d. Third Party – Heirs of Maramag vs.

Eva Maramag to the underwriters on the policy and to receive nine-tenths of the amount due
e. Trustee or Agent Procuring Insurance
Section 56. When the description of the insured in a policy is so general that it may
comprehend any person or any class of persons, only he who can show that it was
intended to include him, can claim the benefit of the policy.
f. Partner procuring insurance
Section 55. To render an insurance effected by one partner or part-owner, applicable
to the interest of his co-partners or other part-owners, it is necessary that the terms
of the policy should be such as are applicable to the joint or common interest.
g. Rights of Assignee of insurance
Section 184. A policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover upon it whatever the insured might have recovered.
Section 58. 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.
INSURABLE INTEREST
a. Concept
a. In life insurance – The relationship of the insured with the one insured, so that the
death, disability, or injury of the insured will result in emotional and/or economic
dislocation of the insured.
 there is an interest by the insured in seeing to it that the life, health, or economic
capacity of insured is not diminished
thereon at his death. Pursuant to the agreement, he executed an assignment of the
policy (infra, p. 104 U. S. 777), and the firm paid the fees and assessments. On his
death, the firm collected from the underwriters nine-tenths of the amount due on the
policy, and his administrator sued the firm therefor. The parties to the agreement did
not thereby design to perpetrate a fraud upon anyone. Held that the plaintiff was
entitled to recover from the firm the moneys so collected with interest thereon, less
the sums advanced by the firm.
Warnock, the plaintiff, is the administrator of the estate of Henry L. Crosser,
deceased, and a resident of Kentucky. Davis and the other defendants are partners,
under the name of the Scioto Trust Association, of Portsmouth, Ohio, and reside in
that state. On the 27th of February, 1872, Crosser applied to the Protection Life
Insurance Company of Chicago, a corporation created under the laws of Illinois, for a
policy on his life to the amount of $5,000, and on the same day entered into the
following agreement with the Scioto Trust Association:
"This agreement, by and between Henry L. Crosser, of the first part, 27 years old,
tanner by occupation, residing at Town of Springville, County of Greenup, State of
Kentucky, and the Scioto Trust Association, of Portsmouth, Ohio, of the second part,
witnesses: said party of the first part having this day made application to the
Protection Life Insurance Company, of Chicago, Illinois, for policy on his life, limited
to the amount of $5,000.00, hereby agrees to and with the Scioto Trust Association
that nine-tenths of the amount due and payable on said policy at the time of the death
of the party of the first part shall be the absolute property of, and be paid by, said
Protection Life Insurance Company to said Scioto Trust Association, and shall be said
party of the first part be assigned and

Warnock vs. Davis Page 104 U. S. 776

U.S. Supreme Court transferred to said Scioto Trust Association, and the remaining one-tenth part thereof
shall be subject to whatever disposition said party of the first part shall make thereof
Warnock v. Davis, 104 U.S. 775 (1881) in his said transfer and assignment of said policy; that the policy to be issued on said
application shall be delivered to and forever held by said Scioto Trust Association,
said party of the first part hereby waiving and releasing and transferring and assigning
Warnock v. Davis to said Scioto Trust Association all his right, title, and interest whatever in and to said
policy, and the moneys due and payable thereon at the time of his death, save and
104 U.S. 775 except the one-tenth part of such moneys being subject to his disposition as
aforesaid; also to keep the Scioto Trust Association constantly informed concerning
his residence, post office address, and removals; and further that said party of the
ERROR TO THE CIRCUIT COURT OF THE UNITED first part shall pay to the said Scioto Trust Association a fee of $6.00 in hand on the
execution and delivery of this agreement, and annual dues of $2.50, to be paid on
STATES FOR THE SOUTHERN DISTRICT OF OHIO the first of July of every year hereafter, and that in default of such payments the
amounts due by him for fees or dues shall be a lien on and be deducted from his said
one-tenth part."
Syllabus

1. A person who has procured a policy of insurance on his life cannot assign it to
parties who have no insurable interest in his life. Cammack v. Lewis, 15 Wall. 643,
cited and approved.
2. The plaintiff's intestate, on procuring an insurance upon his life, entered into an
agreement with a firm whereby the latter was to pay all fees and assessments payable
"In consideration whereof the said Scioto Trust Association, of the second part, agrees
to and with said party of the first part to keep up and maintain said life insurance at
their exclusive expense, to pay all dues, fees, and assessments due and payable on
said policy, and to keep said party of the first part harmless from the payment of such
fees, dues, and assessments, and to procure the payment of one-tenth part of the
moneys due and payable on said policy after the death of said party of the first part,
when obtained from and paid by said Protection Life Insurance Company, to the party
or parties entitled thereto, according to the disposition made thereof by said party of
the first part in his said transfer and assignment of said policy, subject to the aforesaid
lien and deduction."
"It is hereby expressly understood and agreed by and between the parties hereto that
said Scioto Trust Association do not in any manner obligate themselves to said party
of the first part for the performance by said Protection Life Insurance Company of its
promises or obligations contained in the policy issued on the application of said party
of the first part and herein referred to."
"Witness our hands, this 27th day of February, A. D. 1872."
"HENRY L. CROSSER."
"THE SCIOTO TRUST ASSOCIATION"
"By A. MCFARLAND, President"
"GEORGE DAVIS, Treasurer"
Page 104 U. S. 777
The policy, bearing even date with the agreement, was issued to Crosser, and on the
following day he executed to the association the following assignment:
"In consideration of the terms and stipulations of a certain agreement concluded by
and between the undersigned and the Scioto Trust Association, of Portsmouth, Ohio,
and for value received, I hereby waive and release, transfer and assign to said Scioto
Trust Association all my right, title, and interest in and to the within life insurance
policy No. 3247, issued to me by the Protection Life Insurance Company, of Chicago,
Illinois, and all sum or sums of money due, owing, and recoverable by virtue of said
policy, save and except the one-tenth part of the same, which tenth part, after
deducting therefore the amount, if any, which I may owe to said Scioto Trust
Association for fees or dues, shall be paid to Kate Crosser, or, in case of her death,
to such person or persons as the law may direct. And I hereby constitute, without
power of revocation on my part, the said Scioto Trust Association my attorney, with
full power in their own name to collect and receipt for the whole amount due and
payable on said policy at the time of my death, to keep and retain that portion thereof
which is the absolute and exclusive property of said Scioto Trust Association, to-wit,
nine-tenths thereof, and to pay the balance, one-tenth part thereof, when thus
obtained and received from the said Protection Life Insurance Company, to the party
or parties entitled thereto, after first deducting therefrom, as above directed and
stipulated, the amount, if any, due from me at the time of my death to said Scioto
Trust Association for fees and dues."
"Witness my hand and seal, this 28th day of February, A.D. 1872."
"HENRY L CROSSER [SEAL]"
Crosser died on the 11th of September, 1873, and on the 16th of May, 1874, the
association collected from the company the amount of the policy, namely, $5,000;
one-tenth of which, $500, less certain sums due under the agreement, was paid to
the widow of the deceased.
The present action is brought to recover the balance, which with interest exceeds
$5,000. The defendants admit the collection of the money from the insurance
company, but, to defeat the action, rely upon the agreement mentioned, and the
assignment of the policy stipulated in it. The agreement and
Page 104 U. S. 778
assignment are specifically mentioned in the second and third of the three defenses
set up in their answer. The first defense consists in a general allegation that Crosser
assigned, in good faith and for a valuable consideration, nine-tenths of the policy to
the defendants; that a power of attorney was at the time executed to them to collect
the remaining one-tenth and pay the same over to his widow; and that after the
collection of the amount they had paid the one-tenth to her and taken her receipt for
it.
The case was tried by the court without the intervention of a jury. On the trial, the
plaintiff gave in evidence the deposition of the receiver of the insurance company,
who produced from the papers in his custody the policy of insurance, the agreement
and assignment mentioned, the proofs presented to the company of the death of the
insured, and the receipt by the association of the insurance money. There was no
other testimony offered. The court thereupon found for the defendants, to which
finding the plaintiff excepted. Judgment being entered thereon in their favor, the case
is brought to this Court for review.
MR. JUSTICE FIELD, after stating the facts, delivered the opinion of the Court, as
follows:
As seen from the statement of the case, the evidence before the court was not
conflicting, and it was only necessary to meet the general allegations of the first
defense. All the facts established by it are admitted in the other defenses. The court
could not have ruled in favor of the defendants without holding that the agreement
between the deceased and the Scioto Trust Association was valid, and that the
assignment transferred to it the right to nine-tenths of the money collected on the
policy. For alleged error in these particulars the plaintiff asks a reversal of the
judgment.
The policy executed on the life of the deceased was a valid contract, and as such was
assignable by the assured to the association as security for any sums lent to him, or
advanced for the premiums and assessments upon it. But it was not assignable
Page 104 U. S. 779
to the association for any other purpose. The association had no insurable interest in
the life of the deceased, and could not have taken out a policy in its own name. Such
a policy would constitute what is termed a wager policy, or a mere speculative
contract upon the life of the assured, with a direct interest in its early termination.
It is not easy to define with precision what will in all cases constitute an insurable
interest so as to take the contract out of the class of wager policies. It may be stated
generally, however, to be such an interest, arising from the relations of the party
obtaining the insurance, either as creditor of or surety for the assured, or from the
ties of blood or marriage to him, as will justify a reasonable expectation of advantage
or benefit from the continuance of his life. It is not necessary that the expectation of
advantage or benefit should be always capable of pecuniary estimation, for a parent
has an insurable interest in the life of his child and a child in the life of his parent, a
husband in the life of his wife, and a wife in the life of her husband. The natural
affection in cases of this kind is considered as more powerful -- as operating more
efficaciously -- to protect the life of the insured than any other consideration. But in
all cases, there must be a reasonable ground, founded upon the relations of the
parties to each other, either pecuniary or of blood or affinity, to expect some benefit
or advantage from the continuance of the life of the assured. Otherwise the contract
is a mere wager, by which the party taking the policy is directly interested in the early
death of the assured. Such policies have a tendency to create a desire for the event.
They are therefore, independently of any statute on the subject, condemned as being
against public policy.
The assignment of a policy to a party not having an insurable interest is as
objectionable as the taking out of a policy in his name. Nor is its character changed
because it is for a portion merely of the insurance money. To the extent in which the
assignee stipulates for the proceeds of the policy beyond the sums advanced by him,
he stands in the position of one holding a wager policy. The law might be readily
evaded if the policy or an interest in it could, in consideration of paying the premiums
and assessments upon it, and the promise
Page 104 U. S. 780
to pay upon the death of the assured a portion of its proceeds to his representatives,
be transferred so as to entitle the assignee to retain the whole insurance money.
The question here presented has arisen, under somewhat different circumstances, in
several of the state courts, and there is a conflict in their decisions. In Franklin Life
Insurance Company v. Hazzard, which arose in Indiana, the policy of insurance, which
was for $3,000, contained the usual provision that if the premiums were not paid at
the times specified the policy would be forfeited. The second premium was not paid,
and the assured, declaring that he had concluded not to keep up the policy, sold it for
twenty dollars to one having no insurable interest, who took an assignment of it with
the consent of the secretary of the insurance company. The assignee subsequently
settled with the company for the unpaid premium. In a suit upon the policy, the
supreme court of the state held that the assignment was void, stating that all the
objections against the issuing of a policy to one upon the life of another in whose life
he has no insurable interest exist against holding such a policy be mere purchase and
assignment. "In either case," said the court,
"the holder of such policy is interested in the death, rather than the life, of the party
assured. The law ought to be, and we think it clearly is, opposed to such speculations
in human life."
41 Ind. 116. The court referred with approval to a decision of the same purport by
the Supreme Court of Massachusetts in Stevens v. Warren, 101 Mass. 564. There,
the question presented was whether the assignment of a policy by the assured in his
lifetime, without the assent of the insurance company, conveyed any right in law or
equity to the proceeds when due. The court was unanimously of opinion that it did
not, holding that it was contrary not only to the terms of the contract, but contrary
to the general policy of the law respecting insurance, in that it might lead to gambling
or speculative contracts upon the chances of human life. The court also referred to
provisions sometimes inserted in a policy expressing that it is for the benefit of
another, or is payable to another than the representatives of the assured, and, after
remarking that the contract in such a case might be sustained, said
"that the same would
Page 104 U. S. 781
probably be held in the case of an assignment with the assent of the assurers. But if
the assignee has no interest in the life of the subject which would sustain a policy to
himself, the assignment would take effect only as a designation, by mutual agreement
of the parties, of the person who should be entitled to receive the proceeds when due,
instead of the personal representatives of the deceased. And if it should appear that
the arrangement was a cover for a speculating risk, contravening the general policy
of the law, it would not be sustained."
Although the agreement between the Trust Association and the assured was invalid
as far as it provided for an absolute transfer of nine-tenths of the proceeds of the
policy upon the conditions named, it was not of that fraudulent kind with respect to
which the courts regard the parties as alike culpable and refuse to interfere with the
results of their action. No fraud or deception upon anyone was designed by the
agreement, nor did its execution involve any moral turpitude. It is one which must be
treated as creating no legal right to the proceeds of the policy beyond the sums
advanced upon its security, and the courts will therefore hold the recipient of the
moneys beyond those sums to account to the representatives of the deceased. It was
lawful for the association to advance to the assured the sums payable to the insurance
company on the policy as they became due. It was also lawful for the assured to
assign the policy as security for their payment. The assignment was only invalid as a
transfer of the proceeds of the policy beyond what was required to refund those sums,
with interest. To hold it valid for the whole proceeds would be to sanction speculative
risks on human life and encourage the evils for which wager policies are condemned.
The decisions of the New York Court of Appeals are, we are aware, opposed to this
view. They hold that a valid policy of insurance effected by a person upon his own life
is assignable like an ordinary chose in action, and that the assignee is entitled upon
the death of the assured to the full sum payable without regard to the consideration
given by him for the assignment, or to his possession of any insurable interest in the
life of the assured. St. John v. American
Page 104 U. S. 782
Mutual Life Insurance Company, 13 N.Y. 31; Valton v. National Loan Fund Life
Assurance Company, 20 id. 32. In the opinion in the first case, the court cite Ashley
v. Ashley, 3 Simons 149, in support of its conclusions; and it must be admitted that
they are sustained by many other adjudications. But if there be any sound reason for
holding a policy invalid when taken out by a party who has no interest in the life of
the assured, it is difficult to see why that reason is not as cogent and operative against
a party taking an assignment of a policy upon the life of a person in which he has no
interest. The same ground which invalidates the one should invalidate the other -- so
far, at least, as to restrict the right of the assignee to the sums actually advanced by
him. In the conflict of decisions on this subject we are free to follow the one which
seem more fully in accord with the general policy of the law against speculative
contracts upon human life.
In this conclusion we are supported by the decision in Cammack v. Lewis, 15 Wall.
643. There, a policy of life insurance for $3,000, procured by a debtor at the
suggestion of a creditor to whom he owed $70, was assigned to the latter to secure
the debt, upon his promise to pay the premiums, and, in case of the death of the
assured, one-third of the proceeds to his widow. On the death of the assured, the
assignee collected the money from the insurance company and paid to the widow
$950 as her proportion after deducting certain payments made. The widow, as
administratrix of the deceased's estate, subsequently sued for the balance of the
money collected, and recovered judgment. The case being brought to this Court, it
was held that the transaction, so far as the creditor was concerned, for the excess
beyond the debt owing to him was a wagering policy, and that the creditor, in equity
and good conscience, should hold it only as security for what the debtor owed him
when it was assigned, and for such advances as he might have afterwards made on
account of it, and that the assignment was valid only to that extent. This decision is
in harmony with the views expressed in this opinion.
The judgment of the court below will therefore be reversed and the cause remanded
with direction to enter a judgment for the plaintiff for the amount collected from the
insurance company,
Page 104 U. S. 783
with interest, after deducting the sum already paid to the widow, and the several
sums advanced by the defendants, and it is
So ordered.
a.2 Property Insurance – The interest of the insured over the object insured so that
the person will be economically damnified by the damage or loss of the object insured.
Section 13. 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, is an insurable interest.
b. Effect of lack of insurable interest – When there is no insurable interest, the policy
is akin to a wager in gambling and is void.
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.
c. Insurable interest in life insurance – Generally, the persons whose life he has
insurable interest in are:
c.1 His own life
c.2 Life of persons to whom he had blood relations (namely his spouse and children)
Section 10. Every person has an insurable interest in the life and health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education or support, or
in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of money, or
respecting property or services, of which death or illness might delay or prevent the
performance; and
(d) Of any person upon whose life any estate or interest vested in him depends.
G.R. No. 23703 September 28, 1925
HILARIO GERCIO, plaintiff-appellee,
vs.
SUN LIFE ASSURANCE OF CANADA, ET AL., defendants.
SUN LIFE ASSURANCE OF CANADA, appellant.
Fisher, DeWitt, Perkins and Brady and Jesus Trinidad for appellant.
Vicente Romualdez, Feria and La O and P. J. Sevilla for appellee.
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 the 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.
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 P/2,000, 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 1919, 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 will
hereafter see. (Re Succession of Leone 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 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 the 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 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 ([1895]), 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 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 the court, in part said: 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.
xxx xxx xxx
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 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 fried; 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.
xxx xxx xxx
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 of 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 the 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, and 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 semitontine 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, by 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
reasonable 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.
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 plaintiff's
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 of insurance, and for many reasons such persons may never have a right to receive
upon the issuance of the policy, and can thereafter, during the life of the anything when the policy does become due and payable. In my judgment, the action
beneficiary, be defeated only as provided by the terms of the policy. is premature and should have been dismissed.

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. THIRD DIVISION
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., VIOLETA R. LALICAN, G.R. No. 183526
737); Griffith vs. New York Life Ins. Co. ([1894], 101 Cal., 627; 40 Am. St. Rep., Petitioner,
96); Preston vs. Conn. Mut. L. Ins. Co. of Hartford([1902]); 95 Md., 101); Snyder vs. Present:
Supreme Ruler of Fraternal Mystic Circle ([1909], 122 Tenn. 248; 45 L.R.A. [N.S.],
209); Lloyd vs. Royal Union Mut. L. Ins. Co. ([1917], 245 Fed., 162); Phoenix Mut. L. CARPIO MORALES,* J.,
Ins. Co. vs. Dunham ([1878], 46 Conn., 79; 33 Am. Rep., 14); McKee vs. Phoenix - versus - CHICO-NAZARIO,**
Ins. Co. ([1859], 28 Mo., 383; 75 Am. Rep., 129); Supreme Council American Legion Acting Chairperson,
of Honor vs. Smith and Smith ([1889], 45 N.J. Eq., 466); Overhiser vs. VELASCO, JR.,
Overhiser ([1900], 63 Ohio St., 77; 81 Am. St. Rep., 612; 50 L.R.A., 552); Condon NACHURA, and
vs. New York Life Insurance Co. ([1918], 183 Iowa, 658); with which compare Foster THE INSULAR LIFE ASSURANCE PERALTA, JJ.
vs. Gile ([1880], 50 Wis., 603) and Hatch vs. Hatch ([1904], 35 Tex. Civ. App., 373). COMPANY LIMITED, AS
REPRESENTED BY THE PRESIDENT
VICENTE R. AVILON, Promulgated:
On the admitted facts and the authorities supporting the nearly universally accepted
Respondent.
principles of insurance, we are irresistibly led to the conclusion that the question at
August 25, 2009
issue must be answered in the negative.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

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. DECISION
So ordered.

Street, Villamor, Ostrand, Johns, and Villa-Real, JJ., concur. CHICO-NAZARIO, J.:
Avanceña, C.J., concurs in the result.
Romualdez, J., took no part. Challenged in this Petition for Review on Certiorari[1] under Rule 45 of the
Rules of Court are the Decision[2] dated 30 August 2007 and the Orders dated 10 April
2008[3] and 3 July 2008[4] of the Regional Trial Court (RTC) of Gapan City, Branch 34,
in Civil Case No. 2177. In its assailed Decision, the RTC dismissed the claim for death
benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent Insular Life
Assurance Company Limited (Insular Life); while in its questioned Orders dated 10
Separate Opinions April 2008 and 3 July 2008, respectively, the RTC declared the finality of the aforesaid
Decision and denied petitioners Notice of Appeal.
JOHNSON, J., concurring in the result. The factual and procedural antecedents of the case, as culled from the
records, are as follows:
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 Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio).
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. During his lifetime, Eulogio applied for an insurance policy with Insular
It may never become due and payable. The premiums may not be paid, thereby Life. On 24 April 1997, Insular Life, through Josephine Malaluan (Malaluan), its agent
rendering the contract of insurance of non effect, and many other things may occur, in Gapan City, issued in favor of Eulogio Policy No. 9011992,[5] which contained a 20-
before the policy becomes due, which would render it non effective. The plaintiff and Year Endowment Variable Income Package Flexi Plan worth P500,000.00,[6] with two
the other parties who are claiming an interest in said policy should wait until there is riders valued at P500,000.00 each.[7] Thus, the value of the policy amounted
something due them under the same. For the courts to declare now who are the to P1,500,000.00. Violeta was named as the primary beneficiary.
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
 Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on
a quarterly basis in the amount of P8,062.00, 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.[8]
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[9] of Policy
No. 9011992, together with the amount of P8,062.00 to pay for the premium due
on 24 January 1998. In a letter[10] 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[11] 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.
Without knowing of Eulogios death, Malaluan forwarded to the Insular Life
Regional Office in the City of San Fernando, on 18 September 1998, Eulogios second
Application for Reinstatement of Policy No. 9011992 and P17,500.00
deposit. However, Insular Life no longer acted upon Eulogios second Application for
Reinstatement, as the former was informed on 21 September 1998 that Eulogio had
already passed away.
On 28 September 1998, Violeta filed with Insular Life a claim for payment of
the full proceeds of Policy No. 9011992.
In a letter[12] dated 14 January 1999, Insular Life informed Violeta that her
claim could not be granted since, at the time of Eulogios death, Policy No. 9011992
had already lapsed, and Eulogio failed to reinstate the same. According to the
Application for Reinstatement, the policy would only be considered reinstated upon
approval of the application by Insular Life during the applicants lifetime and good
health, and whatever amount the applicant paid in connection thereto was considered
to be a deposit only until approval of said application. Enclosed with the 14 January
1999 letter of Insular Life to Violeta was DBP Check No. 0000309734, for the amount
of P25,417.00, drawn in Violetas favor, representing the full refund of the payments
made by Eulogio on Policy No. 9011992.
On 12 February 1998, Violeta requested a reconsideration of the
disallowance of her claim. In a letter[13] dated 10 March 1999, Insular Life stated that
it could not find any reason to reconsider its decision rejecting Violetas claim. Insular
Life again tendered to Violeta the above-mentioned check in the amount
of P25,417.00.
Violeta returned the letter dated 10 March 1999 and the check enclosed
therein to the Cabanatuan District Office of Insular Life. Violetas counsel subsequently
sent a letter[14] dated 8 July 1999 to Insular Life, demanding payment of the full
proceeds of Policy No. 9011992. On 11 August 1999, Insular Life responded to the
said demand letter by agreeing to conduct a re-evaluation of Violetas claim.
Without waiting for the result of the re-evaluation by Insular Life, Violeta
filed with the RTC, on 11 October 1999, a Complaint for Death Claim Benefit,[15] which
was docketed as Civil Case No. 2177. Violeta alleged that Insular Life engaged in
unfair claim settlement practice and deliberately failed to act with reasonable
promptness on her insurance claim. Violeta prayed that Insular Life be ordered to pay
her death claim benefits on Policy No. 9011992, in the amount of P1,500,000.00, plus
interests, attorneys fees, and cost of suit.
Insular Life filed with the RTC an Answer with Counterclaim,[16] asserting that
Violetas Complaint had no legal or factual bases. Insular Life maintained that Policy
No. 9011992, on which Violeta sought to recover, was rendered void by the non-
payment of the 24 January 1998 premium and non-compliance with the requirements
for the reinstatement of the same. By way of counterclaim, Insular Life prayed that
Violeta be ordered to pay attorneys fees and expenses of litigation incurred by the
former.
Violeta, in her Reply and Answer to Counterclaim, asserted that the
requirements for the reinstatement of Policy No. 9011992 had been complied with
and the defenses put up by Insular Life were purely invented and illusory.
After trial, the RTC rendered, on 30 August 2007, a Decision in favor of
Insular Life.
The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio
needed to have the same reinstated:
[The] arguments [of Insular Life] are not without basis. When the
premiums for April 24 and July 24, 1998 were not paid by [Eulogio]
even after the lapse of the 31-day grace period, his insurance policy
necessarily lapsed. This is clear from the terms and conditions of
the contract between [Insular Life] and [Eulogio] which are written
in [the] Policy provisions of Policy No. 9011992 x x x.[17]
The RTC, taking into account the clear provisions of the Policy Contract
between Eulogio and Insular Life and the Application for Reinstatement Eulogio
subsequently signed and submitted to Insular Life, held that Eulogio was not able to
fully comply with the requirements for the reinstatement of Policy No. 9011992:
The well-settled rule is that a contract has the force of law between
the parties. In the instant case, the terms of the insurance contract
between [Eulogio] and [Insular Life] were spelled out in the policy
provisions of Insurance Policy No. 9011992. There is likewise no
dispute that said insurance contract is by nature a contract of
adhesion[,] which is defined as one in which one of the contracting
parties imposes a ready-made form of contract which the other
party may accept or reject but cannot modify. (Polotan, Sr. vs. CA,
296 SCRA 247).
xxxx
The New Lexicon Websters Dictionary defines ambiguity as the
quality of having more than one meaning and an idea, statement
or expression capable of being understood in more than one
sense. In Nacu vs. Court of Appeals, 231 SCRA 237 (1994),
the Supreme Court stated that[:]
Any ambiguity in a contract, whose terms are
susceptible of different interpretations as a result
thereby, must be read and construed against the
party who drafted it on the assumption that it
could have been avoided by the exercise of a little
care.
In the instant case, the dispute arises from the afore-quoted
provisions written on the face of the second application for
reinstatement. Examining the said provisions, the court
finds the same clearly written in terms that are simple
enough to admit of only one interpretation. They are clearly
not ambiguous, equivocal or uncertain that would need
further construction. The same are written on the very face
of the application just above the space where [Eulogio]
signed his name. It is inconceivable that he signed it without
reading and understanding its import.
Similarly, the provisions of the policy provisions (sic) earlier
mentioned are written in simple and clear laymans language,
rendering it free from any ambiguity that would require a legal
interpretation or construction. Thus, the court believes that
[Eulogio] was well aware that when he filed the said application for
reinstatement, his lapsed policy was not automatically reinstated
and that its approval was subject to certain conditions. Nowhere
in the policy or in the application for reinstatement was it
ever mentioned that the payment of premiums would have
the effect of an automatic and immediate renewal of the
lapsed policy. Instead, what was clearly stated in the
application for reinstatement is that pending approval
thereof, the premiums paid would be treated as a deposit
only and shall not bind the company until this application is
finally approved during my/our lifetime and good health[.]
Again, the court finds nothing in the aforesaid provisions that would
even suggest an ambiguity either in the words used or in the
manner they were written. [Violeta] did not present any proof that
[Eulogio] was not conversant with the English language. Hence, his
having personally signed the application for reinstatement[,] which
consisted only of one page, could only mean that he has read its
contents and that he understood them. x x x
Therefore, consistent with the above Supreme Court ruling and
finding no ambiguity both in the policy provisions of Policy No.
9011992 and in the application for reinstatement subject of this
case, the court finds no merit in [Violetas] contention that the policy
provision stating that [the lapsed policy of Eulogio] should be
reinstated during his lifetime is ambiguous and should be construed
in his favor. It is true that [Eulogio] submitted his application for
reinstatement, together with his premium and interest payments,
to [Insular Life] through its agent Josephine Malaluan in the
morning of September 17, 1998. Unfortunately, he died in the
afternoon of that same day. It was only on the following
day, September 18, 1998 that Ms. Malaluan brought the said
document to [the regional office of Insular Life] in San Fernando,
Pampanga for approval. As correctly pointed out by [Insular
Life] there was no more application to approve because the
applicant was already dead and no insurance company
would issue an insurance policy to a dead
person.[18] (Emphases ours.)
The RTC, in the end, explained that:
While the court truly empathizes with the [Violeta] for the loss of
her husband, it cannot express the same by interpreting the
insurance agreement in her favor where there is no need for such
interpretation. It is conceded that [Eulogios] payment of overdue
premiums and interest was received by [Insular Life] through its
agent Ms. Malaluan. It is also true that [the] application for
reinstatement was filed by [Eulogio] a day before his
death. However, there is nothing that would justify a
conclusion that such receipt amounted to an automatic
reinstatement of the policy that has already lapsed. The
evidence suggests clearly that no such automatic renewal
was contemplated in the contract between [Eulogio] and
[Insular Life]. Neither was it shown that Ms. Malaluan was
the officer authorized to approve the application for
reinstatement and that her receipt of the documents
submitted by [Eulogio] amounted to its
approval.[19] (Emphasis ours.)
The fallo of the RTC Decision thus reads:
WHEREFORE, all the foregoing premises considered and finding
that [Violeta] has failed to establish by preponderance of evidence
her cause of action against the defendant, let this case be, as it is
hereby DISMISSED.[20]
On 14 September 2007, Violeta filed a Motion for Reconsideration[21] of the afore-
mentioned RTC Decision. Insular Life opposed[22] the said motion, averring that the
arguments raised therein were merely a rehash of the issues already considered and
addressed by the RTC. In an Order[23] dated 8 November 2007, the RTC denied
Violetas Motion for Reconsideration, finding no cogent and compelling reason to
disturb its earlier findings. Per the Registry Return Receipt on record, the 8 November
2007 Order of the RTC was received by Violeta on 3 December 2007.
In the interim, on 22 November 2007, Violeta filed with the RTC a Reply[24] to the
Motion for Reconsideration, wherein she reiterated the prayer in her Motion for
Reconsideration for the setting aside of the Decision dated 30 August 2007. Despite
already receiving on 3 December 2007, a copy of the RTC Order dated 8 November
2007, which denied her Motion for Reconsideration, Violeta still filed with the RTC,
on 26 February 2008, a Reply Extended Discussion elaborating on the arguments she
had previously made in her Motion for Reconsideration and Reply.
On 10 April 2008, the RTC issued an Order,[25] declaring that the Decision dated 30
August 2007 in Civil Case No. 2177 had already attained finality in view of Violetas
failure to file the appropriate notice of appeal within the reglementary period. Thus,
any further discussions on the issues raised by Violeta in her Reply and Reply
Extended Discussion would be moot and academic.
Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,[26] praying
that the Order dated 10 April 2008 be set aside and that she be allowed to file an
appeal with the Court of Appeals.
In an Order[27] dated 3 July 2008, the RTC denied Violetas Notice of Appeal with
Motion given that the Decision dated 30 August 2007 had long since attained finality.
Violeta directly elevated her case to this Court via the instant Petition for Review
on Certiorari, raising the following issues for consideration:
1. Whether or not the Decision of the court a
quo dated August 30, 2007, can still be reviewed despite
having allegedly attained finality and despite the fact that
the mode of appeal that has been availed of by Violeta is
erroneous?
2. Whether or not the Regional Trial Court in its original
jurisdiction has decided the case on a question of law not
in accord with law and applicable decisions of the Supreme
Court?
Violeta insists that her former counsel committed an honest mistake in filing a Reply,
instead of a Notice of Appeal of the RTC Decision dated 30 August 2007; and in the
computation of the reglementary period for appealing the said judgment. Violeta
claims that her former counsel suffered from poor health, which rapidly deteriorated
from the first week of July 2008 until the latters death just shortly after the filing of
the instant Petition on 8 August 2008. In light of these circumstances, Violeta entreats
this Court to admit and give due course to her appeal even if the same was filed out
of time.
Violeta further posits that the Court should address the question of law
arising in this case involving the interpretation of the second sentence of Section 19
of the Insurance Code, which provides:
Section. 19. x x x [I]nterest 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.
On the basis thereof, Violeta argues that Eulogio still had insurable interest
in his own life when he reinstated Policy No. 9011992 just before he passed away
on 17 September 1998. The RTC should have construed the provisions of the Policy
Contract and Application for Reinstatement in favor of the insured Eulogio and against
the insurer Insular Life, and considered the special circumstances of the case, to rule
that Eulogio had complied with the requisites for the reinstatement of Policy No.
9011992 prior to his death, and that Violeta is entitled to claim the proceeds of said
policy as the primary beneficiary thereof.
The Petition lacks merit.
At the outset, the Court notes that the elevation of the case to us via the
instant Petition for Review on Certiorari is not justified. Rule 41, Section 1 of the Rules
of Court,[28] provides that no appeal may be taken from an order disallowing or
dismissing an appeal. In such a case, the aggrieved party may file a Petition
for Certiorariunder Rule 65 of the Rules of Court.[29]
Furthermore, the RTC Decision dated 30 August 2007, assailed in this
Petition, had long become final and executory. Violeta filed a Motion for
Reconsideration thereof, but the RTC denied the same in an Order dated 8 November
2007. The records of the case reveal that Violeta received a copy of the 8 November
2007 Order on 3 December 2007. Thus, Violeta had 15 days[30] from said date of
receipt, or until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice
of Appeal only on 20 May 2008, more than five months after receipt of the RTC
Order dated 8 November 2007 denying her Motion for Reconsideration.
Violetas claim that her former counsels failure to file the proper remedy
within the reglementary period was an honest mistake, attributable to the latters
deteriorating health, is unpersuasive.
Violeta merely made a general averment of her former counsels poor health,
lacking relevant details and supporting evidence. By Violetas own admission, her
former counsels health rapidly deteriorated only by the first week of July 2008. The
events pertinent to Violetas Notice of Appeal took place months before July 2008, i.e.,
a copy of the RTC Order dated 8 November 2007, denying Violetas Motion for
Reconsideration of the Decision dated 30 August 2007, was received on 3 December
2007; and Violetas Notice of Appeal was filed on 20 May 2008. There is utter lack
of proof to show that Violetas former counsel was already suffering from ill health
during these times; or that the illness of Violetas former counsel would have affected
his judgment and competence as a lawyer.
Moreover, the failure of her former counsel to file a Notice of Appeal within
the reglementary period binds Violeta, which failure the latter cannot now disown on
the basis of her bare allegation and self-serving pronouncement that the former was
ill. A client is bound by his counsels mistakes and negligence.[31]
 The Court, therefore, finds no reversible error on the part of the RTC in
denying Violetas Notice of Appeal for being filed beyond the reglementary
period. Without an appeal having been timely filed, the RTC Decision dated 30 August
2007 in Civil Case No. 2177 already became final and executory.
A judgment becomes "final and executory" by operation of law. Finality becomes a
fact when the reglementary period to appeal lapses and no appeal is perfected within
such period. As a consequence, no court (not even this Court) can exercise appellate
jurisdiction to review a case or modify a decision that has become final.[32] When a
final judgment is executory, it becomes immutable and unalterable. It may no longer
be modified in any respect either by the court, which rendered it or even by this
Court. The doctrine is founded on considerations of public policy and sound practice
that, at the risk of occasional errors, judgments must become final at some definite
point in time.[33]
The only recognized exceptions to the doctrine of immutability and unalterability are
the correction of clerical errors, the so-called nunc pro tunc entries, which cause no
prejudice to any party, and void judgments.[34] The instant case does not fall under
any of these exceptions.
Even if the Court ignores the procedural lapses committed herein, and proceeds to
resolve the substantive issues raised, the Petition must still fail.
Violeta makes it appear that her present Petition involves a question of law,
particularly, whether Eulogio had an existing insurable interest in his own life until the
day of his death.
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.[35] The existence of an insurable interest gives a person the legal
right to insure the subject matter of the policy of insurance.[36] Section 10 of the
Insurance Code indeed provides that every person has an insurable interest in his
own life.[37] 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.[38]
Upon more extensive study of the Petition, it becomes evident that the matter of
insurable interest is entirely irrelevant in the case at bar. It is actually beyond
question that while Eulogio was still alive, he had an insurable interest in his own life,
which he did insure under Policy No. 9011992. The real point of contention herein is
whether Eulogio was able to reinstate the lapsed insurance policy on his life before
his death on 17 September 1998.
The Court rules in the negative.
Before proceeding, the Court must correct the erroneous declaration of the
RTC in its 30 August 2007 Decision that Policy No. 9011992 lapsed because of
Eulogios non-payment of the premiums which became due on 24 April 1998 and 24
July 1998. Policy No. 9011992 had lapsed and become void earlier, on 24 February
1998, upon the expiration of the 31-day grace period for payment of the premium,
which fell due on 24 January 1998, without any payment having been made.
That Policy No. 9011992 had already lapsed is a fact beyond
dispute. Eulogios filing of his first Application for Reinstatement with Insular Life,
through Malaluan, on 26 May 1998, constitutes an admission that Policy
No. 9011992 had lapsed by then. Insular Life did not act on Eulogios first Application
for Reinstatement, since the amount Eulogio simultaneously deposited was sufficient
to cover only the P8,062.00 overdue premium for 24 January 1998, but not
the P322.48 overdue interests thereon.On 17 September 1998, Eulogio submitted a
second Application for Reinstatement to Insular Life, again through Malaluan,
depositing at the same time P17,500.00, to cover payment for the overdue interest
on the premium for 24 January 1998, and the premiums that had also become due
on 24 April 1998 and 24 July 1998. On the very same day, Eulogio passed away.
To reinstate a policy means to restore the same to premium-paying status after it has
been permitted to lapse.[39] Both the Policy Contract and the Application for
Reinstatement provide for specific conditions for the reinstatement of a lapsed policy.
The Policy Contract between Eulogio and Insular Life identified the following
conditions for reinstatement should the policy lapse:
10. REINSTATEMENT
You may reinstate this policy at any time within three years after it
lapsed if the following conditions are met: (1) the policy has not
been surrendered for its cash value or the period of extension as a
term insurance has not expired; (2) evidence of insurability
satisfactory to [Insular Life] is furnished; (3) overdue premiums are
paid with compound interest at a rate not exceeding that which
would have been applicable to said premium and indebtedness in
the policy years prior to reinstatement; and (4) indebtedness which
existed at the time of lapsation is paid or renewed.[40]
Additional conditions for reinstatement of a lapsed policy were stated in the
Application for Reinstatement which Eulogio signed and submitted, to wit:
I/We agree that said Policy shall not be considered reinstated
until this application is approved by the Company during
my/our lifetime and good health and until all other Company
requirements for the reinstatement of said Policy are fully
satisfied.
I/We further agree that any payment made or to be made in
connection with this application shall be considered as
deposit only and shall not bind the Company until this
application is finally approved by the Company during
my/our lifetime and good health. If this application is
disapproved, I/We also agree to accept the refund of all payments
made in connection herewith, without interest, and to surrender the
receipts for such payment.[41] (Emphases ours.)
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.
Relevant herein is the following pronouncement of the Court in Andres v. The Crown
Life Insurance Company,[42] citing McGuire v. The Manufacturer's Life Insurance
Co.[43]:
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. (Emphases ours.)
It does not matter that when he died, Eulogios Application for Reinstatement and
deposits for the overdue premiums and interests were already with Malaluan. Insular
Life, through the Policy Contract, expressly limits the power or authority of its
insurance agents, thus:
Our agents have no authority to make or modify this contract, to
extend the time limit for payment of premiums, to waive any
lapsation, forfeiture or any of our rights or requirements, such
powers being limited to our president, vice-president or persons
authorized by the Board of Trustees and only in
writing.[44] (Emphasis ours.)
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.
The Court agrees with the RTC that the conditions for reinstatement under
the Policy Contract and Application for Reinstatement were written in clear and simple
language, which could not admit of any meaning or interpretation other than those
that they so obviously embody. A construction in favor of the insured is not called for,
as there is no ambiguity in the said provisions in the first place. The words thereof
are clear, unequivocal, and simple enough so as to preclude any mistake in the
appreciation of the same.
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.[45]
Eulogios death, just hours after filing his Application for Reinstatement and
depositing his payment for overdue premiums and interests with Malaluan, does not
constitute a special circumstance that can persuade this Court to already
consider Policy No. 9011992 reinstated. Said circumstance cannot override the clear
and express provisions of the Policy Contract and Application for Reinstatement, and
operate to remove the prerogative of Insular Life thereunder to approve or disapprove
the Application for Reinstatement. Even though the Court commiserates with Violeta,
as the tragic and fateful turn of events leaves her practically empty-handed, the Court
cannot arbitrarily burden Insular Life with the payment of proceeds on a lapsed
insurance policy. Justice and fairness must equally apply to all parties to a
case. 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.[46]
Policy No. 9011992 remained lapsed and void, not having been reinstated in
accordance with the Policy Contract and Application for Reinstatement before Eulogios
death. Violeta, therefore, cannot claim any death benefits from Insular Life on the
basis of Policy No. 9011992; but she is entitled to receive the full refund of the
payments made by Eulogio thereon.
WHEREFORE, premises considered, the Court DENIES the instant Petition
for Review on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMSthe
Orders dated 10 April 2008 and 3 July 2008 of the RTC of Gapan City, Branch 34, in
Civil Case No. 2177, denying petitioner Violeta R. Lalicans Notice of Appeal, on the
ground that the Decision dated 30 August 2007 subject thereof, was already final and
executory. No costs.
SO ORDERED.
G.R. No. 175666 July 29, 2013
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit
business from or provide insurance coverage only to legitimate and bona fide clients,
by requiring them to thoroughly investigate those they insure within two years from
effectivity of the policy and while the insured is still alive. If they do not, they will be
obligated to honor claims on the policies they issue, regardless of fraud, concealment
or misrepresentation. The law assumes that they will do just that and not sit on their
laurels, indiscriminately soliciting and accepting insurance business from any Tom,
Dick and Harry.
Assailed in this Petition for Review on Certiorari1 are the September 28, 2005
Decision2 of the Court of Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9,
2006 Resolution3 denying the petitioner’s Motion for Reconsideration.4
Factual Antecedents
After a policy of life insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two years from the date
of its issue or of its last reinstatement, the insurer cannot prove that the policy is void
ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent.

During the proceedings on the Motion to Dismiss, petitioner’s investigator testified in

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila
court, stating among others that the insurance underwriter who solicited the
Bankers Life Insurance Corporation (Bankers Life), designating respondent Cresencia
insurance is a cousin of respondent’s husband, Dindo Aban,15 and that it was the
P. Aban (Aban), her niece,5 as her beneficiary.
respondent who paid the annual premiums on the policy.16

Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of
Ruling of the Regional Trial Court
₱100,000.00, in Sotero’s favor on August 30, 1993, after the requisite medical
examination and payment of the insurance premium.6
On December 9, 1997, the trial court issued an Order17 granting respondent’s Motion
to Dismiss, thus:
On April 10, 1996, when the insurance policy had been in force for more than two
7

years and seven months, Sotero died. Respondent filed a claim for the insurance
proceeds on July 9, 1996. Petitioner conducted an investigation into the claim,8 and WHEREFORE, defendant CRESENCIA P. ABAN’s Motion to Dismiss is hereby granted.
came out with the following findings: Civil Case No. 97-867 is hereby dismissed.

1. Sotero did not personally apply for insurance coverage, as she was
illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums
on Insurance Policy No. 747411;
4. Sotero did not sign the July 3, 1993 application for insurance;9 and
5. Respondent was the one who filed the insurance application, and x x x
designated herself as the beneficiary.10
For the above reasons, petitioner denied respondent’s claim on April 16, 1997 and
refunded the premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the
policy, which was docketed as Civil Case No. 97-867 and assigned to Branch 134 of
the Makati Regional Trial Court. The main thesis of the Complaint was that the policy
was obtained by fraud, concealment and/or misrepresentation under the Insurance
Code,12 which thus renders it voidable under Article 139013 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioner’s cause of action was
barred by prescription pursuant to Section 48 of the Insurance Code, which provides
as follows:
SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was the
one who procured the insurance; thus, Sotero could legally take out insurance on her
own life and validly designate – as she did – respondent as the beneficiary. It held
further that under Section 48, petitioner had only two years from the effectivity of
the policy to question the same; since the policy had been in force for more than two
years, petitioner is now barred from contesting the same or seeking a rescission or
annulment thereof.
Petitioner moved for reconsideration, but in another Order19 dated October 20, 1998,
the trial court stood its ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286.
Petitioner questioned the dismissal of Civil Case No. 97-867, arguing that the trial
court erred in applying Section 48 and declaring that prescription has set in. It
contended that since it was respondent – and not Sotero – who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed Decision, which contained the
following decretal portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for
lack of merit.

Whenever a right to rescind a contract of insurance is given to the insurer by any

SO ORDERED.20
provision of this chapter, such right must be exercised previous to the commencement
of an action on the contract.
The CA thus sustained the trial court. Applying Section 48 to petitioner’s case, the CA
held that petitioner may no longer prove that the subject policy was void ab initio or
rescindible by reason of fraudulent concealment or misrepresentation after the lapse
of more than two years from its issuance. It ratiocinated that petitioner was equipped
with ample means to determine, within the first two years of the policy, whether
fraud, concealment or misrepresentation was present when the insurance coverage
was obtained. If it failed to do so within the statutory two-year period, then the
insured must be protected and allowed to claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November
9, 2006 Resolution.22 Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION FOR
RECONSIDERATION.23
Petitioner’s Arguments
In praying that the CA Decision be reversed and that the case be remanded to the
trial court for the conduct of further proceedings, petitioner argues in its Petition and
Reply24 that Section 48 cannot apply to a case where the beneficiary under the
insurance contract posed as the insured and obtained the policy under fraudulent
circumstances. It adds that respondent, who was merely Sotero’s niece, had no
insurable interest in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the
insurance proceeds was filed, petitioner insists that respondent’s claim was spurious,
as it appeared that Sotero did not actually apply for insurance coverage, was
unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently
obtaining insurance in the latter’s name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not
have given rise to rights and obligations; as such, the action for the declaration of its
nullity or inexistence does not prescribe.25
Respondent’s Arguments
Respondent, on the other hand, essentially argues in her Comment26 that the CA is
correct in applying Section 48. She adds that petitioner’s new allegation in its Petition
that the policy is void ab initio merits no attention, having failed to raise the same
below, as it had claimed originally that the policy was merely voidable.
On the issue of insurable interest, respondent echoes the CA’s pronouncement that
since it was Sotero who obtained the insurance, insurable interest was present. Under
Section 10 of the Insurance Code, Sotero had insurable interest in her own life, and
could validly designate anyone as her beneficiary. Respondent submits that the CA’s
findings of fact leading to such conclusion should be respected.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and appellate courts’ finding that it was Sotero
who obtained the insurance for herself, designating respondent as her beneficiary.
Both courts are in accord in this respect, and the Court is loath to disturb this. While
petitioner insists that its independent investigation on the claim reveals that it was
respondent, posing as Sotero, who obtained the insurance, this claim is no longer
feasible in the wake of the courts’ finding that it was Sotero who obtained the
insurance for herself. This finding of fact binds the Court.
With the above crucial finding of fact – that it was Sotero who obtained the insurance
for herself – petitioner’s case is severely weakened, if not totally disproved.
Allegations of fraud, which are predicated on respondent’s alleged posing as Sotero
and forgery of her signature in the insurance application, are at once belied by the
trial and appellate courts’ finding that Sotero herself took out the insurance for
herself. "Fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract."27 In the absence of proof of such fraudulent
intent, no right to rescind arises.
Moreover, the results and conclusions arrived at during the investigation conducted
unilaterally by petitioner after the claim was filed may simply be dismissed as self-
serving and may not form the basis of a cause of action given the existence and
application of Section 48, as will be discussed at length below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and
the insured. Under the provision, an insurer is given two years – from the effectivity
of a life insurance contract and while the insured is alive – to discover or prove that
the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy,
even though the policy was obtained by fraud, concealment, or misrepresentation.
This is not to say that insurance fraud must be rewarded, but that insurers who
recklessly and indiscriminately solicit and obtain business must be penalized, for such
recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire whether the policy was obtained
by fraud, concealment, or misrepresentation; on the other hand, it forewarns
scheming individuals that their attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing into such nefarious enterprise. At
the same time, legitimate policy holders are absolutely protected from unwarranted
denial of their claims or delay in the collection of insurance proceeds occasioned by
allegations of fraud, concealment, or misrepresentation by insurers, claims which may
no longer be set up after the two-year period expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer
and the insured are given the assurance that any dishonest scheme to obtain life
insurance would be exposed, and attempts at unduly denying a claim would be struck
down. Life insurance policies that pass the statutory two-year period are essentially
treated as legitimate and beyond question, and the individuals who wield them are
made secure by the thought that they will be paid promptly upon claim. In this
manner, Section 48 contributes to the stability of the insurance industry.
Section 48 prevents a situation where the insurer knowingly continues to accept
annual premium payments on life insurance, only to later on deny a claim on the
policy on specious claims of fraudulent concealment and misrepresentation, such as
what obtains in the instant case. Thus, instead of conducting at the first instance an
investigation into the circumstances surrounding the issuance of Insurance Policy No.
747411 which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and
opted instead to continue collecting the premiums on the policy. For nearly three
years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied
to it with full force and effect.
The Court therefore agrees fully with the appellate court’s pronouncement that –
the "incontestability clause" is a provision in law that after a policy of life insurance
made payable on the death of the insured shall have been in force during the lifetime
of the insured for a period of two (2) years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible
by reason of fraudulent concealment or misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting
the rescinding of the contract of insurance on the ground of fraudulent concealment
or misrepresentation to a period of only two (2) years from the issuance of the policy
or its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent
concealment or misrepresentation within a period of two (2) years. It is not fair for
the insurer to collect the premiums as long as the insured is still alive, only to raise
the issue of fraudulent concealment or misrepresentation when the insured dies in
order to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the
beneficiary is given the stability to recover under the policy when the insured dies.
The provision also makes clear when the two-year period should commence in case
the policy should lapse and is reinstated, that is, from the date of the last
reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how
patent or well-founded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance
companies to avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses
of false representations or concealment of material facts insofar as health and
previous diseases are concerned if the insurance has been in force for at least two
years during the insured’s lifetime. The phrase "during the lifetime" found in Section
48 simply means that the policy is no longer considered in force after the insured has
died. The key phrase in the second paragraph of Section 48 is "for a period of two
years."
As borne by the records, the policy was issued on August 30, 1993, the insured died
on April 10, 1996, and the claim was denied on April 16, 1997. The insurance policy
was thus in force for a period of 3 years, 7 months, and 24 days. Considering that
the insured died after the two-year period, the plaintiff-appellant is, therefore, barred
from proving that the policy is void ab initio by reason of the insured’s fraudulent
concealment or misrepresentation or want of insurable interest on the part of the
beneficiary, herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellant’s burden to show that the
factual findings of the trial court are not based on substantial evidence or that its
conclusions are contrary to applicable law and jurisprudence. The plaintiff-appellant
failed to discharge that burden.28
Petitioner claims that its insurance agent, who solicited the Sotero account, happens
to be the cousin of respondent’s husband, and thus insinuates that both connived to
commit insurance fraud. If this were truly the case, then petitioner would have
discovered the scheme earlier if it had in earnest conducted an investigation into the
circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two
years later, naturally it was unable to detect the scheme. For its negligence and
inaction, the Court cannot sympathize with its plight. Instead, its case precisely
provides the strong argument for requiring insurers to diligently conduct
investigations on each policy they issue within the two-year period mandated under
Section 48, and not after claims for insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance
agents/salesmen and the insurance policies they issue, then they should cease doing
business. If they could not properly screen their agents or salesmen before taking
them in to market their products, or if they do not thoroughly investigate the
insurance contracts they enter into with their clients, then they have only themselves
to blame. Otherwise said, insurers cannot be allowed to collect premiums on insurance
policies, use these amounts collected and invest the same through the years,
generating profits and returns therefrom for their own benefit, and thereafter (c) An expectancy, coupled with an existing interest in that out of which the
conveniently deny insurance claims by questioning the authority or integrity of their expectancy arises.
own agents or the insurance policies they issued to their premium-paying clients. This
is exactly one of the schemes which Section 48 aims to prevent.
d.2.1 An existing interest
Insurers may not be allowed to delay the payment of claims by filing frivolous cases
in court, hoping that the inevitable may be put off for years – or even decades – by
G.R. No. 147839 June 8, 2006
the pendency of these unnecessary court cases. In the meantime, they benefit from
collecting the interest and/or returns on both the premiums previously paid by the
insured and the insurance proceeds which should otherwise go to their beneficiaries. GAISANO CAGAYAN, INC. Petitioner,
The business of insurance is a highly regulated commercial activity in the vs.
country,29 and is imbued with public interest.30 "An insurance contract is a contract of INSURANCE COMPANY OF NORTH AMERICA, Respondent.
adhesion which must be construed liberally in favor of the insured and strictly against
the insurer in order to safeguard the former’s interest."31 DECISION

WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and AUSTRIA-MARTINEZ, J.:
the November 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286
are AFFIRMED.
Before the Court is a petition for review on certiorari of the Decision1 dated October
11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the
SO ORDERED. Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC)
in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance
Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner);
c.3 A person for whom he relies on for support, education, or a person to whom he and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
has pecuniary interest on. reconsideration.
c.3.1 Creditor
c.3.2 Mortgage redemption insurance The factual background of the case is as follows:

c.4 Any person upon whose life or estate or interest vested in him the insured
depends. Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire
d. Insurable interest in Property insurance
insurance policies with book debt endorsements. The insurance policies provide for
Section 18. No contract or policy of insurance on property shall be enforceable except
coverage on "book debts in connection with ready-made clothing materials which
for the benefit of some person having an insurable interest in the property insured.
have been sold or delivered to various customers and dealers of the Insured anywhere
in the Philippines."2 The policies defined book debts as the "unpaid account still
Section 13. Every interest in property, whether real or personal, or any relation
appearing in the Book of Account of the Insured 45 days after the time of the loss
thereto, or liability in respect thereof, of such nature that a contemplated peril might
covered under this Policy."3 The policies also provide for the following conditions:
directly damnify the insured, is an insurable interest.

d.1 Test 1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
Section 13 outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
d.2 Kinds of insurable interest over property whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve
Section 14. An insurable interest in property may consist in: (12) days after the close of every calendar month all amount shown in their
books of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4
(a) An existing interest;

xxxx
(b) An inchoate interest founded on an existing interest; or
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks
of ready-made clothing materials sold and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against petitioner. It
alleges that IMC and LSPI filed with respondent their claims under their respective
fire insurance policies with book debt endorsements; that as of February 25, 1991,
the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
subrogated to their rights against petitioner; that respondent made several demands
for payment upon petitioner but these went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could
not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed by
it since the loss was due to fire which it could not prevent or foresee; that IMC and
LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire was
not attributable to the negligence of the petitioner; that it has not been established
that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that
"it is further agreed that merely for purpose of securing the payment of purchase
price, the above-described merchandise remains the property of the vendor until the
purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods
and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered
its decision setting aside the decision of the RTC. The dispositive portion of the
decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc.
to pay:
1. the amount of P2,119,205.60 representing the amount paid by the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the plaintiff-
appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire must
be borne by petitioner since the proviso contained in the sales invoices is an exception
under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by
a fortuitous event, the risk is borne by the owner of the thing at the time the loss
under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is
not the delivery of the lost goods but the payment of its unpaid account and as such
the obligation to pay is not extinguished, even if the fire is considered a fortuitous
event; that by subrogation, the insurer has the right to go against petitioner; that,
being a fire insurance with book debt endorsements, what was insured was the
vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot
be deemed to be over credit since an insurance "on credit" belies not only the nature
of fire insurance but the express terms of the policies; that it was not credit that was
insured since respondent paid on the occasion of the loss of the insured goods to fire
and not because of the non-payment by petitioner of any obligation; that, even if the
insurance is deemed as one over credit, there was no loss as the accounts were not
yet due since no prior demands were made by IMC and LSPI against petitioner for
payment of the debt and such demands came from respondent only after it had
already paid IMC and LSPI under the fire insurance policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-
buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies
over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor
of respondent as no valid insurance could be maintained thereon by IMC and LSPI
since all risk had transferred to petitioner upon delivery of the goods; that petitioner
was not privy to the insurance contract or the payment between respondent and its
insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting
its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable
interest over said goods as creditors who stand to suffer direct pecuniary loss from
its destruction by fire; that petitioner is liable for loss of the ready-made clothing
materials since it failed to overcome the presumption of liability under Article
126516 of the Civil Code; that the fire was caused through petitioner's negligence in
failing to provide stringent measures of caution, care and maintenance on its property
because electric wires do not usually short circuit unless there are defects in their
installation or when there is lack of proper maintenance and supervision of the
property; that petitioner is guilty of gross and evident bad faith in refusing to pay
respondent's valid claim and should be liable to respondent for contracted lawyer's
fees, litigation expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought
before it from the CA is limited to reviewing questions of law which involves no
examination of the probative value of the evidence presented by the litigants or any
of them.18 The Supreme Court is not a trier of facts; it is not its function to analyze
or weigh evidence all over again.19 Accordingly, findings of fact of the appellate court
are generally conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues
may be resolved by this Court, such as: (1) when the findings are grounded entirely
on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of facts
are conflicting; (6) when in making its findings the CA went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to the trial court; (8) when the findings
are conclusions without citation of specific evidence on which they are based; (9)
when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; (10) when the findings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on record;
and (11) when the CA manifestly overlooked certain relevant facts not disputed by
the parties, which, if properly considered, would justify a different
conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy."24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are to
be understood literally just as they appear on the face of the contract.25 Thus, what
were insured against were the accounts of IMC and LSPI with petitioner which
remained unpaid 45 days after the loss through fire, and not the loss or destruction
of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed
that merely for purpose of securing the payment of the purchase price the above
described merchandise remains the property of the vendor until the purchase price
thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been retained
by the seller merely to secure performance by the buyer of his obligations under the
contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis
supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss
of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by
concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which
the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an insurance claim.41 Respondent's action against petitioner is squarely sanctioned by
interest, it is sufficient that the insured is so situated with reference to the property Article 2207 of the Civil Code which provides:
that he would be liable to loss should it be injured or destroyed by the peril against
which it is insured.29 Anyone has an insurable interest in property who derives a
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
benefit from its existence or would suffer loss from its destruction.30Indeed, a vendor
from the insurance company for the injury or loss arising out of the wrong or breach
or seller retains an insurable interest in the property sold so long as he has any
of contract complained of, the insurance company shall be subrogated to the rights
interest therein, in other words, so long as he would suffer by its destruction, as where
of the insured against the wrongdoer or the person who has violated the contract. x
he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain
xx
to the unpaid accounts appearing in their Books of Account 45 days after the time of
the loss covered by the policies.
Petitioner failed to refute respondent's evidence.
The next question is: Is petitioner liable for the unpaid accounts?
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated
Petitioner's argument that it is not liable because the fire is a fortuitous event under
April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is
Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss
not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of
under Article 1504 (1) of the Civil Code.
Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.
Moreover, it must be stressed that the insurance in this case is not for loss of goods
by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
subrogation receipt was offered in evidence. Thus, there is no evidence that
correctly stated by the CA, where the obligation consists in the payment of money,
respondent has been subrogated to any right which LSPI may have against petitioner.
the failure of the debtor to make the payment even by reason of a fortuitous event
Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery
shall not relieve him of his liability.33 The rationale for this is that the rule that an
of the amount of P535,613.00.
obligor should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable even in case of fortuitous event. It WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
does not apply when the obligation is pecuniary in nature.34 11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the
amount of P535,613.00 to respondent is DELETED for lack of factual basis.
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation."
If the obligation is generic in the sense that the object thereof is designated merely No pronouncement as to costs.
by its class or genus without any particular designation or physical segregation from
all others of the same class, the loss or destruction of anything of the same kind even SO ORDERED.
without the debtor's fault and before he has incurred in delay will not have the effect
of extinguishing the obligation.35 This rule is based on the principle that the genus of
a thing can never perish. Genus nunquan perit.36 An obligation to pay money is G.R. No. 85141 November 28, 1989
generic; therefore, it is not excused by fortuitous loss of any specific property of the
debtor.37 FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
Thus, whether fire is a fortuitous event or petitioner was negligent are matters COURT OF APPEALS and CHOA TIEK SENG, respondents.
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI. Balgos & Perez Law Offices for petitioner.

With respect to IMC, the respondent has adequately established its claim. Exhibits Lapuz Law office for private respondent.
"C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to
IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent
upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by REGALADO, J.:
itself, is sufficient to establish not only the relationship of respondent as insurer and
IMC as the insured, but also the amount paid to settle the insurance claim. The right
This is a review of the decision of the Court of Appeals, promulgated on July 19,1988,
of subrogation accrues simply upon payment by the insurance company of the
the dispositive part of which reads:
 WHEREFORE, the judgment appealed from is affirmed insofar as it
orders defendant Filipino Merchants Insurance Company to pay the
plaintiff the sum of P51,568.62 with interest at legal rate from the
date of filing of the complaint, and is modified with respect to the
third party complaint in that (1) third party defendant E. Razon,
Inc. is ordered to reimburse third party plaintiff the sum of
P25,471.80 with legal interest from the date of payment until the
date of reimbursement, and (2) the third-party complaint against
third party defendant Compagnie Maritime Des Chargeurs Reunis is
dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as
follows:
This is an action brought by the consignee of the shipment of
fishmeal loaded on board the vessel SS Bougainville and unloaded
at the Port of Manila on or about December 11, 1976 and seeks to
recover from the defendant insurance company the amount of
P51,568.62 representing damages to said shipment which has been
insured by the defendant insurance company under Policy No. M-
2678. The defendant brought a third party complaint against third
party defendants Compagnie Maritime Des Chargeurs Reunis
and/or E. Razon, Inc. seeking judgment against the third (sic)
defendants in case Judgment is rendered against the third party
plaintiff. It appears from the evidence presented that in December
1976, plaintiff insured said shipment with defendant insurance
company under said cargo Policy No. M-2678 for the sum of
P267,653.59 for the goods described as 600 metric tons of fishmeal
in new gunny bags of 90 kilos each from Bangkok, Thailand to
Manila against all risks under warehouse to warehouse terms.
Actually, what was imported was 59.940 metric tons not 600 tons
at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags
were unloaded from the ship on December 11, 1976 at Manila unto
the arrastre contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge 105 bags were in
bad order condition as jointly surveyed by the ship's agent and the
arrastre contractor. The condition of the bad order was reflected in
the turn over survey report of Bad Order cargoes Nos. 120320 to
120322, as Exhibit C-4 consisting of three (3) pages which are also
Exhibits 4, 5 and 6- Razon. The cargo was also surveyed by the
arrastre contractor before delivery of the cargo to the consignee
and the condition of the cargo on such delivery was reflected in E.
Razon's Bad Order Certificate No. 14859, 14863 and 14869
covering a total of 227 bags in bad order condition. Defendant's
surveyor has conducted a final and detailed survey of the cargo in
the warehouse for which he prepared a survey report Exhibit F with
the findings on the extent of shortage or loss on the bad order bags
totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on
said computation the plaintiff made a formal claim against the
defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A
formal claim statement was also presented by the plaintiff against
the vessel dated December 21, 1976, Exhibit B, but the defendant
Filipino Merchants Insurance Company refused to pay the claim.
Consequently, the plaintiff brought an action against said defendant
as adverted to above and defendant presented a third party
complaint against the vessel and the arrastre contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered
in favor of the plaintiff and against the defendant Filipino Merchant's
(sic) Insurance Co., ordering the defendants to pay the plaintiff the
following amount:
The sum of P51,568.62 with interest at legal rate from the date of
the filing of the complaint;
On the third party complaint, the third party defendant Compagnie
Maritime Des Chargeurs Reunis and third party defendant E. Razon,
Inc. are ordered to pay to the third party plaintiff jointly and
severally reimbursement of the amounts paid by the third party
plaintiff with legal interest from the date of such payment until the
date of such reimbursement.
Without pronouncement as to costs.3
On appeal, the respondent court affirmed the decision of the lower court insofar as
the award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the aforesaid
decision was denied, hence this petition with the following assignment of errors:
1. The Court of Appeals erred in its interpretation and application of
the "all risks" clause of the marine insurance policy when it held the
petitioner liable to the private respondent for the partial loss of the
cargo, notwithstanding the clear absence of proof of some fortuitous
event, casualty, or accidental cause to which the loss is attributable,
thereby contradicting the very precedents cited by it in its decision
as well as a prior decision of the same Division of the said court
(then composed of Justices Cacdac, Castro-Bartolome, and
Pronove);
2. The Court of Appeals erred in not holding that the private
respondent had no insurable interest in the subject cargo, hence,
the marine insurance policy taken out by private respondent is null
and void;
3. The Court of Appeals erred in not holding that the private
respondent was guilty of fraud in not disclosing the fact, it being
bound out of utmost good faith to do so, that it had no insurable
interest in the subject cargo, which bars its recovery on the policy. 4
On the first assignment of error, petitioner contends that an "all risks" marine policy
has a technical meaning in insurance in that before a claim can be compensable it is
essential that there must be "some fortuity, " "casualty" or "accidental cause" to which
the alleged loss is attributable and the failure of herein private respondent, upon
whom lay the burden, to adduce evidence showing that the alleged loss to the cargo
in question was due to a fortuitous event precludes his right to recover from the
insurance policy. We find said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the
subject-matter insured but shall in no case be deemed to extend to
cover loss, damage, or expense proximately caused by delay or
inherent vice or nature of the subject-matter insured. Claims
recoverable hereunder shall be payable irrespective of
percentage. 5
An "all risks policy" should be read literally as meaning all risks whatsoever and
covering all losses by an accidental cause of any kind. The terms "accident" and
"accidental", as used in insurance contracts, have not acquired any technical meaning.
They are construed by the courts in their ordinary and common acceptance. Thus, the
terms have been taken to mean that which happens by chance or fortuitously, without
intention and design, and which is unexpected, unusual and unforeseen. An accident
is an event that takes place without one's foresight or expectation; an event that
proceeds from an unknown cause, or is an unusual effect of a known cause and,
therefore, not expected. 6
The very nature of the term "all risks" must be given a broad and comprehensive
meaning as covering any loss other than a willful and fraudulent act of the
insured. 7 This is pursuant to the very purpose of an "all risks" insurance to give
protection to the insured in those cases where difficulties of logical explanation or
some mystery surround the loss or damage to property. 8 An "all asks" policy has
been evolved to grant greater protection than that afforded by the "perils clause," in
order to assure that no loss can happen through the incidence of a cause neither
insured against nor creating liability in the ship; it is written against all losses, that
is, attributable to external causes. 9
The term "all risks" cannot be given a strained technical meaning, the language of
the clause under the Institute Cargo Clauses being unequivocal and clear, to the effect
that it extends to all damages/losses suffered by the insured cargo except (a) loss or
damage or expense proximately caused by delay, and (b) loss or damage or expense
proximately caused by the inherent vice or nature of the subject matter insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an "all risks" policy the burden is not on the insured to prove
the precise cause of loss or damage for which it seeks compensation. The insured
under an "all risks insurance policy" has the initial burden of proving that the cargo
was in good condition when the policy attached and that the cargo was damaged
when unloaded from the vessel; thereafter, the burden then shifts to the insurer to
show the exception to the coverage. 10 As we held in Paris-Manila Perfumery Co. vs.
Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company has the
burden of proving that the loss is caused by the risk excepted and for want of such
proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a special
type of insurance which extends coverage to risks not usually contemplated and
avoids putting upon the insured the burden of establishing that the loss was due to
the peril falling within the policy's coverage; the insurer can avoid coverage upon
demonstrating that a specific provision expressly excludes the loss from
coverage. 12 A marine insurance policy providing that the insurance was to be "against
all risks" must be construed as creating a special insurance and extending to other
risks than are usually contemplated, and covers all losses except such as arise from
the fraud of the insured. 13 The burden of the insured, therefore, is to prove merely
that the goods he transported have been lost, destroyed or deteriorated. Thereafter,
the burden is shifted to the insurer to prove that the loss was due to excepted perils.
To impose on the insured the burden of proving the precise cause of the loss or
damage would be inconsistent with the broad protective purpose of "all risks"
insurance.
In the present case, there being no showing that the loss was caused by any of the
excepted perils, the insurer is liable under the policy. As aptly stated by the
respondent Court of Appeals, upon due consideration of the authorities and
jurisprudence it discussed —
... it is believed that in the absence of any showing that the
losses/damages were caused by an excepted peril, i.e. delay or the
inherent vice or nature of the subject matter insured, and there is
no such showing, the lower court did not err in holding that the loss
was covered by the policy.
There is no evidence presented to show that the condition of the
gunny bags in which the fishmeal was packed was such that they
could not hold their contents in the course of the necessary transit,
much less any evidence that the bags of cargo had burst as the
result of the weakness of the bags themselves. Had there been such
a showing that spillage would have been a certainty, there may
have been good reason to plead that there was no risk covered by
the policy (See Berk vs. Style [1956] cited in Marine Insurance
Claims, Ibid, p. 125). Under an 'all risks' policy, it was sufficient to
show that there was damage occasioned by some accidental cause
of any kind, and there is no necessity to point to any particular
cause. 14
Contracts of insurance are contracts of indemnity upon the terms and conditions
specified in the policy. The agreement has the force of law between the parties. The
terms of the policy constitute the measure of the insurer's liability. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary
and popular sense.15
Anent the issue of insurable interest, we uphold the ruling of the respondent court
that private respondent, as consignee of the goods in transit under an invoice
containing the terms under "C & F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every
interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the
insured. In principle, anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction whether he has or THIRD DIVISION
has not any title in, or lien upon or possession of the property y. 16 Insurable interest
in property may consist in (a) an existing interest; (b) an inchoate interest founded VICENTE ONG LIM SING, JR., G.R. No. 168115
on an existing interest; or (c) an expectancy, coupled with an existing interest in that Petitioner,
out of which the expectancy arises. 17 Present:

YNARES-SANTIAGO, J.,
Herein private respondent, as vendee/consignee of the goods in transit has such
- versus - Chairperson,
existing interest therein as may be the subject of a valid contract of insurance. His
AUSTRIA-MARTINEZ,
interest over the goods is based on the perfected contract of sale. 18The perfected
CHICO-NAZARIO, and
contract of sale between him and the shipper of the goods operates to vest in him an
NACHURA, JJ.
equitable title even before delivery or before be performed the conditions of the
sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this
FEB LEASING & FINANCE CORPORATION, Promulgated:
case, is immaterial in the determination of whether the vendee has an insurable
Respondent.
interest or not in the goods in transit. The perfected contract of sale even without
June 8, 2007
delivery vests in the vendee an equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
x------------------------------------------------------------------------------------x

Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract
of sale, the seller is authorized or required to send the goods to the buyer, delivery
of the goods to a carrier, whether named by the buyer or not, for, the purpose of
transmission to the buyer is deemed to be a delivery of the goods to the buyer, the
exceptions to said rule not obtaining in the present case. The Court has heretofore
ruled that the delivery of the goods on board the carrying vessels partake of the
nature of actual delivery since, from that time, the foreign buyers assumed the risks
of loss of the goods and paid the insurance premium covering them. 20
C & F contracts are shipment contracts. The term means that the price fixed includes
in a lump sum the cost of the goods and freight to the named destination. 21 It simply
means that the seller must pay the costs and freight necessary to bring the goods to
the named destination but the risk of loss or damage to the goods is transferred from
the seller to the buyer when the goods pass the ship's rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest was not among the defenses averred
in petitioners answer. It was neither an issue agreed upon by the parties at the pre-
trial conference nor was it raised during the trial in the court below. It is a settled rule
that an issue which has not been raised in the court a quo cannot be raised for the
first time on appeal as it would be offensive to the basic rules of fair play, justice and
due process. 23 This is but a permuted restatement of the long settled rule that when
a party deliberately adopts a certain theory, and the case is tried and decided upon
that theory in the court below, he will not be permitted to change his theory on appeal
because, to permit him to do so, would be unfair to the adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a
disquisition on the issue of insurable interest raised by petitioner, it was to put at rest
all doubts on the matter under the facts in this case and also to dispose of petitioner's
third assignment of error which consequently needs no further discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the
respondent Court of Appeals is AFFIRMED in toto.
SO ORDERED.
DECISION
NACHURA, J.:
This is a petition for review on certiorari assailing the Decision[1] dated March 15,
2005 and the Resolution[2] 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
lease[3] 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[4] 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[5] 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 (P170,494.00).
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.[6]
On December 6, 2000, FEB filed a Complaint[7] 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.
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 Lims 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 latters 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.
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 Complaints 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 Courts 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 attorneys 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 Order[13] 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 Decision[15] 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 SUBJECT PERSONAL PROPERTIES.
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
RESPONDENTS BOARD OF DIRECTORS AND/OR SECRETARYS
CERTIFICATE.
II
We affirm the ruling of the appellate court.
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).
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING
THE APPEAL FOR FAILURE OF THE RESPONDENT TO FILE ON TIME
ITS APPELLANTS BRIEF AND TO SEPARATELY RULE ON THE
PETITIONERS 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
IX
THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE
INTENTIONS OF THE COURT A QUO IN ITS USAGE OF THE TERM
MERCHANTABILITY.[18]
 First, Lim can no longer question Galangs authority as FEBs authorized
representative in filing the suit against Lim. Galang was the representative of FEB in SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE
the proceedings before the trial court up to the appellate court. Petitioner never
placed in issue the validity of Galangs representation before the trial and appellate 23.1. The LESSOR and the LESSEE agree this instrument constitute
courts. Issues raised for the first time on appeal are barred by estoppel. Arguments the entire agreement between them, and that no representations
not raised in the original proceedings cannot be considered on review; otherwise, it have been made other than as set forth herein. This Agreement
would violate basic principles of fair play.[19] shall not be amended or altered in any manner, unless such
amendment be made in writing and signed by the parties hereto.
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 Petitioners claim that the real intention of the parties was a contract of sale of personal
separately on the petitioners motion to dismiss. property on installment basis is more likely a mere afterthought in order to defeat the
rights of the respondent.
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 The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance
end to litigation and the parties right to due process. In numerous cases, this Court Certificates is, in point of fact, a financial lease within the purview of R.A. No.
has allowed liberal construction of the rules when to do so would serve the demands 8556. Section 3(d) thereof defines financial leasing as:
of substantial justice and equity.[20] In Aguam v. Court of Appeals, the Court
explained:
[A] mode of extending credit through a non-cancelable lease
contract under which the lessor purchases or acquires, at the
The court has the discretion to dismiss or not to dismiss an
instance of the lessee, machinery, equipment, motor vehicles,
appellant's appeal. It is a power conferred on the court, not a
appliances, business
duty. The "discretion must be a sound one, to be exercised in
and office machines, and other movable or immovable property in
accordance with the tenets of justice and fair play, having in mind
consideration of the periodic payment by the lessee of a fixed
the circumstances obtaining in each case." Technicalities, however,
amount of money sufficient to amortize at least seventy (70%) of
must be avoided. The law abhors technicalities that impede the
the purchase price or acquisition cost, including any incidental
cause of justice. The court's primary duty is to render or dispense
expenses and a margin of profit over an obligatory period of
justice. "A litigation is not a game of technicalities." "Lawsuits
not less than two (2) years during which the lessee has the right to
unlike duels are not to be won by a rapier's thrust. Technicality,
hold and use the leased property with the right to expense the lease
when it deserts its proper office as an aid to justice and becomes
rentals paid to the lessor and bears the cost of repairs,
its great hindrance and chief enemy, deserves scant consideration
maintenance, insurance and preservation thereof, but with no
from courts." Litigations must be decided on their merits and not
obligation or option on his part to purchase the leased property from
on technicality. Every party litigant must be afforded the amplest
the owner-lessor at the end of the lease contract.
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
FEB leased the subject equipment and motor vehicles to JVL in consideration
merits and the rules of procedure ought not to be applied in a very
of a monthly periodic payment of P170,494.00. The periodic payment by petitioner is
rigid, technical sense; rules of procedure are used only to help
sufficient to amortize at least 70% of the purchase price or acquisition cost of the said
secure, not override substantial justice. It is a far better and more
movables in accordance with the Lease Schedules with
prudent course of action for the court to excuse a technical lapse
Delivery and AcceptanceCertificates. The basic purpose of a financial leasing
and afford the parties a review of the case on appeal to attain the
transaction is to enable the prospective buyer of equipment, who is unable to pay for
ends of justice rather than dispose of the case on technicality and
such equipment in cash in one lump sum, to lease such equipment in the meantime
cause a grave injustice to the parties, giving a false impression of
for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost
speedy disposal of cases while actually resulting in more delay, if
(including the expenses and a margin of profit for the financial lessor) with the
not a miscarriage of justice.[21]
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]
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 allegation of petitioner that the rent for the use of each movable
the terms thereof are accepted without objection, then the contract serves as the law constitutes the value of the vehicle or equipment leased is of no moment. The law on
between the parties. 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,
In Section 23 of the lease contract, it was expressly stated that: 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]
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 14[28] 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 ANDTHAT 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.
d.2.2 An inchoate interest
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the decision1 of the Court of
Appeals in CA-G.R. SP No. 31916, entitled "Country Bankers Insurance Corporation
versus Armando Geagonia," reversing the decision of the Insurance Commission in
I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against
private respondent Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private
respondent fire insurance policy No. F-146222 for P100,000.00. The period of the
policy was from 22 December 1989 to 22 December 1990 and covered the following:
"Stock-in-trade consisting principally of dry goods such as RTW's for men and women
wear and other usual to assured's business."
The petitioner declared in the policy under the subheading entitled CO-INSURANCE
that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to
1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized
as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
—————
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the Company of any insurance or
insurances already affected, or which may subsequently be
effected, covering any of the property or properties consisting of
stocks in trade, goods in process and/or inventories only hereby
insured, and unless such notice be given and the particulars of such
insurance or insurances be stated therein or endorsed in this policy
pursuant to Section 50 of the Insurance Code, by or on behalf of
the Company before the occurrence of any loss or damage, all
benefits under this policy shall be deemed forfeited, provided
however, that this condition shall not apply when the total insurance
or insurances in force at the time of the loss or damage is not more
than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public
market of San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were
completely destroyed prompting him to file with the private respondent a claim under
the policy. On 28 December 1990, the private respondent denied the claim because
it found that at the time of the loss the petitioner's stocks-in-trade were likewise
covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00
each, issued by the Cebu Branch of the Philippines First Insurance Co., Inc.
(hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount
Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing
Textiles, Cebu City as their interest may appear subject to the terms
of this policy. CO-INSURANCE DECLARED: P100,000. — Phils. First
CEB/F 24758.4
The basis of the private respondent's denial was the petitioner's alleged violation of
Condition 3 of the policy.
The petitioner then filed a complaint 5 against the private respondent with the
Insurance Commission (Case No. 3340) for the recovery of P100,000.00 under fire
insurance policy No. F-14622 and for attorney's fees and costs of litigation. He
attached as Annex "AM"6 thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies
issued by the PFIC were already in existence; however, he had no knowledge of the
provision in the private respondent's policy requiring him to inform it of the prior
policies; this requirement was not mentioned to him by the private respondent's
agent; and had it been mentioned, he would not have withheld such information. He
further asserted that the total of the amounts claimed under the three policies was
below the actual value of his stocks at the time of loss, which was P1,000,000.00.
In its answer,7 the private respondent specifically denied the allegations in the
complaint and set up as its principal defense the violation of Condition 3 of the policy.
In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner
did not violate Condition 3 as he had no knowledge of the existence of the two fire
insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which
procured the PFIC policies without informing him or securing his consent; and that
Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to know of the PFIC
policies only when he filed his claim with the private respondent and that Cebu Tesing
Textile obtained them and paid for their premiums without informing him thereof. The
Insurance Commission then decreed:
WHEREFORE, judgment is hereby rendered ordering the respondent
company to pay complainant the sum of P100,000.00 with legal
interest from the time the complaint was filed until fully satisfied
 plus the amount of P10,000.00 as attorney's fees. With costs. The
compulsory counterclaim of respondent is hereby dismissed.
Its motion for the reconsideration of the decision 9 having been denied by the
Insurance Commission in its resolution of 20 August 1993, 10 the private respondent
appealed to the Court of Appeals by way of a petition for review. The petition was
docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of
the Insurance Commission because it found that the petitioner knew of the existence
of the two other policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA 28146/Fire Policy No.
28144 that the insurance was taken in the name of private
respondent [petitioner herein]. The policy states that "DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)" was the assured and that
"TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by private
respondent, not by the Tesing Textiles which is alleged to have
taken out the other insurance without the knowledge of private
respondent. This is shown by Premium Invoices nos. 46632 and
46630. (Annexes M and N). In both invoices, Tesing Textiles is
indicated to be only the mortgagee of the goods insured but the
party to which they were issued were the "DISCOUNT MART (MR.
ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein] who
took out the policies on the same property subject of the insurance
with petitioner. Hence, in failing to disclose the existence of these
insurances private respondent violated Condition No. 3 of Fire Policy
No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the
provisions insurances is belied by his letter to petitioner [of 18
January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of
the provision requiring me to inform your office
about my
prior insurance under FGA-28146 and F-CEB-
24758. Your representative did not mention
about said requirement at the time he was
convincing me to insure with you. If he only die
or even inquired if I had other existing policies
covering my establishment, I would have told him
so. You will note that at the time he talked to me
until I decided to insure with your company the
two policies aforementioned were already in
effect. Therefore I would have no reason to
withhold such information and I would have
desisted to part with my hard earned peso to pay
the insurance premiums [if] I know I could not
recover anything.
Sir, I am only an ordinary businessman interested
in protecting my investments. The actual value of
my stocks damaged by the fire was estimated by
the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex
"A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my
merchandise inventory was already some
P595,455.75. . . . These will support my claim
that the amount claimed under the three policies
are much below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did
not know that there were other insurances taken on the stock-in-
trade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been denied, the petitioner filed
the instant petition. He contends therein that the Court of Appeals acted with grave
abuse of discretion amounting to lack or excess of jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE
INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED
WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE
DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE
COURTS;
B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH
WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR
TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER
HEREIN AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are (a) whether the
petitioner had prior knowledge of the two insurance policies issued by the PFIC when
he obtained the fire insurance policy from the private respondent, thereby, for not
disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he
is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals' reliance on the petitioner's
letter of reconsideration of 18 January 1991, is without merit. The petitioner claims
that the said letter was not offered in evidence and thus should not have been
considered in deciding the case. However, as correctly pointed out by the Court of
Appeals, a copy of this letter was attached to the petitioner's complaint in I.C. Case
No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has
attained the status of a judicial admission and since its due execution and authenticity
was not denied by the other party, the petitioner is bound by it even if it were not
introduced as an independent evidence. 13
As to the first issue, the Insurance Commission found that the petitioner had no
knowledge of the previous two policies. The Court of Appeals disagreed and found
otherwise in view of the explicit admission by the petitioner in his letter to the private
respondent of 18 January 1991, which was quoted in the challenged decision of the
Court of Appeals. These divergent findings of fact constitute an exception to the
general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding upon
this Court. 14
We agree with the Court of Appeals that the petitioner knew of the prior policies issued
by the PFIC. His letter of 18 January 1991 to the private respondent conclusively
proves this knowledge. His testimony to the contrary before the Insurance
Commissioner and which the latter relied upon cannot prevail over a written admission
made ante litem motam. It was, indeed, incredible that he did not know about the
prior policies since these policies were not new or original. Policy No. GA-28144 was
a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed twice,
the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not
proscribed by law. Its incorporation in the policy is allowed by Section 75 of the
Insurance Code 15 which provides that "[a] policy may declare that a violation of
specified provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision which invariably
appears in fire insurance policies and is intended to prevent an increase in the moral
hazard. It is commonly known as the additional or "other insurance" clause and has
been upheld as valid and as a warranty that no other insurance exists. Its violation
would thus avoid the
policy. 16 However, in order to constitute a violation, the other insurance must be
upon same subject matter, the same interest therein, and the same risk.17
As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be one policy, or each
may take out a separate policy covering his interest, either at the same or at separate
times. 18 The mortgagor's insurable interest covers the full value of the mortgaged
property, even though the mortgage debt is equivalent to the full value of the
property.19 The mortgagee's insurable interest is to the extent of the debt, since the
property is relied upon as security thereof, and in insuring he is not insuring the
property but his interest or lien thereon. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt, not exceeding the value of
the mortgaged property. 20 Thus, separate insurances covering different insurable
interests may be obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of the mortgagee,
which is the usual practice. The mortgagee may be made the beneficial payee in
several ways. He may become the assignee of the policy with the consent of the
insurer; or the mere pledgee without such consent; or the original policy may contain
a mortgage clause; or a rider making the policy payable to the mortgagee "as his
interest may appear" may be attached; or a "standard mortgage clause," containing
a collateral independent contract between the mortgagee and insurer, may be
attached; or the policy, though by its terms payable absolutely to the mortgagor, may
have been procured by a mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the
proceeds. 21
In the policy obtained by the mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the mortgagee is only a beneficiary under the
contract, and recognized as such by the insurer but not made a party to the contract
himself. Hence, any act of the mortgagor which defeats his right will also defeat the
right of the mortgagee. 22 This kind of policy covers only such interest as the
mortgagee has at the issuing of the policy.23
On the other hand, a mortgagee may also procure a policy as a contracting party in
accordance with the terms of an agreement by which the mortgagor is to pay the
premiums upon such insurance. 24 It has been noted, however, that although the
mortgagee is himself the insured, as where he applies for a policy, fully informs the
authorized agent of his interest, pays the premiums, and obtains on the assurance
that it insures him, the policy is in fact in the form used to insure a mortgagor with
loss payable clause. 25
The fire insurance policies issued by the PFIC name the petitioner as the assured and
contain a mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu
City as their interest may appear subject to the terms of this policy.
This is clearly a simple loss payable clause, not a standard mortgage clause.
It must, however, be underscored that unlike the "other insurance" clauses involved
in General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety
Corp. vs. Yap, 27 which read:
The insured shall give notice to the company of any insurance or
insurances already effected, or which may subsequently be effected
covering any of the property hereby insured, and unless such notice
be given and the particulars of such insurance or insurances be
stated in or endorsed on this Policy by or on behalf of the Company
before the occurrence of any loss or damage, all benefits under this
Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole or a
portion of the objects thereby assured must be declared by the insured in
writing and he must cause the company to add or insert it in the policy,
without which such policy shall be null and void, and the insured will not be
entitled to indemnity in case of loss," Condition 3 in the private respondent's
policy No. F-14622 does not absolutely declare void any violation thereof. It
expressly provides that the condition "shall not apply when the total
insurance or insurances in force at the time of the loss or damage is not
more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted Costs against private respondent Country Bankers Insurance Corporation.
liberally in favor of the insured and strictly against the company, the reason being,
undoubtedly, to afford the greatest protection which the insured was endeavoring to
SO ORDERED.
secure when he applied for insurance. It is also a cardinal principle of law that
forfeitures are not favored and that any construction which would result in the
forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if
it is possible to construe the policy in a manner which would permit recovery, as, for
example, by finding a waiver for such forfeiture. 29 Stated differently, provisions,
conditions or exceptions in policies which tend to work a forfeiture of insurance
policies should be construed most strictly against those for whose benefits they are
inserted, and most favorably toward those against whom they are intended to
operate. 30 The reason for this is that, except for riders which may later be inserted,
the insured sees the contract already in its final form and has had no voice in the
selection or arrangement of the words employed therein. On the other hand, the
language of the contract was carefully chosen and deliberated upon by experts and
legal advisers who had acted exclusively in the interest of the insurers and the
technical language employed therein is rarely understood by ordinary laymen. 31

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

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

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

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