it
becomes the loss of the insurer. It has been referred to as the doctrine of substitution and rests on the principle that substantial
justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the
parties without regard to form.31

We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences that the real nature of the
transaction between the parties was that the amount of P3,000,000.00 was not intended as a loan whereby TRANS-ASIA is obligated
to pay PRUDENTIAL, but rather, the same was a partial payment or an advance on the policy of the claims due to TRANS-ASIA.

First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by PRUDENTIAL, subrogating the former to the
extent of "any net recovery made by TRANS ASIA SHIPPING CORP., from any person or persons, corporation or corporations, or
other parties, on account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993: Fire on Board."32

Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly prosecute suit against such persons,
corporation or corporations through whose negligence the aforesaid loss was caused or who may otherwise be responsible
therefore, with all due diligence" in its name, the prosecution of the claims against such third persons are to be carried on "at the
expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC." 33 The clear import of
the phrase "at the expense of and under the exclusive direction and control" as used in the "Loan and Trust Receipt" grants solely to
PRUDENTIAL the power to prosecute, even as the same is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely an
agent of PRUDENTIAL, the principal, in the prosecution of the suit against parties who may have occasioned the loss.

Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay PRUDENTIAL is highly speculative and
contingent, i.e., only in the event and to the extent that any net recovery is made by TRANS-ASIA from any person on account of loss
occasioned by the fire of 25 October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such that, if no recovery
from third parties is made, PRUDENTIAL cannot be repaid the amount. Verily, we do not think that this is constitutive of a loan. 34 The
liberality in the tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA leads to the conclusion that the amount of
P3,000,000.00 was a form of an advance payment on TRANS-ASIAs claim on MH93/1353.

III. A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the balance of the loss suffered by
TRANS-ASIA and covered by Marine Policy No. MH93/1363.

Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid claims covered by Marine Policy No.
MH93/1363, or a total amount of P8,395,072.26.

B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorneys fees equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorneys fees. It held that attorneys fees cannot be awarded absent a showing of bad
faith on the part of PRUDENTIAL in rejecting TRANS-ASIAs claim, notwithstanding that the rejection was erroneous. According to the
Court of Appeals, attorneys fees can be awarded only in the cases enumerated in Article 2208 of the Civil Code which finds no
application in the instant case.

We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorneys fees and other expenses incurred by the
insured after a finding by the Insurance Commissioner or the Court, as the case may be, of an unreasonable denial or withholding of
the payment of the claims due. Moreover, the law imposes an interest of twice the ceiling prescribed by the Monetary Board on the
amount of the claim due the insured from the date following the time prescribed in Section 24235 or in Section 243,36 as the case
may be, until the claim is fully satisfied. Finally, Section 244 considers the failure to pay the claims within the time prescribed in
Sections 242 or 243, when applicable, as prima facie evidence of unreasonable delay in payment.

To the mind of this Court, Section 244 does not require a showing of bad faith in order that attorneys fees be granted. As earlier
stated, under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created by failure of the insurer
to pay the claim within the time fixed in both Sections 242 and 243 of the Insurance Code. As established in Section 244, by reason
of the delay and the consequent filing of the suit by the insured, the insurers shall be adjudged to pay damages which shall consist of
attorneys fees and other expenses incurred by the insured. 37

Section 244 reads:

In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the
Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorneys fees
and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of
twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time
prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment.

Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay or refusal in the payment of the
insurance claims.

In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show that there was an unreasonable
delay by PRUDENTIAL in the payment of the unpaid balance of P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the
occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster, Richards Hogg
International (Phils.), Inc., completed its survey report recommending the amount of P11,395,072.26 as the total indemnity due to
TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a letter39 addressed to TRANS-ASIA denied the latters claim for the amount of
P8,395,072.26 representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent a second letter 40 to TRANS-ASIA
seeking a return of the amount of P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of
money against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing the balance of the proceeds of the
insurance claim.

As can be gleaned from the foregoing, there was an unreasonable delay on the part of PRUDENTIAL to pay TRANS-ASIA, as in fact, it
refuted the latters right to the insurance claims, from the time proof of loss was shown and the ascertainment of the loss was made
by the insurance adjuster. Evidently, PRUDENTIALs unreasonable delay in satisfying TRANS-ASIAs unpaid claims compelled the
latter to file a suit for collection.

Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as attorneys fees to TRANS-ASIA is
reasonable under the circumstances, or otherwise stated, ten percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co.,
Inc. v. Court of Appeals,41 where a finding of an unreasonable delay under Section 244 of the Insurance Code was made by this
Court, we grant an award of attorneys fees equivalent to ten percent (10%) of the total proceeds. We find no reason to deviate
from this judicial precedent in the case at bar.

C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest in
accordance with Section 244 of the Insurance Code.
Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling prescribed by the Monetary Board due the
insured, from the date following the time prescribed in Section 242 or in Section 243, as the case may be, until the claim is fully
satisfied. In the case at bar, we find Section 243 to be applicable as what is involved herein is a marine insurance, clearly, a policy
other than life insurance.

Section 243 is hereunder reproduced:

SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy,
shall be paid within thirty days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either
by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not had or made within sixty days
after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after such receipt.
Refusal or failure to pay the loss or damage within the time prescribed herein will entitle the assured to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such
failure or refusal to pay is based on the ground that the claim is fraudulent.

As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board except when the failure or refusal of the insurer to pay was founded on the ground that the claim
is fraudulent.

D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted to mean 24% per annum.

PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS-ASIA in the assailed Decision of 6
November 2001. It is PRUDENTIALs stance that the award is extortionate and grossly unsconscionable. In support thereto,
PRUDENTIAL makes a reference to TRANS-ASIAs prayer in the Complaint filed with the court a quo wherein the latter sought,
"interest double the prevailing rate of interest of 21% per annum now obtaining in the banking business or plus 42% per annum
pursuant to Article 243 of the Insurance Code x x x."42

The contention fails to persuade. It is settled that an award of double interest is lawful and justified under Sections 243 and 244 of
the Insurance Code.43 In Finman General Assurance Corporation v. Court of Appeals, 44 this Court held that the payment of 24%
interest per annum is authorized by the Insurance Code. 45 There is no gainsaying that the term "double interest" as used in Sections
243 and 244 can only be interpreted to mean twice 12% per annum or 24% per annum interest, thus:

The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per centum per annum (12%) as
prescribed by the Monetary Board in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the Usury Law; so that when Sections
242, 243 and 244 of the Insurance Code provide that the insurer shall be liable to pay interest "twice the ceiling prescribed by the
Monetary Board", it means twice 12% per annum or 24% per annum interest on the proceeds of the insurance. 46

E. The payment of double interest should be counted from 13 September 1996.

The Court of Appeals, in imposing double interest for the duration of the delay of the payment of the unpaid balance due TRANS-
ASIA, computed the same from 13 August 1996 until such time when the amount is fully paid. Although not raised by the parties, we
find the computation of the duration of the delay made by the appellate court to be patently erroneous.

To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board. Significantly, Section 243 mandates the payment of any loss or damage for which an insurer may
be liable, under any policy other than life insurance policy, within thirty days after proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration. It is clear
that under Section 243, the insurer has until the 30th day after proof of loss and ascertainment of the loss or damage to pay its
liability under the insurance, and only after such time can the insurer be held to be in delay, thereby necessitating the imposition of
double interest.

In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was completed by the adjuster,
Richard Hoggs International (Phils.), Inc. on 13 August 1996. PRUDENTIAL had thirty days from 13 August 1996 within which to pay
its liability to TRANS-ASIA under the insurance policy, or until 13 September 1996. Therefore, the double interest can begin to run
from 13 September 1996 only.
IV. A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged in section III herein, computed
from the time of finality of judgment until the full satisfaction thereof in conformity with this Courts ruling in Eastern Shipping Lines,
Inc. v. Court of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the rule of thumb48 in the application of interest to be
imposed on obligations, regardless of their source. Eastern emphasized beyond cavil that when the judgment of the court awarding
a sum of money becomes final and executory, the rate of legal interest, regardless of whether the obligation involves a loan or
forbearance of money, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance49 of credit.

We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the finality of judgment until the full
satisfaction thereof must be imposed on the total amount of liability adjudged to PRUDENTIAL. It is clear that the interim period
from the finality of judgment until the satisfaction of the same is deemed equivalent to a forbearance of credit, hence, the
imposition of the aforesaid interest.

Fallo

WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No. 151991 is GRANTED, thus, we award the
grant of attorneys fees and make a clarification that the term "double interest" as used in the 6 November 2001 Decision of the
Court of Appeals in CA GR CV No. 68278 should be construed to mean interest at the rate of 24% per annum, with a further
clarification, that the same should be computed from 13 September 1996 until fully paid. The Decision and Resolution of the Court
of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001 and 29 January 2002, respectively, are, thus, MODIFIED in the
following manner, to wit:

1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26, representing the balance of the loss suffered by
TRANS-ASIA and covered by Marine Policy No. MH93/1363;

2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of attorneys fees equivalent to 10% of the amount of
P8,395,072.26;

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest at the rate of 24% per
annum to be computed from 13 September 1996 until fully paid; and

4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged as abovestated in paragraphs (1),
(2), and (3) herein, computed from the time of finality of judgment until the full satisfaction thereof.

No costs.

SO ORDERED.

G.R. NO. L-19638 JUNE 20, 1966

FILIPINAS COMPAIA DE SEGUROS, ET AL., PETITIONERS AND APPELLEES,

VS.
HON. FRANCISCO Y. MANDANAS, IN HIS CAPACITY AS INSURANCE COMMISSIONER, RESPONDENT AND APPELLANT.
AGRICULTURAL FIRE INSURANCE & SURETY CO., INC., ET AL., INTERVENORS AND APPELLEES.

CONCEPCION, C.J.:

This is a special civil action for a declaratory relief Thirty-nine (39) non-life insurance companies instituted it, in the Court of First
Instance of Manila, to secure a declaration of legality of Article 22 of the Constitution of the Philippine Rating Bureau, of which they
are members, inasmuch as respondent Insurance Commissioner assails its validity upon the ground that it constitutes an illegal or
undue restraint of trade. Subsequently to the filing of the petition, twenty (20) other non-life insurance companies, likewise,
members of said Bureau, were allowed to intervene in support of the petition. After appropriate proceedings, said court rendered
judgment declaring that the aforementioned Article 22 is neither contrary to law nor against public policy, and that, accordingly,
petitioners herein, as well as the intervenors and other members of the aforementioned Bureau, may lawfully observe and enforce
said Article, and are bound to comply with the provisions thereof, without special pronouncement as to costs. Hence this appeal by
respondent Insurance Commissioner, who insists that the Article in question constitutes an illegal or undue restraint of trade and,
hence, null and void.

The record discloses that on March 11, 1960, respondent wrote to said Bureau, a communication expressing his doubts of the
validity of said Article 22, reading:

In respect to the classes of insurance specified in the Objects of the Bureau 1 and for Philippine business only, the members of this
Bureau agree not to represent nor to effect reinsurance with, nor to accept reinsurance from, any Company, Body, or Underwriter
licensed to do business in the Philippines not a Member in good standing of this Bureau.

and requesting that said provision, be, accordingly, repealed. On April 11, 1960, respondent wrote another letter to the Bureau
inquiring on the action taken on the subject-matter of his previous communication. In reply thereto, the Bureau advised respondent
that the suggestion to delete said Article 22 was still under consideration by a committee of said Bureau. Soon thereafter, or on May
9, 1961, the latter was advised by respondent that, being an illegal agreement or combination in restraint of trade, said Article
should not be given force and effect; that failure to comply with this requirement would compel respondent to suspend the license
issued to the Bureau; and that the latter should circularize all of its members on this matter and advise them that "violation of this
requirement by any member of the Bureau" would also compel respondent "to suspend the certificate of authority of the company
concerned to do business in the Philippines". Thereupon, or on May 16, 1961, the present action was commenced.

Briefly, appellant maintains that, since, in the aforementioned Article 22, members of the Bureau "agree not to represent nor to
effect reinsurance with, nor to accept reinsurance from any company, body, or underwriter, licensed to do business in the
Philippines not a member in good standing of the Bureau", said provision is illegal as a combination in restraint of trade. As early as
August 10, 1916, this Court had had occasion to declare that the test on whether a given agreement constitutes an unlawful
machination or a combination in restraint of trade

... is, whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is,
or is not, unreasonable. (Ferrazini vs. Gsell, 34 Phil. 697, 712-13.)

This view was reiterated in Ollendorf vs. Abrahamson (38 Phil. 585) and Red Line Transportation Co. vs. Bachrach Motor Co. (67 Phil.
77), in the following language:

...The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the
protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld.

...we adopt the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic
reasonableness of the restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not
contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose favor
it is imposed. (Ollendorf vs. Abrahamson, 38 Phil. 585.)

...The test of validity is whether under the particular circumstances of the case and considering the nature of the particular contract
involved, public interest and welfare are not involved and the restraint is not only reasonably necessary for the protection of the
contracting parties but will not affect the public interest or service. (Red Line Transportation Co. vs. Bachrach Motor Co., 67 Phil. 77.)
(See also, Del Castillo vs. Richmond, 45 Phil. 483.)

The issue in the case at bar hinges, therefore, on the purpose or effect of the disputed provision. The only evidence on this point is
the uncontradicted testimony of Salvador Estrada, Chairman of the Bureau when it was first organized and when he took the witness
stand. Briefly stated, he declared that the purpose of Article 22 is to maintain a high degree or standard of ethical practice, so that
insurance companies may earn and maintain the respect of the public, because the intense competition between the great number
of non-life insurance companies operating in the Philippines is conducive to unethical practices, oftentimes taking the form of
underrating; that to achieve this purpose it is highly desirable to have cooperative action between said companies in the compilation
of their total experience in the business, so that the Bureau could determine more accurately the proper rate of premium to be
charged from the insured; that, several years ago, the very Insurance Commissioner had indicated to the Bureau the necessity of
doing something to combat underrating, for, otherwise, he would urge the amendment of the law so that appropriate measures
could be taken therefor by his office; that much of the work of the Bureau has to do with rate-making and policy-wording; that rate-
making is actually dependent very much on statistics; that, unlike life insurance companies, which have tables of mortality to guide
them in the fixing of rates, non-life insurance companies have, as yet, no such guides; that, accordingly, non-life insurance
companies need an adequate record of losses and premium collections that will enable them to determine the amount of risk
involved in each type of risk and, hence, to determine the rates or premiums that should be charged in insuring every type of risk;
that this information cannot be compiled without full cooperation on the part of the companies concerned, which cannot be
expected from non-members of the Bureau, over which the latter has no control; and that, in addition to submitting information
about their respective experience, said Bureau members must, likewise, share in the rather appreciable expenses entailed in
compiling the aforementioned data and in analyzing the same.1wph1.t

We find nothing unlawful, or immoral, or unreasonable, or contrary to public policy either in the objectives thus sought to be
attained by the Bureau, or in the means availed of to achieve said objectives, or in the consequences of the accomplishment thereof.
The purpose of said Article 22 is not to eliminate competition, but to promote ethical practices among non-life insurance companies,
although, incidentally it may discourage, and hence, eliminate unfaircompetition, through underrating, which in itself is eventually
injurious to the public. Indeed, in the words of Mr. Justice Brandeis:

... the legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every
agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of
legality is whether the restraint imposed is such as merely regulates and promotes competition, or whether it is such as may suppress
or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to
which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint, and its effect,
actual or probable. (Board of Trade of Chicago vs. U.S., 246 U.S. 231, 62 L. ed. 683 [1918].)

Thus, in Sugar Institute, Inc. vs. U.S. (297 U.S. 553), the Federal Supreme Court added:

The restrictions imposed by the Sherman Act are not mechanical or artificial. We have repeatedly said that they set up the essential
standard of reasonableness. Standard Oil Co. vs. United States, 221 U.S. 1, 55 L. ed. 619, 31 S. Ct. 502, 34 L.R.A. (N.S.) 834, Ann. Cas.
1912D, 734; United States vs. American Tobacco Co., 221 U.S. 106, 55 L. ed. 663, 31 S. Ct. 632. They are aimed at contracts and
combinations which "by reason of intent or the inherent nature of the contemplated acts, prejudice the public interests
by unduly restraining competition or unduly obstructing the course of trade." Nash vs. United States, 229 U.S. 373, 376, 57 L. ed.
1232, 1235, 33 S. Ct. 780; United States vs. American Linseed Oil Co., 262 U.S. 371, 388, 389, 67 L. ed. 1035, 1040, 1041, 43 S. Ct. 607.
Designed to frustrate unreasonable restraints, they do not prevent the adoption of reasonable means to protect interstate commerce
from destructive or injurious practices and to promote competition upon a sound basis. Voluntary action to end abuses and to foster
fair competitive opportunities in the public interest may be more effective than legal processes. And cooperative endeavor may
appropriately have wider objectives than merely the removal of evils which are infractions of positive law.

Hence, the City Fiscal of Manila refused to prosecute criminally in Manila Fire Insurance Association for following a policy analogous
to that incorporated in the provision disputed in this case and the action of said official was sustained by the Secretary of Justice,
upon the ground that:

... combinations among insurance companies or their agents to fix and control rates of insurance do not constitute indictable
conspiracies, provided no unlawful means are used in accomplishing their purpose (41 C.J. 161; Aetna Ins. Co. vs. Commonwealth,
106 Ky. 864, 51 SW 624; Queen Ins. Co. vs. State, 86 Tex. 250, 24 SW 397; I Joyce on Insurance, par. 329-a).

Indeed, Mr. Estrada's testimony shows that the limitation upon reinsurance contained in the aforementioned Article 22 does not
affect the public at all, for, whether there is reinsurance or not, the liability of the insurer in favor of the insured is the same. Besides,
there are sufficient foreign reinsurance companies operating in the Philippines from which non-members of the Bureau may secure
reinsurance. What is more, whatever the Bureau may do in the matter of rate-fixing is not decisive insofar as the public is concerned,
for no insurance company in the Philippines may charge a rate of premium that has not been approved by the Insurance
Commissioner.

In fact, respondent's Circular No. 54, dated February 261 1954, provides:

II. Non-life Insurance company or Group Association of such companies.

Every non-life insurance company or group or association of such companies doing business in the Philippines shall file with the
Insurance Commissioner for approval general basic schedules showing the premium rates on all classes of risk except marine, as
distinguished from inland marine insurable by such insurance company or association of insurance companies in this country.
An insurance company or group of such companies may satisfy its obligation to make such filings by becoming a member of or
subscriber to a rating organization which makes such filing and by authorizing the insurance commissioner to accept such filings of
the rating organization on such company's or group's behalf.

III. Requiring Previous Application to and Approval by the Insurance Commissioner before any Change in the Rates Schedules filed
with Him Shall Take Effect.

No change in the schedules filed in compliance with the requirements of the next preceding paragraph shall be made except upon
application duly filed with and approved by the Insurance Commissioner. Said application shall state the changes proposed and the
date of their effectivity; all changes finally approved by the Insurance Commissioner shall be incorporated in the old schedules or
otherwise indicated as new in the new schedules.

IV. Empowering the Insurance Commissioner to Investigate All Non-Life Insurance Rates.

The Insurance Commissioner shall have power to examine any or all rates established by non-life insurance companies or group or
association of such insurance companies in the country. Should any rate appear, in the opinion of the Insurance Commissioner,
unreasonably high or not adequate to the financial safety or soundness to the company charging the same, or pre-judicial to policy-
holders, the Commissioner shall, in such case, hold a hearing and/or conduct an investigation. Should the result of such hearing
and/or investigation show that the rate is unreasonably high or low that it is not adequate to the financial safety and soundness of
the company charging the same, or is prejudicial to policy-holders, the Insurance Commissioner shall direct a revision of the said rate
in accordance with his findings. Any insurance company or group or association of insurance companies may be required to publish
the schedule of rates which may have been revised in accordance herewith.

The decision of the Insurance Commissioner shall be appealable within thirty days after it has been rendered to the Secretary of
Finance.

V. Prohibiting Non-life Insurance Companies and their Agents from Insuring Any Property in this Country at a Rate Different from
that in the Schedules; Unethical Practices.

No insurance company shall engage or participate in the insurance of any property located in the Philippines ... unless the schedule of
rates under which such property is insured has been filed and approved in accordance with the provisions of this Circular. ... .
(Emphasis ours.)

On the same date, the Constitution of the Bureau, containing a provision substantially identical to the one now under consideration,
was approved. Article 2 of said Constitution reads:

2. OBJECTS

The objects of the Bureau shall be:

a. To establish rates in respect of Fire, Earthquake, Riot and Civil Commotion, Automobile and Workmen's Compensation, and
whenever applicable, Marine Insurance business.

c. To file the rates referred to above, tariff rules, and all other conditions or data which may in any way affect premium rates with
the Office of the Insurance Commissioner on behalf of members for approval. (Emphasis ours.)

In compliance with the aforementioned Circular No. 54, in April, 1954, the Bureau applied for the license required therein, and
submitted with its application a copy of said Constitution. On April 28, 1954, respondent's office issued to the Bureau the license
applied for, certifying not only that it had complied with the requirements of Circular No. 54, but, also, that the license empowered
it "to engage in the making of rates or policy conditions to be used by insurance companies in the Philippines". Subsequently,
thereafter, the Bureau applied for and was granted yearly the requisite license to operate in accordance with the provisions of its
Constitution. During all this time, respondent's office did not question, but impliedly acknowledged, the legality of Article 22. It was
not until March 11, 1960, that it assailed its validity.

Respondent's contention is anchored mainly on Paramount Famous Lasky Corp. vs. U.S., 282 U.S. 30, but the same is not in point,
not only because it refers to the conditions under which movie film producers and distributors determine the terms under which
theaters or exhibitors may be allowed to run movie films thereby placing the exhibitors under the control of the producers or
distributors and giving the exhibitors, in effect, no choice as to what films and whose films they will show but, also, because there
is, in the film industry, no agency or officer with powers or functions comparable to those in the Insurance Commissioner, as regards
the regulation of the business concerned and of the transactions involved therein.

Wherefore, the decision appealed from should be, as it is hereby affirmed, without costs. It is so ordered.

G.R. NO. L-27932 OCTOBER 30, 1972

UNION MANUFACTURING CO., INC. AND THE REPUBLIC BANK, PLAINTIFFS, REPUBLIC BANK, PLAINTIFF-APPELLANT,
VS.
PHILIPPINE GUARANTY CO., INC., DEFENDANT-APPELLEE.

FERNANDO, J.:p

In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co., Inc., defendant in the lower court and now
appellee, was able to avoid liability upon proof that there was a violation of a warranty. There was no denial thereof from the
insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the effort of the Republic Bank, the main plaintiff and now
the sole appellant, to recover on such policy as mortgagee, by virtue of the cover note in the insurance policy providing that it is
entitled to the payment of loss or damages as its interest may appear, was in vain. The defect being legally incurable, its appeal is
likewise futile. We affirm.

As noted in the decision, the following facts are not disputed: "(1) That on January 12, 1962, the Union Manufacturing Co., Inc.
obtained certain loans, overdrafts and other credit accommodations from the Republic Bank in the total sum of P415,000.00 with
interest at 9% per annum from said date and to secure the payment thereof, said Union Manufacturing Co., Inc. executed a real and
chattel mortgages on certain properties, which are more particularly described and listed at the back of the mortgage contract ...; (2)
That as additional condition of the mortgage contract, the Union Manufacturing Co., Inc. undertook to secure insurance coverage
over the mortgaged properties for the same amount of P415,000.00 distributed as follows: (a) Buildings, P30,000.00; (b)
Machineries, P300,000.00; and (c) Merchandise Inventory, P85,000.00, giving a total of P415,000.00; (3) That as Union
Manufacturing Co., Inc. failed to secure insurance coverage on the mortgaged properties since January 12, 1962, despite the fact
that Cua Tok, its general manager, was reminded of said requirement, the Republic Bank procured from the defendant, Philippine
Guaranty Co., Inc. an insurance coverage on loss against fire for P500,000.00 over the properties of the Union Manufacturing Co.,
Inc., as described in defendant's 'Cover Note' dated September 25, 1962, with the annotation that loss or damage, if any, under said
Cover Note is payable to Republic Bank as its interest may appear, subject however to the printed conditions of said defendant's Fire
Insurance Policy Form; (4) That on September 27, 1962, Fire Insurance Policy No. 43170 ... was issued for the sum of P500,000.00 in
favor of the assured, Union Manufacturing Co., Inc., for which the corresponding premium in the sum of P8,328.12, which was
reduced to P6,688.12, was paid by the Republic Bank to the defendant, Philippine Guaranty Co., Inc. ...; (5) That upon the expiration
of said fire policy on September 25, 1963, the same was renewed by the Republic Bank upon payment of the corresponding
premium in the same amount of P6,663.52 on September 26, 1963; (6) That in the corresponding voucher ..., it appears that
although said renewal premium was paid by the Republic Bank, such payment was for the account of Union Manufacturing Co., Inc.
and that the cash voucher for the payment of the first premium was paid also by the Republic Bank but for the account Union
Manufacturing Co., Inc.; (7) That sometime on September 6, 1964, a fire occurred in the premises of the Union Manufacturing Co.,
Inc.; (8) That on October 6, 1964, the Union Manufacturing Co., Inc. filed its fire claim with the defendant Philippine Guaranty Co.,
Inc., thru its adjuster, H. H. Bayne Adjustment Co., which was denied by said defendant in its letter dated November 27, 1964 ..., on
the following grounds: 'a. Policy Condition No. 3 and/or the 'Other Insurance Clause' of the policy violated because you did not give
notice to us the other insurance which you had taken from New India for P80,000.00, Sincere Insurance for P25,000.00 and Manila
Insurance for P200,000.00 with the result that these insurances, of which we became aware of only after the fire, were not endorsed
on our policy; and (b) Policy Condition No. 11 was not complied with because you have failed to give to our representatives the
required documents and other proofs with respect to your claim and matters touching on our liability, if any, and the amount of
such liability'; (9) That as of September, 1962, when the defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ...
in the sum of P500,000.00 to cover the properties of the Union Manufacturing Co., Inc., the same properties were already covered
by Fire Policy No. 1533 of the Sincere Insurance Company for P25,000.00 for the period from October 7, 1961 to October 7, 1962 ...;
and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic Insurance Agency for the total sum of P300,000.00 and for
periods respectively, from January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963; and (10) That when said
defendant's Fire Insurance Policy No. 43170 was already in full force and effect, the Union Manufacturing Co., Inc. without the
consent of the defendant, Philippine Guaranty Co., Inc., obtained other insurance policies totalling P305,000.00 over the same
properties prior to the fire, to wit: (1) Fire Policy No. 250 of New India Assurance Co., Ltd., for P80,000.00 for the period from May
27, 1964 to May 27, 1965 ...; (2) Fire Policy No. 3702 of the Sincere Insurance Company for P25,000.00 for the period from October
7, 1963 to October 7, 1964 ...; and (3) Fire Policy No. 6161 of Manila Insurance Co. for P200,000.00 for the period from May 15, 1964
to May 15, 1965 ... ."1 There is in the cover note2 and in the fire insurance policy 3 the following warranty: "[Co- Insurance Declared]:
Nil."4

Why the appellant Republic Bank could not recover, as payee, in case of loss as its "interest may appear subject to the terms and
conditions, clauses and warranties" of the policy was expressed in the appealed decision thus: "However, inasmuch as the Union
Manufacturing Co., Inc. has violated the condition of the policy to the effect that it did not reveal the existence of other insurance
policies over the same properties, as required by the warranty appearing on the face of the policy issued by the defendant and that
on the other hand said Union Manufacturing Co., Inc. represented that there were no other insurance policies at the time of the
issuance of said defendant's policy, and it appearing furthermore that while the policy of the defendant was in full force and effect
the Union Manufacturing Co., Inc. secured other fire insurance policies without the written consent of the defendant endorsed on
the policy, the conclusion is inevitable that both the Republic Bank and Union Manufacturing Co., Inc. cannot recover from the same
policy of the defendant because the same is null and void."5 The tone of confidence apparent in the above excerpts from the lower
court decision is understandable. The conclusion reached by the lower court finds support in authoritative precedents. It is far from
easy, therefore, for appellant Republic Bank to impute to such a decision a failure to abide by the law. Hence, as noted at the outset,
the appeal cannot prosper. An affirmance is indicated.

It is to Santa Ana v. Commercial Union Assurance Co.,6 a 1930 decision, that one turns to for the first explicit formulation as to the
controlling principle. As was made clear in the opinion of this Court, penned by Justice Villa-Real: "Without deciding whether notice
of other insurance upon the same property must be given in writing, or whether a verbal notice is sufficient to render an insurance
valid which requires such notice, whether oral or written, we hold that in the absolute absence of such notice when it is one of the
conditions specified in the fire insurance policy, the policy is null and void." 7 The next year, in Ang Giok Chip v. Springfield Fire &
Marine Ins. Co.,8 the conformity of the insured to the terms of the policy, implied from the failure to express any disagreement with
what is provided for, was stressed in these words of the ponente, Justice Malcolm: "It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by the insured without objection binds both the acceptor and the insured to the
terms thereof. The insured may not thereafter be heard to say that he did not read the policy or know its terms, since it is his duty to
read his policy and it will be assumed that he did so." 9 As far back as 1915, in Young v. Midland Textile Insurance Company, 10 it was
categorically set forth that as a condition precedent to the right of recovery, there must be compliance on the part of the insured
with the terms of the policy. As stated in the opinion of the Court through Justice Johnson: "If the insured has violated or failed to
perform the conditions of the contract, and such a violation or want of performance has not been waived by the insurer, then the
insured cannot recover. Courts are not permitted to make contracts for the parties. The function and duty of the courts consist
simply in enforcing and carrying out the contracts actually made. While it is true, as a general rule, that contracts of insurance are
construed most favorably to the insured, 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." 11 More specifically, there was a reiteration of this Santa Ana ruling in a
decision by the then Justice, later Chief Justice, Bengzon, in General Insurance & Surety Corp. v. Ng Hua. 12 Thus: "The annotation
then, must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitles the insurer
to rescind. (Sec. 69, Insurance Act) Such misrepresentation is fatal in the light of our views in Santa Ana v. Commercial Union
Assurance Company, Ltd. ... . The materiality of non-disclosure of other insurance policies is not open to doubt." 13As a matter of
fact, in a 1966 decision, Misamis Lumber Corp. v. Capital Ins. & Surety Co., Inc., 14 Justice J.B.L. Reyes, for this Court, made manifest
anew its adherence to such a principle in the face of an assertion that thereby a highly unfavorable provision for the insured would
be accorded recognition. This is the language used: "The insurance contract may be rather onerous ('one sided', as the lower court
put it), but that in itself does not justify the abrogation of its express terms, terms which the insured accepted or adhered to and
which is the law between the contracting parties." 15

There is no escaping the conclusion then that the lower court could not have disposed of this case in a way other than it did. Had it
acted otherwise, it clearly would have disregarded pronouncements of this Court, the compelling force of which cannot be denied.
There is, to repeat, no justification for a reversal.

WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No costs.

G.R. NO. L-22684 AUGUST 31, 1967

 PHILIPPINE PHOENIX SURETY & INSURANCE, INC., PLAINTIFF-APPELLEE,
VS.
WOODWORKS, INC., DEFENDANT-APPELLANT.

DIZON, J.:

Appeal upon a question of law taken by Woodworks, Inc. from the judgment of the Court of First Instance of Manila in Civil Case No.
50710 "ordering the defendant, Woodworks, Inc. to pay to the plaintiff, Philippine Phoenix Surety & Insurance, Inc., the sum of
P3,522.09 with interest thereon at the legal rate of 6% per annum from the date of the filing of the complaint until fully paid, and
costs of the suit."

Appellee Philippine Phoenix Surety & Insurance Co., Inc. commenced this action in the Municipal Court of Manila to recover from
appellant Woodworks, Inc. the sum of P3,522.09, representing the unpaid balance of the premiums on a fire insurance policy issued
by appellee in favor of appellant for a term of one year from April 1, 1960 to April 1, 1961. From an adverse decision of said court,
Woodworks, Inc. appealed to the Court of First Instance of Manila (Civil Case No. 50710) where the parties submitted the following
stipulation of facts, on the basis of which the appealed decision was rendered:

That plaintiff and defendant are both corporations duly organized and existing under and by virtue of the laws of the Philippines;

That on April 1, 1960, plaintiff issued to defendant Fire Policy No. 9652 for the amount of P300,000.00, under the terms and
conditions therein set forth in said policy a copy of which is hereto attached and made a part hereof as Annex "A";

That the premiums of said policy as stated in Annex "A" amounted to P6,051.95; the margin fee pursuant to the adopted plan as an
implementation of Republic Act 2609 amounted to P363.72, copy of said adopted plan is hereto attached as Annex "B" and made a
part hereof, the documentary stamps attached to the policy was P96.42;

That the defendant paid P3,000.00 on September 22, 1960 under official receipt No. 30245 of plaintiff;

That plaintiff made several demands on defendant to pay the amount of P3,522.09.1wph1.t

In the present appeal, appellant claims that the court a quo committed the following errors:

I. The lower court erred in stating that in fire insurance policies the risk attached upon the issuance and delivery of the policy to the
insured.

II. The lower court erred in deciding that in a perfected contract of insurance non-payment of premium does not cancel the policy.

III. The lower court erred in deciding that the premium in the policy was still collectible when the complaint was filed.

IV. The lower court erred in deciding that a partial payment of the premium made the policy effective during the whole period of the
policy.

It is clear from the foregoing 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.

We can not agree with appellant's theory that non-payment by it of the premium due, produced the cancellation of the contract of
insurance. Such theory would place exclusively in the hands of one of the contracting parties the right to decide whether the
contract should stand or not. Rather the correct view would seem to be this: as the contract had become perfected, the parties
could demand from each other the performance of whatever obligations they had assumed. In the case of the insurer, it is obvious
that it had the right to demand from the insured the completion of the payment of the premium due or sue for the rescission of the
contract. As it chose to demand specific performance of the insured's obligation to pay the balance of the premium, the latter's duty
to pay is indeed indubitable.

Having thus resolved that the fourth and last assignment of error submitted in appellant's brief is without merit, the first three
assignments of error must likewise be overruled as lacking in merit.

Wherefore, the appealed decision being in accordance with law and the evidence, the same is hereby affirmed, with costs.

G.R. NO. L-25317 AUGUST 6, 1979

PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, PLAINTIFF-APPELLEE,

VS.
WOODWORKS, INC., DEFENDANT-APPELLANT.

MELENCIO-HERRERA, J.:

This case was certified to this Tribunal by the Court of Appeals in its Resolution of October 4, 1965 on a pure question of law and
"because the issues raised are practically the same as those in CA-G.R. No. 32017-R" between the same parties, which case had been
forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc.," docketed in this
Court as L-22684, was decided on August 31, 1967 and has been reported in 20 SCRA 1270.

Specifically, this action is for recovery of unpaid premium on a fire insurance policy issued by plaintiff, Philippine Phoenix Surety &
Insurance Company, in favor of defendant Woodworks, Inc.

The following are the established facts:

On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire Insurance Policy No. 9749 for P500,000.00 whereby
plaintiff insured defendant's building, machinery and equipment for a term of one year from July 21, 1960 to July 21, 1961 against
loss by fire. The premium and other charges including the margin fee surcharge of P590.76 and the documentary stamps in the
amount of P156.60 affixed on the Policy, amounted to P10,593.36.

It is undisputed that defendant did not pay the premium stipulated in the Policy when it was issued nor at any time thereafter.

On April 19, 1961, or before the expiration of the one-year term, plaintiff notified defendant, through its Indorsement No. F-
6963/61, of the cancellation of the Policy allegedly upon request of defendant. 1 The latter has denied having made such a request.
In said Indorsement, plaintiff credited defendant with the amount of P3,110.25 for the unexpired period of 94 days, and claimed the
balance of P7,483.11 representing ,learned premium from July 21, 1960 to 18th April 1961 or, say 271 days." On July 6, 1961,
plaintiff demanded in writing for the payment of said amount. 2 Defendant, through counsel, disclaimed any liability in its reply-
letter of August 15, 1961, contending, in essence, that it need not pay premium "because the Insurer did not stand liable for any
indemnity during the period the premiums were not paid." 3

On January 30, 1962, plaintiff commenced action in the Court of First Instance of Manila, Branch IV (Civil Case No. 49468), to recover
the amount of P7,483.11 as "earned premium." Defendant controverted basically on the theory that its failure "to pay the premium
after the issuance of the policy put an end to the insurance TIANO WAS HERE contract and rendered the policy unenforceable." 4

On September 13, 1962, judgment was rendered in plaintiff's favor "ordering defendant to pay plaintiff the sum of P7,483.11, with
interest thereon at the rate of 6%, per annum from January 30, 1962, until the principal shall have been fully paid, plus the sum of
P700.00 as attorney's fees of the plaintiff, and the costs of the suit." From this adverse Decision, defendant appealed to the Court of
Appeals which, as heretofore stated, certified the case to us on a question of law.

The errors assigned read:

1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was a binding contract even if the premium stated in the
policy has not been paid.
2. That the lower court erred in sustaining that the premium in Insurance Policy, Exhibit B, became an obligation which was
demandable even after the period in the Policy has expired.

3. The lower court erred in not deciding that a premium not paid is not a debt enforceable by action of the insurer.

We find the appeal meritorious.

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." 5 The consideration is the "premium". "The premium 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." 6

The provisions on premium in the subject Policy read:

THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of MESSRS. WOODWORKS, INC. hereinafter called the
Insured, paying to the PHILIPPINE PHOENIX SURETY AND INSURANCE, INC., hereinafter called the Company, the sum of PESOS
NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY the Premium for the first period hereinafter mentioned. ...

xxx xxx xxx

THE COMPANY HEREBY AGREES with the Insured ... that if the Property above described, or any part thereof, shall be destroyed or
damaged by Fire or Lightning after payment of Premium, at any time between 4:00 o'clock in the afternoon of the TWENTY FIRST
day of JULY One Thousand Nine Hundred and SIXTY and 4:00 o'clock in the afternoon of the TWENTY FIRST day of JULY One
Thousand Nine Hundred and SIXTY ONE. ... (Emphasis supplied)

Paragraph "2" of the Policy further contained the following condition:

2. 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.

Paragraph "10" of the Policy also provided:

10. This insurance may be terminated at any time at the request of the Insured, in which case the Company will retain the customary
short period rate for the time the policy has been in force. This insurance may also at any time be terminated at the option of the
Company, on notice to that effect being given to the Insured, in which case the Company shall be liable to repay on demand a
ratable proportion of the premium for the unexpired term from the date of the cancelment.

Clearly, the Policy provides for pre-payment of premium. Accordingly; "when the policy is tendered the insured must pay the
premium unless credit is given or there is a waiver, or some agreement obviating the necessity for prepayment." 7 To constitute an
extension of credit there must be a clear and express agreement therefor." 8

From the Policy provisions, we fail to find any clear agreement that a credit extension was accorded defendant. And even if it were
to be presumed that plaintiff had extended credit from the circumstances of the unconditional delivery of the Policy without
prepayment of the premium, yet it is obvious that defendant had not accepted the insurer's offer to extend credit, which is essential
for the validity of such agreement.

An acceptance of an offer to allow credit, if one was made, is as essential to make a valid agreement for credit, to change a
conditional delivery of an insurance policy to an unconditional delivery, as it is to make any other contract. Such an acceptance could
not be merely a mental act or state of mind, but would require a promise to pay made known in some manner to defendant. 9

In this respect, the instant case differs from that involving the same parties entitled Philippine Phoenix Surety & Insurance Inc. vs.
Woodworks, Inc., 10 where recovery of the balance of the unpaid premium was allowed inasmuch as in that case "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." This
is not the situation obtaining here where no partial payment of premiums has been made whatsoever.

Since the premium had not been paid, the policy must be deemed to have lapsed.
The non-payment of premiums does not merely suspend but put, an end to an insurance contract, since the time of the payment is
peculiarly of the essence of the contract. 11

... the rule is that under policy provisions that upon the failure to make a payment of a premium or assessment at the time provided
for, the policy shall become void or forfeited, or the obligation of the insurer shall cease, or words to like effect, because the
contract so prescribes and because such a stipulation is a material and essential part of the contract. This is true, for instance, in the
case of life, health and accident, fire and hail insurance policies. 12

In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a valid defense against recovery under the
Policy it had issued. Explicit in the Policy itself is plaintiff's agreement to indemnify defendant for loss by fire only "after payment of
premium," supra. Compliance by the insured with the terms of the contract is a condition precedent to the right of recovery.

The burden is on an insured to keep a policy in force by the payment of premiums, rather than on the insurer to exert every effort to
prevent the insured from allowing a policy to elapse through a failure to make premium payments. The continuance of the insurer's
obligation is conditional upon the payment of premiums, so that no recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. 13

Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the purpose of
indemnity." 14

The foregoing findings are buttressed by section 77 of the Insurance Code (Presidential Decree No. 612, promulgated on December
18, 1974), which now provides that no contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, notwithstanding any agreement to the contrary.

WHEREFORE, the judgment appealed from is reversed, and plaintiff's complaint hereby dismissed.

[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;
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 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.
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.

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.

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.

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 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.

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 2modifying 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 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.