A.

INTERPRETATION OF INSURANCE CONTRACTS

MALAYAN INSURANCE CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS and TKC MARKETING CORPORATION, respondents.

ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G. R. No.
43023 1 which affirmed, with slight modification, the decision of the Regional Trial Court of Cebu, Branch 15.

Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean
meal which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the
port of Rio del Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner
Malayan Insurance Corporation for which it issued two (2) Marine Cargo policy Nos. M/LP 97800305
amounting to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both dated September 1989.

While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil
authorities arrested and detained it because of a lawsuit on a question of ownership and possession. As a result,
private respondent notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for
the amount of US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of the cargo.
Private respondent likewise sought the assistance of petitioner on what to do with the cargo.

Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private
respondent, accordingly, advised petitioner that it might tranship the cargo and requested an extension of the
insurance coverage until actual transhipment, which extension was approved upon payment of additional
premium. The insurance coverage was extended under the same terms and conditions embodied in the original
policies while in the process of making arrangements for the transhipment of the cargo from Durban to Manila,
covering the period October 4 - December 19, 1989.

However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or
a total of P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to
Manila and another twenty days for the discharge thereof. On January 5, 1990, private respondent forthwith
reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138
per $1.00) representing private respondent's loss after the proceeds of the sale were deducted from the original
claim of $916,886.66 or P20,184,159.55.

Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was
an excepted risk under the marine insurance policies. This prompted private respondent to file a complaint for
damages praying that aside from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and
the interest it paid for the loan it obtained to finance the shipment totalling P942,269.30. In addition, private
respondent asked for moral damages amounting to P200,000.00, exemplary damages amounting to P200,000.00
and attorney's fees equivalent to 30% of what will be awarded by the court.

The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance
claim, consequential and liquidated damages amounting to P1,024,233.88, exemplary damages amounting to
P100,000.00, reimbursement in the amount equivalent to 10% of whatever is recovered as attorney's fees as well
as the costs of the suit. On private respondent's motion for reconsideration, petitioner was also required to further
pay interest at the rate of 12% per annum on all amounts due and owing to the private respondent by virtue of
the lower court decision counted from the inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause
12 of the policies issued to private respondent, the same became automatically covered under subsection 1.1 of
Section 1 of the Institute War Clauses. The arrests, restraints or detainments contemplated in the former clause
were those effected by political or executive acts. Losses occasioned by riot or ordinary judicial processes were
not covered therein. In other words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. &
S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil authorities, such as what
happened in the instant case, is an excepted risk under Clause 12 of the Institute Cargo Clause or the F.C. & S.
Clause. However, with the deletion of Clause 12 of the Institute Cargo Clause and the consequent adoption or
institution of the Institute War Clauses (Cargo), the arrest and seizure by judicial processes which were excluded
under the former policy became one of the covered risks.

The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss
compensable, not only under the Institute War Clause but also under the Theft, Pilferage, and Non-delivery
Clause (TNPD) of the insurance policies, as read in relation to Section 130 of the Insurance Code and as held
in Williams v. Cole. 2

Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from
completing the voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner
continued until the goods could have been transhipped. But due to the perishable nature of the goods, it had to
be promptly sold to minimize loss. Accordingly, the sale of the goods being reasonable and justified, it should
not operate to discharge petitioner from its contractual liability.

Hence this petition, claiming that the Court of Appeals erred:

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

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

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

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

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable
since the term "arrest" refers to "political or executive acts" and does not include a loss caused by riot or by
ordinary judicial process as in this case; (b) the deletion of the Free from capture or Seizure Clause would leave
the assured covered solely for the perils specified by the wording of the policy itself; (c) the rationale for the
exclusion of an arrest pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and
civil authorities.

As to the second assigned error, petitioner submits that any loss which private respondent may have incurred
was in the nature and form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not
by arrest, detention or seizure of the ship.

As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the
arrest of the vessel was not a compensable risk under the policies issued. In fact, petitioner supported private
respondent by accommodating the latter's request for an extension of the insurance coverage, notwithstanding
that it was then under no legal obligation to do so.

Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner
did not raise as an issue the award of exemplary damages. It cannot now, for the first time, raise the same before
this Court. Likewise, petitioner cannot submit for the first time on appeal its argument that it was wrong for the
Court of Appeals to have ruled the way it did based on facts that would need inquiry into the evidence. Even if
inquiry into the facts were possible, such was not necessary because the coverage as ruled upon by the Court of
Appeals is evident from the very terms of the policies.

It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against
it because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be construed
reasonably and in a manner as to make effective the intentions and expectations of the parties. It added that the
policies clearly stipulate that they cover the risks of non-delivery of an entire package and that it was petitioner
itself that invited and granted the extensions and collected premiums thereon.

The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in
relation to the excluded risks or warranty specifically stated therein.

By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils
of the sea" to encompass the wide and varied range of risks that were covered.3 The subject policies contain the
"Perils" clause which is a standard form in any marine insurance policy. Said clause reads:

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

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

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

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

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

1. This insurance covers:

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

According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses
(Cargo), among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike
operations if this Court strictly construes the heading of the said clauses. However, it also claims that the parties
intended to include arrests, etc. even if it were not the result of hostilities or warlike operations. It further claims
that on the strength of jurisprudence on the matter, the term "arrests" would only cover those arising from
political or executive acts, concluding that whether private respondent's claim is anchored on subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the vessel by judicial
authorities is an excluded risk.4

This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it
assumed the risk of arrest caused solely by executive or political acts of the government of the seizing state and
thereby excludes "arrests" caused by ordinary legal processes, such as in the instant case.

With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees
with the Court of Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed
included among the covered risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of
the Institute War Clauses provided that "this insurance covers the risks excluded from the Standard Form of
English Marine Policy by the clause "Warranted free of capture, seizure, arrest, etc. . . ." or the F.C. & S. Clause.
Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk excluded from the Standard Form
of English Marine Policy by the F.C. & S. Clause.

Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the
covered risk simply because the F.C. & S. Clause under the Institute War Clauses can only be operative in case
of hostilities or warlike operations on account of its heading "Institute War Clauses." This Court agrees with the
Court of Appeals when it held that ". . . . Although the F.C. & S. Clause may have originally been inserted in
marine policies to protect against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty
Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, . . . ." 5 In fact, petitioner itself averred that
subsection 1.1 of Section 1 of the Institute War Clauses included "arrest" even if it were not a result of hostilities
or warlike operations. 6 In this regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest"
occasioned by ordinary judicial process, logically, such "arrest" would now become a covered risk under
subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by civil
authorities occurred in a state of war.

Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection
1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the F.C. & S. Clause was "originally
incorporated in insurance policies to eliminate the risks of warlike operations". It also averred that the F.C. & S.
Clause applies even if there be no war or warlike operations . . . ." 7 In the same vein, it contended that subsection
1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it
also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if were not a result of hostilities
or warlike operations. 8

This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the
policy in order to avoid being liable for private respondent's claim.

This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned
by executive or political acts of government which is interpreted as not referring to those caused by ordinary
legal processes as contained in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest
occasioned by executive or political acts of the government and naturally, also those caused by ordinary legal
processes; and, thereafter incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now
includes in the coverage risks of arrest due to executive or political acts of a government but then still excludes
"arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of said Clauses should also
have included "arrests" previously excluded from the coverage of the F.C. & S. Clause.

It has been held that a strained interpretation which is unnatural and forced, as to lead to an absurd conclusion
or to render the policy nonsensical, should, by all means, be avoided. 9 Likewise, it must be borne in mind that
such contracts are invariably prepared by the companies and must be accepted by the insured in the form in
which they are written. 10 Any construction of a marine policy rendering it void should be avoided. 11 Such
policies will, therefore, be construed strictly against the company in order to avoid a forfeiture, unless no other
result is possible from the language used. 12

If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract
by special proviso, exception, or exemption, it should express such limitation in clear and unmistakable
language. 13Obviously, the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1
of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by
ordinary judicial process was expressly indicated as an exception in the subject policies, there would have been
no controversy with respect to the interpretation of the subject clauses.

Be that as it may, exceptions to the general coverage are construed most strongly against the company. 14 Even
an express exception in a policy is to be construed against the underwriters by whom the policy is framed, and
for whose benefit the exception is introduced. 15

An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the
contract which is, to insure against risks of loss or damage to the goods. Such interpretation should result from
the natural and reasonable meaning of language in the policy. 16 Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured is adopted. 17

Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. 18 A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to
preclude the insurer from noncompliance with its obligations. 19

In view of the foregoing, this Court sees no need to discuss the other issues presented.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.

Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.

K. V. Faylona for defendant-appellant.

PAREDES, J.:

On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc., issued Personal Accident Policy
No. 7136 on the life of Francisco del Rosario, alias Paquito Bolero, son of herein plaintiff-appellee, binding itself
to pay the sum of P1,000.00 to P3,000.00, as indemnity for the death of the insured. The pertinent provisions of
the Policy, recite:

Part I. Indemnity For Death

If the insured sustains any bodily injury which is effected solely through violent, external, visible and
accidental means, and which shall result, independently of all other causes and within sixty (60) days
from the occurrence thereof, in the Death of the Insured, the Company shall pay the amount set opposite
such injury:

Section 1. Injury sustained other than those specified below unless

excepted hereinafter. . . . . . . . P1,000.00

Section 2. Injury sustained by the wrecking or disablement of a

railroad passenger car or street railway car in or on which the
Insured is travelling as a farepaying passenger. . . . . . . . P1,500.00

Section 3. Injury sustained by the burning of a church, theatre,

public library or municipal administration building while the
Insured is therein at the commencement of the fire. . . . . . . . P2,000.00

Section 4. Injury sustained by the wrecking or disablement of a

regular passenger elevator car in which the Insured is being
conveyed as a passenger (Elevator in mines excluded) P2,500.00

Section 5. Injury sustained by a stroke of lightning or by a cyclone.

....... P3,000.00

xxx xxx xxx

Part VI. Exceptions

 This policy shall not cover disappearance of the Insured nor shall it cover Death, Disability, Hospital
fees, or Loss of Time, caused to the insured:

. . . (h) By drowning except as a consequence of the wrecking or disablement in the Philippine waters
of a passenger steam or motor vessel in which the Insured is travelling as a farepaying passenger; . . . .

A rider to the Policy contained the following:

IV. DROWNING

It is hereby declared and agreed that exemption clause Letter (h) embodied in PART VI of the policy is hereby
waived by the company, and to form a part of the provision covered by the policy.

On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while on board the motor launch
"ISLAMA" together with 33 others, including his beneficiary in the Policy, Remedios Jayme, were forced to
jump off said launch on account of fire which broke out on said vessel, resulting in the death of drowning, of the
insured and beneficiary in the waters of Jolo. 1äwphï1.ñët

On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir, filed a claim for payment with
defendant company, and on September 13, 1957, defendant company paid to him (plaintiff) the sum of
P1,000.00, pursuant to Section 1 of Part I of the policy. The receipt signed by plaintiff reads —

RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of PESOS
— ONE THOUSAND (P1,000.00) Philippine Currency, being settlement in full for all claims
and demands against said Company as a result of an accident which occurred on February 26,
1957, insured under out ACCIDENT Policy No. 7136, causing the death of the Assured.

In view of the foregoing, this policy is hereby surrendered and CANCELLED.

LOSS COMPUTATION

Amount of Insurance P1,000.00

__________
vvvvv

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant company acknowledging
receipt by his client (plaintiff herein), of the P1,000.00, but informing said company that said amount was not
the correct one. Atty. Francisco claimed —

The amount payable under the policy, I believe should be P1,500.00 under the provision of Section 2,
part 1 of the policy, based on the rule of pari materia as the death of the insured occurred under the
circumstances similar to that provided under the aforecited section.

Defendant company, upon receipt of the letter, referred the matter to the Insurance Commissioner, who rendered
an opinion that the liability of the company was only P1,000.00, pursuant to Section 1, Part I of the Provisions
of the policy (Exh. F, or 3). Because of the above opinion, defendant insurance company refused to pay more
than P1,000.00. In the meantime, Atty. Vicente Francisco, in a subsequent letter to the insurance company, asked
for P3,000.00 which the Company refused, to pay. Hence, a complaint for the recovery of the balance of
P2,000.00 more was instituted with the Court of First Instance of Rizal (Pasay City, Branch VII), praying for it
further sum of P10,000.00 as attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the demand or claim is set forth in
the complaint had already been released, plaintiff having received the full amount due as appearing in policy and
as per opinion of the Insurance Commissioner. An opposition to the motion to dismiss, was presented by plaintiff,
and other pleadings were subsequently file by the parties. On December 28, 1957, the trial court deferred action
on the motion to dismiss until termination of the trial of the case, it appearing that the ground thereof was not
indubitable. In the Answer to the complaint, defendant company practically admitted all the allegations therein,
denying only those which stated that under the policy its liability was P3,000.00.

On September 1, 1958, the trial court promulgated an Amended Decision, the pertinent portions of which read
—

xxx xxx xxx

Since the contemporaneous and subsequent acts of the parties show that it was not their intention that
the payment of P1,000.00 to the plaintiff and the signing of the loss receipt exhibit "1" would be
considered as releasing the defendant completely from its liability on the policy in question, said
intention of the parties should prevail over the contents of the loss receipt "1" (Articles 1370 and 1371,
New Civil Code).

". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00 to P3,000.00 as
indemnity for the death of the insured. The insured died of drowning. Death by drowning is covered by
the policy the pertinent provisions of which reads as follows:

xxx xxx xxx

"Part I of the policy fixes specific amounts as indemnities in case of death resulting from
"bodily injury which is effected solely thru violence, external, visible and accidental means"
but, Part I of the Policy is not applicable in case of death by drowning because death by
drowning is not one resulting from "bodily injury which is affected solely thru violent, external,
visible and accidental means" as "Bodily Injury" means a cut, a bruise, or a wound and
drowning is death due to suffocation and not to any cut, bruise or wound."

xxx xxx xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground for recovery apart
from the bodily injury because death by bodily injury is covered by Part I of the policy while death by
drowning is covered by Part VI thereof. But while the policy mentions specific amounts that may be
recovered for death for bodily injury, yet, there is not specific amount mentioned in the policy for death
thru drowning although the latter is, under Part VI of the policy, a ground for recovery thereunder. Since
the defendant has bound itself to pay P1000.00 to P3,000.00 as indemnity for the death of the insured
but the policy does not positively state any definite amount that may be recovered in case of death by
drowning, there is an ambiguity in this respect in the policy, which ambiguity must be interpreted in
favor of the insured and strictly against the insurer so as to allow greater indemnity.

xxx xxx xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already paid the amount of
P1,000.00 to the plaintiff so that there still remains a balance of P2,000.00 of the amount to which
plaintiff is entitled to recover under the policy Exhibit "A".
 The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of litigation. However,
since it is evident that the defendant had not acted in bad faith in refusing to pay plaintiff's claim, the
Court cannot award plaintiff's claim for attorney's fees and expenses of litigation.

IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its decision dated July
21, 1958 and hereby renders judgment, ordering the defendant to pay plaintiff the sum of Two Thousand
(P2,000.00) Pesos and to pay the costs.

The above judgment was appealed to the Court of Appeals on three (3) counts. Said Court, in a Resolution dated
September 29, 1959, elevated the case to this Court, stating that the genuine issue is purely legal in nature.

All the parties agree that indemnity has to be paid. The conflict centers on how much should the indemnity be.
We believe that under the proven facts and circumstances, the findings and conclusions of the trial court, are
well taken, for they are supported by the generally accepted principles or rulings on insurance, which enunciate
that where there is an ambiguity with respect to the terms and conditions of the policy, the same will be resolved
against the one responsible thereof. It should be recalled in this connection, that generally, the insured, has little,
if any, participation in the preparation of the policy, together with the drafting of its terms and Conditions. The
interpretation of obscure stipulations in a contract should not favor the party who cause the obscurity (Art. 1377,
N.C.C.), which, in the case at bar, is the insurance company.

. . . . And so it has been generally held that the "terms in an insurance policy, which are ambiguous,
equivocal or uncertain . . . are to be construed strictly against, the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment to the insured, especially where a
forfeiture is involved," (29 Am. Jur. 181) and the reason for this rule is that the "insured usually has no
voice in the selection or arrangement of the words employed and that the language of the contract is
selected with great care and deliberation by expert and legal advisers employed by, and acting
exclusively in the interest of, the insurance company" (44 C.J.S. 1174). Calanoc v. Court of Appeals, et
al., G.R. No. L-8151, Dec. 16, 1955.

. . . . Where two interpretations, equally fair, of languages used in an insurance policy may be made,
that which allows the greater indemnity will prevail. (L'Engel v. Scotish Union & Nat. F. Ins. Co., 48
Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep. 70, 5 Ann. Cas. 749).

At any event, the policy under consideration, covers death or disability by accidental means, and the appellant
insurance company agreed to pay P1,000.00 to P3,000.00. is indemnity for death of the insured.

In view of the conclusions reached, it would seem unnecessary to discuss the other issues raised in the appeal.

The judgment appealed from is hereby affirmed. Without costs.

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,

vs.
COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is liable
under the Money, Security, and Payroll Robbery policy it issued to the private respondent or whether recovery
thereunder is precluded under the general exceptions clause thereof. Both the trial court and the Court of Appeals
held that there should be recovery. The petitioner contends otherwise.

This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by private
respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune Insurance and
Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy
issued by Fortune. The sum was allegedly lost during a robbery of Producer's armored vehicle while it was in
transit to transfer the money from its Pasay City Branch to its head office in Makati. The case was docketed as
Civil Case No. 1817 and assigned to Branch 146 thereof.

After joinder of issues, the parties asked the trial court to render judgment based on the following stipulation of
facts:

1. The plaintiff was insured by the defendants and an insurance policy was
issued, the duplicate original of which is hereto attached as Exhibit "A";

2. An armored car of the plaintiff, while in the process of transferring cash in

the sum of P725,000.00 under the custody of its teller, Maribeth Alampay,
from its Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati,
Metro Manila on June 29, 1987, was robbed of the said cash. The robbery
took place while the armored car was traveling along Taft Avenue in Pasay
City;

3. The said armored car was driven by Benjamin Magalong Y de Vera,

escorted by Security Guard Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the plaintiff by virtue of an
Agreement executed on August 7, 1983, a duplicate original copy of which is
hereto attached as Exhibit "B";

4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc.
with the plaintiff by virtue of a contract of Security Service executed on
October 25, 1982, a duplicate original copy of which is hereto attached as
Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver

Magalong and guard Atiga were charged, together with Edelmer Bantigue Y
Eulalio, Reynaldo Aquino and John Doe, with violation of P.D. 532 (Anti-
Highway Robbery Law) before the Fiscal of Pasay City. A copy of the
complaint is hereto attached as Exhibit "D";

6. The Fiscal of Pasay City then filed an information charging the aforesaid
persons with the said crime before Branch 112 of the Regional Trial Court of
Pasay City. A copy of the said information is hereto attached as Exhibit "E."
The case is still being tried as of this date;

7. Demands were made by the plaintiff upon the defendant to pay the amount
of the loss of P725,000.00, but the latter refused to pay as the loss is excluded
from the coverage of the insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General Exceptions" Section (b), which is
marked as Exhibit "A-1," and which reads as follows:

GENERAL EXCEPTIONS
 The company shall not be liable under this policy in report of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal

act of the insured or any officer, employee, partner,
director, trustee or authorized representative of the Insured
whether acting alone or in conjunction with others. . . .

8. The plaintiff opposes the contention of the defendant and contends that
Atiga and Magalong are not its "officer, employee, . . . trustee or authorized
representative . . . at the time of the robbery.1

On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion thereof
reads as follows:

WHEREFORE, premises considered, the Court finds for plaintiff and against defendant, and

(a) orders defendant to pay plaintiff the net amount of

P540,000.00 as liability under Policy No. 0207 (as mitigated
by the P40,000.00 special clause deduction and by the
recovered sum of P145,000.00), with interest thereon at the
legal rate, until fully paid;

(b) orders defendant to pay plaintiff the sum of P30,000.00

as and for attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.

SO ORDERED. 2

The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It Said:

The Court is satisfied that plaintiff may not be said to have selected and engaged Magalong and
Atiga, their services as armored car driver and as security guard having been merely offered by
PRC Management and by Unicorn Security and which latter firms assigned them to plaintiff.
The wages and salaries of both Magalong and Atiga are presumably paid by their respective
firms, which alone wields the power to dismiss them. Magalong and Atiga are assigned to
plaintiff in fulfillment of agreements to provide driving services and property protection as such
— in a context which does not impress the Court as translating into plaintiff's power to control
the conduct of any assigned driver or security guard, beyond perhaps entitling plaintiff to
request are replacement for such driver guard. The finding is accordingly compelled that neither
Magalong nor Atiga were plaintiff's "employees" in avoidance of defendant's liability under the
policy, particularly the general exceptions therein embodied.

Neither is the Court prepared to accept the proposition that driver Magalong and guard Atiga
were the "authorized representatives" of plaintiff. They were merely an assigned armored car
driver and security guard, respectively, for the June 29, 1987 money transfer from plaintiff's
Pasay Branch to its Makati Head Office. Quite plainly — it was teller Maribeth Alampay who
 had "custody" of the P725,000.00 cash being transferred along a specified money route, and
hence plaintiff's then designated "messenger" adverted to in the policy. 3

Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No. 32946. In
its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.

The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were neither
employees nor authorized representatives of Producers and ratiocinated as follows:

A policy or contract of insurance is to be construed liberally in favor of the insured and strictly
against the insurance company (New Life Enterprises vs. Court of Appeals, 207 SCRA 669;
Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). 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 (New Life Enterprises Case, supra, p.
676; Sun Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).

The language used by defendant-appellant in the above quoted stipulation is plain, ordinary and
simple. No other interpretation is necessary. The word "employee" must be taken to mean in
the ordinary sense.

The Labor Code is a special law specifically dealing with/and specifically designed to protect
labor and therefore its definition as to employer-employee relationships insofar as the
application/enforcement of said Code is concerned must necessarily be inapplicable to an
insurance contract which defendant-appellant itself had formulated. Had it intended to apply
the Labor Code in defining what the word "employee" refers to, it must/should have so stated
expressly in the insurance policy.

Said driver and security guard cannot be considered as employees of plaintiff-appellee bank
because it has no power to hire or to dismiss said driver and security guard under the contracts
(Exhs. 8 and C) except only to ask for their replacements from the contractors.5

On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and the Court
of Appeals erred in holding it liable under the insurance policy because the loss falls within the general
exceptions clause considering that driver Magalong and security guard Atiga were Producers' authorized
representatives or employees in the transfer of the money and payroll from its branch office in Pasay City to its
head office in Makati.

According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from one branch
to another, they effectively and necessarily became its authorized representatives in the care and custody of the
money. Assuming that they could not be considered authorized representatives, they were, nevertheless,
employees of Producers. It asserts that the existence of an employer-employee relationship "is determined by
law and being such, it cannot be the subject of agreement." Thus, if there was in reality an employer-employee
relationship between Producers, on the one hand, and Magalong and Atiga, on the other, the provisions in the
contracts of Producers with PRC Management System for Magalong and with Unicorn Security Services for
Atiga which state that Producers is not their employer and that it is absolved from any liability as an employer,
would not obliterate the relationship.

Fortune points out that an employer-employee relationship depends upon four standards: (1) the manner of
selection and engagement of the putative employee; (2) the mode of payment of wages; (3) the presence or
absence of a power to dismiss; and (4) the presence and absence of a power to control the putative employee's
conduct. Of the four, the right-of-control test has been held to be the decisive factor. 6 It asserts that the power
of control over Magalong and Atiga was vested in and exercised by Producers. Fortune further insists that PRC
Management System and Unicorn Security Services are but "labor-only" contractors under Article 106 of the
Labor Code which provides:

Art. 106. Contractor or subcontractor. — There is "labor-only" contracting where the person
supplying workers to an employer does not have substantial capital or investment in the form
of tools, equipment, machineries, work premises, among others, and the workers recruited and
placed by such persons are performing activities which are directly related to the principal
business of such employer. In such cases, the person or intermediary shall be considered merely
as an agent of the employer who shall be responsible to the workers in the same manner and
extent as if the latter were directly employed by him.

Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is equivalent
to a finding that there is an employer-employee relationship between the owner of the project and the employees
of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had nothing to
do with their selection and engagement, the payment of their wages, their dismissal, and the control of their
conduct. Producers argued that the rule in International Timber Corp. is not applicable to all cases but only when
it becomes necessary to prevent any violation or circumvention of the Labor Code, a social legislation whose
provisions may set aside contracts entered into by parties in order to give protection to the working man.

Producers further asseverates that what should be applied is the rule in American President Lines vs. Clave, 8 to
wit:

In determining the existence of employer-employee relationship, the following elements are

generally considered, namely: (1) the selection and engagement of the employee; (2) the
payment of wages; (3) the power of dismissal; and (4) the power to control the employee's
conduct.

Since under Producers' contract with PRC Management Systems it is the latter which assigned Magalong as the
driver of Producers' armored car and was responsible for his faithful discharge of his duties and responsibilities,
and since Producers paid the monthly compensation of P1,400.00 per driver to PRC Management Systems and
not to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga, Producers relies on the
provision of its contract with Unicorn Security Services which provides that the guards of the latter "are in no
sense employees of the CLIENT."

There is merit in this petition.

It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance policy
which is a form of casualty insurance. Section 174 of the Insurance Code provides:

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of insurance such as fire or marine. It includes, but is not limited
to, employer's liability insurance, public liability insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft insurance, personal accident and health insurance as
written by non-life insurance companies, and other substantially similar kinds of insurance.
(emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These contracts are, therefore,
governed by the general provisions applicable to all types of insurance. Outside of these, the rights and
obligations of the parties must be determined by the terms of their contract, taking into consideration its purpose
and always in accordance with the general principles of insurance law. 9

It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the insurer
— the moral hazard — is so great that insurers have found it necessary to fill up their policies with countless
restrictions, many designed to reduce this hazard. Seldom does the insurer assume the risk of all losses due to
the hazards insured against." 10 Persons frequently excluded under such provisions are those in the insured's
service and employment. 11 The purpose of the exception is to guard against liability should the theft be
committed by one having unrestricted access to the property. 12 In such cases, the terms specifying the excluded
classes are to be given their meaning as understood in common speech. 13 The terms "service" and "employment"
are generally associated with the idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against the
insurer, 15 or it should be construed liberally in favor of the insured and strictly against the insurer. 16 Limitations
of liability should be regarded with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying then
that if the terms of the contract are clear and unambiguous, there is no room for construction and such terms
cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is settled
that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and
to impose whatever conditions they deem best upon their obligations not inconsistent with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as employees
or authorized representatives of Producers under paragraph (b) of the general exceptions clause of the policy
which, for easy reference, is again quoted:

GENERAL EXCEPTIONS

The company shall not be liable under this policy in respect of

xxx xxx xxx

(b) any loss caused by any dishonest, fraudulent or criminal act of the insured
or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . . (emphases supplied)

There is marked disagreement between the parties on the correct meaning of the terms "employee" and
"authorized representatives."

It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from protection
and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or having unrestricted
access to Producers' money or payroll. When it used then the term "employee," it must have had in mind any
person who qualifies as such as generally and universally understood, or jurisprudentially established in the light
of the four standards in the determination of the employer-employee relationship, 21 or as statutorily declared
even in a limited sense as in the case of Article 106 of the Labor Code which considers the employees under a
"labor-only" contract as employees of the party employing them and not of the party who supplied them to the
employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security Services are
"labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the employer of Magalong.
Notwithstanding such express assumption of PRC Management Systems and Unicorn Security Services
that the drivers and the security guards each shall supply to Producers are not the latter's employees, it
may, in fact, be that it is because the contracts are, indeed, "labor-only" contracts. Whether they are is,
in the light of the criteria provided for in Article 106 of the Labor Code, a question of fact. Since the
parties opted to submit the case for judgment on the basis of their stipulation of facts which are strictly
limited to the insurance policy, the contracts with PRC Management Systems and Unicorn Security
Services, the complaint for violation of P.D. No. 532, and the information therefor filed by the City
Fiscal of Pasay City, there is a paucity of evidence as to whether the contracts between Producers and
PRC Management Systems and Unicorn Security Services are "labor-only" contracts.

But even granting for the sake of argument that these contracts were not "labor-only" contracts, and PRC
Management Systems and Unicorn Security Services were truly independent contractors, we are satisfied that
Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay City branch to its head
office in Makati, its "authorized representatives" who served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three with the specific duty to safely transfer the money to its head
office, with Alampay to be responsible for its custody in transit; Magalong to drive the armored vehicle which
would carry the money; and Atiga to provide the needed security for the money, the vehicle, and his two other
companions. In short, for these particular tasks, the three acted as agents of Producers. A "representative" is
defined as one who represents or stands in the place of another; one who represents others or another in a special
capacity, as an agent, and is interchangeable with "agent." 23

In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the insurance
policy.

WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. CV
No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of Makati in Civil Case
No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.

No pronouncement as to costs.

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,

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

G.R. No. 76399 January 22, 1993

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

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

B.L. Padilla for petitioner.

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

MELO, J.:

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

While the three fire insurance policies were in force, the insured property was completely destroyed by
fire on the early morning of December 28, 1980. Fidelity was accordingly informed of the loss and despite
demands, refused payment under its policy, thus prompting Verendia to file a complaint with the then
Court of First Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus
attorney's fees and litigation expenses. The complaint was later amended to include Monte de Piedad as
an "unwilling defendant" (P. 16, Record).

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

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

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

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

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the ground
that the motion for extension was filed out of time because the 15th day from receipt of the decision which
fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate
Court has personnel receiving pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration
was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605
was initiated. Subsequently, or more specifically on October 21, 1986, the appellate court denied Fidelity's
motion for reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition for review
on certiorari now docketed as G.R. No. 76399. The two petitions, inter-related as they are, were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

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

# Footnotes

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

NEW LIFE ENTERPRISES and JULIAN SY, petitioners,

vs.
HON. COURT OF APPEALS, EQUITABLE INSURANCE CORPORATION, RELIANCE SURETY
AND INSURANCE CO., INC. and WESTERN GUARANTY CORPORATION, respondents.

REGALADO, J.:

This appeal by certiorari seeks the nullification of the decision 1 of respondent Court of Appeals in CA-G.R. CV
No. 13866 which reversed the decision of the Regional Trial Court, Branch LVII at Lucena City, jointly deciding
Civil Cases Nos. 6-84, 7-84 and 8-84 thereof and consequently ordered the dismissal of the aforesaid actions
filed by herein petitioners.

The undisputed background of this case as found by the court a quo and adopted by respondent court, being
sustained by the evidence on record, we hereby reproduce the same with approval. 2

The antecedents of this case show that Julian Sy and Jose Sy Bang have formed a business
partnership in the City of Lucena. Under the business name of New Life Enterprises, the
partnership engaged in the sale of construction materials at its place of business, a two storey
building situated at Iyam, Lucena City. The facts show that Julian Sy insured the stocks in trade
of New Life Enterpriseswith Western Guaranty Corporation, Reliance Surety and Insurance.
Co., Inc., and Equitable Insurance Corporation.
 On May 15, 1981, Western Guaranty Corporation issued Fire Insurance Policy No. 37201 in
the amount of P350,000.00. This policy was renewed on May, 13, 1982.

On July 30,1981, Reliance Surety and Insurance Co., Inc. issued Fire Insurance Policy No.
69135 inthe amount of P300,000.00 (Renewed under Renewal
Certificate No. 41997) An additional insurancewas issued by the same company on
November 12, 1981 under Fire Insurance Policy No. 71547 in the amount of P700,000.00.

On February 8, 1982, Equitable Insurance

Corporation issued Fire Insurance Policy No. 39328 in the amount of P200,000.00.

Thus when the building occupied by the New Life Enterprises was gutted by fire at about 2:00
o'clock inthe morning of October 19, 1982, the stocks in the
trade inside said building were insured against fire inthe total amount of P1,550,000.00.
According to the certification issued by the Headquarters, Philippine Constabulary /Integrated
National Police, Camp Crame, the cause of fire was
electrical in nature.According to the plaintiffs, the building and the stocks inside were burned.
After the fire, Julian Sy wentto the agent of
Reliance Insurance whom he asked to accompany him to the
office of the company sothat he can file his claim. He averred that in support of his claim, he
submitted the fire clearance, the insurance policies and inventory of stocks. He further testified
that the three insurance companies are sister companies, and as a matter of fact when he was
following-up his claim with Equitable Insurance, the Claims Manager told him to go first to
Reliance Insurance and if said company agrees to pay, they would also pay. The same
treatment was given him by the other insurance
companies. Ultimately, thethree insurance companies denied plaintiffs' claim for payment.

In its letter of denial dated March 9, 1983, (Exhibit "C" No. 8-

84) Western Guaranty Corporationthrough Claims Manager Bernard S. Razon told the
plaintiff that his claim "is
denied for breach of policyconditions." Reliance Insurance purveyed the same message in its
letter dated November 23, 1982and signed by Executive Vice-President Mary Dee
Co (Exhibit "C" No. 7-84) which said that "plaintiff's claim is denied for breach of policy
conditions." The letter of denial received by the plaintiff fromEquitable Insurance
Corporation (Exhibit "C" No. 6-84) was of the same tenor, as said letter dated February 22,
1983, and signed by Vice-President Elma R. Bondad, said "we find that certain
policyconditions were violated, therefore, we regret, we have to deny your claim, as it is
hereby denied in its entirety."

In relation to the case against Reliance Surety and Insurance Company, a certain Atty. Serafin
D.Dator, acting in behalf of the plaintiff, sent a letter dated February 13, 1983 (Exhibit "G-
l" No 7-84) toExecutive Vice-President Mary Dee Co asking that he be informed as to
the specific policy conditions allegedly violated by the plaintiff. In her reply-letter dated
March 30, 1983, Executive Vice-PresidentMary Dee Co informed Atty.
Dator that Julian Sy violated Policy Condition No. "3" which requires theinsured
to give notice of any insurance or insurances already effected covering the stocks in trade. 3

Because of the denial of their claims for payment by the three (3) insurance companies, petitioner filed separate
civilactions against the former before the Regional Trial
Court of Lucena City, which cases were consolidated for trial,
and thereafter the court below rendered its decision on December 19, l986 with the following disposition:
 WHEREFORE, judgment in the above-entitled cases is rendered in the following manner, viz:

1. In Civil Case No. 6-84, judgment is rendered for the

plaintiff New Life Enterprises and against the defendant Equitable Insurance Corporation
ordering the latter to pay the former the sum of TwoHundred Thousand (P200,000.00) Pesos
and
considering that payment of the claim of the insured hasbeen unreasonably denied, pursuant t
o Sec. 244 of the Insurance Code, defendant is further ordered topay the plaintiff attorney's fe
es in the amount of Twenty Thousand (P20,000.00)
Pesos. All sums ofmoney to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of theInsurance Code) from
February 14, 1983, (91st day from November 16, 1982, when Sworn Statementof Fire Claim
was received from the insured) until they are fully paid;

2. In Civil Case No. 7-84, judgment is rendered for the plaintiff Julian Sy and against
the defendantReliance Surety and Insurance Co., Inc., ordering the latter to pay the former the
sum of P1,000,000.00(P300,000.00 under Policy
No. 69135 and P700,000.00 under Policy No. 71547)
and considering thatpayment of the claim of the
insured has been unreasonably denied, pursuant to
Sec. 244 of theInsurance Code, defendant is further ordered to pay the plaintiff the amount of
P100,000.00 as attorney's fees.

All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 14, 1983,
(91st day from November 16,
1982 when SwornStatement of Fire Claim was received from the insured) until they are fully
paid;

3. In Civil Case No. 8-84, judgment is rendered for

the plaintiff New Life Enterprises and against thedefendant Western Guaranty Corporation
ordering the latter to pay the sum of P350,000.00
to theConsolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the
face ofPolicy No. 37201, and considering that payment of the
aforementioned sum of money has been
unreasonably denied, pursuant to Sec. 244 of the Insurance Code,
defendant is further ordered to pay the plaintiff attorney's fees in the amount of P35,000.00.

All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 5, 1982, (91st day from 1st
week of November 1983 when insured filed formal claim for full indemnity according to
adjuster Vetremar Dela Merced) until they are fully paid. 4

As aforestated, respondent Court of Appeals reversed said judgment of the trial court, hence this petition the
cruxwherein is whether or not Conditions Nos. 3 and 27 of
the insurance contracts were violated by petitioners thereby resulting in
their forfeiture of all the benefits thereunder.

Condition No. 3 of said insurance policies, otherwise known as

the "Other Insurance Clause," is uniformly contained in all the aforestated
insurance contracts of herein petitioners, as follows:
 3. The insured shall give notice to the Company of any insurance or insurances already
effected, orwhich may subsequently be effected, covering any of the property or properties
consisting of stocks intrade, goods in process
and/or inventories only hereby insured, and unless
such notice be given andthe particulars of such insurance or insurances be stated therein or
endorsed on this policy pursuant to Section 50 of the Insurance
Code, by or on behalf of the Company before the occurrence of any loss ordamage, all
benefits under this policy shall be deemed forfeited, provided however, that this condition
shall not apply when the total insurance or insurances in force at
the time of loss or damage not morethan P200,000.00. 5

Petitioners admit that the respective insurance policies issued by private respondents did not state or endorse
thereon the other insurance coverage obtained or subsequently effected on the same stocks in trade for the loss
of which compensation is claimed by petitioners. 6 The policy
issued by respondent Western Guaranty Corporation(Western) did not
declare respondent Reliance Surety and Insurance Co., Inc. (Reliance) and respondent Equitable Insurance
Corporation (Equitable) as co-insurers on the same stocks,
while Reliance's Policies covering the samestocks did not likewise declare Western and Equitable as such co-
insurers. It is further admitted by petitioners thatEquitable's policy stated "nil" in the space thereon requiring
indication of any co-insurance although there were three (3) policies subsisting on the same stocks in trade
at the time of the loss, namely, that of Western in the amount ofP350,000.00 and two (2) policies of Reliance in
the total amount of P1,000,000.00. 7

In other words, the coverage by other insurance or co-insurance effected

or subsequently arranged by petitioners were neither stated nor endorsed in the policies of the three (3) private
respondents, warranting forfeiture of all benefits thereunder if we are to follow the express stipulation in the
aforequoted Policy Condition No. 3.

Petitioners contend that they are not to be blamed for the omissions, alleging that insurance agent Leon Alvarez
(for Western) and Yap Kam Chuan (for Reliance and Equitable) knew about the existence of the additional
insurancecoverage and that they were not informed about the requirement that such other or additional insurance
should bestated in the policy, as they have not even read policies.8 These contentions cannot pass judicial
muster.

The terms of the contract are clear and unambiguous. The insured is specifically required to disclose to the
insurer any other insurance and its particulars which he may have effected on the
same subject matter. The knowledge of such insurance by the insurer's agents, even assuming the acquisition
thereof by the former, is not the "notice" that would estop the insurers from denying the claim. Besides, the so-
called theory of imputed knowledge, that is, knowledge of the agent is
knowledge of the principal, aside from being of dubious applicability here has likewisebeen roundly
refuted by respondent court whose factual findings we find acceptable.

Thus, it points out that while petitioner Julian Sy claimed that he had informed insurance agent Alvarez
regarding the co-insurance on the property, he contradicted
himself by inexplicably claiming that he had not read the terms of the policies; that
Yap Dam Chuan could not likewise have obtained such knowledge for the same reason, aside from the fact that
the insurance with Western was obtained before those of Reliance and Equitable; and that theconclusion of
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawnfrom the mere fact that Yap Kam Chuan was
an agent for both companies which also had the same insuranceclaims adjuster. Availment of the
services of the same agents and adjusters by different companies is a
commonpractice in the insurance business and such facts do not warrant the speculative conclusion of the trial
court.

Furthermore, when the words and language of documents are clear and plain or readily understandable by an
ordinary reader thereof, there is absolutely no room for interpretation or construction anymore.9 Courts are not
allowed to make contracts for the parties; rather, they will intervene
only when the terms of the policy areambiguous, equivocal, or uncertain. 10 The parties must abide by the
terms of the contract because such termsconstitute the
measure of the insurer's liability and compliance therewith is a
condition precedent to the insured'sright of recovery from the insurer. 11

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally
infavor of the insured and strictly against the insurer company, yet contracts of insurance, like other contracts,
are to be construed according to the sense and meaning of the terms which
the parties themselves have used. If suchterms are clear and unambiguous, they must be taken and understood
in their plain, ordinary and popular sense. 12Moreover, obligations arising from contracts have the force of law
between the contracting parties and should becomplied with in good faith. 13

Petitioners should be aware of the fact that a party is not relieved of the duty to exercise the ordinary care and
prudence that would be exacted in relation to other contracts. The conformity of the insured to the terms of the
policy is implied from his failure to express any disagreement with what is provided for.14 It may be true that
themajority rule, as cited by petitioners, is that injured persons may accept policies without reading them, and
that this is not negligence per se. 15 But, this is not without any exception. It is and was incumbent upon petitioner Sy to read the insurance
contracts, and this can be reasonably expected of him considering that he has been a businessman since 196516 and the contract concerns indemnity in case
of loss in his money-making trade of which important consideration he could not have been unaware as it was pre-in case of loss in his money-making trade
of which important consideration he could not have been unaware as it was precisely the reason for his procuring the same.

We reiterate our pronouncement in Pioneer Insurance and Surety Corporation vs. Yap: 17

. . .
And considering the terms of the policy which required the insured to declare other insurance
s, thestatement in question must be deemed to be a statement (warranty) binding on
both insurer and insured, that there were no other insurance on the property. . . .

The annotation then, must be deemed to be a warranty that the property was not insured
by any other policy. Violation thereof entitled the insurer to rescind (Sec. 69, Insurance
Act). Such misrepresentation is fatal in the light of our views in Santa Ana vs. Commercial
Union Assurance Company, Ltd., 55 Phil. 329. The materiality of non-disclosure of other
insurance policies is not open to doubt.

xxx xxx xxx

The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance
and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in
preventing the situation in which a fire would be profitable to the insured. According to Justice
Story: "The insured has no right to complain, for he assents to comply
with all the stipulations on his side, in order to entitlehimself to the
benefit of the contract, which, upon reason or principle, he has no right to ask the court to
dispense with the performance of his own part of the agreement, and yet to
bind the other party to obligations, which, but for those stipulations, would not have been
entered into."

Subsequently, in the case of Pacific Banking Corporation vs. Court of Appeals, et al., 18 we held:
 It is not disputed that the insured failed to reveal before the loss three other insurances. As
found by the Court of Appeals, by reason of said unrevealed insurances, the insured had been
guilty of a falsedeclaration; a clear misrepresentation and a vital one because where
the insured had been asked to reveal but did not, that was deception. Otherwise stated, had the
insurer known that there were many co-insurances, it could have hesitated or plainly desisted
from entering into such contract. Hence, theinsured was guilty of clear fraud (Rollo, p. 25).

Petitioner's contention that the allegation of fraud is but

a mere inference or suspicion is untenable. In fact, concrete evidence of fraud or false
declaration by the insured was furnished by the petitioner itself when the facts alleged in the
policy under clauses "Co-Insurances Declared" and
"Other InsuranceClause" are materially different from the actual number of co-
insurances taken over the subjectproperty. Consequently, "the whole foundation of the
contract fails, the risk does not attach and thepolicy never becomes a contract between the
parties." Representations of facts are the foundation ofthe contract and if the foundation does
not exist, the superstructure does not arise. Falsehood in suchrepresentations is not shown to
vary or add to the contract, or to terminate a contract which has oncebeen made, but to
show that no contract has ever existed (Tolentino, Commercial Laws of thePhilippines, p.
991, Vol. II, 8th Ed.,) A void or inexistent contract is one which has no force and effectfrom
the very beginning, as if it had never been entered into, and which cannot be
validated either bytime or by ratification (Tongoy vs. C.A., 123 SCRA 99 (1983); Avila v.
C.A., 145 SCRA, 1986).

As the insurance policy against fire expressly required that notice should be given by
the insured ofother insurance upon the same property, the total absence of such notice nullifies
the policy.

To further warrant and justify the forfeiture of the benefits under the insurance contracts involved, we need
merely toturn to Policy Condition No. 15 thereof, which reads in part:

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

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

27. Action or suit

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

On this point, the trial court ruled:

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

in concluding thatplaintiff's right to ventilate his claim in court has been barred by reason of t
he time constraint provided in the insurance contract. It is
 evident that after the plaintiff had received
the letter of denial, he stillfound it necessary to be informed of the specific causes or reasons
for the denial of his claim, reasonfor which his lawyer, Atty. Dator deemed it wise to send a
letter of inquiry to the defendant which wasanswered by defendant's Executive Vice-
President in a letter dated March 30, 1983, . . .
. Assuming,gratuitously, that the letter of Executive Vice-President Mary Dee Co dated March
30, 1983, was received by plaintiff on the same date, the period of limitation should
start to run only from said date in the spirit of fair play and equity. . . . 21

We have perforce to reject this theory of the court below for being contrary to what we have heretofore declared:

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

The condition contained in an insurance policy that claims must be presented

within one year
after rejection is not merely a procedural requirement but an important matte
r essential to a prompt settlement of claims against insurance companies as it
demandsthat insurance suits be brought by
the insured while the evidence as to the
origin andcause of destruction have not yet disappeared.

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

xxx xxx xxx

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the
samecannot be taken to mean the rejection of a petition for reconsideration as insisted by
respondents.
Suchwas clearly not the meaning contemplated by this Court. The insurance policy in said
case providesthat the insured should file his claim first, with the carrier and then with the
insurer. The "final rejection"being referred to in said case is the rejection by the
insurance company. 22

Furthermore, assuming arguendo that petitioners felt the

legitimate need to be clarified as to the policy condition violated, there was a considerable lapse of time from
their receipt of the insurer's clarificatory letter dated March 30, 1983, up to the time the complaint was
filed in court on January 31, 1984. The one-year prescriptive period was yet
to expire on November 29, 1983, or about eight (8) months from the
receipt of the clarificatory letter, but petitioners let the period lapse without bringing their action in court.
We accordingly find no "peculiar circumstances" sufficient to relax the enforcement of the one-
year prescriptive period and we, therefore, hold that petitioners' claim was definitely filed out of time.
WHEREFORE, finding no cogent reason to disturb the judgment
of respondent Court of Appeals, the same ishereby AFFIRMED.

SO ORDERED.

NATIONAL POWER CORPORATION, petitioner,

vs.
COURT OF APPEALS and PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., respondents.

Conrado Q. Crucillo for petitioner.

Gregorio D. David for private respondent.

PARAS, J.:

This is a petition for review on certiorari seeking to set aside: (a) the judgment of respondent Court of Appeals
dated March 25, 1976 in CA-G.R. No. 50112-R, entitled National Power Corporation, Plaintiff-Appellee vs.
The Philippine American Insurance Company, Inc. Defendant-Appellant, which reversed the decision of the
Court of First Instance of Manila in Civil Case No. 70811 entitled "National Power Corporation v. Far Eastern
Electric, Inc., et al." and (b) respondent's Court's resolution dated April 19, 1976 denying petitioner National
Power Corporation's Motion for Reconsideration (Petition, p. 13, Rollo).

The undisputed facts of this case are as follows:

The National Power Corporation (NPC) entered into a contract with the Far Eastern Electric, Inc. (FFEI) on
December 26, 1962 for the erection of the Angat Balintawak 115-KW-3-Phase transmission lines for the Angat
Hydroelectric Project. FEEI agreed to complete the work within 120 days from the signing of the contract,
otherwise it would pay NPC P200.00 per calendar day as liquidated damages, while NPC agreed to pay the sum
of P97,829.00 as consideration. On the other hand, Philippine American General Insurance Co., Inc. (Philamgen)
issued a surety bond in the amount of P30,672.00 for the faithful performance of the undertaking by FEEI, as
required.

The condition of the bond reads:

The liability of the PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.

under this bond will expire One (1) year from final Completion and Acceptance and said bond
will be cancelled 30 days after its expiration, unless surety is notified of any existing obligation
thereunder. (Exhibit 1-a)

in correlation with the provisions of the construction contract between Petitioner and Far Eastern Electric, Inc.
particularly the following provisions of the Specifications. to wit:

1. Par. 1B-2l Release of Bond

1B-21 Release of Bond

 The Contractor's performance bond will be released by the National Power Corporation at the
expiration of one (1) year from the completion and final acceptance of the work, pursuant to
the provisions of Act No. 3959, and subject to the General Conditions of this contract. (Page
49, Printed Record on Appeal); and

2. GP-19 of Specifications, which reads:

(a) Should the Contractor fail to complete the construction of the work as herein specified and
agreed upon, or if the work is abandoned, ... the Corporation shall have the power to take over
the work by giving notice in writing to that effect to the Contractor and his sureties of its
intention to take over the construction work.

(b) ... It is expressly agreed that in the event the corporation takes over the work from the
Contractor, the latter and his bondsmen shall continue to be liable under this contract for any
expense in the completion of the work in excess of the contract price and the bond filed by the
Contractor shall be answerable for the same and for any and all damages that the Corporation
may suffer as a result thereof. (pp. 76-78, Printed Record on Appeal)

FEEI started construction on December 26, 1962 but on May 30, 1963, both FEEI and Philamgen wrote NPC
requesting the assistance of the latter to complete the project due to unavailability of the equipment of FEEI. The
work was abandoned on June 26, 1963, leaving the construction unfinished. On July 19, 1963, in a joint letter,
Philamgen and FEEI informed NPC that FEEI was giving up the construction due to financial difficulties. On
the same date, NPC wrote Philamgen informing it of the withdrawal of FEEI from the work and formally holding
both FEEI and Philamgen liable for the cost of the work to be completed as of July 20, 1962 plus damages.

The work was completed by NPC on September 30, 1963. On January 30, 1967 NPC notified Philamgen that
FEEI had an outstanding obligation in the amount of P75,019.85, exclusive of interest and damages, and
demanded the remittance of the amount of the surety bond the answer for the cost of completion of the work. In
reply, Philamgen requested for a detailed statement of account, but after receipt of the same, Philamgen did not
pay as demanded but contended instead that its liability under the bond has expired on September 20, 1964 and
claimed that no notice of any obligation of the surety was made within 30 days after its expiration. (Record on
Appeal, pp. 191-194; Rollo, pp. 62-64).

NPC filed Civil Case No. 70811 for collection of the amount of P75,019.89 spent to complete the work
abandoned; P144,000.00 as liquidated damages and P20,000.00 as attorney's fees. Only Philamgen answered
while FEEI was declared in default.

The trial court rendered judgment in favor of NPC, the dispositive portion of which reads:

WHEREFORE, the defendant Far Eastern Electric, Inc., is ordered to pay the plaintiff the sum
of P75,019.86 plus interest at the legal rate from September 21, 1967 until fully paid. Out of
said amount, both defendants, Far Eastern Electric, Inc., and the Philippine American Insurance
Company, Inc., are ordered to pay, jointly and severally, the amount of P30,672.00 covered by
Surety Bond No. 26268, dated December 26, 1962, plus interest at the legal rate from
September 21, 1967 until fully paid,

Both defendants are also ordered to pay plaintiff the sum of P3,000.00 as attorney's fees and
costs.

On appeal by Philamgen, the Court of Appeals reversed the lower court's decision and dismissed the complaint.
Hence this petition.

Respondent Philamgen filed its comment on the petition on August 6, 1978 (Rollo, p. 62) in compliance with
the resolution dated June 16, 1976 of the First Division of this Court (Rollo, p. 52) while petitioner NPC filed
its Reply to the comment of respondent (Rollo, p. 76) as required in the resolution of this Court of August 16,
1976, (Rollo, p. 70). In the resolution of September 20, 1976, the petition for certiorari was given due course
(Rollo, p. 85). Petitioner's brief was filed on November 27, 1976 (Rollo, p. 97) while Philamgen failed to file
brief within the required period and this case was submitted for decision without respondent's brief in the
resolution of this Court of February 25. 1977) Rollo, p. 103).

In its brief, petitioner raised the following assignment of errors:

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER

SHOULD HAVE GIVEN NOTICE TO PRIVATE RESPONDENT PHILAMGEN OF ANY
EXISTING OBLIGATION WITHIN 30 DAYS FROM EXPIRATION OF THE BOND TO
HOLD SAID SURETY LIABLE THEREUNDER, DESPITE PETITIONER'S TAKING
OVER OF THE WORK ABANDONED BY THE CONTRACTOR BEFORE ITS
COMPLETION.

II

ASSUMING ARGUENDO THAT PETITIONER SHOULD STILL NOTIFY PRIVATE

RESPONDENT PHILAMGEN OF ANY EXISTING OBLIGATION UNDER THE BOND
DESPITE THE TAKE-OVER OF WORK BY PETITIONER, RESPONDENT COURT OF
APPEALS NONETHELESS ERRED IN HOLDING THAT PETITIONER'S LETTER
DATED JULY 19, 1963 (EXH. E) TO PRIVATE RESPONDENT WAS NOT SUFFICIENT
COMPLIANCE WITH THE CONDITION OF THE BOND.

III

RESPONDENT COURT OF APPEALS ERRED IN ABSOLVING PRIVATE

RESPONDENT PHILAMGEN FROM ITS LIABILITY UNDER THE BOND.

The decisive issue in this case is the correct interpretation and/or application of the condition of the bond relative
to its expiration, in correlation with the provisions of the construction contract, the faithful performance of which,
said bond was issued to secure.

The bone of contention in this case is the compliance with the notice requirement as a condition in order to hold
the surety liable under the bond.

Petitioner claims that it has already complied with such requirement by virtue of its notice dated July 19, 1963
of abandonment of work by FEEI and of its takeover to finish the construction, at the same time formally holding
both FEEI and Philamgen liable for the uncompleted work and damages. It further argued that the notice required
in the bond within 30 days after its expiration of any existing obligation, is applicable only in case the contractor
itself had completed the contract and not when the contractor failed to complete the work, from which arises the
continued liability of the surety under its bond as expressly provided for in the contract. Petitioner's contention
was sustained by the trial court.
On the other hand, private respondent insists that petitioner's notice dated July 19, 1983 is not sufficient despite
previous events that it had knowledge of FEEI's failure to comply with the contract and claims that it cannot be
held liable under the bond without notice within thirty days from the expiration of the bond, that there is a
subsisting obligation. Private respondent's contention is sustained by the Court of Appeals.

The petition is impressed with merit.

As correctly assessed by the trial court, the evidence on record shows that as early as May 30, 1963, Philamgen
was duly informed of the failure of its principal to comply with its undertaking. In fact, said notice of failure was
also signed by its Assistant Vice President. On July 19, 1963, when FEEI informed NPC that it was abandoning
the construction job, the latter forthwith informed Philamgen of the fact on the same date. Moreover, on August
1, 1963, the fact that Philamgen was seasonably notified, was even bolstered by its request from NPC for
information of the percentage completed by the bond principal prior to the relinquishment of the job to the latter
and the reason for said relinquishment. (Record on Appeal, pp. 193-195). The 30-day notice adverted to in the
surety bond applies to the completion of the work by the contractor. This completion by the contractor never
materialized.

The surety bond must be read in its entirety and together with the contract between NPC and the contractors.
The provisions must be construed together to arrive at their true meaning. Certain stipulations cannot be
segregated and then made to control.

Furthermore, it is well settled that contracts of insurance are to be construed liberally in favor of the insured and
strictly against the insurer. Thus ambiguity in the words of an insurance contract should be interpreted in favor
of its beneficiary. (Serrano v. Court of Appeals, 130 SCRA 327, July 16, 1984).

In the case at bar, it cannot be denied that the breach of contract in this case, that is, the abandonment of the
unfinished work of the transmission line of the petitioner by the contractor Far Eastern Electric, Inc. was within
the effective date of the contract and the surety bond. Such abandonment gave rise to the continuing liability of
the bond as provided for in the contract which is deemed incorporated in the surety bond executed for its
completion. To rule therefore that private respondent was not properly notified would be gross error.

PREMISES CONSIDERED, the decision dated March 25, 1976 and the resolution dated April 19, 1976 of the
Court of Appeals are hereby SET ASIDE, and a new one is hereby rendered reinstating the decision of the Court
of First Instance of Manila in Civil Case No. 70811 entitled "National Power Corporation v. Far Eastern Electric,
Inc., et al."

SO ORDERED.
B. AS A CONSENSUAL CONTRACT
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.

G.R. No. L-31878 April 30, 1979

LAPULAPU D. MONDRAGON, petitioner,

vs.
HON. COURT OF APPEALS and NGO HING, respondents.

Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company.

Voltaire Garcia for petitioner Mondragon.

Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:

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

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

The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner
Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again
strongly recommending the approval of the 20-year endowment insurance plan to children, pointing out that
since 1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the insurance, but
having failed in his effort, he filed the action for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to against both petitioners.

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

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

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

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

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

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

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

Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure
outright. As held by this Court, where an agreement is made between the applicant and the agent, no liability
shall attach until the principal approves the risk and a receipt is given by the agent. The acceptance is merely
conditional and is subordinated to the act of the company in approving or rejecting the application. Thus, in life
insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life Assurance
Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a meeting of the minds
between petitioner Pacific Life and private respondent Ngo Hing over the 20-year endowment life insurance in
the amount of P50,000.00 in favor of the latter's one-year old daughter, and with the non-compliance of the
abovequoted conditions stated in the disputed binding deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be
refunded by Pacific Life.

As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other
contracts, must be assented to by both parties either in person or by their agents ... The contract, to be binding
from the date of the application, must have been a completed contract, one that leaves nothing to be dione,
nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no
contract of insurance unless the minds of the parties have met in agreement."

We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate
to him the rejection of the insurance application would not have any adverse effect on the allegedly perfected
temporary contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between
the parties who had no meeting of their minds. Private respondet, being an authorized insurance agent of Pacific
Life at Cebu branch office, is indubitably aware that said company does not offer the life insurance applied for.
When he filed the insurance application in dispute, private respondent was, therefore, only taking the chance that
Pacific Life will approve the recommendation of Mondragon for the acceptance and approval of the application
in question along with his proposal that the insurance company starts to offer the 20-year endowment insurance
plan for children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected the
proposal and recommendation. Secondly, having an insurable interest on the life of his one-year old daughter,
aside from being an insurance agent and an offense associate of petitioner Mondragon, private respondent Ngo
Hing must have known and followed the progress on the processing of such application and could not pretend
ignorance of the Company's rejection of the 20-year endowment life insurance application.

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

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

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

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

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

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

SO ORDERED.

C. AS A CONTRACT OF INDEMNITY

MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT SUPPLIES

DEPARTMENT, petitioners,
vs.
COURT OF APPEALS, SOUTH SEA SURETY AND INSURANCE CO., INC. and the CHARTER
INSURANCE CORPORATION, respondents.

PUNO, J.:

This is a petition for review on certiorari to annul and set aside the Decision of respondent Court of Appeals
dated December 14, 1995 1 and its Resolution dated February 22, 1996 2 in CA-G.R. CV No. 45805
entitled Mayer Steel Pipe Corporation and Hongkong Government Supplies Department v. South Sea Surety
Insurance Co., Inc. and The Charter Insurance Corporation. 3
In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted petitioner Mayer Steel
Pipe Corporation (Mayer) to manufacture and supply various steel pipes and fittings. From August to October,
1983, Mayer shipped the pipes and fittings to Hongkong as evidenced by Invoice Nos. MSPC-1014, MSPC-
1015, MSPC-1025, MSPC-1020, MSPC-1017 and MSPC-1022. 4

Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private respondents
South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp. (Charter). The pipes and
fittings covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a total amount of US$212,772.09 were insured
with respondent South Sea, while those covered by Invoice Nos. 1020, 1017 and 1022 with a total amount of
US$149,470.00 were insured with respondent Charter.

Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as third-party
inspector to examine whether the pipes and fittings are manufactured in accordance with the specifications in
the contract. Industrial Inspection certified all the pipes and fittings to be in good order condition before they
were loaded in the vessel. Nonetheless, when the goods reached Hongkong, it was discovered that a substantial
portion thereof was damaged.

Petitioners filed a claim against private respondents for indemnity under the insurance contract. Respondent
Charter paid petitioner Hongkong the amount of HK$64,904.75. Petitioners demanded payment of the balance
of HK$299,345.30 representing the cost of repair of the damaged pipes. Private respondents refused to pay
because the insurance surveyor's report allegedly showed that the damage is a factory defect.

On April 17, 1986, petitioners filed an action against private respondents to recover the sum of HK$299,345.30.
For their defense, private respondents averred that they have no obligation to pay the amount claimed by
petitioners because the damage to the goods is due to factory defects which are not covered by the insurance
policies.

The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to manufacturing
defects. It also noted that the insurance contracts executed by petitioner Mayer and private respondents are "all
risks" policies which insure against all causes of conceivable loss or damage. The only exceptions are those
excluded in the policy, or those sustained due to fraud or intentional misconduct on the part of the insured. The
dispositive portion of the decision states:

WHEREFORE, judgment is hereby rendered ordering the defendants jointly and severally, to
pay the plaintiffs the following:

1. the sum equivalent in Philippine currency of HK$299,345.30, with legal rate of interest as
of the filing of the complaint;

2. P100,000.00 as and for attorney's fees; and

3. costs of suit.

SO ORDERED. 5

Private respondents elevated the case to respondent Court of Appeals.

Respondent court affirmed the finding of the trial court that the damage is not due to factory defect and that it
was covered by the "all risks" insurance policies issued by private respondents to petitioner Mayer. However, it
set aside the decision of the trial court and dismissed the complaint on the ground of prescription. It held that the
action is barred under Section 3(6) of the Carriage of Goods by Sea Act since it was filed only on April 17, 1986,
more than two years from the time the goods were unloaded from the vessel. Section 3(6) of the Carriage of
Goods by Sea Act provides that "the carrier and the ship shall be discharged from all liability in respect of loss
or damage unless suit is brought within one year after delivery of the goods or the date when the goods should
have been delivered." Respondent court ruled that this provision applies not only to the carrier but also to the
insurer, citing Filipino Merchants Insurance Co., Inc. v. Alejandro. 6

Hence this petition with the following assignments of error:

1. The respondent Court of Appeals erred in holding that petitioners' cause of action had already
prescribed on the mistaken application of the Carriage of Goods by Sea Act and the doctrine of
Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and

2. The respondent Court of Appeals committed an error in dismissing the complaint. 7

The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the Carriage of Goods
by Sea Act.

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be discharged from all
liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date
when they should have been delivered. Under this provision, only the carrier's liability is extinguished if no suit
is brought within one year. But the liability of the insurer is not extinguished because the insurer's liability is
based not on the contract of carriage but on the contract of insurance. A close reading of the law reveals that the
Carriage of Goods by Sea Act governs the relationship between the carrier on the one hand and the shipper, the
consignee and/or the insurer on the other hand. It defines the obligations of the carrier under the contract of
carriage. It does not, however, affect the relationship between the shipper and the insurer. The latter case is
governed by the Insurance Code.

Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro 8 and the other cases 9 cited therein does not
support respondent court's view that the insurer's liability prescribes after one year if no action for indemnity is
filed against the carrier or the insurer. In that case, the shipper filed a complaint against the insurer for recovery
of a sum of money as indemnity for the loss and damage sustained by the insured goods. The insurer, in turn,
filed a third-party complaint against the carrier for reimbursement of the amount it paid to the shipper. The
insurer filed the third-party complaint on January 9, 1978, more than one year after delivery of the goods on
December 17, 1977. The court held that the insurer was already barred from filing a claim against the carrier
because under the Carriage of Goods by Sea Act, the suit against the carrier must be filed within one year after
delivery of the goods or the date when the goods should have been delivered. The court said that "the coverage
of the Act includes the insurer of the goods." 10

The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the insurer which
filed a claim against the carrier for reimbursement of the amount it paid to the shipper. In the case at bar, it was
the shipper which filed a claim against the insurer. The basis of the shipper's claim is the "all risks" insurance
policies issued by private respondents to petitioner Mayer.

The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the shipper, the
consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of the Carriage of Goods
by Sea Act applies to the insurer, it meant that the insurer, like the shipper, may no longer file a claim against
the carrier beyond the one-year period provided in the law. But it does not mean that the shipper may no longer
file a claim against the insurer because the basis of the insurer's liability is the insurance contract. An insurance
contract is a contract whereby one party, for a consideration known as the premium, agrees to indemnify another
for loss or damage which he may suffer from a specified peril. 11 An "all risks" insurance policy covers all kinds
of loss other than those due to willful and fraudulent act of the insured. 12 Thus, when private respondents issued
the "all risks" policies to petitioner Mayer, they bound themselves to indemnify the latter in case of loss or
damage to the goods insured. Such obligation prescribes in ten years, in accordance with Article 1144 of the
New Civil Code. 13

IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals dated December
14, 1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE and the Decision of the Regional
Trial Court is hereby REINSTATED. No costs.

SO ORDERED.

PARAMOUNT INSURANCE CORPORATION, petitioner,

vs.
HON. MAXIMO M. JAPZON, Presiding Judge, Br. 36, RTC, Manila; City Sheriff and Deputy Sheriffs
Nestor Macabilin & Teodoro Episcope, public respondents, JOSE LARA and ARSENIO PAED, private
respondents.

ROMERO, J.:

Assailed in this petition for certiorari and prohibition with preliminary injunction is the decision 1 of the
Regional Trial Court of Manila, Branch 36 dated August 30, 1983 in Civil Case No. 82-4416 entitled "Jose Lara
and Arsenio Paed v. Willy Garcia, Emilio Macasieb, Domingo Natividad, Willy Manuel, and Paramount
Insurance Co. Inc." ordering petitioner to pay private respondents an aggregate sum of P175,000.00 as insurer
of a motor vehicle owned by Domingo Natividad despite the absence of jurisdiction over its persons.

It appears that on May 27, 1978, Jose Lara contracted the services of a passenger jeepney with Plate No. PUJ
K5-826, owned and operated by Willy Garcia (Garcia for brevity), to transport his family, relatives and friends
from Manila to Pangasinan. The said jeepney was then driven by Emilio Macasieb (Macasieb for brevity).

On the very same date, within the vicinity of Barangay Parsolingan in Gerona, Tarlac, a Ford truck F-600 with
Plate No. WL-628, then driven by Willy Manuel (Manuel for brevity) while cruising the National Highway on
its way to Manila, overtook an unidentified motor vehicle and in the process hit and sideswept the said passenger
jeepney then driven by Macasieb. As a consequence of such mishap, the two (2) passengers of the jeepney,
namely: Jose Lara (Lara for brevity) and Arsenio Paed (Paed for brevity) sustained physical injuries of varying
degrees. Specifically, Lara suffered serious physical injuries resulting in the amputation of his right arm while
Paed suffered serious physical injuries which incapacitated him to work for more than two (2) weeks. Aside
from bodily injuries suffered by its passengers, both vehicles suffered minor damages at their respective points
of impact. The insurer of said truck is herein petitioner Paramount Surety and Insurance Co. Inc. 2

After the said accident, Natividad filed a notice of claim with Paramount and the latter lost no time in dispatching
and/or contracting an independent adjuster handling casualty and marine claims, the EM Salvatierra Adjustment
Office.

Thereafter, the adjustment of Natividad's claims were transferred to Speedway Adjustment and Appraisal
Corporation which investigated the facts surrounding the incident and recommended petitioner to pay Natividad
under its policy, using the "no fault" clause under the Insurance Code as its basis of liability.

A check in the amount of Eight Hundred Pesos (P800.00) covered by Check No. EBC-10036191F was paid to
Paed's wife, Priscilla Paed. It was covered by Voucher No. 32358. 3

In addition to said amount, another check in the amount of Five Thousand Pesos (P5,000.00) covered by EBC
Check No. 3082 was paid by Paramount to Central Luzon Doctor's Hospital covering the expense for medical
treatment and hospitalization of the victims, Lara and Paed. It was covered by Voucher No. 32196. 4
On or about June 5, 1978, Lara and Paed filed a criminal case against Manuel for Reckless Imprudence resulting
in Damage to Property docketed as Criminal Case No. 2227 before the Municipal Trial Court of Gerona, Tarlac. 5

During the pendency of said criminal case, Lara filed a manifestation reserving the right to file a separate civil
action against the operators of the two (2) vehicles, namely: Natividad and Garcia as well as the two (2) drivers,
Manuel and Macasieb. 6

Accordingly, Lara and Paed filed on September 17, 1978 a civil case for damages docketed as Civil Case No.
82-4416 against Garcia, Macasieb, Manuel, Natividad, and impleaded Paramount, the latter as insurer of the
Ford truck. 7

A certain Atty. Segundo Gloria filed a notice of appearance dated November 16, 1978 where he informed the
court that he was appearing for and in behalf of the defendants Natividad, Manuel and Paramount. 8 Subsequently,
on December 14, 1978, he filed an answer with crossclaim and counterclaim. 9

During the trial of Criminal Case No. 2227 for Reckless Imprudence resulting in Damage to Property, accused
Manuel pleaded guilty to the crime charged on September 18, 1979, and was accordingly, sentenced to
imprisonment of six months of arresto mayor maximum under Article 365 of the Revised Penal Code. 10

In the interim period, a fire gutted the City Hall of Manila on November 19, 1981 and the records of the case
were burned to ashes. Subsequently, on January 25, 1982, plaintiffs (herein private respondents Lara and Paed)
filed a petition for reconstitution of the judicial records of the case 11 which was approved without any opposition
in the order of the court dated November 4, 1982. 12

On February 17, 1983, the court reiterated its order before the reconstitution of the judicial records declaring
defendants Natividad, Manuel and Paramount in default in view of their continued failure to appear during the
trial of the case and allowed the plaintiffs (Lara and Paed) to make a formal offer of exhibits and considered the
case submitted for decision. 13

After protracted proceedings which lasted for almost five years, the Regional Trial Court of Manila, rendered a
decision dated August 30, 1983, the decretal portion of which states:

WHEREFORE, finding the evidence presented by plaintiff sufficient to prove the allegations
of the complaint, judgment is hereby rendered in favor of the plaintiffs and against the
defendants ordering the latter to pay jointly and severally plaintiff Jose Lara, the amount of
P15,000.00 for medical and hospitalization expenses; the sum of P80,000.00 as moral and
exemplary damages; the sum of P50,000.00 as compensatory damages; to pay jointly and
severally plaintiff Arsenio Paed the sum of P20,000.00 as moral and actual damages and to pay
the sum of P10,000.00 by way of attorney's fees and the costs of suit. 14

A copy of the said decision was served on the petitioner's counsel, Atty. Segundo Gloria, on October 5,
1981. 15 No appeal from the judgment having been filed within the reglementary period or up to October 20,
1983, the same became final and executory. So, on March 2, 1984, Lara and Paed, now private respondents, filed
an ex-partemotion for execution of the said judgment and the trial court granted the same on July 10, 1984. 16

It was only on March 3, 1984 that Paramount, now petitioner, filed a motion to set aside the Decision raising the
issue that the court has not validly acquired jurisdiction over its person. 17

Hence, the present recourse.

After deliberating on the petition, the Court issued a temporary restraining order on July 30, 1984 as prayed for
and enjoined the respondents from enforcing the Decision dated August 30, 1983 and the Writ of Execution
dated July 10, 1984, both rendered and issued in Civil Case No. 82-4416. 18

The pivotal issue to be resolved in this case is whether or not the court validly acquired jurisdiction over
petitioner despite the appearance of Atty. Segundo M. Gloria who allegedly was not retained or authorized to
file an answer for it. 19

Petitioner now claims that the Decision of the trial court dated August 30, 1983, should be set aside since the
court has not validly acquired jurisdiction over its person, not having been validly served with summons and a
copy of the complaint nor did it actively participate in the said proceedings. It alleged that Atty. Segundo Gloria
was not its retained counsel at that time nor was he authorized by petitioner to act for and in its behalf; and that
private respondents' claims for moral, exemplary and compensatory damages as well as attorney's fees are not
recoverable from petitioner. 20

The petition is devoid of merit.

Jurisdiction is the power with which courts are invested for administering justice, that is, for hearing and deciding
cases. 21 In order for the court to have authority to dispose of the case on the merits, it must acquire jurisdiction
over the subject matter and the parties. 22

Jurisdiction over the person of the defendant in civil cases is acquired either by his voluntary appearance in court
and his submission to its authority or by service of summons. The service of summons is intended to give notice
to the defendant or respondent that an action has been commenced against it. The defendant or respondent is
thus put on guard as to the demands of the plaintiff or the petitioner. 23

Consequently, petitioner's contentions that it was not properly served with summons and that Atty. Segundo
Gloria was not authorized to appear for and in its behalf are untenable.

In the case at bar, although petitioner questioned the propriety of the service of summons, it however failed to
substantiate its allegation that it was not properly served with summons. Hence, the disputable presumption that
official duty has been regularly performed prevails. 24

The records of the case, however, showed that all the pleadings, including the answer with crossclaim and
counterclaim filed by Atty. Segundo Gloria stated that he represented the defendants Natividad, Manuel and
Paramount. In fact, he even filed a notice of appearance informing the court that he is representing the said
defendants. 25

It is worth noting that this is not the first time petitioner raised the issue of warrant of jurisdiction over its person
as well as warrant of authority of a lawyer to appear for and in its behalf. In the case docketed as G.R. No. 68066
entitled "Paramount Insurance Corp. v. Luna," this Court had the opportunity to rule that "the mere filling of the
answer with crossclaim raised a presumption of authority to appear for petitioner Paramount Insurance
Corporation . . . in accordance with Section 21, Rule 138 of the Rules of Court. Such presumption is rebuttable,
but only by clear and positive proof.

In the absence of such clear and positive proof, the presumption of authority . . . should prevail over the
petitioner's self-serving denial of such authority.

It strains credulity that a counsel who has no personal interest in the case would fight for and defend a case with
persistence and vigor if he has not been authorized or employed by the party concerned. 26
To the mind of the Court, the instant petition is filed merely to derail its execution. It took Paramount almost six
years to question the jurisdiction of the lower court. Moreover, as earlier adverted to, the controverted Decision
of August 30, 1983, became final and executory on October 20, 1983. In any event, it is axiomatic that there is
no justification in law and in fact for the reopening of a case which has long become final and which in fact was
already executed on July 18, 1984. Time and again, this Court has said that the doctrine of finality of judgment
is grounded on fundamental considerations of public policy and sound practice and at the risk of occasional
error, the judgments of courts must become final at some definite date fixed by law. 27

However, there is merit in petitioner's contention that its liability is limited only to P50,000.00 as expressed in
Insurance Policy No. CV-3466 issued on February 23, 1978. 28 The said insurance policy clearly and
categorically placed the petitioners liability for all damages arising out of death or bodily injury sustained by
one person as a result of any one accident at P50,000.00. Said amount complied with the minimum fixed by law
then prevailing, Section 377 of Presidential Decree No. 6123 (which was retained by P.D. No. 1460, the
Insurance Code of 1978), which provided that the liability of land transportation vehicle operators for bodily
injuries sustained by a passenger arising out of the use of their vehicles shall not be less than P12,000.00. Since
the petitioner's liability under the insurance contract is neither less than P12,000.00 nor contrary to law, morals,
good customs, public order or public policy, said stipulation must be upheld as effective and binding between
the parties. Therefore, the terms of the contract constitute the measure of the insurer's liability. 29

WHEREFORE, the petition is DISMISSED and the temporary restraining order of July 30, 1984 is LIFTED.
The decision of the Regional Trial Court of Manila, Branch 36, dated August 30, 1983, is hereby AFFIRMED
with the MODIFICATION that petitioner be held liable to pay respondents Jose Lara and Arsenio Paed the
amount of P50,000.00 each which is the limit of its liability under the insurance policy minus the amounts of
P5,000.00 and P800.00 which it paid for the hospitalization and medical expenses, respectively, of respondents.

Costs against petitioner.

SO ORDERED.
D. RIGHT TO SUBROGATION
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner,
vs.
COURT OF APPEALS and FELMAN SHIPPING LINES, respondents.

BELLOSILLO, J.:

This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the
extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be subrogated
to the rights of the insured upon payment of the insurance claim.

On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel owned and operated
by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles
to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc.,
Cebu.1 The shipment was insured with petitioner Philippine American General Insurance Co., Inc.
(PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG.

"MV Asilda" left the port of Zamboanga in fine weather at eight o'clock in the evening of the same day. At around
eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of Zamboanga del Norte
bringing down her entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink bottles.

On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with respondent
FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles that sank with "MV
Asilda." Respondent denied the claim thus prompting the consignee to file an insurance claim with
PHILAMGEN which paid its claim of P755,250.00.

Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which disclaimed
any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner for sum of
money and damages.

In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo were due to
the vessel's unseaworthiness as she was put to sea in an unstable condition. It further alleged that the vessel was
improperly manned and that its officers were grossly negligent in failing to take appropriate measures to proceed
to a nearby port or beach after the vessel started to list.

On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right of
subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event, FELMAN had
abandoned all its rights, interests and ownership over "MV Asilda" together with her freight and appurtenances
for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of Commerce.2

On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of Appeals
set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN filed a petition
for certiorari with this Court but it was subsequently denied on 13 February 1989.

On 28 February 1992 the trial court rendered judgment in favor of FELMAN.3 It ruled that "MV Asilda" was
seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine Coast Guard
and the shipowner's surveyor attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment
could only be attributed to either a fortuitous event, in which case, no liability should attach unless there was a
stipulation to the contrary, or to the negligence of the captain and his crew, in which case, Art. 587 of the Code
of Commerce should apply.

The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN could not recover
from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied warranty on
the vessel's seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured was an undue, wrong
and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN the right of subrogation so
as to permit it to bring an action in court as a subrogee.

On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994 respondent
appellate court rendered judgment finding "MV Asilda" unseaworthy for being top-heavy as 2,500 cases of Coca-
Cola softdrink bottles were improperly stowed on deck. In other words, while the vessel possessed the necessary
Coast Guard certification indicating its seaworthiness with respect to the structure of the ship itself, it was not
seaworthy with respect to the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the
ground that the assured's implied warranty of seaworthiness was not complied with. Perfunctorily,
PHILAMGEN was not properly subrogated to the rights and interests of the shipper. Furthermore, respondent
court held that the filing of notice of abandonment had absolved the shipowner/agent from liability under the
limited liability rule.

The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left the port of
Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should apply; and, (c)
whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper had against
FELMAN, the shipowner.

"MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as well as
the chief mate of the vessel confirmed that the weather was fine when they left the port of Zamboanga. According
to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200
empty CO2 cylinders and an undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes
for eggs and about 500 cases of Coca-Cola bottles on deck.4 The ship captain stated that around four o'clock in
the morning of 7 July 1983 he was awakened by the officer on duty to inform him that the vessel had hit a
floating log. At that time he noticed that the weather had deteriorated with strong southeast winds inducing big
waves. After thirty minutes he observed that the vessel was listing slightly to starboard and would not correct
itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside
until the vessel was balanced. At about seven o'clock in the morning, the master of the vessel stopped the engine
because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard.
The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed.

At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on his next
move, some of the cargo on deck were thrown overboard and seawater entered the engine room and cargo holds
of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship. Shortly thereafter, "MV
Asilda" capsized and sank. He ascribed the sinking to the entry of seawater through a hole in the hull caused by
the vessel's collision with a partially submerged log.5

The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report, which was adopted
by the Court of Appeals, reads —

We found in the course of our investigation that a reasonable explanation for the series of lists
experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel
was top-heavy which is to say that while the vessel may not have been overloaded, yet the
distribution or stowage of the cargo on board was done in such a manner that the vessel was in
 top-heavy condition at the time of her departure and which condition rendered her unstable and
unseaworthy for that particular voyage.

In this connection, we wish to call attention to the fact that this vessel was designed as a fishing
vessel . . . and it was not designed to carry a substantial amount or quantity of cargo on deck.
Therefore, we believe strongly that had her cargo been confined to those that could have been
accommodated under deck, her stability would not have been affected and the vessel would not
have been in any danger of capsizing, even given the prevailing weather conditions at that time
of sinking.

But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel
was rendered unseaworthy for the purpose of carrying the type of cargo because the weight of
the deck cargo so decreased the vessel's metacentric height as to cause it to become unstable.

Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed
out that ships are precisely designed to be able to navigate safely even during heavy weather
and frequently we hear of ships safely and successfully weathering encounters with typhoons
and although they may sustain some amount of damage, the sinking of ship during heavy
weather is not a frequent occurrence and is not likely to occur unless they are inherently
unstable and unseaworthy . . . .

We believe, therefore, and so hold that the proximate cause of the sinking of the M/V "Asilda"
was her condition of unseaworthiness arising from her having been top-heavy when she
departed from the Port of Zamboanga. Her having capsized and eventually sunk was bound to
happen and was therefore in the category of an inevitable occurrence (emphasis supplied).6

We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate cause of
the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship captain's allegations, evidence shows
that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days after "MV Asilda" sank,
an estimated 2,500 empty Coca-Cola plastic cases were recovered near the vicinity of the sinking. Considering
that the ship's hatches were properly secured, the empty Coca-Cola cases recovered could have come only from
the vessel's deck cargo. It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless
it can be shown that the deck cargo will not interfere with the proper management of the ship. However, in this
case it was established that "MV Asilda" was not designed to carry substantial amount of cargo on deck. The
inordinate loading of cargo deck resulted in the decrease of the vessel's metacentric height 7 thus making it
unstable. The strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage
and as such merely contributed to its already unstable and unseaworthy condition.

On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar.8 Simply put, the ship
agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This liability however
can be limited through abandonment of the vessel, its equipment and freightage as provided in Art. 587.
Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable despite
the abandonment, as where the loss or injury was due to the fault of the shipowner and the captain.9 The
international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner's
liability, does not apply to cases where the injury or average was occasioned by the shipowner's own fault. 10 It
must be stressed at this point that Art. 587 speaks only of situations where the fault or negligence is committed
solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation
will be covered by the provisions of the Civil Code on common carrier. 11

It was already established at the outset that the sinking of "MV Asilda" was due to its unseaworthiness even at
the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of cargo was
loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal miscalculation.
As such, FELMAN was equally negligent. It cannot therefore escape liability through the expedient of filing a
notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce.

Under Art 1733 of the Civil Code, "(c)ommon carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case . . ." In the event of loss of goods,
common carriers are presumed to have acted negligently. FELMAN, the shipowner, was not able to rebut this
presumption.

In relation to the question of subrogation, respondent appellate court found "MV Asilda" unseaworthy with
reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that rendered the
assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN paid the claim of
the bottling firm there was in effect a "voluntary payment" and no right of subrogation accrued in its favor. In
other words, when PHILAMGEN paid it did so at its own risk.

It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that the
vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the
policy. 12 Thus Sec. 113 of the Insurance Code provides that "(i)n every marine insurance upon a ship or freight,
or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is
seaworthy." Under Sec. 114, a ship is "seaworthy when reasonably fit to perform the service, and to encounter
the ordinary perils of the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of
the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. He may
have no control over the vessel but he has full control in the selection of the common carrier that will transport
his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture.

We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly pointed
out by FELMAN to stress that subrogation will not work in this case. In policies where the law will generally
imply a warranty of seaworthiness, it can only be excluded by terms in writing in the policy in the clearest
language. 13 And where the policy stipulates that the seaworthiness of the vessel as between the assured and the
assurer is admitted, the question of seaworthiness cannot be raised by the assurer without showing concealment
or misrepresentation by the assured. 14

The marine policy issued by PHILAMGEN to the Coca-Cola bottling firm in at least two (2) instances has
dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG
reads "(t)he liberties as per Contract of Affreightment the presence of the Negligence Clause and/or Latent Defect
Clause in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as between the Assured and
the Company shall not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the
Assurers is hereby admitted."15

The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states "(t)he
seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted . . . ." 16

The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things: (a) that
the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed
by the insurance company. 17 The insertion of such waiver clauses in cargo policies is in recognition of the
realistic fact that cargo owners cannot control the state of the vessel. Thus it can be said that with such categorical
waiver, PHILAMGEN has accepted the risk of unseaworthiness so that if the ship should sink by
unseaworthiness, as what occurred in this case, PHILAMGEN is liable.

Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN's action against
FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:
 Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or injury.

In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the assurer to the assured
operates as an equitable assignment to the assurer of all the remedies which the assured may have against the
third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon,
nor does it grow out of any privity of contract or upon payment by the insurance company of the insurance claim.
It accrues simply upon payment by the insurance company of the insurance claim.

The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the
mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good
conscience ought to pay. 19 Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers Philippines,
Inc., gave the former the right to bring an action as subrogee against FELMAN. Having failed to rebut the
presumption of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink
bottles is inevitable.

WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay
petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five
Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29 November
1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. 20

SO ORDERED.

FIREMAN'S FUND INSURANCE COMPANY and FIRESTONE TIRE AND RUBBER COMPANY OF
THE PHILIPPINES, plaintiffs-appellants,
vs.
JAMILA & COMPANY, INC. and FIRST QUEZON CITY INSURANCE CO., INC., defendants-
appellees.

Conrado R. Ayuyao for plaintiffs-appellees.

Ponciano U. Pitargue for defendant-appellee First quezon City Insurance Co., Inc.

Fernando B. Zamora for defendant-appellee Jamila & Company, Inc.

AQUINO, J.:

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

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

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

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

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

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

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

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

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

But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration, completely
ignored that first ground. It reverted to the second ground which was relied upon in its order of September 3,
1966. The lower court reiterated its order of July 22, 1966 that Fireman's Fund had no cause of action against
Jamila because Jamila did not consent to the subrogation. The court did not mention Firestone, the co-plaintiff
of Fireman's Fund.

At this juncture, it may be noted that motions for reconsideration become interminable when the court's orders
follow a seesaw pattern. That phenomenon took place in this case.

Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of October 18,
1966 on the ground that Fireman's Fund Insurance Company was suing on the basis of legal subrogation whereas
the lower court erroneously predicated its dismissal order on the theory that there was
no conventional subrogation because the debtor's consent was lacking.
The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff's property has been insured,
and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against
the wrongdoer or the person who has violated the contract".

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SO ORDERED.
E. WHO MAY BE INSURED
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.

Ramirez and Ortigas for petitioner.

Ewald Huenefeld for respondent.

PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese military occupation, the building and insured merchandise
were burned. In due time the respondent submitted to the petitioner its claim under the policy. The salvage goods
were sold at public auction and, after deducting their value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the ground that the policy in favor of the respondent had
ceased to be in force on the date the United States declared war against Germany, the respondent Corporation
(though organized under and by virtue of the laws of the Philippines) being controlled by the German subjects
and the petitioner being a company under American jurisdiction when said policy was issued on October 1, 1941.
The petitioner, however, in pursuance of the order of the Director of Bureau of Financing, Philippine Executive
Commission, dated April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650 above mentioned. The theory of the petitioner is that the
insured merchandise were burned up after the policy issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war between the United States and Germany on December
10, 1941, and that the payment made by the petitioner to the respondent corporation during the Japanese military
occupation was under pressure. After trial, the Court of First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of Appeals, the judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is now before us on appeal by certiorari from the decision of the
Court of Appeals.

The Court of Appeals overruled the contention of the petitioner that the respondent corporation became an enemy
when the United States declared war against Germany, relying on English and American cases which held that
a corporation is a citizen of the country or state by and under the laws of which it was created or organized. It
rejected the theory that nationality of private corporation is determine by the character or citizenship of its
controlling stockholders.

There is no question that majority of the stockholders of the respondent corporation were German subjects. This
being so, we have to rule that said respondent became an enemy corporation upon the outbreak of the war
between the United States and Germany. The English and American cases relied upon by the Court of Appeals
have lost their force in view of the latest decision of the Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which
the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a paper presented to the Second
International Conference of the Legal Profession held at the Hague (Netherlands) in August. 1948 the following
enlightening passages appear:

Since World War I, the determination of enemy nationality of corporations has been discussion in many
countries, belligerent and neutral. A corporation was subject to enemy legislation when it was controlled
 by enemies, namely managed under the influence of individuals or corporations, themselves considered
as enemies. It was the English courts which first the Daimler case applied this new concept of "piercing
the corporate veil," which was adopted by the peace of Treaties of 1919 and the Mixed Arbitral
established after the First World War.

The United States of America did not adopt the control test during the First World War. Courts refused
to recognized the concept whereby American-registered corporations could be considered as enemies
and thus subject to domestic legislation and administrative measures regarding enemy property.

World War II revived the problem again. It was known that German and other enemy interests were
cloaked by domestic corporation structure. It was not only by legal ownership of shares that a material
influence could be exercised on the management of the corporation but also by long term loans and
other factual situations. For that reason, legislation on enemy property enacted in various countries
during World War II adopted by statutory provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic corporation.

The United States did not, in the amendments of the Trading with the Enemy Act during the last war,
include as did other legislations the applications of the control test and again, as in World War I, courts
refused to apply this concept whereby the enemy character of an American or neutral-registered
corporation is determined by the enemy nationality of the controlling stockholders.

Measures of blocking foreign funds, the so called freezing regulations, and other administrative practice
in the treatment of foreign-owned property in the United States allowed to large degree the
determination of enemy interest in domestic corporations and thus the application of the control test.
Court decisions sanctioned such administrative practice enacted under the First War Powers Act of
1941, and more recently, on December 8, 1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the Court: "The property of all foreign interest was
placed within the reach of the vesting power (of the Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy interest which masqueraded under those innocent fronts. .
. . The power of seizure and vesting was extended to all property of any foreign country or national so
that no innocent appearing device could become a Trojan horse."

It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the appealed decision.
However, we may add that, in Haw Pia vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we already
held that China Banking Corporation came within the meaning of the word "enemy" as used in the Trading with
the Enemy Acts of civilized countries not only because it was incorporated under the laws of an enemy country
but because it was controlled by enemies.

The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that "anyone except a public
enemy may be insured." It stands to reason that an insurance policy ceases to be allowable as soon as an insured
becomes a public enemy.

Effect of war, generally. — All intercourse between citizens of belligerent powers which is inconsistent
with a state of war is prohibited by the law of nations. Such prohibition includes all negotiations,
commerce, or trading with the enemy; all acts which will increase, or tend to increase, its income or
resources; all acts of voluntary submission to it; or receiving its protection; also all acts concerning the
transmission of money or goods; and all contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens engaged in service
with the enemy; this for the reason that the subjects of one country cannot be permitted to lend their
assistance to protect by insurance the commerce or property of belligerent, alien subjects, or to do
 anything detrimental too their country's interest. The purpose of war is to cripple the power and exhaust
the resources of the enemy, and it is inconsistent that one country should destroy its enemy's property
and repay in insurance the value of what has been so destroyed, or that it should in such manner increase
the resources of the enemy, or render it aid, and the commencement of war determines, for like reasons,
all trading intercourse with the enemy, which prior thereto may have been lawful. All individuals
therefore, who compose the belligerent powers, exist, as to each other, in a state of utter exclusion, and
are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)

In the case of an ordinary fire policy, which grants insurance only from year, or for some other specified
term it is plain that when the parties become alien enemies, the contractual tie is broken and the
contractual rights of the parties, so far as not vested. lost. (Vance, the Law on Insurance, Sec. 44, p.
112.)

The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its
favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and enforcible, and
since the insured goods were burned after December 10, 1941, and during the war, the respondent was not
entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the
period covered by its policy from December 11, 1941, should be returned by the petitioner.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the question of whether the
policy in question became null and void upon the declaration of war between the United States and Germany on
December 10, 1941, and its judgment in favor of the respondent corporation was predicated on its conclusion
that the policy did not cease to be in force. The Court of Appeals necessarily assumed that, even if the payment
by the petitioner to the respondent was involuntary, its action is not tenable in view of the ruling on the validity
of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to by the appellee
was not unjust but the exercise of its lawful right to claim for and received the payment of the insurance policy,"
and that the ruling of the Bureau of Financing to the effect that "the appellee was entitled to payment from the
appellant was, well founded." Factually, there can be no doubt that the Director of the Bureau of Financing, in
ordering the petitioner to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In view of the findings and conclusion of this office
contained in its decision on Administrative Case dated February 9, 1943 copy of which was sent to your office
and the concurrence therein of the Financial Department of the Japanese Military Administration, and following
the instruction of said authority, you are hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co.,
Inc. The payment of said claim, however, should be made by means of crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover what paid to the respondent under the circumstances on this
case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippines currency of
P92,650 paid on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.

Wherefore, the appealed decision is hereby reversed and the respondent corporation is ordered to pay to the
petitioner the sum of P77,208.33, Philippine currency, less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired term of the policy in question, beginning December
11, 1941. Without costs. So ordered.