MERCANTILE LAW | I n s u r a n c e
GOYU obtained in its name a total of ten insurance policies from
SECOND DIVISION
G.R. No. 128833 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN
BING AND ELI D. LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.
G.R. No. 128834 April 20, 1998
RIZAL COMMERCIAL BANKING CORPORATION, petitioners,
vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU &
SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and
BETTY CHIU SUK YING alias BETTY GO, respondents.
G.R. No. 128866 April 20, 1998
MALAYAN INSURANCE INC., petitioners,
vs.
GOYU & SONS, INC. respondent.
MELO, J.:
The issue relevant to the herein three consolidated petitions
revolve around the fire loss claims of respondent Goyu & Sons,
Inc. (GOYU) with petitioner Malayan Insurance Company, Inc.
(MICO) in connection with the mortgage contracts entered into
by and between Rizal Commercial Banking Corporation (RCBC)
and GOYU.
The Court of Appeals ordered MICO to pay GOYU its claims in
the total amount of P74,040,518.58, plus 37% interest per
annum commending July 27, 1992. RCBC was ordered to pay
actual and compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily liable to
pay GOYU P1,500,000.00 as exemplary damages and
P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC
was fixed at P68,785,069.04 as of April 1992, without any
interest, surcharges, and penalties. RCBC and MICO appealed
separately but, in view of the common facts and issues involved,
their individual petitions were consolidated.
The undisputed facts may be summarized as follows:
GOYU applied for credit facilities and accommodations with
RCBC at its Binondo Branch. After due evaluation, RCBC
Binondo Branch, through its key officers, petitioners Uy Chun
Bing and Eli D. Lao, recommended GOYU's application for
approval by RCBC's executive committee. A credit facility in the
amount of P30 million was initially granted. Upon GOYU's
application and Uy's and Lao's recommendation, RCBC's
executive committee increased GOYU's credit facility to P50
million, then to P90 million, and finally to P117 million.
As security for its credit facilities with RCBC, GOYU executed
two real estate mortgages and two chattel mortgages in favor of
RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage
contracts, GOYU committed itself to insure the mortgaged
property with an insurance company approved by RCBC, and
subsequently, to endorse and deliver the insurance polices to
RCBC.
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MICO. In February 1992, Alchester Insurance Agency, Inc., the
insurance agent where GOYU obtained the Malayan insurance
policies, issued nine endorsements in favor of RCBC seemingly
upon instructions of GOYU (Exhibits "1-Malayan" to "9-
Malayan").
On April 27, 1992, one of GOYU's factory buildings in
Valenzuela was gutted by fire. Consequently, GOYU submitted
its claim for indemnity on account of the loss insured against.
MICO denied the claim on the ground that the insurance policies
were either attached pursuant to writs of
attachments/garnishments issued by various courts or that the
insurance proceeds were also claimed by other creditors of
GOYU alleging better rights to the proceeds than the insured.
GOYU filed a complaint for specific performance and damages
which was docketed at the Regional Trial Court of the National
Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-
65442, now subject of the present G.R. No. 128833 and 128866.
RCBC, one of GOYU's creditors, also filed with MICO its formal
claim over the proceeds of the insurance policies, but said
claims were also denied for the same reasons that MICO denied
GOYU's claims.
In an interlocutory order dated October 12, 1993 (Record, pp.
311-312), the Regional Trial Court of Manila (Branch 3),
confirmed that GOYU's other creditors, namely, Urban Bank,
Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an
aggregate amount of P14,938,080.23, and ordered that the
proceeds of the ten insurance policies be deposited with the said
court minus the aforementioned P14,938,080.23. Accordingly,
on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
In the meantime, another notice of garnishment was handed
down by another Manila RTC sala (Branch 28) for the amount of
P8,696,838.75 (Exhibit "22-Malayan").
After trial, Branch 3 of the Manila RTC rendered judgment in
favor of GOYU, disposing:
WHEREFORE, judgment is hereby rendered in favor
of the plaintiff and against the defendant, Malayan
Insurance Company, Inc. and Rizal Commercial
Banking Corporation, ordering the latter as follows:
1. For defendant Malayan Insurance Co., Inc.:
a. To pay the plaintiff its fire loss claims in the
total amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;
b. To pay the plaintiff damages by was of
interest for the duration of the delay since July 27,
1992 (ninety days after defendant insurer's receipt of
the required proof of loss and notice of loss) at the rate
of twice the ceiling prescribed by the Monetary Board,
on the following amounts:
1) P50,000,000.00 — from July 27,
1992 up to the time said amount was
deposited with this Court on January 7, 1994;
2) P24,040,518.58 — from July 27,
1992 up to the time when the writs of
attachments were received by defendant
Malayan;
2. For defendant Rizal Commercial Banking
Corporation:
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MERCANTILE LAW | I n s u r a n c e
a. To pay the plaintiff actual and
compensatory damages in the amount of
P2,000,000.00;
3. For both defendants Malayan and RCBC:
a. To pay the plaintiff, jointly and severally,
the following amounts:
1) P1,000,000.00 as exemplary
damages;
2) P1,000,000.00 as, and for,
attorney's fees;
3) Costs of suit.
and on the Counterclaim of defendant RCBC, ordering
the plaintiff to pay its loan obligations with defendant
RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the
respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B & 14-C.
FURTHER, the Clerk of Court of the Regional Trial
Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of
P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interest earned thereon.
(Record, pp. 478-479.)
From this judgment, all parties interposed their
respective appeals. GOYU was unsatisfied with the
amount awarded in its favor. MICO and RCBC
disputed the trial court's findings of liability on their
part. The Court of Appeals party granted GOYU's
appeal, but sustained the findings of the trial court with
respect to MICO and RCBC's liabilities, thusly:
WHEREFORE, the decision of the lower court dated
June 29, 1994 is hereby modified as follows:
1. FOR DEFENDANT MALAYAN INSURANCE CO.,
INC:
a) To pay the plaintiff its fire loss claim in the
total amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus
deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu
receives the said amount at the rate of thirty-seven
(37%) percent per annum which is twice the ceiling
prescribed by the Monetary Board.
2. FOR DEFENDANT RIZAL COMMERCIAL
BANKING CORPORATION;
a) To pay the plaintiff actual and
compensatory damages in the amount of
P5,000,000.00.
3. FOR DEFENDANTS MALAYAN INSURANCE CO.,
INC., RIZAL COMMERCIAL BANKING
CORPORATION, UY CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the
following amounts:
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1. P1,500,000.00 as exemplary damages;
2. P1,500,000.00 as and for attorney's fees.
4. And on RCBC's Counterclaim, ordering the plaintiff
Goyu & Sons, Inc. to pay its loan obligation with RCBC
in the amount of P68,785,069.04 as of April 27, 1992
without any interest, surcharges and penalties.
The Clerk of the Court of the Regional Trial Court of
Manila is hereby ordered to immediately release to
Goyu & Sons, Inc. the amount of P50,505,594.60 (per
O.R. No. 3649285) deposited with it by Malayan
Insurance Co., Inc., together with all the interests
thereon.
(Rollo, p. 200.)
RCBC and MICO are now before us in G.R. No. 128833 and
128866, respectively, seeking review and consequent reversal
of the above dispositions of the Court of Appeals.
In G.R. No. 128834, RCBC likewise appeals from the decision in
C.A. G.R. No. CV-48376, which case, by virtue of the Court of
Appeals' resolution dated August 7, 1996, was consolidated with
C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At
issue in said petition is RCBC's right to intervene in the action
between Alfredo C. Sebastian (the creditor) and GOYU (the
debtor), where the subject insurance policies were attached in
favor of Sebastian.
After a careful reviews of the material facts as found by the two
courts below in relation to the pertinent and applicable laws, we
find merit in the submission of RCBC and MICO.
The several causes of action pursued below by GOYU gave rise
to several related issues which are now submitted in the
petitions before us. This Court, however, discerns one primary
and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by
GOYU, the mortgagor, in case of the occurrence of loss.
As earlier mentioned, accordant with the credit facilities
extended by RCBC to GOYU, the latter executed several
mortgage contracts in favor of RCBC. It was expressly stipulated
in these mortgage contracts that GOYU shall insure the
mortgaged property with any of the insurance companies
acceptable to RCBC. GOYU indeed insured the mortgaged
property with MICO, an insurance company acceptable to
RCBC. Bases on their stipulations in the mortgage contracts,
GOYU was supposed to endorse these insurance policies in
favor of, and deliver them, to RCBC. Alchester Insurance
Agency, Inc., MICO's underwriter from whom GOYU obtained
the subject insurance policies, prepared the nine endorsements
(see Exh. "1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to
"59-RCBC"), copies of which were delivered to GOYU, RCBC,
and MICO. However, because these endorsements do not bear
the signature of any officer of GOYU, the trial court, as well as
the Court of Appeals, concluded that the endorsements are
defective.
We do not quite agree.
It is settled that a mortgagor and a mortgagee have separated
and distinct insurable interests in the same mortgaged property,
such that each one of them may insure the same property for his
own sole benefit. There is no question that GOYU could insure
the mortgaged property for its own exclusive benefit. In the
present case, although it appears that GOYU obtained the
subject insurance policies naming itself as the sole payee, the
intentions of the parties as shown by their contemporaneous
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acts, must be given due consideration in order to better serve
the interest of justice and equity.
It is to be noted that nine endorsement documents were
prepared by Alchester in favor of RCBC. The Court is in a
quandary how Alchester could arrive at the idea of endorsing
any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named
payee or beneficiary been specifically disclosed by the insured
itself. It is also significant that GOYU voluntarily and purposely
took the insurance policies from MICO, a sister company of
RCBC, and not just from any other insurance company.
Alchester would not have found out that the subject pieces of
property were mortgaged to RCBC had not such information
been voluntarily disclosed by GOYU itself. Had it not been for
GOYU, Alchester would not have known of GOYU's intention of
obtaining insurance coverage in compliance with its undertaking
in the mortgage contracts with RCBC, and verily, Alchester
would not have endorsed the policies to RCBC had it not been
so directed by GOYU.
On equitable principles, particularly on the ground of estoppel,
the Court is constrained to rule in favor of mortgagor RCBC. The
basis and purpose of the doctrine was explained in Philippine
National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to
wit:
The doctrine of estoppel is based upon the
grounds of public, policy, fair dealing, good
faith and justice, and its purpose is to forbid
one to speak against his own act,
representations, or commitments to the injury
of one to whom they were directed and who
reasonably relied thereon. The doctrine of
estoppel springs from equitable principles
and the equities in the case. It is designed to
aid the law in the administration of justice
where without its aid injustice might result. It
has been applied by this Court wherever and
whenever special circumstances of a case so
demand.
(p. 368.)
Evelyn Lozada of Alchester testified that upon instructions of Mr.
Go, through a certain Mr. Yam, she prepared in quadruplicate on
February 11, 1992 the nine endorsement documents for GOYU's
nine insurance policies in favor of RCBC. The original copies of
each of these nine endorsement documents were sent to
GOYU, and the others were sent to RCBC and MICO, while the
fourth copies were detained for Alchester's file (tsn, February 23,
pp. 7-8). GOYU has not denied having received from Alchester
the originals of these documents.
RCBC, in good faith, relied upon the endorsement documents
sent to it as this was only pursuant to the stipulation in the
mortgage contracts. We find such reliance to be justified under
the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared
such endorsements. Over and above this, GOYU continued, in
the meantime, to enjoy the benefits of the credit facilities
extended to it by RCBC. After the occurrence of the loss insure
against, it was too late for GOYU to disown the endorsements
for any imagined or contrived lack of authority of Alchester to
prepare and issue said endorsements. If there had not been
actually an implied ratification of said endorsements by virtue of
GOYU's inaction in this case, GOYU is at the very least
estopped from assailing their operative effects. To permit GOYU
to capitalize on its non-confirmation of these endorsements
while it continued to enjoy the benefits of the credit facilities of
RCBC which believed in good faith that there was due
endorsement pursuant to their mortgage contracts, is to
countenance grave contravention of public policy, fair dealing,
good faith, and justice. Such an unjust situation, the Court
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cannot sanction. Under the peculiar circumstances obtaining in
this case, the Court is bound to recognize RCBC's right to the
proceeds of the insurance polices if not for the actual
endorsement of the policies, at least on the basis of the
equitable principle of estoppel.
GOYU cannot seek relief under Section 53 of the Insurance
Code which provides that the proceeds of insurance shall
exclusively apply to the interest of the person in whose name or
for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a
justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the
intention of the parties to designate RCBC as the party for
whose benefit the insurance policies were taken out. Consider
thus the following:
1. It is undisputed that the insured pieces of property were the
subject of mortgage contracts entered into between RCBC and
GOYU in consideration of and for securing GOYU's credit
facilities from RCBC. The mortgage contracts contained
common provisions whereby GOYU, as mortgagor, undertook to
have the mortgaged property properly covered against any loss
by an insurance company acceptable to RCBC.
2. GOYU voluntarily procured insurance policies to cover the
mortgaged property from MICO, no less than a sister company
of RCBC and definitely an acceptable insurance company to
RCBC.
3. Endorsement documents were prepared by MICO's
underwriter, Alchester Insurance Agency, Inc., and copies
thereof were sent to GOYU, MICO, and RCBC. GOYU did not
assail, until of late, the validity of said endorsements.
4. GOYU continued until the occurrence of the fire, to enjoy the
benefits of the credit facilities extended by RCBC which was
conditioned upon the endorsement of the insurance policies to
be taken by GOYU to cover the mortgaged properties.
This Court can not over stress the fact that upon receiving its
copies of the endorsement documents prepared by Alchester,
GOYU, despite the absence of its written conformity thereto,
obviously considered said endorsement to be sufficient
compliance with its obligation under the mortgage contracts
since RCBC accordingly continued to extend the benefits of its
credits facilities and GOYU continued to benefit therefrom. Just
as plain too is the intention of the parties to constitute RCBC as
the beneficiary of the various insurance policies obtained by
GOYU. The intention of the parties will have to be given full
force and effect particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the
factual circumstances of the case, is truly the person or entity for
whose benefit the polices were clearly intended.
Moreover, the law's evident intention to protect the interests of
the mortgage upon the mortgaged property is expressed in
Article 2127 of the Civil Code which states:
Art. 2127. The mortgage extends to the
natural accessions, to the improvements,
growing fruits, and the rents or income not
yet received when the obligation becomes
due, and to the amount of the indemnity
granted or owing to the proprietor from the
insurers of the property mortgaged, or in
virtue of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate
remains in the possession of the mortgagor,
or it passes into the hands of a third person.
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MERCANTILE LAW | I n s u r a n c e
Significantly, the Court notes that out of the 10 insurance
policies subject of this case, only 8 of them appear to have been
subject of the endorsements prepared and delivered by
Alchester for and upon instructions of GOYU as shown below:
INSURANCE POLICY PARTICULARS
ENDORSEMENT
a. Policy Number F-114-07795 None
Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92
b. Policy Number ACIA/F-174-07660 Exhibit "1-
Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54
c. Policy Number ACIA/F-114-07661 Exhibit "2-
Malayan"
Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43
d. Policy Number ACIA/F-114-07662 Exhibit "3-
Malayan"
Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43
e. Policy Number ACIA/F-114-07663 Exhibit "4-
Malayan"
Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76
f. Policy Number ACIA/F-114-07623 Exhibit "7-
Malayan"
Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00
g. Policy Number ACIA/F-174-07223 Exhibit "6-
Malayan"
Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00
h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00
i. Policy Number F-114-07402 Exhibit "8-Malayan"
Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20
j. Policy Number F-114-07525 Exhibit "9-Malayan"
Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43
(pp. 456-457, Record; Folder of Exhibits for
MICO.)
Policy Number F-114-07795 [(a) above] has not been endorsed.
This fact was admitted by MICO's witness, Atty. Farolan (tsn,
February 16, 1994, p. 25). Likewise, the record shows no
endorsement for Policy Number CI/F-128-03341 [(h) above].
4|Page
Also, one of the endorsement documents, Exhibit "5-Malayan",
refers to a certain insurance policy number ACIA-F-07066,
which is not among the insurance policies involved in the
complaint.
The proceeds of the 8 insurance policies endorsed to RCBC
aggregate to P89,974,488.36. Being excessively payable to
RCBC by reason of the endorsement by Alchester to RCBC,
which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be
attached by GOYU's other creditors up to the extent of the
GOYU's outstanding obligation in RCBC's favor. Section 53 of
the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper
interest of the person for whose benefit it was made. In this
case, to the extent of GOYU's obligation with RCBC, the interest
of GOYU in the subject policies had been transferred to RCBC
effective as of the time of the endorsement. These policies may
no longer be attached by the other creditors of GOYU, like
Alfredo Sebastian in the present G.R. No. 128834, which may
nonetheless forthwith be dismissed for being moot and
academic in view of the results reached herein. Only the two
other policies amounting to P19,646,224.92 may be validly
attached, garnished, and levied upon by GOYU's other creditors.
To the extent of GOYU's outstanding obligation with RCBC, all
the rest of the other insurance policies above-listed which were
endorsed to RCBC, are, therefore, to be released from
attachment, garnishment, and levy by the other creditors of
GOYU.
This brings us to the next issue to be resolved, which is, the
extent of GOYU's outstanding obligation with RCBC which the
proceeds of the 8 insurance policies will discharge and liquidate,
or put differently, the actual amount of GOYU's liability to RCBC.
The Court of Appeals simply echoed the declaration of the trial
court finding that GOYU's total obligation to RCBC was only
P68,785,060.04 as of April 27, 1992, thus sanctioning the trial
court's exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92
(renewal of Promissory Note No. 952-91) on the ground that
their execution is highly questionable for not only are these
dated after the fire, but also because the signatures of either
GOYU or any its representative are conspicuously absent.
Accordingly, the Court of Appeals speculated thusly:
. . . Hence, this Court is inclined to conclude
that said promissory notes were pre-signed
by plaintiff in bank terms, as averred by
plaintiff, in contemplation of the speedy grant
of future loans, for the same practice of
procedure has always been adopted in its
previous dealings with the bank.
(Rollo, pp. 181-182.)
The fact that the promissory notes bear dates posterior to the
fire does not necessarily mean that the documents are spurious,
for it is presumed that the ordinary course of business had been
followed (Metropolitan Bank and Trust Company vs. Quilts and
All, Inc., 22 SCRA 486 [1993]). The obligor and not the holder of
the negotiable instrument has the burden of proof of showing
that he no longer owes the obligee any amount (Travel-On, Inc.
vs. Court of Appeals, 210 SCRA 351 [1992]).
Even casting aside the presumption of regularity of private
transactions, receipt of the loan amounting to P121,966,058.67
(Exhibits 1-29, RCBC) was admitted by GOYU as indicated in
the testimony of Go Song Hiap when he answered the queries of
the trial court.
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ATTY. NATIVIDAD
Q: But insofar as the amount stated in Exhibits 1 to 29-
RCBC, you received all the amounts stated therein?
A: Yes, sir, I received the amount.
COURT
He is asking if he received all the amounts stated in
Exhibits 1 to 29-RCBC?
WITNESS:
Yes, Your Honor, I received all the amounts.
COURT
Indicated in the Promissory Notes?
WITNESS
A. The promissory Notes they did not give to me but
the amount I asked which is correct, Your Honor.
COURT
Q Your mean to say the amounts indicated in Exhibits
1 to 29-RCBC is correct?
A Yes, Your Honor.
(tsn, Jan. 14, 1994, p. 26.)
Furthermore, aside from its judicial admission of having received
all the proceeds of the 29 promissory notes as hereinabove
quotes, GOYU also offered and admitted to RCBC that is
obligation be fixed at P116,301,992.60 as shown in its letter date
March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are
ready and willing to pay the current past due
account of this company in the amount of
P116,301,992.60 as of 21 January 1993,
specified in pars. 15, p. 10, and 18, p. 13 of
your affidavits of Third Party Claims in the
Urban case at Makati, Metro Manila and in
the Zamboanga case at Zamboanga city,
respectively, less the total of P8,851,519.71
paid from the Seaboard and Equitable
insurance companies and other legitimate
deductions. We accept and confirm this
amount of P116,301,992.60 as stated as true
and correct.
(Exhibit BB.)
The Court of Appeals erred in placing much significance on the
fact that the excluded promissory notes are dated after the fire. It
failed to consider that said notes had for their origin transactions
consummated prior to the fire. Thus, careful attention must be
paid to the fact that Promissory Notes No. 420-92 and 421-92
are mere renewals of Promissory Notes No. 908-91 and 952-91,
loans already availed of by GOYU.
The two courts below erred in failing to see that the promissory
notes which they ruled should be excluded for bearing dates
which are after that of the fire, are mere renewals of previous
ones. The proceeds of the loan represented by these promissory
5|Page #SJBL
notes were admittedly received by GOYU. There is ample
factual and legal basis for giving GOYU's judicial admission of
liability in the amount of P116,301,992.60 full force and effect.
It should, however, be quickly added that whatever amount
RCBC may have recovered from the other insurers of the
mortgage property will, nonetheless, have to be applied as
payment against GOYU's obligation. But, contrary to the lower
courts' findings, payments effected by GOYU prior to January
21, 1993 should no longer be deducted. Such payments had
obviously been duly considered by GOYU, in its aforequoted
letter date March 9, 1993, wherein it admitted that its past due
account totaled P116,301,992.60 as of January 21, 1993.
The net obligation of GOYU, after deductions, is thus reduced to
P107,246,887.90 as of January 21, 1993, to wit:
Total Obligation as admitted by GOYU
as of January 21, 1993: P116,301,992.60
Broken down as follows:
Principal 1 Interest
Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2
LESS:
1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81
2) Proceeds from
Equitable Insurance
Company 2,756,373.00
3) Payment from
foreign department
negotiation: 203,584.89
___________
9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90
The need for the payment of interest due the principal amount of
the obligation, which is the cost of money to RCBC, the primary
end and the ultimate reason for RCBC's existence and being,
was duly recognized by the trial court when it ruled favorably on
RCBC's counterclaim, ordering GOYU "to pay its loan obligation
with RCBC in the amount of P68,785,069.04, as of April 27,
1992, with interest thereon at the rate stipulated in the
respective promissory notes (without surcharges and penalties)
per computation, pp. 14-A, 14-B 14-C" (Record, p. 479).
Inexplicably, the Court of Appeals, without even laying down the
factual or legal justification for its ruling, modified the trial court's
ruling and ordered GOYU "to pay the principal amount of
P68,785,069.04 without any interest, surcharges and penalties"
(Rollo, p. 200).
It is to be noted in this regard that even the trial court hedgingly
and with much uncertainty deleted the payment of additional
interest, penalties, and charges, in this manner:
Regarding defendant RCBC's commitment
not to charge additional interest, penalties
and surcharges, the same does not require
that it be embodied in a document or some
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MERCANTILE LAW | I n s u r a n c e
form of writing to be binding and enforceable.
The principle is well known that generally a
verbal agreement or contract is no less
binding and effective than a written one. And
the existence of such a verbal agreement has
been amply established by the evidence in
this case. In any event, regardless of the
existence of such verbal agreement, it would
still be unjust and inequitable for defendant
RCBC to charge the plaintiff with surcharges
and penalties considering the latter's pitiful
situation. (Emphasis supplied).
(Record, p. 476)
The essence or rationale for the payment of interest or cost of
money is separate and distinct from that of surcharges and
penalties. What may justify a court in not allowing the creditor to
charge surcharges and penalties despite express stipulation
therefor in a valid agreement, may not equally justify non-
payment of interest. The charging of interest for loans forms a
very essential and fundamental element of the banking
business, which may truly be considered to be at the very core
of its existence or being. It is inconceivable for a bank to grant
loans for which it will not charge any interest at all. We fail to find
justification for the Court of Appeal's outright deletion of the
payment of interest as agreed upon in the respective promissory
notes. This constitutes gross error.
For the computation of the interest due to be paid to RCBC, the
following rules of thumb laid down by this Court in Eastern
Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]),
shall apply, to wit:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept
of actual and compensatory damages, the rate of interest, as
well as the actual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated
claims or damages except when or until the
demand can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty
cannot be so reasonably established at the
time the demand is made, the interest shall
begin to run only from the date of the
judgment of the court is made (at which time
6|Page #SJBL
the quantification of damages may be
deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding
a sum of money becomes final and
executory, the rate of legal interest, whether
the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction,
this interim period being deemed to be by
then an equivalent to a forbearance of credit.
(pp. 95-97).
There being written stipulations as to the rate of interest owing
on each specific promissory note as summarized and tabulated
by the trial court in its decision (pp. 470 and 471, Record) such
agreed interest rates must be followed. This is very clear from
paragraph II, sub-paragraph 1 quoted above.
On the issue of payment of surcharges and penalties, we partly
agree that GOYU's pitiful situation must be taken into account.
We do not agree, however, that payment of any amount as
surcharges and penalties should altogether be deleted. Even
assuming that RCBC, through its responsible officers, herein
petitioners Eli Lao and Uy Chun Bing, may have relayed its
assurance for assistance to GOYU immediately after the
occurrence of the fire, we cannot accept the lower courts' finding
that RCBC had thereby ipso facto effectively waived collection of
any additional interests, surcharges, and penalties from GOYU.
Assurances of assistance are one thing, but waiver of additional
interests, surcharges, and penalties is another.
Surcharges and penalties agreed to be paid by the debtor in
case of default partake of the nature of liquidated damages,
covered by Section 4, Chapter 3, Title XVIII of the Civil Code.
Article 2227 thereof provides:
Art. 2227. Liquidated damages, whether
intended as a indemnity or penalty, shall be
equitably reduced if they are iniquitous and
unconscionable.
In exercising this vested power to determine what is iniquitous
and unconscionable, the Court must consider the circumstances
of each case. It should be stressed that the Court will not make
any sweeping ruling that surcharges and penalties imposed by
banks for non-payment of the loans extended by them are
generally iniquitous and unconscionable. What may be
iniquitous and unconscionable in one case, may be totally just
and equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given the
circumstance under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of
36%, to be definitely iniquitous and unconscionable. The Court
tempers these rates to 2% and 3%, respectively. Furthermore, in
the light of GOYU's offer to pay the amount of P116,301,992.60
to RCBC as March 1993 (See: Exhibit "BB"), which RCBC
refused, we find it more in keeping with justice and equity for
RCBC not to charge additional interest, surcharges, and
penalties from that time onward.
Given the factual milieu hereover, we rule that it was error to
hold MICO liable in damages for denying or withholding the
proceeds of the insurance claim to GOYU.
Firstly, by virtue of the mortgage contracts as well as the
endorsements of the insurance policies, RCBC has the right to
claim the insurance proceeds, in substitution of the property lost
Part 2
MERCANTILE LAW | I n s u r a n c e
in the fire. Having assigned its rights, GOYU lost its standing as
the beneficiary of the said insurance policies.
Secondly, for an insurance company to be held liable for
unreasonably delaying and withholding payment of insurance
proceeds, the delay must be wanton, oppressive, or malevolent
(Zenith Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It
is generally agreed, however, that an insurer may in good faith
and honesty entertain a difference of opinion as to its liability.
Accordingly, the statutory penalty for vexatious refusal of an
insurer to pay a claim should not be inflicted unless the evidence
and circumstances show that such refusal was willful and
without reasonable cause as the facts appear to a reasonable
and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F
[2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331,
28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security Ins. Co.,
313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does
not show that MICO wantonly and in bad faith delayed the
release of the proceeds. The problem in the determination of
who is the actual beneficiary of the insurance policies,
aggravated by the claim of various creditors who wanted to
partake of the insurance proceeds, not to mention the
importance of the endorsement to RCBC, to our mind, and as
now borne out by the outcome herein, justified MICO in
withholding payment to GOYU.
In adjudging RCBC liable in damages to GOYU, the Court of
Appeals said that RCBC cannot avail itself of two simultaneous
remedies in enforcing the claim of an unpaid creditor, one for
specific performance and the other for foreclosure. In doing so,
said the appellate court, the second action is deemed barred,
RCBC having split a single cause of action (Rollo, pp. 195-199).
The Court of Appeals was too accommodating in giving due
consideration to this argument of GOYU, for the foreclosure suit
is still pending appeal before the same Court of Appeals in CA
G.R. CV No. 46247, the case having been elevated by RCBC.
In finding that the foreclosure suit cannot prosper, the Fifteenth
Division of the Court of Appeals pre-empted the resolution of
said foreclosure case which is not before it. This is plain
reversible error if not grave abuse of discretion.
As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):
It should have been enough, nonetheless, for
the appellate court to merely set aside the
questioned ordered of the trial court for
having been issued by the latter with grave
abuse of discretion. In likewise enjoining
permanently herein petitioner "from entering
in and interfering with the use or occupation
and enjoyment of petitioner's (now private
respondent) residential house and
compound," the appellate court in effect,
precipitately resolved with finality the case for
injunction that was yet to be heard on the
merits by the lower court. Elevated to the
appellate court, it might be stressed, were
mere incidents of the principal case still
pending with the trial court. In Municipality of
Biñan, Laguna vs. Court of Appeals, 219
SCRA 69, we ruled that the Court of Appeals
would have "no jurisdiction in
a certiorariproceeding involving an incident in
a case to rule on the merits of the main case
itself which was not on appeal before it.
(pp. 701-702.)
Anent the right of RCBC to intervene in Civil Case No. 1073,
before the Zamboanga Regional Trial Court, since it has been
determined that RCBC has the right to the insurance proceeds,
the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the
7|Page #SJBL
preferential right of RCBC over the MICO insurance policies. It is
basic and fundamental that the first mortgagee has superior
rights over junior mortgagees or attaching creditors (Alpha
Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun
Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271
[1928]).
WHEREFORE, the petitions are hereby GRANTED and the
decision and resolution of December 16, 1996 and April 3, 1997
in CA-G.R. CV No. 46162 are hereby REVERSED and SET
ASIDE, and a new one entered:
1. Dismissing the Complaint of private
respondent GOYU in Civil Case No. 93-
65442 before Branch 3 of the Manila Trial
Court for lack of merit;
2. Ordering Malayan Insurance Company,
Inc. to deliver to Rizal Commercial Banking
Corporation the proceeds of the insurance
policies in the amount of P51,862,390.94 (per
report of adjuster Toplis & Harding (Far
East), Inc., Exhibits "2" and "2-1"), less the
amount of P50,505,594.60 (per O.R. No.
3649285);
3. Ordering the Clerk of Court to release the
amount of P50,505,594.60 including the
interests earned to Rizal Commercial
Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan
obligation with Rizal Commercial Banking
Corporation in the principal amount of
P107,246,887.90, with interest at the
respective rates stipulated in each
promissory note from January 21, 1993 until
finality of this judgment, and surcharges at
2% and penalties at 3% from January 21,
1993 to March 9, 1993, minus payments
made by Malayan Insurance Company, Inc.
and the proceeds of the amount deposited
with the trial court and its earned interest.
The total amount due RCBC at the time of
the finality of this judgment shall earn interest
at the legal rate of 12% in lieu of all other
stipulated interests and charges until fully
paid.
The petition of Rizal Commercial Banking Corporation against
the respondent Court in CA-GR CV 48376 is DISMISSED for
being moot and academic in view of the results herein arrived at.
Respondent Sebastian's right as attaching creditor must yield to
the preferential rights of Rizal Commercial Banking Corporation
over the Malayan insurance policies as first mortgagee.
SO ORDERED.
Regalado, Puno, Mendoza and Martinez, JJ., concur.
Footnotes
1 See: Exhibit "70-RCBC"
2 Computed by deducting P108,083,971.49 from the
admitted amount of P116,301,992.60.
3 To be deducted from interest payments due in
accordance with Article 1253 of the Civil Code which
provides:
Part 2
MERCANTILE LAW | I n s u r a n c e

Art. 1253. If debt produces interest, payment of the

principal shall not be deemed to have been made until
the interests have been covered.

8|Page #SJBL Part 2

MERCANTILE LAW | I n s u r a n c e
FIRST DIVISION
G.R. No. 114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY BANKERS
INSURANCE CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of Court is the
decision of the Court of Appeals in CA-G.R. SP No. 31916,
1
entitled "Country Bankers Insurance Corporation versus
Armando Geagonia," reversing the decision of the Insurance
Commission in I.C. Case No. 3340 which awarded the claim of
petitioner Armando Geagonia against private respondent
Country Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart located in the
public market of San Francisco, Agusan del Sur. On 22
December 1989, he obtained from the private respondent fire
insurance policy No. F-14622 for P100,000.00. The period of
2
the policy was from 22 December 1989 to 22 December 1990
and covered the following: "Stock-in-trade consisting principally
of dry goods such as RTW's for men and women wear and other
usual to assured's business."
The petitioner declared in the policy under the subheading
entitled CO-INSURANCE that Mercantile Insurance Co., Inc.
was the co-insurer for P50,000.00. From 1989 to 1990, the
petitioner had in his inventory stocks amounting to P392,130.50,
itemized as follows:
Zenco Sales, Inc. P55,698.00
F. Legaspi Gen. Merchandise 86,432.50
Cebu Tesing Textiles 250,000.00 (on credit)
—————
P392,130.50
The policy contained the following condition:
3. The insured shall give notice to the
Company of any insurance or insurances
already affected, or which may subsequently
be effected, covering any of the property or
properties consisting of stocks in trade,
goods in process and/or inventories only
hereby insured, and unless such notice be
given and the particulars of such insurance or
insurances be stated therein or endorsed in
this policy pursuant to Section 50 of the
Insurance Code, by or on behalf of the
Company before the occurrence of any loss
or damage, all benefits under this policy shall
be deemed forfeited, provided however, that
this condition shall not apply when the total
insurance or insurances in force at the time
of the loss or damage is not more than
P200,000.00.
9|Page #SJBL
On 27 May 1990, fire of accidental origin broke out at around
7:30 p.m. at the public market of San Francisco, Agusan del Sur.
The petitioner's insured stock-in-trade were completely
destroyed prompting him to file with the private respondent a
claim under the policy. On 28 December 1990, the private
respondent denied the claim because it found that at the time of
the loss the petitioner's stocks-in-trade were likewise covered by
fire insurance policies No. GA-28146 and No. GA-28144, for
P100,000.00 each, issued by the Cebu Branch of the Philippines
First Insurance Co., Inc. (hereinafter PFIC). These policies
3
indicate that the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" with a mortgage clause reading:
MORTGAGE: Loss, if any shall be payable to
Messrs. Cebu Tesing Textiles, Cebu City as
their interest may appear subject to the terms
of this policy. CO-INSURANCE DECLARED:
P100,000. — Phils. First CEB/F 24758. 4
The basis of the private respondent's denial was the petitioner's
alleged violation of Condition 3 of the policy.
The petitioner then filed a complaint against the private
5
respondent with the Insurance Commission (Case No. 3340) for
the recovery of P100,000.00 under fire insurance policy No. F-
14622 and for attorney's fees and costs of litigation. He attached
as Annex "AM" thereof his letter of 18 January 1991 which
6
asked for the reconsideration of the denial. He admitted in the
said letter that at the time he obtained the private respondent's
fire insurance policy he knew that the two policies issued by the
PFIC were already in existence; however, he had no knowledge
of the provision in the private respondent's policy requiring him
to inform it of the prior policies; this requirement was not
mentioned to him by the private respondent's agent; and had it
been mentioned, he would not have withheld such information.
He further asserted that the total of the amounts claimed under
the three policies was below the actual value of his stocks at the
time of loss, which was P1,000,000.00.
In its answer, the private respondent specifically denied the
7
allegations in the complaint and set up as its principal defense
the violation of Condition 3 of the policy.
In its decision of 21 June 1993, the Insurance Commission
8
found that the petitioner did not violate Condition 3 as he had no
knowledge of the existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing Textiles which
procured the PFIC policies without informing him or securing his
consent; and that Cebu Tesing Textile, as his creditor, had
insurable interest on the stocks. These findings were based on
the petitioner's testimony that he came to know of the PFIC
policies only when he filed his claim with the private respondent
and that Cebu Tesing Textile obtained them and paid for their
premiums without informing him thereof. The Insurance
Commission then decreed:
WHEREFORE, judgment is hereby rendered
ordering the respondent company to pay
complainant the sum of P100,000.00 with
legal interest from the time the complaint was
filed until fully satisfied plus the amount of
P10,000.00 as attorney's fees. With costs.
The compulsory counterclaim of respondent
is hereby dismissed.
Its motion for the reconsideration of the decision having been
9
denied by the Insurance Commission in its resolution of 20
August 1993, the private respondent appealed to the Court of
10
Appeals by way of a petition for review. The petition was
docketed as CA-G.R. SP No. 31916.
In its decision of 29 December 1993, the Court of Appeals
11
reversed the decision of the Insurance Commission because it
Part 2
MERCANTILE LAW | I n s u r a n c e
found that the petitioner knew of the existence of the two other
policies issued by the PFIC. It said:
It is apparent from the face of Fire Policy GA
28146/Fire Policy No. 28144 that the insurance was
taken in the name of private respondent [petitioner
herein]. The policy states that "DISCOUNT MART
(MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the
mortgagee of the goods.
In addition, the premiums on both policies were paid
for by private respondent, not by the Tesing Textiles
which is alleged to have taken out the other insurance
without the knowledge of private respondent. This is
shown by Premium Invoices nos. 46632 and 46630.
(Annexes M and N). In both invoices, Tesing Textiles is
indicated to be only the mortgagee of the goods
insured but the party to which they were issued were
the "DISCOUNT MART (MR. ARMANDO
GEAGONIA)."
In is clear that it was the private respondent [petitioner
herein] who took out the policies on the same property
subject of the insurance with petitioner. Hence, in
failing to disclose the existence of these insurances
private respondent violated Condition No. 3 of Fire
Policy No. 1462. . . .
Indeed private respondent's allegation of lack of
knowledge of the provisions insurances is belied by his
letter to petitioner [of 18 January 1991. The body of the
letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of
the provision requiring me to inform your office
about my
prior insurance under FGA-28146 and F-CEB-
24758. Your representative did not mention about
said requirement at the time he was convincing
me to insure with you. If he only die or even
inquired if I had other existing policies covering
my establishment, I would have told him so. You
will note that at the time he talked to me until I
decided to insure with your company the two
policies aforementioned were already in effect.
Therefore I would have no reason to withhold
such information and I would have desisted to part
with my hard earned peso to pay the insurance
premiums [if] I know I could not recover anything.
Sir, I am only an ordinary businessman interested
in protecting my investments. The actual value of
my stocks damaged by the fire was estimated by
the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex
"A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my
merchandise inventory was already some
P595,455.75. . . . These will support my claim that
the amount claimed under the three policies are
much below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension
that he did not know that there were other insurances
taken on the stock-in-trade and seriously puts in
question his credibility.
10 | P a g e #SJBL
His motion to reconsider the adverse decision having been
denied, the petitioner filed the instant petition. He contends
therein that the Court of Appeals acted with grave abuse of
discretion amounting to lack or excess of jurisdiction:
A — . . . WHEN IT REVERSED THE
FINDINGS OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY
CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND
WHOSE DECISION IS ACCORDED
RESPECT AND EVEN FINALITY BY THE
COURTS;
B — . . . WHEN IT CONSIDERED AS
EVIDENCE MATTERS WHICH WERE NOT
PRESENTED AS EVIDENCE DURING THE
HEARING OR TRIAL; AND
C — . . . WHEN IT DISMISSED THE CLAIM
OF THE PETITIONER HEREIN AGAINST
THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are
(a) whether the petitioner had prior knowledge of the two
insurance policies issued by the PFIC when he obtained the fire
insurance policy from the private respondent, thereby, for not
disclosing such fact, violating Condition 3 of the policy, and (b) if
he had, whether he is precluded from recovering therefrom.
The second ground, which is based on the Court of Appeals'
reliance on the petitioner's letter of reconsideration of 18
January 1991, is without merit. The petitioner claims that the
said letter was not offered in evidence and thus should not have
been considered in deciding the case. However, as correctly
pointed out by the Court of Appeals, a copy of this letter was
attached to the petitioner's complaint in I.C. Case No. 3440 as
Annex "M" thereof and made integral part of the complaint. It 12
has attained the status of a judicial admission and since its due
execution and authenticity was not denied by the other party, the
petitioner is bound by it even if it were not introduced as an
independent evidence. 13
As to the first issue, the Insurance Commission found that the
petitioner had no knowledge of the previous two policies. The
Court of Appeals disagreed and found otherwise in view of the
explicit admission by the petitioner in his letter to the private
respondent of 18 January 1991, which was quoted in the
challenged decision of the Court of Appeals. These divergent
findings of fact constitute an exception to the general rule that in
petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are
conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of
the prior policies issued by the PFIC. His letter of 18 January
1991 to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the Insurance
Commissioner and which the latter relied upon cannot prevail
over a written admission made ante litem motam. It was, indeed,
incredible that he did not know about the prior policies since
these policies were not new or original. Policy No. GA-28144
was a renewal of Policy No. F-24758, while Policy No. GA-
28146 had been renewed twice, the previous policy being F-
24792.
Condition 3 of the private respondent's Policy No. F-14622 is a
condition which is not proscribed by law. Its incorporation in the
policy is allowed by Section 75 of the Insurance Code which
15
provides that "[a] policy may declare that a violation of specified
provisions thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid the policy." Such a condition
is a provision which invariably appears in fire insurance policies
Part 2
MERCANTILE LAW | I n s u r a n c e
and is intended to prevent an increase in the moral hazard. It is
commonly known as the additional or "other insurance" clause
and has been upheld as valid and as a warranty that no other
insurance exists. Its violation would thus avoid the
policy. However, in order to constitute a violation, the other
16
insurance must be upon same subject matter, the same interest
therein, and the same risk. 17
As to a mortgaged property, the mortgagor and the mortgagee
have each an independent insurable interest therein and both
interests may be one policy, or each may take out a separate
policy covering his interest, either at the same or at separate
times. The mortgagor's insurable interest covers the full value
18
of the mortgaged property, even though the mortgage debt is
equivalent to the full value of the property. The mortgagee's
19
insurable interest is to the extent of the debt, since the property
is relied upon as security thereof, and in insuring he is not
insuring the property but his interest or lien thereon. His
insurable interest is prima facie the value mortgaged and
extends only to the amount of the debt, not exceeding the value
of the mortgaged property. Thus, separate insurances covering
20
different insurable interests may be obtained by the mortgagor
and the mortgagee.
A mortgagor may, however, take out insurance for the benefit of
the mortgagee, which is the usual practice. The mortgagee may
be made the beneficial payee in several ways. He may become
the assignee of the policy with the consent of the insurer; or the
mere pledgee without such consent; or the original policy may
contain a mortgage clause; or a rider making the policy payable
to the mortgagee "as his interest may appear" may be attached;
or a "standard mortgage clause," containing a collateral
independent contract between the mortgagee and insurer, may
be attached; or the policy, though by its terms payable
absolutely to the mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the mortgagee's
benefit, in which case the mortgagee acquires an equitable lien
upon the proceeds. 21
In the policy obtained by the mortgagor with loss payable clause
in favor of the mortgagee as his interest may appear, the
mortgagee is only a beneficiary under the contract, and
recognized as such by the insurer but not made a party to the
contract himself. Hence, any act of the mortgagor which defeats
his right will also defeat the right of the mortgagee. This kind of
22
policy covers only such interest as the mortgagee has at the
issuing of the policy. 23
On the other hand, a mortgagee may also procure a policy as a
contracting party in accordance with the terms of an agreement
by which the mortgagor is to pay the premiums upon such
insurance. It has been noted, however, that although the
24
mortgagee is himself the insured, as where he applies for a
policy, fully informs the authorized agent of his interest, pays the
premiums, and obtains on the assurance that it insures him, the
policy is in fact in the form used to insure a mortgagor with loss
payable clause. 25
The fire insurance policies issued by the PFIC name the
petitioner as the assured and contain a mortgage clause which
reads:
Loss, if any, shall be payable to MESSRS.
TESING TEXTILES, Cebu City as their
interest may appear subject to the terms of
this policy.
This is clearly a simple loss payable clause, not a standard
mortgage clause.
It must, however, be underscored that unlike the "other
insurance" clauses involved in General Insurance and Surety
11 | P a g e #SJBL
Corp. vs. Ng Hua or in Pioneer Insurance & Surety
26
Corp. vs. Yap, which read:
27
The insured shall give notice to the company
of any insurance or insurances already
effected, or which may subsequently be
effected covering any of the property hereby
insured, and unless such notice be given and
the particulars of such insurance or
insurances be stated in or endorsed on this
Policy by or on behalf of the Company before
the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial
Union Assurance
Co. which provided "that any outstanding insurance
28
upon the whole or a portion of the objects thereby
assured must be declared by the insured in writing and
he must cause the company to add or insert it in the
policy, without which such policy shall be null and void,
and the insured will not be entitled to indemnity in case
of loss," Condition 3 in the private respondent's policy
No. F-14622 does not absolutely declare void any
violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or
insurances in force at the time of the loss or damage is
not more than P200,000.00."
It is a cardinal rule on insurance that a policy or insurance
contract is to be interpreted liberally in favor of the insured and
strictly against the company, the reason being, undoubtedly, to
afford the greatest protection which the insured was
endeavoring to secure when he applied for insurance. It is also a
cardinal principle of law that forfeitures are not favored and that
any construction which would result in the forfeiture of the policy
benefits for the person claiming thereunder, will be avoided, if it
is possible to construe the policy in a manner which would
permit recovery, as, for example, by finding a waiver for such
forfeiture. Stated differently, provisions, conditions or
29
exceptions in policies which tend to work a forfeiture of
insurance policies should be construed most strictly against
those for whose benefits they are inserted, and most favorably
toward those against whom they are intended to operate. The 30
reason for this is that, except for riders which may later be
inserted, the insured sees the contract already in its final form
and has had no voice in the selection or arrangement of the
words employed therein. On the other hand, the language of the
contract was carefully chosen and deliberated upon by experts
and legal advisers who had acted exclusively in the interest of
the insurers and the technical language employed therein is
rarely understood by ordinary laymen. 31
With these principles in mind, we are of the opinion that
Condition 3 of the subject policy is not totally free from ambiguity
and must, perforce, be meticulously analyzed. Such analysis
leads us to conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy shall only be to
the extent exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition
referring to other insurance "covering any of the property or
properties consisting of stocks in trade, goods in process and/or
inventories only hereby insured," and the portion regarding the
insured's declaration on the subheading CO-INSURANCE that
the co-insurer is Mercantile Insurance Co., Inc. in the sum of
P50,000.00. A double insurance exists where the same person
is insured by several insurers separately in respect of the same
subject and interest. As earlier stated, the insurable interests of
a mortgagor and a mortgagee on the mortgaged property are
distinct and separate. Since the two policies of the PFIC do not
cover the same interest as that covered by the policy of the
private respondent, no double insurance exists. The non-
disclosure then of the former policies was not fatal to the
petitioner's right to recover on the private respondent's policy.
Part 2
MERCANTILE LAW | I n s u r a n c e

Furthermore, by stating within Condition 3 itself that such 14 Tolentino vs. De Jesus, 56 SCRA 167
condition shall not apply if the total insurance in force at the time [1974]; Remalante vs. Tibe, 158 SCRA 138
of loss does not exceed P200,000.00, the private respondent [1988].
was amenable to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to discourage 15 P.D. No. 1460.
over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent over-
insurance and thus avert the perpetration of fraud. When a 16 MARIA CLARA L.
property owner obtains insurance policies from two or more CAMPOS, Insurance (1983 ed.) citing
insurers in a total amount that exceeds the property's value, the General Insurance & Surety Corp. vs. Ng
insured may have an inducement to destroy the property for the Hua, 106 Phil. 1117 [1960]; Petitioner
purpose of collecting the insurance. The public as well as the Insurance & Surety Corp. vs. Yap, 61 SCRA
insurer is interested in preventing a situation in which a fire 426 [1974]; Union Manufacturing Co., Inc. vs.
would be profitable to the insured. 32 Philippine Guaranty Co., Inc., 47 SCRA 271
[1972].
WHEREFORE, the instant petition is hereby GRANTED. The
decision of the Court of Appeals in CA-G.R. SP No. 31916 is 17 Id., JOHN F. DOBBYN, Insurance Law in
SET ASIDE and the decision of the Insurance Commission in a Nutshell 204 (2d ed. 1989.)
Case No. 3340 is REINSTATED.
18 COUCH on Insurance 2d § 24:68 (1960
Costs against private respondent Country Bankers Insurance ed.).
Corporation.
19 Id., § 24:69.
SO ORDERED.
20 Id., § 24:72.
Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.
21 WILLIAM R. VANCE, Handbook on the
Law on Insurance 773-774 (3rd ed.)

Footnotes 22 Id., 775.

1 Annex "A" of Petition; Rollo, 18-26. Per 23 COUCH, op cit., § 24:72.

Associate Justice Vicente V. Mendoza,
concurred in by Associate Justices Jesus M. 24 VANCE, op cit., 775.
Elbinias and Lourdes K. Tayao-Jaguros.
25 COUCH, op cit., § 23:36.
2 Exhibit "1"; Original Records (OR) (CA-
G.R. SP. No. 31916), 34.
26 Supra note 16.
3 Exhibit "4"; Annex "C" of Petition; OR (CA-
G.R. SP No. 31916), 27. 27 Supra note 16.

4 Exhibits "2" and "3"; Annexes "F" and
"G," Id., 45-46.
5 Annex "E," Id.; Rollo, 38.
6 Annex "L," Id.; OR (CA-G.R. SP No.
31916), 66.
7 Annex "E" of Petition; Rollo, 43.
8 Annex "D," Id.; Id., 32.
9 Annex "G," Id.; Id., 47.
28 55 Phil. 329, 334 [1930].
29 2 TEODORICO C.
MARTIN, Commentaries and Jurisprudence
on the Philippine Commercial Laws,143
(1986 rev. ed.).
30 Trinidad vs. Orient Protective Assurance
Association, 67 Phil. 181 [1939].
31 CAMPOS, op cit., 12.
32 Pioneer Insurance and Surety Corp. vs.
Yap, supra note 16.

10 Annex "H" of Petition; Rollo, 52.

11 Annex "A," Id.; Id., 18.

12 It is specifically referred to in paragraph 7

of the complaint. Rollo, 40.

13 Philippine Bank of Communications vs.

Court of Appeals, 195 SCRA 567 [1991].

12 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
SECOND DIVISION
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,
vs.
COURT OF APPEALS AND MEDARDA V.
LEUTERIO, respondents.
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court,
assails the Decision dated May 17, 1993, of the Court of
1
Appeals and its Resolution dated January 4, 1994 in CA-G.R.
2
CV No. 18341. The appellate court affirmed in toto the judgment
of the Misamis Oriental Regional Trial Court, Branch 18, in an
insurance claim filed by private respondent against Great Pacific
Life Assurance Co. The dispositive portion of the trial court's
decision reads:
WHEREFORE, judgment is rendered
adjudging the defendant GREAT PACIFIC
LIFE ASSURANCE CORPORATION as
insurer under its Group policy No. G-1907, in
relation to Certification B-18558 liable and
ordered to pay to the DEVELOPMENT BANK
OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of
EIGHTY SIX THOUSAND TWO HUNDRED
PESOS (P86,200.00); dismissing the claims
for damages, attorney's fees and litigation
expenses in the complaint and counterclaim,
with costs against the defendant and
dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary,
for lack of cause of action.
3 CAUSE OF ACTION.
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between
petitioner Great Pacific Life Assurance Corporation (hereinafter
Grepalife) and Development Bank of the Philippines (hereinafter
DBP). Grepalife agreed to insure the lives of eligible housing
loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a
housing debtor of DBP applied for membership in the group life
insurance plan. In an application form, Dr. Leuterio answered
questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a
heart condition, high blood pressure, cancer, diabetes,
lung; kidney or stomach disorder or any other physical
impairment?
Answer: No. If so give details _____________.
8. Are you now, to the best of your knowledge, in good
health?
Answer: [x] Yes [ ] NO. 4
13 | P a g e #SJBL
On November 15, 1983, Grepalife issued Certificate No. B-
18558, as insurance coverage of Dr. Leuterio, to the extent of
his DBP mortgage indebtedness amounting to eighty-six
thousand, two hundred (P86,200.00) pesos. 1âw phi 1.nêt
On August 6, 1984, Dr. Leuterio died due to "massive cerebral
hemorrhage." Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging that Dr. Leuterio
was not physically healthy when he applied for an insurance
coverage on November 15, 1983. Grepalife insisted that Dr.
Leuterio did not disclose he had been suffering from
hypertension, which caused his death. Allegedly, such non-
disclosure constituted concealment that justified the denial of the
claim.
On October 20, 1986, the widow of the late Dr. Leuterio,
respondent Medarda V. Leuterio, filed a complaint with the
Regional Trial Court of Misamis Oriental, Branch 18, against
Grepalife for "Specific Performance with Damages." During the5
trial, Dr. Hernando Mejia, who issued the death certificate, was
called to testify. Dr. Mejia's findings, based partly from the
information given by the respondent widow, stated that Dr.
Leuterio complained of headaches presumably due to high
blood pressure. The inference was not conclusive because Dr.
Leuterio was not autopsied, hence, other causes were not ruled
out.
On February 22, 1988, the trial court rendered a decision in
favor of respondent widow and against Grepalife. On May 17,
1993, the Court of Appeals sustained the trial court's decision.
Hence, the present petition. Petitioners interposed the following
assigned errors:
1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
WHICH IS NOT A PARTY TO THE CASE FOR
PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF
PLAINTIFF'S HUSBAND WILFREDO LEUTERIO ONE
OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-
APPELLANT [Petitioner Grepalife] FOR LACK OF
2. THE LOWER COURT ERRED IN NOT
DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE
OF THE ACTION AND OVER THE PERSON OF THE
DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE
ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE
CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN HOLDING THAT
THERE WAS NO CONCEALMENT OF MATERIAL
INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR
MEMBERSHIP IN THE GROUP LIFE INSURANCE
PLAN BETWEEN DEFENDANT-APPELLANT OF THE
INSURANCE CLAIM ARISING FROM THE DEATH
OF WILFREDO LEUTERIO. 6
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding
petitioner liable to DBP as beneficiary in a group life
Part 2
MERCANTILE LAW | I n s u r a n c e
insurance contract from a complaint filed by the widow
of the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding
that Dr. Leuterio concealed that he had hypertension,
which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding
Grepalife liable in the amount of eighty six thousand,
two hundred (P86,200.00) pesos without proof of the
actual outstanding mortgage payable by the mortgagor
to DBP.
Petitioner alleges that the complaint was instituted by the widow
of Dr. Leuterio, not the real party in interest, hence the trial court
acquired no jurisdiction over the case. It argues that when the
Court of Appeals affirmed the trial court's judgment, Grepalife
was held liable to pay the proceeds of insurance contract in
favor of DBP, the indispensable party who was not joined in the
suit.
To resolve the issue, we must consider the insurable interest in
mortgaged properties and the parties to this type of contract.
The rationale of a group insurance policy of mortgagors,
otherwise known as the "mortgage redemption insurance," is a
device for the protection of both the mortgagee and the
mortgagor. On the part of the mortgagee, it has to enter into
such form of contract so that in the event of the unexpected
demise of the mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be applied to the
payment of the mortgage debt, thereby relieving the heirs of the
mortgagor from paying the obligation. In a similar vein, ample
7
protection is given to the mortgagor under such a concept so
that in the event of death; the mortgage obligation will be
extinguished by the application of the insurance proceeds to the
mortgage indebtedness. Consequently, where the mortgagor
8
pays the insurance premium under the group insurance policy,
making the loss payable to the mortgagee, the insurance is on
the mortgagor's interest, and the mortgagor continues to be a
party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such
loss-payable clause does not make the mortgagee a party to the
contract. 9
Sec. 8 of the Insurance Code provides:
Unless the policy provides, where a
mortgagor of property effects insurance in his
own name providing that the loss shall be
payable to the mortgagee, or assigns a policy
of insurance to a mortgagee, the insurance is
deemed to be upon the interest of the
mortgagor, who does not cease to be a party
to the original contract, and any act of his,
prior to the loss, which would otherwise avoid
the insurance, will have the same effect,
although the property is in the hands of the
mortgagee, but any act which, under the
contract of insurance, is to be performed by
the mortgagor, may be performed by the
mortgagee therein named, with the same
effect as if it had been performed by the
mortgagor.
The insured private respondent did not cede to the mortgagee
all his rights or interests in the insurance, the policy stating that:
"In the event of the debtor's death before his indebtedness with
the Creditor [DBP] shall have been fully paid, an amount to pay
the outstanding indebtedness shall first be paid to the creditor
and the balance of sum assured, if there is any, shall then be
paid to the beneficiary/ies designated by the debtor." When
10
DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment
committed by the insured. Thereafter, DBP collected the debt
14 | P a g e #SJBL
from the mortgagor and took the necessary action of foreclosure
on the residential lot of private respondent. In Gonzales La O
11
vs. Yek Tong Lin Fire & Marine Ins. Co. we held:
12
Insured, being the person with whom the
contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to
some exceptions, insured may thus sue,
although the policy is taken wholly or in part
for the benefit of another person named or
unnamed, and although it is expressly made
payable to another as his interest may
appear or otherwise. * * * Although a policy
issued to a mortgagor is taken out for the
benefit of the mortgagee and is made
payable to him, yet the mortgagor may sue
thereon in his own name, especially where
the mortgagee's interest is less than the full
amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same
work, we read the following:
Insured may be regarded as the real party in
interest, although he has assigned the policy
for the purpose of collection, or has assigned
as collateral security any judgment he may
obtain. 13
And since a policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has an
insurable interest or not, and such person may recover it
whatever the insured might have recovered, the widow of the
14
decedent Dr. Leuterio may file the suit against the insurer,
Grepalife.
The second assigned error refers to an alleged concealment that
the petitioner interposed as its defense to annul the insurance
contract. Petitioner contends that Dr. Leuterio failed to disclose
that he had hypertension, which might have caused his death.
Concealment exists where the assured had knowledge of a fact
material to the risk, and honesty, good faith, and fair dealing
requires that he should communicate it to the assured, but he
designedly and intentionally withholds the same. 15
Petitioner merely relied on the testimony of the attending
physician, Dr. Hernando Mejia, as supported by the information
given by the widow of the decedent. Grepalife asserts that Dr.
Mejia's technical diagnosis of the cause of death of Dr. Leuterio
was a duly documented hospital record, and that the widow's
declaration that her husband had "possible hypertension several
years ago" should not be considered as hearsay, but as part
of res gestae.
On the contrary the medical findings were not conclusive
because Dr. Mejia did not conduct an autopsy on the body of the
decedent. As the attending physician, Dr. Mejia stated that he
had no knowledge of Dr. Leuterio's any previous hospital
confinement. Dr. Leuterio's death certificate stated that
16
hypertension was only "the possible cause of death." The private
respondent's statement, as to the medical history of her
husband, was due to her unreliable recollection of events.
Hence, the statement of the physician was properly considered
by the trial court as hearsay.
The question of whether there was concealment was aptly
answered by the appellate court, thus:
The insured, Dr. Leuterio, had answered in
his insurance application that he was in good
health and that he had not consulted a doctor
or any of the enumerated ailments, including
hypertension; when he died the attending
Part 2
MERCANTILE LAW | I n s u r a n c e

physician had certified in the death certificate
that the former died of cerebral hemorrhage,
probably secondary to hypertension. From
this report, the appellant insurance company
refused to pay the insurance claim. Appellant
alleged that the insured had concealed the
fact that he had hypertension.
WHEREFORE, the petition is hereby DENIED. The Decision
and Resolution of the Court of Appeals in CA-G.R. CV 18341 is
AFFIRMED with MODIFICATION that the petitioner is
ORDERED to pay the insurance proceeds amounting to Eighty-
six thousand, two hundred (P86,200.00) pesos to the heirs of
the insured, Dr. Wilfredo Leuterio (deceased), upon presentation
of proof of prior settlement of mortgagor's indebtedness to
Development Bank of the Philippines. Costs against petitioner. 1âw phi 1.nêt

Contrary to appellant's allegations, there was

no sufficient proof that the insured had SO ORDERED.
suffered from hypertension. Aside from the
statement of the insured's widow who was Mendoza, Buena and De Leon, Jr., JJ., concur.
not even sure if the medicines taken by Dr.
Leuterio were for hypertension, the appellant
had not proven nor produced any witness Bellosillo, J, on official leave.
who could attest to Dr. Leuterio's medical
history . . . Footnotes

xxx xxx xxx 1 Rollo, pp. 36-42.

Appellant insurance company had failed to 2 Id. at 44.

establish that there was concealment made
by the insured, hence, it cannot refuse 3 Id. at 36.
payment of the claim. 17

4 Id. at 37.
The fraudulent intent on the part of the insured must be
established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid
18 5 Civil Case 10788.
liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the 6 Rollo, pp. 18-19.
insurer. In the case at bar, the petitioner failed to clearly and
19

satisfactorily establish its defense, and is therefore liable to pay

the proceeds of the insurance. 1âw phi1.nêt
7 Serrano vs. Court of Appeals, 130 SCRA
327, 335 (1984).

And that brings us to the last point in the review of the case at
bar. Petitioner claims that there was no evidence as to the 8 Ibid.
amount of Dr. Leuterio's outstanding indebtedness to DBP at the
time of the mortgagor's death. Hence, for private respondent's 9 43 Am Jur 2d, Insurance Section
failure to establish the same, the action for specific performance 766; citing Hill vs. International Indem. Co.
should be dismissed. Petitioner's claim is without merit. A life 116 Kan 109, 225 P 1056, 38 ALR 362.
insurance policy is a valued policy. Unless the interest of a
20

person insured is susceptible of exact pecuniary measurement,

10 Rollo, p. 12.
the measure of indemnity under a policy of insurance upon life
or health is the sum fixed in the policy. The mortgagor paid the
21

premium according to the coverage of his insurance, which 11 Id. at 180.

states that:
12 55 Phil. 386 (1930), citing Corpus Juris,
The policy states that upon receipt of due volume 26 pages 483 et seq.
proof of the Debtor's death during the terms
of this insurance, a death benefit in the 13 Id. at 391, citing Corpus Juris, volume 26
amount of P86,200.00 shall be paid. pages 483 at seq.

In the event of the debtor's death before his 14 Sec. 181, Philippine Insurance Code.
indebtedness with the creditor shall have
been fully paid, an amount to pay the
outstanding indebtedness shall first be paid 15 Argente vs. West Coast Life Insurance
to the Creditor and the balance of the Sum Co., 51 Phil. 725, 731 (1928). Section 26,
Assured, if there is any shall then be paid to Philippine Insurance Code. — A neglect to
the beneficiary/ies designated by the communicate that which a party knows and
debtor." (Emphasis omitted)
22 ought to communicate is called a
concealment.
However, we noted that the Court of Appeals' decision was
promulgated on May 17, 1993. In private respondent's 16 Rollo, p. 40.
memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagor's outstanding loan. 17 Id. at 39-40.
Considering this supervening event, the insurance proceeds
shall inure to the benefit of the heirs of the deceased person or
his beneficiaries. Equity dictates that DBP should not unjustly 18 Ng Gan Zee vs. Asian Crusader Life
enrich itself at the expense of another (Nemo cum alterius Assurance Corp, 122 SCRA 461, 466 (1983).
detrimenio protest). Hence, it cannot collect the insurance
proceeds, after it already foreclosed on the mortgage. The 19 Ibid.
proceeds now rightly belong to Dr. Leuterio's heirs represented
by his widow, herein private respondent Medarda Leuterio.

15 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e

20 Third Edition, Lohel A. Martirez, Philippine

Insurance Code Annotated, p.
380, citing Belvin vs. Connecticut Mutual Life
Ins., 23 Comm. 244.

21 Sec. 183. Philippine Insurance Code.

22 Rollo, p. 12.

16 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
FIRST DIVISION
G.R. No. 124520 August 18, 1997
Spouses NILO CHA and STELLA UY CHA, and UNITED
INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules
of Court seeks to set aside a decision of respondent Court of
Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees,
entered into a lease contract with private respondent CKS
Development Corporation (hereinafter CKS), as lessor, on 5
October 1988.
2. One of the stipulations of the one (1) year lease contract
states:
18. . . . The LESSEE shall not insure against fire the
chattels, merchandise, textiles, goods and effects
placed at any stall or store or space in the leased
premises without first obtaining the written consent and
approval of the LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of the LESSOR
then the policy is deemed assigned and transferred to
the LESSOR for its own benefit; . . . 1
3. Notwithstanding the above stipulation in the lease contract,
the Cha spouses insured against loss by fire the merchandise
inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter
United) without the written consent of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke
out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the
Cha spouses (without its consent), it wrote the insurer (United) a
demand letter asking that the proceeds of the insurance contract
(between the Cha spouses and United) be paid directly to CKS,
based on its lease contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint
against the Cha spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila,
rendered a decision * ordering therein defendant United to pay
CKS the amount of P335,063.11 and defendant Cha spouses to
pay P50,000.00 as exemplary damages, P20,000.00 as
attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No.
39328 rendered a decision ** dated 11 January 1996, affirming
17 | P a g e #SJBL
the trial court decision, deleting however the awards for
exemplary damages and attorney's fees. A motion for
reconsideration by United was denied on 29 March 1996.
In the present petition, the following errors are assigned by
petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THAT THE STIPULATION IN
THE CONTRACT OF LEASE TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO
RESPONDENT IS NULL AND VOID FOR BEING
CONTRARY TO LAW, MORALS AND PUBLIC
POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN
FAILING TO DECLARE THE CONTRACT OF LEASE
ENTERED INTO AS A CONTRACT OF ADHESION
AND THEREFORE THE QUESTIONABLE
PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO
RESPONDENT MUST BE RULED OUT IN FAVOR OF
PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE
POLICY TO APPELLEE WHICH IS NOT PRIVY TO
THE SAID POLICY IN CONTRAVENTION OF THE
INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN
AWARDING PROCEEDS OF AN INSURANCE
POLICY ON THE BASIS OF A STIPULATION WHICH
IS VOID FOR BEING WITHOUT CONSIDERATION
AND FOR BEING TOTALLY DEPENDENT ON THE
WILL OF THE RESPONDENT CORPORATION. 2
The core issue to be resolved in this case is whether or not the
aforequoted paragraph 18 of the lease contract entered into
between CKS and the Cha spouses is valid insofar as it provides
that any fire insurance policy obtained by the lessee (Cha
spouses) over their merchandise inside the leased premises is
deemed assigned or transferred to the lessor (CKS) if said policy
is obtained without the prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations
contained in a contract cannot be contrary to law, morals, good
customs, public order or public policy. 3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property
shall be enforceable except for the benefit of some
person having an insurable interest in the property
insured.
A non-life insurance policy such as the fire insurance policy
taken by petitioner-spouses over their merchandise is primarily a
contract of indemnity. Insurable interest in the property insured
must exist at the time the insurance takes effect and at the time
the loss occurs. The basis of such requirement of insurable
4
interest in property insured is based on sound public policy: to
prevent a person from taking out an insurance policy on property
Part 2
MERCANTILE LAW | I n s u r a n c e

upon which he has no insurable interest and collecting the

proceeds of said policy in case of loss of the property. In such a
case, the contract of insurance is a mere wager which is void
under Section 25 of the Insurance Code, which provides:

Sec. 25. Every stipulation in a policy of Insurance for

the payment of loss, whether the person insured has or
has not any interest in the property insured, or that the
policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering,
is void.

In the present case, it cannot be denied that CKS has no

insurable interest in the goods and merchandise inside the
leased premises under the provisions of Section 17 of the
Insurance Code which provide:

Sec. 17. The measure of an insurable interest in

property is the extent to which the insured might be
damnified by loss of injury thereof.

Therefore, respondent CKS cannot, under the Insurance Code

— a special law — be validly a beneficiary of the fire insurance
policy taken by the petitioner-spouses over their merchandise.
This insurable interest over said merchandise remains with the
insured, the Cha spouses. The automatic assignment of the
policy to CKS under the provision of the lease contract
previously quoted is void for being contrary to law and/or public
policy. The proceeds of the fire insurance policy thus rightfully
belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-
petitioners). The insurer (United) cannot be compelled to pay the
proceeds of the fire insurance policy to a person (CKS) who has
no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease
contract in that the Cha spouses obtained a fire insurance policy
over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R.

CV No. 39328 is SET ASIDE and a new decision is hereby
entered, awarding the proceeds of the fire insurance policy to
petitioners Nilo Cha and Stella Uy-Cha.

SO ORDERED.

Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes

1 Rollo, p. 50.

* Penned by Judge Roberto M. Lagman.

** Penned by Justice Conchita Carpio-

Morales with Justices Fidel P. Purisima and
Fermin A. Matin, Jr., concurring.

2 Rollo, p. 18.

3 Article 1409(i), Civil Code.

4 Section 19, Insurance Code.

18 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
FIRST DIVISION
G.R. No. 137172 June 15, 1999
UCPB GENERAL INSURANCE CO., INC., petitioner,
vs.
MASAGANA TELAMART, INC., respondent.
PARDO, J.:
The case is an appeal via certiorari seeking to set aside the
decision of the Court of Appeals, affirming with modification that
1 (2) Declaring plaintiff to have fully complied
of the Regional Trial Court, Branch 58, Makati, ordering
petitioner to pay respondent the sum of P18,645,000.00, as the
proceeds of the insurance coverage of respondent's property
razed by fire; 25% of the total amount due as attorney's fees and
P25,000.00 as litigation expenses, and costs.
The facts are undisputed and may be related as follows:
On April 15, 1991, petitioner issued five (5) insurance policies
covering respondent's various property described therein against
fire, for the period from May 22, 1991 to May 22, 1992.
In March 1992, petitioner evaluated the policies and decided not
to renew them upon expiration of their terms on May 22, 1992.
Petitioner advised respondent's broker, Zuellig Insurance
Brokers, Inc. of its intention not to renew the policies.
On April 6, 1992, petitioner gave written notice to respondent of
the non-renewal of the policies at the address stated in the
policies.
On June 13, 1992, fire razed respondent's property covered by
three of the insurance policies petitioner issued.
On July 13, 1992, respondent presented to petitioner's cashier at
its head office five (5) manager's checks in the total amount of
P225,753.95, representing premium for the renewal of the
policies from May 22, 1992 to May 22, 1993. No notice of loss
was filed by respondent under the policies prior to July 14, 1992.
On July 14, 1992, respondent filed with petitioner its formal claim
for indemnification of the insured property razed by fire.
On the same day, July 14, 1992, petitioner returned to
respondent the five (5) manager's checks that it tendered, and at
the same time rejected respondent's claim for the reasons (a)
that the policies had expired and were not renewed, and (b) that
the fire occurred on June 13, 1992, before respondent's tender
of premium payment.
On July 21, 1992, respondent filed with the Regional Trial Court,
Branch 58, Makati City, a civil complaint against petitioner for
recovery of P18,645,000.00, representing the face value of the
policies covering respondent's insured property razed by fire,
and for attorney's fees.2
On October 23, 1992, after its motion to dismiss had been
denied, petitioner filed an answer to the complaint. It alleged that
19 | P a g e #SJBL
the complaint "fails to state a cause of action"; that petitioner
was not liable to respondent for insurance proceeds under the
policies because at the time of the loss of respondent's property
due to fire, the policies had long expired and were not renewed. 3
After due trial, on March 10, 1993, the Regional Trial Court,
Branch 58, Makati, rendered decision, the dispositive portion of
which reads:
WHEREFORE, premises considered,
judgment is hereby rendered in favor of the
plaintiff and against the defendant, as
follows:
(1) Authorizing and allowing the plaintiff to
consign/deposit with this Court the sum of
P225,753.95 (refused by the defendant) as
full payment of the corresponding premiums
for the replacement-renewal policies for
Exhibits A, B, C, D and E;
with its obligation to pay the premium thereby
rendering the replacement-renewal policy of
Exhibits A, B, C, D and E effective and
binding for the duration May 22, 1992 until
May 22, 1993; and, ordering defendant to
deliver forthwith to plaintiff the said
replacement-renewal policies;
(3) Declaring Exhibits A & B, in force from
August 22, 1991 up to August 23, 1992 and
August 9, 1991 to August 9, 1992,
respectively; and
(4) Ordering the defendant to pay plaintiff the
sums of: (a) P18,645,000.00 representing the
latter's claim for indemnity under Exhibits A,
B & C and/or its replacement-renewal
policies; (b) 25% of the total amount due as
and for attorney's fees; (c) P25,000.00 as
necessary litigation expenses; and, (d) the
costs of suit.
All other claims and counterclaims asserted
by the parties are denied and/or dismissed,
including plaintiff's claim for interests.
SO ORDERED.
Makati, Metro-Manila, March 10, 1993.
ZOSIMO Z. ANGELES.
Judge. 4
In due time, petitioner appealed to the Court of Appeals. 5
On September 7, 1998, the Court of Appeals promulgated its
decision affirming that of the Regional Trial Court with the
6
modification that item No. 3 of the dispositive portion was
deleted, and the award of attorney's fees was reduced to 10% of
the total amount due. 7
The Court of Appeals held that following previous practise,
respondent was allowed a sixty (60) to ninety (90) day credit
term for the renewal of its policies, and that the acceptance of
the late premium payment suggested an understanding that
payment could be made later.
Part 2
MERCANTILE LAW | I n s u r a n c e

Hence, this appeal. 6 Aliño-Hormachuelos, J., ponente, Guerrero and

Villarama, Jr. JJ., concurring.
By resolution adopted on March 24, 1999, we required
respondent to comment on the petition, not to file a motion to 7 Petition, Annex "A", Rollo, pp. 38-54.
dismiss within ten (10) days from notice. On April 22, 1999,
8

respondent filed its comment. 9

8 Rollo, p. 72.

Respondent submits that the Court of Appeals correctly ruled

9 Rollo, p. 73-106.
that no timely notice of non-renewal was sent. The notice of non-
renewal sent to broker Zuellig which claimed that it verbally
notified the insurance agency but not respondent itself did not 10 Comment, Rollo, on p. 84.
suffice. Respondent submits further that the Court of Appeals
did not err in finding that there existed a sixty (60) to ninety (90) 11 Sec. 77, Insurance Code of the Philippines;
days credit agreement between UCPB and Masagana, and that, Valenzuela vs. Court of Appeals, 191 SCRA 1; South
finally, the Supreme Court could not review factual findings of Sea Surety and Insurance Co., Inc. vs. Court of
the lower court affirmed by the Court of Appeals. 10
Appeals, 244 SCRA 744; Tibay vs. Court of Appeals,
275 SCRA 126.
We give due course to the appeal.
12 154 SCRA 672.
The basic issue raised is whether the fire insurance policies
issued by petitioner to the respondent covering the period May
22, 1991 to May 22, 1992, had expired on the latter date or had
been extended or renewed by an implied credit arrangement
though actual payment of premium was tendered on a later date
after the occurrence of the risk (fire) insured against.

The answer is easily found in the Insurance Code. No, an

insurance policy, other than life, issued originally or on renewal,
is not valid and binding until actual payment of the premium. Any
agreement to the contrary is void. The parties may not agree
11

expressly or impliedly on the extension of creditor time to pay

the premium and consider the policy binding before actual
payment.

The case of Malayan Insurance Co., Inc. vs. Cruz-

Arnaldo, cited by the Court of Appeals, is not applicable. In that
12

case, payment of the premium was in fact actually made on

December 24, 1981, and the fire occurred on January 18, 1982.
Here, the payment of the premium for renewal of the policies
was tendered on July 13, 1992, a month after the fire occurred
on June 13, 1992. The assured did not even give the insurer a
notice of loss within a reasonable time after occurrence of the
fire.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE

the decision of the Court of Appeals in CA-G.R. CV No. 42321.
In lieu thereof the Court renders judgment dismissing
respondent's complaint and petitioner's counterclaims thereto
filed with the Regional Trial Court, Branch 58, Makati City, in
Civil Case No. 92-2023. Without costs. 1âwphi 1.nêt

SO ORDERED.

Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ.,

concur.

Footnotes

1 In CA-G.R. CV No. 42321, promulgated on

September 7, 1998. Aliño-Hormachuelos, J., ponente,
Guerero and Villarama, Jr., JJ., concurring.

2 RTC Original Record, pp. 1-10.

3 RTC Original Record, pp. 103-117.

4 RTC Original Record, pp. 454-466.

5 Docketed as CA-G.R. CV No. 42321.

20 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e

discontinued the payment of premiums because the policy did

not contain a credit clause in its favor and the receipts for the
installment payments covering the policy for 1984-85, as well as
the two (2) previous policies, stated the following reservations:

2. Acceptance of this payment shall not

waive any of the company rights to deny
FIRST DIVISION liability on any claim under the policy arising
before such payments or after the expiration
of the credit clause of the policy; and
G.R. No. 95546 November 6, 1992
3. Subject to no loss prior to premium
MAKATI TUSCANY CONDOMINIUM payment. If there be any loss such is not
CORPORATION, petitioner, covered.
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE
CO., represented by American International Underwriters Petitioner further claimed that the policy was never binding and
(Phils.), Inc., respondent. valid, and no risk attached to the policy. It then pleaded a
counterclaim for P152,000.00 for the premiums already paid for
1984-85, and in its answer with amended counterclaim, sought
the refund of P924,206.10 representing the premium payments
for 1982-85.
BELLOSILLO, J.:
After some incidents, petitioner and private respondent moved
This case involves a purely legal question: whether payment by for summary judgment.
installment of the premiums due on an insurance policy
invalidates the contract of insurance, in view of Sec. 77 of P.D.
On 8 October 1987, the trial court dismissed the complaint and
612, otherwise known as the Insurance Code, as amended,
the counterclaim upon the following findings:
which provides:

While it is true that the receipts issued to the

Sec. 77. An insurer is entitled to the payment
defendant contained the aforementioned
of the premium as soon as the thing is
reservations, it is equally true that payment of
exposed to the peril insured against.
the premiums of the three aforementioned
Notwithstanding any agreement to the
policies (being sought to be refunded) were
contrary, no policy or contract of insurance
made during the lifetime or term of said
issued by an insurance company is valid and
policies, hence, it could not be said, inspite of
binding unless and until the premium thereof
the reservations, that no risk attached under
has been paid, except in the case of a life or
the policies. Consequently, defendant's
an industrial life policy whenever the grace
counterclaim for refund is not justified.
period provision applies.

As regards the unpaid premiums on

Sometime in early 1982, private respondent American Home
Insurance Policy No. AH-CPP-9210651, in
Assurance Co. (AHAC), represented by American International
view of the reservation in the receipts
Underwriters (Phils.), Inc., issued in favor of petitioner Makati
ordinarily issued by the plaintiff on premium
Tuscany Condominium Corporation (TUSCANY) Insurance
payments the only plausible conclusion is
Policy No. AH-CPP-9210452 on the latter's building and
that plaintiff has no right to demand their
premises, for a period beginning 1 March 1982 and ending 1
payment after the lapse of the term of said
March 1983, with a total premium of P466,103.05. The premium
policy on March 1, 1985. Therefore, the
was paid on installments on 12 March 1982, 20 May 1982, 21
defendant was justified in refusing to pay the
June 1982 and 16 November 1982, all of which were accepted
same. 1

by private respondent.

Both parties appealed from the judgment of the trial court.

On 10 February 1983, private respondent issued to petitioner
Thereafter, the Court of Appeals rendered a decision modifying
2

Insurance Policy No. AH-CPP-9210596, which replaced and

that of the trial court by ordering herein petitioner to pay the
renewed the previous policy, for a term covering 1 March 1983
balance of the premiums due on Policy No. AH-CPP-921-651, or
to 1 March 1984. The premium in the amount of P466,103.05
P314,103.05 plus legal interest until fully paid, and affirming the
was again paid on installments on 13 April 1983, 13 July 1983, 3
denial of the counterclaim. The appellate court thus explained —
August 1983, 9 September 1983, and 21 November 1983. All
payments were likewise accepted by private respondent.
The obligation to pay premiums when due is
ordinarily as indivisible obligation to pay the
On 20 January 1984, the policy was again renewed and private
entire premium. Here, the parties herein
respondent issued to petitioner Insurance Policy No. AH-CPP-
agreed to make the premiums payable in
9210651 for the period 1 March 1984 to 1 March 1985. On this
installments, and there is no pretense that
renewed policy, petitioner made two installment payments, both
the parties never envisioned to make the
accepted by private respondent, the first on 6 February 1984 for
insurance contract binding between them. It
P52,000.00 and the second, on 6 June 1984 for P100,000.00.
was renewed for two succeeding years, the
Thereafter, petitioner refused to pay the balance of the premium.
second and third policies being a
renewal/replacement for the previous one.
Consequently, private respondent filed an action to recover the And the insured never informed the insurer
unpaid balance of P314,103.05 for Insurance Policy No. AH- that it was terminating the policy because the
CPP-9210651. terms were unacceptable.

In its answer with counterclaim, petitioner admitted the issuance

of Insurance Policy No. AH-CPP-9210651. It explained that it

21 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
While it may be true that under Section 77 of
the Insurance Code, the parties may not
agree to make the insurance contract valid
and binding without payment of premiums,
there is nothing in said section which
suggests that the parties may not agree to
allow payment of the premiums in
installment, or to consider the contract as
valid and binding upon payment of the first
premium. Otherwise, we would allow the
insurer to renege on its liability under the
contract, had a loss incurred (sic) before
completion of payment of the entire premium,
despite its voluntary acceptance of partial
payments, a result eschewed by a basic
considerations of fairness and equity.
To our mind, the insurance contract became
valid and binding upon payment of the first
premium, and the plaintiff could not have
denied liability on the ground that payment
was not made in full, for the reason that it
agreed to accept installment payment. . . . 3
Petitioner now asserts that its payment by installment of the
premiums for the insurance policies for 1982, 1983 and 1984
invalidated said policies because of the provisions of Sec. 77 of
the Insurance Code, as amended, and by the conditions
stipulated by the insurer in its receipts, disclaiming liability for
loss for occurring before payment of premiums.
It argues that where the premiums is not actually paid in full, the
policy would only be effective if there is an acknowledgment in
the policy of the receipt of premium pursuant to Sec. 78 of the
Insurance Code. The absence of an express acknowledgment in
the policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said premiums on or
before the effective dates of said policies rendered them invalid.
Petitioner thus concludes that there cannot be a perfected
contract of insurance upon mere partial payment of the
premiums because under Sec. 77 of the Insurance Code, no
contract of insurance is valid and binding unless the premium
thereof has been paid, notwithstanding any agreement to the
contrary. As a consequence, petitioner seeks a refund of all
premium payments made on the alleged invalid insurance
policies.
We hold that the subject policies are valid even if the premiums
were paid on installments. The records clearly show that
petitioner and private respondent intended subject insurance
policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance
contract entered into in 1982 was renewed in 1983, then in
1984. In those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments speaks
loudly of the insurer's intention to honor the policies it issued to
petitioner. Certainly, basic principles of equity and fairness
would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny
liability on the lame excuse that the premiums were not prepared
in full.
We therefore sustain the Court of Appeals. We quote with
approval the well-reasoned findings and conclusion of the
appellate court contained in its Resolution denying the motion to
reconsider its Decision —
While the import of Section 77 is that
prepayment of premiums is strictly required
as a condition to the validity of the contract,
We are not prepared to rule that the request
to make installment payments duly approved
by the insurer, would prevent the entire
contract of insurance from going into effect
22 | P a g e #SJBL
despite payment and acceptance of the initial
premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the
insurer of the condition of prepayment by
making an acknowledgment in the insurance
policy of receipt of premium as conclusive
evidence of payment so far as to make the
policy binding despite the fact that premium
is actually unpaid. Section 77 merely
precludes the parties from stipulating that the
policy is valid even if premiums are not paid,
but does not expressly prohibit an agreement
granting credit extension, and such an
agreement is not contrary to morals, good
customs, public order or public policy (De
Leon, the Insurance Code, at p. 175). So is
an understanding to allow insured to pay
premiums in installments not so proscribed.
At the very least, both parties should be
deemed in estoppel to question the
arrangement they have voluntarily accepted. 4
The reliance by petitioner on Arce vs. Capital Surety and
Insurance
Co. is unavailing because the facts therein are substantially
5
different from those in the case at bar. In Arce, no payment was
made by the insured at all despite the grace period given. In the
case before Us, petitioner paid the initial installment and
thereafter made staggered payments resulting in full payment of
the 1982 and 1983 insurance policies. For the 1984 policy,
petitioner paid two (2) installments although it refused to pay the
balance.
It appearing from the peculiar circumstances that the parties
actually intended to make three (3) insurance contracts valid,
effective and binding, petitioner may not be allowed to renege on
its obligation to pay the balance of the premium after the
expiration of the whole term of the third policy (No. AH-CPP-
9210651) in March 1985. Moreover, as correctly observed by
the appellate court, where the risk is entire and the contract is
indivisible, the insured is not entitled to a refund of the premiums
paid if the insurer was exposed to the risk insured for any period,
however brief or momentary.
WHEREFORE, finding no reversible error in the judgment
appealed from, the same is AFFIRMED. Costs against
petitioner.
SO ORDERED.
Cruz, Padilla and Griño-Aquino, JJ., concur.
Medialdea, J., is on leave.
Footnotes
1 Rollo, p. 85.
2 Penned by Mme. Justice Minerva P.
Gonzaga-Reyes, concurred by Mr. Justice
Ricardo J. Francisco and Mme. Justice
Salome A. Montoya.
3 Decision, pp. 6-7; Rollo, pp. 36-37.
4 Rollo, pp. 41-42.
5 No. L-28501, September 30, 1982, 117
SCRA 63.
Part 2
MERCANTILE LAW | I n s u r a n c e
SECOND DIVISION
G.R. No. 107062 February 21, 1994
PHILIPPINE PRYCE ASSURANCE
CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and
GEGROCO, INC., respondents.
Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for
petitioner.
A.M. Sison, Jr. & Associates for private respondent.
NOCON, J.:
Two purely technical, yet mandatory, rules of procedure
frustrated petitioner's bid to get a favorable decision from the
Regional Trial Court and then again in the Court of
Appeals. These are non-appearance during the pre-trial despite
1 until date of payment; and P20,000.00 as and
due notice, and non-payment of docket fees upon filing of its
third-party complaint. Just how strict should these rules be
applied is a crucial issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now
carries the corporate name Philippine Pryce Assurance
Corporation), was the butt of the complaint for collection of sum
of money, filed on May 13, 1988 by respondent, Gegroco, Inc.
before the Makati Regional Trial Court, Branch 138. The
complaint alleged that petitioner issued two surety bonds (No.
0029, dated July 24, 1987 and No. 0037, dated October 7, 1987)
in behalf of its principal Sagum General Merchandise for FIVE
HUNDRED THOUSAND (P500,000.00) PESOS and ONE
MILLION (1,000,000.00) PESOS, respectively.
On June 16, 1988, summons, together with the copy of the
complaint, was served on petitioner. Within the reglementary
period, two successive motions were filed by petitioner praying
for a total of thirty (30) days extention within which to file a
responsible pleading.
In its Answer, dated July 29, 1988, but filed only on August 4,
1988, petitioner admitted having executed the said bonds, but
denied liability because allegedly 1) the checks which were to
pay for the premiums bounced and were dishonored hence
there is no contract to speak of between petitioner and its
supposed principal; and 2) that the bonds were merely to
guarantee payment of its principal's obligation, thus, excussion
is necessary. After the issues had been joined, the case was set
for pre-trial conference on September 29, 1988. the petitioner
received its notice on September 9, 1988, while the notice
addressed to its counsel was returned to the trial court with the
notation "Return to Sender, Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel
for petitioner appeared while both the representative of
respondent and its counsel were present. The counsel for
petitioner manifested that he was unable to contract the Vice-
President for operations of petitioner, although his client
intended to file a third party complaint against its principal.
Hence, the pre-trial was re-set to October 14, 1988. 3
23 | P a g e #SJBL
On October 14, 1988, petitioner filed a "Motion with Leave to
Admit Third-Party Complaint" with the Third-Party Complaint
attached. On this same day, in the presence of the
representative for both petitioner and respondent and their
counsel, the pre-trial conference was re-set to December 1,
1988. Meanwhile on November 29, 1988, the court admitted the
Third Party Complaint and ordered service of summons on third
party defendants. 4
On scheduled conference in December, petitioner and its
counsel did not appear notwithstanding their notice in open
court. The pre-trial was nevertheless re-set to February 1,
5
1989. However, when the case was called for pre-trial
conference on February 1, 1989, petitioner was again nor
presented by its officer or its counsel, despite being duly notified.
Hence, upon motion of respondent, petitioner was considered as
in default and respondent was allowed to present evidence ex-
parte, which was calendared on February 24, 1989. Petitioner
6
received a copy of the Order of Default and a copy of the Order
setting the reception of respondent's evidence ex-parte, both
dated February 1, 1989, on February 16, 1989. 7
On March 6, 1989, a decision was rendered by the trial court,
the dispositive portion reads:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff and against the
defendant Interworld Assurance Corporation
to pay the amount of P1,500,000.00
representing the principal of the amount due,
plus legal interest thereon from April 7, 1988,
for attorney's fees.
8
Petitioner's "Motion for Reconsideration and New Trial" dated
April 17, 1989, having been denied it elevated its case to the
Court of Appeals which however, affirmed the decision of the
trial court as well as the latter's order denying petitioner's motion
for reconsideration.
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely
erred in declaring that the case was already
ripe for pre-trial conference when the trial
court set it for the holding thereof.
II. The respondent Court of Appeals gravely
erred in affirming the decision of the trial
court by relying on the ruling laid down by
this Honorable Court in the case of
Manchester Development Corporation v.
Court of Appeals, 149 SCRA 562, and
disregarding the doctrine laid down in the
case of Sun Insurance Office, Ltd. (SIOL) v.
Asuncion, 170 SCRA 274.
III. The respondent Court of Appeals gravely
erred in declaring that it would be useless
and a waste of time to remand the case for
further proceedings as defendant-appellant
has no meritorious defense.
We do not find any reversible error in the conclusion reached by
the court a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner
argues that since the last pleading, which was supposed to be
the third-party defendant's answer has not been filed, the case is
not yet ripe for pre-trial. This argument must fail on three points.
First, the trial court asserted, and we agree, that no answer to
the third party complaint is forthcoming as petitioner never
Part 2
MERCANTILE LAW | I n s u r a n c e
initiated the service of summons on the third party defendant.
The court further said:
. . . Defendant's claim that it was not aware of the
Order admitting the third-party complaint is
preposterous. Sec. 8, Rule 13 of the Rules, provides:
Completeness of service — . . . Service by
registered mail is complete upon actual
receipt by the addressee, but if he fails to
claim his mail from the post office within five
(5) days from the date of first notice of the
postmaster, service shall take effect at the
expiration of such time. 9
Moreover, we observed that all copies of notices and orders
issued by the court for petitioner's counsel were returned with
the notation "Return to Sender, Unclaimed." Yet when he chose
to, he would appear in court despite supposed lack of notice.
Second, in the regular course of events, the third-party
defendant's answer would have been regarded as the last
pleading referred to in Sec. 1, Rule 20. However, petitioner
cannot just disregard the court's order to be present during the
pre-trial and give a flimsy excuse, such as that the answer has
yet to be filed.
The pre-trial is mandatory in any action, the main objective being
to simplify, abbreviate and expedite trial, if not to fully dispense
with it. Hence, consistent with its mandatory character the Rules
oblige not only the lawyers but the parties as well to appear for
this purpose before the Court and when a party fails to appear
10
at a pre-trial conference he may be non-suited or considered as
in default.11
Records show that even at the very start, petitioner could have
been declared as in default since it was not properly presented
during the first scheduled pre-trial on September 29, 1988.
Nothing in the record is attached which would show that
petitioner's counsel had a special authority to act in behalf of his
client other than as its lawyer.
We have said that in those instances where a party may not
himself be present at the pre-trial, and another person
substitutes for him, or his lawyer undertakes to appear not only
as an attorney but in substitution of the client's person, it is
imperative for that representative or the lawyer to have "special
authority" to enter into agreements which otherwise only the
client has the capacity to make. 12
Third, the court of Appeals properly considered the third-party
complaint as a mere scrap of paper due to petitioner's failure to
pay the requisite docket fees. Said the court a quo:
A third-party complaint is one of the
pleadings for which Clerks of court of
Regional Trial Courts are mandated to collect
docket fees pursuant to Section 5, Rule 141
of the Rules of Court. The record is bereft of
any showing tha(t) the appellant paid the
corresponding docket fees on its third-party
complaint. Unless and until the
corresponding docket fees are paid, the trial
court would not acquire jurisdiction over the
third-party complaint (Manchester
Development Corporation vs. Court of
Appeals, 149 SCRA 562). The third-party
complaint was thus reduced to a mere scrap
of paper not worthy of the trial court's
attention. Hence, the trial court can and
correctly set the case for pre-trial on the
basis of the complaint, the answer and the
answer to the counterclaim. 13
24 | P a g e #SJBL
It is really irrelevant in the instant case whether the ruling in Sun
Insurance Office, Ltd. (SIOL) v. Asuncion or that in Manchester
14
Development Corp. v. C.A. was applied. Sun Insurance and
15
Manchester are mere reiteration of old jurisprudential
pronouncements on the effect of non-payment of docket
fees. In previous cases, we have consistently ruled that the
16
court cannot acquire jurisdiction over the subject matter of a
case, unless the docket fees are paid.
Moreover, the principle laid down in Manchester could have very
well been applied in Sun Insurance. We then said:
The principle in Manchester [Manchester
Development Corp. v. C.A., 149 SCRA 562
(1987)] could very well be applied in the
present case. The pattern and the intent to
defraud the government of the docket fee
due it is obvious not only in the filing of the
original complaint but also in the filing of the
second amended complaint.
xxx xxx xxx
In the present case, a more liberal
interpretation of the rules is called for
considering that, unlike Manchester, private
respondent demonstrated his willingness to
abide by the rules by paying the additional
docket fees as required. The promulgation of
the decision in Manchester must have had
that sobering influence on private respondent
who thus paid the additional docket fee as
ordered by the respondent court. It triggered
his change of stance by manifesting his
willingness to pay such additional docket fees
as may be ordered. 17
Thus, we laid down the rules as follows:
1. It is not simply the filing of the complaint or
appropriate initiatory pleading, but the
payment of the prescribed docket fee, that
vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where
the filing of the initiatory pleading is not
accompanied by payment of the docket fee,
the court may allow payment of the fee within
a reasonable time, but in no case beyond the
applicable prescriptive or reglamentary
period.
2. The same rule applies to permissive
counterclaims, third-party claims and similar
pleadings, which shall not be considered filed
until and unless the filing fee prescribed
therefor is paid. The court may also allow
payment of said fee within a prescriptive or
reglementary period.
3. Where the trial court acquires jurisdiction
over a claim by the filing of the appropriate
pleading and payment of the prescribed filing
fee, but subsequently, the judgment awards a
claim nor specified in the pleading, or if
specified the same has not been left for
determination by the court, the additional
filing fee therefor shall constitute a lien on the
judgment. It shall be the responsibility of the
clerk of court or his duly authorized deputy to
enforce said lien and assess and collect the
additional
fee. 18
Part 2
MERCANTILE LAW | I n s u r a n c e

It should be remembered that both in Manchester and Sun
Insurance plaintiffs therein paid docket fees upon filing of their
respective pleadings, although the amount tendered were found
to be insufficient considering the amounts of the reliefs sought in
their complaints. In the present case, petitioner did not and
never attempted to pay the requisite docket fee. Neither is there
any showing that petitioner even manifested to be given time to
pay the requisite docket fee, as in fact it was not present during
the scheduled pre-trial on December 1, 1988 and then again on
February 1, 1989. Perforce, it is as if the third-party complaint
Merchandise proving that parts were purchased, delivered and
received.
On the other hand, petitioner's defense that it did not have
authority to issue a Surety Bond when it did is an admission of
fraud committed against respondent. No person can claim
benefit from the wrong he himself committed. A representation
made is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying
thereon. 22

was never filed.

WHEREFORE, in view of the foregoing, the decision of the

Finally, there is reason to believe that partitioner does not really
Court of Appeals dismissing the petition before them and
have a good defense. Petitioner hinges its defense on two affirming the decision of the trial court and its order denying
arguments, namely: a) that the checks issued by its principal
petitioner's Motion for Reconsideration are hereby AFFIRMED.
which were supposed to pay for the premiums, bounced, hence The present petition is DISMISSED for lack of merit.
there is no contract of surety to speak of; and 2) that as early as
1986 and covering the time of the Surety Bond, Interworld
Assurance Company (now Phil. Pryce) was not yet authorized SO ORDERED.
by the insurance Commission to issue such bonds.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.
The Insurance Code states that:

Sec. 177. The surety is entitled to payment of

the premium as soon as the contract of #Footnotes
suretyship or bond is perfected and delivered
to the obligor. No contract of suretyship or
bonding shall be valid and binding unless and 1 Gegroco, Inc. v. Phil. Pryce Assurance
until the premium therefor has been paid, Corp., CA-G.R. CV No. 25539, Justice
except where the obligee has accepted the Eduardo R. Bengzon,ponente. Justices Lorna
bond, in which case the bond becomes valid Lombos-de la Fuente and Quirino Abad
and enforceable irrespective of whether or Santos, Jr., concurring.
not the premium has been paid by the obligor
to the surety. . . . (emphasis added) 2 see attached notice on p. 29, Original
Record.
The above provision outrightly negates petitioner's first defense.
In a desperate attempt to escape liability, petitioner further 3 Order of the Court dated September 29,
asserts that the above provision is not applicable because the 1988, p. 33 of the Original Record.
respondent allegedly had not accepted the surety bond, hence
could not have delivered the goods to Sagum Enterprises. This
statement clearly intends to muddle the facts as found by the 4 Original Record, p. 45.
trial court and which are on record.
5 Id., p. 43.
In the first place, petitioner, in its answer, admitted to have
issued the bonds subject matter of the original 6 Id., p. 52.
action. Secondly, the testimony of Mr. Leonardo T. Guzman,
19

witness for the respondent, reveals the following:

7 see attached return slip on p. 52, Original
Record.
Q. What are the conditions and terms of sales you
extended to Sagum General Merchandise?
8 Original Record, p. 108.

A. First, we required him to submit to us Surety Bond

9 Order of the Court dated September 29,
to guaranty payment of the spare parts to be
1989, Original Record, p. 120.
purchased. Then we sell to them on 90 days credit.
Also, we required them to issue post-dated checks.
10 Sec. 1, Rule 20, Rules of Court.
Q. Did Sagum General merchandise comply with your
surety bond requirement? 11 Development Bank of the Philippines v.
Court of Appeals, G.R. No. 49410, 169
SCRA 409 (1989).
A. Yes. They submitted to us and which we have
accepted two surety bonds.
12 Home Insurance Co. v. U.S. Lines Co.,
G.R. No. L-25593, 21 SCRA 863; Barrera v.
Q Will you please present to us the aforesaid surety
Militante, G.R. No. L-54681, 114 SCRA 323.
bonds?

13 Rollo, p. 27.
A. Interworld Assurance Corp. Surety Bond No. 0029
for P500,000 dated July 24, 1987 and Interworld
Assurance Corp. Surety Bond No. 0037 for P1,000.000 14 G.R. No. 79937, 170 SCRA 274 (1989).
dated October 7, 1987. 20

15 G.R. No. L-75919, 149 SCRA 562 (1987).

Likewise attached to the record are exhibits C to C-
18 consisting of delivery invoices addressed to Sagum General
21

25 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e

16 Lazaro v. Endencia and Andres, 51 Phil.

552 (1932); Lee v. Republic, 10 SCRA 65
(1964); Malimit v. Degamo, 12 SCRA 450
(1964); Garcia v. Vasquez, 28 SCRA 330
(1969); Magaspi v. Ramolete, 115 SCRA 193
(1982).

17 sun Insurance Office, Ltd. (SIOL) v. Hon.

Maximiano Asuncion, G.R. No. 79937-38,
170 SCRA 274 (1989).

18 Sun Insurance, supra, at p. 285.

19 Rollo, p. 68.

20 TSN of February 24, 1989, p. 2, Original

Record, p. 55.

21 Original Record, pp. 67-85.

22 Article 1431, New Civil Code.

26 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
SECOND DIVISION
G.R. No. 136914 January 25, 2002
COUNTRY BANKERS INSURANCE
CORPORATION, petitioner,
vs.
LIANGA BAY AND COMMUNITY MULTI-PURPOSE
COOPERATIVE, INC., respondent.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision of
1
the Court of Appeals dated December 29, 1998 in CA-G.R. CV
2
Case No. 36902 affirming in toto the Decision dated December
3
26, 1991 of the Regional Trial Court of Lianga, Surigao del Sur,
Branch 28, in Civil Case No. L-518 which ordered petitioner
Country Bankers Insurance Corporation to fully pay the
insurance claim of respondent Lianga Bay and Community Multi-
Purpose Cooperative, Inc., under Fire Insurance Policy No. F-
1397, for loss sustained as a result of the fire that occurred on
July 1, 1989 in the amount of Two Hundred Thousand Pesos
(₱200,000.00), with interest at twelve percent (12%) per annum
from the date of filing of the complaint until fully paid, as well as
Fifty Thousand Pesos (₱50,000.00) as actual damages, Fifty
Thousand Pesos (₱50,000.00) as exemplary damages, Five
Thousand Pesos (₱5,000.00) as litigation expenses, Ten
Thousand Pesos (₱10,000.00) as attorney’s fees, and the costs
of suit.
The facts are undisputed:
The petitioner is a domestic corporation principally engaged in
the insurance business wherein it undertakes, for a
consideration, to indemnify another against loss, damage or
liability from an unknown or contingent event including fire while
the respondent is a duly registered cooperative judicially
declared insolvent and represented by the elected assignee,
Cornelio Jamero.
It appears that sometime in 1989, the petitioner and the
respondent entered into a contract of fire insurance. Under Fire
Insurance Policy No. F-1397, the petitioner insured the
respondent’s stocks-in-trade against fire loss, damage or liability
during the period starting from June 20, 1989 at 4:00 p.m. to
June 20, 1990 at 4:00 p.m., for the sum of Two Hundred
Thousand Pesos (₱200,000.00).
On July 1, 1989, at or about 12:40 a.m., the respondent’s
building located at Barangay Diatagon, Lianga, Surigao del Sur
was gutted by fire and reduced to ashes, resulting in the total
loss of the respondent’s stocks-in-trade, pieces of furnitures and
fixtures, equipments and records.
Due to the loss, the respondent filed an insurance claim with the
petitioner under its Fire Insurance Policy No. F-1397, submitting:
(a) the Spot Report of Pfc. Arturo V. Juarbal, INP Investigator,
dated July 1, 1989; (b) the Sworn Statement of Jose Lomocso;
and (c) the Sworn Statement of Ernesto Urbiztondo.
The petitioner, however, denied the insurance claim on the
ground that, based on the submitted documents, the building
was set on fire by two (2) NPA rebels who wanted to obtain
canned goods, rice and medicines as provisions for their
comrades in the forest, and that such loss was an excepted risk
27 | P a g e
under paragraph No. 6 of the policy conditions of Fire Insurance
Policy No. F-1397, which provides:
This insurance does not cover any loss or damage
occasioned by or through or in consequence, directly
or indirectly, of any of the following occurrences,
namely:
xxx xxx xxx
(d) Mutiny, riot, military or popular uprising,
insurrection, rebellion, revolution, military or usurped
power.
Any loss or damage happening during the existence of
abnormal conditions (whether physical or otherwise)
which are occasioned by or through or in
consequence, directly or indirectly, of any of said
occurrences shall be deemed to be loss or damage
which is not covered by this insurance, except to the
extent that the Insured shall prove that such loss or
damage happened independently of the existence of
such abnormal conditions.
Finding the denial of its claim unacceptable, the respondent then
instituted in the trial court the complaint for recovery of "loss,
damage or liability" against petitioner. The petitioner answered
the complaint and reiterated the ground it earlier cited to deny
the insurance claim, that is, that the loss was due to NPA rebels,
an excepted risk under the fire insurance policy.
In due time, the trial court rendered its Decision dated December
26, 1991 in favor of the respondent, declaring that:
Based on its findings, it is therefore the considered
opinion of this Court, as it so holds, that the defenses
raised by defendant-Country Bankers has utterly
crumbled on account of its inherent weakness,
incredibility and unreliability, and after applying those
helpful tools like common sense, logic and the Court’s
honest appraisal of the real and actual situation
obtaining in this area, such defenses remains (sic)
unimpressive and unconvincing, and therefore, the
defendant-Country Bankers has to be irreversibly
adjudged liable, as it should be, to plaintiff-Insolvent
Cooperative, represented in this action by its Assignee,
Cornelio Jamero, and thus, ordering said defendant-
Country Bankers to pay the plaintiff-Insolvent
Cooperative, as follows:
1. To fully pay the insurance claim for the
loss the insured-plaintiff sustained as a result
of the fire under its Fire Insurance Policy No.
F-1397 in its full face value of ₱200,000.00
with interest of 12% per annum from date of
filing of the complaint until the same is fully
paid;
2. To pay as and in the concept of actual or
compensatory damages in the total sum of
₱50,000.00;
3. To pay as and in the concept of exemplary
damages in the total sum of ₱50,000.00;
4. To pay in the concept of litigation
expenses the sum of ₱5,000.00;
5. To pay by way of reimbursement the
attorney’s fees in the sum of ₱10,000.00; and
#SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
6. To pay the costs of the suit.
For being unsubstantiated with credible and positive
evidence, the "counterclaim" is dismissed.
IT IS SO ORDERED.
Petitioner interposed an appeal to the Court of Appeals. On
December 29, 1998, the appellate court affirmed the challenged
decision of the trial court in its entirety. Petitioner now comes
before us via the instant petition anchored on three (3) assigned
errors, to wit:
4
1. THE HONORABLE COURT OF APPEALS FAILED
TO APPRECIATE AND GIVE CREDENCE TO THE
SPOT REPORT OF PFC. ARTURO JUARBAL (EXH.
3) AND THE SWORN STATEMENT OF JOSE
LOMOCSO (EXH. 4) THAT THE RESPONDENT’S
STOCK-IN-TRADE WAS BURNED BY THE NPA
REBELS, HENCE AN EXCEPTED RISK UNDER THE
FIRE INSURANCE POLICY.
2. THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING PETITIONER LIABLE FOR 12%
INTEREST PER ANNUM ON THE FACE VALUE OF
THE POLICY FROM THE FILING OF THE
COMPLAINT UNTIL FULLY PAID.
3. THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THE PETITIONER LIABLE FOR
ACTUAL AND EXEMPLARY DAMAGES,
LITIGATION EXPENSES, ATTORNEYS FEES AND
COST OF SUIT.
A party is bound by his own affirmative allegations. This is a
well-known postulate echoed in Section 1 of Rule 131 of the
Revised Rules of Court. Each party must prove his own
affirmative allegations by the amount of evidence required by
law which in civil cases, as in this case, is preponderance of
evidence, to obtain a favorable judgment. 5
In the instant case, the petitioner does not dispute that the
respondent’s stocks-in-trade were insured against fire loss,
damage or liability under Fire Insurance Policy No. F- 1397 and
that the respondent lost its stocks-in-trade in a fire that occurred
on July 1, 1989, within the duration of said fire insurance. The
petitioner, however, posits the view that the cause of the loss
was an excepted risk under the terms of the fire insurance
policy.
Where a risk is excepted by the terms of a policy which insures
against other perils or hazards, loss from such a risk constitutes
a defense which the insurer may urge, since it has not assumed
that risk, and from this it follows that an insurer seeking to defeat
a claim because of an exception or limitation in the policy has
the burden of proving that the loss comes within the purview of
the exception or limitation set up. If a proof is made of a loss
apparently within a contract of insurance, the burden is upon the
insurer to prove that the loss arose from a cause of loss which is
excepted or for which it is not liable, or from a cause which limits
its liability. Stated else wise, since the petitioner in this case is
6
defending on the ground of non-coverage and relying upon an
exemption or exception clause in the fire insurance policy, it has
the burden of proving the facts upon which such excepted risk is
based, by a preponderance of evidence. But petitioner failed to
7
do so.
The petitioner relies on the Sworn Statements of Jose Lomocso
and Ernesto Urbiztondo as well as on the Spot Report of Pfc.
Arturo V. Juarbal dated July 1, 1989, more particularly the
following statement therein:
28 | P a g e #SJBL
xxx investigation revealed by Jose Lomocso that those
armed men wanted to get can goods and rice for their
consumption in the forest PD investigation further
disclosed that the perpetrator are member (sic) of the
NPA PD end… x x x
A witness can testify only to those facts which he knows of his
personal knowledge, which means those facts which are derived
from his perception. Consequently, a witness may not testify as
8
to what he merely learned from others either because he was
told or read or heard the same. Such testimony is considered
hearsay and may not be received as proof of the truth of what he
has learned. Such is the hearsay rule which applies not only to
oral testimony or statements but also to written evidence as
well.
9
The hearsay rule is based upon serious concerns about the
trustworthiness and reliability of hearsay evidence inasmuch as
such evidence are not given under oath or solemn affirmation
and, more importantly, have not been subjected to cross-
examination by opposing counsel to test the perception,
memory, veracity and articulateness of the out-of-court declarant
or actor upon whose reliability on which the worth of the out-of-
court statement depends. 10
Thus, the Sworn Statements of Jose Lomocso and Ernesto
Urbiztondo are inadmissible in evidence, for being hearsay,
inasmuch as they did not take the witness stand and could not
therefore be cross-examined.
There are exceptions to the hearsay rule, among which are
entries in official records. To be admissible in evidence,
11
however, three (3) requisites must concur, to wit:
(a) that the entry was made by a public officer, or by
another person specially enjoined by law to do so;
(b) that it was made by the public officer in the
performance of his duties, or by such other person in
the performance of a duty specially enjoined by law;
and
(c) that the public officer or other person had sufficient
knowledge of the facts by him stated, which must have
been acquired by him personally or through official
information. 12
The third requisite was not met in this case since no
investigation, independent of the statements gathered from Jose
Lomocso, was conducted by Pfc. Arturo V. Juarbal. In fact, as
the petitioner itself pointed out, citing the testimony of Pfc. Arturo
Juarbal, the latter’s Spot Report "was based on the personal
13
knowledge of the caretaker Jose Lomocso who witnessed every
single incident surrounding the facts and circumstances of the
case." This argument undeniably weakens the petitioner’s
defense, for the Spot Report of Pfc. Arturo Juarbal relative to the
statement of Jose Lomocso to the effect that NPA rebels
allegedly set fire to the respondent’s building is inadmissible in
evidence, for the purpose of proving the truth of the statements
contained in the said report, for being hearsay.
The said Spot Report is admissible only insofar as it constitutes
part of the testimony of Pfc. Arturo V. Juarbal since he himself
took the witness stand and was available for cross-examination.
The portions of his Spot Report which were of his personal
knowledge or which consisted of his perceptions and
conclusions are not hearsay. The rest of the said report relative
to the statement of Jose Lomocso may be considered as
independently relevant statements gathered in the course of
Juarbal’s investigation and may be admitted as such but not
necessarily to prove the truth thereof. 14
Part 2
MERCANTILE LAW | I n s u r a n c e
The petitioner’s evidence to prove its defense is sadly wanting
and thus, gives rise to its liability to the respondent under Fire
Insurance Policy No. F-1397. Nonetheless, we do not sustain
the trial court’s imposition of twelve percent (12%) interest on
the insurance claim as well as the monetary award for actual
and exemplary damages, litigation expenses and attorney’s fees
for lack of legal and valid basis.
Concerning the application of the proper interest rates, the
following guidelines were set in Eastern Shipping Lines, Inc. v.
Court of Appeals and Mercantile Insurance Co., Inc.: 15
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts,
is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed,
as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated
claims or damages except when or until the
demand can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty
cannot be so reasonably established at the
time the demand is made, the interest shall
begin to run only from the date the judgment
of the court is made (at which time the
quantification of damages may be deemed to
have been reasonably ascertained). The
actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding
a sum of money becomes final and
executory, the rate of legal interest, whether
the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this
interim period being deemed to be by then an
equivalent to a forbearance of credit.
In the said case of Eastern Shipping, the Court further observed
that a "forbearance" in the context of the usury law is a
"contractual obligation of lender or creditor to refrain, during a
given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable."
29 | P a g e #SJBL
Considering the foregoing, the insurance claim in this case is
evidently not a forbearance of money, goods or credit, and thus
the interest rate should be as it is hereby fixed at six percent
(6%) computed from the date of filing of the complaint.
We find no justification for the award of actual damages of Fifty
Thousand Pesos (₱50,000.00). Well-entrenched is the doctrine
that actual, compensatory and consequential damages must be
proved, and cannot be presumed. That part of the dispositive
16
portion of the Decision of the trial court ordering the petitioner to
pay actual damages of Fifty Thousand Pesos (₱50,000.00) has
no basis at all. The justification, if any, for such an award of
actual damages does not appear in the body of the decision of
the trial court. Neither is there any testimonial and documentary
evidence on the alleged actual damages of Fifty Thousand
Pesos (₱50,000.00) to warrant such an award. Thus, the same
must be deleted.
Concerning the award of exemplary damages for Fifty Thousand
Pesos (₱50,000.00), we likewise find no legal and valid basis for
granting the same. Article 2229 of the New Civil Code provides
that exemplary damages may be imposed by way of example or
correction for the public good. Exemplary damages are imposed
not to enrich one party or impoverish another but to serve as a
deterrent against or as a negative incentive to curb socially
deleterious actions. They are designed to permit the courts to
mould behavior that has socially deleterious consequences, and
its imposition is required by public policy to suppress the wanton
acts of an offender. However, it cannot be recovered as a matter
of right. It is based entirely on the discretion of the court. We find
no cogent and valid reason to award the same in the case at
bar.
With respect to the award of litigation expenses and attorney’s
fees, Article 2208 of the New Civil Code enumerates the
17
instances where such may be awarded and, in all cases, it must
be reasonable, just and equitable if the same were to be
granted. Attorney’s fees as part of damages are not meant to
enrich the winning party at the expense of the losing litigant.
They are not awarded every time a party prevails in a suit
because of the policy that no premium should be placed on the
right to litigate. The award of attorney’s fees is the exception
18
rather than the general rule. As such, it is necessary for the
court to make findings of facts and law that would bring the case
within the exception and justify the grant of such award. We find
none in this case to warrant the award by the trial court of
litigation expenses and attorney’s fees in the amounts of Five
Thousand Pesos (₱5,000.00) and Ten Thousand Pesos
(₱10,000.00), respectively, and therefore, the same must also
be deleted.
WHEREFORE, the appealed Decision is MODIFIED. The rate of
interest on the adjudged principal amount of Two Hundred
Thousand Pesos (₱200,000.00) shall be six percent (6%) per
annum computed from the date of filing of the Complaint in the
trial court. The awards in the amounts of Fifty Thousand Pesos
(₱50,000.00) as actual damages, Fifty Thousand Pesos
(₱50,000.00) as exemplary damages, Five Thousand Pesos
(₱5,000.00) as litigation expenses, and Ten Thousand Pesos
(₱10,000.00) as attorney’s fees are hereby DELETED. Costs
against the petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena,
JJ., concur.
Footnotes
1
Penned by Associate Justice Jesus M. Elbinias and
concurred in by Associate Justices Eugenio S.
Labitoria and Marina L. Buzon, Rollo, pp. 25-29.
Part 2
MERCANTILE LAW | I n s u r a n c e

2
Fourth Division. 3) In criminal cases of malicious prosecution
against the plaintiff;
3
Penned by Judge Bernardo V. Saludares, Rollo, pp.
31-52. 4) In case of a clearly unfounded civil action
or proceeding against the plaintiff;
4
Rollo, p. 12.
5) Where the defendant acted in gross and
evident bad faith in refusing to satisfy the
5
Tai Tong Chuache & Co. v. Insurance Commission,
158 SCRA 366, 372 [1988]; Summit Guaranty & plaintiff’s plainly valid, just and demandable
claim;
Insurance Co., Inc. v. Court of Appeals, 110 SCRA
241, 249 [1981] citing 20 Am. Jur. 142; Paris-Manila
Perfume Co. v. Phoenix Assurance Co., 49 Phil. 753 6) In actions for legal support;
[1926].
7) In actions for the recovery of wages of
6
44 Am Jur 2d Insurance § 1938. household helpers, laborers and skilled
workers;
7
44 Am Jur 2d Insurance § 2021.
8) In actions for indemnity under workmen’s
8
Section 36 of Rule 130 of the Revised Rules of Court. compensation and employer’s liability laws;

9
D.M. Consunji, Inc. v. Court of Appeals and Maria J.
Juego, G.R. No. 137873, April 20, 2001, pp. 3-4 citing
31A C.J.S. Evidence § 194 and Philippine Home
Assurance Corp. v. Court of Appeals, 257 SCRA 468,
479 [1996].
9) In a separate civil action to recover civil
liability arising from a crime;
10) When at least double judicial costs are
awarded;

Section 216 [2], Gilbert, Law Summaries on

10
11) In any other case where the court deems
Evidence, cited in Remedial Law, Vol. V: Revised it just and equitable that attorney’s fees and
Rules on Evidence, Oscar M. Herrera, 1999 Edition, p. expenses of litigation should be recovered.
565.
In all cases, the attorney’s fees and expenses of
Section 44 of Rule 130 of the Revised Rules of Court
11
litigation must be reasonable.
provides:
Ibaan Rural Bank, Inc. v. Court of Appeals, 321
18

Entries in official records made in the SCRA 88, 95 [1999].

performance of his duty by a public officer of
the Philippines, or by a person in the
performance of a duty specially enjoined by
law, are prima facie evidence of the facts
therein stated.

Africa v. Caltex (Phil.), Inc., 16 SCRA 448, 452

12

[1966].

13
Rollo, pp. 16-17.

Rodriguez v. Court of Appeals, 273 SCRA 607, 618

14

[1997].

15
234 SCRA 78, 95-97 [1994].

Eduardo P. Lucas v. Spouses Maximo C. Royo and

16

Corazon B. Royo, G.R. No. 136185, October 30, 2000,

p. 9; Integrated Packaging Corporation v. Court of
Appeals, 333 SCRA 170, 179 [2000]; Lucena v. Court
of Appeals, 313 SCRA 47, 61-62 [1999].

Art. 2208. In the absence of stipulation, attorney’s

17

fees and expenses of litigation, other than judicial

costs, cannot be recovered, except:

1) When exemplary damages are awarded;

2) When the defendant’s act or omission has

compelled the plaintiff to litigate with third
persons or to incur expenses to protect his
interest;

30 | P a g e #SJBL Part 2
MERCANTILE LAW | I n s u r a n c e
THIRD DIVISION
G.R. No. 92492 June 17, 1993
THELMA VDA. DE CANILANG, petitioner,
vs.
HON. COURT OF APPEALS and GREAT PACIFIC LIFE
ASSURANCE CORPORATION, respondents.
Simeon C. Sato for petitioner.
FELICIANO, J.:
On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B.
Claudio and was diagnosed as suffering from "sinus
tachycardia." The doctor prescribed the following fro
him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug.
Mr. Canilang consulted the same doctor again on 3 August 1982
and this time was found to have "acute bronchitis."
On next day, 4 August 1982, Jaime Canilang applied for a "non-
medical" insurance policy with respondent Great Pacific Life
Assurance Company ("Great Pacific") naming his wife, Thelma
Canilang, as his beneficiary. Jaime Canilang was issued
1 involves concealment.
ordinary life insurance Policy No. 345163, with the face value of
P19,700, effective as of 9 August 1982.
On 5 August 1983, Jaime Canilang died of "congestive heart
failure," "anemia," and "chronic anemia." Petitioner, widow and
2
beneficiary of the insured, filed a claim with Great Pacific which
the insurer denied on 5 December 1983 upon the ground that
the insured had concealed material information from it.
Petitioner then filed a complaint against Great Pacific with the
Insurance Commission for recovery of the insurance proceeds.
During the hearing called by the Insurance Commissioner,
petitioner testified that she was not aware of any serious illness
suffered by her late husband and that, as far as she knew, her
3
husband had died because of a kidney disorder. A deposition
4
given by Dr. Wilfredo Claudio was presented by petitioner. There
Dr. Claudio stated that he was the family physician of the
deceased Jaime Canilang and that he had previously treated
5
him for "sinus tachycardia" and "acute bronchitis." Great Pacific
6
for its part presented Dr. Esperanza Quismorio, a physician
and a medical underwriter working for Great Pacific. She 7 insurance executed by Jaime Canilang read as follows:
testified that the deceased's insurance application had been
approved on the basis of his medical declaration. She explained
8
that as a rule, medical examinations are required only in cases
where the applicant has indicated in his application for insurance
coverage that he has previously undergone medical consultation
and hospitalization.9
In a decision dated 5 November 1985, Insurance Commissioner
Armando Ansaldo ordered Great Pacific to pay P19,700 plus
legal interest and P2,000.00 as attorney's fees after holding that:
1. the ailment of Jaime Canilang was not so
serious that, even if it had been disclosed, it
would not have affected Great Pacific's
decision to insure him;
2. Great Pacific had waived its right to inquire
into the health condition of the applicant by
the issuance of the policy despite the lack of
31 | P a g e #SJBL
answers to "some of the pertinent questions"
in the insurance application;
3. there was no intentional concealment on
the part of the insured Jaime Canilang as he
had thought that he was merely suffering
from a minor ailment and simple cold; and
10
4. Batas Pambansa Blg. 847 which voids an
insurance contract, whether or not
concealment was intentionally made, was not
applicable to Canilang's case as that law
became effective only on 1 June 1985.
On appeal by Great Pacific, the Court of Appeals reversed and
set aside the decision of the Insurance Commissioner and
dismissed Thelma Canilang's complaint and Great Pacific's
counterclaim. The Court of Appealed found that the use of the
word "intentionally" by the Insurance Commissioner in defining
and resolving the issue agreed upon by the parties at pre-trial
before the Insurance Commissioner was not supported by the
evidence; that the issue agreed upon by the parties had been
whether the deceased insured, Jaime Canilang, made a material
concealment as the state of his health at the time of the filing of
insurance application, justifying respondent's denial of the claim.
The Court of Appeals also found that the failure of Jaime
Canilang to disclose previous medical consultation and
treatment constituted material information which should have
been communicated to Great Pacific to enable the latter to make
proper inquiries. The Court of Appeals finally held that the Ng
Gan Zee case which had involved misrepresentation was not
applicable in respect of the case at bar which
Petitioner Thelma Canilang is now before this Court on a
Petition for Review on Certiorari alleging that:
1. . . . the Honorable Court of Appeals,
speaking with due respect, erred in not
holding that the issue in the case agreed
upon between the parties before the
Insurance Commission is whether or not
Jaime Canilang "intentionally" made material
concealment in stating his state of health;
2. . . . at any rate, the non-disclosure of
certain facts about his previous health
conditions does not amount to fraud and
private respondent is deemed to have waived
inquiry thereto. 11
The medical declaration which was set out in the application for
MEDICAL DECLARATION
I hereby declare that:
(1) I have not been confined in any hospital, sanitarium
or infirmary, nor receive any medical or surgical
advice/attention within the last five (5) years.
(2) I have never been treated nor consulted a
physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney, stomach disorder, or
any other physical impairment.
(3) I am, to the best of my knowledge, in good health.
EXCEPTIONS:
Part 2
MERCANTILE LAW | I n s u r a n c e
___________________________________________
_____________________________________
GENERAL DECLARATION
I hereby declare that all the foregoing answers and
statements are complete, true and correct. I
hereby agree that if there be any fraud or
misrepresentation in the above statements material to
the risk, the INSURANCE COMPANY upon discovery
within two (2) years from the effective date of
insurance shall have the right to declare such
insurance null and void. That the liabilities of the
Company under the said Policy/TA/Certificate shall
accrue and begin only from the date of
commencement of risk stated in the
Policy/TA/Certificate, provided that the first premium is
paid and the Policy/TA/Certificate is delivered to, and
accepted by me in person, when I am in actual good
health.
Signed at Manila his 4th day of August, 1992.
We note that in addition to the negative statements made by Mr.
Canilang in paragraph 1 and 2 of the medical declaration, he
failed to disclose in the appropriate space, under the caption
"Exceptions," that he had twice consulted Dr. Wilfredo B.
Claudio who had found him to be suffering from "sinus
tachycardia" and "acute bronchitis."
32 | P a g e #SJBL
The relevant statutory provisions as they stood at the time Great
Pacific issued the contract of insurance and at the time Jaime
Canilang died, are set out in P.D. No. 1460, also known as the
Insurance Code of 1978, which went into effect on 11 June
1978. These provisions read as follows:
Sec. 26. A neglect to communicate
that which a party knows and ought to
communicate, is called a concealment.
xxx xxx xxx
Sec. 28. Each party to a contract of
insurance must communicate to the other, in
good faith, all factors within his
knowledge which are material to the
contract and as to which he makes no
warranty, and which the other has not the
means of ascertaining. (Emphasis supplied)
Under the foregoing provisions, the information concealed must
be information which the concealing party knew and "ought to
[have] communicate[d]," that is to say, information which was
"material to the contract." The test of materiality is containedI in
Section 31 of the Insurance Code of 1978 which reads: l
l
e
Sec. 31. Materially is to be determined not by
the event, but solely by the probable andg
i
reasonable influence of the facts upon the
party to whom the communication is due,bin
forming his estimate of the disadvantagesl of
the proposed contract, or in making his e
inquiries. (Emphasis supplied) —
—
—
"Sinus tachycardia" is considered present "when the heart rate —
exceeds 100 beats per minute." The symptoms of this
13
—
condition include pounding in the chest and sometimes faintness —
and weakness of the person affected. The following elaboration —
was offered by Great Pacific and set out by the Court of Appeals—
in its Decision: —
—
Sinus tachycardia is defined as sinus- S
initiated; heart rate faster than 100 beatsi per
minute. (Harrison' s Principles of Internalg
Medicine, 8th ed. [1978], p. 1193.) It is, n
among others, a common reaction to heart a
disease, including myocardial infarction, tand
heart failure per se. (Henry J.L. Marriot, u
M.D., Electrocardiography, 6th ed., [1977], r p.
127.) The medication prescribed by Dr. e
Claudio for treatment of Canilang's ailment o
on June 18, 1982, indicates the conditionf that
said physician was trying to manage. Thus, A
he prescribed Trazepam, (Philippine Index p of
Medical Specialties (PIMS), Vol. 14, No. p3,
Dec. 1985, p. 112) which is anti-anxiety, lanti-
convulsant, muscle-relaxant; and Aptin, i
c
(Idem, p. 36) a cardiac drug, for palpitations
and nervous heart. Such treatment coulda
have been a very material information to nthe
insurer in determining the action to be taket
on Canilang's application for life insurance.
coverage. 14
1
2
We agree with the Court of Appeals that the information which
Jaime Canilang failed to disclose was material to the ability of
Great Pacific to estimate the probable risk he presented as a
subject of life insurance. Had Canilang disclosed his visits to his
doctor, the diagnosis made and medicines prescribed by such
doctor, in the insurance application, it may be reasonably
assumed that Great Pacific would have made further inquiries
and would have probably refused to issue a non-medical
insurance policy or, at the very least, required a higher premium
Part 2
MERCANTILE LAW | I n s u r a n c e
for the same coverage. The materiality of the information
15
withheld by Great Pacific did not depend upon the state of mind
of Jaime Canilang. A man's state of mind or subjective belief is
not capable of proof in our judicial process, except through proof
of external acts or failure to act from which inferences as to his
subjective belief may be reasonably drawn. Neither does
materiality depend upon the actual or physical events which
ensue. Materiality relates rather to the "probable and reasonable
influence of the facts" upon the party to whom the
communication should have been made, in assessing the risk
involved in making or omitting to make further inquiries and in
accepting the application for insurance; that "probable and
reasonable influence of the facts" concealed must, of course, be
determined objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "non-medical"
insurance policy. In Saturnino v. Philippine-American Life
Insurance Company, this Court held that:
16
. . . if anything, the waiver of medical
examination [in a non-medical insurance
contract] renders even more material the
information required of the applicant
concerning previous condition of health and
diseases suffered, for such information
necessarily constitutes an important factor
which the insurer takes into consideration in
deciding whether to issue the policy or not . .
. . (Emphasis supplied)
17
The Insurance Commissioner had also ruled that the failure of
Great Pacific to convey certain information to the insurer was not
"intentional" in nature, for the reason that Jaime Canilang
believed that he was suffering from minor ailment like a common
cold. Section 27 of the Insurance Code of 1978 as it existed
from 1974 up to 1985, that is, throughout the time range material
for present purposes, provided that:
Sec. 27. A concealment entitles the injured
party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood from
1914 up to 1974, had provided:
Sec. 26. A concealment, whether intentional
or unintentional, entitles the injured party to
rescind a contract of insurance. (Emphasis
supplied)
Upon the other hand, in 1985, the Insurance Code of 1978 was
amended by
B.P. Blg. 874. This subsequent statute modified Section 27 of
the Insurance Code of 1978 so as to read as follows:
Sec. 27. A concealment whether intentional
or unintentional entitles the injured party to
rescind a contract of insurance. (Emphasis
supplied)
The unspoken theory of the Insurance Commissioner appears to
have been that by deleting the phrase "intentional or
unintentional," the Insurance Code of 1978 (prior to its
amendment by B.P. Blg. 874) intended to limit the kinds of
concealment which generate a right to rescind on the part of the
injured party to "intentional concealments." This argument is not
persuasive. As a simple matter of grammar, it may be noted that
"intentional" and "unintentional" cancel each other out. The net
result therefore of the phrase "whether intentional or
unitentional" is precisely to leave unqualified the term
"concealment." Thus, Section 27 of the Insurance Code of 1978
is properly read as referring to "any concealment" without regard
to whether such concealment is intentional or unintentional. The
phrase "whether intentional or unintentional" was in fact
33 | P a g e #SJBL
superfluous. The deletion of the phrase "whether intentional or
unintentional" could not have had the effect of imposing an
affirmative requirement that a concealment must be intentional if
it is to entitle the injured party to rescind a contract of insurance.
The restoration in 1985 by B.P. Blg. 874 of the phrase "whether
intentional or unintentional" merely underscored the fact that all
throughout (from 1914 to 1985), the statute did not require proof
that concealment must be "intentional" in order to authorize
rescission by the injured party.
In any case, in the case at bar, the nature of the facts not
conveyed to the insurer was such that the failure to
communicate must have been intentional rather than merely
inadvertent. For Jaime Canilang could not have been unaware
that his heart beat would at times rise to high and alarming
levels and that he had consulted a doctor twice in the two (2)
months before applying for non-medical insurance. Indeed, the
last medical consultation took place just the day before the
insurance application was filed. In all probability, Jaime Canilang
went to visit his doctor precisely because of the discomfort and
concern brought about by his experiencing "sinus tachycardia."
We find it difficult to take seriously the argument that Great
Pacific had waived inquiry into the concealment by issuing the
insurance policy notwithstanding Canilang's failure to set out
answers to some of the questions in the insurance application.
Such failure precisely constituted concealment on the part of
Canilang. Petitioner's argument, if accepted, would obviously
erase Section 27 from the Insurance Code of 1978.
It remains only to note that the Court of Appeals finding that the
parties had not agreed in the pretrial before the Insurance
Commission that the relevant issue was whether or not Jaime
Canilang had intentionally concealed material information from
the insurer, was supported by the evidence of record, i.e., the
Pre-trial Order itself dated 17 October 1984 and the Minutes of
the Pre-trial Conference dated 15 October 1984, which "readily
shows that the word "intentional" does not appear in the
statement or definition of the issue in the said Order and
Minutes." 18
WHEREFORE, the Petition for Review is DENIED for lack of
merit and the Decision of the Court of Appeals dated 16 October
1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No
pronouncement as to the costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
# Footnotes
1 A non-medical insurance is one "which
does away with the usual medical
examination before the policy is issued;"
Saturnino v. Philippine-American Life
Insurance Company, 7 SCRA 316 (1963).
2 Death Certificate, Records, p. 211.
3 TSN, 18 January 1985, p. 6; 8 March 1985,
p. 5.
4 Id., p. 9.
5 Deposition, 18 July 1985, p. 4.
6 Id., p. 5.
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MERCANTILE LAW | I n s u r a n c e

7 TSN, 7 August 1985, p. 8.

8 Id., p. 10.

9 Id., p. 19.

10 Here the Commissioner cited Ng Gan Zee

v. Asian Crusader Life Assurance
Corporation, 122 SCRA 461 (1983).

11 Petition p. 5; Rollo, p. 1.

12 As quoted in the Decision of the Court of

Appeals, Rollo, pp. 81-82; italics in the
original.

13 Harrison's Principle of Internal Medicine

(11th Ed., 1978), p. 926. See also: Dorland's
Illustrated Medical Dictionary (24th Ed.,
1965), p. 1503.

14 As quoted in the Decision of the Court of

Appeals, Rollo, pp. 84-85; italics partly
supplied and partly in the original.

15 See, e.g., Yu Pang Cheng, etc. v. Court of

Appeals, 105 Phil. 930 (1959); Great Pacific
Life Assurance Corporation v. Hon. Court of
Appeals, 89 SCRA 543 (1979).

16 7 SCRA 316 (1963).

17 7 SCRA at 318.

18 Decision of the Court of Appeals, Rollo, p.

40.

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MERCANTILE LAW | I n s u r a n c e
FIRST DIVISION
G.R. No. 105135 June 22, 1995
SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses ROLANDO
and BERNARDA BACANI, respondents.
QUIASON, J.:
This is a petition for review for certiorari under Rule 45 of the
Revised Rules of Court to reverse and set aside the Decision
dated February 21, 1992 of the Court of Appeals in CA-G.R. CV
No. 29068, and its Resolution dated April 22, 1992, denying
reconsideration thereof.
We grant the petition.
I Petitioner filed its Request for Admissions relative to the
On April 15, 1986, Robert John B. Bacani procured a life
insurance contract for himself from petitioner. He was issued
Policy No. 3-903-766-X valued at P100,000.00, with double
indemnity in case of accidental death. The designated
beneficiary was his mother, respondent Bernarda Bacani.
On June 26, 1987, the insured died in a plane crash.
Respondent Bernarda Bacani filed a claim with petitioner,
seeking the benefits of the insurance policy taken by her son.
Petitioner conducted an investigation and its findings prompted it
to reject the claim.
In its letter, petitioner informed respondent Bernarda Bacani,
that the insured did not disclose material facts relevant to the
issuance of the policy, thus rendering the contract of insurance
voidable. A check representing the total premiums paid in the
amount of P10,172.00 was attached to said letter.
Petitioner claimed that the insured gave false statements in his
application when he answered the following questions:
5. Within the past 5 years have you:
a) consulted any doctor or other health
practitioner?
b) submitted to:
EGG?
X-rays?
blood tests?
other tests?
c) attended or been admitted to any hospital
or other medical facility?
6. Have you ever had or sought advice for:
35 | P a g e #SJBL
xxx xxx xxx
b) urine, kidney or bladder disorder? (Rollo, p. 53)
The deceased answered question No. 5(a) in the affirmative but
limited his answer to a consultation with a certain Dr. Reinaldo
D. Raymundo of the Chinese General Hospital on February
1986, for cough and flu complications. The other questions were
answered in the negative (Rollo, p. 53).
Petitioner discovered that two weeks prior to his application for
insurance, the insured was examined and confined at the Lung
Center of the Philippines, where he was diagnosed for renal
failure. During his confinement, the deceased was subjected to
urinalysis, ultra-sonography and hematology tests.
On November 17, 1988, respondent Bernarda Bacani and her
husband, respondent Rolando Bacani, filed an action for specific
performance against petitioner with the Regional Trial Court,
Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer
with counterclaim and a list of exhibits consisting of medical
records furnished by the Lung Center of the Philippines.
On January 14, 1990, private respondents filed a "Proposed
Stipulation with Prayer for Summary Judgment" where they
manifested that they "have no evidence to refute the
documentary evidence of concealment/misrepresentation by the
decedent of his health condition (Rollo, p. 62).
authenticity and due execution of several documents as well as
allegations regarding the health of the insured. Private
respondents failed to oppose said request or reply thereto,
thereby rendering an admission of the matters alleged.
Petitioner then moved for a summary judgment and the trial
court decided in favor of private respondents. The dispositive
portion of the decision is reproduced as follows:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiffs and against the
defendant, condemning the latter to pay the
former the amount of One Hundred
Thousand Pesos (P100,000.00) the face
value of insured's Insurance Policy No.
3903766, and the Accidental Death Benefit in
the amount of One Hundred Thousand Pesos
(P100,000.00) and further sum of P5,000.00
in the concept of reasonable attorney's fees
and costs of suit.
Defendant's counterclaim is hereby
Dismissed (Rollo, pp. 43-44).
In ruling for private respondents, the trial court concluded that
the facts concealed by the insured were made in good faith and
under a belief that they need not be disclosed. Moreover, it held
that the health history of the insured was immaterial since the
insurance policy was "non-medical".
Petitioner appealed to the Court of Appeals, which affirmed the
decision of the trial court. The appellate court ruled that
petitioner cannot avoid its obligation by claiming concealment
because the cause of death was unrelated to the facts
concealed by the insured. It also sustained the finding of the trial
court that matters relating to the health history of the insured
were irrelevant since petitioner waived the medical examination
prior to the approval and issuance of the insurance policy.
Moreover, the appellate court agreed with the trial court that the
policy was "non-medical" (Rollo, pp. 4-5).
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MERCANTILE LAW | I n s u r a n c e

Petitioner's motion for reconsideration was denied; hence, this Moreover, such argument of private respondents would make
petition. Section 27 of the Insurance Code, which allows the injured party
to rescind a contract of insurance where there is concealment,
II ineffective (See Vda. de Canilang v. Court of Appeals, supra).

We reverse the decision of the Court of Appeals.
The rule that factual findings of the lower court and the appellate
court are binding on this Court is not absolute and admits of
exceptions, such as when the judgment is based on a
misappreciation of the facts (Geronimo v. Court of Appeals, 224
SCRA 494 [1993]).
In weighing the evidence presented, the trial court concluded
that indeed there was concealment and misrepresentation,
however, the same was made in "good faith" and the facts
concealed or misrepresented were irrelevant since the policy
was "non-medical". We disagree.
Section 26 of The Insurance Code is explicit in requiring a party
to a contract of insurance to communicate to the other, in good
faith, all facts within his knowledge which are material to the
contract and as to which he makes no warranty, and which the
other has no means of ascertaining. Said Section provides:
A neglect to communicate that which a party
knows and ought to communicate, is called
concealment.
Anent the finding that the facts concealed had no bearing to the
cause of death of the insured, it is well settled that the insured
need not die of the disease he had failed to disclose to the
insurer. It is sufficient that his non-disclosure misled the insurer
in forming his estimates of the risks of the proposed insurance
policy or in making inquiries (Henson v. The Philippine American
Life Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its right to
rescind the contract of insurance by reason of the concealment
employed by the insured. It must be emphasized that rescission
was exercised within the two-year contestability period as
recognized in Section 48 of The Insurance Code.
WHEREFORE, the petition is GRANTED and the Decision of the
Court of Appeals is REVERSED and SET ASIDE.
SO ORDERED.
Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

Materiality is to be determined not by the event, but solely by the

probable and reasonable influence of the facts upon the party to
whom communication is due, in forming his estimate of the
disadvantages of the proposed contract or in making his
inquiries (The Insurance Code, Sec. 31).

The terms of the contract are clear. The insured is specifically

required to disclose to the insurer matters relating to his health.

The information which the insured failed to disclose were

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

In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993),

we held that materiality of the information withheld does not
depend on the state of mind of the insured. Neither does it
depend on the actual or physical events which ensue.

Thus, "goad faith" is no defense in concealment. The insured's

failure to disclose the fact that he was hospitalized for two weeks
prior to filing his application for insurance, raises grave doubts
about his bonafides. It appears that such concealment was
deliberate on his part.

The argument, that petitioner's waiver of the medical

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

36 | P a g e #SJBL Part 2