LALICAN VS INSULAR LIFE (G.R. NO.

183526 AUGUST 25, 2009)

Lalican vs The Insular Life Assurance Company Limited
G.R. No. 183526 August 25, 2009

Facts: Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio). During his lifetime, Eulogio applied for an
insurance policy with Insular Life. On 24 April 1997, Insular Life, through Josephine Malaluan (Malaluan), its agent in
Gapan City, issued in favor of Eulogio Policy No. 9011992, which contained a 20-Year Endowment Variable Income
Package Flexi Plan worth P500,000.00, with two riders valued at P 500,000.00 each. Thus, the value of the policy
amounted to P1,500,000.00. Violeta was named as the primary beneficiary. P Under the terms of Policy No. 9011992,
Eulogio was to pay the premiums on a quarterly basis in the amount of 8,062.00, payable every 24 April, 24 July, 24
October and 24 January of each year, until the end of the 20-year period of the policy. According to the Policy Contract,
there was a grace period of 31 days for the payment of each premium subsequent to the first. If any premium was not
paid on or before the due date, the policy would be in default, and if the premium remained unpaid until the end of the
grace period, the policy would automatically lapse and become void. Eulogio paid the premiums due on 24 July 1997 and
24 October 1997. However, he failed to pay the premium due on 24 January 1998, even after the lapse of the grace
period of 31 days. Policy No. 9011992, therefore, lapsed and became void. Eulogio submitted to the Cabanatuan District
Office of Insular Life, through Malaluan, on 26 May 1998, an Application for Reinstatement of Policy No. 9011992,
together with the amount of P 8,062.00 to pay for the premium due on 24 January 1998. In a letter dated 17 July 1998,
Insular Life notified Eulogio that his Application for Reinstatement could not be fully processed because, although he
already deposited P8,062.00 as payment for the 24 January 1998 premium, he left unpaid the overdue interest thereon
amounting to P322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest and to file another application for
reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums that subsequently became due on 24 April
1998 and 24 July 1998, plus interest. On 17 September 1998, Eulogio went to Malaluans house and submitted a second
Application for Reinstatement of Policy No. 9011992, including the amount of P17,500.00, representing payments for the
overdue interest on the premium for 24 January 1998, and the premiums which became due on 24 April 1998 and 24 July
1998. As Malaluan was away on a business errand, her husband received Eulogios second Application for Reinstatement
and issued a receipt for the amount Eulogio deposited. A while later, on the same day, 17 September 1998, Eulogio died
of cardio-respiratory arrest secondary to electrocution.
Issue: Whether or not Eulogio had an existing insurable interest in his own life until the day of his death in order to have
the insurance policy validly reinstated.
Held: No. An insurable interest is one of the most basic and essential requirements in an insurance contract. In general,
an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a
relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the
preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or
injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right
to insure the subject matter of the policy of insurance. Section 10 of the Insurance Code indeed provides that every
person has an insurable interest in his own life. Section 19 of the same code also states that an interest in the life or
health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss
occurs.
In the instant case, Eulogios death rendered impossible full compliance with the conditions for reinstatement of Policy No.
9011992. True, Eulogio, before his death, managed to file his Application for Reinstatement and deposit the amount for
payment of his overdue premiums and interests thereon with Malaluan; but Policy No. 9011992 could only be considered
reinstated after the Application for Reinstatement had been processed and approved by Insular Life during Eulogios
lifetime and good health.
The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written application does not
give the insured absolute right to such reinstatement by the mere filing of an application. The insurer has the right to deny
the reinstatement if it is not satisfied as to the insurability of the insured and if the latter does not pay all overdue premium
and all other indebtedness to the insurer. After the death of the insured the insurance Company cannot be compelled to
entertain an application for reinstatement of the policy because the conditions precedent to reinstatement can no longer
be determined and satisfied.
Malaluan did not have the authority to approve Eulogios Application for Reinstatement. Malaluan still had to turn over to
Insular Life Eulogios Application for Reinstatement and accompanying deposits, for processing and approval by the latter.
Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import and meaning of the
provisions of his Policy Contract and/or Application for Reinstatement, both of which he voluntarily signed. While it is a
cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured
and strictly as against the insurer company, 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.

Page 1 of 43
Gercio v. Sun Life - Insurance Beneficiary
48 PHIL 53
Facts: > Sunlife issued a life insurance policy to Gercio, the former agreeing to insure the life of Gercio for 2T to be paid
to him on Feb. 1, 1930 or if he should die before said date, then to his wife Andrea, should she survive him; otherwise to
the executor, administrator of Gercio.
> The policy did not include any provision reserving to Gercio the right to change the beneficiary.
> The wife was convicted of adultery and a decree of divorce was issued.
> Gercio notified Sunlife that he had revoked his donation in favor of Andrea and that he had designated his present wife
Adela as his beneficiary.
> Sunlife refused to change the beneficiary.

Issue: Whether or not Gercio may change the beneficiary in the policy.

Held: NO. If the policy contains no provision authorizing a change of beneficiary without the beneficiary’s consent, the
insured cannot make such change. It is held that a life insurance policy of a husband made payable to his wife as a
beneficiary is the separate property of the beneficiary and beyond the control of the husband. (NOTE: this case is based
on the old rule under the Insurance Act)
Court also held that the designation of a beneficiary that is originally valid does NOT render it invalid dut to a subsequent
cessation of the interests between the beneficiary and insured.

HILARIO GERCIO, PLAINTIFF AND APPELLEE, VS. SUN LIFE ASSURANCE CO. OF CANADA ET AL.,
DEFENDANTS. SUN LIFE ASSURANCE CO. OF CANADA, APPELLANT.

DECISION
MALCOLM, J.:

The question of first impression in the law of life insurance to be here decided is whether the insured the husband has the
power to change the beneficiary the former wife and to name instead his actual wife, where the insured and the
beneficiary have been divorced, and where the policy of insurance does not expressly reserve to the insured the right to
change the beneficiary. Although the authorities have been exhausted, no legal situation exactly like the one before us
has been encountered.
Hilario Gercio, the insured, is the plaintiff. The Sun Life Assurance Co. of Canada, the insurer, and Andrea Zialcita, the
beneficiary, are the defendants. The complaint is in the nature of mandamus. Its purpose is to compel the defendant Sun
Life Assurance Co. of Canada to change the beneficiary in the policy issued by the defendant company on the life of the
plaintiff Hilario Gercio, with one Andrea Zialcita as beneficiary.

A default judgment was taken in the lower court against the defendant Andrea Zialcita. The other defendant, the Sun Life
Assurance Co. of Canada, first demurred to the complaint and when the demurrer was overruled, filed an answer in the
nature of a general denial. The case was then submitted for decision on an agreed statement of facts. The judgment of
the trial court was in favor of the plaintiff without costs, and ordered the defendant company to eliminate from the
insurance policy the name of Andrea Zialcita as beneficiary and to substitute therefor such name as the plaintiff might
furnish to the defendant for that purpose.

The Sun Life Assurance Co. of Canada has appealed and has assigned three errors alleged, to have been committed by
the lower court. The appellee has countered with a motion which asks the court to dismiss the appeal of the defendant
Sun Life Assurance Co. of Canada, with costs.

As the motion presented by the appellee and the first two errors assigned by the appellant are preliminary in nature, we
will pass upon them first. Appellee argues that the "substantial defendant" was Andrea Zialcita, and that since she was
adjudged in default, the Sun Life Assurance Co. of Canada has no interest in the appeal. It will be noticed, however, that
the complaint prays for affirmative relief against the insurance company. It will be noticed further that it is stipulated that
the insurance company has persistently refused to change the beneficiary as desired by the plaintiff. As the rights of
Andrea Zialcita in the policy are rights which are enforceable by her only against the insurance company, the defendant
insurance company will only be fully protected if the question at issue is conclusively determined. Accordingly, we have
decided not to accede to the motion of the appellee and not to order the dismissal of the appeal of the appellant.

Page 2 of 43
This brings us to the main issue. Before, however, discussing its legal aspects, it is advisable to have before us the
essential facts. As they are stipulated, this part of the decision can easily be accomplished.

On January 29, 1910, the Sun Life Assurance Co. of Canada issued insurance policy No. 161481 on the life of Hilario
Gercio. The policy was what is known as a twenty-year endowment policy. By its terms, the insurance company agreed to
insure the life of Hilario Gercio for the sum of P2,000, to be paid him on February 1, 1930, or if the insured should die
before said date, then to his wife, Mrs. Andrea Zialcita, should she survive him; otherwise, to the executors,
administrators, or assigns of the insured. The policy also contained a schedule of reserves, amounts in cash, paid-up
policies, and renewed insurance, guaranteed. The policy did not include any provision reserving to the insured the right to
change the beneficiary.

On the date the policy was issued, Andrea Zialcita was the lawful wife of Hilario Gercio. Towards the end of the year
4919, she was convicted of the crime of adultery. On September 4, 1920, a decree of divorce was issued in civil case No.
17955, which had the effect of completely dissolving the bonds of matrimony contracted by Hilario Gercio and Andrea
Zialcita.

On March 4, 1922, Hilario Gercio formally notified the Sun Life Assurance Co. of Canada that he had revoked his
donation in favor of Andrea Zialcita, and that he had designated in her stead his present wife, Adela Garcia de Gercio, as
the beneficiary of the policy. Gercio requested the insurance-company to eliminate Andrea Zialcita as beneficiary. This,
the insurance company has refused and still refuses to do.

With all of these introductory matters disposed of and with the legal question to the forefront, it becomes our first duty to
determine what law should be applied to the facts. In this connection, it should be remembered that the insurance policy
was taken out in 1910, that the Insurance Act, No. 2427, became effective in 1914, and that the effort to change the
beneficiary was made in 1922. Should the provisions of the Code of Commerce and the Civil Code in force in 1910, or the
provisions of the Insurance Act now in force, or the general principles of law, guide the court in its decision?

On the supposition, first, that the Code of Commerce is applicable, yet there can be found in it no provision either
permitting or prohibiting the insured to change the beneficiary.

On the supposition, next, that the Civil Code regulates insurance contracts, it would be most difficult, if indeed it is
practicable, to test a life insurance policy by its provisions. Should the insurance contract, whereby the husband names
the wife as the beneficiary, be denominated a donation inter vivos, a donation causa mortis, a contract in favor of a third
person, or an aleatory contract? The subject is further complicated by the fact that if an insurance contract should be
considered a donation, a husband may then never insure his life in favor of his wife and vice versa, inasmuch as article
1334 prohibits all donations between spouses during marriage. It would seem, therefore, that this court was right when in
the case of Del Val vs. Del Val ([1915], 29 Phil., 534), it declined to consider the proceeds of the insurance policy as a
donation or gift, saying "the contract of life insurance is a special contract and the destination of the proceeds thereof is
determined by special laws which deal exclusively with that subject. The Civil Code has no provisions which relate directly
and specifically to life-insurance contracts or to the destination of life-insurance proceeds. * * *" Some satisfaction is
gathered from the perplexities of the Louisiana Supreme Court, a civil law jurisdiction, where the jurists have disagreed as
to the classification of the insurance contract, but have agreed in their conclusions as we will hereafter see. (Re
Succession of Leonce Desforges [1914], 52 L. R. A. [N. S.], 689; Lambert vs. Penn Mutual Life Insurance Company of
Philadelphia and L'Hote & Co. [1898], 50 La. Ann., 1027.)

On the further supposition that the Insurance Act applies, it will be found that in this Law, there is likewise no provision
either permitting or prohibiting the insured to change the beneficiary.

We must perforce conclude that whether the case be considered as of 1910, or 1914, or 1922, and whether the case be
considered in the light of the Code of Commerce, the Civil Code, or the Insurance Act, the deficiencies in the law will have
to be supplemented by the general principles prevailing on the subject. To that end, we have gathered the rules which
follow from the best considered American authorities. In adopting these rules, we do so with the purpose of having the
Philippine Law of Insurance conform as nearly as possible to the modern Law of Insurance as found in the United States
proper.

The wife has an insurable interest in the life of her husband. "The beneficiary has an absolute vested interest in the policy
from the date of its issuance and delivery. So when a policy of life insurance is taken out by the husband in. which the wife
is named as beneficiary, she has a subsisting interest in the policy. And this applies to a policy to which there are attached
the incidents of a loan value, cash surrender value, an automatic extension by premiums paid, and to an endowment

Page 3 of 43
policy, as well as to an ordinary life insurance policy. If the husband wishes to retain to himself the control and ownership
of the policy, he may so provide in the policy. But if the policy contains no provision authorizing a change of beneficiary
without the beneficiary's consent, the insured cannot make such change. Accordingly, it is held that a life insurance policy
of a husband made payable to the wife as beneficiary, is the separate property of the beneficiary and beyond the control
of the husband.

As to the effect produced by the divorce, the Philippine Divorce Law, Act No. 2710, merely provides in section 9 that the
decree of divorce shall dissolve the community property as soon as such decree becomes final. Unlike the statutes of a
few jurisdictions, there is no provision in Philippine Law permitting the beneficiary in a policy for the benefit of the wife of
the husband to be changed after a divorce. It must follow, therefore, in the absence of a statute to the contrary, that if a
policy is taken out upon a husband's life and the wife is named as beneficiary therein, a subsequent divorce does not
destroy her rights under the policy.

These are some of the pertinent principles of the Law of Insurance. To reinforce them, we would, even at the expense of
clogging the decision with unnecessary citation of authority, bring to notice certain decisions which seem to us to have
controlling influence.

To begin with, it is said that our Insurance Act is mostly taken from the statute of California. It should prove of interest,
therefore, to know the stand taken by the Supreme Court of that State. A California decision oft cited in the Cyclopedias is
Yore vs. Booth ([1395], 110 Cal., 238; 52 Am. St. Rep., 81), in which we find the following:

" * * * It seems to be the settled doctrine, with but slight dissent in the courts of this country, that a person who procures a
policy upon his own life, payable to a designated beneficiary, although he pays the premiums himself, and keeps the
policy in his exclusive possession, has no power to change the beneficiary, unless the policy itself, or the charter of the
insurance company, so provides. In other words, it is held that the beneficiary named in the policy, although he has parted
with nothing, and is simply the object of another's bounty, has acquired a vested and irrevocable interest in the policy,
which he may keep alive for his own benefit by paying the premiums or assessments if the person who effected the
insurance fails or refuses to do so."

As carrying great weight, there should also be taken into account two decisions coming from the Supreme Court of the
United States. The first of these decisions, in point of time, is Connecticut Mutual Life Insurance Company vs. Schaefer
([1877], 94 U. S., 457). There, Mr. Justice Bradley, delivering the opinion of the court, in part said:

"This was an action on a policy of life assurance issued July 25, 1868, on the joint lives of George F. and Francisca
Schaefer, then husband and wife, payable to the survivor on the death of either. In. January, 1870, they were divorced,
and alimony was decreed and paid to the wife, and there was never any issue of the marriage. They both subsequently
married again, after which, in February, 1871, George F. Schaefer died. This action was brought by Francisca, the
survivor.

*******

"The other point, relating to the alleged cessation of insurable interest by reason of the divorce of the parties, is entitled to
more serious consideration, although we have very little difficulty in disposing of it.

"It will be proper, in the first place, to ascertain what is an insurable interest. It is generally agreed that mere wager
policies, that is, policies in which the insured party has no interest whatever in the matter insured, but only an interest in its
loss or destruction, are void, as against public policy. * * * But precisely what interest is necessary, in order to take a
policy out of the category of mere wager, has been the subject of much discussion. In marine and fire insurance the
difficulty is not so great, because there insurance is considered as strictly an indemnity. But in life insurance the loss can
seldom be measured by pecuniary values. Still, an interest of some sort in the insured life must exist. A man cannot take
out insurance on the life of a total stranger, nor on that of one who is not so connected with him as to make the
continuance of the life a matter of some real interest to him.

"It is well settled that a man has an insurable interest in his own life and in that of his wife and children; a woman in the life
of her husband; and the creditor in the life of his debtor. Indeed it may be said generally that any reasonable expectation
of pecuniary benefit or advantage from the continued life of another creates an insurable interest in such life. And there is
no doubt that a man may effect an insurance on his own life for the benefit of a relative or friend; or two or more persons,
on their joint lives, for the benefit of the survivor or survivors. The old tontines were based substantially on this principle,
and their validity has never been called in question.

Page 4 of 43
*******

"The policy in question might, in our opinion, be sustained as a joint insurance, without reference to any other interest, or
to the question whether the cessation of interest avoids a policy good at its inception. We do not hesitate to say, however,
that a policy taken out in good faith and valid at its inception, is not avoided by the cessation of the insurable interest,
unless such be the necessary effect of the provisions of the policy itself. * * *

" * * * In our judgment a life policy, originally valid, does not cease to be so by the cessation of the assured party's interest
in the life insured."

Another controlling decision of the United States Supreme Court is that of Central National Bank of Washington City vs.
Hume ([1888], 128 U. S., 134). Therein, Mr. Chief Justice Fuller, as the organ of the court, announced the following
doctrines:

"We think it cannot be doubted that in the instance of contracts of insurance with a wife or children, or both, upon their
insurable interest in the life of the husband or father, the latter, while they are living, can exercise no power of disposition
over the same without their consent, nor has he any interest therein of which he can avail himself; nor upon his death
have his personal representatives or his creditors any interest in the proceeds of such contracts, which belong to the
beneficiaries to whom they are payable.

"It is indeed the general rule that a policy, and the money to become due under it, belong, the moment it is issued, to the
person or persons named in it as the beneficiary or beneficiaries, arid that there is no power in the person procuring the
insurance, by any act of his, by deed or by will, to transfer to any other person the interest of the person named."

A jurisdiction which found itself in somewhat the same situation as the Philippines, because of having to reconcile the civil
law with the more modern principles of insurance, is Louisiana. In a case coming before the Federal Courts, In re Dreuil &
Co. ([1915], 221 Fed., 796), the facts were that an endowment insurance policy provided for payment of the amount
thereof at the expiration of twenty years to the insured, or his executors, administrators, or assigns, with the proviso that, if
the insured die within such period, payment was to be made to his wife if she survive him. It was held that the wife has a
vested interest in the policy, of which she cannot be deprived without her consent. Foster, District Judge, announced:

"In so far as the law of Louisiana is concerned, it may also be considered settled that where a policy is of the semitoritine
variety, as in this case, the beneficiary has a vested right in the policy, of which she cannot be deprived without her
consent, (Lambert vs. Penn Mutual Life Ins. Co., 50 La. Ann., 1027; 24 South., 16,)" (See in same connection a leading
decision of the Louisiana Supreme Court, Re Succession of Leonce Desforges, [1914], 52 L. R. A. [N. S.], 689.)

Some question has arisen as to the power of the insured to destroy the vested interest of the beneficiary in the policy.
That point is well covered in the case of Entwistle vs. Travelers Insurance Company ([1902], 202 Pa. St., 141). To quote:

"* * * The interest of the wife was wholly contingent upon her surviving her husband, and she could convey no greater
interest in the policy than she herself had. The interest of the children of the insured, which was created for them by the
contract when the policy was issued; vested in them at the same time that the interest of the wife became vested in her.
Both interests were contingent. If the wife die before the insured, she will take nothing under the policy. If the insured
should die before the wife, then the children take nothing under the policy. We see no reason to discriminate between the
wife and the children. They are all payees, under the policy, and together constitute the 'assured.'

"The contingency which will determine whether the wife, or the children as a class will take the proceeds, has not as yet
happened; all the beneficiaries are living, and nothing has occurred by which the rights of the parties are in any way
changed. The provision that the policy may be converted into cash at the option of the holder does not change the relative
rights of the parties. We agree entirely with the suggestion that 'holder' or 'holders,' as used in this connection, means
those who in law are the owners of the policy, and are entitled to the rights and benefits which may accrue under it; in
other words, all the beneficiaries; in the present case, not only the wife, but the children of the insured. If for any reason,
prudence required the conversion of the policy into cash, a guardian would have no special difficulty in reasonably
protecting the interest of his wards. But however that may be, it is manifest that the option can only be exercised by those
having the full legal interest in the policy, or by their assignee. Neither the husband, nor the wife, nor both together had
power to destroy the vested interest of the children in the policy."

Page 5 of 43
The case most nearly on all fours with the one at bar is that of Wallace vs. Mutual Benefit Life Insurance Co. ([1906], 97
Minn., 27; 3 L. R. A. [N. S.], 478). The opinion there delivered also invokes added interest when it is noted that it was
written by Mr. Justice Elliott, the author of a text on insurance, later a member of this court. In the Minnesota case cited,
one Wallace effected a "twenty-year endowment" policy of insurance on his life, payable in the event of his death within
twenty years to Emma G. Wallace, his wife, but, if he lived, to himself at the end of twenty years. If Wallace died before
the death of his wife, within the twenty years, the policy was payable to the personal representatives of the insured.
During the pendency of divorce proceedings, the parties signed a contract by which Wallace agreed that, if a divorce was
granted to Mrs. Wallace, the court might award her certain specified property as alimony, and Mrs. Wallace agreed to
relinquish all claim to any property arising out of the relation of husband and wife. The divorce was granted. An action was
brought by Wallace to compel Mrs. Wallace to relinquish her interest in the insurance policy. Mr. Justice Elliott said:

"As soon as the policy was issued Mrs. Wallace acquired a vested interest therein, of which she could not be deprived
without her consent, except under the terms of the contract with the insurance company. No right to change the
beneficiary was reserved. Her interest in the policy was her individual property, subject to be divested only by her death,
the lapse of time, or by the failure of the insured to pay the premiums. She could keep the policy alive by paying the
premiums, if the insured did not do so. It was contingent upon these events, but it was free from the control of her
husband. He had no interest in her property in this policy, contingent or otherwise. Her interest was free from any claim on
the part of the insured or his creditors. He could deprive her of her interest absolutely in but one way, by living more than
twenty years. We are unable to see how the plaintiffs interest in the policy was primary or superior to that of the husband.
Both interests were contingent, but they were entirely separate and distinct, the one from the other. The wife's interest
was not affected by the decree of court which dissolved the marriage contract between the parties. It remains her
separate property, after the divorce as before. * * *

" * * * The fact that she was his wife at the time the policy was issued may have been, and undoubtedly was, the reason
why she was named as beneficiary in the event of his death. But her property interest in the policy after it was issued did
not in any reasonable sense arise out of the marriage relation."

Somewhat the same question came before the Supreme Court of Kansas in the leading case of Filley vs. Illinois Life
Insurance Company ([1914], 91 Kansas, 220; L. R. A, [1915 D], 130). It was held, following consideration extending to two
motions for rehearing, as follows:

"The benefit accruing from a policy of life insurance upon the life of a married man, payable upon his death to his wife,
naming her, is payable to the surviving beneficiary named, although she may have years thereafter secured a divorce
from her husband, and he was thereafter again married to one who sustained the relation of wife to him at the time of his
death.

"The rights of a beneficiary in an ordinary life insurance policy become vested, upon the issuance of the policy, and can
thereafter, during the life of the beneficiary, be defeated only as provided by the terms of the policy."

If space permitted, the following corroborative authority could also be taken into account: Joyce, The Law of Insurance,
second edition, vol. 2, pp. 1649 et seq.; 37 Corpus Juris, pp. 394 et seq.; 14 R. C. L., pp. 1376 et seq.; Green vs. Green
([1912], 147 Ky., 608; 39 L. R. A. [N. S.], 370); Washington Life Insurance Co. vs. Berwald ([1903], 97 Tex., 111); Begley
vs. Miller ([1907], 137 Ill., App., 278); Blum vs. New York L. Ins. Co. ([1906], 197 Mo., 513; 8 L, R. A, [N. S.], 923); Union
Central Life Ins. Co. vs. Buxer ([1900], 62 Ohio St., 385; 49 L. R. A., 737); Griffith vs. New York Life Ins. Co. ([1894], 101
Cal., 627; 40 Am. St. Rep., 96); Preston vs. Conn. Mut. L. Ins. Co. of Hart- ford ([1902], 95 Md., 101); Snyder vs. Supreme
Ruler of Fraternal Mystic Circle ([1909], 122 Tenn., 248; 45 L. R. A. [N. S.], 209); Llyod vs. Royal Union Mut. L. Ins. Co.
([1917], 245 Fed., 162); Phoenix Mut. L. Ins. Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix
Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme Council American Legion of Honor vs. Smith and Smith
([1889], 45 N. J. Eq., 466); Overhiser vs. Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L. R. A., 552);
Condon vs. New York Life Insurance Co. ([1918], 183 Iowa, 658); with which compare Foster vs. Gile ([1880], 50 Wis.,
603) and Hatch vs. Hatch ([1904], 35 Tex. Civ. App., 373).

On the admitted facts and the authorities supporting the nearly universally accepted principles of insurance, we are
irresistibly led to the conclusion that the question at issue must be answered in the negative.

The judgment appealed from will be reversed and the complaint ordered dismissed as to the appellant, without special
pronouncement as to the costs in either instance. So ordered.

Street, Villamor, Ostrand, Johns, and Villa-Real, JJ., concur.

Page 6 of 43
Avanceña, C. J., concurs in the result.

CONCURRING IN THE RESULT

JOHNSON, J.:

I agree with the majority of the court, that the judgment of the lower court should be revoked, but for a different reason. In
my judgment, the question presented by the plaintiff is purely an academic one. The purpose of the petition is to have
declared the rights of certain persons in an insurance policy which is not yet due and payable. It may never become due
and payable. The premiums may not be paid, thereby rendering the contract of insurance of non effect, and many other
things may occur, before the policy becomes due, which would render it non effective. The plaintiff and the other parties
who are claiming an interest in said policy should wait until there is something due them under the same. For the courts to
declare now who are the persons entitled to receive the amounts due, if they ever become due and payable, is
impossible, for the reason that nothing may ever become payable under the contract of insurance, and for many reasons
such persons may never have a right to receive anything when the policy does become due and payable. In my judgment,
the action is premature and should have been dismissed.

Romualdez, J., did not take part.

Page 7 of 43
Philamlife v. Pineda - Life Insurance
175 SCRA 416

Facts: > On Jan. 15 1963, Dimayuga processed an ordinary life insurance policy from Philamlife and designated his wife
and children as irrevocable beneficiaries.
> On Feb. 22, 1980, Dimayuga filed a petition in court to amend the designation of the beneficiaries in his policy from
irrevocable to revocable.
> Lower Court granted the petition.
Issue: Whether or not the court erred in granting Dimayuga’s petition.
Held: YES. Under the Insurance Act, the beneficiary designated in a life insurance contract cannot be changed without
the consent of the beneficiary because he has a vested interest in the policy. The policy contract states that the
designation of the beneficiaries is irrevocable. Therefore, based on the said provision of the contract, not to mention the
law then applicable, it is only with the consent of all the beneficiaries that any change or amendment in the poicy may be
legally and validly effected. The contract between the parties is the law binding on them. (This case rule is no longer
controlling under the Insurance Code.)

Philam v Pineda G.R. No. L-54216 July 19, 1989

J. Paras

Facts: Pineda procured an ordinary life insurance policy from the petitioner company and designated his wife and
children as irrevocable beneficiaries.
He then filed a petition to amend the designation of the beneficiaries in his life policy from irrevocable to revocable.
The judge granted the request.
Petitioner promptly filed a motion but was denied. Hence, this petition.

Issues:
1. WON the designation of the irrevocable beneficiaries could be changed or amended without the consent of all the
irrevocable beneficiaries.
2. WON the irrevocable minor beneficiaries could give consent to the change in designation

Held: No to both. Petition dismissed.

Ratio: Under the Insurance Act, the beneficiary designated in a life insurance contract cannot be changed without the
consent of the beneficiary because he has a vested interest in the policy.
There was an express stipulation to this effect: “It is hereby understood and agreed that, notwithstanding the provisions of
this policy to the contrary, inasmuch as the designation of the primary/contingent beneficiary/beneficiaries in this Policy
has been made without reserving the right to change said beneficiary/ beneficiaries, such designation may not be
surrendered to the Company, released or assigned; and no right or privilege under the Policy may be exercised,
or agreement made with the Company to any change in or amendment to the Policy, without the consent of the
said beneficiary/beneficiaries.”
The alleged acquiescence of the six (6) children beneficiaries of the policy cannot be considered an effective ratification
due to the fact that they were minors. Neither could they act through their father insured since their interests are quite
divergent from one another.
Therefore, the parent-insured cannot exercise rights and/or privileges pertaining to the insurance contract, for otherwise,
the vested rights of the irrevocable beneficiaries would be rendered inconsequential.
Of equal importance is the well-settled rule that the contract between the parties is the law binding on both of them and for
so many times, this court has consistently issued pronouncements upholding the validity and effectivity of contracts.
Likewise, contracts which are the private laws of the contracting parties should be fulfilled according to the literal sense of
their stipulations, for contracts are obligatory, no matter in what form they may be, whenever the essential requisites for
their validity are present
The change in the designation of was not within the contemplation of the parties. The lower court instead made a new
contract for them. It acted in excess of its authority when it did so.

Page 8 of 43
Heirs of Maramag v. Maramag
G.R. No. 181132 , June 5, 2009
FACTS: The case stems from a petition filed against respondents with the RTC for revocation and/or reduction of
insurance proceeds for being void and/or inofficious. The petition alleged that: (1) petitioners were the legitimate wife and
children of Loreto Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de Guzman Maramag
(Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive any proceeds
from his insurance policies from Insular Life Assurance Company, Ltd. (Insular) and Great Pacific Life
Assurance Corporation (Grepalife) (3) the illegitimate children of Loreto—Odessa, Karl Brian, and Trisha Angelie—were
entitled only to one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and those to be
released to Karl Brian and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could not
be deprived of their legitimes, which should be satisfied first. Insular admitted that Loreto misrepresented Eva as his
legitimate wife and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the
insurance proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto,
it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie, as the
remaining designated beneficiaries; and that it released Odessa’s share as she was of age, but withheld the release of the
shares of minors Karl Brian and Trisha Angelie pending submission of letters of guardianship. Insular alleged that the
complaint or petition failed to state a cause of action insofar as it sought to declare as void the designation of Eva
as beneficiary, because Loreto revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy
No. A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie,
considering that no settlement of Loreto’s estate had been filed nor had the respective shares of the heirs been
determined. Insular further claimed that it was bound to honor the insurance policies designating the children of Loreto
with Eva as beneficiaries pursuant to Section 53 of the Insurance Code. Grepalife alleged that Eva was not designated as
an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were denied
because Loreto was ineligible for insurance due to a misrepresentation in his application form that he was born on
December 10, 1936 and, thus, not more than 65 years old when he signed it in September 2001; that the case was
premature, there being no claim filed by the legitimate family of Loreto; and that the law on succession does not apply
where the designation of insurance beneficiaries is clear.

ISSUE: Whether or not illegitimate children can be beneficiaries in an insurance contract.

RULING: Yes. Section 53 of the Insurance Code states that the insurance proceeds shall be applied exclusively to the
proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, if still
alive; or the beneficiary, if the insured is already deceased, upon the maturation of the policy.The exception to this rule is
a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the
formof favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.
Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not entitled to the
proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal obligation to turn over the insurance
proceeds to petitioners. The revocation of Eva as a beneficiary in one policy and her disqualification as such in another
are of no moment considering that the designation of the illegitimate children as beneficiaries in Loreto’s insurance
policies remains valid. Because no legal proscription exists in naming as beneficiaries the children of illicit relationships by
the insured, the shares of Eva in the insurance proceeds, whether forfeited by the court in view of the prohibition
on donations under Article 739 of the Civil Code or by the insurers themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of petitioners. It
is only in cases where the insured has not designated any beneficiary, or when
the designated beneficiary is disqualified by law to receive the proceeds, that the insurance policy proceeds shall redound
to the benefit of the estate of the insured.

Page 9 of 43
GAISANO CAGAYAN, INC. VS INSURANCE COMPANY OF NORTH AMERICA
June 8, 2006; Austria-Martinez, J.

TOPIC: WON an insurance for book debts is covered by a fire insurance policy?

FACTS:
 Petitioner is a customer and dealer of the products of Intercapitol Marketing Corporation (IMC), maker of Wrangler
Jeans, and Levi Strauss (Phils) Inc, (LSPI)
 IMC and LSPI 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.
 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 the policy”
 On Feb. 25, 1991 – Gaisano Superstore Complex in Cagayan de Oro CIty 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 Feb. 4, 1992 – respondent filed a complaint for damages against petitioner, with respect to the claims of IMC
and LSPI under the respective fire insurance policies; that as of Feb. 25, 1991 the unpaid accounts of petitioner
on the sale and delivery of ready-made clothing materials with IMC was P2,119,205.00 and P535,613 with LSPI;
that respondent was subrogated to their rights against petitioner
 RTC – dismissed respondent’s complaint: fire was purely accidental; cause of fire not attributable to negligence of
petitioner; not established that petitioner is a debtor of IMC and LSPI; and that merchandise remains property of
the vendor until the full purchase price is paid, they must bear the loss
 CA – set aside the decision of RTC; sales invoice are proofs of sale; that the loss of goods must be borne by
petitioner; petitioner’s obligation is not the delivery of 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; sales invoice
proviso is an exception under ART 1504 (1) CC
 Petitioner’s argument: the insurance in the present case is not an insurance on credit but an insurance for the loss
of goods to fire; that despite delivery, IMC and LSPI assumed the risk of loss when they secured fire insurance
policies over the goods; 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 and that the
petitioner was not privy to the insurance contract – its consent was not secured
 Respondents’ argument: while the ownership of the goods transferred to petitioner upon delivery, IMC and LSPI
have insurable interest over said goods as creditors who stand to suffer direct pecuniary loss from its destruction
by fire; petitioner did not overcome presumption of liability under Art. 1265 CC; petitioner is negligent; petitioner is
guilty of bad faith in refusing to pay respondent

ISSUES: WON a fire insurance policy on book debts covers the unpaid accounts (credit) to IMC and LSPI and not
the goods itself?
-WON IMC and LSPI have an insurable interest?
2. WON petitioner is liable for the unpaid accounts?

HELD/RATIO:
1. YES. When the words of a contract are plain and readily understood, there is no room for construction.
 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”. 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. Thus what were insured
against were the accounts of IMC and LSPI with petitioner w/c remained unpaid 45 days after the loss through
fire, and not the loss or destruction of the goods delivered.
 The present case falls under par (1), Art. 1504 CC:
o 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:
o (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;

Page 10 of 43
  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. In property insurance, one’s interest is not determined by
concept of title, but whether insured has substantial economic interest in the property.
o Sec. 13 of the Insurance Code defines insurable interest as “every interest in property, whether real or
personal, or any relation thereto, or liability on respect thereof , of such nature that a contemplated peril
might directly damnify the insured.”
o Sec. 14, same code –an insurable interest in property may consist in: a) an existing interest, b) an
inchoate interest founded on existing interest and c) an expectancy, coupled with an existing interest in
that out of which the expectancy arises
 Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its
destruction.
 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

2. YES. Petitioner bears the loss under Art. 1504 (1). The petitioner’s obligation is for the payment of money. 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. Court cites Art. 1263 CC, rule applicable in an obligation to
deliver a generic thing.

The right of subrogation accrues simply upon payment by the insurance company of the insurance claim (Art 2207 CC)

However, respondent failed to present sufficient evidence to prove its cause of action with regards to LSPI.

DISPOSITIVE: petition partly granted

Page 11 of 43
FILIPINO MERCHANTS INSURANCE CO. v. CA +
DECISION

259 Phil. 262

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 ChargeursReunis 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 arrastrecontractor."[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;

Page 12 of 43
"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 wilful 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 risks" 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 risks 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 -
"x x x 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]

Page 13 of 43
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.[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. [18] The
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 he 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 petitioner's 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.
Paras, Padilla, and Sarmiento, JJ., concur.
Melencio-Herrera, J., (Chairman),on leave.

Page 14 of 43
ONG LIM SING VS FEB LEASING (G.R. NO. 168115 JUNE 8, 2007)
Ong Lim Sing Jr. FEB Leasing & Finance Corporation
G.R. No. 168115 June 8, 2007
Facts: On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease of equipment and motor
vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual
Guaranty Agreement with FEB to guarantee the prompt and faithful performance of the terms and conditions of the
aforesaid lease agreement. Corresponding Lease Schedules with Delivery and Acceptance Certificates over the
equipment and motor vehicles formed part of the agreement. Under the contract, JVL was obliged to pay FEB an
aggregate gross monthly rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (P 170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears, including penalty charges
and insurance premiums, amounted to Three Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight and
75/100 Pesos (P3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of the said amount.
However, JVL failed to pay.

Issue: Whether or not JVL as the lessee have an insurable interest over the leased items.

Held: Yes. The stipulation in Section 14 of the lease contract, that the equipment shall be insured at the cost and expense
of the lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk for the full term of the
lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor
vehicles leased. Section 17 of the Insurance Code provides that the measure of an insurable interest in property is the
extent to which the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly
damnified in case of loss, damage, or destruction of any of the properties leased.
It has also been held that the test of insurable interest in property is whether the assured has a right, title or interest
therein that he will be benefited by its preservation and continued existence or suffer a direct pecuniary loss from its
destruction or injury by the peril insured against.

G.R. No. 168115 June 8, 2007

VICENTE ONG LIM SING, JR., vs.FEB LEASING & FINANCE CORPORATION,
DECISION

NACHURA, J.:

This is a petition for review on certiorari assailing the Decision1 dated March 15, 2005 and the Resolution2 dated May 23,
2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.

The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease3 of equipment and motor vehicles
with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty
Agreement4 with FEB to guarantee the prompt and faithful performance of the terms and conditions of the aforesaid lease
agreement. Corresponding Lease Schedules with Delivery and Acceptance Certificates5 over the equipment and motor
vehicles formed part of the agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly
rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (₱170,494.00).

JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears, including penalty charges
and insurance premiums, amounted to Three Million Four Hundred Fourteen Thousand Four Hundred Sixty-Eight and
75/100 Pesos (₱3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of the said amount.
However, JVL failed to pay.6

On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila, docketed as Civil Case No. 00-
99451, for sum of money, damages, and replevin against JVL, Lim, and John Doe.

Page 15 of 43
In the Amended Answer,8 JVL and Lim admitted the existence of the lease agreement but asserted that it is in reality a
sale of equipment on installment basis, with FEB acting as the financier. JVL and Lim claimed that this intention was
apparent from the fact that they were made to believe that when full payment was effected, a Deed of Sale will be
executed by FEB as vendor in favor of JVL and Lim as vendees.9 FEB purportedly assured them that documenting the
transaction as a lease agreement is just an industry practice and that the proper documentation would be effected as
soon as full payment for every item was made. They also contended that the lease agreement is a contract of adhesion
and should, therefore, be construed against the party who prepared it, i.e., FEB.

In upholding JVL and Lim’s stance, the trial court stressed the contradictory terms it found in the lease agreement. The
pertinent portions of the Decision dated November 22, 2002 read:

A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed the use of several
contradictory terms. To name a few, in Section 9 of the said contract – disclaiming warranty, it is stated that the lessor is
not the manufacturer nor the latter’s agent and therefore does not guarantee any feature or aspect of the object of the
contract as to its merchantability. Merchantability is a term applied in a contract of sale of goods where conditions and
warranties are made to apply. Article 1547 of the Civil Code provides that unless a contrary intention appears an implied
warranty on the part of the seller that he has the right to sell and to pass ownership of the object is furnished by law
together with an implied warranty that the thing shall be free from hidden faults or defects or any charge or encumbrance
not known to the buyer.

In an adhesion contract which is drafted and printed in advance and parties are not given a real arms’ length opportunity
to transact, the Courts treat this kind of contract strictly against their architects for the reason that the party entering into
this kind of contract has no choice but to accept the terms and conditions found therein even if he is not in accord
therewith and for that matter may not have understood all the terms and stipulations prescribed thereat. Contracts of this
character are prepared unilaterally by the stronger party with the best legal talents at its disposal. It is upon that thought
that the Courts are called upon to analyze closely said contracts so that the weaker party could be fully protected.

Another instance is when the alleged lessee was required to insure the thing against loss, damage or destruction.

In property insurance against loss or other accidental causes, the assured must have an insurable interest, 32 Corpus
Juris 1059.

xxxx

It has also been held that the test of insurable interest in property is whether the assured has a right, title or interest
therein that he will be benefited by its preservation and continued existence or suffer a direct pecuniary loss from its
destruction or injury by the peril insured against. If the defendants were to be regarded as only a lessee, logically the
lessor who asserts ownership will be the one directly benefited or injured and therefore the lessee is not supposed to be
the assured as he has no insurable interest.

There is also an observation from the records that the actual value of each object of the contract would be the result after
computing the monthly rentals by multiplying the said rentals by the number of months specified when the rentals ought to
be paid.

Still another observation is the existence in the records of a Deed of Absolute Sale by and between the same parties,
plaintiff and defendants which was an exhibit of the defendant where the plaintiff sold to the same defendants one unit
1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The Court noticed that the same terms as in the alleged
lease were used in respect to warranty, as well as liability in case of loss and other conditions. This action of the plaintiff
unequivocally exhibited their real intention to execute the corresponding Deed after the defendants have paid in full and
as heretofore discussed and for the sake of emphasis the obscurity in the written contract cannot favor the party who
caused the obscurity.

Page 16 of 43
Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident
intention of the parties, their contemporaneous and subsequent acts shall be principally considered. If the doubts are cast
upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of
the parties, the contract shall be null and void.10

Thus, the court concluded with the following disposition:

In this case, which is held by this Court as a sale on installment there is no chattel mortgage on the thing sold, but it
appears amongst the Complaint’s prayer, that the plaintiff elected to exact fulfillment of the obligation.

For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because of the previous payments
made by the defendants for the reasonable use of the units, specially so, as it appears, these returned vehicles were sold
at auction and that the plaintiff can apply the proceeds to the balance. However, with respect to the unreturned units and
machineries still in the possession of the defendants, it is this Court’s view and so hold that the defendants are liable
therefore and accordingly are ordered jointly and severally to pay the price thereof to the plaintiff together with attorney’s
fee and the costs of suit in the sum of Php25,000.00.

SO ORDERED.11

On December 27, 2002, FEB filed its Notice of Appeal.12 Accordingly, on January 17, 2003, the court issued an Order13
elevating the entire records of the case to the CA. FEB averred that the trial court erred:

A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal properties on installment and
not of lease;

B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not R.A. No. 8556;

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price because of the previous
payments made by the defendants for the reasonable use of the units;

D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong Lim, Jr. to the Plaintiff-
Appellant.14

On March 15, 2005, the CA issued its Decision15 declaring the transaction between the parties as a financial lease
agreement under Republic Act (R.A.) No. 8556.16 The fallo of the assailed Decision reads:

WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002 rendered by the
Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is REVERSED and SET ASIDE, and a new
judgment is hereby ENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant
FEB Leasing and Finance Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty
Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per annum starting from the
date of judicial demand on 06 December 2000, until full payment thereof. Costs against appellees.

SO ORDERED.17

Lim filed the instant Petition for Review on Certiorari under Rule 45 contending that:

I The Honorable Court of Appeals erred when it failed to consider that the undated complaint was filed by Saturnino J.
Galang, Jr., without any authority from respondent’s Board of Directors and/or Secretary’s Certificate.

II The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the 1997 Rules of Civil
Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).

Page 17 of 43
III The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent to file on time its
appellant’s brief and to separately rule on the petitioner’s motion to dismiss.

IV The Honorable Court of Appeals erred in finding that the contract between the parties is one of a financial lease and
not of a contract of sale.

V The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the respondent are
"rentals" and not installments paid for the purchase price of the subject motor vehicles, heavy machines and equipment.

VI The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the pick-up vehicle is of no
consequence.

VII The Honorable Court of Appeals failed to take into consideration that the contract of lease, a contract of adhesion,
concealed the true intention of the parties, which is a contract of sale.

VIII The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable interest over the subject
personal properties.

IX The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage of the term
merchantability.18

We affirm the ruling of the appellate court.

First, Lim can no longer question Galang’s authority as FEB’s authorized representative in filing the suit against Lim.
Galang was the representative of FEB in the proceedings before the trial court up to the appellate court. Petitioner never
placed in issue the validity of Galang’s representation before the trial and appellate courts. Issues raised for the first time
on appeal are barred by estoppel. Arguments not raised in the original proceedings cannot be considered on review;
otherwise, it would violate basic principles of fair play.19

Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters agreed upon during
the pre-trial conference, or in not dismissing the appeal for failure of FEB to file its brief on time, or in not ruling separately
on the petitioner’s motion to dismiss.

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to
reconcile both the need to speedily put an end to litigation and the parties’ right to due process. In numerous cases, this
Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and
equity.20 In Aguam v. Court of Appeals , the Court explained:

The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not a
duty. The "discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in
mind the circumstances obtaining in each case." Technicalities, however, must be avoided. The law abhors technicalities
that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game of
technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest
opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of
appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of
procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of
action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of
justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression
of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21

Page 18 of 43
Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is not void per se. It is as
binding as any ordinary contract. A party who enters into an adhesion contract is free to reject the stipulations entirely.22
If the terms thereof are accepted without objection, then the contract serves as the law between the parties.

In Section 23 of the lease contract, it was expressly stated that:

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between them, and that no
representations have been made other than as set forth herein. This Agreement shall not be amended or altered in any
manner, unless such amendment be made in writing and signed by the parties hereto.

Petitioner’s claim that the real intention of the parties was a contract of sale of personal property on installment basis is
more likely a mere afterthought in order to defeat the rights of the respondent.

The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates is, in point of fact, a
financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines "financial leasing" as:

[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the
instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other
movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money
sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses
and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold
and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.

FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic payment of
₱170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of the purchase price or acquisition
cost of the said movables in accordance with the Lease Schedules with Delivery and Acceptance Certificates. "The basic
purpose of a financial leasing transaction is to enable the prospective buyer of equipment, who is unable to pay for such
equipment in cash in one lump sum, to lease such equipment in the meantime for his use, at a fixed rental sufficient to
amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with
the expectation that at the end of the lease period the buyer/financial lessee will be able to pay any remaining balance of
the purchase price."23

The allegation of petitioner that the rent for the use of each movable constitutes the value of the vehicle or equipment
leased is of no moment. The law on financial lease does not prohibit such a circumstance and this alone does not make
the transaction between the parties a sale of personal property on installment. In fact, the value of the lease, usually
constituting the value or amount of the property involved, is a benefit allowed by law to the lessor for the use of the
property by the lessee for the duration of the lease. It is recognized that the value of these movables depreciates through
wear and tear upon use by the lessee. In Beltran v. PAIC Finance Corporation,24 we stated that:

Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading company. Neither is it an
ordinary leasing company; it does not make its profit by buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a purchase and sale contract covering the equipment
which becomes the subject matter of the financial lease. The financial lessor takes the role of the buyer of the equipment
leased. And so the formal or documentary tie between the seller and the real buyer of the equipment, i.e., the financial
lessee, is apparently severed. In economic reality, however, that relationship remains. The sale of the equipment by the
supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure the repayment over
time of the purchase price of the equipment, plus financing charges, through the payment of lease rentals; that legal title is
the upfront security held by the financial lessor, a security probably superior in some instances to a chattel mortgagee's
lien.25

Page 19 of 43
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into the lease contract
with full knowledge of its terms and conditions. The contract was in force for more than four years. Since its inception on
March 9, 1995, JVL and Lim never questioned its provisions. They only attacked the validity of the contract after they were
judicially made to answer for their default in the payment of the agreed rentals.

It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions as they may want to
include in a contract. As long as such agreements are not contrary to law, morals, good customs, public policy, or public
order, they shall have the force of law between the parties.26 Contracting parties may stipulate on terms and conditions
as they may see fit and these have the force of law between them.27

The stipulation in Section 1428 of the lease contract, that the equipment shall be insured at the cost and expense of the
lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk for the full term of the lease, is
a binding and valid stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor vehicles
leased. Section 17 of the Insurance Code provides that the measure of an insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly damnified in
case of loss, damage, or destruction of any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the merchantability of the
equipment is a valid stipulation. Section 9.1 of the lease contract is stated as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE MANUFACTURER OR
SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE MANUFACTURER OR SUPPLIER THEREOF. THE
LESSEE HEREBY ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF
AND THAT THERE ARE NO WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS,
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY
FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS, SUITABILITY,
CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE EQUIPMENT WILL MEET THE
REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC
MACHINERY OR APPARATUS OR SPECIAL METHODS.29

In the financial lease agreement, FEB did not assume responsibility as to the quality, merchantability, or capacity of the
equipment. This stipulation provides that, in case of defect of any kind that will be found by the lessee in any of the
equipment, recourse should be made to the manufacturer. "The financial lessor, being a financing company, i.e., an
extender of credit rather than an ordinary equipment rental company, does not extend a warranty of the fitness of the
equipment for any particular use. Thus, the financial lessee was precisely in a position to enforce such warranty directly
against the supplier of the equipment and not against the financial lessor. We find nothing contra legem or contrary to
public policy in such a contractual arrangement."30

Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a contract of sale on
installment in the same manner that a previous transaction between the parties over a 1995 Mitsubishi L-200 Strada DC-
Pick-Up was initially covered by an agreement denominated as a lease and eventually became the subject of a Deed of
Absolute Sale.

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be read into the terms of the
lease agreement would expand the coverage of the agreement, in violation of Article 1372 of the New Civil Code. 31 The
lease contract subject of the complaint speaks only of a lease. Any agreement between the parties after the lease contract
has ended is a different transaction altogether and should not be included as part of the lease. Furthermore, it is a
cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is necessary in
order to determine the parties' intent.32

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in CA-G.R. CV No. 77498
dated March 15, 2005 and Resolution dated May 23, 2005 are AFFIRMED. Costs against petitioner.

SO ORDERED.

Page 20 of 43
Cha V. CA (1997)

G.R. No. 124520 August 18, 1997

Lessons Applicable: Effect of Lack of Insurable Interest (Insurance)

Laws Applicable: Sec. 17, Sec. 18, Sec. 25 of the Insurance Code

FACTS: Spouses Nilo Cha and Stella Uy-Cha and CKS Development Corporation entered a 1 year lease contract with a
stipulation not to insure against fire the chattels, merchandise, textiles, goods and effects placed at any stall or store or
space in the leased premises without first obtaining the written consent and approval of the lessor. But it insured against
loss by fire their merchandise inside the leased premises for P500,000 with the United Insurance Co., Inc. without the
written consent of CKS
On the day the lease contract was to expire, fire broke out inside the leased premises and CKS learning that the spouses
procured an insurance wrote to United to have the proceeds be paid directly to them. But United refused so CKS filed
against Spouses Cha and United.
RTC: United to pay CKS the amount of P335,063.11 and Spouses Cha to pay P50,000 as exemplary damages, P20,000
as attorney’s fees and costs of suit
CA: deleted exemplary damages and attorney’s fees

ISSUE: W/N the CKS has insurable interest because the spouses Cha violated the stipulation

HELD: NO. CA set aside. Awarding the proceeds to spouses Cha.

Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having
an insurable interest in the property insured
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their merchandise is
primarily a contract of indemnity. Insurable interest in the property insured must exist a t the time the insurance takes
effect and at the time the loss occurs. The basis of such requirement of insurable interest in property insured is based on
sound public policy: to prevent a person from taking out an insurance policy on property upon which he has no insurable
interest and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance
is a mere wager which is void under Section 25 of the Insurance Code.
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person insured has or has
not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy
executed by way of gaming or wagering, is void
Section 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss
of injury thereof
The automatic assignment of the policy to CKS under the provision of the lease contract previously quoted is void for
being contrary to law and/or public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha spouses obtained a fire insurance
policy over their own merchandise, without the consent of CKS, is a separate and distinct issue which we do not resolve in
this case.

Page 21 of 43
SAN MIGUEL BREWERY VS LAW UNION AND ROCK INSURANCE
40 Phil. 674

STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff, the San
Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten respectively by the Law Union
and Bock Insurance Company (Ltd.), and the "Filipinas" Compañia de Seguros, for the sum of P7,500 each, insuring
certain property which has been destroyed by fire. The plaintiff, the San Miguel Brewery, is named as the party assured in
the two policies referred to, but it is alleged in the complaint that said cdmpany was in reality interested in the property
which was the subject of insurance in the character of a mortgage creditor only, and that the owner of said property upon
the date the policies were issued was one D. P. Dunn. who was later succeeded as owner by one Henry Harding.
Accordingly said Harding was made a defendant, as a person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in fayor of the plaintiff against the two companies named for the
sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of P4,505.30 due to the plaintiff
upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be absolved from San Miguel Brewery vs.
Law Union and Rock Insurance Co. liability to the defendants or any of them. The peculiar form of the latter part of the
prayer is evidently due to the design of the plaintiff to lay a foundation for Harding to recover the difference between the
plaintiff's credit and the amount for which the property was insured. Accordingly, as was to be expected, Harding
answered, admitting the material allegations of the complaint and claiming for himself the right to recover the difference
between the plaintiff's mortgage credit and the face value of the policies. The two insurance companies also answered,
admitting in effect their liability to the San Miguel Brewery to the extent of its mortgage credit, but denying liability to
Harding on the ground that under the contracts of insurance the liability of the insurance companies was limited to the
insurable interest of the plaintiff therein. Soon after the action was begun the insurance companies effected a settlement
with the San Miguel Brewery by paying the full amount of the credit claimed by it, with the result that the litigation as
between the original plaintiff and the two insurance companies came to an end, leaving the action to be prosecuted to
final judgment by the defendant Harding with respect to the balance claimed to be due to him upon the policies.

Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action whatever against the
companies and absolved them from liability without special finding as to costs. From this decision the said Henry Harding
has appealed.

The two insurance companies who are named as defendants do not dispute their liability to the San Miguel Brewery, to
the extent already stated, and the only question here under discussion is that of the liability of the insurance companies to
Harding. It is therefore necessary to take account of such facts only as bear upon this aspect of the case.

In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which the insurance
relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the contract of mortgage Dunn
agreed to keep the property insured at his expense to the full amount of its value in companies to be selected by the
Brewery Company and authorized the latter in case of loss to receive the proceeds of the insurance and to retain such
part as might be necessary to cover the mortgage debt. At the same time, in order more conveniently to accomplish the
end in view, Dunn authorized and requested the Brewery Company to effect said insurance itself. Accordingly on the
same date Antonio Brias, general manager of the Brewery, made a verbal application to the Law Union and Rock
Insurance Company for insurance to the extent of P15,000 upon said property. In reply to a question of the company's
agent as to whether the Brewery was the owner of the property, he stated that the company was interested only as a
mortgagee. No information was asked as to who was the owner of the property, and no information upon this point was
given.

It seems that the insurance company to whom this application was directed did not want to carry more than onehalf the
risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be issued by the "Filipinas"
Compañia de Seguros. Both policies were issued in the name of the San Miguel Brewery as the assured, and contained
no reference to any other interest in the property. Both policies contain the usual clause requiring assignments to be
approved and noted on the policy. The premiums were paid by the Brewery and charged to Dunn. A year later the policies
were renewed, without change, the renewal premiums being paid by the Brewery, supposedly for the account of the
owner. In the month of March of the year 1917 Dunn sold the insured property to the defendant Henry Harding, but no
Assignment of the insurance, of the insurance policies, was at any time made to him.

We agree with the trial court that no cause of action in Henry Harding against the insurance companies is shown. He is
not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy Tam and Uy Yet vs. Leonard,

Page 22 of 43
30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be made effective, if at all, through
the San Miguel Brewery in whose name the contracts are written. Now the Brewery, as mortgagee of the insured property,
undoubtedly had an insurable interest therein; but it could not, in any event, recover upon these policies an amount in
excess of its mortgage credit. In this connection it will be remembered that Antonio Brias, upon making application for the
insurance, informed the company with which the insurance was placed that the Brewery was interested only as a
mortgagee. It would, therefore, be impossible for the Brewery to recover anything beyond the amount secured by its
mortgage on the insured property.

This conclusion is not only deducible from the principles governing the operation and effect of insurance contracts in
general but the point is clearly covered by the express provisions of sections 16 and 50 of the Insurance Act (Act No.
2427). In the first of the sections cited, it is declared that the measure of an insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof (sec. 16), while in the other it is stated that "the insurance
shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the
policy" (sec. 50).

These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of the property
had continued in him up to the time of the loss; and as regards Harding, an additional insuperable obstacle is found in the
fact that the ownership of the property had been changed, prior to the loss, without any corresponding change having
been effected in the policy of insurance. In section 19 of the Insurance Act we find it stated that "a change of interest in
any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same
person." Again in section 55 it is declared that the mere transfer of a thing insured does not transfer the policy, but
suspends it until the same person becomes the owner of both the policy and the thing insured.

Undoubtedly these policies of insurance might have been so framed as to have been "payable to the San Miguel Brewery,
mortgagee, as its interest may appear, remainder to whomsoever, during the continuance of the risk, may become the
owner of the interest insured." (Sec. 54, Act No. 2427.) Such a clause would have proved an intention to insure the entire
interest in the property, not merely the insurable interest of the San Miguel Brewery, and would have shown exactly to
whom the money, in case of loss, should be paid. But the policies are not so written.

It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of Brias, the
manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of the insurance companies was
different from that contemplated by Dunn, at whose request the insurance was written, and Brias. In the contract of
mortgage Dunn had agreed, at his own expense, to insure the mortgaged property for its full value and to indorse the
policies in such manner as to authorize the Brewery Company to receive the proceeds in case of loss and to retain such
part thereof as might be necessary to satisfy the remainder then due upon the mortgage debt. Instead, however, of
effecting the insurance himself Dunn authorized and requested the Brewery Company to procure insurance on the
property in the amount of P15,000 at Dunn's expense. The Brewery Company undertook to carry this mandate into effect,
and it of course became its duty to procure insurance of the character contemplated, that is, to have the policies so written
as to protect not only the insurable interest of the Brewery, but also the owner. Brias seems to have supposed that the
policies as written had this effect, but in this he was mistaken. It was certainly a hardship on the owner to be required to
pay the premiums upon P15,000 of insurance when he was receiving no benefit whatever except in protection to the
extent of his indebtedness to the Brewery. The blame for the situation thus created rests, however, with the Brewery
rather than with the insurance companies, and there is nothing in the record to indicate that the insurance companies
were requested to write insurance upon the insurable interest of the owner or intended to make themselves liable to that
extent.

If during the negotiations which resulted in the writing of this insurance, it had been agreed between the contracting
parties that the insurance should be so written as to protect not only the interest of the mortgagee but also the residuary
interest of the owner, and the policies had been, by inadvertence, ignorance, or mistake written in the form in which they
were issued, a court would have the power to reform the contracts and give effect to them in the sense in which the
parties intended to be bound. But in order to justify this, it must be made clearly to appear that the minds of the
contracting parties did actually meet in agreement and that they labored under some mutual error bv mistake in respect to
the expression of their purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Ted., 250), it appeared that a
mortgagee desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be
insured. The insurance company agreed to accept the risk, but the policy was issued in the name of the owner, because
of the mistaken belief of the company's agent that the law required it to be so drawn. It was held that a court of equity had
the power, at the suit of the mortgagee, to reform the instrument and give judgment in his favor for the loss thereunder,
although it had been agreed by both parties that the policy should be written exactly as it was. Said the court: "If the

Page 23 of 43
applicant correctly states his interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to
comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by mistake
of law adopts the wrong form, a court of equity will reform the instrument so as to make it insurance upon the interest
named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318; Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St.
Rep., 443; Woodbury Savings etc., Co., vs. Charter Oack Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire
Insurance Co., 67 Mich., 179.)

Similarly, in cases where the mortgagee is by mistake described as owner, the court may grant reformation and permit a
recovery by the mortgagee in his character as such. (Dalton vs. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare vs.
Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phenix Insurance Co. (136 U. S., 287; 34 L. ed., 408), it
appeared that one Kearney made application to an insurance company for insurance on certain property in his hands as
receiver and it was understood between him and the company's agent that, in case of loss, the proceeds of the policy
should accrue to him and his successors as receiver and to others whom it might concern. However, the policy, as issued,
was so worded as to be payable only to him as receiver. In an action brought on the policy by a successor of Kearney, it
was alleged that the making of the contract in this form was due to inadvertence, accident, and mistake upon the part of
both Kearney and the company.

Said the court:

"If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the plaintiff is
entitled to have it reformed."
In another case the same court said:
"We have before us a contract from which, by mistake, material stipulations have been omitted, whereby the true intent
and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement as to
insurance, which, in point of time, preceded the preparation and delivery of the policy, and this is demonstrated by legal
and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement there has
been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the
property less than that agreed to be insured. The written agreement did not effect that which the parties intended. That a
court of equity can afford relief in such a case, is, we think, well settled by the authorities." (Smell vs. Atlantic, etc., Ins.
Co., 98 U. S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear
that the contract failed to express the real agreement between the parties. (Philippine Sugar Estates Development
Company vs. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government of Philippine Islands vs.
Philippine Sugar Estates Development Co., 30 Phil. Rep., 27.)

In the case now before us the proof is entirely insufficient to authorize the application of the doctrine stated in the
foregoing cases, for it is by no means clear from the testimony of Brias and none other was offered that the parties
intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the defendant
Harding is not entitled to relief in any aspect of the case.

Page 24 of 43
Social Security System V. Davac (1966)
G.R. No. L-21642 July 30, 1966
Lessons Applicable: Invalid Designation (Insurance)

FACTS:
 Petronilo Davac, a former employee of Lianga Bay Logging Co., Inc. became a member of the Social Security System
(SSS) he designated Candelaria Davac as his beneficiary and indicated his relationship to her as that of "wife"
 Lourdes Tuplano his legal wife and their son Romeo Davac and Candelaria Davac and their minor daughter Elizabeth
Davac filed their claims
 Social Security Commission: Candelaria Davac
ISSUE: W/N Candelaria Davac can claim and New Civil Code 739 is not applicable

HELD: YES.
 she was not guilty of concubinage, there being no proof that she had knowledge of the previous marriage of her
husband Petronilo
 The amounts that may thus be received cannot be considered as property earned by the member during his lifetime
 if there is a named beneficiary and the designation is not invalid (as it is not so in this case), it is not the heirs of the
employee who are entitled to receive the benefits (unless they are the designated beneficiaries themselves). It is only
when there is no designated beneficiaries or when the designation is void, that the laws of succession are applicable.
And we have already held that the Social Security Act is not a law of succession.

SSS vs Davac
124 Phil. 255

BARRERA, J.:
This is an appeal from the resolution of the Social Security Commission declaring respondent Candelaria Davac as the
person entitled to receive the death benefits payable for the death of Petronilo Davac.

The facts of the case as found by the Social Security Commission, briefly are: The late Petronilo Davac, a former
employee of Lianga Bay Logging Co. Inc. became a member of the Social Security System (SSS for short) on September
1, 1957. As such member, he was assigned SS I.D. No. 08-007137. In SSS Form E-1 (Member's Record) which he
accomplished and filed with the SSS on November 21, 1957, he designated respondent Candelaria Davac as his
beneficiary and indicated his relationship to her as that of "wife". He died on April 5, 1959 and thereupon, each of the
respondents (Candelaria Davac and Lourdes Tuplano) filed their claims for death benefit with the SSS. It appears from
their respective claims and the documents submitted in support thereof, that the deceased contracted two marriages, the
first, with claimant Lourdes Tuplano on August 29, 1946, who bore him a child, Romeo Davac, and the second, with
claimant Candelaria Davac on January 18, 1949, with whom he had a minor daughter, Elizabeth Davac. Due to their
conflicting claims, the processing thereof was held in abeyance, whereupon the SSS filed this petition praying that
respondents be required to interplead and litigate between themselves their conflicting claims over the death benefits in
question.

On February 25, 1968, the Social Security Commission issued the resolution referred to above. Not satisfied with the said
resolution, respondent Lourdes Tuplano brought to us the present appeal.

The only question to be determined herein is whether or not the Social Security Commission acted correctly in declaring
respondent Candelaria Davac as the person entitled to receive the death benefits in question.

Section 13, Republic Act No. 1161, as amended by Republic Act No. 1792, in force at the time of Petronilo Davac's death
on April 5, 1959, provides:

"SEC. 13. Upon the covered employee's death or total and permanent disability under such conditions as the Commission
may define, before becoming eligible for retirement and if either such death or disability is not compensable under the
Workmen's Compensation Act, he or in case of his death, his beneficiaries, as recorded by his employer shall be entitled
to the following benefit: * * *." (Italics supplied.)

Page 25 of 43
Under this provision, the beneficiary "as recorded" by the employee's employer is the one entitled to the death benefits. In
the case of Tecson vs. Social Security System, (L-15798, December 28, 1961), this Court, construing said Section 13,
said:

"it may be true that the purpose of the coverage under the Social Security System is protection of the employee as well as
of his family, but this purpose or intention of the law cannot be enforced to the extent of contradicting the very provisions
of said law as contained in Section 13, thereof, * * *. When the provisions of a law are clear and explicit, the courts can do
nothing but apply its clear and explicit provisions (Velasco vs. Lopez, 1 Phil. 720; Caminetti vs. U.S., 242 U.S. 470, 61 L.
ed. 442)."
But appellant contends that the designation herein made in the person of the second and, therefore, bigamous wife is null
and void, because (1) it contravenes the provisions of the Civil Code, and (2) it deprives the lawful wife of her share in the
conjugal property as well of her own and her child's legitime in the inheritance.

As to the first point, appellant argues that a beneficiary under the Social Security System partakes of the nature of a
beneficiary in a life insurance policy and, therefore, the same qualifications and disqualifications should be applied.

Article 2012 of the New Civil Code provides:

"ART. 2012. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a
life insurance policy by the person who cannot make any donation to him according to said article."
And, Article 739 of the same Code prescribes:

"ART. 739. The following donations shall be void: "(1) Those made between persons who were guilty of adultery or
concubinage at the time of the donation;

* * * * * * *
Without deciding whether the naming of a beneficiary of the benefits accruing from membership in the Social Security
System is a donation, or that it creates a situation analogous to the relation of an insured and the beneficiary under a life
insurance policy, it is enough, for the purpose of the instant case, to state that the disqualification mentioned in Article 739
is not applicable to herein appellee Candelaria Davac because she was not guilty of concubinage, there being no proof
that she had knowledge of the previous marriage of her husband Petronilo.[1]

Regarding the second point raised by appellant, the benefits accruing from membership in the Social Security System do
not form part of the properties of the conjugal partnership of the covered member. They are disbursed from a public
special fund created by Congress in pursuance to the declared policy of the Republic "to develop, establish gradually and
perfect a social security system which * * * shall provide protection against the hazards of disability, sickness, old age and
death."[2]

The sources of this special fund are the covered employee's contribution (equal to 2-1/2 per cent of the employee's
monthly compensation);[3] the employer's contribution (equivalent to 3-1/2 per cent of the monthly compensation of the
covered employee);[4]and the Government contribution which consists in yearly appropriation of public funds to assure the
maintenance of an adequate working balance of the funds of the System.[5] Additionally, Section 21 of the Social Security
Act, as amended by Republic Act 1792, provides:

"SEC. 21. Government Guarantee. The benefits prescribed in this Act shall not be diminished and to guarantee said
benefits the Government of the Republic of the Philippines accepts general responsibility for the solvency of the System."
From the foregoing provisions, it appears that the benefit receivable under the Act is in the nature of a special privilege or
an arrangement secured by the law pursuant to the policy of the State to provide social security to the workingmen. The
amounts that may thus be received cannot be considered as property earned by the member during his lifetime. His
contribution to the fund, it may be noted, constitutes only an insignificant portion thereof. Then, the benefits are
specifically declared not transferable,[6] and exempted from tax, legal processes, and lien.[7] Furthermore, in the settlement
of claims thereunder, the procedure to be observed is governed not by the general provisions of law, but by rules and
regulations promulgated by the Commission. Thus, if the money is payable to the estate of a deceased member, it is the
Commission, not the probate or regular court that determines the Person or persons to whom it is payable.[8] That the
benefits under the Social Security Act are not intended by the lawmaking body to form part of the estate of the covered
members may be gathered from the subsequent amendment made to Section 15 thereof, as follows :

Page 26 of 43
"SEC. 15. Non-transfer ability of benefit. The System shall pay the benefits provided for in this Act to such person as may
be entitled thereto in accordance with the provisions of this Act. Such benefits are not transferable and no power of
attorney or other document executed by those entitled thereto in favor of any agent, attorney, or any other individual for
the collection thereof in their behalf shall be recognized except when they are physically and legally unable to collect
personally such benefits: Provided, however, That in the case of death benefits, if no beneficiary has been designated or
the designation thereof is void, said benefits shall be paid to the legal heirs in accordance with the laws of succession."
(Rep. Act 2658, amending Rep. Act 1161.)

In short, if there is a named beneficiary and the designation is not invalid (as it is not so in this case), it is not the heirs of
the employee who are entitled to receive the benefits (unless they are the designated beneficiaries themselves). It is only
when there is no designated beneficiaries or when the designation is void, that the laws of succession are
applicable. And we have already held that the Social Security Act is not a law of succession. [9]

Wherefore, in view of the foregoing considerations, the resolution of the Social Security Commission appealed from is
hereby affirmed, with costs against the appellant. So ordered.

Page 27 of 43
CONSUEGRA v. GOVERNMENT SERVICE INSURANCE SYSTEM +
147 Phil. 269
ZALDIVAR, J.:
Appeal on purely questions or law from the decis-ion of the Court of First Instance of Surigao del Norte, dated March 7,
1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are the following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the office of the District Engineer
in the province of Surigao del Norte. In his lifetime, Consuegra contracted two marriages, the first with herein respondent
Rosario Diaz, solem-nized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on July 15, 1937, out of
which mar-riage were born two children, namely, Jose Consuegra, Jr. and Pedro Consuegra, but both predeceased their
father; and the second, which was contracted in good faith while the first marriage was subsisting, with herein petitioner
Basilia Berdin, on May 1, 1957 in the same parish and municipality, out of which marriage were born seven children,
namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz,* all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when Consuegra died on Septem-ber 26,
1965, the proceeds of his life insurance under policy No. 601801 were paid by the GSIS to petitioner Basilia Berdin and
her children who were the beneficia-ries named in the policy. Having been in the service of the government for 22.5028
years, Consuegra was entitled to retirement insurance benefits in the sum of P6,304.47 pursuant to Section 12(c) of
Commonwealth Act 186 as amended by Republic Acts 1616 and 3836. Consuegra did not designate any beneficiary who
would receive the retirement insurance benefits due to him. Respondent Rosario Diaz, the widow by the first marriage,
filed a claim with the GSIS asking that the retirement insurance benefits be paid to her as the only legal heir of
Consuegra, considering that the deceased did not designate any beneficiary with respect to his retirement insurance
benefits. Petitioner Basilia Berdin and her children, likewise, filed a similar claim with the GSIS, asserting that being the
beneficiaries named in the life insurance policy of Consuegra, they are the only ones entitled to receive the retirement
insurance benefits due the deceased Consuegra. Resolving the conflicting claims, the GSIS ruled that the legal heirs of
the late Jose Consuegra were Rosario Diaz, his widow by his first marriage who is entitled to one-half, or 8/16, of the
retirement insurance benefits, on the one hand; and Basilia Berdin, his widow by the second marriage and their seven
children, on the other hand, who are entitled to the remaining one-half, or 8/16, each of them to receive an equal share of
1/16.
Dissatisfied with the foregoing ruling and appor-tionment made by the GSIS, Basilia Berdin and her children[1] filed on
October 10, 1966 a petition for mandamus with preliminary injunction in the Court of First Instance of Surigao, naming as
respondents the GSIS, the Commissioner of Public Highways, the Highway District Engineer of Surigao del Norte, the
Commis-sioner of Civil Service, and Rosario Diaz, praying that they (petitioners therein) be declared the legal heirs and
exclusive beneficiaries of the retirement insurance of the late Jose Consuegra, and that a writ of preliminary injunction be
issued restraining the implementation of the adjudication made by the GSIS. On October 26, 1966, the trial court issued
an order requiring therein respondents to file their respective answers, but refrained from issuing the writ of preli-minary
injunction prayed for. On February 11, 1967, the parties submitted a stipulation of facts, prayed that the same be
admitted and approved and that judgment be rendered on the basis of the stipulation of facts. On March 7, 1967, the
court below rendered judgment, the pertinent portions of which are quoted hereunder:
"This Court, in conformity with the foregoing stipulation of facts, likewise is in full accord with the parties with respect to the
authority cited by them in support of said stipulation and which is herein-below cited for purposes of this judgment, to wit:
'When two women innocently and in good faith are legally united in holy matrimony to the same man, they and their
children, born of said wedlock, will be regarded as legiti-mate children and each family be entitled to one half of the estate.
Lao & Lao vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon v. Bejec, 74 Phil. 88.
"WHEREFORE, in view of the above premises, this Court is of the opinion that the foregoing stipulation of facts is in order
and in accordance with law and the same is hereby approved. Judg-ment, therefore, is hereby rendered declaring the
petitioner Basilia Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria Lourdes, Jose Jr., Rodrigo,
Lenida and Luis, all surnamed Consuegra, beneficiary and entitled to one-half (1/2), of the retirement benefit in the
amount of Six Thousand Three Hundred Four Pesos and Fourty-Seven Centavos (P6,304.47) due to the deceased Jose
Consuegra from the Government Service Insurance System or the amount of P3,152.235 to be divided equally among
them in the propor-tional amount of 1/16 each. Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby
declared beneficiary and entitled to the other half of the retirement benefit of the late Jose Consuegra or the amount of
P3,152.235. The case with respect to the Highway District Engineer of Surigao del Norte is hereby ordered dismissed."
Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her children.
It is the contention of appellants that the lower court erred in not holding that the designated beneficiaries in the life
insurance of the late Jose Cons-uegra are also the exclusive beneficiaries in the retirement insurance of said deceased.
In other words, it is the submission of appellants that because the deceased Jose Consuegra failed to designate the
bene-ficiaries in his retirement insurance, the appellants who were the beneficiaries named in the life insurance should
automatically be considered the beneficiaries to receive the retirement insurance benefits, to the exclusion of respondent
Rosario Diaz. From the ar-guments adduced by appellants in their brief We gather that it is their stand that the system of

Page 28 of 43
life insurance and the system of retirement insurance, are provided for in Commonwealth Act 186 as amended, are simply
complementary to each other, or that one is a part or an extension of the other, such that who-ever is named the
beneficiary in the life insurance is also the beneficiary in the retirement insurance when no such beneficiary is named in
the retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Govern-ment Service Insurance System is Commonwealth Act 186 which was
enacted by the National Assembly on November 14, 1936. As originally approved, Commonwealth Act 186 pro-vided for
the compulsory membership in the Government Service Insurance System of all regularly and permanent-ly appointed
officials and employees of the government, considering as automatically insured on life all such officials and employees,
and issuing to them the corres-ponding membership policy under the terms and conditions as provided in the Act.[2]
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act 186 was amended by Republic
Act 660 which was enacted by the Congress of the Philippines on June 16, 1951, and, among others the amendatory Act
provided that aside from the system of life insurance under the Government Service Insurance System there was also
established the system of retire-ment insurance. Thus, We will note in Republic Act 660 that there is a chapter on life
insurance and another chapter on retirement insurance.[3] Under the chapter on life insurance are sections 8,9 and 10 of
Common-wealth Act 186, as amended; and under the chapter on retirement insurance are sections 11, 12, 13 and 13-A.
On May 31, 1957, Republic Act 1616 was enacted by Congress, amending section 12 of Commonwealth Act 186 as
amended by Republic Act 660, by adding thereto two new subsections, designated as subsections (b) and (c). This
subsection (c) of section 12 of Common-wealth Act 186, as amended by Republic Acts 660, 1616 and 3096, was again
amended by Republic Act 3836 which was enacted on June 22, 1963. The pertinent provisions or subsection (c) of
Section 12 of Com-monwealth Act 186, as thus amended and reamended, read as follows:
"(c) Retirement is likewise allowed to a member, regardless of age, who has rendered at least twenty years of service.
The benefit shall, in addition to the return of his personal contributions plus interest and the payment of the correspond-ing
employer's premiums described in sub-section (a) or Section 5 hereof, without interest, be only a gratuity equivalent to
one month's salary for every year of service, based on the highest rate received, but not to exceed twenty four months;
Provided, That the retiring officer or employee has been in the service of the said employer or office for at least four years,
immediate-ly preceding his retirement.
x x x x
"The gratuity is payable by the employ-er or office concerned which is hereby autho-rized to provide the necessary
appropriation to pay the same from any unexpended items of appropriations or savings in its appropria-tions.
"Elective or appointive officials and employees paid gratuity under this subsection shall be entitled to the commutation of
the unused vacation and sick leave, based on the highest rate received, which they may have to their credit at the time or
retirement."
Jose Consuegra died on September 26, 1965, and so at the time of his death he had acquired rights under the above-
quoted provisions of subsection (c) of Section 12 of Com. Act 186, as finally amended by Rep. Act 3836 on June 22,
1963. When Consuegra died on September 26, 1965, he had to his credit 22.5028 years or service in the government,
and pursuant to the above-quoted provisions of subsection (c) of Sec-tion 12 of Com. Act 186, as amended, on the basis
of the highest rate of salary received by him which was P282.83 per month, he was entitled to receive retire-ment
insurance benefits in the amount of P6,304.47. This is the retirement benefits that are the subject of dispute between the
appellants, on the one hand, and the appellee Rosario Diaz, on the other, in the present case. The question posed is: to
whom should this retirement insurance benefits or Jose Consuegra be paid, because he did not, or failed to, designate the
beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on September 26, 1965, it follows that he
started in the government service some-time during the early part of 1943, or before 1943. In 1943 Com. Act 186 was not
yet amended, and the only benefits then provided for in said Com. Act 186 were those that proceed from a life insurance.
Upon enter-ing the government service Consuegra became a compul-sory member of the GSIS, being automatically
insured on his life, pursuant to the provisions of Com. Act 186 which was in force at the time. During 1943 the opera-tion
of the Government Service Insurance System was suspended because of the war, and the operation was resumed
sometime in 1946. When Consuegra designated his beneficiaries in his life insurance he could not have intended those
beneficiaries of his life insurance as also the beneficiaries of his retirement insurance because the provisions on
retirement insurance under the GSIS came about only when Com. Act 186 was amended by Rep. Act 660 on June 16,
1951. Hence, it cannot be said that because herein appellants were designated beneficiaries in Consuegra's life
insurance they automatically became the beneficiaries also of his retire-ment insurance. Rep. Act 660 added to Com. Act
186 provisions regarding retirement insurance, which are Sections 11, 12, and 13 of Com. Act 186, as amended.
Subsection (b) of Section 11 of Com. Act 186, as amend-ed by Rep. Act 660, provides as follows:
"(b) Survivors benefit. Upon death before he becomes eligible for retirement, his beneficiaries as recorded in the
application for retirement annuity filed with the System shall be paid his own premiums with interest or three per centum
per annum, compounded monthly. If on his death he is eligible for retirement, then the automatic retirement annuity or the
annuity chosen by him previously shall be paid accordingly."

Page 29 of 43
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186, as amended by Rep. Act 660,
clearly indicate that there is need for the employee to file an application for retirement insurance benefits when he
becomes a member of the GSIS, and he should state in his application the beneficiary of his retirement insurance.
Hence, the beneficiary named in the life insurance does nor automatically become the beneficiary in the retirement
insurance un-less the same beneficiary in the life insurance is so designated in the application for retirement insurance.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life insurance fund and for a
retirement insurance fund. There was no such pro-vision in Com. Act 186 before it was amended by Rep. Act 660. Thus,
subsections (a) and (b) of Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, part-ly read as follows:
"(a) Life insurance fund. - This shall consist of all premiums for life insurance benefit and/or earnings and savings
therefrom. It shall meet death claims as they may arise or such equities as any member may be entitled to, under the
conditions of his policy, and shall maintain the required reserves to the end of guaranteeing the fulfillment of the life
insurance contracts issued by the System...."
"(b) Retirement insurance fund. - This shall consist of all contributions for retirement insurance benefit and of earn-ings
and savings therefrom. It shall meet annuity payments and establish the re-quired reserves to the end of the
guaran-teeing the fulfillment of the contracts issued by the System...."
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its members one is the life insurance
and the other is the retirement insurance. These two distinct systems of benefits are paid out from two distinct and
separate funds that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named the beneficiary in the life insurance
policy. As in the case of a life insurance provided for in the Insurance Act (Act 2427, as amended), the beneficiary in a life
insurance under the GSIS may not necessarily be an heir or the insured. The insured in a life insurance may designate
any person as beneficiary unless disqualified to be so under the provisions of the Civil Code.[4] And in the absence of any
beneficiary named in the life in-surance policy, the proceeds of the insurance will go to the estate of the insured.
Retirement insurance is primarily intended for the benefit of the employee - to provide for his old age, or incapacity, after
rendering service in the government for a required number of years. If the employee reaches the age of retirement, he
gets the retirement benefits even to the exclusion of the bene-ficiary or beneficiaries named in his application for
retirement insurance. The beneficiary of the retire-ment insurance can only claim the proceeds of the retirement
insurance if the employee dies before retirement. If the employee failed or overlooked to state the beneficiary of his
retirement insurance, the retirement benefits will accrue to his estate and will be given to his legal heirs in accordance with
law, as in the case of a life insurance if no beneficiary is named in the insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly acted when it ruled that the pro-ceeds of the retirement
insurance of the late Jose Consuegra should be divided equally between his first living wife Rosario Diaz, on the one
hand, and his second wife Basilia Berdin and his children by her, on the other; and the lower court did not commit er-ror
when it confirmed the action of the GSIS, it being accepted as a fact that the second marriage of Jose Consuegra to
Basilia Berdin was contracted in good faith. The lower court has correctly applied the ruling of this Court in the case of
Lao, et al., vs. Dee Tim, et al., 45 Phil. 739, as cited in the sti-pulation of facts and in the decision appealed from.[5] In the
recent case of Gomez vs. Lipana, L-23214, June 30, 1970,[6] this Court, in construing the rights of two women who were
married to the same man - a situation more or less similar to the case of appellant Basilia Berdin and appellee Rosario
Diaz - held "that since the defendant's first marriage has not been dissolved or declared void the conjugal partnership
established by that marriage has not ceased. Nor has the first wife lost or relinquished her status as putative heir of her
husband under the new Civil Code, entitled to share in his estate upon his death should she survive him. Consequently,
whether as conjugal partner in a still subsisting marriage or as such putative heir she has an interest in the husband's
share in the property here in dispute...." And with respect to the right of the second wife, this Court observed that although
the second marriage can be presumed to be void ab initio as it was celebrated while the first marriage was still subsisting,
still there is need for judicial declara-tion of such nullity. And inasmuch as the conjugal partnership formed by the second
marriage was dissolved before judicial declaration or its nullity, "[t]he only just and equitable solution in this case would be
to recognize the right of the second wife to her share of one-half in the property acquired by her and her husband, and
consider the other half as pertaining to the conjugal partnership of the first marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitioners-appellants.
IT IS SO ORDERED.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando, Teehankee, Barredo, Vil

Page 30 of 43
Garcia v. HongKong Fire and Marine Insurance Co. - Wrong Policy
45 PHIL 122
Facts:> Garcia had his merchandise insured by Hongkong Fire and Marine Insurance Co.
> The insurance company however made a mistake and issued a policy covering the building where the merchandise
was stored. (The building was not owned by Garcia)
> The policy was written in English, of which Garcia was ignorant, so he could not have noticed the error of the insurance
company.
> Said policy was later on assigned by Garcia to PNB to secure a loan. PNB acknowledged receipt of said policy,
referring to it as a policy covering the merchandise.
> The insurance company made the necessary endorsements to PNB.
> The building which housed the merchandise was later razed by fire. The insurance company refused to pay due to the
fact that the policy indicates insurance on the building and not on the merchandise.
Issue:Whether or not Garcia can collect.
Held: YES. The defense of the insurer is purely technical. The mistake was obviously on the part of the insurer when it
issued a wrong policy. It cannot deny such allegation due to the fact that it even confirmed with PNB the nature of said
policy when it was endorsed. Garcia could not have noticed the mistake due to his ignorance of the English language.

Garcia v. HongKong Fire and Marine Insurance Co. - Wrong Policy

45 Phil. 123

STATEMENT
After formal pleas, the plaintiffs 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, plaintiifs pray judgment for that amount, with legal
interest from the date of the 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 any 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 question was issued and delivered to him,
and it was issued on the building which 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.

Page 31 of 43
"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 may be 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 to 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 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 then 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
knowledge 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, the answer of the defendant is confined to a 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 reasons 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

Page 32 of 43
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.
Araullo, C.J., Johnson, Malcolm, Avanceña, Villamor, and Romualdez, JJ., concur.
Street, J., dissents.

Page 33 of 43
[G.R. No. 9370. March 31, 1915. ]
K. S. YOUNG, Plaintiff-Appellee, v. THE MIDLAND TEXTILE INSURANCE COMPANY, Defendant-Appellant.

SYLLABUS
1. INSURANCE; EFFECT OF VIOLATION OF CONTRACT OF. — Contracts of insurance are contracts of indemnity,
Upon the terms and conditions specified therein. Parties have a right to impose such reasonable conditions at the time of
the making of the contract as they deem wise and necessary. The rate of premium is measured by the character of the
risk assumed. The insurer, for a comparatively small consideration, undertakes to guarantee the insured against loss or
damage, upon the terms and conditions agreed upon, and upon no other. When the insurer is called upon to pay, in case
of loss, he may justly insist upon a fulfillment of the terms of the contract. If the insured cannot bring himself within the
terms and conditions of the contract, he is not entitled to recover for any loss suffered. The terms of the contract constitute
the measure of the insurer’s liability. If the contract has been terminated, by a violation of its terms on the part of the
insured, there can be no recovery. Compliance with the terms of the contract is a condition precedent to the right of
recovery. Courts cannot make contracts for the parties. While contracts of insurance are construed most favorably to the
insured yet they must be construed according to the sense and meaning of the terms which the parties themselves have
used. Astute and subtle distinctions should not be permitted, when the language of the contract is plain and unambiguous.
Such distinctions tend to bring the law itself into disrepute.

2. ID.; "STORED;" STORING. — The word "stored" has been defined to be a deposit in a store or warehouse for
preservation or safe keeping; to put away for future use, especially for future consumption; to place in a warehouse or
other place of deposit for safe keeping. Said definition does not include a deposit in a store, in small quantities, for daily
use. "Daily use" precludes the idea of deposit for preservation or safe keeping, as well as a deposit for future consumption
or safe keeping.

3. ID.; VIOLATION OF TERMS OF CONTRACT WHICH DOES NOT CONTRIBUTE TO LOSS OR INJURY. — A violation
of the terms of a contract of insurance, by either party, will constitute the basis for a termination of the contractual
relations, at the election of the other. The right to terminate the contractual relations exists even though the violation was
not the direct cause of the loss. In the present case, the deposit of the "hazardous goods," in the building insured, was a
violation of the terms of the contract. Although the hazardous goods did not contribute to the loss, the insurer, at his
election, was relieved from liability Said deposit created a new risk, not included in the terms of the contract. The insurer
had neither been paid, nor had he entered into a contract, to cover the increased risk.

DECISION

JOHNSON, J. :

The purpose of the present action is to recover the sum of P3,000 upon an insurance policy. The lower court rendered a
judgment in favor of the plaintiff and against the defendant for the sum of P2,708.78, and costs. From that judgment the
defendant appealed to this court.

The undisputed facts upon which said action is based are as follows:chanrob1es virtual 1aw library

1. The plaintiff conducted a candy and fruit store on the Escolta, in the city of Manila, and occupied a building at ’321 Calle
Claveria, as a residence and bodega (storehouse).

2. On the 29th of May, 1912, the defendant, in consideration of the payment of a premium of P60, entered into a contract
of insurance with the plaintiff (policy No. 509105) by the terms of which the defendant company, upon certain conditions,
promised to pay to the plaintiff the sum of P3,000, in case said residence and bodega and contents should be destroyed
by fire.

3. One of the conditions of said contract of insurance is found in "warranty B" and is as follows: "Warranty B. It is hereby
declared and agreed that during the pendency of this policy no hazardous goods be stored or kept for sale, and no
hazardous trade or process be carried on, in the building to which this insurance applies, or in any building connected
therewith."cralaw virtua1aw library

4. On the 4th or 5th of February, 1913, the plaintiff placed in said residence and bodega three boxes, 18 by 18 by 20

Page 34 of 43
inches measurement, which belonged to him and which were filled with fireworks.

5. On the 18th day of March, 1913, said residence and bodega and the contents thereof were partially destroyed

6. Said fireworks had been given to the plaintiff by the former owner of the Luneta Candy Store; that the plaintiff intended
to use the same in the celebration of the Chinese new year; that the authorities of the city of Manila had prohibited the use
of fireworks on said occasion, and that the plaintiff then placed the same in said bodega, where they remained from the
4th or 5th of February, 1913, until after the fire of the 18th of March, 1913.

7. Both of the parties agree that said fireworks come within the phrase "hazardous goods," mentioned in said "warranty B"
of the policy.

8. That said fireworks were found in a part of the building not destroyed by the fire; that they in no way contributed to the
fire, or to the loss occasioned thereby.

The only question presented by the parties is whether or not the placing of said fireworks in the building insured, under the
conditions above enumerated, they being "hazardous goods," is a violation of the terms of the contract of insurance and
especially of "warranty B." "Warranty B" provides that "no hazardous goods be stored" in the building insured. It is
admitted by both parties that the fireworks are "hazardous goods." The defendant alleged that they were "stored." The
plaintiff contends that under all the facts and circumstances of the case, they were not "stored" in said building, and that
the placing of them in the building was not a violation of the terms of the contract. Both the plaintiff and defendant agree
that if they were "hazardous goods," and if they were "stored," then the act of the plaintiff was a violation of the terms of
the contract of insurance and the defendant was justified in repudiating its liability thereunder.

This leads us to a consideration of the meaning of the word "stored" as used in said "warranty B." While the word "stored"
has been variously defined by authors, as well as by courts, we have found no case exactly analogous to the present. The
plaintiff says that he placed said fire- works in the bodega after he had been notified that he could not use them on the
Chinese new year, in order that he might later send them to a friend in the provinces. Whether a particular article is
"stored" or not must, in some degree depend upon the intention of the parties. The interpretation of the word "stored" is
quite difficult, in view of the many decisions upon the various conditions presented. Nearly all of the cases cited by the
lower court are cases where the article was being put to some reasonable and actual use, which might easily have been
permitted by the terms of the policy, and within the intention of the parties and excepted from the operation of the
warranty, like the present. Said decisions are upon cases like:chanrob1es virtual 1aw library

1. Where merchants have had or kept the "hazardous" articles in small quantities, and for actual daily use, for sale, .such
as gasoline, gunpowder, etc.;

2. Where such articles have been brought on the premises for actual use thereon, and in small quantities, such as oil,
paints, etc; and

3. Where such articles or goods were used for lighting purposes, and in small quantities.

The author of the Century Dictionary defines the word "store" to be a deposit in a store or warehouse for preservation or
safe keeping; to put away for future use, especially for future consumption; to place in a warehouse or other place of
deposit for safe keeping. See also the definitions given by the Standard Dictionary, to the same effect.

Said definitions, of course, do not include a deposit in a store, in small quantities, for daily use. "Daily use" precludes the
idea of a deposit for preservation or safe keeping, as well as a deposit for future consumption, or safe keeping.

In the present case no claim is made that the "hazardous goods" were placed in the bodega for present or daily use. It is
admitted that they were placed in the bodega "for future use," or for future consumption, or for safe keeping. The plaintiff
makes no claim that he deposited them there with any other idea than "for future use" — for future consumption. It seems
clear to us that the "hazardous goods" in question were "stored" in the bodega, as that word is generally defined. That
being true, suppose the defendant had made an examination of the premises, even in the absence of a fire, and had
found the "hazardous goods" there, under the conditions above described, would it not have been justified, then and
there, in declaring the policy null and of no effect by reason of a violation of its terms on the part of the plaintiff? If it might,
then may it not repudiate its liability, even after the fire? If the "warranty" is a term of the contract, will not its violation
cause a breach and justify noncompliance or a repudiation?

Page 35 of 43
Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The parties have
a right to impose such reasonable conditions at the time of the making of the contract as they may deem wise and
necessary. The rate of premium is measured by the character of the risk assumed. The insurance company, for a
comparatively small consideration, undertakes to guarantee the insured against loss or damage, upon the terms and
conditions agreed upon, and upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may
justly insist upon a fulfillment of these terms. If the insured cannot bring himself within the conditions of the policy, he is
not entitled to recover for the loss. The terms of the policy constitute the measure of the insurer’s liability, and in order to
recover the insured must show himself within those terms; and if it appears that the contract has been terminated by a
violation, on the part of the insured, of its conditions, then there can be no right of recovery. The compliance of the insured
with the terms of the contract is a condition precedent to the right of recovery. 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. (Imperial Fire Ins.
Co. v. County of Coos, 151 U. S., 452; Kyte v. Commercial Union Assurance Co., 149 Mass., 116, 122.) The conditions of
contracts of insurance, when plainly expressed in a policy, are binding upon the parties and should be enforced by the
courts, if the evidence brings the case clearly within their meaning and intent. It tends to bring the law itself into disrepute
when, by astute and subtle distinctions, a plain case is attempted to be taken without the operation of a clear, reasonable,
and material obligation of the contract. (Mack v. Rochester German Ins. Co., 106 N. Y., 560, 564.)

The appellant argues, however, that in view of the fact that the "storing" of the fireworks on the premises of the insured did
not contribute in any way to the damage occasioned by the fire, he should be permitted to recover — that the "storing" of
the "hazardous goods" in no way caused injury to the defendant company. That argument, however, is beside the
question, if the "storing" was a violation of the terms of the contract. The violation of the terms of the contract, by virtue of
the provisions of the policy itself, terminated, at the election of either party, the contractual relations. (Kyte v. Commercial
Union Assurance Co., 149 Mass., 116, 122.) The plaintiff paid a premium based upon the risk at the time the policy was
issued. Certainly it cannot be denied that the placing of the firecrackers in the building insured increased the risk. The
plaintiff had not paid a premium based upon the increased risk, neither had the defendant issued a policy upon the theory
of a different risk. The plaintiff was enjoying, if his contention may be allowed, the benefits of an insurance policy upon
one risk, whereas, as a matter of fact, it was issued upon an entirely different risk. The defendant had neither been paid
nor had issued a policy to cover the increased risk. An increase of risk which is substantial and which is continued for a
considerable period of time, is a direct and certain injury to the insurer, and changes the basis upon which the contract of
insurance rests. (Kyte v. Commercial Union Assurance Co. (supra); Frost’s Detroit Lumber Works v. Millers’ Mutual Ins.
Co., 37 Minn., 300, 302; Moore v. Phoenix Ins. Co., 62 N. H., 240; Ferree v. Oxford Fire & Life Ins. Co., 67 Pa. State,
373.)

Therefore and for the foregoing reasons, the judgment of the lower court is hereby revoked and the defendant is hereby
relieved from any responsibility under said complaint, and, without any finding as to costs, it is so ordered.

Arellano, C.J., Torres, Carson, Trent and Araullo, JJ., concur.

Moreland, J., concurs in the result.

Page 36 of 43
G.R. No. 94052 August 9, 1991
ORIENTAL ASSURANCE CORPORATION, vs. COURT OF APPEALS AND PANAMA SAW MILL CO., INC.,

MELENCIO-HERRERA, J:

An action to recover on a marine insurance policy, issued by petitioner in favor of private respondent, arising from the loss
of a shipment of apitong logs from Palawan to Manila.

The facts relevant to the present review disclose that sometime in January 1986, private respondent Panama Sawmill
Co., Inc. (Panama) bought, in Palawan, 1,208 pieces of apitong logs, with a total volume of 2,000 cubic meters. It hired
Transpacific Towage, Inc., to transport the logs by sea to Manila and insured it against loss for P1-M with petitioner
Oriental Assurance Corporation (Oriental Assurance). There is a claim by Panama, however, that the insurance coverage
should have been for P3-M were it not for the fraudulent act of one Benito Sy Yee Long to whom it had entrusted the
amount of P6,000.00 for the payment of the premium for a P3-M policy.

Oriental Assurance issued Marine Insurance Policy No. OACM 86/002, which stipulated, among others:

Name of Insured:
Panama Sawmill, Inc.
Karuhatan, Valenzuela
Metro Manila

Vessel:

MT. 'Seminole' Barge PCT 7,000-1,000 cubic meter apitong Logs

Barge Transpac 1,000-1,000 cubic meter apitong Logs
Voyage or Period of Insurance:

From Palawan-ETD January 16, 1986

To: Manila

Subject matter Insured:

2,000 cubic meters apitong Logs

Agreed Value

Amount Insured Hereunder:

Pesos: One Million Only (P1,000,000.00)

Philippine Currency

Premium — P2,500.00 rate — 0.250%

Doc. stamps 187.60 Invoice No. 157862

l % P/tax 25.00

TOTAL P2,712.50

CLAUSES, ENDORSEMENTS, SPECIAL CONDITIONS and WARRANTIES

Warranted that this Insurance is against TOTAL LOSS ONLY. Subject to the following clauses:

— Civil Code Article 1250 Waiver clause

— Typhoon warranty clause

— Omnibus clause.

Page 37 of 43
The logs were loaded on two (2) barges: (1) on barge PCT-7000,610 pieces of logs with a volume of 1,000 cubicmeters;
and (2) on Barge TPAC-1000, 598 pieces of logs, also with a volume of 1,000 cubic meters.

On 28 January 1986, the two barges were towed by one tug-boat, the MT 'Seminole' But, as fate would have it, during the
voyage, rough seas and strong winds caused damage to Barge TPAC-1000 resulting in the loss of 497 pieces of logs out
of the 598 pieces loaded thereon.

Panama demanded payment for the loss but Oriental Assurance refuse on the ground that its contracted liability was for
"TOTAL LOSS ONLY." The rejection was upon the recommendation of the Tan Gatue Adjustment Company.

Unable to convince Oriental Assurance to pay its claim, Panama filed a Complaint for Damages against Ever Insurance
Agency (allegedly, also liable), Benito Sy Lee Yong and Oriental Assurance, before the Regional Trial Court, Kalookan,
Branch 123, docketed as Civil Case No. C-12601.

After trial on the merit, the RTC1 rendered its Decision, with the following dispositive portion:

WHEREFORE, upon all the foregoing premises, judgment is hereby rendered:

1. Ordering the defendant Oriental Assurance Corporation to pay plaintiff Panama Saw Mill Inc. the amount of
P415,000.00 as insurance indemnity with interest at the rate of 12% per annum computed from the date of the filing of the
complaint;

2. Ordering Panama Saw Mill to pay defendant Ever Insurance Agency or Antonio Sy Lee Yong, owner thereof,
(Ever being a single proprietorship) for the amount of P20,000.00 as attorney's fee and another amount of P20,000.00 as
moral damages.

3. Dismissing the complaint against defendant Benito Sy Lee Yong.

SO ORDERED.

On appeal by both parties, respondent Appellate Court2 affirmed the lower Court judgment in all respects except for the
rate of interest, which was reduce from twelve (12%) to six (6%) per annum.

Both Courts shared the view that the insurance contract should be liberally construed in order to avoid a denial of
substantial justice; and that the logs loaded in the two barges should be treated separately such that the loss sustained by
the shipment in one of them may be considered as "constructive total loss" and correspondingly compensable.

In this Petition for Review on Certiorari, Oriental Assurance challenges the aforesaid dispositions. In its Comment,
Panama, in turn, maintains that the constructive total loss should be based on a policy value of P3-M and not P1-M, and
prays that the award to Ever Insurance Agency or Antonio Sy Lee Yong of damages and attorney's fees be set aside.

The question for determination is whether or not Oriental Assurance can be held liable under its marine insurance policy
based on the theory of a divisible contract of insurance and, consequently, a constructive total loss.

Our considered opinion is that no liability attaches.

The terms of the contract constitute the measure of the insurer liability and compliance therewith is a condition precedent
to the insured's right to recovery from the insurer (Perla Compania de Seguros, Inc. v. Court of Appeals, G.R. No. 78860,
May 28, 1990, 185 SCRA 741). Whether a contract is entire or severable is a question of intention to be determined by
the language employed by the parties. The policy in question shows that the subject matter insured was the entire
shipment of 2,000 cubic meters of apitong logs. The fact that the logs were loaded on two different barges did not make
the contract several and divisible as to the items insured. The logs on the two barges were not separately valued or
separately insured. Only one premium was paid for the entire shipment, making for only one cause or consideration. The
insurance contract must, therefore, be considered indivisible.

More importantly, the insurer's liability was for "total loss only." A total loss may be either actual or constructive (Sec. 129,
Insurance Code). An actual total loss is caused by:

(a) A total destruction of the thing insured;

Page 38 of 43
(b) The irretrievable loss of the thing by sinking, or by being broken up;

(c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or

(d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing
insured. (Section 130, Insurance Code).

A constructive total loss is one which gives to a person insured a right to abandon, under Section 139 of the Insurance
Code. This provision reads:

SECTION 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular
portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when
the cause of the loss is a peril injured against,

(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the
peril;

(b) If it is injured to such an extent as to reduce its value more than three-fourths;

xxx xxx xxx

(Emphasis supplied)

Respondent Appellate Court treated the loss as a constructive total loss, and for the purpose of computing the more than
three-fourths value of the logs actually lost, considered the cargo in one barge as separate from the logs in the other.
Thus, it concluded that the loss of 497 pieces of logs from barge TPAC-1000, mathematically speaking, is more than
three-fourths (¾) of the 598 pieces of logs loaded in that barge and may, therefore, be considered as constructive total
loss.

The basis thus used is, in our opinion, reversible error.1âwphi1 The requirements for the application of Section 139 of the
Insurance Code, quoted above, have not been met. The logs involved, although placed in two barges, were not separately
valued by the policy, nor separately insured. Resultantly, the logs lost in barge TPAC-1000 in relation to the total number
of logs loaded on the same barge can not be made the basis for determining constructive total loss. The logs having been
insured as one inseparable unit, the correct basis for determining the existence of constructive total loss is the totality of
the shipment of logs. Of the entirety of 1,208, pieces of logs, only 497 pieces thereof were lost or 41.45% of the entire
shipment. Since the cost of those 497 pieces does not exceed 75% of the value of all 1,208 pieces of logs, the shipment
can not be said to have sustained a constructive total loss under Section 139(a) of the Insurance Code.

In the absence of either actual or constructive total loss, there can be no recovery by the insured Panama against the
insurer, Oriental Assurance.

By reason of the conclusions arrived at, Panama's asseverations in its Comment need no longer be passed upon, besides
the fact that no review, in proper form, has been sought by it.

WHEREFORE, the judgment under review is hereby SET ASIDE and petitioner, Oriental Assurance Corporation, is
hereby ABSOLVED from liability under its marine insurance policy No. OAC-M-86/002. No costs.

SO ORDERED.

Page 39 of 43
G.R. No. 34774 September 21, 1931

EL ORIENTE FABRICA DE TABACOS, INC vs.

JUAN POSADAS, Collector of Internal Revenue, MALCOLM, J.:

The issue in this case is whether the proceeds of insurance taken by a corporation on the life of an important official to
indemnify it against loss in case of his death, are taxable as income under the Philippine Income Tax Law.

The parties submitted the case to the Court of First Instance of Manila for decision upon the following agreed statement of
facts:

1. That the plaintiff is a domestic corporation duly organized and existing under and by virtue of the laws of the
Philippine Islands, having its principal office at No. 732 Calle Evangelista, Manila, P.I.; and that the defendant is
the duly appointed, qualified and acting Collector of Internal Revenue of the Philippine Islands.

2. That on March 18, 1925, plaintiff, in order to protect itself against the loss that it might suffer by reason of the
death of its manager, A. Velhagen, who had had more than thirty-five (35) years of experience in the manufacture
of cigars in the Philippine Islands, and whose death would be a serious loss to the plaintiff, procured from the
Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E.E. Elser, an insurance policy on the
life of the said A. Velhagen for the sum of $50,000, United States currency.

3. That the plaintiff, El Oriente, Fabrica de Tabacos, Inc., designated itself as the sole beneficiary of said policy on
the life of its said manager.

4. That during the time the life insurance policy hereinbefore referred to was in force and effect plaintiff paid from
its funds all the insurance premiums due thereon.

5. That the plaintiff charged as expenses of its business all the said premiums and deducted the same from its
gross incomes as reported in its annual income tax returns, which deductions were allowed by the defendant
upon a showing made by the plaintiff that such premiums were legitimate expenses of its (plaintiff's) business.

6. That the said A. Velhagen, the insured, had no interest or participation in the proceeds of said life insurance
policy.

7. That upon the death of said A. Velhagen in the year 1929, the plaintiff received all the proceeds of the said life
insurance policy, together with the interests and the dividends accruing thereon, aggregating P104,957.88.

8. That over the protest of the plaintiff, which claimed exemption under section 4 of the Income Tax Law, the
defendant Collector of Internal Revenue assessed and levied the sum of P3,148.74 as income tax on the
proceeds of the insurance policy mentioned in the preceding paragraph, which tax the plaintiff paid under instant
protest on July 2, 1930; and that defendant overruled said protest on July 9, 1930.

Thereupon, a decision was handed down which absolved the defendant from the complaint, with costs against the
plaintiff. From this judgment, the plaintiff appealed, and its counsel now allege that:

1. That trial court erred in holding that section 4 of the Income Tax Law (Act No. 2833) is not applicable to the
present case.

2. The trial court erred in reading into the law certain exceptions and distinctions not warranted by its clear and
unequivocal provisions.

3. The trial court erred in assuming that the proceeds of the life insurance policy in question represented a net
profit to the plaintiff when, as a matter of fact, it merely represented an indemnity, for the loss suffered by it thru
the death of its manager, the insured.

Page 40 of 43
 4. The trial court erred in refusing to hold that the proceeds of the life insurance policy in question is not taxable
income, and in absolving the defendant from the complaint.

The Income Tax Law for the Philippines is Act No. 2833, as amended. It is divided into four chapters: Chapter I On
Individuals, Chapter II On Corporations, Chapter III General Administrative Provisions, and Chapter IV General
Provisions. In chapter I On Individuals, is to be found section 4 which provides that, "The following incomes shall be
exempt from the provisions of this law: (a) The proceeds of life insurance policies paid to beneficiaries upon the death of
the insured ... ." Section 10, as amended, in Chapter II On Corporations, provides that, There shall be levied, assessed,
collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every
corporation ... a tax of three per centum upon such income ... ." Section 11 in the same chapter, provides the exemptions
under the law, but neither here nor in any other section is reference made to the provisions of section 4 in Chapter I.

Under the view we take of the case, it is sufficient for our purposes to direct attention to the anomalous and vague
condition of the law. It is certain that the proceeds of life insurance policies are exempt. It is not so certain that the
proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are likewise exempt. But
at least, it may be said that the law is indefinite in phraseology and does not permit us unequivocally to hold that the
proceeds of life insurance policies received by corporations constitute income which is taxable.

The situation will be better elucidated by a brief reference to laws on the same subject in the United States. The Income
Tax Law of 1916 extended to the Philippine Legislature, when it came to enact Act No. 2833, to copy the American
statute. Subsequently, the Congress of the United States enacted its Income Tax Law of 1919, in which certain doubtful
subjects were clarified. Thus, as to the point before us, it was made clear, when not only in the part of the law concerning
individuals were exemptions provided for beneficiaries, but also in the part concerning corporations, specific reference
was made to the exemptions in favor of individuals, thereby making the same applicable to corporations. This was
authoritatively pointed out and decided by the United States Supreme Court in the case of United States vs. Supplee-
Biddle Hardware Co. ( [1924], 265 U.S., 189), which involved facts quite similar to those before us. We do not think the
decision of the higher court in this case is necessarily controlling on account of the divergences noted in the federal
statute and the local statute, but we find in the decision certain language of a general nature which appears to furnish the
clue to the correct disposition of the instant appeal. Conceding, therefore, without necessarily having to decide, the
assignments of error Nos. 1 and 2 are not well taken, we would turn to the third assignment of error.

It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life of its manager, who had had
more than thirty-five years' experience in the manufacture of cigars in the Philippines, to protect itself against the loss it
might suffer by reason of the death of its manager. We do not believe that this fact signifies that when the plaintiff received
P104,957.88 from the insurance on the life of its manager, it thereby realized a net profit in this amount. It is true that the
Income Tax Law, in exempting individual beneficiaries, speaks of the proceeds of life insurance policies as income, but
this is a very slight indication of legislative intention. In reality, what the plaintiff received was in the nature of an indemnity
for the loss which it actually suffered because of the death of its manager.

Page 41 of 43
[G.R. No. L-9602. April 25, 1957.]
In the Matter of the Petition of TEOTIMO RODRIGUEZ TIO TIAM to be admitted a citizen of the Philippines.
TEOTIMO RODRIGUEZ TIO TIAM, Petitioner-Appellee, v. REPUBLIC OF THE PHILIPPINES, Oppositor-Appellant.

Jose L. Rodriguez and Nicolas Jumapao for Appellee.

Solicitor General Ambrosio Padilla and Solicitor Isidro C. Borromeo for Appellant.

SYLLABUS

1. NATURALIZATION; PERSONS BORN IN THE PHILIPPINES OF ALIEN PARENTS WHO HAD NOT BEEN DECLARED FILIPINO
CITIZENS BY JUDICIAL PRONOUNCEMENT BEFORE OVERRULING OF ROA DOCTRINE CAN NOT INVOKE PRINCIPLE OF Jus
Soli. — While this Court has held in the case of Roa v. Collector of Customs, 23 Phil., 313, that persons born in the
Philippines of alien parents are deemed Filipino citizens by virtue of the principle of jus soli, however, petitioner can not
invoke the benefit granted by said decision even if he is similarly situated for the reason that he has not been declared a
Filipino citizen by judicial pronouncement before the overruling of said decision in the case of Tan Chong v. Secretary of
Labor, 79 Phil., 249. This is clearly inferred from the decision in the Tan Chong case wherein this Court has held that "this
decision is not intended or designed to deprive, as it cannot divest, of their Filipino citizenship, those who had been declared
to be Filipino citizens, or upon whom such citizenship had been conferred, by the courts because of the doctrine or principle
of res adjudicata."
cralaw virtua1aw l ibra ry

2. ID.; ID.; RIGHT OF AN APPLICANT ENTITLED TO PHILIPPINE CITIZENSHIP IS NOT AFFECTED BY HEARSAY EVIDENCE. —
Except the testimony of the Chief of the National Bureau of Investigation who declared on a supposed investigation
conducted by an agent of his office, where one S. T. gave sworn statement as to an alleged illicit relation had by petitioner
with a woman, which evidence however is hearsay and incompetent not only because the supposed sworn statement was not
presented as evidence, but also because S. T. never appeared to testify in spite of the opportunity given her by the Court to
do so, the evidence on record shows that petitioner possesses all the qualifications and none of the disqualifications
prescribed in the law for the acquisition of Philippine citizenship. Hence, petitioner is entitled to become a Philippine citizen
subject, however, to the requirements of Republic Act No. 530 relative to the two year suspension of the period prior to the
effectivity of the decision.

DECISION

BAUTISTA ANGELO, J.:

Teotimo Rodriguez Tio Tiam filed this petition for naturalization before the Court of First Instance of Cebu praying that he be
granted Philippine citizenship. During the hearing, petitioner asked that he be allowed to present evidence to show that long
before the filing of the petition he had already possessed the status of a Filipino citizen. The court granted this request and,
after the presentation of the evidence, found the same sufficient to consider petitioner a Filipino citizen and rendered,
accordingly, a decision declaring him Filipino citizen without the need of complying with the requirements of Republic Act No.
530 relative to the two-year suspension of the period prior to the effectivity of the decision. From this decision, the
Government has appealed.

The evidence of petitioner shows that he was born in Cebu City of Chinese parents on January 12, 1904 and has never left
the Philippines since then. He is married to a Chinese woman with whom he has eleven children. He considers himself Filipino
and has voted in the elections held in 1964, 1949, 1951 and 1953. On October 25, 1945, while he was forty-one years old,
he took the oath of allegiance as a citizen of the Philippines before the Court of First Instance of Cebu. His wife and children
never registered as aliens in the Bureau of Immigration. During the occupation, he joined the Cebu Guerrilla Command with
the rank of second lieutenant under General Macario Peralta, Jr. He finished first year high school while all his children are
presently studying in schools recognized by the Government. He is at present a businessman by profession with an average
annual income of P20,000 and is a registered owner of several real properties situated in Cebu City. He has evinced a sincere
desire to learn and embrace the customs, traditions, and ideals of the Filipino people. He has never been convicted of any
crime involving moral turpitude. He is not opposed to organized government nor is he affiliated with any person or
association with subversive ideas. He is not a believer in the practice of polygamy and is not suffering from any mental
ailment or any incurable contagious disease. He believes in the principles underlying the Philippine Constitution and is able to
speak and write English and Chinese languages and the Cebuano dialect. And he was once brought to Camp Murphy,
Philippine Army Headquarters, where he was investigated for the the charge of rebellion and multiple murder, but
subsequently, however, he was cleared by the army authorities.

The Government did not introduce any evidence except the testimony of Mauro Magsaysay, Chief of National Bureau of
Investigation, Cebu Office, who declared that Agent No. 64 was assigned by him to cover the case of petitioner and that said
agent obtained a sworn statement of Sonia Tiu to the effect that petitioner had illicit relations with another woman and begot
Sonia Tiu as a result. However, Sonia Tiu, notwithstanding the opportunity given to her, failed to appear to substantiate the

Page 42 of 43
charge.

The lower court, on the strength of the evidence presented, declared petitioner as having already acquired Filipino citizenship
relying apparently on the decision rendered in the case of Roa v. Collector of Customs (23 Phil., 315), which holds that those
born in the Philippines of alien parents are deemed Filipino citizens by virtue of the principle of jus soli. However, we are of
the opinion that petitioner cannot invoke said decision in his favor for the reason that the same has already been expressly
overruled in the case of Tan Chong v. Secretary of Labor, 79 Phil., 249. Said the Court in said case: jgc:chanro bles. com.ph

"Considering that the common law principle or rule of jus soli obtaining in England and in the United States, as embodied in
the Fourteenth Amendment to the Constitution of the United States, has never been extended to this jurisdiction (section 1,
Act of 1 July 1902 sec. 5, Act of 29 August 1916); considering that the law in force and applicable to the petitioner and the
applicant in the two cases at the time of their birth is sec. 4 of the Philippine Bill (Act of 1 July 1902), as amended by Act of
23 March 1912, which provides that only those inhabitants of the Philippine Islands continuing to reside therein who were
Spanish subjects on the 11th day of April, 1899, and then resided in said Islands, and their children born subsequent thereto,
shall be deemed and held to be citizens of the Philippine Islands, we are of the opinion and so hold that the petitioner in the
first case and the applicant in the second case, who were born of alien parentage, were not and are not, under said section,
citizens of the Philippine Islands."
cralaw virtua 1aw lib rary

Neither can petitioner invoke the benefit of the Roa decision even if he is similarly situated for the reason that he has not
been declared a Filipino citizen by judicial pronouncement before the overruling of said decision. This is clearly inferred from
our decision in the Tan Chong case wherein we stated: "this decision is not intended or designed to deprive, as it cannot
divest, of their Filipino citizenship, those who had been declared to be Filipino citizens, or upon whom such citizenship had
been conferred, by the courts because of the doctrine or principle of res adjudicata. (Italics supplied).

We believe, however, that petitioner can be given the benefit of our naturalization law considering that, as his evidence
shows, he possesses all the qualifications and none of the disqualifications prescribed in the law for the acquisition of
Philippine citizenship. Indeed, the Government has not presented any evidence that may serve as basis for his
disqualification, except the testimony of Mauro Magsaysay who declared on a supposed investigation conducted by an agent
of his office, wherein one Sonia Tiu gave sworn statement as to an alleged illicit relation had by petitioner with a woman,
which evidence however is hearsay and incompetent not only because the supposed sworn statement was not presented as
evidence. but also because Sonia Tiu never appeared to testify in spite of the opportunity given her by the court to do so.
The claim of the Government that petitioner is disqualified to be naturalized because he does not possess good moral
character or has not behaved in a proper and irreproachable manner during his stay in the Philippines, cannot therefore be
sustained.

Wherefore, the decision appealed from is modified in the sense that petitioner is granted Philippine citizenship subject to the
requirements of Republic Act No. 530.

To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the court:

It is earnestly pressed upon us that proceeds of life insurance paid on the death of the insured are in fact capital,
and cannot be taxed as income under the Sixteenth Amendment. Eisner vs. Macomber, 252 U.S., 189, 207;
Merchants' Loan & Trust Co. vs. Smietanka, 255 U.S., 509, 518. We are not required to meet this question. It is
enough to sustain our construction of the act to say that proceeds of a life insurance policy paid on the death of
the insured are not usually classed as income.

. . . Life insurance in such a case is like that of fire and marine insurance, — a contract of indemnity. Central Nat.
Bank vs. Hume, 128 U.S., 195. The benefit to be gained by death has no periodicity. It is a substitution of money
value for something permanently lost, either in a house, a ship, or a life. Assuming, without deciding, that
Congress could call the proceeds of such indemnity income, and validly tax it as such, we think that, in view of the
popular conception of the life insurance as resulting in a single addition of a total sum to the resources of the
beneficiary, and not in a periodical return, such a purpose on its part should be express, as it certainly is not here.

Considering, therefore, the purport of the stipulated facts, considering the uncertainty of Philippine law, and considering
the lack of express legislative intention to tax the proceeds of life insurance policies paid to corporate beneficiaries,
particularly when in the exemption in favor of individual beneficiaries in the chapter on this subject, the clause is inserted
"exempt from the provisions of this law," we deem it reasonable to hold the proceeds of the life insurance policy in
question as representing an indemnity and not taxable income.

The foregoing pronouncement will result in the judgment being reversed and in another judgment being rendered in favor
of the plaintiff and against the defendant for the sum of P3,148.74. So ordered, without costs in either instance.

Page 43 of 43