SPECIAL FIRST DIVISION

PHILIPPINE HEALTH CARE G.R. No. 167330

PROVIDERS, INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,

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

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

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RESOLUTION
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

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

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive

approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost. There
shall be priority for the needs of the underprivileged sick, elderly, disabled, women,
and children. The State shall endeavor to provide free medical care to paupers. [1]

For resolution are a motion for reconsideration and supplemental motion for reconsideration

dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care

Providers, Inc.[2]

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is [t]o establish,

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

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR]

sent petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on

petitioners health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As

respondent did not act on the protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.

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

which read:

WHEREFORE, in view of the foregoing, the instant Petition

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

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)]

insofar as it cancelled the DST assessment. He claimed that petitioners health care
agreement was a contract of insurance subject to DST under Section 185 of the 1997
Tax Code.

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

WHEREFORE, the petition for review is GRANTED. The

Decision of the Court of Tax Appeals, insofar as it cancelled and set
aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.
 Respondent is ordered to pay the amounts
of P55,746,352.19 and P68,450,258.73 as deficiency Documentary
Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for
late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same
shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence,

petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs

decision. We held that petitioners health care agreement during the pertinent period was in the

nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.

Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it

is a health maintenance organization (HMO) and not an insurance company is irrelevant because

contracts between companies like petitioner and the beneficiaries under their plans are treated

as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the

privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and

supplemental motion for reconsideration, asserting the following arguments:

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

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

(c) Section 185 should be strictly construed.

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

(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they
are not those contemplated under Section 185.

(f) Assuming arguendo that petitioners agreements are akin to health insurance,
health insurance is not covered by Section 185.
 (g) The agreements do not fall under the phrase other branch of insurance
mentioned in Section 185.

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

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

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

memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax

amnesty under RA 9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying the amount

of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005. [8]

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange

Commission on June 30, 1987.[9] It is engaged in the dispensation of the following medical services to

individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health

problems, family planning counseling, consultation and advices on diet, exercise and
other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays,

urinalysis, fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other

remedial and therapeutic processes in the event of an injury or sickness on the part
of the enrolled member.[10]

Individuals enrolled in its health care program pay an annual membership fee. Membership is

on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic

owned, operated or accredited by petitioner, through physicians, medical and dental practitioners

under contract with it. It negotiates with such health care practitioners regarding payment schemes,

financing and other procedures for the delivery of health services. Except in cases of emergency, the

professional services are to be provided only by petitioner's physicians, i.e. those directly employed by

it[11] or whose services are contracted by it. [12] Petitioner also provides hospital services such as room
and board accommodation, laboratory services, operating rooms, x-ray facilities and general nursing

care.[13] If and when a member avails of the benefits under the agreement, petitioner pays the

participating physicians and other health care providers for the services rendered, at pre-agreed rates.

[14]

To avail of petitioners health care programs, the individual members are required to sign and

execute a standard health care agreement embodying the terms and conditions for the provision of

the health care services. The same agreement contains the various health care services that can be

engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for

the curative aspect of the medical service offered, the enrolled member may actually make use of the

health care services being offered by petitioner at any time.

HEALTH MAINTENANCE
ORGANIZATIONS ARE NOT
ENGAGED IN THE INSURANCE
BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not

an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the

business but an excise on the privilege, opportunity or facility used in the transaction of the business.

[15]

Petitioner, however, submits that it is of critical importance to characterize the business it is

engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is

indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements.

[16]

A second hard look at the relevant law and jurisprudence convinces the Court that the

arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
 Section 185. Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of
any office or position, for the doing or not doing of anything therein specified, and
on all obligations guaranteeing the validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a documentary stamp tax
of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part

of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this

end, a construction which renders every word operative is preferred over that which makes some

words idle and nugatory.[17] This principle is expressed in the maxim Ut magis valeat quam pereat, that

is, we choose the interpretation which gives effect to the whole of the statute its every word. [18]

From the language of Section 185, it is evident that two requisites must concur before the

DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature

of indemnity and (2) the maker should be transacting the business of accident, fidelity, employers

liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch

of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of

1995), an HMO is an entity that provides, offers or arranges for coverage of designated health services

needed by plan members for a fixed prepaid premium. [19] The payments do not vary with the extent,

frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the

pertinent taxable years? We rule that it was not.

Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what

constitutes doing an insurance business or transacting an insurance business:

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

b) making or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or
activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

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

Various courts in the United States, whose jurisprudence has a persuasive effect on our

decisions,[21] have determined that HMOs are not in the insurance business. One test that they have

applied is whether the assumption of risk and indemnification of loss (which are elements of an

insurance business) are the principal object and purpose of the organization or whether they are

merely incidental to its business. If these are the principal objectives, the business is that of

insurance. But if they are merely incidental and service is the principal purpose, then the business is

not insurance.

Applying the principal object and purpose test, [22] there is significant American case law

supporting the argument that a corporation (such as an HMO, whether or not organized for profit),

whose main object is to provide the members of a group with health services, is not engaged in the

insurance business.

The rule was enunciated in Jordan v. Group Health Association [23] wherein the Court of

Appeals of the District of Columbia Circuit held that Group Health Association should not be

considered as engaged in insurance activities since it was created primarily for the distribution of

health care services rather than the assumption of insurance risk.

xxx Although Group Healths activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not exclusively, with risk
 and the consequences of its descent, not with service, or its extension in kind,
quantity or distribution; with the unusual occurrence, not the daily routine of living.
Hazard is predominant. On the other hand, the cooperative is concerned principally
with getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary purpose
is to reduce the cost rather than the risk of medical care; to broaden the service to
the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and clothing or
oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor
ills and all the temporary bodily discomforts as well as the more serious and unusual
illness. To summarize, the distinctive features of the cooperative are the rendering
of service, its extension, the bringing of physician and patient together, the
preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the medical
job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are
not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering
of service, even on the contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be

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

In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing

the plan of operation as a whole of the corporation, it was service rather than indemnity which stood

as its principal purpose.

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

insurance company is that HMOs undertake to provide or arrange for the provision of medical services

through participating physicians while insurance companies simply undertake to indemnify the

insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,

P.A. v. Horizon Blue Cross and Blue Shield of New Jersey[27] is clear on this point:

The basic distinction between medical service corporations and ordinary

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

xxx xxx xxx

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

A participating provider of health care services is one who agrees in writing

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

Consequently, the mere presence of risk would be insufficient to override the primary

purpose of the business to provide medical services as needed, with payment made directly to the

provider of these services.[29] In short, even if petitioner assumes the risk of paying the cost of these

services even if significantly more than what the member has prepaid, it nevertheless cannot be

considered as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in

case of emergency by non-participating health providers would still be incidental to petitioners

purpose of providing and arranging for health care services and does not transform it into an

insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a

system and the facilities for the delivery of such medical services. This indubitably shows that

indemnification is not its sole object.

 In fact, a substantial portion of petitioners services covers preventive and diagnostic medical

services intended to keep members from developing medical conditions or diseases. [30] As an HMO, it

is its obligation to maintain the good health of its members. Accordingly, its health care programs are

designed to prevent or to minimize thepossibility of any assumption of risk on its part. Thus, its

undertaking under its agreements is not to indemnify its members against any loss or damage arising

from a medical condition but, on the contrary, to provide the health and medical services needed to

prevent such loss or damage.[31]

Overall, petitioner appears to provide insurance-type benefits to its members (with respect

to its curative medical services), but these are incidental to the principal activity of providing them

medical care. The insurance-like aspect of petitioners business is miniscule compared to its

noninsurance activities. Therefore, since it substantially provides health care services rather than

insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the principal purpose test used in the above-

quoted U.S. cases, we are not saying that petitioners operations are identical in every respect to those

of the HMOs or health providers which were parties to those cases. What we are stating is that, for

the purpose of determining what doing an insurance business means, we have to scrutinize the

operations of the business as a whole and not its mere components. This is of course only prudent

and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable

to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful

that there are other American authorities who have found particular HMOs to be actually engaged in

insurance activities.[32]

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is

evident from the fact that it is not supervised by the Insurance Commission but by the Department of

Health.[33] In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that

petitioner is not engaged in the insurance business.This determination of the commissioner must be

accorded great weight. It is well-settled that the interpretation of an administrative agency which is

tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of

Appeals:[34]

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

A HEALTH CARE AGREEMENT IS

NOT AN INSURANCE CONTRACT
CONTEMPLATED UNDER
SECTION 185 OF THE NIRC OF
1997

Section 185 states that DST is imposed on all policies of insurance or obligations of the nature

of indemnity for loss, damage, or liability. In our decision dated June 12, 2008, we ruled that

petitioners health care agreements are contracts of indemnity and are therefore insurance contracts:

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

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

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

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

In construing this provision, we should be guided by the principle that tax statutes are strictly

construed against the taxing authority. [38] This is because taxation is a destructive power which

interferes with the personal and property rights of the people and takes from them a portion of their

property for the support of the government. [39]Hence, tax laws may not be extended by implication

beyond the clear import of their language, nor their operation enlarged so as to embrace matters not

specifically provided.[40]

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care

agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However,

those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of

a health service provider to a member under the terms of their health care agreement. Such

contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against

the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable

here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby

one undertakes for a consideration to indemnify another against loss, damage or liability arising from

an unknown or contingent event. An insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

4. Such assumption of risk is part of a general scheme to distribute actual losses

among a large group of persons bearing a similar risk and

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

Do the agreements between petitioner and its members possess all these elements? They do

not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a

contract contains all the elements of an insurance contract, if its primary purpose is the rendering of

service, it is not a contract of insurance:

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

Second. Not all the necessary elements of a contract of insurance are present in petitioners

agreements. To begin with, there is no loss, damage or liability on the part of the member that should

be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a

predetermined consideration in exchange for the hospital, medical and professional services rendered

by the petitioners physician or affiliated physician to him. In case of availment by a member of the

benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter

does not pay any third party. Instead, it is the petitioner who pays the participating physicians and

other health care providers for the services rendered at pre-agreed rates. The member does not make

any such payment.

 In other words, there is nothing in petitioner's agreements that gives rise to a monetary

liability on the part of the member to any third party-provider of medical services which might in turn

necessitate indemnification from petitioner. The terms indemnify or indemnity presuppose that a

liability or claim has already been incurred. There is no indemnity precisely because the member

merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the

agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits

anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine

administration as well as family planning counseling, even in the absence of any peril, loss or damage

on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives

care from a non-participating physician or hospital. However, this is only a very minor part of the list of

services available. The assumption of the expense by petitioner is not confined to the happening of a

contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although the

health care contracts called for the defendant to partially reimburse a subscriber for treatment

received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the

Court determined that the primary activity of the defendant (was) the provision of podiatric services

to subscribers in consideration of prepayment for such services. [44] Since indemnity of the insured was

not the focal point of the agreement but the extension of medical services to the member at an

affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true

that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation

always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid

service contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health

services: the risk that it might fail to earn a reasonable return on its investment.But it is not the risk of
the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk

that the cost of insurance claims might be higher than the premiums paid. The amount of premium is

calculated on the basis of assumptions made relative to the insured. [45]

However, assuming that petitioners commitment to provide medical services to its members

can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still

will not qualify as an insurance contract because petitioners objective is to provide medical services at

reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioners agreements with its members leads us to conclude that

it is not an insurance contract within the context of our Insurance Code.

THERE WAS NO LEGISLATIVE

INTENT TO IMPOSE DST ON
HEALTH CARE AGREEMENTS OF
HMOS

Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care

agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The text of

Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not

even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189

(otherwise known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904 and became

effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim

reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

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

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

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising

and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section

116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.

2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604

(l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the

pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the

Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of

1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by

RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the

same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158

(NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10,

1984 respectively, the DST rate was again increased.

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was

renumbered as Section 198. And under Section 23 of EO [47] 273 dated July 25, 1987, it was again

renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the

rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of

1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to

the DST provisions were introduced by RA 9243[48] but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same pioneer
HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or
Intercare). However, there are those who claim that Health Maintenance, Inc. is the
HMO industry pioneer, having set foot in the Philippines as early as 1965 and having
been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and
currently, there are 36 registered HMOs with a total enrollment of more than 2
million.[49]

We can clearly see from these two histories (of the DST on the one hand and HMOs on the

other) that when the law imposing the DST was first passed, HMOs were yet unknown in the

Philippines. However, when the various amendments to the DST law were enacted, they were already

in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been

the intent of the legislature to impose DST on health care agreements, it could have done so in clear

and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC

contained no specific provision on the DST liability of health care agreements of HMOs at a time they

were already known as such, belies any legislative intent to impose it on them. As a matter of fact,

petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the

business as an HMO.[50]

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would

be safe to say that health care agreements were never, at any time, recognized as insurance contracts

or deemed engaged in the business of insurance within the context of the provision.

THE POWER TO TAX IS NOT

THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,

acknowledging in its very nature no limits, so that security against its abuse is to be found only in the

responsibility of the legislature which imposes the tax on the constituency who is to pay it. [51] So

potent indeed is the power that it was once opined that the power to tax involves the power to

destroy.[52]

Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net

worth of P259 million.[54] Respondent never disputed these assertions.Given the realities on the

ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the

government to throttle private business. On the contrary, the government ought to encourage private

enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to

maintain a legitimate business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]

The power of taxation is sometimes called also the power to destroy.

Therefore it should be exercised with caution to minimize injury to the proprietary
rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the hen that lays the golden egg.[58]

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring

losses because of a tax imposition may be an acceptable consequence but killing the business of an

entity is another matter and should not be allowed. It is counter-productive and ultimately subversive

of the nations thrust towards a better economy which will ultimately benefit the majority of our

people.[59]

PETITIONERS TAX LIABILITY

WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years

1996 and 1997 became moot and academic [60] when it availed of the tax amnesty under RA 9480 on

December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended

December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA

9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from

the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. [61]

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

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a

taxpayer to immunity from payment of the tax involved, including the civil, criminal,
or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising
in 2005 and the preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without

conceding the merits of this case as discussed above, respondent concedes that
such tax amnesty extinguishes the tax liabilities of petitioner. This admission,
however, is not meant to preclude a revocation of the amnesty granted in case it is
found to have been granted under circumstances amounting to tax fraud under
Section 10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax

amnesty program under RA 9480. [63] There is no other conclusion to draw than that petitioners liability

for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax

amnesty under RA 9480.

IS THE COURT BOUND BY A

MINUTE RESOLUTION IN
ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is

bound by the ruling of the CA [64] in CIR v. Philippine National Bank[65] that a health care agreement of

Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court

dismissing the appeal in Philippine National Bank (G.R. No. 148680).[66]Petitioner argues that the

dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court

should apply the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a

disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA

ruling being questioned. As a result, our ruling in that case has already become final. [67] When a

minute resolution denies or dismisses a petition for failure to comply with formal and substantive

requirements, the challenged decision, together with its findings of fact and legal conclusions, are

deemed sustained.[68] But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it

constitutes res judicata.[69] However, if other parties or another subject matter (even with the same

parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-

Nickel,[70] the Court noted that a previous case, CIR v. Baier-Nickel[71] involving the same parties and

the same issues, was previously disposed of by the Court thru a minute resolution dated February 17,

2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no

bearing on the latter case because the two cases involved different subject matters as they were

concerned with the taxable income of different taxable years. [72]

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a

decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the

Constitution that the facts and the law on which the judgment is based must be expressed clearly and

distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the

clerk of court by authority of the justices, unlike a decision. It does not require the certification of the

Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine

Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. [73] Indeed, as a rule, this

Court lays down doctrines or principles of law which constitute binding precedent in a decision duly

signed by the members of the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability

for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot

successfully invoke the minute resolution in that case (which is not even binding precedent) in its
favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the

fact that petitioners health care agreements are not subject to DST.
A FINAL NOTE

Taking into account that health care agreements are clearly not within the ambit of Section

185 of the NIRC and there was never any legislative intent to impose the same on HMOs like

petitioner, the same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical

services at a cost which the average wage earner can afford. HMOs arrange, organize and manage

health care treatment in the furtherance of the goal of providing a more efficient and inexpensive

health care system made possible by quantity purchasing of services and economies of scale. They

offer advantages over the pay-for-service system (wherein individuals are charged a fee each time they

receive medical services), including the ability to control costs. They protect their members from

exposure to the high cost of hospitalization and other medical expenses brought about by a

fluctuating economy. Accordingly, they play an important role in society as partners of the State in

achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. [74] Its

imposition will elevate the cost of health care services. This will in turn necessitate an increase in the

membership fees, resulting in either placing health services beyond the reach of the ordinary wage

earner or driving the industry to the ground. At the end of the day, neither side wins, considering the

indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of

the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997

deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is

ordered to desist from collecting the said tax.

No costs.

SO ORDERED.
 RENATO C. CORONA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

MINITA V. CHICO-NAZARIO TERESITA J. LEONARDO-DE CASTRO

Associate Justice Associate Justice

LUCAS P. BERSAMIN
Associate Justice

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above resolution had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

*
Per Special Order No. 698 dated September 4, 2009.
**
Additional member per raffle list of 13 April 2009.
[1]
1987 Constitution.
[2]
Now known as Maxicare Healthcare Corp. Rollo, p. 293.
[3]
G.R. No. 169737, 12 February 2008, 544 SCRA 580.
[4]
429 Phil. 82 (2002).
[5]
Republic Act.
[6]
Rollo, pp. 257-258.
[7]
Entitled An Act Enhancing Revenue Administration and Collection by Granting an
Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National
Government for Taxable Year 2005 and Prior Years.
[8]
Rollo, p. 288.
[9]
Id., p. 591.
[10]
Id., pp. 592, 613.
[11]
This is called the Staff Model, i.e., the HMO employs salaried health care
professionals to provide health care services. (Id., pp. 268, 271.)
[12]
This is referred to as the Group Practice Model wherein the HMO contracts with a
private practice group to provide health services to its members. (Id., pp. 268,
271, 592.) Thus, it is both a service provider and a service contractor. It is a
service provider when it directly provides the health care services through its
salaried employees. It is a service contractor when it contracts with third
parties for the delivery of health services to its members.
[13]
Id., p. 102.
[14]
Id., p. 280.
[15]
Decision, p. 422.
[16]
Rollo, p. 265.
[17]
Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, 16 January
1998, 284 SCRA 327, 367, citing Shimonek v. Tillanan, 1 P. 2d., 154.
[18]
Inding v. Sandiganbayan, G.R. No. 143047, 14 July 2004, 434 SCRA 388, 403.
[19]
Section 4 (o) (3) thereof. Under this law, it is one of the classes of a health care
provider.
[20]
Presidential Decree.
[21]
Our Insurance Code was based on California and New York laws. When a statute
has been adopted from some other state or country and said statute has
previously been construed by the courts of such state or country, the statute is
deemed to have been adopted with the construction given. (Prudential
Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc., G.R. No.
151890, 20 June 2006, 491 SCRA 411, 439; Constantino v. Asia Life Inc. Co.,
87 Phil. 248, 251 [1950]; Gercio v. Sun Life Assurance Co. of Canada, 48 Phil.
53, 59 [1925]; Cerezo v. Atlantic, Gulf & Pacific Co., 33 Phil. 425, 428-429
[1916]).
[22]
H. S. de Leon, The Insurance Code of the Philippines Annotated, p. 56 (2002 ed.).
[23]
107 F.2d 239 (D.C. App. 1939). This is a seminal case which had been reiterated in succeeding
cases, e.g. Smith v. Reserve Nat'l Ins. Co., 370 So. 2d 186 ( La. Ct. App. 3d Cir.
1979); Transportation Guarantee Co. v. Jellins, 29 Cal.2d 242, 174 P.2d 625 (1946); State v.
Anderson, 195 Kan. 649, 408 P.2d 864 (1966); Commissioner of Banking and Insurance v.
Community Health Service, 129 N.J.L. 427, 30 A.2d 44 (1943).
[24]
Id., pp. 247-248.
[25]
28 Cal. 2d 790 (1946).
[26]
Id., p. 809.
[27]
345 N.J. Super. 410, 785 A.2d 457 (2001);< http://lawlibrary.rutgers.edu/courts/appellate/a1562-
00.opn.html> (visited July 14, 2009).
[28]
Id., citing Group Health Ins. of N.J. v. Howell, 40 N.J. 436, 451 (1963).
[29]
L.R. Russ and S.F. Segalla, 1 Couch on Ins. 1:46 (3rd ed., December 2008).
[30]
This involves the determination of a medical condition (such as a disease) by
physical examination or by study of its symptoms (Rollo, p. 613, citing Blacks
Law Dictionary, p. 484 [8th ed.]).
[31]
Rollo, pp. 612-613.
[32]
One such decision of the United States Supreme Court is Rush Prudential HMO,
Inc. v. Moran (536 U.S. 355 [2002]). In that case, the Court recognized
that HMOs provide both insurance and health care services and that Congress
has understood the insurance aspects of HMOs since the passage of the HMO
Act of 1973. This case is not applicable here. Firstly, this was not a tax
case. Secondly, the Court stated that Congress expressly understood and
viewed HMOs as insurers. It is not the same here in the Philippines. As will be
discussed below, there is no showing that the Philippine Congress had
demonstrated an awareness of HMOs as insurers.
[33]
See Executive Order No. 119 (1987) and Administrative Order (AO) No. 34
(1994), as amended by AO No. 36 (1996).
[34]
G.R. No. 86738, 13 November 1991, 203 SCRA 504.
[35]
140 Phil. 20 (1969).
[36]
Supra note 34, pp. 510-511.
[37]
Decision, pp. 420-421.
[38]
Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, 25
November 2003, 416 SCRA 436, citing Miller v. Illinois Cent. R Co., Ill. So.
559, 28 February 1927.
[39]
Paseo Realty & Development Corporation v. Court of Appeals, G.R. No. 119286,
13 October 2004, 440 SCRA 235, 251.
[40]
Collector of Int. Rev. v. La Tondea, Inc. and CTA, 115 Phil. 841, 846 (1963).
[41]
Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No. 156167, 16 May 2005, 458
SCRA 550, 566, citations omitted.

[42]
M. C. L. Campos, Insurance, pp. 17-18 (1983), citing Physicians Defense Co. v.
OBrien, 100 Minn. 490, 111 N.W. 397 (1907).
[43]
438 N.W.2d 350. (Mich. Ct. App. 1989).
[44]
Id., p. 354.
[45]
Rollo, p. 702, citing Phillip, Booth et al., Modern Actuarial Theory and Practice
(2005).
[46]
Entitled An Act to Provide for the Support of the Insular, Provincial and Municipal
Governments, by Internal Taxation.
[47]
Executive Order No.
[48]
An Act Rationalizing the Provisions of the DST of the NIRC of 1997, as amended,
and for other purposes.
[49]
Rollo, pp. 589, 591, citing <http://www.rmaf.org.ph/Awardees/Biography/ Biography
BengzonAlf.htm>; <http://doktorko.com/_blog/index.php?
mod=blog_article&a=80&md=897>;
<http://www.hmi.com.ph/prof.html> (visited July 15, 2009).

[50]
Id., p. 592.
[51]
MCIAA v. Marcos, 330 Phil. 392, 404 (1996).
[52]
United States Chief Justice Marshall in McCulloch v. Maryland, 17 U.S. 316, 4
Wheat, 316, 4 L ed. 579, 607 (1819).
[53]
Inclusive of penalties.
[54]
Rollo, p. 589.
[55]
Manila Railroad Company v. A. L. Ammen Transportation Co., Inc., 48 Phil. 900,
907 (1926).
[56]
Constitution, Section 3, Article XIII on Social Justice and Human Rights reads as follows:
Section 3. xxx
 The State shall regulate the relations between workers and employers, recognizing the right
of labor to its just share in the fruits of production and the right of enterprises to reasonable
return on investments, and to expansion and growth. (Emphasis supplied)
[57]
131 Phil. 773 (1968).
[58]
Id., pp. 780-781.
[59]
Manatad v. Philippine Telegraph and Telephone Corporation, G.R. No. 172363, 7
March 2008, 548 SCRA 64, 80.
[60]
Rollo, p. 661.
[61]
Id., pp. 260-261.
[62]
Id., p. 742.
[63]
Philippine Banking Corporation v. CIR, G.R. No. 170574, 30 January 2009.
[64]
CA-G.R. SP No. 53301, 18 June 2001.
[65]
G.R. No. 148680.
[66]
The dismissal was due to the failure of petitioner therein to attach a certified true
copy of the assailed decision.
[67]
Del Rosario v. Sandiganbayan, G.R. No. 143419, 22 June 2006, 492 SCRA 170,
177.
[68]
Complaint of Mr. Aurelio Indencia Arrienda Against SC Justices Puno, Kapunan,
Pardo, Ynares-Santiago, et al., A.M. No. 03-11-30-SC, 9 June 2005, 460
SCRA 1, 14, citing Tan v. Nitafan, G.R. No. 76965, 11 March 1994, 231
SCRA 129; Republic v. CA, 381 Phil. 558, 565 (2000), citing Bernarte, et al. v.
Court of Appeals, et al., 331 Phil. 643, 659 (1996).
[69]
See Bernarte, et al. v. Court of Appeals, et al., id., p. 567.
[70]
G.R. No. 153793, 29 August 2006, 500 SCRA 87.
[71]
Extended Resolution, G.R. No. 156305, 17 February 2003.
[72]
Supra note 70, p. 102. G.R. No. 156305 referred to the income of Baier-Nickel for
taxable year 1994 while G.R. No. 153793 pertained to Baier-Nickels income
in 1995.
[73]
Section 4. xxx
(3) Cases or matters heard by a Division shall be decided or resolved with the
concurrence of a majority of the members who actually took part in the
deliberation on the issues in the case and voted thereon, and in no case,
without the concurrence of at least three of such members. When the required
number is not obtained, the case shall be decided En Banc: Provided, that no
doctrine or principle of law laid down by the Court in
a decision rendered En Banc or in Division may be modified or reversed
except by the Court sitting En Banc. (Emphasis supplied)
[74]
That is, fifty centavos (P0.50) on each four pesos (P4.00), or a fractional part
thereof, of the premium charged.
THIRD DIVISION

[G.R. NO. 168402 : August 6, 2008]

ABOITIZ SHIPPING CORPORATION, Petitioner, v. INSURANCE COMPANY OF NORTH AMERICA,

Respondent.

DECISION

REYES, R.T., J.:

THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the
assured. As subrogee, the insurer steps into the shoes of the assured and may exercise only those
rights that the assured may have against the wrongdoer who caused the damage.

Before Us is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) which
reversed the Decision2 of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping
Corporation to pay the sum of P280,176.92 plus interest and attorney's fees in favor of respondent
Insurance Company of North America (ICNA).

The Facts

Culled from the records, the facts are as follows:

On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary Companies
(MSAS) procured a marine insurance policy from respondent ICNA UK Limited of London. The
insurance was for a transshipment of certain wooden work tools and workbenches purchased for the
consignee Science Teaching Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu City,
Philippines.3 ICNA issued an "all-risk" open marine policy,4 stating:

This Company, in consideration of a premium as agreed and subject to the terms and conditions
printed hereon, does insure for MSAS Cargo International Limited &/or Associated &/or Subsidiary
Companies on behalf of the title holder: - Loss, if any, payable to the Assured or order.5

The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany
on board M/S Katsuragi. A clean bill of lading6 was issued by Hapag-Lloyd which stated the consignee
to be STIP, Ecotech Center, Sudlon Lahug, Cebu City.

The container van was then off-loaded at Singapore and transshipped on board M/S Vigour Singapore.
On July 18, 1993, the ship arrived and docked at the Manila International Container Port where the
container van was again off-loaded. On July 26, 1993, the cargo was received by petitioner Aboitiz
Shipping Corporation (Aboitiz) through its duly authorized booking representative, Aboitiz Transport
System. The bill of lading7 issued by Aboitiz contained the notation "grounded outside warehouse."

The container van was stripped and transferred to another crate/container van without any notation
on the condition of the cargo on the Stuffing/Stripping Report.8 On August 1, 1993, the container van
was loaded on board petitioner's vessel, MV Super Concarrier I. The vessel left Manila en route to
Cebu City on August 2, 1993.

On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the
Cebu International Port. It was then brought to the Cebu Bonded Warehousing Corporation pending
clearance from the Customs authorities. In the Stripping Report9 dated August 5, 1993, petitioner's
checker noted that the crates were slightly broken or cracked at the bottom.

On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science
Teaching Improvement Project (STIP) and delivered to Don Bosco Technical High School, Punta
Princesa, Cebu City. It was received by Mr. Bernhard Willig. On August 13, 1993, Mayo B. Perez, then
Claims Head of petitioner, received a telephone call from Willig informing him that the cargo sustained
water damage. Perez, upon receiving the call, immediately went to the bonded warehouse and
checked the condition of the container and other cargoes stuffed in the same container. He found that
the container van and other cargoes stuffed there were completely dry and showed no sign of
wetness.10

Perez found that except for the bottom of the crate which was slightly broken, the crate itself
appeared to be completely dry and had no water marks. But he confirmed that the tools which were
stored inside the crate were already corroded. He further explained that the "grounded outside
warehouse" notation in the bill of lading referred only to the container van bearing the cargo.11
In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the
cargo.12 The letter stated that the crate was broken at its bottom part such that the contents were
exposed. The work tools and workbenches were found to have been completely soaked in water with
most of the packing cartons already disintegrating. The crate was properly sealed off from the inside
with tarpaper sheets. On the outside, galvanized metal bands were nailed onto all the edges. The
letter concluded that apparently, the damage was caused by water entering through the broken parts
of the crate.

The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the
Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of the damage.
CAC reported to ICNA that the goods sustained water damage, molds, and corrosion which were
discovered upon delivery to consignee.13

On September 21, 1993, the consignee filed a formal claim14 with Aboitiz in the amount of
P276,540.00 for the damaged condition of the following goods:

ten (10) wooden workbenches

three (3) carbide-tipped saw blades

one (1) set of ball-bearing guides

one (1) set of overarm router bits

twenty (20) rolls of sandpaper for stroke sander

In a Supplemental Report dated October 20, 1993,15 CAC reported to ICNA that based on official
weather report from the Philippine Atmospheric, Geophysical and Astronomical Services
Administration, it would appear that heavy rains on July 28 and 29, 1993 caused water damage to the
shipment. CAC noted that the shipment was placed outside the warehouse of Pier No. 4, North
Harbor, Manila when it was delivered on July 26, 1993. The shipment was placed outside the
warehouse as can be gleaned from the bill of lading issued by Aboitiz which contained the notation
"grounded outside warehouse." It was only on July 31, 1993 when the shipment was stuffed inside
another container van for shipment to Cebu.

Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to
consignee. A subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the claim
and subrogation receipt executed in its favor. Despite follow-ups, however, no reply was received from
Aboitiz.

RTC Disposition

ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum of P280,176.92,
plus interest and attorney's fees.16 ICNA alleged that the damage sustained by the shipment was
exclusively and solely brought about by the fault and negligence of Aboitiz when the shipment was left
grounded outside its warehouse prior to delivery.

Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It countered
that the complaint stated no cause of action, plaintiff ICNA had no personality to institute the suit, the
cause of action was barred, and the suit was premature there being no claim made upon Aboitiz.

On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the
decision17 states:

WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the relief claimed in
the complaint for being baseless and without merit. The complaint is hereby DISMISSED. The
defendant's counterclaims are, likewise, DISMISSED for lack of basis.18
The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim against
Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK Limited with
address at Cigna House, 8 Lime Street, London EC3M 7NA. However, complainant ICNA Phils. did not
present any evidence to show that ICNA UK is its predecessor-in-interest, or that ICNA UK assigned the
insurance policy to ICNA Phils. Moreover, ICNA Phils.' claim that it had been subrogated to the rights
of the consignee must fail because the subrogation receipt had no probative value for being hearsay
evidence. The RTC reasoned:

While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of North America
(U.K.) _x0016_Limited (ICNA UK) with address at Cigna House, 8 Lime Street, London EC3M 7NA, no
evidence has been adduced which would show that ICNA UK is the same as or the predecessor-in-
interest of plaintiff Insurance Company of North America ICNA with office address at Cigna-Monarch
Bldg., dela Rosa cor. Herrera Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned the
Marine Policy to ICNA. Second, the assured in the Marine Policy appears to be MSAS Cargo
International Limited &/or Associated &/or Subsidiary Companies. Plaintiff's witness, Francisco B.
Francisco, claims that the signature below the name MSAS Cargo International is an endorsement of
the marine policy in favor of Science Teaching Improvement Project. Plaintiff's witness, however, failed
to identify whose signature it was and plaintiff did not present on the witness stand or took (sic) the
deposition of the person who made that signature. Hence, the claim that there was an endorsement
of the marine policy has no probative value as it is hearsay.

Plaintiff, further, claims that it has been subrogated to the rights and interest of Science Teaching
Improvement Project as shown by the Subrogation Form (Exhibit "K") allegedly signed by a
representative of Science Teaching Improvement Project. Such representative, however, was not
presented on the witness stand. Hence, the Subrogation Form is self-serving and has no probative
value.19 (Emphasis supplied)cralawlibrary

The trial court also found that ICNA failed to produce evidence that it was a foreign corporation duly
licensed to do business in the Philippines. Thus, it lacked the capacity to sue before Philippine Courts,
to wit:

Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign insurance company
duly authorized to do business in the Philippines. This allegation was, however, denied by the
defendant. In fact, in the Pre-Trial Order of 12 March 1996, one of the issues defined by the court is
whether or not the plaintiff has legal capacity to sue and be sued. Under Philippine law, the condition
is that a foreign insurance company must obtain licenses/authority to do business in the Philippines.
These licenses/authority are obtained from the Securities and Exchange Commission, the Board of
Investments and the Insurance Commission. If it fails to obtain these licenses/authority, such foreign
corporation doing business in the Philippines cannot sue before Philippine courts. Mentholatum Co.,
Inc. v. Mangaliman, 72 Phil. 524. (Emphasis supplied)cralawlibrary

CA Disposition

ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is
anchored on the right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the
same as the ICNA UK Limited as made known in the dorsal portion of the Open Policy.20

On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal
claim was not filed within the period required under Article 366 of the Code of Commerce; that ICNA
had no right of subrogation because the subrogation receipt should have been signed by MSAS, the
assured in the open policy, and not Willig, who is merely the representative of the consignee.

On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:

WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed decision of
the Regional Trial Court of Makati City in Civil Case No. 94-1590 is hereby REVERSED and SET ASIDE. A
new judgment is hereby rendered ordering defendant-appellee Aboitiz Shipping Corporation to pay
the plaintiff-appellant Insurance Company of North America the sum of P280,176.92 with interest
thereon at the legal rate from the date of the institution of this case until fully paid, and attorney's
fees in the sum of P50,000, plus the costs of suit.21

The CA opined that the right of subrogation accrues simply upon payment by the insurance company
of the insurance claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even assuming
that it is an unlicensed foreign corporation. The CA ruled:

At any rate, We find the ground invoked for the dismissal of the complaint as legally untenable. Even
assuming arguendo that the plaintiff-insurer in this case is an unlicensed foreign corporation, such
circumstance will not bar it from claiming reimbursement from the defendant carrier by virtue of
subrogation under the contract of insurance and as recognized by Philippine courts. x x x

x x x

Plaintiff insurer, whether the foreign company or its duly authorized Agent/Representative in the
country, as subrogee of the claim of the insured under the subject marine policy, is therefore the real
party in interest to bring this suit and recover the full amount of loss of the subject cargo shipped by it
from Manila to the consignee in Cebu City. x x x22

The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not
overcome by any countervailing evidence. Hence, the trial court erred in dismissing the complaint and
in not finding that based on the evidence on record and relevant provisions of law, Aboitiz is liable for
the loss or damage sustained by the subject cargo.

Issues

The following issues are up for Our consideration:

(1) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT ICNA
HAS A CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF SUBROGATION BUT
WITHOUT CONSIDERING THE ISSUE CONSISTENTLY RAISED BY ABOITIZ THAT THE FORMAL CLAIM OF
STIP WAS NOT MADE WITHIN THE PERIOD PRESCRIBED BY ARTICLE 366 OF THE CODE OF COMMERCE;
AND, MORE SO, THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT.

(2) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE SUIT
FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY ICNA AS THE LATTER WAS AN
AUTHORIZED AGENT OF THE INSURANCE COMPANY OF NORTH AMERICA (U.K.) ("ICNA UK").

(3) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THERE
WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM THE ORIGINAL ASSURED MSAS CARGO
INTERNATIONAL LIMITED ("MSAS") IN FAVOR OF THE CONSIGNEE STIP, AND THAT THE SUBROGATION
RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS VALID NOTWITHSTANDING THE FACT THAT IT HAS NO
PROBATIVE VALUE AND IS MERELY HEARSAY AND A SELF-SERVING DOCUMENT FOR FAILURE OF ICNA
TO PRESENT A REPRESENTATIVE OF STIP TO IDENTIFY AND AUTHENTICATE THE SAME.

(4) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE
EXTENT AND KIND OF DAMAGE SUSTAINED BY THE SUBJECT CARGO WAS CAUSED BY THE FAULT OR
NEGLIGENCE OF ABOITIZ.23 (Underscoring supplied)cralawlibrary

Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the real
party-in-interest that possesses the right of subrogation to claim reimbursement from petitioner
Aboitiz? (b) Was there a timely filing of the notice of claim as required under Article 366 of the Code
of Commerce? (c) If so, can petitioner be held liable on the claim for damages?

Our Ruling
We answer the triple questions in the affirmative.

A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated
from filing a suit in local courts. Only when that foreign corporation is "transacting" or "doing
business" in the country will a license be necessary before it can institute suits.24 It may, however,
bring suits on isolated business transactions, which is not prohibited under Philippine law.25 Thus, this
Court has held that a foreign insurance company may sue in Philippine courts upon the marine
insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine
carrier, even if it has no license to do business in this country. It is the act of engaging in business
without the prescribed license, and not the lack of license per se, which bars a foreign corporation
from access to our courts.26

In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the
subject marine policy, the present suit was filed by the said company's authorized agent in Manila. It
was the domestic corporation that brought the suit and not the foreign company. Its authority is
expressly provided for in the open policy which includes the ICNA office in the Philippines as one of
the foreign company's agents.

As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the
insurance policy by MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the
consignee.

The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought
against ICNA UK, the company who issued the insurance, or against any of its listed agents
worldwide.27 MSAS accepted said provision when it signed and accepted the policy. The acceptance
operated as an acceptance of the authority of the agents. Hence, a formal indorsement of the policy
to the agent in the Philippines was unnecessary for the latter to exercise the rights of the insurer.

Likewise, the Open Policy expressly provides that:

The Company, in consideration of a premium as agreed and subject to the terms and conditions
printed hereon, does insure MSAS Cargo International Limited &/or Associates &/or Subsidiary
Companies in behalf of the title holder: - Loss, if any, payable to the Assured or Order.

The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims
on behalf of the assured. This is in keeping with Section 57 of the Insurance Code which states:

A policy may be so framed that it will inure to the benefit of whosoever, during the continuance of the
risk, may become the owner of the interest insured. (Emphasis added)

Respondent's cause of action is founded on it being subrogated to the rights of the consignee of the
damaged shipment. The right of subrogation springs from Article 2207 of the Civil Code, which states:

Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully
cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury. (Emphasis added)

As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals,28 payment
by the insurer to the assured operates as an equitable assignment of all remedies the assured may
have against the third party who caused the damage. Subrogation is not dependent upon, nor does it
grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer.29
Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to
subrogation equipped it with a cause of action against petitioner in case of a contractual breach or
negligence.30 This right of subrogation, however, has its limitations. First, both the insurer and the
consignee are bound by the contractual stipulations under the bill of lading.31 Second, the insurer can
be subrogated only to the rights as the insured may have against the wrongdoer. If by its own acts
after receiving payment from the insurer, the insured releases the wrongdoer who caused the loss
from liability, the insurer loses its claim against the latter.32

The giving of notice of loss or injury is a condition precedent to the action for loss or injury or the right
to enforce the carrier's liability. Circumstances peculiar to this case lead Us to conclude that the notice
requirement was complied with. As held in the case of Philippine American General Insurance Co., Inc.
v. Sweet Lines, Inc.,33 this notice requirement protects the carrier by affording it an opportunity to
make an investigation of the claim while the matter is still fresh and easily investigated. It is meant to
safeguard the carrier from false and fraudulent claims.

Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from
receipt of the cargo if the damage is not apparent from the outside of the package. For damages that
are visible from the outside of the package, the claim must be made immediately. The law provides:

Article 366. Within twenty four hours following the receipt of the merchandise, the claim against the
carrier for damages or average which may be found therein upon opening the packages, may be
made, provided that the indications of the damage or average which give rise to the claim cannot be
ascertained from the outside part of such packages, in which case the claim shall be admitted only at
the time of receipt.

After the periods mentioned have elapsed, or the transportation charges have been paid, no claim
shall be admitted against the carrier with regard to the condition in which the goods transported were
delivered. (Emphasis supplied)cralawlibrary

The periods above, as well as the manner of giving notice may be modified in the terms of the bill of
lading, which is the contract between the parties. Notably, neither of the parties in this case presented
the terms for giving notices of claim under the bill of lading issued by petitioner for the goods.

The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the
damage was dated August 15, 1993, that letter, together with the notice of claim, was received by
petitioner only on September 21, 1993. But petitioner admits that even before it received the written
notice of claim, Mr. Mayo B. Perez, Claims Head of the company, was informed by telephone
sometime in August 13, 1993. Mr. Perez then immediately went to the warehouse and to the delivery
site to inspect the goods in behalf of petitioner.34

In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage Corporation,35
the notice was allegedly made by the consignee through telephone. The claim for damages was
denied. This Court ruled that such a notice did not comply with the notice requirement under the law.
There was no evidence presented that the notice was timely given. Neither was there evidence
presented that the notice was relayed to the responsible authority of the carrier.

As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule
differently from the PCIC case, albeit this ruling is being made pro hac vice, not to be made a
precedent for other cases.

Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of
recovery from a carrier must be given a reasonable and practical construction, adapted to the
circumstances of the case under adjudication, and their application is limited to cases falling fairly
within their object and purpose.36

Bernhard Willig, the representative of consignee who received the shipment, relayed the information
that the delivered goods were discovered to have sustained water damage to no less than the Claims
Head of petitioner, Mayo B. Perez. Immediately, Perez was able to investigate the claims himself and
he confirmed that the goods were, indeed, already corroded.

Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a
reasonable and practical, rather than a strict construction.37 We give due consideration to the fact
that the final destination of the damaged cargo was a school institution where authorities are bound
by rules and regulations governing their actions. Understandably, when the goods were delivered, the
necessary clearance had to be made before the package was opened. Upon opening and discovery of
the damaged condition of the goods, a report to this effect had to pass through the proper channels
before it could be finalized and endorsed by the institution to the claims department of the shipping
company.

The call to petitioner was made two days from delivery, a reasonable period considering that the
goods could not have corroded instantly overnight such that it could only have sustained the damage
during transit. Moreover, petitioner was able to immediately inspect the damage while the matter was
still fresh. In so doing, the main objective of the prescribed time period was fulfilled. Thus, there was
substantial compliance with the notice requirement in this case.

To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in
interest to institute the claim for damages against petitioner; and pro hac vice, that a valid notice of
claim was made by respondent.

We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated in
Article 1735 of the Civil Code is that in cases where the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence required by law.38 Extraordinary diligence is that extreme
measure of care and caution which persons of unusual prudence and circumspection use for securing
and preserving their own property rights.39 This standard is intended to grant favor to the shipper
who is at the mercy of the common carrier once the goods have been entrusted to the latter for
shipment.40

Here, the shipment delivered to the consignee sustained water damage. We agree with the findings of
the CA that petitioner failed to overturn this presumption:

x x x upon delivery of the cargo to the consignee Don Bosco Technical High School by a representative
from Trabajo Arrastre, and the crates opened, it was discovered that the workbenches and work tools
suffered damage due to "wettage" although by then they were already physically dry. Appellee carrier
having failed to discharge the burden of proving that it exercised extraordinary diligence in the
vigilance over such goods it contracted for carriage, the presumption of fault or negligence on its part
from the time the goods were unconditionally placed in its possession (July 26, 1993) up to the time
the same were delivered to the consignee (August 11, 1993), therefore stands. The presumption that
the carrier was at fault or that it acted negligently was not overcome by any countervailing evidence. x
x x41 (Emphasis added)

The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26,
1993. On the same day, it was stripped from the container van. Five days later, on July 31, 1993, it was
re-stuffed inside another container van. On August 1, 1993, it was loaded onto another vessel bound
for Cebu. During the period between July 26 to 31, 1993, the shipment was outside a container van
and kept in storage by petitioner.

The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside
warehouse," suggesting that from July 26 to 31, the goods were kept outside the warehouse. And
since evidence showed that rain fell over Manila during the same period, We can conclude that this
was when the shipment sustained water damage.

To prove the exercise of extraordinary diligence, petitioner must do more than merely show the
possibility that some other party could be responsible for the damage. It must prove that it used "all
reasonable means to ascertain the nature and characteristic of the goods tendered for transport and
that it exercised due care in handling them.42 Extraordinary diligence must include safeguarding the
shipment from damage coming from natural elements such as rainfall.

Aside from denying that the "grounded outside warehouse" notation referred not to the crate for
shipment but only to the carrier van, petitioner failed to mention where exactly the goods were stored
during the period in question. It failed to show that the crate was properly stored indoors during the
time when it exercised custody before shipment to Cebu. As amply explained by the CA:

On the other hand, the supplemental report submitted by the surveyor has confirmed that it was
rainwater that seeped into the cargo based on official data from the PAGASA that there was, indeed,
rainfall in the Port Area of Manila from July 26 to 31, 1993. The Surveyor specifically noted that the
subject cargo was under the custody of appellee carrier from the time it was delivered by the shipper
on July 26, 1993 until it was stuffed inside Container No. ACCU-213798-4 on July 31, 1993. No other
inevitable conclusion can be deduced from the foregoing established facts that damage from
"wettage" suffered by the subject cargo was caused by the negligence of appellee carrier in grounding
the shipment outside causing rainwater to seep into the cargoes.

Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to the subject
goods by claiming that the notation "GROUNDED OUTSIDE WHSE." actually refers to the container and
not the contents thereof or the cargoes. And yet it presented no evidence to explain where did they
place or store the subject goods from the time it accepted the same for shipment on July 26, 1993 up
to the time the goods were stripped or transferred from the container van to another container and
loaded into the vessel M/V Supercon Carrier I on August 1, 1993 and left Manila for Cebu City on
August 2, 1993. x x x If the subject cargo was not grounded outside prior to shipment to Cebu City,
appellee provided no explanation as to where said cargo was stored from July 26, 1993 to July 31,
1993. What the records showed is that the subject cargo was stripped from the container van of the
shipper and transferred to the container on August 1, 1993 and finally loaded into the appellee's
vessel bound for Cebu City on August 2, 1993. The Stuffing/Stripping Report (Exhibit "D") at the
Manila port did not indicate any such defect or damage, but when the container was stripped upon
arrival in Cebu City port after being discharged from appellee's vessel, it was noted that only one (1)
slab was slightly broken at the bottom allegedly hit by a forklift blade (Exhibit "F").43 (Emphasis
added)

Petitioner is thus liable for the water damage sustained by the goods due to its failure to satisfactorily
prove that it exercised the extraordinary diligence required of common carriers.

WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.

SO ORDERED.

Endnotes:

1 Rollo, pp. 43-60. Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices
Regalado E. Maambong and Lucenito N. Tagle, concurring. CA-G.R. CV No. 81684, decision dated
March 29, 2005.

2 Id. at 212-218. Penned by Judge Romeo F. Barza. Civil Case No. 94-1590, decision dated November
14, 2003.

3 Covered by a commercial invoice from Rainer Fux German Asia Trade.

4 Records, pp. 348-349. Open Marine Policy No. 87GB 4475.

5 Id. at 348.

6 Id. at 381-382. Bill of Lading No. 33-006402.

7 Id. at 346-347. Bill of Lading Nos. 02-4519072 and INA-02.

8 Id. at 350. Dated July 31, 1993.

9 Rollo, p. 127.

10 Records, pp. 536-539; TSN, October 16, 2001, pp. 6-9.

11 Id.

12 Id. at 375-376.

13 Id. at 356-359. Report dated September 18, 1993.

14 Id. at 377.

15 Id. at 373-374.

16 Docketed as Civil Case No. 94-1590, RTC-Makati, Branch 61.

17 Rollo, pp. 212-218.

18 Id. at 218.

19 Id. at 216-217.

20 The dorsal portion contained the provision stating that all claims shall be submitted to the office of
the Company or to one (1) of the "Agents" or "Representatives," as per list which included "Manila,
Philippines, Insurance Co. of North America, Legaspi Village, Makati CCPO Box 482."

21 Rollo, p. 59.

22 Id. at 52-53.

23 Id. at 20-21.

24 Corporation Code, Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines, but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws. See also
European Resources and Technologies, Inc. v. Ingenieuburo Birkhahn + Nolte, G.R. No. 159586, July 26,
2004, 435 SCRA 246, 255.

25 Bulakhidas v. Navarro, G.R. No. L-49695, April 7, 1986, 142 SCRA 1, 2-3.

26 Universal Shipping Lines v. Intermediate Appellate Court, G.R. No. 74125, July 31, 1990, 188 SCRA
170, 173.

27 See note 20.

28 G.R. No. 81026, April 3, 1990, 184 SCRA 54; see also Philippine American General Insurance Co.,
Inc. v. Court of Appeals, G.R. No. 116940, June 11, 1997, 273 SCRA 262, 274.

29 Pan Malayan Insurance Corporation v. Court of Appeals, id. at 58.

30 Federal Express Corporation v. American Home Assurance Company, G.R. No. 150094, August 18,
2004, 437 SCRA 50, 56.

31 Id. at 56-57.

32 Manila Mahogany Manufacturing Corporation v. Court of Appeals, G.R. No. L-52756, October 12,
1987, 154 SCRA 650, 656.

33 G.R. No. 87434, August 5, 1992, 212 SCRA 194.

34 Records, pp. 536-539; TSN, October 16, 2001, pp. 6-9.

35 G.R. No. 136888, June 29, 2005, 462 SCRA 77.

36 14 Am. Jur. 2d 581.

37 14 Am. Jur. 2d 585.

38 Civil Code, Art. 1735.

39 Republic v. Lorenzo Shipping Corporation, G.R. No. 153563, February 7, 2005, 450 SCRA 550, 556,
citing Black's Law Dictionary, 5th ed. 1979, 411.

40 Id.

41 Rollo, p. 58.

42 Calvo v. UCPB General Insurance, Inc., 429 Phil. 244 (2002).

43 Rollo, pp. 57-58.

FIRST DIVISION

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

WHITE GOLD MARINE SERVICES, INC., petitioner, vs. PIONEER

INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP
MUTUAL UNDERWRITING ASSOCIATION (BERMUDA)
LTD., respondents.

DECISION
QUISUMBING, J.:

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

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT

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

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS

BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED
IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER

NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN
AGENT/BROKER OF RESPONDENT STEAMSHIP.
 FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF

RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]

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

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

(b) making, or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or
activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

...

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

SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker in the solicitation
or procurement of applications for insurance, or receive for services in obtaining
insurance, any commission or other compensation from any insurance company doing
business in the Philippines or any agent thereof, without first procuring a license so to
act from the Commissioner, which must be renewed annually on the first day of
January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneers certificate of authority and

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

[1]
Rollo, pp. 28-41. Penned by Associate Justice Delilah Vidallon-Magtolis, with
Associate Justices Candido V. Rivera, and Sergio L. Pestao concurring.
[2]
CA Rollo, pp. 43-51.
[3]
Id. at 103.
[4]
SEC. 186. No person, partnership, or association of persons shall transact any
insurance business in the Philippines except as agent of a person or
corporation authorized to do the business of insurance in the Philippines,
unless possessed of the capital and assets required of an insurance corporation
doing the same kind of business in the Philippines and invested in the same
manner; nor unless the Commissioner shall have granted to him or them a
certificate to the effect that he or they have complied with all the provisions of
law which an insurance corporation doing business in the Philippines is
required to observe.
Every person, partnership, or association receiving any such certificate of authority
shall be subject to the insurance laws of the Philippines and to the jurisdiction
and supervision of the Commissioner in the same manner as if an insurance
corporation authorized by the laws of the Philippines to engage in the business
of insurance specified in the certificate.
[5]
SEC. 187. No Insurance Company shall transact any insurance business in the
Philippines until after it shall have obtained a certificate of authority for that
purpose from the Commissioner upon application therefor and payment by the
company concerned of the fees hereinafter prescribed.
...
[6]
SEC. 299. No insurance company doing business in the Philippines, nor any agent
thereof, shall pay any commission or other compensation to any person for
services in obtaining insurance, unless such person shall have first procured
from the Commissioner a license to act as an insurance agent of such company
or as an insurance broker as hereinafter provided.
No person shall act as an insurance agent or as an insurance broker in the solicitation
or procurement of applications for insurance, or receive for services in
obtaining insurance, any commission or other compensation from any
insurance company doing business in the Philippines or any agent thereof,
without first procuring a license so to act from the Commissioner, . . .
[7]
SEC. 300. Any person who for compensation solicits or obtains insurance on behalf
of any insurance company or transmits for a person other than himself an
application for a policy or contract of insurance to or from such company or
offers or assumes to act in the negotiating of such insurance shall be an
insurance agent within the intent of this section and shall thereby become
liable to all the duties, requirements, liabilities and penalties to which an
insurance agent is subject.
[8]
SEC. 301. Any person who for any compensation, commission or other thing of
value acts or aids in any manner in soliciting, negotiating or procuring the
making of any insurance contract or in placing risk or taking out insurance, on
behalf of an insured other than himself, shall be an insurance broker within the
intent of this Code, and shall thereby become liable to all the duties,
requirements, liabilities and penalties to which an insurance broker is subject.
[9]
Rollo, pp. 144-145.
[10]
No. L-77369, 31 August 1988, 165 SCRA 258, 260.
[11]
Rollo, p. 176.
[12]
THE INSURANCE CODE OF THE PHILIPPINES, Section 2(2).
[13]
43 AM JUR. 2d Insurance Sec. 4 (1982).
[14]
RUFUS B. RODRIGUEZ, THE INSURANCE CODE OF THE PHILIPPINES
ANNOTATED 4 (4th ed., 1999), citing BUIST M. ANDERSON, VANCE ON
INSURANCE 83 (3rd ed., 1951).
[15]
EDUARDO F. HERNANDEZ AND ANTERO A. PEASALES, PHILIPPINE
ADMIRALTY AND MARITIME LAW 612 (1st ed., 1987).
[16]
SEC. 99. Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities, choses in action, evidences of debt,
valuable papers, bottomry, and respondentia interests and all other kinds of
property and interests therein, in respect to, appertaining to or in connection
with any and all risks or perils of navigation, transit or transportation, or while
being assembled, packed, crated, baled, compressed or similarly prepared for
shipment or while awaiting shipment, or during any delays, storage,
 trasshipment, or reshipment incident thereto, including war risks, marine
builders risks, and all personal property floater risks.
(b) Person or property in connection with or appertaining to a marine, inland marine,
transit or transportation insurance, including liability for loss of or damage
arising out of or in connection with the construction, repair, operation,
maintenance or use of the subject matter of such insurance (but not including
life insurance or surety bonds nor insurance against loss by reason of bodily
injury to any person arising out of the ownership, maintenance, or use of
automobiles).
(c) Precious stones, jewels, jewelry, precious metals, whether in course of
transportation or otherwise.
(d) Bridges, tunnels and other instrumentalities of transportation and communication
(excluding buildings, their furniture and furnishings, fixed contents and
supplies held in storage); piers, wharves, docks and slips, and other aids to
navigation and transportation, including dry docks and marine railways, dams
and appurtenant facilities for the control of waterways.
(2) Marine protection and indemnity insurance, meaning insurance against, or against
legal liability of the insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use, repair, or construction of
any vessel, craft or instrumentality in use in ocean or inland waterways,
including liability of the insured for personal injury, illness or death or for loss
of or damage to the property of another person.
[17]
Supra, note 13 at Sec. 65.
[18]
HOWARD BENNETT, THE LAW OF MARINE INSURANCE 236 (1996).
[19]
Supra, note 15 at 733.
[20]
Supra, note 5.
[21]
Supra, note 12 at Sec. 187.
[22]
CA Rollo, p. 154.
[23]
Id. at 153.
[24]
Id. at 112. Certification issued by the Insurance Commission which certified that
Pioneer is not a registered broker for any foreign corporation.
Today is Sunday, December 10, 2017

FIRST DIVISION
 April 19, 2016

G.R. No. 195728

PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Petitioner,

vs.
CHERRY T. CASTRO and GLENN ANTHONY T. CASTRO, Respondents.

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

G.R. No. 211329

CHERRY T. CASTRO and GLENN ANTHONY T. CASTRO, Petitioners,

vs.
PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, Respondent

DECISION

SERENO, CJ:

These Petitions for Review on Certiorari under Rule 45 of the Rules of Court originate from a Complaint 1 for
Declaration of Nullity of Individual Insurance Contract (Civil Case No. 09-599 2). The Complaint was
instituted by Paramount Life and General Insurance Corporation (Paramount) against Cherry T. Castro and
Glenn Anthony T. Castro (Castro’s) and filed before the Regional Trial Court, Makati City, Branch 61 (RTC),
on 2 July 2009.

The Petition3 docketed as G.R. No. 195728 assails the Court of Appeals (CA) Decision 4 dated 4 October 2010
and Resolution5 dated 21 February 2011 in CA-G.R. SP No. 113972. The CA remanded the case to the RTC
for the admission of the Castro's Third-Party Complaint against the Philippine Postal Savings Bank,
Incorporated (PPS BI). 6

On the other hand, the Petition 7 docketed as G.R. No. 211329 assails the Resolution8 of the RTC in Civil
Case No. 09-599 dated 11 February 2014. The trial court ordered that the Motion to Dismiss filed by the
defendants (the Castro’s) be deemed expunged from the records, as they had previously been declared to be
in default. Nonetheless, due to the protracted nature of the proceedings, the RTC allowed the plaintiff no
more than two settings for the presentation of evidence.9

These Petitions have been consolidated as they involve the same parties, arise from an identical set of facts,
and raise interrelated issues. 10 The Court resolves to dispose of these cases jointly.

FACTS OF THE CASE

In 2004, the PPSBI applied for and obtained insurance from Paramount, 11 which accordingly issued Group
Master Policy No. G-08612 effective 1 September 2004. Under Section 20, Article IV of the said policy, "all
death benefits shall be payable to the creditor, PPSBI, as its interest may appeal." 13

Meanwhile, Virgilio J. Castro (Virgilio) - Cherry's husband and Glenn's father - obtained a housing loan from
the PPSBI in the amount of Pl .5 million. 14 PPSBI required Virgilio to apply for a mortgage redemption
insurance (MRI) from Paramount to cover the loan. 15 In his application for the said insurance policy, Virgilio
named Cherry and Glenn as beneficiaries. 16 Paramount issued Certificate No. 041913 effective 12 March
2008 in his favor, subject to the terms and conditions of Group Master Policy No. G-086. 17

On 26 February 2009, Virgilio died of septic shock. 18 Consequently, a claim was filed for death benefits
under the individual insurance coverage issued under the group policy. 19 Paramount however denied the
claim, on the

ground of the failure of Virgilio to disclose material information, or material concealment or

misrepresentation.20 It said that when Virgilio submitted his insurance application on 12 March 2008, he made
some material misrepresentations by answering "no" to questions on whether he had any adverse health
history and whether he had sought medical advice or consultation concerning it. Paramount learned that in
2005, Virgilio had sought consultation in a private hospital after complaining of a dull pain in his lumbosacral
area. 21 Because of the alleged material concealment or misrepresentation, it declared Virgilio's individual
insurance certificate (No. 041913) rescinded, null, and absolutely void from the very beginning.22

On 2 July 2009, Paramount filed a Complaint23 with the RTC docketed as Civil Case No. 09-599. It prayed
that Application and Insurance Certificate No. 041913 covering the individual insurance of Virgilio be
declared null and void by reason of material concealment and misrepresentation. It also prayed for attorney's
fees and exemplary damages.24

In their Answer with Counterclaim, 25 the Castro’s argued that Virgilio had not made any material
misrepresentation. They contended that he had submitted the necessary evidence of insurability to the
satisfaction of

Paramount. They further argued that by approving Virgilio's application, Paramount was estopped from
raising the supposed misrepresentations. 26 The Castro’s made a counterclaim for actual and exemplary
damages, as well

as attorney's fees, for the alleged breach of contract by Paramount arising from its refusal to honor its
obligation as insurer of the Pl.5 million loan.27

STATEMENT OF THE CASES

G.R. No. 195728

On 29 October 2009, the Castros filed a motion 28 to include the PPSBI as an indispensible party-defendant.
The RTC thereafter denied the motion, reasoning that Paramount's Complaint could be fully resolved without
the PPSBI's participation. 29

Consequently, the Castro’s filed a Motion for Leave to File a Third Party-Complaint and to Admit Attached
Third-Party Complaint.30 They argued that due to the death of Virgilio, and by virtue of Group Policy No. G-
086 in· relation to Certificate No. 041913, PPSBI stepped into the shoes of Cherry and Glen under the
principle of "indemnity, subrogation, or any other reliefs" found in Section 22, Rule 6 of the Rules of
Court.31 This motion was likewise denied, on the ground that "what the defendants herein want is the
introduction of a controversy that is entirely foreign and distinct from the main cause." 32 The Castro’s Motion
for Reconsideration was again denied in a Resolution33 dated 19 April 2010

On 13 May 2010, the Castro’s assailed the RTC Resolutions through a Petition for Certiorari filed with the
CA.34They likewise subsequently filed a Motion for Leave of Court to File and to Admit Attached
Supplemental Petition for Review.35

In its Decision36 dated 4 October 2010, the CA partially granted the Petition by allowing a third-party
complaint to be filed against the PPSBI. It ruled that the Castro’s were freed from the obligation to pay the
bank by virtue of subrogation, as the latter would collect the loan amount pursuant to the MRI issued by
Paramount in Virgilio's favor. 37 Paramount moved for reconsideration, but the CA denied the motion through
a Resolution38 dated 21 February 2011.

On 11 April 2011, Paramount filed a Petition for Review under Rule 45, arguing that the case could be fully
appreciated and resolved without involving the PPSBI as a third-party defendant in Civil Case No. 09-599.39

G.R. No. 211329

Meanwhile, on 7 January 2014, the Castro’s filed a Motion to Dismiss 40 the Complaint on the ground of
failure to prosecute for an unreasonable length of time without justifiable cause and to present evidence ex
parte pursuant to a court order. In a Resolution 41 dated 11 February 2014, the RTC denied the motion. Owing
to its previous Order dated 26 May 2010, which declared the Castro’s as in default for failure to attend the
pretrial, the RTC treated the Motion to Dismiss as a mere scrap of paper and expunged it from the records.

The Castro’s come straight to this Court via a Petition for Review 42 under Rule 45, assailing the RTC
Resolution dated 11 February 2014.

THE ISSUES

1. Whether the CA erred in remanding the case to the R TC for the admission of the Third-Party Complaint
against PPSBI

2. Whether the RTC erred in denying the Motion to Dismiss filed by the Castro’s

THE COURT'S RULING

G.R. No. 195728

The Castro’s sought to implead the PPSBI as a third-party defendant in the nullification case instituted by
Paramount. They theorized that by virtue of the death of Virgilio and the mandate of the group insurance
policy in relation to his individual insurance policy, the PPSBI stepped into the shoes of Cherry and Glenn.
According to the Castro’s, upon Virgilio's death, the obligation to pay the third-party defendant (PPSBI)
passed on to Paramount by virtue of the Mortgage Redemption Insurance, 43 and not to them as Virgilio's
heirs.

In Great Pacific Life Assurance Corp. v. Court of Appeals, 44 we defined mortgage redemption insurance as 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 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.45

In this case, the PPSBI, as the mortgagee-bank, required Virgilio to obtain an MRI from Paramount to cover
his housing loan. The issuance of the MRI, as evidenced by the Individual Insurance Certificate in Virgilio's
favor, was derived from the group insurance policy issued by Paramount in favor of the PPSBI. Paramount
undertook to pay the PPSBI "the benefits in accordance with the Insurance Schedule, upon receipt and
approval of due proof that the member has incurred a loss for which benefits are payable."46

Paramount, in opposing the PPSBI's inclusion as a third-party defendant, reasons that it is only seeking the
nullification of Virgilio's individual insurance certificate, and not the group insurance policy forged between
it and the PPSBI. It concludes that the nullification action it filed has nothing to do with the PPSBI.

We disagree.

Should Paramount succeed in having the individual insurance certificate nullified, the PPSBI shall then
proceed against the Castro’s. This would contradict the provisions of the group insurance policy that ensure
the direct payment by the insurer to the bank:

Notwithstanding the provision on Section 22 "No Assignment" of Article IV Benefit Provisions, and in
accordance with provisions of Section 6 "Amendment of this Policy" under Article II General Provisions of
the Group Policy, it is hereby agreed that all death benefits shall be payable to the Creditor, Philippine
Postal Savings Bank as its interest may appeal.47 (Emphasis supplied.)

In allowing the inclusion of the PPSBI as a third-party defendant, the Court recognizes the inseparable
interest of the bank (as policyholder of the group policy) in the validity of the individual insurance
certificates issued by Paramount. The PPSBI need not institute a separate case, considering that its cause of
action is intimately related to that of Paramount as against the Castro’s. The soundness of admitting a third-
party complaint hinges on causal connection between the claim of the plaintiff in his complaint and a claim
for contribution, indemnity or other relief of the defendant against the third-party defendant. 48 In this case,
the Castro’s stand to incur a bad debt to the PPSBI - the exact event that is insured against by Group Master
Policy No. G-086 - in the event that Paramount succeeds in nullifying Virgilio's Individual Insurance
Certificate.

Paramount further argues that the propriety of a third-party complaint rests on whether the possible third-
party defendant (in this case PPSBI) can raise the same defenses that the third-party plaintiffs (the Castro’s)
have against the plaintiff. However, the Rules do not limit the third-party defendant's options to such a
condition. Thus:

Section 13. Answer to third (fourth, etc.)-party complaint. – A third (fourth, etc.)-party defendant may allege
in his answer his defenses, counterclaims or cross-claims, including such defenses that the third (fourth, etc.)-
party plaintiff may have against the original plaintiffs claim. In proper cases, he may also assert a
counterclaim against the original plaintiff in respect of the latter's claim against the third-party plaintiff. 49

As seen above, the same defenses the third-party plaintiff has against the original plaintiff are just some of the
allegations a third-party defendant may raise in its answer. Section 13 even gives the third-party defendant
the prerogative to raise a counterclaim against the original plaintiff in respect of the latter's original claim
against the defendant/third-party plaintiff.
In Firestone Tire & Rubber Co. of the Phil. v. Tempongko, 50 We ruled that a defendant is permitted to bring in
a third-party defendant to litigate a separate cause of action in respect of the plaintiffs claim against a third
party in the original and principal case. The objective is to avoid circuitry of action and unnecessary
proliferation of lawsuits, as well as to expeditiously dispose of the entire subject matter arising from one
particular set of facts, in one litigation.

The CA correctly ruled that to admit the Castro’s Third-Party Complaint, in which they can assert against the
PPSBI an independent claim they would otherwise assert in another action, would prevent multiplicity of
suits.51Considering also that the original case from which these. Present Petitions arose has not yet been
resolved, the Court deems it proper to have all the parties air all their possible grievances in the original case
still pending with the RTC.

Finally, the Court resolves the legal issues allegedly ignored by the CA, to wit: 1) whether legal grounds exist
for the inhibition of Judge Ruiz (the presiding judge); and 2) whether the defendants were properly declared

as in default for failure to appear at pretrial.

The first issue is unmeritorious. Counsel for the Castro’s postulates that since six rulings of the judge are
being assailed for grave abuse of discretion, the judge should inhibit himself. 52 According to counsel, no
judge shall sit in any case if the latter's ruling is subject to review. The Court reminds counsel that the rule
contemplates a scenario in which judges are tasked to review their own decisions on appeal, not when their
decisions are being appealed to another tribunal.

With regard to the second issue, counsel apparently confuses a declaration of default under Section 353 of
Rule 9 with the effect of failure to appear under Section 5 54 of Rule 18. Failure to file a responsive pleading
within the reglementary period is the sole ground for an order of default under Rule 9. 55 On the other hand,
under Rule 18, failure of the defendant to appear at the pre-trial conference results in the plaintiff being
allowed to present evidence ex parte. The difference is that a declaration of default under Rule 9 allows the
Court to proceed to render judgment granting the claimant such relief as his pleading may warrant; while the
effect of default under Rule 18 allows the plaintiff to present evidence ex parte and for the Court to render
judgment on the basis thereof. The lower com1 may have declared defendants therein as in default; however,
it did not issue an order of default, rather, it ordered the plaintiff to present evidence ex parte in accordance
with the Rules. In any case, the Castro’s could have availed themselves of appropriate legal remedies when
the CA failed to resolve the issue, but they did not. They cannot now resurrect the issue through a Comment
before this Court.

G.R. No. 211329

As regards G.R. No. 211329, this Court finds that outright denial of the Petition is warranted, pursuant to our
ruling in Rayos v. City of Manila.56 In that case, We ruled that an order denying a motion to dismiss is
interlocutory and, hence, not appealable. 57 That ruling was based on Section 1 (b), Rule 41 of the Rules of
Court, as amended, which provides:

SECTION 1. Subject of appeal. - An appeal may be taken from a judgment or final order that completely
disposes of the case, or of a particular matter therein when declared by these Rules to be appealable.

No appeal may be taken from:

 xxxx

(b) An interlocutory order;

xxxx

In all the above instances where the judgment or final order is not appealable, the aggrieved party may file an
appropriate special civil action under Rule 65.

In the present case, the RTC's denial of the Motion to Dismiss was an interlocutory order, as it did not finally
dispose of the case. On the contrary; the denial paved way for the case to proceed until final adjudication by
the trial court.

Upon denial of their Motion to Dismiss, the Castro’s were not left without any recourse. In such a situation,
the aggrieved party's remedy is to file a special civil action for certiorari under Rule 65 of the Rules of Court.
However, the aggrieved parties herein resorted to filing a Petition for Review under Rule 45 before this
Court. Even if the present Petition is treated as one for certiorari under Rule 65, it must still be dismissed for
violation of the principle of hierarchy of courts. This well-settled principle dictates that petitioners should
have filed the Petition for Certiorari with the CA, and not directly with this Court.

WHEREFORE, premises considered, the Petitions in G.R. Nos. 195728 and 211329 are DENIED.

SO ORDERED.

MARIA LOURDES P.A. SERENO

Chief Justice, Chairperson

WE CONCUR:

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

LUCAS P. BERSAMIN ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice

ALFREDO BENJAMIN S. CAGUIOA

Associate Justice

C E RT I FI CAT I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision
had been reached in consultation before the case was assigned to the writer of the opinion of the Court's
Division.

MARIA LOURDES P. A. SERENO

Chief Justice
Footnotes
1
Rollo (G.R. No. 195728), pp. 35-44.
2
In the Complaint, the case was denominated as "Civil Case No. 09-598," but was later referred to as "Civil
Case No. 09-599" in subsequent pleadings of the parties and issuances of the trial and the appellate courts.
3
Rollo (G.R. No. 195728), pp. 12-34.
4
Id. at 113-126; Penned by Associate Justice Juan Q. Enriquez, Jr., and concurred in by Associate Justices
Ramon M. Bato, Jr. and Fiorito S. Macalino.
5
Id. at 128-129.
6
Id. at 125.
7
Rollo (G.R. No. 211329), pp. 3-24
8
Id. at 52-53; Penned by Assisting Judge Maria Amifaith S. Fider-Reyes.
9
Id. at 53.
10
Id. at 117; Pursuant to the Court's Resolution dated 23 April 2014.
11
Rollo (G.R. No. 195728), p. 15.
12
Id. at 45-55.
13
Id. at 51.
14
Id. at 62-63.
15
Id. at 63.
16
Id. at 56.
17
Id. at 56-57.
18
Id. at 58.
19
Id. at 59.
20
Id. at. 60.
21
Id. at 59-60.
22
Id. at 60.
23
Id. at 35-42.
24
Id. at 41.
25
Id. at 61-73.
26
Id. at 65.
27
Id. at 67-69.
28
Id. at 77-80.
29
Id. at 85-86.
30
Id. at 87-97.
31
Id. at 95.
32
Id. at I 05.
33
Id. at I I I .
34
Id. at 152.
35
Id. at 152-172.
36
Id. at 113-126.
37
Id. at 125.
38
Id. at. 128-129.
39
Id. at 12-29.
40
Rollo (G.R. No. 211329), pp. 54-61.
41
Id. at 52-53.
42
Id. at 3-24.
43
Id.
44
375 Phil. 142 (1999).
45
Id. at 148.
46
Rollo (G.R. No. 195728), p. 45.
47
Group Policy, Article IV, Section 20. See id. at 5 ! .
48
Asian Construction and Development Corp. v. CA, 498 Phil. 36 (2005).
49
Rule 6, Section 13, Revised Rules of Court.
50
137 Phil. 239 (1969).
51
Rollo (G.R. No. 195728), p. 125.
52
Id. at 146.
53
Section 3. Default; declaration ~f - If the defending party fails to answer within the time allowed therefor,
the court shall, upon motion of the claiming party with notice to the defending party, and proof of such
failure, declare the defending party in default.1âwphi1 Thereupon, the court shall proceed to render judgment
granting the claimant such relief as his pleading may warrant, unless the court in its discretion requires the
claimant to submit evidence. Such reception of evidence may be delegated to the clerk of court.

xxxx
54
Section 5. Effect of failure to appear. -The failure of the plaintiff to appear when so required pursuant to the
next preceding section shall be cause for dismissal of the action. The dismissal shall be with prejudice, unless
other-wise ordered by the court. A similar failure on the part of the defendant shall be cause to allow the
plaintiff to present his evidence ex parte and the court to render judgment on the basis thereof.
55
Valentina Rosario v. Alonzo, 118 Phil. 404 (1963).
56
G.R. No. 196063, 14 December 2011, 662 SCRA 684.
57
Fil-Estate Golf and Development, Inc. v. Navarro, 553 Phil. 48 (2007), citing Lu Ym v. Nabua, 492 Phil.
397 (2005).

The Lawphil Project - Arellano Law Foundation

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.

DECISION
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. x x x. 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; x x x[1]

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire their 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 respondents 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 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
attorneys 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 the trial court decision, deleting however
the awards for exemplary damages and attorneys 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 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.[4] The basis of such requirement of insurable interest in property
insured is based on sound public policy: to prevent a person from taking out an
insurance policy on property upon which he has no insurable interest and collecting
the proceeds of said policy in case of loss of the property.In such a case, the contract
of insurance is a mere wager which is void under Section 25 of the Insurance Code,
which provides:
SECTION 25. Every stipulation in a policy of Insurance for the payment of
loss, whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.
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.
Section 17. The measure of an insurable interest in property is the extent to
which the insured might be damnified by loss of injury thereof."
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
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.

[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.

THIRD DIVISION
 [G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF

APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of

Court seeking to annul and set aside the July 15, 1993 Decision[1] and October
22, 1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV NO. 28779,
which modified the Ruling[4] of the Regional Trial Court of Pasig, Branch 161,
in Civil Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills,
Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and
eventually increased to One Million Five Hundred Thousand (P1,500,000.00)
Pesos, covering the period from August 14, 1980 to March 13, 1981.

Pertinent portions of subject policy on the buildings insured, and location

thereof, read:

"On stocks of finished and/or unfinished products, raw materials and

supplies of every kind and description, the properties of the Insureds
and/or held by them in trust, on commission or on joint account with
others and/or for which they (sic) responsible in case of loss whilst
contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound at MAGDALO STREET, BARRIO UGONG,
PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.

xxx...............xxx...............xxx

Said building of four-span lofty one storey in height with mezzanine

portions is constructed of reinforced concrete and hollow blocks and/or
concrete under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly plant, offices,
warehouse and caretaker's quarters.

'Bounds in front partly by one-storey concrete building under

galvanized iron roof occupied as canteen and guardhouse, partly by
building of two and partly one storey constructed of concrete below,
timber above undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or tracking/ packing, beyond
which is the aforementioned Magdalo Street; on its right and left by
driveway, thence open spaces, and at the rear by open spaces.'"[5]
The same pieces of property insured with the petitioner were also insured with
New India Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the
middle portion of its four-span building and partly gutting the left and right
sections thereof. A two-storey building (behind said four-span building) where
fun and amusement machines and spare parts were stored, was also destroyed
by the fire.

Transworld filed its insurance claims with Rizal Surety & Insurance Company
and New India Assurance Company but to no avail.

On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages, docketed as
Civil Case No. 46106 before Branch 161 of the then Court of First Instance of
Rizal; praying for judgment ordering Rizal Insurance and New India to pay the
amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's fees,
exemplary damages, expenses of litigation of P50,000.00 and costs of suit.[6]

Petitioner Rizal Insurance countered that its fire insurance policy sued upon
covered only the contents of the four-span building, which was partly burned,
and not the damage caused by the fire on the two-storey annex building.[7]

On January 4, 1990, the trial court rendered its decision; disposing as follows:

"ACCORDINGLY, judgment is hereby rendered as follows:

(1)Dismissing the case as against The New India Assurance Co., Ltd.;

(2) Ordering defendant Rizal Surety And Insurance Company to pay

Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00
representing the actual value of the losses suffered by it; and

(3) Cost against defendant Rizal Surety and Insurance Company.

SO ORDERED."[8]

Both the petitioner, Rizal Insurance Company, and private respondent,

Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out
with its decision of July 15, 1993 under attack, the decretal portion of which
reads:

"WHEREFORE, and upon all the foregoing, the decision of the court
below is MODIFIED in that defendant New India Assurance Company
has and is hereby required to pay plaintiff-appellant the amount of
P1,818,604.19 while the other Rizal Surety has to pay the plaintiff-
appellant P470,328.67, based on the actual losses sustained by plaintiff
Transworld in the fire, totalling P2,790,376.00 as against the amounts
of fire insurance coverages respectively extended by New India in the
 amount of P5,800,000.00 and Rizal Surety and Insurance Company in
the amount of P1,500,000.00.

No costs.

SO ORDERED."[9]

On August 20, 1993, from the aforesaid judgment of the Court of Appeals
New India appealed to this Court theorizing inter alia that the private
respondent could not be compensated for the loss of the fun and amusement
machines and spare parts stored at the two-storey building because it
(Transworld) had no insurable interest in said goods or items.

On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-
111118 (New India Assurance Company Ltd. vs. Court of Appeals).

Petitioner Rizal Insurance and private respondent Transworld, interposed a

Motion for Reconsideration before the Court of Appeals, and on October 22,
1993, the Court of Appeals reconsidered its decision of July 15, 1993, as
regards the imposition of interest, ruling thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only

insofar as the imposition of legal interest is concerned, that, on the
assessment against New India Assurance Company on the amount of
P1,818,604.19 and that against Rizal Surety & Insurance Company on
the amount of P470,328.67, from May 26, 1982 when the complaint
was filed until payment is made. The rest of the said decision is
retained in all other respects.

SO ORDERED."[10]

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

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT

THE ANNEX BUILDING WHERE THE BULK OF THE BURNED
PROPERTIES WERE STORED, WAS INCLUDED IN THE
COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL
SURETY TO TRANSWORLD.

II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B)

ERRED IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-
C-RIZAL SURETY), TAKEN IMMEDIATELY AFTER THE FIRE,
WHICH CLEARLY SHOW THAT THE PREMISES OCCUPIED BY
TRANSWORLD, WHERE THE INSURED PROPERTIES WERE
LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.

III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING

THAT TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH
AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED
 CIVIL ACTION, AND IN NOT ORDERING TRANSWORLD TO
PAY TO RIZAL SURETY MORAL AND PUNITIVE DAMAGES
(ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND
EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL
CODE).[11]

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon

protected only the contents of the main building (four-span),[12] and did not
include those stored in the two-storey annex building. On the other hand, the
private respondent theorized that the so called "annex" was not an annex but
was actually an integral part of the four-span building[13]and therefore, the
goods and items stored therein were covered by the same fire insurance policy.

Resolution of the issues posited here hinges on the proper interpretation of the
stipulation in subject fire insurance policy regarding its coverage, which reads:

"xxx contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in

question did not limit its coverage to what were stored in the four-span
building. As opined by the trial court of origin, two requirements must concur
in order that the said fun and amusement machines and spare parts would be
deemed protected by the fire insurance policy under scrutiny, to wit:

"First, said properties must be contained and/or stored in the areas

occupied by Transworld and second, said areas must form part of the
building described in the policy xxx"[14]

'Said building of four-span lofty one storey in height

with mezzanine portions is constructed of reinforced
concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly
plant, offices, ware house and caretaker's quarter.'

The Court is mindful of the well-entrenched doctrine that factual findings by

the Court of Appeals are conclusive on the parties and not reviewable by this
Court, and the same carry even more weight when the Court of Appeals has
affirmed the findings of fact arrived at by the lower court.[15]

In the case under consideration, both the trial court and the Court of Appeals
found that the so called "annex " was not an annex building but an integral and
inseparable part of the four-span building described in the policy and
consequently, the machines and spare parts stored therein were covered by the
fire insurance in dispute. The letter-report of the Manila Adjusters and
Surveyor's Company, which petitioner itself cited and invoked, describes the
"annex" building as follows:

"Two-storey building constructed of partly timber and partly concrete

hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty
storey building and thence by property fence wall."[16]

Verily, the two-storey building involved, a permanent structure which adjoins

and intercommunicates with the "first right span of the lofty storey building",
[17]
formed part thereof, and meets the requisites for compensability under the
fire insurance policy sued upon.

So also, considering that the two-storey building aforementioned was already

existing when subject fire insurance policy contract was entered into on
January 12, 1981, having been constructed sometime in 1978,[18] petitioner
should have specifically excluded the said two-storey building from the
coverage of the fire insurance if minded to exclude the same but if did not, and
instead, went on to provide that such fire insurance policy covers the products,
raw materials and supplies stored within the premises of respondent
Transworld which was an integral part of the four-span building occupied by
Transworld, knowing fully well the existence of such building adjoining and
intercommunicating with the right section of the four-span building.

After a careful study, the Court does not find any basis for disturbing what the
lower courts found and arrived at.

Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured
thereby. Article 1377 of the New Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity"

Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers
drafted the fire insurance policy contract under scrutiny. Citing the aforecited
provision of law in point, the Court in Landicho vs. Government Service
Insurance System,[19] ruled:

"This is particularly true as regards insurance policies, in respect of

which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed strictly
and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment
to the insured, especially where forfeiture is involved' (29 Am. Jur.,
181), and the reason for this is that the 'insured usually has no voice in
the selection or arrangement of the words employed and that the
language of the contract is selected with great care and deliberation
 by experts and legal advisers employed by, and acting exclusively in
the interest of, the insurance company.' (44 C.J.S., p. 1174).""[20]

Equally relevant is the following disquisition of the Court in Fieldmen's

Insurance Company, Inc. vs. Vda. De Songco,[21] to wit:

"'This rigid application of the rule on ambiguities has become

necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered into
by parties bargaining on an equal footing, such contracts (of which
policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the part
of courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain,
13 Dec. 1934, 27 February 1942.)'"[22]

The issue of whether or not Transworld has an insurable interest in the fun and
amusement machines and spare parts, which entitles it to be indemnified for
the loss thereof, had been settled in G.R. No. L-111118, entitled New India
Assurance Company, Ltd., vs. Court of Appeals, where the appeal of New
India from the decision of the Court of Appeals under review, was denied with
finality by this Court on February 2, 1994.

The rule on conclusiveness of judgment, which obtains under the premises,

precludes the relitigation of a particular fact or issue in another action between
the same parties based on a different claim or cause of action. "xxx the
judgment in the prior action operates as estoppel only as to those matters in
issue or points controverted, upon the determination of which the finding or
judgment was rendered. In fine, the previous judgment is conclusive in the
second case, only as those matters actually and directly controverted and
determined and not as to matters merely involved therein."[23]

Applying the abovecited pronouncement, the Court, in Smith Bell and

Company (Phils.), Inc. vs. Court of Appeals,[24] held that the issue of
negligence of the shipping line, which issue had already been passed upon in a
case filed by one of the insurers, is conclusive and can no longer be relitigated
in a similar case filed by another insurer against the same shipping line on the
basis of the same factual circumstances. Ratiocinating further, the Court
opined:

"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai
Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually,
 directly and expressly raised, controverted and litigated in C.A.-G.R.
No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and
held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this Court
in G.R. No. L-48839 in a Resolution dated 6 December 1987. The
Reyes Decision thus became final and executory approximately two (2)
years before the Sison Decision, which is assailed in the case at bar,
was promulgated. Applying the rule of conclusiveness of judgment, the
question of which vessel had been negligent in the collision between
the two (2) vessels, had long been settled by this Court and could no
longer be relitigated in C.A.-G.R. No. 61206-R. Private respondent Go
Thong was certainly bound by the ruling or judgment of Reyes, L.B., J.
and that of this Court. The Court of Appeals fell into clear and
reversible error when it disregarded the Decision of this Court
affirming the Reyes Decision."[25]

The controversy at bar is on all fours with the aforecited case. Considering that
private respondent's insurable interest in, and compensability for the loss of
subject fun and amusement machines and spare parts, had been adjudicated,
settled and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and
by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994,
the same can no longer be relitigated and passed upon in the present case.
Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the
ruling of the Court of Appeals and of this Court that the private respondent has
an insurable interest in the aforesaid fun and amusement machines and spare
parts; and should be indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable.[26]

All things studiedly considered and viewed in proper perspective, the Court is
of the irresistible conclusion, and so finds, that the Court of Appeals erred not
in holding the petitioner, Rizal Surety Insurance Company, liable for the
destruction and loss of the insured buildings and articles of the private
respondent.

WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are
AFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

[1]
Annex "A"; Rollo, pp. 27-49.
[2]
Annex "B"; Rollo, pp. 51- 52.
[3]
Special Tenth Division; composed of Associate Justices: Cezar D. Francisco
(Ponente), Gloria C. Paras (Chairman), and Ricardo P. Galvez (Member)
[4]
Penned by Judge Efren D. Villanueva.
[5]
Decision, Annex "A"; Rollo, pp. 28-29.
[6]
Rollo, p. 59.
[7]
Rollo, p. 62.
[8]
Decision, Rollo, pp. 78-79.
[9]
Decision, Rollo, p. 49.
[10]
Resolution, Rollo, p. 52.
[11]
Petition, Rollo, pp. 12-13.
[12]
Answer, Rollo, p. 62.
[13]
Rollo, p. 76.
[14]
Rollo, p. 77.
[15]
Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999;
citing: Meneses vs. Court of Appeals, 246 SCRA 162, p.171; Coca Cola Bottlers Phil.,
Inc vs. Court of Appeals, 229 SCRA 533; and Binalay vs. Manalo, 195 SCRA 374.
[16]
Petitioner, Rollo, p. 17.
[17]
Rollo, p. 17.
[18]
Decision, Rollo, p. 69.
[19]
44 SCRA 7.
[20]
Ibid., pp. 12-13, citing: Calanoc vs. Court of Appeals, 98 Phil. 79, 84. See, also,
H.E. Heacock Co. vs. Macondray, 42, Phil. 205; Rivero vs. Robe, 54 Phil. 982;
Asturias Sugar Central vs. The Pure Cane Molasses Co., 57 Phil. 519; Gonzales vs. La
Previsora Filipina, 74 Phil. 165; Del Rosario vs. The Equitable Insurance, 620 O.G.
5400, 5403-04.
[21]
25 SCRA 70.
[22]
Ibid., p. 75.
[23]
Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA 201, p.
209; citing: Tingson vs. Court of Appeals, 49 SCRA 429.
[24]
Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, supra.
[25]
Ibid., pp. 210-211.
[26]
Rollo, p. 43.
SECOND DIVISION

G.R. No. 171379 : January 10, 2011

JOSE MARQUES and MAXILITE TECHNOLOGIES, INC., Petitioners, v. FAR EAST BANK AND TRUST
COMPANY, FAR EAST BANK INSURANCE BROKERS, INC., and MAKATI INSURANCE COMPANY,
Respondents.

G.R. No. 171419 : January 10, 2011

FAR EAST BANK AND TRUST COMPANY and MAKATI INSURANCE COMPANY, Petitioners, v. JOSE
MARQUES and MAXILITE TECHNOLOGIES, INC., Respondents.

DECISION

CARPIO, J.:

The Case

These consolidated petitions for reviewcralaw1cralaw assail the 31 May 2005 Decision cralaw2cralaw
and the 26 January 2006 Resolutioncralaw3cralaw of the Court of Appeals-Cebu City in CA-G.R. CV No.
62105. The Court of Appeals affirmed with modifications the 4 September 1998
Decisioncralaw4cralaw of the Regional Trial Court of Cebu City, Branch 58, in Civil Case No. CEB-18979.

The Facts

Maxilite Technologies, Inc. (Maxilite) is a domestic corporation engaged in the importation and trading
of equipment for energy-efficiency systems. Jose N. Marques (Marques) is the President and
controlling stockholder of Maxilite.

Far East Bank and Trust Co. (FEBTC)cralaw5cralaw is a local bank which handled the financing and
related requirements of Marques and Maxilite. Marques and Maxilite maintained accounts with
FEBTC. Accordingly, FEBTC financed Maxilite's capital and operational requirements through loans
secured with properties of Marques under the latter's name. Among Maxilite's and Marques'
transactions with FEBTC were: chanrob1esvirtwallawlibrary

a. A straight loan in the name of Jose N. Marques for Maxilite at the original principal amount of P 1
million. This is secured by real estate mortgage. From said original principal amount, the bank
increased it by P 300, 000.00 about 26 October 1994 to enable the wiping out of Maxilite's Trust
Receipts Account and simplify the remaining accounts into straight loan accounts.

b. A straight loan in the name of Maxilite Technologies, Inc. for a principal amount of P 2 million. This
is secured with a Real Estate Mortgage of Marques' residential property.

c. Master Card transactions covering two (2) Master Card Accounts of Marques, and

d. Local credit card transactions covering one credit card account of Marques.cralaw6cralawredlaw

Far East Bank Insurance Brokers, Inc. (FEBIBI) is a local insurance brokerage corporation while Makati
Insurance Company cralaw7cralaw is a local insurance company. Both companies are subsidiaries of
FEBTC.cralaw8cralawredlaw

On 17 June 1993, Maxilite and Marques entered into a trust receipt transaction with FEBTC, in the sum
of US$80, 765.00, for the shipment of various high-technology equipment from the United States,
cralaw9cralaw with the merchandise serving as collateral. The foregoing importation was covered by a
trust receipt document signed by Marques on behalf of Maxilite, which pertinently reads:
chanrob1esvirtwallawlibrary

The undersigned (Marques) further agree(s) to keep said merchandise insured against fire to its full
value, payable to the said bank, at the cost and expense of the undersigned, who hereby further
agree(s) to pay all charges for storage on said merchandise or any or other expenses incurred thereon.

x x xcralaw10cralawredlaw

Sometime in August 1993, FEBIBI, upon the advice of FEBTC, facilitated the procurement and
processing from Makati Insurance Company of four separate and independent fire insurance policies
over the trust receipted merchandise: (1) Policy No. BR-F-1016333, issued on 15 September 1993,
covering the period 12 August 1993 to 12 November 1993 in the amount of P 1, 000,
000.00;cralaw11cralaw (2) Policy No. BR-F-1016888, issued on 15 September 1993 covering the period
8 September 1993 to 8 December 1993 in the amount of P 605, 494.28;cralaw12cralaw (3) Policy No.
BR-F-1016930, issued on 18 October 1993, covering the period 14 October 1993 to 12 January 1994 in
the amount of P 527, 723.66;cralaw13cralaw and (4) Policy No. BR-F-1018392, issued on 14 December
1993, covering the period 1 December 1993 to 1 March 1994 in the amount of P 725,
000.00.cralaw14cralaw Maxilite paid the premiums for these policies through debit arrangement.
FEBTC would debit Maxilite's account for the premium payments, as reflected in statements of
accounts sent by FEBTC to Maxilite.
On 19 August 1994, Insurance Policy No. 1024439, covering the period 24 June 1994 to 24 June 1995,
was released to cover the trust receipted merchandise. The policy relevantly provides:
chanrob1esvirtwallawlibrary

2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the
premium has been fully paid to and duly receipted by the Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent, broker or
Company official, shall be deemed invalid and of no effect.cralaw15cralawredlaw

Finding that Maxilite failed to pay the insurance premium in the sum of P 8, 265.60 for Insurance
Policy No. 1024439 covering the period 24 June 1994 to 24 June 1995, FEBIBI sent written reminders
to FEBTC, dated 19 October 1994, cralaw16cralaw 24 January 1995, cralaw17cralaw and 6 March
1995, to debit Maxilite's account.cralaw18cralawredlaw

On 24 and 26 October 1994, Maxilite fully settled its trust receipt account.

On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building along M.J. Cuenco Avenue, Cebu
City, where Maxilite's office and warehouse were located. As a result, Maxilite suffered losses
amounting to at least P 2.1 million, which Maxilite claimed against the fire insurance policy with
Makati Insurance Company. Makati Insurance Company denied the fire loss claim on the ground of
non-payment of premium. FEBTC and FEBIBI disclaimed any responsibility for the denial of the claim.

Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company. Maxilite prayed for (1)
actual damages totaling P 2.3 million representing full insurance coverage and "business opportunity
losses, " (2) moral damages, and (3) exemplary damages. cralaw19cralaw On the other hand, Marques
sought payment of actual, moral and exemplary damages, attorney's fees, and litigation expenses.
Maxilite and Marques also sought the issuance of a preliminary injunction or a temporary restraining
to enjoin FEBTC from (1) imposing penalties on their obligations; (2) foreclosing the real estate
mortage securing their straight loan accounts; and (3) initiating actions to collect their obligations.

FEBTC, FEBIBI, and Makati Insurance Company countered that Maxilite and Marques have no cause of
action against them and essentially denied the allegations in the complaint.

The Ruling of the Trial Court

In ruling in favor of Maxilite and Marques, the Regional Trial Court of Cebu City, Branch 58, explained:
chanrob1esvirtwallawlibrary

Considering the interest of the defendant FEBTC in the property insured, hence, its concern that the
insurance policy therefor has to be effected and enforceable, and considering that the payment of the
premium thereof was the procedure adopted by debiting the plaintiffs' account, the Court is of the
view that the non-payment of the premium of the insurance policy in question was due to the fault or
negligence of the defendant FEBTC. What could have happened to the interest of the defendant FEBTC
in the insurance policy in question had the fire occurred prior to the full settlement and payment of
plaintiff's Maxilite trust receipt account? Would defendant FEBTC have tossed the blame on the non-
payment of premium to the plaintiffs?

Although there were reminders by defendant FEBIBI of the non-payment of the premium, the same
were made by said defendant through the defendant FEBTC and not to the plaintiffs directly. Despite
said reminders, the first of which was made on October 19, 1994 when plaintiff Maxilite has sufficient
fund in its trust receipt account, defendant FEBTC did not heed the same and more so did it not care
to pay the premium after the plaintiff Maxilite fully and finally settled its trust receipt account with
defendant FEBTC as the latter has already lost its interest in the insurance policy in question by virtue
of said full payment. But despite the non-payment of the insurance premium, the defendant Makati
Insurance did not cancel the policy in question nor informed plaintiffs of its cancellation if the
insurance premium should not be paid. Just as defendant FEBIBI failed to notify directly the plaintiffs
of the said non-payment. Considering the relationship of the three (3) defendants herein, as
undeniably sister companies, the non-payment of the premium of the insurance policy in question
should be imputable to their fault or negligence. Under the factual milieu in the case at bar, the Court
finds it just and equitable to hold said defendants liable to pay all the consequent damages suffered by
the plaintiffs and their liability is solidary (Art. 2194, Civil Code).cralaw20cralawredlaw

The trial court disposed of the case as follows: chanrob1esvirtwallawlibrary

WHEREFORE, premises considered, judgment is hereby rendered ordering the defendants to pay
jointly and severally to the plaintiff Maxilite the sum of Two Million One Hundred Thousand Pesos ( P
2, 100, 000.00), Philippine Currency, representing the full coverage of Insurance Policy No.
1024439 (Exh. 'A'), as actual damages, plus interest of 12% per annum from filing of Complaint on July
11, 1996 until fully paid, to the plaintiff Marque[s] the sum of P 400, 000.00 as moral damages, to
both plaintiffs the sum of P 500, 000.00 as exemplary damages, the sum of P 50, 000.00 as
attorney's fees, the sum of P 23, 082.50, representing the filing fees, as litigation expenses, and to
pay the costs.

The counter-claims are hereby dismissed.

The writ of preliminary injunction is hereby made permanent.

SO ORDERED.cralaw21cralawredlaw

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court's decision, with modifications, on the following grounds:
chanrob1esvirtwallawlibrary

First, the relations among defendants with each other are closely related and so intertwined. The said
three defendants, FEBTC, FEBIBI and MICI, are sister companies. This was never denied by the
defendants themselves.

Second, the insurance coverage was the business of sister companies FEBIBI and Makati Insurance, not
with FEBTC, which has been the bank of plaintiffs which handled the latter's financing and related
transactions. Stated a bit differently, defendant FEBTC handled the financing and related requirements
of plaintiffs; defendant FEBIBI on the other hand is an insurance brokerage company of defendant
FEBTC, while Makati Insurance is the insurance (arm) company of both defendants FEBIBI and FEBTC.

Third, defendant FEBTC caused FEBIBI to facilitate the insurance coverage of plaintiffs. FEBIBI then
asked Makati Insurance to issue the subject policy. Makati Insurance delivered the policy to FEBIBI
which it tasked with the collection of premium. FEBIBI in turn delivered the policy to FEBTC from
where it sought the payment of the premiums.

Fourth, it must be noted that the cover note and policy was supposedly issued and made effective on
June 24, 1994, when the trust receipt account was still outstanding and the insured merchandise was
still theoretically owned by the bank. Thus, for all intents and purposes, it was to the best interest and
protection of the bank to see to it that the goods were properly covered by insurance.

Fifth, the payment of premium has never been made an issue when the subject policy was still
separated into three. Or even after the said consolidation into one policy (No. 1024439), still, payment
of the premium has never become an issue.

xxx

For another, if We were to believe defendants' claim that the premium for the subject policy was not
paid, then defendants should have cancelled the policy long before. But even up to the time the fire
gutted plaintiffs' warehouse in March 1995, defendants acknowledged that the subject policy
remained effective. x x x

Furthermore, there was no notice of cancellation or any communication from defendants sent to
plaintiffs that the policy shall be cancelled because of non-payment of premiums. Thus, the more
reasonable and logical conclusion is that the subject policy was still fully in force because plaintiffs are
still paying its premiums and defendants are collecting the same through debit
account.cralaw22cralawredlaw

The Court of Appeals disposed of the case as follows: chanrob1esvirtwallawlibrary

UPON THE VIEW WE TAKE OF THIS CASE, judgment appealed from is hereby MODIFIED in such that:
chanrob1esvirtwallawlibrary

a. the interest shall be at the rate of six percent (6%) per annum to run from the time of demand on
April 11, 1995, in accordance with Article 1589 of the Civil Code, until the finality of this decision;
chanroblesvirtualawlibrary

b. the moral damages of P 400, 000.00 is reduced to P 50, 000.00; chanroblesvirtualawlibrary

c. the exemplary damages of P 500, 000.00 is reduced to P 50, 000.00; and

d. the writ of preliminary injunction previously issued lifted and set aside.

In all other respects, judgment appealed from is AFFIRMED. Without pronouncement as to costs.

SO ORDERED.cralaw23cralawredlaw

Hence, these petitions.

The Issues

In G.R. No. 171379, petitioners assail the Court of Appeals' reduction of (1) the interest rate from 12%
to 6% per annum to be imposed on respondents' liabilities; and (2) the award of moral and exemplary
damages. Petitioners also question the portion of the Court of Appeals' judgment allowing FEBTC to
foreclose the real estate mortgage securing petitioners' loans and disallowing legal compensation for
the parties' mutual obligations.

In G.R. No. 171419, petitioners challenge the Court of Appeals' findings that (1) the premium for the
subject insurance policy has in fact been paid; (2) FEBTC, FEBIBI and Makati Insurance Company are
jointly and severally liable to pay respondents the full coverage of the subject insurance policy despite
(a) their separate juridical personalities; (b) the absence of any fault or negligence on their part; and
(c) respondents' failure to prove the extent of the alleged loss. Petitioners further impugn the award
of damages and attorney's fees.

The Court's Ruling

The petition in G.R. No. 171319 lacks merit, whereas the petition in G.R. No. 171419 is partially
meritorious.

Essentially, Maxilite and Marques invoke estoppel in claiming against FEBTC, FEBIBI, and Makati
Insurance Company the face value of the insurance policy. In their complaint, Maxilite and Marques
alleged they were led to believe and they in fact believed that the settlement of Maxilite's trust
receipt account included the payment of the insurance premium.cralaw24cralaw Maxilite and
Marques faulted FEBTC "if it failed to transmit the premium payments on subject insurance coverage
contrary to its represented standard operating procedure of solely handling the insurance coverage
and past practice of debiting [Maxilite's] account."cralaw25cralawredlaw
Article 1431 of the Civil Code defines estoppel as follows: chanrob1esvirtwallawlibrary

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.

Meanwhile, Section 2(a), Rule 131 of the Rules of Court provides: chanrob1esvirtwallawlibrary

SEC. 2. Conclusive presumptions. - The following are instances of conclusive presumptions:

chanrob1esvirtwallawlibrary

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing is true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act or omission, be permitted to falsify it.

In estoppel, a party creating an appearance of fact, which is false, is bound by that appearance as
against another person who acted in good faith on it.cralaw26cralaw Estoppel is based on public
policy, fair dealing, good faith and justice.cralaw27cralaw Its purpose is to forbid one to speak against
his own act, representations, or commitments to the injury of one who reasonably relied
thereon.cralaw28cralaw It springs from equity, and is designed to aid the law in the administration of
justice where without its aid injustice might result.cralaw29cralawredlaw

In Santiago Syjuco, Inc. v. Castro, cralaw30cralaw the Court stated that "estoppel may arise from
silence as well as from words." 'Estoppel by silence' arises where a person, who by force of
circumstances is obliged to another to speak, refrains from doing so and thereby induces the other to
believe in the existence of a state of facts in reliance on which he acts to his prejudice.cralaw31cralaw
Silence may support an estoppel whether the failure to speak is intentional or
negligent.cralaw32cralawredlaw

Both trial and appellate courts basically agree that FEBTC is estopped from claiming that the insurance
premium has been unpaid. That FEBTC induced Maxilite and Marques to believe that the insurance
premium has in fact been debited from Maxilite's account is grounded on the the following facts: (1)
FEBTC represented and committed to handle Maxilite's financing and capital requirements, including
the related transactions such as the insurance of the trust receipted merchandise; (2) prior to the
subject Insurance Policy No. 1024439, the premiums for the three separate fire insurance policies had
been paid through automatic debit arrangement; (3) FEBIBI sent FEBTC, not Maxilite nor Marques,
written reminders dated 19 October 1994, 24 January 1995, and 6 March 1995 to debit Maxilite's
account, establishing FEBTC's obligation to automatically debit Maxilite's account for the premium
amount; (4) there was no written demand from FEBTC or Makati Insurance Company for Maxilite or
Marques to pay the insurance premium; (5) the subject insurance policy was released to Maxilite on
19 August 1994; and (6) the subject insurance policy remained uncancelled despite the alleged non-
payment of the premium, making it appear that the insurance policy remained in force and binding.

Moreover, prior to the full settlement of the trust receipt account on 24 and 26 October 1994, FEBTC
had insurable interest over the merchandise, and thus had greater reason to debit Maxilite's account.
Further, as found by the trial court, and apparently undisputed by FEBTC, FEBIBI and Makati Insurance
Company, Maxilite had sufficient funds at the time the first reminder, dated 19 October 1994, was sent
by FEBIBI to FEBTC to debit Maxilite's account for the payment of the insurance premium. Since (1)
FEBTC committed to debit Maxilite's account corresponding to the insurance premium; (2) FEBTC had
insurable interest over the property prior to the settlement of the trust receipt account; and (3)
Maxilite's bank account had sufficient funds to pay the insurance premium prior to the settlement of
the trust receipt account, FEBTC should have debited Maxilite's account as what it had repeatedly
done, as an established practice, with respect to the previous insurance policies. However, FEBTC
failed to debit and instead disregarded the written reminder from FEBIBI to debit Maxilite's account.
FEBTC's conduct clearly constitutes negligence in handling Maxilite's and Marques' accounts.
Negligence is defined as "the omission to do something which a reasonable man, guided upon those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent man and reasonable man could not do." cralaw33cralawredlaw

As a consequence of its negligence, FEBTC must be held liable for damages pursuant to Article 2176 of
the Civil Code which states "whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done." Indisputably, had the insurance premium been
paid, through the automatic debit arrangement with FEBTC, Maxilite's fire loss claim would have been
approved. Hence, Maxilite suffered damage to the extent of the face value of the insurance policy or
the sum of P 2.1 million.

Contrary to Maxilite's and Marques' view, FEBTC is solely liable for the payment of the face value of
the insurance policy and the monetary awards stated in the Court of Appeals' decision. Suffice it to
state that FEBTC, FEBIBI, and Makati Insurance Company are independent and separate juridical
entities, even if FEBIBI and Makati Insurance Company are subsidiaries of FEBTC. Absent any showing
of its illegitimate or illegal functions, a subsidiary's separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary shall be confined to those arising in their
respective business.cralaw34cralaw Besides, the records are bereft of any evidence warranting the
piercing of corporate veil in order to treat FEBTC, FEBIBI, and Makati Insurance Company as a single
entity. Likewise, there is no evidence showing FEBIBI's and Makati Insurance Company's negligence as
regards the non-payment of the insurance premium.

The Court agrees with the Court of Appeals in reducing the interest rate from 12% to 6% as the
obligation to pay does not arise from a loan or forbearance of money. In Eastern Shipping Lines, Inc. v.
Court of Appeals, cralaw35cralaw the Court laid down the following guidelines for the application of
the proper interest rates: chanrob1esvirtwallawlibrary

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:
chanrob1esvirtwallawlibrary

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 . . . 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 forbearance of credit. (Emphasis supplied)
With respect to Maxilite's and Marques' invocation of legal compensation, we find the same devoid of
merit. Aside from their bare allegations, there is no clear and convincing evidence that legal
compensation exists in this case. In other words, Maxilite and Marques failed to establish the essential
elements of legal compensation. Therefore, Maxilite's and Marques' claim of legal compensation must
fail.

WHEREFORE , we AFFIRM with MODIFICATION the 31 May 2005 Decision and the 26 January 2006
Resolution of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. Only Far East Bank and Trust
Company, and not Far East Bank Insurance Brokers, Inc. or Makati Insurance Company, is
ORDERED to PAY the face value of the subject insurance policy and the monetary awards stated
in the Court of Appeals' decision.

SO ORDERED .

ANTONIO T. CARPIO
Associate Justice

WE CONCUR: chanrob1esvirtwallawlibrary

BRION,*cralaw PERALTA, ABAD, and MENDOZA, JJ.

cralaw Endnotes:

cralaw*cralaw Designated additional member per Raffle dated 9 June 2010.

cralaw1cralaw Under Rule 45 of the Rules of Court.

cralaw2cralaw Rollo (G.R. No. 171419), pp. 94-113. Penned by Associate Justice Vicente L. Yap, with
Associate Justices Isaias P. Dicdican and Enrico A. Lanzanas concurring.

cralaw3cralaw Id. at 114-118.

cralaw4cralaw Id. at 631-664. Penned by Judge Jose P. Soberano, Jr.

cralaw5cralaw FEBTC has been merged with Bank of the Philippine Islands (BPI), which is the surviving
corporation.

cralaw6cralaw Rollo (G.R. No. 171379), p. 157.

cralaw7cralaw Now known as BPI/MS Insurance Corporation (BPI/MS-IC), id. at 198.

cralaw8cralaw Rollo (G.R. No. 171419), p. 330; TSN, 9 February 1998, p. 20.

cralaw9cralaw Id. at 251.

cralaw10cralaw Id. at 225; TSN, 31 July 1997, p. 8 (Benjamin Torno).

cralaw11cralaw Id. at 306.

cralaw12cralaw Id. at 309.

cralaw13cralaw Id. at 310.

cralaw14cralaw Id. at 308.

cralaw15cralaw Id. at 414.

cralaw16cralaw Id. at 403.

cralaw17cralaw Id. at 404.

cralaw18cralaw Id. at 405.

cralaw19cralaw Id. at 616-617.

cralaw20cralaw Id. at 661-662.

cralaw21cralaw Id. at 663-664.

cralaw22cralaw Id. at 107-109.

cralaw23cralaw Id. at 112-113.

cralaw24cralaw Id. at 605.

cralaw25cralaw Id. at 608.

cralaw26cralaw Aquino, Ramon C., The Civil Code of the Philippines, Vol. 2, 1990 Edition, p. 508, citing
Strong v. Gutierrez Repide, 6 Phil. 680, 685.

cralaw27cralaw Id. at 509.

cralaw28cralaw Id.

cralaw29cralaw Id., citing 28 Am Jur 2nd 28; PNB v. Perez, 183 Phil. 54 (1979); Lazo v. Republic Surety
& Ins. Co., Inc., 142 Phil. 158 (1970).

cralaw30cralaw G.R. No. 70403, 7 July 1989, 175 SCRA 171, 192, citing 31 C.J.S., pp. 490-494.

cralaw31cralaw Id.

cralaw32cralaw Id.

cralaw33cralaw Bank of the Philippine Islands v. Suaez , G.R. No. 167750, 15 March 2010, 615 SCRA
291, 298.

cralaw34cralaw Nisce v. Equitable PCI Bank, Inc. , G.R. No. 167434, 19 February 2007, 516 SCRA 231,
258.

cralaw35cralaw G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.
THIRD DIVISION

VICENTE ONG LIM SING, JR., G.R. No. 168115

Petitioner,
Present:

YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ,
 CHICO-NAZARIO, and
NACHURA, JJ.

FEB LEASING & FINANCE Promulgated:

CORPORATION,
Respondent. June 8, 2007

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

DECISION

NACHURA, J.:

[1]
This is a petition for review on certiorari assailing the Decision dated March 15, 2005 and the
[2]
Resolution dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.

The facts are as follows:

[3]
On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease of equipment
and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim)
[4]
executed an Individual Guaranty Agreement with FEB to guarantee the prompt and faithful
performance of the terms and conditions of the aforesaid lease agreement. Corresponding Lease
[5]
Schedules with Delivery and Acceptance Certificates over the equipment and motor vehicles formed
part of the agreement.Under the contract, JVL was obliged to pay FEB an aggregate gross monthly
rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (P170,494.00).

JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears,
including penalty charges and insurance premiums, amounted to Three Million Four Hundred
Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On August 23, 2000,
[6]
FEB sent a letter to JVL demanding payment of the said amount. However, JVL failed to pay.

[7]
On December 6, 2000, FEB filed a Complaint with the Regional Trial Court of Manila,
docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and
John Doe.

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

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

A profound scrutiny of the provisions of the contract which is a contract of adhesion

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

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

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

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

xxxx

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

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

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

Thus, the court concluded with the following disposition:

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

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

SO ORDERED.[11]

[12]
On December 27, 2002, FEB filed its Notice of Appeal. Accordingly, on January 17, 2003,
[13]
the court issued an Order elevating the entire records of the case to the CA. FEB averred that the
trial court erred:

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

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

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid
balance of the price because of the previous payments made by the defendants for
the reasonable use of the units;
 D. When it failed to make a ruling or judgment on the Joint and Solidary
Liability of Vicente Ong Lim, Jr. to the Plaintiff-Appellant. [14]

[15]
On March 15, 2005, the CA issued its Decision declaring the transaction between the
[16]
parties as a financial lease agreement under Republic Act (R.A.) No. 8556. The fallo of the assailed
Decision reads:

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

SO ORDERED.[17]

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

THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT

THE UNDATED COMPLAINT WAS FILED BY SATURNINO J. GALANG, JR., WITHOUT
ANY AUTHORITY FROM RESPONDENTS BOARD OF DIRECTORS AND/OR SECRETARYS
CERTIFICATE.

II

THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO STRICTLY APPLY

SECTION 7, RULE 18 OF THE 1997 RULES OF CIVIL PROCEDURE AND NOW ITEM 1,
A(8) OF A.M. NO. 03-1-09 SC (JUNE 8, 2004).

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE APPEAL FOR
FAILURE OF THE RESPONDENT TO FILE ON TIME ITS APPELLANTS BRIEF AND TO
SEPARATELY RULE ON THE PETITIONERS MOTION TO DISMISS.

IV

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THE CONTRACT

BETWEEN THE PARTIES IS ONE OF A FINANCIAL LEASE AND NOT OF A CONTRACT
OF SALE.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PAYMENTS PAID
BY THE PETITIONER TO THE RESPONDENT ARE RENTALS AND NOT INSTALLMENTS
 PAID FOR THE PURCHASE PRICE OF THE SUBJECT MOTOR VEHICLES, HEAVY
MACHINES AND EQUIPMENT.

VI

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PREVIOUS

CONTRACT OF SALE INVOLVING THE PICK-UP VEHICLE IS OF NO CONSEQUENCE.

VII

THE HONORABLE COURT OF APPEALS FAILED TO TAKE

INTO CONSIDERATION THAT THE CONTRACT OF LEASE, A CONTRACT OF ADHESION,
CONCEALED THE TRUE INTENTION OF THE PARTIES, WHICH IS A CONTRACT OF SALE.

VIII

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE PETITIONER IS A

LESSEE WITH INSURABLE INTEREST OVER THE SUBJECT PERSONAL PROPERTIES.

IX

THE HONORABLE COURT OF APPEALS ERRED IN CONSTRUING THE INTENTIONS OF

THE COURT A QUO IN ITS USAGE OF THE TERM MERCHANTABILITY.[18]

We affirm the ruling of the appellate court.

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

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

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

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

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

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

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

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

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

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

[A] mode of extending credit through a non-cancelable lease contract

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

FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly
periodic payment of P170,494.00. The periodic payment by petitioner is sufficient to amortize at least
70% of the purchase price or acquisition cost of the said movables in accordance with the Lease
Schedules with Delivery and AcceptanceCertificates. The basic purpose of a financial leasing
transaction is to enable the prospective buyer of equipment, who is unable to pay for such equipment
in cash in one lump sum, to lease such equipment in the meantime for his use, at a fixed rental
sufficient to amortize at least 70% of the acquisition cost (including the expenses and a margin of
profit for the financial lessor) with the expectation that at the end of the lease period the
[23]
buyer/financial lessee will be able to pay any remaining balance of the purchase price.

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

Generally speaking, a financing company is not a buyer or seller of

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

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

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

[28]
The stipulation in Section 14 of the lease contract, that the equipment shall be insured at
the cost and expense of the lessee against loss, damage, or destruction from fire, theft, accident, or
other insurable risk for the full term of the lease, is a binding and valid stipulation. Petitioner, as a
lessee, has an insurable interest in the equipment and motor vehicles leased. Section 17 of the
Insurance Code provides that the measure of an insurable interest in property is the extent to which
the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly
damnified in case of loss, damage, or destruction of any of the properties leased.

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

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT
IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER
THEREOF ANDTHAT THERE ARE NO WARRANTIES, CONDITIONS, TERMS,
REPRESENTATION OR INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR
OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY FEATURE OR
ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS,
SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER
THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.[29]
 In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of defect of any
kind that will be found by the lessee in any of the equipment, recourse should be made to the
manufacturer. The financial lessor, being a financing company, i.e., an extender of credit rather than
an ordinary equipment rental company, does not extend a warranty of the fitness of the equipment
for any particular use. Thus, the financial lessee was precisely in a position to enforce such warranty
directly against the supplier of the equipment and not against the financial lessor. We find
[30]
nothing contra legem or contrary to public policy in such a contractual arrangement.

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

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

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

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO
Associate Justice Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is
hereby certified that the conclusions in the above decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court.

LEONARDO A. QUISUMBING
Acting Chief Justice

[1]
Rollo, pp. 72-104.
[2]
Id. at pp. 106-107.
[3]
Lease No. 27:95:20; id. at pp. 121-126.
[4]
Id. at pp. 127-128.
[5]
Id. at pp. 129-144.
[6]
Id. at p. 148.
[7]
Id. at pp. 146-155.
[8]
Id. at pp. 156-171.
[9]
Id. at p. 159.
[10]
Id. at pp. 218-220.
[11]
Id. at p. 222.
[12]
Id. at pp. 223-224.
[13]
Id. at p. 225.
[14]
Id. at p. 87.
[15]
Penned by Associate Justice Celia C. Librea-Leagogo.
[16]
An Act Amending Republic Act No. 5980, as amended, otherwise known as The
Financing Company Act.
.
[17]
Rollo, pp. 101-102.
[18]
Id. at pp. 41-42.
[19]
Cruz v. Fernando, Sr., G.R. No. 145470, December 9, 2005, 477 SCRA 182, 183.
[20]
Barnes v. Padilla, G. R. No. 160753, June 28, 2005, 461 SCRA 539.
[21]
G.R. No. 137672, May 31, 2000, 332 SCRA 789, 790.
[22]
Fabrigas v. San Francisco Del Monte, Inc., G.R. No. 152346, November 25, 2005,
476 SCRA 263.
[23]
Beltran v. PAIC Finance Corporation, G.R. No. 83113, May 19, 1992, 209 SCRA 118.
[24]
Id.
[25]
Id. at pp. 118-119.
[26]
Herrera v. Petrophil Corporation, G.R. No. L-48349, December 29, 1986, 146
SCRA 389.
[27]
Philippine Communications Satellite Corporation v. Globe Telecom, Inc., G.R. No.
147324, May 25, 2004, 429 SCRA 153.
[28]
Rollo, p. 123.
[29]
Id. at pp. 122-123.
[30]
Beltran v. PAIC Finance Corporation, supra, p. 119.
[31]
Article 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct and cases that are different
from those upon which the parties intended to agree.
[32]
Inter-Asia Services Corp. (International) v. Court of Appeals, G.R. No. 106427, October 21, 1996, 263
SCRA 417.

FIRST DIVISION

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

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF

APPEALS and JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

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

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

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

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

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

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

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

plaintiff;

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

SO ORDERED.[3]

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

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

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

(2) of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

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

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

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

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

In addition to the above condition, petitioner additionally required the applicant

for authorization to inquire about the applicants medical history, thus:

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

Petitioner cannot rely on the stipulation regarding Invalidation of agreement

which reads:

Failure to disclose or misrepresentation of any material information by the member in

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

The answer assailed by petitioner was in response to the question relating to the
medical history of the applicant. This largely depends on opinion rather than fact,
especially coming from respondents husband who was not a medical doctor. Where
matters of opinion or judgment are called for, answers made in good faith and without
intent to deceive will not avoid a policy even though they are untrue.[14]Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in inducing
the acceptance of the risk, or its acceptance at a lower rate of premium, and this is
likewise the rule although the statement is material to the risk, if the statement is
obviously of the foregoing character, since in such case the insurer is not justified in
relying upon such statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is fraudulently and
intentionally states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the facts
within his knowledge, since in such case the intent to deceive the insurer is obvious
and amounts to actual fraud.[15] (Underscoring ours)

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

1. Prior notice of cancellation to insured;

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

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

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

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

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

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

[1]
Record, p. 28.
[2]
Exhibit 4, Record, p. 156.
[3]
Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp. 134-135.
[4]
Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima,
concurred in by Associate Justices Fermin A. Martin, Jr. and Conchita Carpio
Morales; Rollo, p. 45.
[5]
Resolution dated July 23, 1996; Rollo, p. 48.
[6]
Section 48 of P.D. No. 1460 otherwise known as the Insurance Code.
[7]
Petition, pp. 13-14; Rollo, pp. 22-23.
[8]
See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2,
1986 ed. p. 6.
[9]
Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).
[10]
Record, p. 28.
[11]
Ibid.
[12]
Ibid.
 [13]
Ibid., p. 13.
[14]
Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.
[15]
Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of
America, supra; Boutelle v. Westchester Fire Ins. Co., 51 Vt 4 cited in 43 Am Jur 2d
1016.
[16]
Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan
Zee v. Asian Crusader Life Assurance Corp., 122 SCRA 461 [1983].
[17]
Section 48, Insurance Code.
[18]
Malayan Insurance v. Cruz Arnaldo, 154 SCRA 672 [1987].
[19]
Heirs of Ildefonso Cosculluela, Sr. v. Rico General Insurance Corporation, 179
SCRA 511 [1989].
[20]
Landicho v. GSIS, 44 SCRA 7 [1972]; Western Guaranty Company v. Court of
Appeals, 187 SCRA 652 [1990].
[21]
44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna Insurance Co. v. Rhodes,
170 F2d 111; Insurance Co. v. Norton, 96 U.S. 234, 24 L ed 689; Pfeiffer v. Missouri
State Life Ins. Co., 174 Ark 783, 297 SW 847.
[22]
See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109, 66 ALR3d
1196; Hunt v. Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am Jur 2d 289.
[23]
Record, p. 257.
[24]
Exhibit B, Exhibits D to D-7; Record, pp. 88-97.
Today is Sunday, December 10, 2017

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 200784 August 7, 2013

MALAYAN INSURANCE COMPANY, INC., PETITIONER,

vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.

DECISION

MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the October 27,
2011 Decision1 of the Court of Appeals (CA), which affirmed with modification the September 17, 2009
Decision2 of the Regional Trial Court, Branch 15, Manila (RTC), and its February 24, 2012
Resolution3 denying the motion for reconsideration filed by petitioner Malayan Insurance Company., Inc.
(Malayan).

The Facts

The undisputed factual antecedents were succinctly summarized by the CA as follows:

On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy No. F-00227-000073
to PAP Co., Ltd. (PAP Co.) for the latter’s machineries and equipment located at Sanyo Precision Phils. Bldg.,
Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building). The insurance, which was for Fifteen
Million Pesos (?15,000,000.00) and effective for a period of one (1) year, was procured by PAP Co. for Rizal
Commercial Banking Corporation (RCBC), the mortgagee of the insured machineries and equipment.

After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co. renewed the
policy on an "as is" basis. Pursuant thereto, a renewal policy, Fire Insurance Policy No. F-00227-000079, was
issued by Malayan to PAP Co. for the period May 13, 1997 to May 13, 1998.

On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries and
equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with Malayan in the amount
insured.

In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the time of the loss,
the insured machineries and equipment were transferred by PAP Co. to a location different from that
indicated in the policy. Specifically, that the insured machineries were transferred in September 1996 from
the Sanyo Building to the Pace Pacific Bldg., Lot 14, Block 14, Phase III, PEZA, Rosario, Cavite (Pace
Pacific). Contesting the denial, PAP Co. argued that Malayan cannot avoid liability as it was informed of the
transfer by RCBC, the party duty-bound to relay such information. However, Malayan reiterated its denial of
PAP Co.’s claim. Distraught, PAP Co. filed the complaint below against Malayan.4

Ruling of the RTC

On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay PAP Company Ltd
(PAP) an indemnity for the loss under the fire insurance policy as well as for attorney’s fees. The dispositive
portion of the RTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff. Defendant is
hereby ordered:

a)

To pay plaintiff the sum of FIFTEEN MILLION PESOS (₱15,000,000.00) as and for indemnity for the loss
under the fire insurance policy, plus interest thereon at the rate of 12% per annum from the time of loss on
October 12, 1997 until fully paid;

b)
To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (Ph₱500,000.00) as and by way of
attorney’s fees; [and,]

c)

To pay the costs of suit.

SO ORDERED.5

The RTC explained that Malayan is liable to indemnify PAP for the loss under the subject fire insurance
policy because, although there was a change in the condition of the thing insured as a result of the transfer of
the subject machineries to another location, said insurance company failed to show proof that such transfer
resulted in the increase of the risk insured against. In the absence of proof that the alteration of the thing
insured increased the risk, the contract of fire insurance is not affected per Article 169 of the Insurance Code.

The RTC further stated that PAP’s notice to Rizal Commercial Banking Corporation (RCBC) sufficiently
complied with the notice requirement under the policy considering that it was RCBC which procured the
insurance. PAP acted in good faith in notifying RCBC about the transfer and the latter even conducted an
inspection of the machinery in its new location.

Not contented, Malayan appealed the RTC decision to the CA basically arguing that the trial court erred in
ordering it to indemnify PAP for the loss of the subject machineries since the latter, without notice and/or
consent, transferred the same to a location different from that indicated in the fire insurance policy.

Ruling of the CA

On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC decision but deleted the
attorney’s fees. The decretal portion of the CA decision reads:

WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance Company must
indemnify PAP Co. Ltd the amount of Fifteen Million Pesos (Ph₱15,000,000.00) for the loss under the fire
insurance policy, plus interest thereon at the rate of 12% per annum from the time of loss on October 12,
1997 until fully paid. However, the Five Hundred Thousand Pesos (Ph₱500,000.00) awarded to PAP Co., Ltd.
as attorney’s fees is DELETED. With costs.

SO ORDERED.6

The CA wrote that Malayan failed to show proof that there was a prohibition on the transfer of the insured
properties during the efficacy of the insurance policy. Malayan also failed to show that its contractual consent
was needed before carrying out a transfer of the insured properties. Despite its bare claim that the original
and the renewed insurance policies contained provisions on transfer limitations of the insured properties,
Malayan never cited the specific provisions.

The CA further stated that even if there was such a provision on transfer restrictions of the insured properties,
still Malayan could not escape liability because the transfer was made during the subsistence of the original
policy, not the renewal policy. PAP transferred the insured properties from the Sanyo Factory to the Pace
Pacific Building (Pace Factory) sometime in September 1996. Therefore, Malayan was aware or should have
been aware of such transfer when it issued the renewal policy on May 14, 1997. The CA opined that since an
insurance policy was a contract of adhesion, any ambiguity must be resolved against the party that prepared
the contract, which, in this case, was Malayan.

Finally, the CA added that Malayan failed to show that the transfer of the insured properties increased the risk
of the loss. It, thus, could not use such transfer as an excuse for not paying the indemnity to PAP. Although
the insurance proceeds were payable to RCBC, PAP could still sue Malayan to enforce its rights on the policy
because it remained a party to the insurance contract.

Not in conformity with the CA decision, Malayan filed this petition for review anchored on the following

GROUNDS

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN

ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE
HONORABLE COURT WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
AND THUS RULING IN THE QUESTIONED DECISION AND RESOLUTION THAT
PETITIONER MALAYAN IS LIABLE UNDER THE INSURANCE CONTRACT
BECAUSE:

CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER

MALAYAN WAS ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF
THE RENEWAL POLICY ISSUED TO RESPONDENT PAP CO., THERE IS AN
AFFIRMATIVE WARRANTY OR A REPRESENTATION MADE BY THE INSURED
THAT THE "LOCATION OF THE RISK" WAS AT THE SANYO BUILDING. IT IS
LIKEWISE UNDISPUTED THAT WHEN THE RENEWAL POLICY WAS ISSUED TO
RESPONDENT PAP CO., THE INSURED PROPERTIES WERE NOT AT THE SANYO
BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE PACE
FACTORY AND IT WAS IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED
AGAINST OCCURRED. THESE SET OF UNDISPUTED FACTS, BY ITSELF ALREADY
ENTITLES PETITIONER MALAYAN TO CONSIDER THE RENEWAL POLICY AS
AVOIDED OR RESCINDED BY LAW, BECAUSE OF CONCEALMENT,
MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE WARRANTY UNDER
SECTIONS 27, 45 AND 74 IN RELATION TO SECTION 31 OF THE INSURANCE CODE,
RESPECTIVELY.

RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT
CONCEALMENT, MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE
WARRANTY WHEN IT FAILED TO PROVE THAT IT INFORMED PETITIONER
MALAYAN THAT THE INSURED PROPERTIES HAD BEEN TRANSFERRED TO A
LOCATION DIFFERENT FROM WHAT WAS INDICATED IN THE INSURANCE
POLICY.

IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE
CONDITIONS AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE
REASONS WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST
PROOF THAT RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND
LIMITATIONS IS THE FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS
FACTUAL ASSERTION THAT IT SUPPOSEDLY NOTIFIED PETITIONER MALAYAN
 OF THE TRANSFER AS REQUIRED BY THE INSURANCE POLICY.

MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS

AN INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE
INSURED PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY
RESPONDENT PAP CO.

II

THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED
INTEREST AT THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME
OF THE LOSS UNTIL FULLY PAID.

JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS

NOT A LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES
A PLAINTIFF TO AN AWARD OF INTEREST AT THE RATE OF TWELVE PERCENT
(12%) PER ANNUM.

MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE

SHOULD NOT HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE
THERE WAS NEVER ANY FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY
REFUSED OR WITHHELD THE PROCEEDS OF THE INSURANCE POLICY BECAUSE
IN THE FIRST PLACE, THERE WAS A LEGITIMATE DISPUTE OR DIFFERENCE IN
OPINION ON WHETHER RESPONDENT PAP CO. COMMITTED CONCEALMENT,
MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE WARRANTY WHICH
ENTITLES PETITIONER MALAYAN TO RESCIND THE INSURANCE POLICY AND/OR
TO CONSIDER THE CLAIM AS VOIDED.

III

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN

ACCORDANCE WITH THE LAW AND APPLICABLE DECISIONS OF THE
HONORABLE COURT WHEN IT AGREED WITH THE TRIAL COURT AND HELD IN
THE QUESTIONED DECISION THAT THE PROCEEDS OF THE INSURANCE
CONTRACT IS PAYABLE TO RESPONDENT PAP CO. DESPITE THE EXISTENCE OF A
MORTGAGEE CLAUSE IN THE INSURANCE POLICY.

IV

THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND
RESOLUTION THAT THE INTERPRETATION MOST FAVORABLE TO THE INSURED
SHALL BE ADOPTED.7

Malayan basically argues that it cannot be held liable under the insurance contract because PAP committed
concealment, misrepresentation and breach of an affirmative warranty under the renewal policy when it
transferred the location of the insured properties without informing it. Such transfer affected the correct
estimation of the risk which should have enabled Malayan to decide whether it was willing to assume such
risk and, if so, at what rate of premium. The transfer also affected Malayan’s ability to control the risk by
guarding against the increase of the risk brought about by the change in conditions, specifically the change in
the location of the risk.

Malayan claims that PAP concealed a material fact in violation of Section 27 of the Insurance Code 8 when it
did not inform Malayan of the actual and new location of the insured properties. In fact, before the issuance
of the renewal policy on May 14, 1997, PAP even informed it that there would be no changes in the renewal
policy. Malayan also argues that PAP is guilty of breach of warranty under the renewal policy in violation of
Section 74 of the Insurance Code9 when, contrary to its affirmation in the renewal policy that the insured
properties were located at the Sanyo Factory, these were already transferred to the Pace Factory. Malayan
adds that PAP is guilty of misrepresentation upon a material fact in violation of Section 45 of the Insurance
Code10 when it informed Malayan that there would be no changes in the original policy, and that the original
policy would be renewed on an "as is" basis.

Malayan further argues that PAP failed to discharge the burden of proving that the transfer of the insured
properties under the insurance policy was with its knowledge and consent. Granting that PAP informed
RCBC of the transfer or change of location of the insured properties, the same is irrelevant and does not bind
Malayan considering that RCBC is a corporation vested with separate and distinct juridical personality.
Malayan did not consent to be the principal of RCBC. RCBC did not also act as Malayan’s representative.

With regard to the alleged increase of risk, Malayan insists that there is evidence of an increase in risk as a
result of the unilateral transfer of the insured properties. According to Malayan, the Sanyo Factory was
occupied as a factory of automotive/computer parts by the assured and factory of zinc & aluminum die cast
and plastic gear for copy machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A, while
Pace Factory was occupied as factory that repacked silicone sealant to plastic cylinders with a rate of 0.657%
under 6.1.2 A.

PAP’s position

On the other hand, PAP counters that there is no evidence of any misrepresentation, concealment or deception
on its part and that its claim is not fraudulent. It insists that it can still sue to protect its rights and interest on
the policy notwithstanding the fact that the proceeds of the same was payable to RCBC, and that it can collect
interest at the rate of 12% per annum on the proceeds of the policy because its claim for indemnity was
unduly delayed without legal justification.

The Court’s Ruling

The Court agrees with the position of Malayan that it cannot be held liable for the loss of the insured
properties under the fire insurance policy.

As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained a ?
15,000,000.00 fire insurance policy from Malayan covering its machineries and equipment effective for one
(1) year or until May 13, 1997; that the policy expressly stated that the insured properties were located at
"Sanyo Precision Phils. Building, Phase III, Lots 4 & 6, Block 15, EPZA, Rosario, Cavite"; that before its
expiration, the policy was renewed11 on an "as is" basis for another year or until May 13, 1998; that the
subject properties were later transferred to the Pace Factory also in PEZA; and that on October 12, 1997,
during the effectivity of the renewal policy, a fire broke out at the Pace Factory which totally burned the
insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan

Condition No. 9(c) of the renewal policy provides:

9. Under any of the following circumstances the insurance ceases to attach as regards the property affected
unless the insured, before the occurrence of any loss or damage, obtains the sanction of the company
signified by endorsement upon the policy, by or on behalf of the Company:

xxx xxx xxx

(c) If property insured be removed to any building or place other than in that which is herein stated to be
insured.12

Evidently, by the clear and express condition in the renewal policy, the removal of the insured property to any
building or place required the consent of Malayan. Any transfer effected by the insured, without the insurer’s
consent, would free the latter from any liability.

The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal

The records are bereft of any convincing and concrete evidence that Malayan was notified of the transfer of
the insured properties from the Sanyo factory to the Pace factory. The Court has combed the records and
found nothing that would show that Malayan was duly notified of the transfer of the insured properties.

What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer to RCBC,
the entity which made the referral and the named beneficiary in the policy. Malayan and RCBC might have
been sister companies, but such fact did not make one an agent of the other. The fact that RCBC referred PAP
to Malayan did not clothe it with authority to represent and bind the said insurance company. After the
referral, PAP dealt directly with Malayan.

The respondent overlooked the fact that during the November 9, 2006 hearing, 13 its counsel stipulated in open
court that it was Malayan’s authorized insurance agent, Rodolfo Talusan, who procured the original policy
from Malayan, not RCBC. This was the reason why Talusan’s testimony was dispensed with.

Moreover, in the previous hearing held on November 17, 2005,14 PAP’s hostile witness, Alexander Barrera,
Administrative Assistant of Malayan, testified that he was the one who procured Malayan’s renewal policy,
not RCBC, and that RCBC merely referred fire insurance clients to Malayan. He stressed, however, that no
written referral agreement exists between RCBC and Malayan. He also denied that PAP notified Malayan
about the transfer before the renewal policy was issued. He added that PAP, through Maricar Jardiniano
(Jardiniano), informed him that the fire insurance would be renewed on an "as is basis."15

Granting that any notice to RCBC was binding on Malayan, PAP’s claim that it notified RCBC and Malayan
was not indubitably established. At best, PAP could only come up with the hearsay testimony of its principal
witness, Branch Manager Katsumi Yoneda (Mr. Yoneda), who testified as follows:

What did you do as Branch Manager of Pap Co. Ltd.?

A
What I did I instructed my Secretary, because these equipment was bank loan and because of the insurance I
told my secretary to notify.

To notify whom?

I told my Secretary to inform the bank.

You are referring to RCBC?

Yes, sir.

xxxx

After the RCBC was informed in the manner you stated, what did you do regarding the new location of these
properties at Pace Pacific Bldg. insofar as Malayan Insurance Company is concerned?

After that transfer, we informed the RCBC about the transfer of the equipment and also Malayan Insurance
but we were not able to contact Malayan Insurance so I instructed again my secretary to inform Malayan
about the transfer.

Who was the secretary you instructed to contact Malayan Insurance, the defendant in this case?

Dory Ramos.

How many secretaries do you have at that time in your office?

Only one, sir.

Q
Do you know a certain Maricar Jardiniano?

Yes, sir.

Why do you know her?

Because she is my secretary.

So how many secretaries did you have at that time?

Two, sir.

What happened with the instruction that you gave to your secretary Dory Ramos about the matter of
informing the defendant Malayan Insurance Co of the new location of the insured properties?

She informed me that the notification was already given to Malayan Insurance.

Aside from what she told you how did you know that the information was properly relayed by the said
secretary, Dory Ramos, to Malayan Insurance?

I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.

Now after you were told by your secretary, Dory Ramos, that she was able to inform Malayan Insurance
Company about the transfer of the properties insured to the new location, do you know what happened
insofar this information was given to the defendant Malayan Insurance?

I heard that someone from Malayan Insurance came over to our company.
Q

Did you come to know who was that person who came to your place at Pace Pacific?

I do not know, sir.

How did you know that this person from Malayan Insurance came to your place?

It is according to the report given to me.

Who gave that report to you?

Dory Ramos.

Was that report in writing or verbally done?

Verbal.16 [Emphases supplied]

The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal knowledge of the
notice to either Malayan or RCBC. PAP should have presented his secretaries, Dory Ramos and Maricar
Jardiniano, at the witness stand. His testimony alone was unreliable.

Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured properties were
transferred to a different location only after the renewal of the fire insurance policy.

COURT

When did you transfer the machineries and equipments before the renewal or after the renewal of the
insurance?

After the renewal.

COURT

You understand my question?

Yes, Your Honor.17 [Emphasis supplied]

This enfeebles PAP’s position that the subject properties were already transferred to the Pace factory before
the policy was renewed.

The transfer from the Sanyo Factory to the PACE Factory increased the risk.

The courts below held that even if Malayan was not notified thereof, the transfer of the insured properties to
the Pace Factory was insignificant as it did not increase the risk.

Malayan argues that the change of location of the subject properties from the Sanyo Factory to the Pace
Factory increased the hazard to which the insured properties were exposed. Malayan wrote:

With regards to the exposure of the risk under the old location, this was occupied as factory of
automotive/computer parts by the assured, and factory of zinc & aluminum die cast, plastic gear for copy
machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A. But under Pace Pacific Mfg.
Corporation this was occupied as factory that repacks silicone sealant to plastic cylinders with a rate of
0.657% under 6.1.2 A. Hence, there was an increase in the hazard as indicated by the increase in rate.18

The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to a hazardous
environment and negatively affected the fire rating stated in the renewal policy. The increase in tariff rate
from 0.449% to 0.657% put the subject properties at a greater risk of loss. Such increase in risk would
necessarily entail an increase in the premium payment on the fire policy.

Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the importance of
the issue, PAP failed to refute Malayan’s argument on the increased risk.

Malayan is entitled to rescind the insurance contract

Considering that the original policy was renewed on an "as is basis," it follows that the renewal policy carried
with it the same stipulations and limitations. The terms and conditions in the renewal policy provided, among
others, that the location of the risk insured against is at the Sanyo factory in PEZA. The subject insured
properties, however, were totally burned at the Pace Factory. Although it was also located in PEZA, Pace
Factory was not the location stipulated in the renewal policy. There being an unconsented removal, the
transfer was at PAP’s own risk. Consequently, it must suffer the consequences of the fire. Thus, the Court
agrees with the report of Cunningham Toplis Philippines, Inc., an international loss adjuster which
investigated the fire incident at the Pace Factory, which opined that "[g]iven that the location of risk covered
under the policy is not the location affected, the policy will, therefore, not respond to this loss/claim."19

It can also be said that with the transfer of the location of the subject properties, without notice and without
Malayan’s consent, after the renewal of the policy, PAP clearly committed concealment, misrepresentation
and a breach of a material warranty. Section 26 of the Insurance Code provides:

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

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of
insurance."

Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the insurance contract in
case of an alteration in the use or condition of the thing insured. Section 168 of the Insurance Code provides,
as follows:

Section 68. An alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured, and increasing the
risks, entitles an insurer to rescind a contract of fire insurance.

Accordingly, an insurer can exercise its right to rescind an insurance contract when the following conditions
are present, to wit:

1) the policy limits the use or condition of the thing insured;

2) there is an alteration in said use or condition;

3) the alteration is without the consent of the insurer;

4) the alteration is made by means within the insured’s control; and

5) the alteration increases the risk of loss.20

In the case at bench, all these circumstances are present. It was clearly established that the renewal policy
stipulated that the insured properties were located at the Sanyo factory; that PAP removed the properties
without the consent of Malayan; and that the alteration of the location increased the risk of loss.

WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby REVERSED and SET
ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby declared NOT liable for the loss of the
insured machineries and equipment suffered by PAP Co., Ltd.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO*

Chief Justice

PRESBITERO J. VELASCO, JR. DIOSDADO M. PERALTA

Associate Justice Associate Justice
 MARVIC MARIO VICTOR F. LEONEN
Associate Justice

ATT E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

C E R T I F I CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes
*
Designated additional member in lieu of Associate Justice Roberto A. Abad, per Raffle dated July 2, 2012.
1
Rollo, pp. 114-128. Penned by Associate Justice Normandie B. Pizarro and concurred in by Amelita B.
Tolentino and Associate Justice Rodel V. Zalameda.
2
Id. at 725-730.
3
Id. at 130-131.
4
Id. at 115-116.
5
Id. at 730.
6
Id. at 127.
7
Id. at 50-54.
8
Section 27. A concealment whether intentional or unintentional entitles the injured party to rescind a
contract of insurance.
9
Section 74. The violation of a material warranty, or other material provision of a policy, on the part of either
party thereto, entitles the other to rescind.
10
Section 45. If a representation is false in a material point, whether affirmative or promissory, the injured
party is entitled to rescind the contract from the time when the representation becomes false. x x x
11
Rollo, p. 373.
12
Records, pp, 683-684.
13
Rollo, TSN, November 9, 2006, pp. 614-625.
14
Id., TSN, November 17, 2005, pp. 492-562.
15
Id. at 540-541, 559.
16
Id., TSN, July 14, 2005, pp. 460-464.
17
Id. at 484.
18
Records, Vol. II, p. 692.
19
Id. at 231.
20
Rodriguez, The Insurance Code of the Philippines Annotated, Fifth Edition, p. 289.

The Lawphil Project - Arellano Law Foundation

THIRD DIVISION

G.R. No. 211212, June 08, 2016

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, v. MA. DAISY'S. SIBYA, JESUS MANUEL S. SIBYA III,
JAIME LUIS S. SIBYA, AND THE ESTATE OF THE DECEASED ATTY. JESUS SIBYA, JR., Respondents.

DECISION

REYES, J.:

Before this Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court seeking to
annul and set aside the Decision2 dated November 18, 2013 and Resolution3 dated February 13, 2014
of the Court of Appeals (CA) in CA-G.R. CV. No. 93269. In both instances, the CA affirmed the
Decision4 dated March 16, 2009 of the Regional Trial Court (RTC) of Makati City, Branch 136, in Civil
Case No. 01-1506, ordering petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma. Daisy
S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya (respondents) the amounts of
P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00 as exemplary damages,
and P100,000.00 as attorney's fees and costs of suit. Insofar as the charges for violation of Sections
241 and 242 of Presidential Decree No. 612, or the Insurance Code of the Philippines, however, the CA
modified the decision of the RTC and absolved Sun Life therein.

Statement of Facts of the Case

On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance with Sun Life. In his
Application for Insurance, he indicated that he had sought advice for kidney problems.5 Atty. Jesus Jr.
indicated the following in his application:
chanRoblesvirtualLawlibrary
"Last 1987, had undergone lithotripsy due to kidney stone under Dr. Jesus Benjamin Mendoza at
National Kidney Institute, discharged after 3 days, no recurrence as
claimed."6ChanRoblesVirtualawlibrary
On February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued Insurance Policy No.
031097335. The policy indicated the respondents as beneficiaries and entitles them to a death benefit
of P1,000,000.00 should Atty. Jesus Jr. dies on or before February 5, 2021, or a sum of money if Atty.
Jesus Jr. is still living on the endowment date.7

On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin, Iloilo. As such, Ma.
Daisy filed a Claimant's Statement with Sun Life to seek the death benefits indicated in his insurance
policy.8

In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground that the details on
Atty. Jesus Jr.'s medical history were not disclosed in his application. Simultaneously, Sun Life tendered
a check representing the refund of the premiums paid by Atty. Jesus Jr.9

The respondents reiterated their claim against Sun Life thru a letter dated September 17, 2001. Sun
Life, however, refused to heed the respondents' requests and instead filed a Complaint for Rescission
before the RTC and prayed for judicial confirmation of Atty. Jesus Jr.'s rescission of insurance policy.10

In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance application his
previous medical treatment at the National Kidney Transplant Institute in May and August of 1994.
According to Sun Life, the undisclosed fact suggested that the insured was in "renal failure" and at a
high risk medical condition. Consequently, had it known such fact, it would not have issued the
insurance policy in favor of Atty. Jesus Jr.11

For their defense, the respondents claimed that Atty. Jesus Jr. did not commit misrepresentation in his
application for insurance. They averred that Atty. Jesus Jr. was in good faith when he signed the
insurance application and even authorized Sun Life to inquire further into his medical history for
verification purposes. According to them, the complaint is just a ploy to avoid the payment of
insurance claims.12

Ruling of the RTC

On March 16, 2009, the RTC issued its Decision13 dismissing the complaint for lack of merit. The RTC
held that Sun Life violated Sections 241, paragraph 1(b), (d), and (e)14 and 24215 of the Insurance
Code when it refused to pay the rightful claim of the respondents. Moreover, the RTC ordered Sun Life
to pay the amounts of P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00
as exemplary damages, and P100,000.00 as attorney's fees and costs of suit.

The RTC held that Atty. Jesus Jr. did not commit material concealment and misrepresentation when he
applied for life insurance with Sun Life. It observed that given the disclosures and the waiver and
authorization to investigate executed by Atty. Jesus Jr. to Sun Life, the latter had all the means of
ascertaining the facts allegedly concealed by the applicant.16

Aggrieved, Sun Life elevated the case to the CA.

Ruling of the CA

On appeal, the CA issued its Decision17 dated November 18, 2013 affirming the RTC decision in
ordering Sun Life to pay death benefits and damages in favor of the respondents. The CA, however,
modified the RTC decision by absolving Sun Life from the charges of violation of Sections 241 and 242
of the Insurance Code.18
The CA ruled that the evidence on records show that there was no fraudulent intent on the part of
Atty. Jesus Jr. in submitting his insurance application. Instead, it found that Atty. Jesus Jr. admitted in
his application that he had sought medical treatment for kidney ailment.19

Sun Life filed a Motion for Partial Reconsideration20 dated December 11, 2013 but the same was
denied in a Resolution21 dated February 13, 2014.

Undaunted, Sun Life filed an appeal by way of petition for review on certiorari under Rule 45 of the
Rules of Court before this Court.

The Issue

Essentially, the main issue of the instant case is whether or not the CA erred when it affirmed the RTC
decision finding that there was no concealment or misrepresentation when Atty. Jesus Jr. submitted
his insurance application with Sun Life.

Ruling of the Court

The petition has no merit.

In Manila Bankers Life Insurance Corporation v. Aban,22 the Court held that if the insured dies within
the two-year contestability period, the insurer is bound to make good its obligation under the policy,
regardless of the presence or lack of concealment or misrepresentation. The Court held:
chanRoblesvirtualLawlibrary
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years - from the effectivity of a life insurance contract and
while the insured is alive - to discover or prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-
year period lapses, or when the insured dies within the period, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This is not
to say that insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately
solicit and obtain business must be penalized, for such recklessness and lack of discrimination
ultimately work to the detriment of bona fide takers of insurance and the public in general.23
(Emphasis ours)
In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus, it has two years
from its issuance, to investigate and verify whether the policy was obtained by fraud, concealment, or
misrepresentation. Upon the death of Atty. Jesus Jr., however, on May 11, 2001, or a mere three
months from the issuance of the policy, Sun Life loses its right to rescind the policy. As discussed in
Manila Bankers, the death of the insured within the two-year period will render the right of the
insurer to rescind the policy nugatory. As such, the incontestability period will now set in.

Assuming, however, for the sake of argument, that the incontestability period has not yet set in, the
Court agrees, nonetheless, with the CA when it held that Sun Life failed to show that Atty. Jesus Jr.
committed concealment and misrepresentation.

As correctly observed by the CA, Atty. Jesus Jr. admitted in his application his medical treatment for
kidney ailment. Moreover, he executed an authorization in favor of Sun Life to conduct investigation in
reference with his medical history. The decision in part states:
chanRoblesvirtualLawlibrary
Records show that in the Application for Insurance, [Atty. Jesus Jr.] admitted that he had sought
medical treatment for kidney ailment. When asked to provide details on the said medication, [Atty.
Jesus Jr.] indicated the following information: year ("1987"), medical procedure ("undergone
lithotripsy due to kidney stone"), length of confinement ("3 days"), attending physician ("Dr. Jesus
Benjamin Mendoza") and the hospital ("National Kidney Institute").
It appears that [Atty. Jesus Jr.] also signed the Authorization which gave [Sun Life] the opportunity to
obtain information on the facts disclosed by [Atty. Jesus Jr.] in his insurance application. x x x

xxxx

Given the express language of the Authorization, it cannot be said that [Atty. Jesus Jr.] concealed his
medical history since [Sun Life] had the means of ascertaining [Atty. Jesus Jr.'s] medical record.

With regard to allegations of misrepresentation, we note that [Atty. Jesus Jr.] was not a medical doctor,
and his answer "no recurrence" may be construed as an honest opinion. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not avoid a
policy even though they are untrue.24 (Citations omitted and italics in the original)
Indeed, the intent to defraud on the part of the insured must be ascertained to merit rescission of the
insurance contract. Concealment as a defense for the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider
or insurer.25 In the present case, Sun Life failed to clearly and satisfactorily establish its allegations,
and is therefore liable to pay the proceeds of the insurance.

Moreover, well-settled is the rule that this Court is not a trier of facts. Factual findings of the lower
courts are entitled to great weight and respect on appeal, and in fact accorded finality when
supported by substantial evidence on the record.26

WHEREFORE, the petition for review is DENIED. The Decision dated November 18, 2013 and
Resolution dated February 13, 2014 of the Court of Appeals in CA-G.R. CV. No. 93269 are hereby
AFFIRMED.

SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), and Perez, JJ., concur.

Peralta, and Jardeleza, JJ., on official leave.chanroblesvirtuallawlibrary

Endnotes:

1Rollo, pp. 33-54.

2 Penned by Associate Justice Nina G. Antonio-Valenzuela, with Associate Justices Isaias P. Dicdican
and Michael P. Elbinias concurring; id. at 6-18.

3 Id. at 29-30.

4 Rendered by Acting Presiding Judge Rowena De Juan-Quinagoran; id. at 84-88.

5 Id. at 6-7.

6 Id. at 7.

7 Id.

8 Id.

9 Id.

10 Id.

11 Id. at 7-8.

12 Id. at 8.
13 Id. at 84-88.

14 Sec. 241. (1) No insurance company doing business in the Philippines shall refuse, without just
cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such
company engage in unfair claim settlement practices. Any of the following acts by an insurance
company, if committed without just cause and performed with such frequency as to indicate a general
business practice, shall constitute unfair claim settlement practices:

xxxx

(b) failing to acknowledge with reasonable promptness pertinent communications with respect to
claims arising under its policies;

xxxx

(d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear; or

(e) compelling policyholders to institute suits to recover amounts due under its policies by offering
without justifiable reason substantially less than the amounts ultimately recovered in suits brought by
them.

xxxx

15 Sec. 242. The proceeds of a life insurance policy shall be paid immediately upon maturity of the
policy, unless such proceeds are made payable in installments or as an annuity, in which case the
installments, or annuities shall be paid as they become due: Provided, however, That in the case of a
policy maturing by the death of the insured, the proceeds thereof shall be paid within sixty days after
presentation of the claim and filing of the proof of the death of the insured. Refusal or failure to pay
the claim within the time prescribed herein will entitle the beneficiary to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is
fraudulent.

The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall
include the discounted value of all premiums paid in advance of their due dates, but are not due and
payable at maturity.

16Rollo, p. 86.

17 Id. at 6-18.

18 Id. at 17.

19 Id. at 14.

20 Id. at 19-28.

21 Id. at 29-30.

22 715 Phil. 404 (2013).

23 Id. at 415.

24Rollo, pp. 14-15.cralawred

25Philamcare Health Systems, Inc. v. CA, 429 Phil. 82, 92 (2002).

26Spouses Bernales v. Heirs of Julian Sambaan, 624 Phil. 88, 97 (2010).

THIRD DIVISION

G.R. No. 211212, June 08, 2016

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, v. MA. DAISY'S. SIBYA, JESUS MANUEL S. SIBYA III,
JAIME LUIS S. SIBYA, AND THE ESTATE OF THE DECEASED ATTY. JESUS SIBYA, JR., Respondents.

DECISION

REYES, J.:

Before this Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court seeking to
annul and set aside the Decision2 dated November 18, 2013 and Resolution3 dated February 13, 2014
of the Court of Appeals (CA) in CA-G.R. CV. No. 93269. In both instances, the CA affirmed the
Decision4 dated March 16, 2009 of the Regional Trial Court (RTC) of Makati City, Branch 136, in Civil
Case No. 01-1506, ordering petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma. Daisy
S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya (respondents) the amounts of
P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00 as exemplary damages,
and P100,000.00 as attorney's fees and costs of suit. Insofar as the charges for violation of Sections
241 and 242 of Presidential Decree No. 612, or the Insurance Code of the Philippines, however, the CA
modified the decision of the RTC and absolved Sun Life therein.

Statement of Facts of the Case

On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance with Sun Life. In his
Application for Insurance, he indicated that he had sought advice for kidney problems.5 Atty. Jesus Jr.
indicated the following in his application:
chanRoblesvirtualLawlibrary
"Last 1987, had undergone lithotripsy due to kidney stone under Dr. Jesus Benjamin Mendoza at
National Kidney Institute, discharged after 3 days, no recurrence as
claimed."6ChanRoblesVirtualawlibrary
On February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued Insurance Policy No.
031097335. The policy indicated the respondents as beneficiaries and entitles them to a death benefit
of P1,000,000.00 should Atty. Jesus Jr. dies on or before February 5, 2021, or a sum of money if Atty.
Jesus Jr. is still living on the endowment date.7

On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin, Iloilo. As such, Ma.
Daisy filed a Claimant's Statement with Sun Life to seek the death benefits indicated in his insurance
policy.8

In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground that the details on
Atty. Jesus Jr.'s medical history were not disclosed in his application. Simultaneously, Sun Life tendered
a check representing the refund of the premiums paid by Atty. Jesus Jr.9

The respondents reiterated their claim against Sun Life thru a letter dated September 17, 2001. Sun
Life, however, refused to heed the respondents' requests and instead filed a Complaint for Rescission
before the RTC and prayed for judicial confirmation of Atty. Jesus Jr.'s rescission of insurance policy.10

In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance application his
previous medical treatment at the National Kidney Transplant Institute in May and August of 1994.
According to Sun Life, the undisclosed fact suggested that the insured was in "renal failure" and at a
high risk medical condition. Consequently, had it known such fact, it would not have issued the
insurance policy in favor of Atty. Jesus Jr.11

For their defense, the respondents claimed that Atty. Jesus Jr. did not commit misrepresentation in his
application for insurance. They averred that Atty. Jesus Jr. was in good faith when he signed the
insurance application and even authorized Sun Life to inquire further into his medical history for
verification purposes. According to them, the complaint is just a ploy to avoid the payment of
insurance claims.12

Ruling of the RTC

On March 16, 2009, the RTC issued its Decision13 dismissing the complaint for lack of merit. The RTC
held that Sun Life violated Sections 241, paragraph 1(b), (d), and (e)14 and 24215 of the Insurance
Code when it refused to pay the rightful claim of the respondents. Moreover, the RTC ordered Sun Life
to pay the amounts of P1,000,000.00 as death benefits, P100,000.00 as moral damages, P100,000.00
as exemplary damages, and P100,000.00 as attorney's fees and costs of suit.

The RTC held that Atty. Jesus Jr. did not commit material concealment and misrepresentation when he
applied for life insurance with Sun Life. It observed that given the disclosures and the waiver and
authorization to investigate executed by Atty. Jesus Jr. to Sun Life, the latter had all the means of
ascertaining the facts allegedly concealed by the applicant.16

Aggrieved, Sun Life elevated the case to the CA.

Ruling of the CA

On appeal, the CA issued its Decision17 dated November 18, 2013 affirming the RTC decision in
ordering Sun Life to pay death benefits and damages in favor of the respondents. The CA, however,
modified the RTC decision by absolving Sun Life from the charges of violation of Sections 241 and 242
of the Insurance Code.18

The CA ruled that the evidence on records show that there was no fraudulent intent on the part of
Atty. Jesus Jr. in submitting his insurance application. Instead, it found that Atty. Jesus Jr. admitted in
his application that he had sought medical treatment for kidney ailment.19

Sun Life filed a Motion for Partial Reconsideration20 dated December 11, 2013 but the same was
denied in a Resolution21 dated February 13, 2014.

Undaunted, Sun Life filed an appeal by way of petition for review on certiorari under Rule 45 of the
Rules of Court before this Court.

The Issue

Essentially, the main issue of the instant case is whether or not the CA erred when it affirmed the RTC
decision finding that there was no concealment or misrepresentation when Atty. Jesus Jr. submitted
his insurance application with Sun Life.

Ruling of the Court

The petition has no merit.

In Manila Bankers Life Insurance Corporation v. Aban,22 the Court held that if the insured dies within
the two-year contestability period, the insurer is bound to make good its obligation under the policy,
regardless of the presence or lack of concealment or misrepresentation. The Court held:
chanRoblesvirtualLawlibrary
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years - from the effectivity of a life insurance contract and
while the insured is alive - to discover or prove that the policy is void ab initio or is rescindible by
reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-
year period lapses, or when the insured dies within the period, the insurer must make good on the
policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This is not
to say that insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately
solicit and obtain business must be penalized, for such recklessness and lack of discrimination
ultimately work to the detriment of bona fide takers of insurance and the public in general.23
(Emphasis ours)
In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus, it has two years
from its issuance, to investigate and verify whether the policy was obtained by fraud, concealment, or
misrepresentation. Upon the death of Atty. Jesus Jr., however, on May 11, 2001, or a mere three
months from the issuance of the policy, Sun Life loses its right to rescind the policy. As discussed in
Manila Bankers, the death of the insured within the two-year period will render the right of the
insurer to rescind the policy nugatory. As such, the incontestability period will now set in.

Assuming, however, for the sake of argument, that the incontestability period has not yet set in, the
Court agrees, nonetheless, with the CA when it held that Sun Life failed to show that Atty. Jesus Jr.
committed concealment and misrepresentation.

As correctly observed by the CA, Atty. Jesus Jr. admitted in his application his medical treatment for
kidney ailment. Moreover, he executed an authorization in favor of Sun Life to conduct investigation in
reference with his medical history. The decision in part states:
chanRoblesvirtualLawlibrary
Records show that in the Application for Insurance, [Atty. Jesus Jr.] admitted that he had sought
medical treatment for kidney ailment. When asked to provide details on the said medication, [Atty.
Jesus Jr.] indicated the following information: year ("1987"), medical procedure ("undergone
lithotripsy due to kidney stone"), length of confinement ("3 days"), attending physician ("Dr. Jesus
Benjamin Mendoza") and the hospital ("National Kidney Institute").

It appears that [Atty. Jesus Jr.] also signed the Authorization which gave [Sun Life] the opportunity to
obtain information on the facts disclosed by [Atty. Jesus Jr.] in his insurance application. x x x

xxxx

Given the express language of the Authorization, it cannot be said that [Atty. Jesus Jr.] concealed his
medical history since [Sun Life] had the means of ascertaining [Atty. Jesus Jr.'s] medical record.

With regard to allegations of misrepresentation, we note that [Atty. Jesus Jr.] was not a medical doctor,
and his answer "no recurrence" may be construed as an honest opinion. Where matters of opinion or
judgment are called for, answers made in good faith and without intent to deceive will not avoid a
policy even though they are untrue.24 (Citations omitted and italics in the original)
Indeed, the intent to defraud on the part of the insured must be ascertained to merit rescission of the
insurance contract. Concealment as a defense for the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider
or insurer.25 In the present case, Sun Life failed to clearly and satisfactorily establish its allegations,
and is therefore liable to pay the proceeds of the insurance.

Moreover, well-settled is the rule that this Court is not a trier of facts. Factual findings of the lower
courts are entitled to great weight and respect on appeal, and in fact accorded finality when
supported by substantial evidence on the record.26

WHEREFORE, the petition for review is DENIED. The Decision dated November 18, 2013 and
Resolution dated February 13, 2014 of the Court of Appeals in CA-G.R. CV. No. 93269 are hereby
AFFIRMED.

SO ORDERED.cralawlawlibrary
Velasco, Jr., (Chairperson), and Perez, JJ., concur.
Peralta, and Jardeleza, JJ., on official leave.chanroblesvirtuallawlibrary

Endnotes:

1Rollo, pp. 33-54.

2 Penned by Associate Justice Nina G. Antonio-Valenzuela, with Associate Justices Isaias P. Dicdican
and Michael P. Elbinias concurring; id. at 6-18.

3 Id. at 29-30.

4 Rendered by Acting Presiding Judge Rowena De Juan-Quinagoran; id. at 84-88.

5 Id. at 6-7.

6 Id. at 7.

7 Id.

8 Id.

9 Id.

10 Id.

11 Id. at 7-8.

12 Id. at 8.

13 Id. at 84-88.

14 Sec. 241. (1) No insurance company doing business in the Philippines shall refuse, without just
cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such
company engage in unfair claim settlement practices. Any of the following acts by an insurance
company, if committed without just cause and performed with such frequency as to indicate a general
business practice, shall constitute unfair claim settlement practices:

xxxx

(b) failing to acknowledge with reasonable promptness pertinent communications with respect to
claims arising under its policies;

xxxx

(d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims
submitted in which liability has become reasonably clear; or

(e) compelling policyholders to institute suits to recover amounts due under its policies by offering
without justifiable reason substantially less than the amounts ultimately recovered in suits brought by
them.

xxxx

15 Sec. 242. The proceeds of a life insurance policy shall be paid immediately upon maturity of the
policy, unless such proceeds are made payable in installments or as an annuity, in which case the
installments, or annuities shall be paid as they become due: Provided, however, That in the case of a
 policy maturing by the death of the insured, the proceeds thereof shall be paid within sixty days after
presentation of the claim and filing of the proof of the death of the insured. Refusal or failure to pay
the claim within the time prescribed herein will entitle the beneficiary to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the
Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is
fraudulent.

The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall
include the discounted value of all premiums paid in advance of their due dates, but are not due and
payable at maturity.

16Rollo, p. 86.

17 Id. at 6-18.

18 Id. at 17.

19 Id. at 14.

20 Id. at 19-28.

21 Id. at 29-30.

22 715 Phil. 404 (2013).

23 Id. at 415.

24Rollo, pp. 14-15.cralawred

25Philamcare Health Systems, Inc. v. CA, 429 Phil. 82, 92 (2002).

26Spouses Bernales v. Heirs of Julian Sambaan, 624 Phil. 88, 97 (2010).

Today is Sunday, December 10, 2017

Republic of the Philippines

SUPREME COURT
Manila

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.

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

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

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts
relevant to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing
the total premiums paid in the amount of P10,172.00 was attached to said letter.

Petitioner claimed that the insured gave false statements in his application when he answered the following
questions:

5. Within the past 5 years have you:

a) consulted any doctor or other health practitioner?

b) submitted to:

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

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

6. Have you ever had or sought advice for:

xxx xxx xxx

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

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

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

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

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

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

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

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

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

In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made
in good faith and under a belief that they need not be disclosed. Moreover, it held that the health history of
the insured was immaterial since the insurance policy was "non-medical".

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court
ruled that petitioner cannot avoid its obligation by claiming concealment because the cause of death was
unrelated to the facts concealed by the insured. It also sustained the finding of the trial court that matters
relating to the health history of the insured were irrelevant since petitioner waived the medical examination
prior to the approval and issuance of the insurance policy. Moreover, the appellate court agreed with the trial
court that the policy was "non-medical" (Rollo, pp. 4-5).

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

II

We reverse the decision of the Court of Appeals.

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

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

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

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

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

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

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

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

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

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

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

Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled
that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-
disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in
making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).

We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of
the concealment employed by the insured. It must be emphasized that rescission was exercised within the
two-year contestability period as recognized in Section 48 of The Insurance Code.

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

SO ORDERED.

Padilla, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Today is Sunday, December 10, 2017

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 175666 July 29, 2013

MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.

vs.
CRESENCIA P. ABAN, Respondent.

DECISION

DEL CASTILLO, J.:

The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from or provide
insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly investigate those
they insure within two years from effectivity of the policy and while the insured is still alive. If they do not,
they will be obligated to honor claims on the policies they issue, regardless of fraud, concealment or
misrepresentation. The law assumes that they will do just that and not sit on their laurels, indiscriminately
soliciting and accepting insurance business from any Tom, Dick and Harry.

Assailed in this Petition for Review on Certiorari 1 are the September 28, 2005 Decision2 of the Court of
Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution 3 denying the petitioner’s
Motion for Reconsideration.4

Factual Antecedents

On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life Insurance
Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece,5 as her beneficiary.

Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of ₱100,000.00, in Sotero’s
favor on August 30, 1993, after the requisite medical examination and payment of the insurance premium.6

On April 10, 1996,7 when the insurance policy had been in force for more than two years and seven months,
Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner conducted an
investigation into the claim,8 and came out with the following findings:

1. Sotero did not personally apply for insurance coverage, as she was illiterate;

2. Sotero was sickly since 1990;

3. Sotero did not have the financial capability to pay the insurance premiums on Insurance Policy No.
747411;

4. Sotero did not sign the July 3, 1993 application for insurance;9 and

5. Respondent was the one who filed the insurance application, and x x x designated herself as the
beneficiary.10

For the above reasons, petitioner denied respondent’s claim on April 16, 1997 and refunded the premiums
paid on the policy.11

On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which was
docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial Court. The main
thesis of the Complaint was that the policy was obtained by fraud, concealment and/or misrepresentation
under the Insurance Code,12 which thus renders it voidable under Article 139013 of the Civil Code.

Respondent filed a Motion to Dismiss14 claiming that petitioner’s cause of action was barred by prescription
pursuant to Section 48 of the Insurance Code, which provides as follows:

Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter,
such right must be exercised previous to the commencement of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioner’s investigator testified in court, stating among
others that the insurance underwriter who solicited the insurance is a cousin of respondent’s husband, Dindo
Aban,15 and that it was the respondent who paid the annual premiums on the policy.16

Ruling of the Regional Trial Court

On December 9, 1997, the trial court issued an Order17 granting respondent’s Motion to Dismiss, thus:

WHEREFORE, defendant CRESENCIA P. ABAN’s Motion to Dismiss is hereby granted. Civil Case No. 97-
867 is hereby dismissed.

SO ORDERED.18

In dismissing the case, the trial court found that Sotero, and not respondent, was the one who procured the
insurance; thus, Sotero could legally take out insurance on her own life and validly designate – as she did –
respondent as the beneficiary. It held further that under Section 48, petitioner had only two years from the
effectivity of the policy to question the same; since the policy had been in force for more than two years,
petitioner is now barred from contesting the same or seeking a rescission or annulment thereof.

Petitioner moved for reconsideration, but in another Order 19 dated October 20, 1998, the trial court stood its
ground.

Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner questioned the
dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying Section 48 and declaring that
prescription has set in. It contended that since it was respondent – and not Sotero – who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable interest.

Ruling of the Court of Appeals

On September 28, 2005, the CA issued the assailed Decision, which contained the following decretal portion:

WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit.

SO ORDERED.20

The CA thus sustained the trial court. Applying Section 48 to petitioner’s case, the CA held that petitioner
may no longer prove that the subject policy was void ab initio or rescindible by reason of fraudulent
concealment or misrepresentation after the lapse of more than two years from its issuance. It ratiocinated that
petitioner was equipped with ample means to determine, within the first two years of the policy, whether
fraud, concealment or misrepresentation was present when the insurance coverage was obtained. If it failed to
do so within the statutory two-year period, then the insured must be protected and allowed to claim upon the
policy.

Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition.

Issues
Petitioner raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE

TRIAL COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION
IN CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.

II

WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION

OF THE INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE
TRIAL COURT.

III

WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION

FOR RECONSIDERATION.23

Petitioner’s Arguments

In praying that the CA Decision be reversed and that the case be remanded to the trial court for the conduct of
further proceedings, petitioner argues in its Petition and Reply 24 that Section 48 cannot apply to a case where
the beneficiary under the insurance contract posed as the insured and obtained the policy under fraudulent
circumstances. It adds that respondent, who was merely Sotero’s niece, had no insurable interest in the life of
her aunt.

Relying on the results of the investigation that it conducted after the claim for the insurance proceeds was
filed, petitioner insists that respondent’s claim was spurious, as it appeared that Sotero did not actually apply
for insurance coverage, was unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently obtaining insurance in the
latter’s name without her knowledge and consent.

Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given rise to rights
and obligations; as such, the action for the declaration of its nullity or inexistence does not prescribe.25

Respondent’s Arguments

Respondent, on the other hand, essentially argues in her Comment 26 that the CA is correct in applying Section
48. She adds that petitioner’s new allegation in its Petition that the policy is void ab initio merits no attention,
having failed to raise the same below, as it had claimed originally that the policy was merely voidable.

On the issue of insurable interest, respondent echoes the CA’s pronouncement that since it was Sotero who
obtained the insurance, insurable interest was present. Under Section 10 of the Insurance Code, Sotero had
insurable interest in her own life, and could validly designate anyone as her beneficiary. Respondent submits
that the CA’s findings of fact leading to such conclusion should be respected.

Our Ruling
The Court denies the Petition.

The Court will not depart from the trial and appellate courts’ finding that it was Sotero who obtained the
insurance for herself, designating respondent as her beneficiary. Both courts are in accord in this respect, and
the Court is loath to disturb this. While petitioner insists that its independent investigation on the claim
reveals that it was respondent, posing as Sotero, who obtained the insurance, this claim is no longer feasible
in the wake of the courts’ finding that it was Sotero who obtained the insurance for herself. This finding of
fact binds the Court.

With the above crucial finding of fact – that it was Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not totally disproved. Allegations of fraud, which are predicated on
respondent’s alleged posing as Sotero and forgery of her signature in the insurance application, are at once
belied by the trial and appellate courts’ finding that Sotero herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract."27 In the absence of proof of such fraudulent intent, no right to rescind arises.

Moreover, the results and conclusions arrived at during the investigation conducted unilaterally by petitioner
after the claim was filed may simply be dismissed as self-serving and may not form the basis of a cause of
action given the existence and application of Section 48, as will be discussed at length below.

Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under the
provision, an insurer is given two years – from the effectivity of a life insurance contract and while the
insured is alive – to discover or prove that the policy is void ab initio or is rescindible by reason of the
fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy, even though the policy
was obtained by fraud, concealment, or misrepresentation. This is not to say that insurance fraud must be
rewarded, but that insurers who recklessly and indiscriminately solicit and obtain business must be penalized,
for such recklessness and lack of discrimination ultimately work to the detriment of bona fide takers of
insurance and the public in general.

Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on the
other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate
policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers, claims
which may no longer be set up after the two-year period expires as ordained under the law.

Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the insured are given
the assurance that any dishonest scheme to obtain life insurance would be exposed, and attempts at unduly
denying a claim would be struck down. Life insurance policies that pass the statutory two-year period are
essentially treated as legitimate and beyond question, and the individuals who wield them are made secure by
the thought that they will be paid promptly upon claim. In this manner, Section 48 contributes to the stability
of the insurance industry.

Section 48 prevents a situation where the insurer knowingly continues to accept annual premium payments
on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent concealment
and misrepresentation, such as what obtains in the instant case. Thus, instead of conducting at the first
instance an investigation into the circumstances surrounding the issuance of Insurance Policy No. 747411
which would have timely exposed the supposed flaws and irregularities attending it as it now professes,
petitioner appears to have turned a blind eye and opted instead to continue collecting the premiums on the
policy. For nearly three years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied to it with full force and
effect.

The Court therefore agrees fully with the appellate court’s pronouncement that –

the "incontestability clause" is a provision in law that after a policy of life insurance made payable on the
death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years
from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio
or is rescindible by reason of fraudulent concealment or misrepresentation of the insured or his agent.

The purpose of the law is to give protection to the insured or his beneficiary by limiting the rescinding of the
contract of insurance on the ground of fraudulent concealment or misrepresentation to a period of only two
(2) years from the issuance of the policy or its last reinstatement.

The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums as long
as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation when the
insured dies in order to defeat the right of the beneficiary to recover under the policy.

At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given the
stability to recover under the policy when the insured dies. The provision also makes clear when the two-year
period should commence in case the policy should lapse and is reinstated, that is, from the date of the last
reinstatement.

After two years, the defenses of concealment or misrepresentation, no matter how patent or well-founded,
will no longer lie.

Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid
liability.

The so-called "incontestability clause" precludes the insurer from raising the defenses of false representations
or concealment of material facts insofar as health and previous diseases are concerned if the insurance has
been in force for at least two years during the insured’s lifetime. The phrase "during the lifetime" found in
Section 48 simply means that the policy is no longer considered in force after the insured has died. The key
phrase in the second paragraph of Section 48 is "for a period of two years."

As borne by the records, the policy was issued on August 30, 1993, the insured died on April 10, 1996, and
the claim was denied on April 16, 1997. The insurance policy was thus in force for a period of 3 years, 7
months, and 24 days. Considering that the insured died after the two-year period, the plaintiff-appellant is,
therefore, barred from proving that the policy is void ab initio by reason of the insured’s fraudulent
concealment or misrepresentation or want of insurable interest on the part of the beneficiary, herein
defendant-appellee.

Well-settled is the rule that it is the plaintiff-appellant’s burden to show that the factual findings of the trial
court are not based on substantial evidence or that its conclusions are contrary to applicable law and
jurisprudence. The plaintiff-appellant failed to discharge that burden.28

Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the cousin of
respondent’s husband, and thus insinuates that both connived to commit insurance fraud. If this were truly the
case, then petitioner would have discovered the scheme earlier if it had in earnest conducted an investigation
into the circumstances surrounding the Sotero policy. But because it did not and it investigated the Sotero
account only after a claim was filed thereon more than two years later, naturally it was unable to detect the
scheme. For its negligence and inaction, the Court cannot sympathize with its plight. Instead, its case
precisely provides the strong argument for requiring insurers to diligently conduct investigations on each
policy they issue within the two-year period mandated under Section 48, and not after claims for insurance
proceeds are filed with them.

Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen and the
insurance policies they issue, then they should cease doing business. If they could not properly screen their
agents or salesmen before taking them in to market their products, or if they do not thoroughly investigate the
insurance contracts they enter into with their clients, then they have only themselves to blame. Otherwise
said, insurers cannot be allowed to collect premiums on insurance policies, use these amounts collected and
invest the same through the years, generating profits and returns therefrom for their own benefit, and
thereafter conveniently deny insurance claims by questioning the authority or integrity of their own agents or
the insurance policies they issued to their premium-paying clients. This is exactly one of the schemes which
Section 48 aims to prevent.

Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that the
inevitable may be put off for years – or even decades – by the pendency of these unnecessary court cases. In
the meantime, they benefit from collecting the interest and/or returns on both the premiums previously paid
by the insured and the insurance proceeds which should otherwise go to their beneficiaries. The business of
insurance is a highly regulated commercial activity in the country, 29 and is imbued with public interest. 30 "An
insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and
strictly against the insurer in order to safeguard the former’s interest."31

WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the November 9,
2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION JOSE PORTUGAL PEREZ

Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice
 ATT E S TAT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson

C E R T I F I CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes
1
Rollo, pp. 3-14.
2
CA rollo, pp. 38-47; penned by Associate Justice Amelita G. Tolentino and concurred in by Associate
Justices Danilo B. Pine and Vicente S.E. Veloso.
3
Id. at 59-60; penned by Associate Justice Amelita G. Tolentino and concurred in by Associate Justices
Regalado E. Maambong and Vicente S.E. Veloso.
4
Id. at 48-56.
5
Rollo, p. 6.
6
Id. at 6-7, 71.
7
Records, p. 23.
8
Rollo, p. 7.
9
Id. at 7, 16.
10
Records, p. 2.
11
Id.
12
Presidential Decree No. 612.
13
Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage
to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification.
14
Records, pp. 19-22.
15
TSN, May 5, 1998, pp. 12-13; records, pp. 95-96.
16
Id. at 15; id. at 98.
17
Records, pp. 55-56; penned by Judge Ignacio M. Capulong.
18
Id. at 56.
19
Id. at 116-119.
20
CA rollo, p. 46.
21
Id. at 48-56.
22
Id. at 59-60.
23
Rollo, p. 9.
24
Id. at 69-75.
25
Citing Article 1410 of the Civil Code:

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
26
Rollo, pp. 57-67.
27
Great Pacific Life Assurance Corporation v. Court of Appeals, 375 Phil. 142, 152 (1999).
28
CA rollo, pp. 44-46.
29
Tongko v. The Manufacturers Life Insurance Company (Phils.), Inc., G.R. No. 167622, June 29, 2010, 622
SCRA 58, 75.
30
Republic v. Del Monte Motors, Inc., 535 Phil. 53, 60 (2006); White Gold Marine Services, Inc. v. Pioneer
Insurance & Surety Corporation, 502 Phil. 692, 700 (2005).
31
Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Company, G.R. No.
166245, April 9, 2008, 551 SCRA 1, 13.

The Lawphil Project - Arellano Law Foundation

Synopsis/Syllabi

SECOND DIVISION

[G.R. No. 113899. October 13, 1999]

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF

APPEALS AND MEDARDA V. LEUTERIO, respondents.

DECISION
QUISUMBING, J.:

This petition for review, under Rule 45 of the Rules of Court, assails the
Decision[1] dated May 17, 1993, of the Court of Appeals and its Resolution [2] dated
January 4, 1994 in CA-G.R. 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 courts 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, attorneys 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]

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]
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.
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. [5] During the trial, Dr.
Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejias
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 courts 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 PLAINTIFFS HUSBAND WILFREDO
LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT
[Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.
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 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 courts 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.[7] In a similar
vein, ample 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.[8] Consequently, where the
mortgagor pays the insurance premium under the group insurance policy, making the
loss payable to the mortgagee, the insurance is on the mortgagors 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]
Section 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 debtors 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.[10] When 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 from the mortgagor and took the
necessary action of foreclosure on the residential lot of private respondent.
[11]
In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:

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 mortgagees 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,[14] the widow of the
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. Mejias technical diagnosis of the cause of death of
Dr. Leuterio was a duly documented hospital record, and that the widows 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. Leuterios any previous hospital
confinement.[16] Dr. Leuterios death certificate stated that hypertension was only the
possible cause of death. The private respondents 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 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.

Contrary to appellants allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insureds widow who was
not even sure if the medicines taken by Dr. Leuterio were for hypertension, the
appellant had not proven nor produced any witness who could attest to Dr. Leuterios
medical history...

xxx

Appellant insurance company had failed to establish that there was concealment made
by the insured, hence, it cannot refuse payment of the claim.[17]

The fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract.[18] Misrepresentation as a defense of the insurer to
avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer.[19] In the case at bar, the
petitioner failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.
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 amount of Dr. Leuterios outstanding
indebtedness to DBP at the time of the mortgagors death. Hence, for private
respondents failure to establish the same, the action for specific performance should
be dismissed. Petitioners claim is without merit. A life insurance policy is a valued
policy.[20] Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy. [21] The mortgagor paid the premium according to
the coverage of his insurance, which states that:

The policy states that upon receipt of due proof of the Debtors death during the terms
of this insurance, a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtors death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to
the Creditor and the balance of the Sum Assured, if there is any shall then be paid to
the beneficiary/ies designated by the debtor.[22] (Emphasis omitted)

However, we noted that the Court of Appeals decision was promulgated on May
17, 1993. In private respondents memorandum, she states that DBP foreclosed in 1995
their residential lot, in satisfaction of mortgagors outstanding loan. 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
enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence,
it cannot collect the insurance proceeds, after it already foreclosed on the
mortgage. The proceeds now rightly belong to Dr. Leuterios heirs represented by his
widow, herein private respondent Medarda Leuterio.
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 mortgagors
indebtedness to Development Bank of the Philippines. Costs against petitioner.
SO ORDERED.
Mendoza, Buena, and De Leon Jr., JJ., concur.
Bellosillo, (Chairman), J., on official leave.

[1]
Rollo, pp. 36-42.
[2]
Id. at 44.
[3]
Id. at 36.
[4]
Id. at 37.
[5]
Civil Case 10788.
[6]
Rollo, pp. 18-19.
[7]
Serrano vs. Court of Appeals, 130 SCRA 327, 335 (1984).
[8]
Ibid.
[9]
43 Am Jur 2d, Insurance Section 766; citing Hill vs. International Indem. Co. 116
Kan 109, 225 P 1056, 38 ALR 362.
[10]
Rollo, p. 12.
[11]
Id. at 180.
[12]
55 Phil. 386 (1930), citing Corpus Juris, volume 26 pages 483 et seq.
[13]
Id. at 391, citing Corpus Juris, volume 26 pages 483 at seq.
[14]
Section 181, Philippine Insurance Code.
[15]
Argente vs. West Coast Life Insurance Co., 51 Phil. 725, 731 (1928). Section 26,
Philippine Insurance Code.- A neglect to communicate that which a party knows and
ought to communicate is called a concealment.
[16]
Rollo, p. 40.
[17]
Id. at 39-40.
[18]
Ng Gan Zee vs. Asian Crusader Life Assurance Corp, 122 SCRA 461, 466 (1983)
[19]
Ibid.
[20]
Third Edition, Lohel A. Martirez, Philippine Insurance Code Annotated, p. 380,
citing Belvin vs. Connecticut Mutual Life Ins., 23 Comm. 244.
[21]
Section 183. Philippine Insurance Code.
[22]
Rollo, p. 12.

THIRD DIVISION

MA. LOURDES S. FLORENDO, G.R. No. 186983

Petitioner,
Present:
VELASCO, JR., J., Chairperson,
- versus - PERALTA,
ABAD,
MENDOZA, and
PERLAS-BERNABE, JJ.
PHILAM PLANS, INC.,
PERLA ABCEDE and Promulgated:
MA. CELESTE ABCEDE,
Respondents. February 22, 2012

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

DECISION
ABAD, J.:

This case is about an insureds alleged concealment in his pension plan application of his true
state of health and its effect on the life insurance portion of that plan in case of death.

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan
with respondent Philam Plans, Inc. (Philam Plans) after some convincing by respondent Perla
Abcede. The plan had a pre-need price of P997,050.00, payable in 10 years, and had a maturity value
[1]
of P2,890,000.00 after 20 years. Manuel signed the application and left to Perla the task of
[2]
supplying the information needed in the application. Respondent Ma. Celeste Abcede, Perlas
[3]
daughter, signed the application as sales counselor.
 Aside from pension benefits, the comprehensive pension plan also provided life insurance
[4]
coverage to Florendo. This was covered by a Group Master Policy that Philippine American Life
[5]
Insurance Company (Philam Life) issued to Philam Plans. Under the master policy, Philam Life was to
automatically provide life insurance coverage, including accidental death, to all who signed up for
[6]
Philam Plans comprehensive pension plan. If the plan holder died before the maturity of the plan,
his beneficiary was to instead receive the proceeds of the life insurance, equivalent to the pre-need
price. Further, the life insurance was to take care of any unpaid premium until the pension plan
[7]
matured, entitling the beneficiary to the maturity value of the pension plan.

[8]
On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 to Manuel,
with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly
[9]
premiums.
Eleven months later or on September 15, 1998, Manuel died of blood
poisoning. Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits
[10]
under her husbands plan. Because Manuel died before his pension plan matured and his wife was
[11]
to get only the benefits of his life insurance, Philam Plans forwarded her claim to Philam Life.

[12]
On May 3, 1999 Philam Plans wrote Lourdes a letter, declining her claim. Philam Life found
that Manuel was on maintenance medicine for his heart and had an implanted pacemaker. Further, he
suffered from diabetes mellitus and was taking insulin. Lourdes renewed her demand for payment
[13] [14]
under the plan but Philam Plans rejected it, prompting her to file the present action against the
[15]
pension plan company before the Regional Trial Court (RTC) of Quezon City.

[16]
On March 30, 2006 the RTC rendered judgment, ordering Philam Plans, Perla and Ma.
Celeste, solidarily, to pay Lourdes all the benefits from her husbands pension plan,
namely: P997,050.00, the proceeds of his term insurance, and P2,890,000.00 lump sum pension
benefit upon maturity of his plan; P100,000.00 as moral damages; and to pay the costs of the suit. The
RTC ruled that Manuel was not guilty of concealing the state of his health from his pension plan
application.

[17]
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, holding that
insurance policies are traditionally contracts uberrimae fidae or contracts of utmost good faith. As
such, it required Manuel to disclose to Philam Plans conditions affecting the risk of which he was
[18]
aware or material facts that he knew or ought to know.

Issues Presented

The issues presented in this case are:

 1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he kept
blank and did not answer questions in his pension plan application regarding the ailments he suffered
from;

2. Whether or not the CA erred in holding that Manuel was bound by the failure of
respondents Perla and Ma. Celeste to declare the condition of Manuels health in the pension plan
application; and

3. Whether or not the CA erred in finding that Philam Plans approval of Manuels pension plan
application and acceptance of his premium payments precluded it from denying Lourdes claim.

Rulings of the Court

One. Lourdes points out that, seeing the unfilled spaces in Manuels pension plan application relating
to his medical history, Philam Plans should have returned it to him for completion. Since Philam Plans
chose to approve the application just as it was, it cannot cry concealment on Manuels
part. Further, Lourdes adds that Philam Plans never queried Manuel directly regarding the state of his
[19]
health. Consequently, it could not blame him for not mentioning it.

But Lourdes is shifting to Philam Plans the burden of putting on the pension plan application the true
state of Manuels health. She forgets that since Philam Plans waived medical examination for Manuel,
it had to rely largely on his stating the truth regarding his health in his application. For, after all, he
knew more than anyone that he had been under treatment for heart condition and diabetes for more
than five years preceding his submission of that application. But he kept those crucial facts from
Philam Plans.

Besides, when Manuel signed the pension plan application, he adopted as his own the written
representations and declarations embodied in it. It is clear from these representations that he
concealed his chronic heart ailment and diabetes from Philam Plans. The pertinent portion of his
representations and declarations read as follows:
I hereby represent and declare to the best of my knowledge that:

xxxx

(c) I have never been treated for heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment in the last five years.

(d) I am in good health and physical condition.

If your answer to any of the statements above reveal otherwise, please give details
in the space provided for:

Date of confinement : ____________________________

Name of Hospital or Clinic : ____________________________
Name of Attending Physician : ____________________________
 Findings : ____________________________
Others: (Please specify) : ____________________________
x x x x.[20] (Emphasis supplied)
Since Manuel signed the application without filling in the details regarding his continuing
treatments for heart condition and diabetes, the assumption is that he has never been treated for the
said illnesses in the last five years preceding his application. This is implicit from the phrase If your
answer to any of the statements above (specifically, the statement: I have never been treated for heart
condition or diabetes) reveal otherwise, please give details in the space provided for. But this is untrue
[21]
since he had been on Coumadin, a treatment for venous thrombosis, and insulin, a drug used in
[22]
the treatment of diabetes mellitus, at that time.

Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew that
Manuel had a pacemaker implanted on his chest in the 70s or about 20 years before he signed up for
[23]
the pension plan. But by its tenor, the responsibility for preparing the application belonged to
Manuel. Nothing in it implies that someone else may provide the information that Philam Plans
needed. Manuel cannot sign the application and disown the responsibility for having it filled up. If he
furnished Perla the needed information and delegated to her the filling up of the application, then she
acted on his instruction, not on Philam Plans instruction.

Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he
had a pacemaker implant in the early 70s since this did not fall within the five-year timeframe that the
[24]
disclosure contemplated. But a pacemaker is an electronic device implanted into the body and
connected to the wall of the heart, designed to provide regular, mild, electric shock that stimulates the
[25]
contraction of the heart muscles and restores normalcy to the heartbeat. That Manuel still had his
pacemaker when he applied for a pension plan in October 1997 is an admission that he remained
under treatment for irregular heartbeat within five years preceding that application.

Besides, as already stated, Manuel had been taking medicine for his heart condition and
diabetes when he submitted his pension plan application. These clearly fell within the five-year
period. More, even if Perlas knowledge of Manuels pacemaker may be applied to Philam Plans under
[26]
the theory of imputed knowledge, it is not claimed that Perla was aware of his two other afflictions
[27]
that needed medical treatments. Pursuant to Section 27 of the Insurance Code, Manuels
concealment entitles Philam Plans to rescind its contract of insurance with him.
Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let Perla fill
in the required details did not make her his agent and bind him to her concealment of his true state of
health. Since there is no evidence of collusion between them, Perlas fault must be considered solely
[28]
her own and cannot prejudice Manuel.
But Manuel forgot that in signing the pension plan application, he certified that he wrote all the
information stated in it or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program
described herein in accordance with the General Provisions set forth in this
application and hereby certify that the date and other information stated herein
are written by me or under my direction. x x x.[29] (Emphasis supplied)

Assuming that it was Perla who filled up the application form, Manuel is still bound by what it
contains since he certified that he authorized her action. Philam Plans had every right to act on the
faith of that certification.

Lourdes could not seek comfort from her claim that Perla had assured Manuel that the state
of his health would not hinder the approval of his application and that what is written on his
application made no difference to the insurance company. But, indubitably, Manuel was made aware
when he signed the pension plan application that, in granting the same, Philam Plans and Philam Life
were acting on the truth of the representations contained in that application. Thus:

DECLARATIONS AND REPRESENTATIONS

xxxx

I agree that the insurance coverage of this application is based on the

truth of the foregoing representations and is subject to the provisions of the Group
Life Insurance Policy issued by THE PHILIPPINE AMERICAN LIFE INSURANCE CO. to
PHILAM PLANS, INC.[30] (Emphasis supplied)

[31]
As the Court said in New Life Enterprises v. Court of Appeals:

It may be true that x x x insured persons may accept policies without reading them,
and that this is not negligence per se. But, this is not without any exception. It is and
was incumbent upon petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a businessman since 1965
and the contract concerns indemnity in case of loss in his money-making trade of
which important consideration he could not have been unaware as it was precisely
the reason for his procuring the same. [32]

The same may be said of Manuel, a civil engineer and manager of a construction company.
[33]
He could be expected to know that one must read every document, especially if it creates rights
and obligations affecting him, before signing the same. Manuel is not unschooled that the Court must
come to his succor. It could reasonably be expected that he would not trifle with something that
would provide additional financial security to him and to his wife in his twilight years.
Three. In a final attempt to defend her claim for benefits under Manuels pension plan, Lourdes points
out that any defect or insufficiency in the information provided by his pension plan application should
be deemed waived after the same has been approved, the policy has been issued, and the premiums
[34]
have been collected.

The Court cannot agree. The comprehensive pension plan that Philam Plans issued contains a one-
year incontestability period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we can no
longer contest for health reasons any claim for insurance under this Agreement,
except for the reason that installment has not been paid (lapsed), or that you are
not insurable at the time you bought this pension program by reason of age. If this
Agreement lapses but is reinstated afterwards, the one (1) year contestability period
shall start again on the date of approval of your request for reinstatement. [35]

The above incontestability clause precludes the insurer from disowning liability under the
policy it issued on the ground of concealment or misrepresentation regarding the health of the
insured after a year of its issuance.

[36]
Since Manuel died on the eleventh month following the issuance of his plan, the one year
incontestability period has not yet set in. Consequently, Philam Plans was not barred from
questioning Lourdes entitlement to the benefits of her husbands pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in CA-G.R. CV
87085 dated December 18, 2007.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson
DIOSDADO M. PERALTA JOSE CATRAL MENDOZA
Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

[1]
Rollo, pp. 285, 326.
[2]
Id. at 285.
[3]
Records, p. 225 (dorsal side).
[4]
Rollo, pp. 285, 324.
[5]
TSN, May 6, 2003, p. 879.
[6]
Id. at 894; records, p. 226.
[7]
Id. at 888-895.
[8]
Records, pp. 9-13.
[9]
Id. at 174-177.
[10]
Rollo, p. 286.
[11]
Records, pp. 227-232.
[12]
Rollo, p. 110.
[13]
Id. at 111-112.
[14]
Records, p. 246.
[15]
Rollo, pp. 93-96.
[16]
Records, pp. 363-399.
[17]
Penned by Associate Justice Monina Arevalo-Zearosa with Associate Justices
Conrado M. Vasquez, Jr. and Edgardo F. Sundiam concurring; rollo, pp. 38-55.
[18]
Id. at 51.
[19]
Id. at 292, 294, 296-297.
[20]
Supra note 3.
[21]
Mims & Mims Annual, 116th Ed., pp. 86-87.
[22]
Websters New World College Dictionary, Third Edition.
[23]
Rollo, pp. 285, 297-299.
[24]
Id.
[25]
Supra note 21, p. 968.
[26]
Section 30 of the Insurance Code; see: Sunace International Management Services,
Inc. v. National Labor Relations Commission, 515 Phil. 779, 787 (2006); New Life
Enterprises v. Court of Appeals, G.R. No. 94071, March 31, 1992, 207 SCRA 669,
675.
[27]
Section 27. A concealment whether intentional or unintentional entitles the injured
party to rescind a contract of insurance.
[28]
Rollo, pp. 308-311.
[29]
Records, p. 171.
[30]
Supra note 3.
[31]
Supra note 26.
[32]
Id. at 676-677.
[33]
TSN, October 28, 2002, p. 463.
[34]
Rollo, pp. 294, 296-297.
[35]
Records, p. 173.
[36]
Rollo, p. 286.
G.R. No. 183272, October 15, 2014 - SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, v. SANDRA
TAN KIT AND THE ESTATE OF THE DECEASED NORBERTO TAN KIT, Respondents.
PHILIPPINE SUPREME COURT DECISIONS

SECOND DIVISION

G.R. No. 183272, October 15, 2014

SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner, v. SANDRA TAN KIT AND THE ESTATE OF THE
DECEASED NORBERTO TAN KIT, Respondents.

DECISION

DEL CASTILLO, J.:

The Court of Appeals’ (CA) imposition of 12% interest on the P13,080.93 premium refund is the only
matter in question in this case.

This Petition for Review on Certiorari1 assails the October 17, 2007 Decision2 of CA in CA-G.R. CV No.
86923, which, among others, imposed a 12% per annum rate of interest reckoned from the time of
death of the insured until fully paid, on the premium to be reimbursed by petitioner Sun Life of
Canada (Philippines), Inc. (petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the
Estate of the Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is the
CA’s June 12, 2008 Resolution3 denying petitioner’s Motion for Reconsideration of the said Decision.

Factual Antecedents

Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose
application for a life insurance policy,4 with face value of P300,000.00, was granted by petitioner on
October 28, 1999. On February 19, 2001, or within the two-year contestability period,5 Norberto died
of disseminated gastric carcinoma.6 Consequently, respondent Tan Kit filed a claim under the subject
policy.

In a Letter7 dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of
Norberto’s failure to fully and faithfully disclose in his insurance application certain material and
relevant information about his health and smoking history. Specifically, Norberto answered “No” to
the question inquiring whether he had smoked cigarettes or cigars within the last 12 months prior to
filling out said application.8 However, the medical report of Dr. Anna Chua (Dr. Chua), one of the
several physicians that Norberto consulted for his illness, reveals that he was a smoker and had only
stopped smoking in August 1999. According to petitioner, its underwriters would not have approved
Norberto’s application for life insurance had they been given the correct information. Believing that
the policy is null and void, petitioner opined that its liability is limited to the refund of all the
premiums paid. Accordingly, it enclosed in the said letter a check for P13,080.93 representing the
premium refund.

In a letter9 dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted on
the payment of the insurance proceeds.

On October 4, 2002, petitioner filed a Complaint10 for Rescission of Insurance Contract before the
Regional Trial Court (RTC) of Makati City.

Ruling of the Regional Trial Court

In its November 30, 2005 Decision,11 the RTC noted that petitioner’s physician, Dr. Charity Salvador
(Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy E.
Javelosa (Javelosa), answered “NO” to the question “Are you aware of anything about the life to be
insured’s lifestyle, hazardous sports, habits, medical history, or any risk factor that would have an
adverse effect on insurability?” in her Agent’s Report. Javelosa also already knew Norberto two years
prior to the approval of the latter’s application for insurance. The RTC concluded that petitioner,
through the above-mentioned circumstances, had already cleared Norberto of any misrepresentation
that he may have committed. The RTC also opined that the affidavit of Dr. Chua, presented as part of
petitioner’s evidence and which confirmed the fact that the insured was a smoker and only stopped
smoking a year ago [1999], is hearsay since Dr. Chua did not testify in court. Further, since Norberto
had a subsisting insurance policy with petitioner during his application for insurance subject of this
case, it was incumbent upon petitioner to ascertain the health condition of Norberto considering the
additional burden that it was assuming. Lastly, petitioner did not comply with the requirements for
rescission of insurance contract as held in Philamcare Health Systems, Inc. v. Court of Appeals.12 Thus,
the dispositive portion of the RTC Decision:chanRoblesvirtualLawlibrary

WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the
[respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay the
[respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(P300,000.00), representing the face value of the insurance policy with interest at six percent (6%) per
annum from October 4, 2002 until fully paid.

Cost de oficio.

SO ORDERED.13
Petitioner moved for reconsideration,14 but was denied in an Order15 dated February 15, 2006.

Hence, petitioner appealed to the CA.

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17, 2007.

From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr.
Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom he
confided that he had stopped smoking only in 1999. At the time therefore that he applied for
insurance policy on October 28, 1999, there is no truth to his claim that he did not smoke cigarettes
within 12 months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the insurance policy. This
gave petitioner the right to rescind the insurance contract which it properly exercised in this case.

In addition, the CA held that the content of Norberto’s medical records are deemed admitted by
respondents since they failed to deny the same despite having received from petitioner a Request for
Admission pursuant to Rule 26 of the Rules of Court.17 And since an admission is in the nature of
evidence the legal effects of which form part of the records, the CA discredited the RTC’s ruling that
the subject medical records and the affidavits executed by Norberto’s physicians attesting to the truth
of the same were hearsay.

The dispositive portion of the CA Decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed
Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered GRANTING the
complaint a quo.

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from the time of the
death of the insured until fully paid.

SO ORDERED.18chanrobleslaw

The parties filed their separate motions for reconsideration.19 While respondents questioned the
factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the imposition of
interest on the premium ordered refunded to respondents.

However, the appellate court denied the motions in its June 12, 2008
Resolution,20viz:chanRoblesvirtualLawlibrary

WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the
[petitioner] and the [respondents] are hereby DENIED.

SO ORDERED.21

Only petitioner appealed to this Court through the present Petition for Review on Certiorari.

Issue

The sole issue in this case is whether petitioner is liable to pay interest on the premium to be refunded
to respondents.

The Parties’ Arguments

Petitioner argues that no interest should have been imposed on the premium to be refunded because
the CA Decision does not provide any legal or factual basis therefor; that petitioner directly and timely
tendered to respondents an amount representing the premium refund but they rejected it since they
opted to pursue their claim for the proceeds of the insurance policy; that respondents should bear the
consequence of their unsound decision of rejecting the refund tendered to them; and, that petitioner
is not guilty of delay or of invalid or unjust rescission as to make it liable for interest. Hence, following
the ruling in Tio Khe Chio v. Court of Appeals,22 no interest can be assessed against petitioner.

Respondents, on the other hand, contend that the reimbursement of premium is clearly a money
obligation or one that arises from forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they admit that they refused the tender
of payment of the premium refund, they aver that they only did so because they did not want to
abandon their claim for the proceeds of the insurance policy. In any case, what petitioner should have
done under the circumstances was to consign the amount of payment in court during the pendency of
the case.

Our Ruling

Tio Khe Chio is not applicable in this case.

Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue of
payment of interest. There, the Court pointed to Sections 243 and 244 of the Insurance Code which
explicitly provide for payment of interest when there is unjustified refusal or withholding of payment
of the claim by the insurer, 23 and to Article 220924 of the New Civil Code which likewise provides for
payment of interest when the debtor is in delay.

The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of interest
on the insurance proceeds in which the claim therefor was either unreasonably denied or withheld or
the insurer incurred delay in the payment thereof. In this case, what is involved is an order for
petitioner to refund to respondents the insurance premium paid by Norberto as a consequence of the
rescission of the insurance contract on account of the latter’s concealment of material information in
his insurance application. Moreover, petitioner did not unreasonably deny or withhold the insurance
proceeds as it was satisfactorily established that Norberto was guilty of concealment.

Nature of interest imposed by the CA

There are two kinds of interest – monetary and compensatory.

“Monetary interest refers to the compensation set by the parties for the use or forbearance of
money.”25 No such interest shall be due unless it has been expressly stipulated in writing.26 “On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law or
by the courts.”27 The interest mentioned in Articles 2209 and 221228 of the Civil Code applies to
compensatory interest.29cralawlawlibrary

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this case,
the subject interest was not one which was agreed upon by the parties in writing. This being the case
and judging from the tenor of the CA, to wit:chanRoblesvirtualLawlibrary

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from time of death of
the insured until fully paid.30chanrobleslaw

there can be no other conclusion than that the interest imposed by the appellate court is in the nature
of compensatory interest.

The CA incorrectly imposed

compensatory interest on the premium
refund reckoned from the time of death
of the insured until fully paid

As a form of damages, compensatory interest is due only if the obligor is proven to have failed to
comply with his obligation.31cralawlawlibrary

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching to
the said notice a check representing the amount of refund. However, respondents refused to accept
the same since they were seeking for the release of the proceeds of the policy. Because of this discord,
petitioner filed for judicial rescission of the contract. Petitioner, after receiving an adverse judgment
from the RTC, appealed to the CA. And as may be recalled, the appellate court found Norberto guilty
of concealment and thus upheld the rescission of the insurance contract and consequently decreed
the obligation of petitioner to return to respondents the premium paid by Norberto. Moreover, we
find that petitioner did not incur delay or unjustifiably deny the claim.

Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.

Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within the
said period, then the amount shall be deemed equivalent to a forbearance of credit.32 In such a case,
the rate of interest shall be 6% per annum.33cralawlawlibrary

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 86923
is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse to
respondents Sandra Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of P13,080.93
representing the premium paid by the insured within fifteen (15) days from date of finality of this
Decision. If the amount is not reimbursed within said period, the same shall earn interest of 6% per
annum until fully paid.

SO ORDERED.cralawred

Carpio, (Chairperson), Peralta,* Del Castillo, Reyes,** and Leonen, JJ., concur.

Endnotes:

* Per Raffle dated October 8, 2014.

** Per Special Order No. 1844 dated October 14, 2014.

1Rollo, pp. 12-24.

2 CA rollo, pp. 99-113; penned by Associate Justice Josefina Guevara-Salonga and concurred in by
Associate Justices Vicente Q. Roxas and Ramon R. Garcia.

3 Id. at 158-159.

4 With Policy No. 030500710; records, pp. 45-52.

5 As provided under Section 48 of the Insurance Code viz:chanRoblesvirtualLawlibrary

Sec. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to the commencement of an action on the
contract.
After a policy of life insurance made payable on the death of the insured shall have been in force
during the lifetime of the insured for a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of the insured or his agent.

6 See Death Certificate, records, p. 7.

7 Id. at 8.

8 Id. at 6.

9 Id. at 10.

10 Id. at 1-5.

11 Id. at 240-244; penned by Judge Cesar O. Untalan.

12 429 Phil. 82, 93 (2002); It was held therein that the cancellation of health care agreements as in
insurance policies requires the concurrence of the following conditions:chanRoblesvirtualLawlibrary

“1. Prior notice of cancellation to insured;

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

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

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

13 Records, p. 243.

14 Id. at 255-266.

15 Id. at 288-289.

16 CA rollo, pp. 99-113.

17 Rule 26. ADMISSION BY ADVERSE PARTY

SECTION 1. Request for Admission. – At any time after issues have been joined, a party may file and
serve upon any other party a written request for the admission by the latter of the genuineness of any
material and relevant document described in and exhibited with the request or of the truth of any
material and relevant matter of fact set forth in the request. Copies of the documents shall be
delivered with the request unless copies have already been furnished.

Sec. 2. Implied admission. – Each of the matters of which an admission is requested shall be deemed
admitted unless, within a period designated in the request, which shall not be less than fifteen (15)
days after service thereof, or within such further time as the court may allow on motion, the party to
whom the request is directed files and serves upon the party requesting the admission a sworn
statement either denying specifically the matters of which an admission is requested or setting forth in
detail the reasons why he cannot truthfully either admit or deny those matters.

xxxx

18 CA rollo, p. 112; emphasis supplied.

19 Id. at 114-121 and 123-128.

20 Id. at 158-159.

21 Id. at 159.

22 279 Phil. 127 (1991).

23 Sections 243 and 244 provide as follows:chanRoblesvirtualLawlibrary

SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy other
than life insurance policy, shall be paid within thirty days after proof of loss is received by the insurer
and ascertainment of the loss or damage is made either by agreement between the insured and the
insurer or by arbitration; but if such ascertainment is not had or made within sixty days after such
receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days
after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will
entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the
rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is
based on the ground that the claim is fraudulent.

SEC. 244. In case of any litigation for the enforcement of any policy or contract of insurance, it shall be
the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the
payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall consist of attorney’s fees
and other expenses incurred by the insured person by reason of such unreasonable denial or
withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the
amount of the claim due the insured, from the date following the time prescribed in section two
hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully
satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections
shall be considered prima facie evidence of unreasonable delay in payment. (Emphases supplied)

24 Article 2209. If the obligation consists in the payment of a sum of money and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum. (Emphasis supplied)

25Asia Trust Development Bank v. Tuble, G.R. No. 183987, July 25, 2012, 677 SCRA 519, 536.

26Siga-an v. Villanueva, 596 Phil. 760, 769 (2009).

27Asia Trust Development Bank v. Tuble, supra note 25.

28 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded although the
obligation may be silent upon this point.

29Siga-an v. Villanueva, supra note 26 at 772.

30 CA rollo, p. 112. Emphasis supplied.

31Asia Trust Development Bank v. Tuble, supra note 25.

32Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 458.

33 Id.

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

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF

APPEALS and JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

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

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

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

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

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

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

plaintiff;

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

SO ORDERED.[3]

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

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

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

(2) of any person on whom he depends wholly or in part for education or

support, or in whom he has a pecuniary interest;

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

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

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

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

In addition to the above condition, petitioner additionally required the applicant

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

Petitioner cannot rely on the stipulation regarding Invalidation of agreement

which reads:

Failure to disclose or misrepresentation of any material information by the member in

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

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

(A)lthough false, a representation of the expectation, intention, belief, opinion, or

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

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

1. Prior notice of cancellation to insured;

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

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

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

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

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

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

[1]
Record, p. 28.
[2]
Exhibit 4, Record, p. 156.
[3]
Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp. 134-135.
[4]
Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima,
concurred in by Associate Justices Fermin A. Martin, Jr. and Conchita Carpio
Morales; Rollo, p. 45.
[5]
Resolution dated July 23, 1996; Rollo, p. 48.
[6]
Section 48 of P.D. No. 1460 otherwise known as the Insurance Code.
[7]
Petition, pp. 13-14; Rollo, pp. 22-23.
[8]
See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2,
1986 ed. p. 6.
[9]
Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).
[10]
Record, p. 28.
[11]
Ibid.
[12]
Ibid.
[13]
Ibid., p. 13.
[14]
Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.
[15]
Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of
America, supra; Boutelle v. Westchester Fire Ins. Co., 51 Vt 4 cited in 43 Am Jur 2d
1016.
[16]
Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan
Zee v. Asian Crusader Life Assurance Corp., 122 SCRA 461 [1983].
[17]
Section 48, Insurance Code.
[18]
Malayan Insurance v. Cruz Arnaldo, 154 SCRA 672 [1987].
[19]
Heirs of Ildefonso Cosculluela, Sr. v. Rico General Insurance Corporation, 179
SCRA 511 [1989].
[20]
Landicho v. GSIS, 44 SCRA 7 [1972]; Western Guaranty Company v. Court of
Appeals, 187 SCRA 652 [1990].
[21]
44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna Insurance Co. v. Rhodes,
170 F2d 111; Insurance Co. v. Norton, 96 U.S. 234, 24 L ed 689; Pfeiffer v. Missouri
State Life Ins. Co., 174 Ark 783, 297 SW 847.
[22]
See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109, 66 ALR3d
1196; Hunt v. Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am Jur 2d 289.
[23]
Record, p. 257.
[24]
Exhibit B, Exhibits D to D-7; Record, pp. 88-97.
 Today is Sunday, December 10, 2017

SECOND DIVISION

April 18, 2016

G.R. No. 195176

THE INSULAR LIFE

ASSURANCE COMPANY,
LTD., Petitioner,
vs.
PAZ Y. KHU, FELIPE Y. KHU, JR., and FREDERICK Y. KHU, Respondents.

DECISION

DEL CASTILLO, J.:

The date of last reinstatement mentioned in Section 48 of the Insurance Code pertains to the date that the
insurer approved· the application for reinstatement. However, in light of the ambiguity in the insurance
documents to this case, this Court adopts the interpretation favorable to the insured in determining the date
when the reinstatement was approved.

Assailed in this Petition for Review on Certiorari1 are the June 24, 2010 Decision2 of the Court of Appeals
(CA), which dismissed the Petition in CA-GR. CV No. 81730, and its December 13, 2010 Resolution3 which
denied the petitioner Insular Life Assurance Company Ltd. 's (Insular Life) motion for partial
reconsideration.4

Factual Antecedents

On March 6, 1997, Felipe N. Khu, Sr. (Felipe) applied for a life insurance policy with Insular Life under the
latter’s Diamond Jubilee Insurance Plan. Felipe accomplished the required medical questionnaire wherein he
did not declare any illness or adverse medical condition. Insular Life thereafter issued him Policy Number
A000015683 with a face value of P1 million. This took effect on June 22, 1997.5

On June 23, 1999, Felipe’s policy lapsed due to non-payment of the premium covering the period from June
22, 1999 to June 23, 2000.6

On September 7, 1999, Felipe applied for the reinstatement of his policy and paid P25,020.00 as premium.
Except for the change in his occupation of being self-employed to being the Municipal Mayor of Binuangan,
Misamis Oriental, all the other information submitted by Felipe in his application for reinstatement was
virtually identical to those mentioned in his original policy.7

On October 12, 1999, Insular Life advised Felipe that his application for reinstatement may only be
considered if he agreed to certain conditions such as payment of additional premium and the cancellation of
the riders pertaining to

premium waiver and accidental death benefits. Felipe agreed to these conditions8 and on December 27, 1999
paid the agreed additional premium of P3,054.50.9

On January 7, 2000, Insular Life issued Endorsement No. PNA000015683, which reads:

This certifies that as agreed by the Insured, the reinstatement of this policy has been approved by the
Company on the understanding that the following changes are made on the policy effective June 22, 1999:

1. The EXTRA PREMIUM is imposed; and

2. The ACCIDENTAL DEATH BENEFIT (ADB) and WAIVER OF PREMIUM DISABILITY (WPD) rider
originally attached to and forming parts of this policy [are] deleted.

In consequence thereof, the premium rates on this policy are adjusted to P28,000.00 annually, P14,843.00
semi-annually and P7,557.00 quarterly, Philippine currency.10

On June 23, 2000, Felipe paid the annual premium in the amount of P28,000.00 covering the period from
June 22, 2000 to June 22, 2001. And on July 2, 2001, he also paid the same amount as annual premium
covering the period from June 22, 2001 to June 21, 2002.11

On September 22, 2001, Felipe died. His Certificate of Death enumerated the following as causes of death:

Immediate cause: a. End stage renal failure, Hepatic failure

Antecedent cause: b. Congestive heart failure, Diffuse myocardial ischemia.

Underlying cause: c. Diabetes Neuropathy, Alcoholism, and Pneumonia.12

On October 5, 2001, Paz Y. Khu, Felipe Y. Khu, Jr. and Frederick Y. Khu (collectively, Felipe’s beneficiaries
or respondents) filed with Insular Life a claim for benefit under the reinstated policy. This claim was denied.
Instead, Insular Life advised Felipe’s beneficiaries that it had decided to rescind the reinstated policy on the
grounds of concealment and misrepresentation by Felipe.

Hence, respondents instituted a complaint for specific performance with damages. Respondents prayed that
the reinstated life insurance policy be declared valid, enforceable and binding on Insular Life; and that the
latter be ordered to pay unto Felipe’s beneficiaries the proceeds of this policy, among others.13

In its Answer, Insular Life countered that Felipe did not disclose the ailments (viz., Type 2 Diabetes Mellitus,
Diabetes Nephropathy and Alcoholic Liver Cirrhosis with Ascites) that he already had prior to his application
for reinstatement of his insurance policy; and that it would not have reinstated the insurance policy had Felipe
disclosed the material information on his adverse health condition. It contended that when Felipe died, the
policy was still

contestable.14
Ruling of the Regional Trial Court (RTC)

On December 12, 2003, the RTC, Branch 39 of Cagayan de Oro City found15 for Felipe’s beneficiaries, thus:

WHEREFORE, in view of the foregoing, plaintiffs having substantiated [their] claim by preponderance of
evidence, judgment is hereby rendered in their favor and against defendants, ordering the latter to pay jointly
and severally the

sum of One Million (P1,000,000.00) Pesos with legal rate of interest from the date of demand until it is fully
paid representing the face value of Plan Diamond Jubilee No. PN-A000015683 issued to insured the late
Felipe N. Khu[,] Sr; the sum of P20,000.00 as moral damages; P30,000.00 as attorney’s fees; P10,000.00 as
litigation expenses.

SO ORDERED.16

In ordering Insular Life to pay Felipe’s beneficiaries, the RTC agreed with the latter’s claim that the insurance
policy was reinstated on June 22, 1999. The RTC cited the ruling in Malayan Insurance Corporation v. Court
of

Appeals17 that any ambiguity in a contract of insurance should be resolved strictly against the insurer upon the
principle that an insurance contract is a contract of adhesion. 18 The RTC also held that the reinstated
insurance policy had already become incontestable by the time of Felipe’s death on September 22, 2001 since
more than two years had already lapsed from the date of the policy’s reinstatement on June 22, 1999. The
RTC noted that since it was Insular Life itself that supplied all the pertinent forms relative to the reinstated
policy, then it is barred from taking advantage of any ambiguity/obscurity perceived therein particularly as
regards the date when the reinstated insurance policy became effective.

Ruling of the Court of Appeals

On June 24, 2010, the CA issued the assailed Decision19 which contained the following decretal portion:

WHEREFORE, the appeal is DISMISSED. The assailed Judgment of the lower court is AFFIRMED with the
MODIFICATION that the award of moral damages, attorney’s fees and litigation expenses [is] DELETED.

SO ORDERED.20

The CA upheld the RTC’s ruling on the non-contestability of the reinstated insurance policy on the date the
insured died. It declared that contrary to Insular Life’s contention, there in fact exists a genuine ambiguity or
obscurity in the language of the two documents prepared by Insular Life itself, viz., Felipe’s Letter of
Acceptance and Insular Life’s Endorsement; that given the obscurity/ambiguity in the language of these two
documents, the construction/interpretation that favors the insured’s right to recover should be adopted; and
that in keeping with this principle, the insurance policy in dispute must be deemed reinstated as of June 22,
1999.21

Insular Life moved for partial reconsideration22 but this was denied by the CA in its Resolution of December
13, 2010.23 Hence, the present Petition.
 Issue

The fundamental issue to be resolved in this case is whether Felipe’s reinstated life insurance policy is
already incontestable at the time of his death.

Petitioner’s Arguments

In praying for the reversal of the CA Decision, Insular Life basically argues that respondents should not be
allowed to recover on the reinstated insurance policy because the two-year contestability period had not yet
lapsed inasmuch as the insurance policy was reinstated only on December 27, 1999, whereas Felipe died on
September 22, 2001;24 that the CA overlooked the fact that Felipe paid the additional extra premium only on
December 27, 1999, hence, it is only upon this date that the reinstated policy had become effective; that the
CA erred in declaring that resort to the principles of statutory construction is still necessary to resolve that
question given that the Application for Reinstatement, the Letter of Acceptance and the Endorsement in and
by themselves already embodied unequivocal provisions stipulating that the two-year contestability clause
should be reckoned from the date of approval of the reinstatement; 25 and that Felipe’s misrepresentation and
concealment of material facts in regard to his health or adverse medical condition gave it (Insular Life) the
right to rescind the contract of insurance and consequently, the right to deny the claim of Felipe’s
beneficiaries for death benefits under the disputed policy.26

Respondents’ Arguments

Respondents maintain that the phrase "effective June 22, 1999" found in both the Letter of Acceptance and in
the Endorsement is unclear whether it refers to the subject of the sentence, i.e., the "reinstatement of this
policy" or to the subsequent phrase "changes are made on the policy;" that granting that there was any
obscurity or ambiguity in the insurance policy, the same should be laid at the door of Insular Life as it was
this insurance company that prepared the necessary documents that make up the same;27 and that given the
CA’s finding which effectively affirmed the RTC’s finding on this particular issue, it stands to reason that the
insurance policy had indeed become incontestable upon the date of Felipe’s death.28

Our Ruling

We deny the Petition.

The Insurance Code pertinently provides that:

Sec. 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.

The rationale for this provision was discussed by the Court in Manila Bankers Life Insurance Corporation v.
Aban,29

Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on the
other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate
policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers, claims
which may no longer be set up after the two-year period expires as ordained under the law.

xxxx

The Court therefore agrees fully with the appellate court’s pronouncement that-

xxxx

‘The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums as long
as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation when the
insured dies in order to defeat the right of the beneficiary to recover under the policy.

At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given the
stability to recover under the policy when the insured dies. The provision also makes clear when the two-year
period should commence in case the policy should lapse and is reinstated, that is, from the date of the last
reinstatement’.

In Lalican v. The Insular Life Assurance Company, Limited,30 which coincidentally also involves the herein
petitioner, it was there held that the reinstatement of the insured’s policy is to be reckoned from the date when
the

application was processed and approved by the insurer. There, we stressed that:

To reinstate a policy means to restore the same to premium-paying status after it has been permitted to lapse.
xxx

xxxx

In the instant case, Eulogio’s death rendered impossible full compliance with the conditions for reinstatement
of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application for Reinstatement
and deposit

the amount for payment of his overdue premiums and interests thereon with Malaluan; but Policy No.
9011992 could only be considered reinstated after the Application for Reinstatement had been processed and
approved by Insular Life during Eulogio’s lifetime and good health.31

Thus, it is settled that the reinstatement of an insurance policy should be reckoned from the date when the
same was approved by the insurer.

In this case, the parties differ as to when the reinstatement was actually approved. Insular Life claims that it
approved the reinstatement only on December 27, 1999. On the other hand, respondents contend that it was
on June
22, 1999 that the reinstatement took effect.

The resolution of this issue hinges on the following documents: 1) Letter of Acceptance; and 2) the
Endorsement.

The Letter of Acceptance32 wherein Felipe affixed his signature was actually drafted and prepared by Insular
Life. This pro-forma document reads as follows:

LETTER OF ACCEPTANCE

Place: Cag. De [O]ro City

The Insular Life Assurance Co., Ltd.

P.O. Box 128, MANILA

Policy No. A000015683

Gentlemen:

Thru your Reinstatement Section, I/WE learned that this policy may be reinstated provided
I/we agree to the following condition/s indicated with a check mark:

[xx] Accept the imposition of an extra/additional extra premium of [P]5.00 a year per thousand
of insurance; effective June 22, 1999

[ ] Accept the rating on the WPD at ____ at standard rates; the ABD at _____ the standard
rates; the SAR at P____ annually per thousand of Insurance;

[xx] Accept the cancellation of the Premium waiver & Accidental death benefit.

[]

I am/we are agreeable to the above condition/s. Please proceed with the reinstatement of the
policy.

Very truly yours,

Felipe N. Khu, Sr.

After Felipe accomplished this form, Insular Life, through its Regional Administrative Manager, Jesse James
R. Toyhorada, issued an Endorsement33 dated January 7, 2000. For emphasis, the Endorsement is again
quoted as follows:

ENDORSEMENT

PN-A000015683

This certifies that as agreed to by the Insured, the reinstatement of this policy has been
approved by the Company on the understanding that the following changes are made on the
 policy effective June 22, 1999:

1. The EXTRA PREMIUM is imposed; and

2. The ACCIDENTAL DEATH BENEFIT (ADB) and WAIVER OF PREMIUM DISABILITY

(WPD) rider originally attached to and forming parts of this policy is deleted.

In consequence thereof, the PREMIUM RATES on this policy are adjusted to [P]28,000.00
annuallly, [P]14,843.00 semi-annually and [P]7,557.00 quarterly, Philippine Currency.

Cagayan de Oro City, 07 January 2000.

RCV/

(Signed) Authorized Signature

Based on the foregoing, we find that the CA did not commit any error in holding that the subject insurance
policy be considered as reinstated on June 22, 1999. This finding must be upheld not only because it accords
with the evidence, but also because this is favorable to the insured who was not responsible for causing the
ambiguity or obscurity in the insurance contract.34

The CA expounded on this point thus –

The Court discerns a genuine ambiguity or obscurity in the language of the two documents.

In the Letter of Acceptance, Khu declared that he was accepting "the imposition of an extra/additional x x x
premium of P5.00 a year per thousand of insurance; effective June 22, 1999". It is true that the phrase as used
in this

particular paragraph does not refer explicitly to the effectivity of the reinstatement. But the Court notes that
the reinstatement was conditioned upon the payment of additional premium not only prospectively, that is, to
cover the

remainder of the annual period of coverage, but also retroactively, that is for the period starting June 22,
1999. Hence, by paying the amount of P3,054.50 on December 27, 1999 in addition to the P25,020.00 he had
earlier paid on September 7, 1999, Khu had paid for the insurance coverage starting June 22, 1999. At the
very least, this circumstance has engendered a true lacuna.

In the Endorsement, the obscurity is patent. In the first sentence of the Endorsement, it is not entirely clear
whether the phrase "effective June 22, 1999" refers to the subject of the sentence, namely "the reinstatement
of this policy," or to the subsequent phrase "changes are made on the policy."

The court below is correct. Given the obscurity of the language, the construction favorable to the insured will
be adopted by the courts.

Accordingly, the subject policy is deemed reinstated as of June 22, 1999. Thus, the period of contestability
has lapsed.35

In Eternal Gardens Memorial Park Corporation v. The Philippine American Life Insurance Company, 36 we
ruled in favor of the insured and in favor of the effectivity of the insurance contract in the midst of ambiguity
in the insurance contract provisions. We held that:

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

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

xxxx

As a final note, to characterize the insurer and the insured as contracting parties on equal footing is inaccurate
at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the
industry

purposefully used to its advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all understandable to laypersons,
that are imposed on those who wish to avail of insurance. As such, insurance contracts are imbued with
public interest that must be considered whenever the rights and obligations of the insurer and the insured are
to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be
obligated to act with haste upon insurance applications, to either deny or approve the same, or otherwise be
bound to honor the application as a valid, binding, and effective insurance contract.37

Indeed, more than two years had lapsed from the time the subject insurance policy was reinstated on June 22,
1999 vis-a-vis Felipe’s death on September 22, 2001.1âwphi1 As such, the subject insurance policy has
already become incontestable at the time of Felipe’s death.

Finally, we agree with the CA that there is neither basis nor justification for the RTC’s award of moral
damages, attorney’s fees and litigation expenses; hence this award must be deleted.

WHEREFORE, the Petition is DENIED. The assailed .June 24, 2010 Decision and December 13, 2010
Resolution of the Court of Appeals in CA-GR. CV No. 81730 are AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION JOSE CATRAL MENDOZA

 Associate Justice Associate Justice

MARVIC M.V.F. LEONEN

Associate Justice

ATTE S TATI O N

I attest that the conclusions in the above Decision had· been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson

C E RT I FI CAT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes
1
Rollo, pp. 28-29.
2
Id. at 70-82; penned by Associ.ate Justice Romuio V Borja and concurred in by Associate Justices Edgardo
T. Lloren and Ramon Paul L. Hernando.
3
Id. at 83-84.
4
Id. at 442-461.
5
Id. at 71.
6
Id.
7
Id.
8
Id. at unpaginated before p. 72.
9
Id. at 72.
10
Records, p. 80.
11
Rollo, p. 72.
12
Id. at 72-73.
13
Id. at 70 and 73.
14
Id. at unpaginated before p. 74.
15
Id. at 277-297; penned by Judge Downey C. Valdevilla.
16
Id. at 296-297.
17
336 Phil. 977 (1997).
18
Id. at 989.
19
Rollo, p. 70-82.
20
Id. at 81-82.
21
Id. at 80-81.
22
Id. at 442-461.
23
Id. at 83-84.
24
Id. at 583.
25
Id. at 581-582.
26
Id. at 592.
27
Id. at 611.
28
Id. at 607.
29
G.R. No. 175666, July 29, 2013, 702 SCRA 417, 427-429.
30
613 Phil. 518 (2009).
31
Id. at 535-537.
32
Records, p. 85, dorsal side.
33
Id. at 80.
34
CIVIL CODE OF THE PHILIPPINES, Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
35
Rollo, pp. 80-81.
36
574 Phil. 161 (2008).
37
Id. at 172-174.

The Lawphil Project - Arellano Law Foundation

THIRD DIVISION

HEIRS OF LORETO C. MARAMAG, G.R. No. 181132

represented by surviving spouse
VICENTA PANGILINAN MARAMAG,
Petitioners,

- versus - Present:

YNARES-SANTIAGO, J.,
EVA VERNA DE GUZMAN MARAMAG, Chairperson,
ODESSA DE GUZMAN MARAMAG, CARPIO,*
KARL BRIAN DE GUZMAN CORONA,**
MARAMAG, TRISHA ANGELIE NACHURA, and
MARAMAG, THE INSULAR LIFE PERALTA, JJ.
ASSURANCE COMPANY, LTD., and
GREAT PACIFIC LIFE ASSURANCE Promulgated:
CORPORATION,
Respondents. June 5, 2009

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

DECISION

NACHURA, J.:

This is a petition[1] for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside
the Resolution[2] dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No. 85948,
dismissing petitioners appeal for lack of jurisdiction.
The case stems from a petition [3] filed against respondents with the Regional Trial Court, Branch 29, for
revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer for a
temporary restraining order (TRO) and a writ of preliminary injunction.

The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto
Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva de Guzman Maramag
(Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to
receive any proceeds from his insurance policies from Insular Life Assurance Company, Ltd. (Insular)
[4]
and Great Pacific Life Assurance Corporation (Grepalife); [5] (3) the illegitimate children of
LoretoOdessa, Karl Brian, and Trisha Angeliewere entitled only to one-half of the legitime of the
legitimate children, thus, the proceeds released to Odessa and those to be released to Karl Brian and
Trisha Angelie were inofficious and should be reduced; and (4) petitioners could not be deprived of
their legitimes, which should be satisfied first.

In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged,
among others, that part of the insurance proceeds had already been released in favor of Odessa, while
the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon
the appointment of their legal guardian. Petitioners also prayed for the total amount of P320,000.00
as actual litigation expenses and attorneys fees.

In answer,[6] Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl
Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the insurance
proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto,
it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha
Angelie, as the remaining designated beneficiaries; and that it released Odessas share as she was of
age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending submission
of letters of guardianship. Insular alleged that the complaint or petition failed to state a cause of
action insofar as it sought to declare as void the designation of Eva as beneficiary, because Loreto
revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy No.
A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and
Trisha Angelie, considering that no settlement of Loretos estate had been filed nor had the respective
shares of the heirs been determined. Insular further claimed that it was bound to honor the insurance
policies designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the
Insurance Code.

In its own answer[7] with compulsory counterclaim, Grepalife alleged that Eva was not designated as an
insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were
denied because Loreto was ineligible for insurance due to a misrepresentation in his application form
that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the legitimate family of
Loreto; and that the law on succession does not apply where the designation of insurance
beneficiaries is clear.

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners,
summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their
answer. Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated
May 7, 2004.

During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their
respective answers be resolved first. The trial court ordered petitioners to comment within 15 days.

In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal
whether the complaint itself was proper or not and that the designation of a beneficiary is an act of
liberality or a donation and, therefore, subject to the provisions of Articles 752 [8] and 772[9] of the Civil
Code.

In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the
designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also
reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally
married to Vicenta Pangilinan Maramag.

On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads

WHEREFORE, the motion to dismiss incorporated in the answer of defendants

Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian
and Trisha Maramag. The action shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.[10]

In so ruling, the trial court ratiocinated thus

Art. 2011 of the Civil Code provides that the contract of insurance is governed by the
(sic) special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code.The principal law on insurance is the Insurance Code, as
amended. Only in case of deficiency in the Insurance Code that the Civil Code may
be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)

The Insurance Code, as amended, contains a provision regarding to whom the

insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made, unless otherwise specified in the
 policy. Since the defendants are the ones named as the primary beneficiary (sic) in
the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the beneficiary
has a vested right to the indemnity, unless the insured reserves the right to change
the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).

Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect
the insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which
can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern
Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme Court
made the following pronouncements[:]

With the finding of the trial court that the proceeds to the
Life Insurance Policy belongs exclusively to the defendant as his
individual and separate property, we agree that the proceeds of an
insurance policy belong exclusively to the beneficiary and not to
the estate of the person whose life was insured, and that such
proceeds are the separate and individual property of the
beneficiary and not of the heirs of the person whose life was
insured, is the doctrine in America. We believe that the same
doctrine obtains in these Islands by virtue of Section 428 of the
Code of Commerce x x x.

In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic)
no sufficient cause of action against defendants Odessa, Karl Brian and Trisha
Angelie Maramag for the reduction and/or declaration of inofficiousness of donation
as primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.

However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is
his concubine Eva Verna De Guzman. Any person who is forbidden from receiving
any donation under Article 739 cannot be named beneficiary of a life insurance
policy of the person who cannot make any donation to him, according to said article
(Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the
insurance contract will still remain valid, but the indemnity must go to the legal heirs
and not to the concubine, for evidently, what is prohibited under Art. 2012 is the
naming of the improper beneficiary. In such case, the action for the declaration of
nullity may be brought by the spouse of the donor or donee, and the guilt of the
donor and donee may be proved by preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the
designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art.
739 of the Civil Code, the insurance indemnity that should be paid to her must go to
the legal heirs of the deceased which this court may properly take cognizance as the
action for the declaration for the nullity of a void donation falls within the general
jurisdiction of this Court.[11]

Insular[12] and Grepalife[13] filed their respective motions for reconsideration, arguing, in the main, that
the petition failed to state a cause of action. Insular further averred that the proceeds were divided
among the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged
that the premiums paid had already been refunded.

Petitioners, in their comment, reiterated their earlier arguments and posited that whether the
complaint may be dismissed for failure to state a cause of action must be determined solely on the
basis of the allegations in the complaint, such that the defenses of Insular and Grepalife would be
better threshed out during trial.

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:

WHEREFORE, in view of the foregoing disquisitions, the Motions for

Reconsideration filed by defendants Grepalife and Insular Life are hereby
GRANTED. Accordingly, the portion of the Resolution of this Court dated 21
September 2004 which ordered the prosecution of the case against defendant Eva
Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case
against them is hereby ordered DISMISSED.

SO ORDERED.[14]

In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the
allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular
disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to the
illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is
only in cases where there are no beneficiaries designated, or when the only designated beneficiary is
disqualified, that the proceeds should be paid to the estate of the insured. As to the claim that the
proceeds to be paid to Loretos illegitimate children should be reduced based on the rules on legitime,
the trial court held that the distribution of the insurance proceeds is governed primarily by the
Insurance Code, and the provisions of the Civil Code are irrelevant and inapplicable. With respect to
the Grepalife policy, the trial court noted that Eva was never designated as a beneficiary, but
only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the
illegitimate children. It further held that the matter of Loretos misrepresentation was premature; the
appropriate action may be filed only upon denial of the claim of the named beneficiaries for the
insurance proceeds by Grepalife.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of
jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a
cause of action involved a pure question of law. The appellate court also noted that petitioners did not
file within the reglementary period a motion for reconsideration of the trial courts Resolution, dated
September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus,
the said Resolution had already attained finality.
Hence, this petition raising the following issues:

a. In determining the merits of a motion to dismiss for failure to

state a cause of action, may the Court consider matters which were not alleged in
the Complaint, particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss
for failure to state a cause of action, did not the Regional Trial Court engage in the
examination and determination of what were the facts and their probative value, or
the truth thereof, when it premised the dismissal on allegations of the defendants in
their answer which had not been proven?

c. x x x (A)re the members of the legitimate family entitled to the

proceeds of the insurance for the concubine? [15]

In essence, petitioners posit that their petition before the trial court should not have been
dismissed for failure to state a cause of action because the finding that Eva was either disqualified as a
beneficiary by the insurance companies or that her designation was revoked by Loreto, hypothetically
admitted as true, was raised only in the answers and motions for reconsideration of both Insular and
Grepalife. They argue that for a motion to dismiss to prosper on that ground, only the allegations in
the complaint should be considered. They further contend that, even assuming Insular disqualified Eva
as a beneficiary, her share should not have been distributed to her children with Loreto but, instead,
awarded to them, being the legitimate heirs of the insured deceased, in accordance with law and
jurisprudence.

The petition should be denied.

The grant of the motion to dismiss was based on the trial courts finding that the petition failed to state
a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads

SECTION 1. Grounds. Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:

xxxx

(g) That the pleading asserting the claim states no cause of action.

A cause of action is the act or omission by which a party violates a right of another. [16] A complaint
states a cause of action when it contains the three (3) elements of a cause of action(1) the legal right
of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the
defendant in violation of the legal right. If any of these elements is absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause of action. [17]
 When a motion to dismiss is premised on this ground, the ruling thereon should be based
only on the facts alleged in the complaint. The court must resolve the issue on the strength of such
allegations, assuming them to be true. The test of sufficiency of a cause of action rests on whether,
hypothetically admitting the facts alleged in the complaint to be true, the court can render a valid
judgment upon the same, in accordance with the prayer in the complaint. This is the general rule.

However, this rule is subject to well-recognized exceptions, such that there is no hypothetical
admission of the veracity of the allegations if:

1. the falsity of the allegations is subject to judicial notice;

2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case. [18]

In this case, it is clear from the petition filed before the trial court that, although petitioners
are the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies
issued by Insular and Grepalife. The basis of petitioners claim is that Eva, being a concubine of Loreto
and a suspect in his murder, is disqualified from being designated as beneficiary of the insurance
policies, and that Evas children with Loreto, being illegitimate children, are entitled to a lesser share of
the proceeds of the policies.They also argued that pursuant to Section 12 of the Insurance Code,
[19]
Evas share in the proceeds should be forfeited in their favor, the former having brought about the
death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of Loretos
illegitimate children should be awarded to them, being the legitimate heirs of Loreto entitled to their
respective legitimes.

It is evident from the face of the complaint that petitioners are not entitled to a favorable
judgment in light of Article 2011 of the Civil Code which expressly provides that insurance contracts
shall be governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states

SECTION 53. The insurance proceeds shall be applied exclusively to the

proper interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.

Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are
either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the
maturation of the policy.[20] The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of favorable stipulations
or indemnity. In such a case, third parties may directly sue and claim from the insurer. [21]

Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus,
are not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal
obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary in
one policy and her disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loretos insurance policies remains
valid. Because no legal proscription exists in naming as beneficiaries the children of illicit relationships
by the insured,[22] the shares of Eva in the insurance proceeds, whether forfeited by the court in view
of the prohibition on donations under Article 739 of the Civil Code or by the insurers themselves for
reasons based on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has not
designated any beneficiary,[23] or when the designated beneficiary is disqualified by law to receive the
proceeds,[24] that the insurance policy proceeds shall redound to the benefit of the estate of the
insured.

In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the
same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate
court had no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of
action is a question of law and not of fact, there being no findings of fact in the first place. [25]

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

ANTONIO T. CARPIO RENATO C. CORONA

Associate Justice Associate Justice
 DIOSDADO M. PERALTA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

*
Additional member in lieu of Associate Justice Conchita Carpio Morales per Special
Order No. 646 dated May 15, 2009.
**
Additional member in lieu of Associate Justice Minita V. Chico-Nazario per Special
Order No. 631 dated April 29, 2009.
[1]
Rollo, pp. 11-36.
[2]
Penned by Associate Justice Marina L. Buzon, with Associate Justices Rosmari D.
Carandang and Mariflor P. Punzalan Castillo, concurring; id. at 37-52.
[3]
Rollo, pp. 59-64.
[4]
Two Life Insurance plans with Policy Nos. A001544070, for the sum
of P1,500,000.00; and 1643029, for the sum of P500,000.00.
[5]
Two Pension Plans with Policy Nos. PTLIG 1000326-0000, with a maturity value
of P1,000,000.00; and PTLIG 1000344-0000, with a maturity value of P500,000.00;
and a Memorial Plan with Policy No. M0109-159064-0000 with plan value
of P50,000.00.
[6]
Cited in the January 8, 2008 Resolution of the Court of Appeals in CA-G.R. CV
No. 85948; rollo, pp. 40-41.
[7]
Id. at 40.
[8]
ART. 752. The provisions of Article 750 notwithstanding, no person may give or receive, by way of
donation, more than he may give or receive by will.
ART. 750. The donation may comprehend all the present property of the donor, or part
thereof, provided he reserves, in full ownership or in usufruct, sufficient means for the support of
himself, and of all relatives who, at the time of the acceptance of the donation, are by law entitled to
be supported by the donor. Without such reservation, the donation shall be reduced on petition of
any person affected.
[9]
ART. 772. Only those who at the time of the donors death have a right to the legitime and their heirs
and successors in interest may ask for the reduction of inofficious donations.
Those referred to in the preceding paragraph cannot renounce their right during the lifetime
of the donor, either by express declaration, or by consenting to the donation.
The donees, devisees and legatees, who are not entitled to the legitime and the creditors of
the deceased can neither ask for the reduction nor avail themselves thereof.
[10]
Rollo, pp. 42-43.
[11]
Id. at 43-45.
[12]
Id. at 65-72.
[13]
Id. at 73-80.
[14]
Id. at 46-47.
[15]
Id. at 20-21.
[16]
RULES ON CIVIL PROCEDURE, Rule 2, Sec. 2.
[17]
Bank of America NT&SA v. Court of Appeals, G.R. No. 120135, March 31, 2003,
400 SCRA 156, 167.
[18]
Perkin Elmer Singapore Pte Ltd. v. Dakila Trading Corporation, G.R. No. 172242,
August 14, 2007, 530 SCRA 170; China Road and Bridge Corporation v. Court of
Appeals, G.R. No. 137898, December 15, 2000, 348 SCRA 401, 409, 412; Dabuco v.
Court of Appeals, 379 Phil. 939 (2000); Peltan Dev., Inc. v. CA, 336 Phil. 824
(1997); City of Cebu v. Court of Appeals, G.R. No. 109173, July 5, 1996, 258 SCRA
175, 182-184; United States of America v. Reyes, G.R. No. 79253, March 1, 1993, 219
SCRA 192; Santiago v. Pioneer Savings & Loan Bank, No. L-77502, January 15,
1988, 157 SCRA 100; Marcopper Mining Corporation v. Garcia, No. L-55935, July
30, 1986, 143 SCRA 178, 187-189; Tan v. Director of Forestry, No. L-24548, October
27, 1983, 125 SCRA 302, 315.
[19]
SECTION 12. The interest of a beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal, accomplice, or accessory in willfully
bringing about the death of the insured; in which event, the nearest relative of the
insured shall receive the proceeds of said insurance if not otherwise disqualified.
[20]
Southern Luzon Employees Ass. v. Golpeo, et al., 96 Phil. 83, 86 (1954), citing Del
Val v. Del Val, 29 Phil. 534, 540-541 (1915).
[21]
Coquila v. Fieldmens Insurance Co., Inc., No. L-23276, November 29, 1968, 26
SCRA 178, 181; Guingon v. Del Monte, No. L-22042, August 17, 1967, 20 SCRA
1043.
[22]
Southern Luzon Employees Ass. v. Golpeo, et al., supra note 20, at 87-88.
[23]
Vda. de Consuegra v. Government Service Insurance System, No. L-28093,
January 30, 1971, 37 SCRA 315.
[24]
The Insular Life Assurance Company, Ltd. v. Ebrado, No. L-44059, October 28,
1977, 80 SCRA 181.
[25]
China Road and Bridge Corporation v. Court of Appeals, supra note 18, at 409-
410.
 SECOND DIVISION
FILIPINAS LIFE ASSURANCE COMPANY (now AYALA
LIFE ASSURANCE, INC.), G.R. No. 159489
Petitioner,
Present:

QUISUMBING, J., Chairperson,

CARPIO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
CLEMENTE N. PEDROSO,
TERESITA O. PEDROSO and JENNIFER N. PALACIO thru
her Attorney-in-Fact PONCIANO C. MARQUEZ,
Respondents. Promulgated:

February 4, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
QUISUMBING, J.:

[1]
This petition for review on certiorari seeks the reversal of the Decision and Resolution,
[2]
dated November 29, 2002 and August 5, 2003, respectively, of the Court of Appeals in CA-G.R. CV
[3]
No. 33568. The appellate court had affirmed the Decision dated October 10, 1989 of the Regional
Trial Court (RTC) of Manila, Branch 3, finding petitioner as defendant and the co-defendants below
jointly and severally liable to the plaintiffs, now herein respondents.

The antecedent facts are as follows:

Respondent Teresita O. Pedroso is a policyholder of a 20-year endowment life insurance issued by

petitioner Filipinas Life Assurance Company (Filipinas Life). Pedroso claims Renato Valle was her
insurance agent since 1972 and Valle collected her monthly premiums. In the first week of January
1977, Valle told her that the Filipinas Life Escolta Office was holding a promotional investment
program for policyholders. It was offering 8% prepaid interest a month for certain amounts deposited
on a monthly basis. Enticed, she initially invested and issued a post-dated check dated January 7,
[4] [5]
1977 for P10,000. In return, Valle issued Pedroso his personal check for P800 for the 8% prepaid
[6]
interest and a Filipinas Life Agents Receipt No. 807838.

Subsequently, she called the Escolta office and talked to Francisco Alcantara, the
administrative assistant, who referred her to the branch manager, Angel Apetrior. Pedroso inquired
about the promotional investment and Apetrior confirmed that there was such a promotion. She was
even told she could push through with the check she issued. From the records, the check, with the
endorsement of Alcantara at the back, was deposited in the account of Filipinas Life with the
Commercial Bank and Trust Company (CBTC), Escolta Branch.

Relying on the representations made by the petitioners duly authorized representatives

Apetrior and Alcantara, as well as having known agent Valle for quite some time, Pedroso waited for the
maturity of her initial investment. A month after, her investment of P10,000 was returned to her after
she made a written request for its refund. The formal written request, dated February 3, 1977, was
[7]
written on an inter-office memorandum form of Filipinas Life prepared by Alcantara. To collect the
amount, Pedroso personally went to the Escolta branch where Alcantara gave her the P10,000 in
cash. After a second investment, she made 7 to 8 more investments in varying amounts, totaling P37,000
[8]
but at a lower rate of 5% prepaid interest a month. Upon maturity of Pedrosos subsequent
investments, Valle would take back from Pedroso the corresponding yellow-colored agents receipt he
issued to the latter.

Pedroso told respondent Jennifer N. Palacio, also a Filipinas Life insurance policyholder, about
[9]
the investment plan. Palacio made a total investment of P49,550 but at only 5% prepaid
interest. However, when Pedroso tried to withdraw her investment, Valle did not want to return
some P17,000 worth of it. Palacio also tried to withdraw hers, but Filipinas Life, despite demands,
refused to return her money. With the assistance of their lawyer, they went to Filipinas Life Escolta
Office to collect their respective investments, and to inquire why they had not seen Valle for quite
some time. But their attempts were futile. Hence, respondents filed an action for the recovery of a
sum of money.

After trial, the RTC, Branch 3, Manila, held Filipinas Life and its co-defendants Valle, Apetrior
and Alcantara jointly and solidarily liable to the respondents.

On appeal, the Court of Appeals affirmed the trial courts ruling and subsequently denied the
motion for reconsideration.

Petitioner now comes before us raising a single issue:

WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR AND

GRAVELY ABUSED ITS DISCRETION IN AFFIRMING THE DECISION OF THE LOWER
COURT HOLDING FLAC [FILIPINAS LIFE] TO BE JOINTLY AND SEVERALLY LIABLE WITH
ITS CO-DEFENDANTS ON THE CLAIM OF RESPONDENTS INSTEAD OF HOLDING ITS
[10]
AGENT, RENATO VALLE, SOLELY LIABLE TO THE RESPONDENTS.

Simply put, did the Court of Appeals err in holding petitioner and its co-defendants jointly
and severally liable to the herein respondents?
 Filipinas Life does not dispute that Valle was its agent, but claims that it was only a life
insurance company and was not engaged in the business of collecting investment money. It contends
that the investment scheme offered to respondents by Valle, Apetrior and Alcantara was outside the
scope of their authority as agents of Filipinas Life such that, it cannot be held liable to the
[11]
respondents.

On the other hand, respondents contend that Filipinas Life authorized Valle to solicit
investments from them. In fact, Filipinas Lifes official documents and facilities were used in
consummating the transactions. These transactions, according to respondents, were confirmed by its
officers Apetrior and Alcantara. Respondents assert they exercised all the diligence required of them
in ascertaining the authority of petitioners agents; and it is Filipinas Life that failed in its duty to
ensure that its agents act within the scope of their authority.

Considering the issue raised in the light of the submissions of the parties, we
find that the petition lacks merit. The Court of Appeals committed no reversible error
nor abused gravely its discretion in rendering the assailed decision and resolution.

It appears indisputable that respondents Pedroso and Palacio had

invested P47,000 and P49,550, respectively. These were received by Valle and
remitted to Filipinas Life, using Filipinas Lifes official receipts, whose authenticity
were not disputed. Valles authority to solicit and receive investments was also
established by the parties. When respondents sought confirmation, Alcantara, holding
a supervisory position, and Apetrior, the branch manager, confirmed that Valle had
authority. While it is true that a person dealing with an agent is put upon inquiry and
must discover at his own peril the agents authority, in this case, respondents did
exercise due diligence in removing all doubts and in confirming the validity of the
representations made by Valle.

Filipinas Life, as the principal, is liable for obligations contracted by its agent
Valle. By the contract of agency, a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority
of the latter.[12] The general rule is that the principal is responsible for the acts of its
agent done within the scope of its authority, and should bear the damage caused to
third persons.[13] When the agent exceeds his authority, the agent becomes personally
liable for the damage.[14] But even when the agent exceeds his authority, the principal
is still solidarily liable together with the agent if the principal allowed the agent to act
as though the agent had full powers.[15] In other words, the acts of an agent beyond the
scope of his authority do not bind the principal, unless the principal ratifies them,
expressly or impliedly.[16] Ratification in agency is the adoption or confirmation by
one person of an act performed on his behalf by another without authority.[17]

Filipinas Life cannot profess ignorance of Valles acts. Even if Valles

representations were beyond his authority as a debit/insurance agent, Filipinas Life
thru Alcantara and Apetrior expressly and knowingly ratified Valles acts. It cannot
even be denied that Filipinas Life benefited from the investments deposited by Valle
in the account of Filipinas Life. In our considered view, Filipinas Life had clothed
Valle with apparent authority; hence, it is now estopped to deny said
authority. Innocent third persons should not be prejudiced if the principal failed to
adopt the needed measures to prevent misrepresentation, much more so if the
principal ratified his agents acts beyond the latters authority. The act of the agent is
considered that of the principal itself. Qui per alium facit per seipsum facere
videtur. He who does a thing by an agent is considered as doing it himself.[18]

WHEREFORE, the petition is DENIED for lack of merit. The Decision and
Resolution, dated November 29, 2002 and August 5, 2003, respectively, of the Court
of Appeals in CA-G.R. CV No. 33568 are AFFIRMED.

Costs against the petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

CONCHITA CARPIO MORALES DANTE O. TINGA

Associate Justice Associate Justice
 PRESBITERO J. VELASCO, JR.
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Rollo, pp. 43-55. Penned by Associate Justice Renato C. Dacudao, with Associate
Justices Eugenio S. Labitoria and Danilo B. Pine concurring.
[2]
Id. at 56.
[3]
Id. at 57-63. Penned by Judge Clemente M. Soriano.
[4]
Records, p. 246.
[5]
TSN, October 7, 1983, pp. 9-10.
[6]
Records, p. 248.
[7]
Id. at 247.
[8]
Supra note 5.
[9]
Records, pp. 253-264.
[10]
Rollo, p. 108.
[11]
Id. at 109.
[12]
CIVIL CODE, Art. 1868.
[13]
Lopez, et al. v. Hon. Alvendia, et al., 120 Phil. 1424, 1431-1432 (1964).
[14]
BA Finance Corporation v. Court of Appeals, G.R. No. 94566, July 3, 1992, 211
SCRA 112, 118.
[15]
CIVIL CODE, Art. 1911.
[16]
Id., Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.
[17]
Manila Memorial Park Cemetery, Inc. v. Linsangan, G.R. No. 151319, November
22, 2004, 443 SCRA 377, 394.
[18]
Prudential Bank v. Court of Appeals, G.R. No. 108957, June 14, 1993, 223 SCRA
350, 357.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,

vs.
COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE,
INC., respondents-appellees.

Gutierrez, Cortes & Gonzales for petitioners.

Bengzon, Bengzon, Baraan & Fernandez Law Offices for private respondent.

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos Areola's
Personal Accident Insurance Policy No. PA-20015, respondent insurance company
unilaterally cancelled the same since company records revealed that petitioner-insured
failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same policy it

had previously cancelled and even proposed to extend its lifetime to December 17,
1985, upon a finding that the cancellation was erroneous and that the premiums were
paid in full by petitioner-insured but were not remitted by Teofilo M. Malapit,
respondent insurance company's branch manager.
These, in brief, are the material facts that gave rise to the action for damages due to
breach of contract instituted by petitioner-insured before
Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-
insured to payment of damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by
respondent insurance company, in an effort to rectify such error, obliterate whatever
liability for damages it may have to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured, Santos
Areola, a lawyer from Dagupan City, bought, through
the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter
referred to as Prudential), a personal accident insurance policy covering the one-year
period between noon of November 28, 1984 and noon of November 28, 1985. 1 Under
the terms of the statement of account issued by respondent insurance company,
petitioner-insured was supposed to pay the total amount of P1,609.65 which included
the premium of P1,470.00, documentary stamp of P110.25 and 2% premium tax of
P29.40. 2 At the lower left-hand corner of the statement of account, the following is
legibly printed:

This Statement of Account must not be considered a receipt. Official Receipt will be
issued to you upon payment of this account.

If payment is made to our representative, demand for a Provisional Receipt and if our
Official Receipts is (sic) not received by you within 7 days please notify us.

If payment is made to our office, demand for an OFFICIAL RECEIPT.

On December 17, 1984, respondent insurance company issued collector's provisional

receipt No. 9300 to petitioner-insured for the amount of P1,609.65 3 On the lower
portion of the receipt the following is written in capital letters:

Note: This collector's provisional receipt will be confirmed by our official receipt. If
our official receipt is not received by you within 7 days, please notify us. 4

On June 29, 1985, respondent insurance company, through its Baguio City manager,
Teofilo M. Malapit, sent petitioner-insured Endorsement
No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of
premium effective as of inception dated." 5 The same endorsement also credited "a
return premium of P1,609.65 plus documentary stamps and premium tax" to the
account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang,

agent of respondent insurance company, and demanded the issuance of an official
receipt. Ang told petitioner-insured that the cancellation of the policy was a mistake
but he would personally see to its rectification. However, petitioner-insured failed to
receive any official receipt from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a

letter demanding that he be insured under the same terms and conditions as those
contained in Policy No. PA-BG-20015 commencing upon its receipt of his letter, or
that the current commercial rate of increase on the payment he had made under
provisional receipt No. 9300 be returned within five days. 6 Areola also warned that
should his demands be unsatisfied, he would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit informing
him that the "partial payment" of P1,000.00 he had made on the policy had been
"exhausted pursuant to the provisions of the Short Period Rate Scale" printed at the
back of the policy. Malapit warned Areola that should be fail to pay the balance, the
company's liability would cease to operate. 7

In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance

company, through its Assistant Vice-President Mariano M. Ampil III, wrote Areola a
letter dated July 25, 1985 stating that the company was verifying whether the payment
had in fact been issued therefor. Ampil emphasized that the official receipt should
have been issued seven days from the issuance of the provisional receipt but because
no official receipt had been issued in Areola's name, there was reason to believe that
no payment had been made. Apologizing for the inconvenience, Ampil expressed the
company's concern by agreeing "to hold you cover (sic) under the terms of the
referenced policy until such time that this matter is cleared." 8

On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of
P1,609.65 covered by provisional receipt No. 9300 was in fact received by Prudential
on December 17, 1984. Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to
December 17, 1985 or one year from the date when payment was received."
Apologizing again for the inconvenience caused Areola, Ampil exhorted him to
indicate his conformity to the proposal by signing on the space provided for in the
letter. 9

The letter was personally delivered by Carlito Ang to Areola on

August 13, 1985 10 but unfortunately, Areola and his wife, Lydia, as early as August 6,
1985 had filed a complaint for breach of contract with damages before the lower
court.

In its Answer, respondent insurance company admitted that the cancellation of

petitioner-insured's policy was due to the failure of Malapit to turn over the premiums
collected, for which reason no official receipt was issued to him. However, it argued
that, by acknowledging the inconvenience caused on petitioner-insured and after
taking steps to rectify its omission by reinstating the cancelled policy prior to the
filing of the complaint, respondent insurance company had complied with its
obligation under the contract. Hence, it concluded that petitioner-insured no longer
has a cause of action against it. It insists that it cannot be held liable for damages
arising from breach of contract, having demonstrated fully well its fulfillment of its
obligation.
The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured,
ordering respondent insurance company to pay the former the following:

a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;

2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and

3. To pay the costs.

In its decision, the court below declared that respondent insurance company acted in
bad faith in unilaterally cancelling subject insurance policy, having done so only after
seven months from the time that it had taken force and effect and despite the fact of
full payment of premiums and other charges on the issued insurance policy.
Cancellation from the date of the policy's inception, explained the lower court, meant
that the protection sought by petitioner-insured from the risks insured against was
never extended by respondent insurance company. Had the insured met an accident at
the time, the insurance company would certainly have disclaimed any liability
because technically, the petitioner could not have been considered insured.
Consequently, the trial court held that there was breach of contract on the part of
respondent insurance company, entitling petitioner-insured to an award of the
damages prayed for.

This ruling was challenged on appeal by respondent insurance company, denying bad
faith on its part in unilaterally cancelling subject insurance policy.

After consideration of the appeal, the appellate court issued a reversal of the decision
of the trial court, convinced that the latter had erred in finding respondent insurance
company in bad faith for the cancellation of petitioner-insured's policy. According to
the Court of Appeals, respondent insurance company was not motivated by
negligence, malice or bad faith in cancelling subject policy. Rather, the cancellation of
the insurance policy was based on what the existing records showed, i.e., absence of
an official receipt issued to petitioner-insured confirming payment of premiums. Bad
faith, said the Court of Appeals, is some motive of self-interest or ill-will; a furtive
design of ulterior purpose, proof of which must be established convincingly. On the
contrary, it further observed, the following acts indicate that respondent insurance
company did not act precipitately or willfully to inflict a wrong on petitioner-insured:
(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured
had indeed paid the premium; (b) the letter of August 3, 1985 confirming that the
premium had been paid on December 17, 1984; (c) the reinstatement of the policy
with a proposal to extend its effective period to December 17, 1985; and (d)
respondent insurance company's apologies for the "inconvenience" caused upon
petitioner-insured. The appellate court added that respondent insurance company even
relieved Malapit, its Baguio City manager, of his job by forcing him to resign.
Petitioner-insured moved for the reconsideration of the said decision which the Court
of Appeals denied. Hence, this petition for review on certiorari anchored on these
arguments:

Respondent Court of Appeals is guilty of grave abuse of discretion and committed a

serious and reversible error in not holding Respondent Prudential liable for the
cancellation of the insurance contract which was admittedly caused by the fraudulent
acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and abused its
discretion in ruling that the defenses of good faith and honest mistake can co-exist
with the admitted fraudulent acts and evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not finding that even
without considering the fraudulent acts of its own officer in misappropriating the
premium payment, the act itself in cancelling the insurance policy was done with bad
faith and/or gross negligence and wanton attitude amounting to bad faith, because
among others, it was
Mr. Malapit — the person who committed the fraud — who sent and signed the notice
of cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to law and
applicable decision of the Supreme Court when it refused to award damages in favor
of herein Petitioner-Appellants.

It is petitioner-insured's submission that the fraudulent act of Malapit, manager of

respondent insurance company's branch office in Baguio, in misappropriating his
premium payments is the proximate cause of the cancellation of the insurance policy.
Petitioner-insured theorized that Malapit's act of signing and even sending the notice
of cancellation himself, notwithstanding his personal knowledge of petitioner-
insured's full payment of premiums, further reinforces the allegation of bad faith.
Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to
respondent insurance company, an artificial corporate being which can act only
through its officers or employees. Malapit's actuation, concludes petitioner-insured, is
therefore not separate and distinct from that of respondent-insurance company,
contrary to the view held by the Court of Appeals. It must, therefore, bear the
consequences of the erroneous cancellation of subject insurance policy caused by the
non-remittance by its own employee of the premiums paid. Subsequent reinstatement,
according to petitioner-insured, could not possibly absolve respondent insurance
company from liability, there being an obvious breach of contract. After all, reasoned
out petitioner-insured, damage had already been inflicted on him and no amount of
rectification could remedy the same.
Respondent insurance company, on the other hand, argues that where reinstatement,
the equitable relief sought by petitioner-insured was granted at an opportune moment,
i.e. prior to the filing of the complaint, petitioner-insured is left without a cause of
action on which to predicate his claim for damages. Reinstatement, it further
explained, effectively restored petitioner-insured to all his rights under the policy.
Hence, whatever cause of action there might have been against it, no longer exists and
the consequent award of damages ordered by the lower court in unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of

misappropriating the premiums paid by petitioner-insured is beyond doubt directly
imputable to respondent insurance company. A corporation, such as respondent
insurance company, acts solely thru its employees. The latters' acts are considered as
its own for which it can be held to account. 11 The facts are clear as to the relationship
between private respondent insurance company and Malapit. As admitted by private
respondent insurance company in its answer, 12 Malapit was the manager of its Baguio
branch. It is beyond doubt that he represented its interest and acted in its behalf. His
act of receiving the premiums collected is well within the province of his authority.
Thus, his receipt of said premiums is receipt by private respondent insurance
company who, by provision of law, particularly under Article 1910 of the Civil Code,
is bound by the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which the agent may
have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not
bound except when he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for
private respondent insurance company; no exoneration from liability could result
therefrom. The fact that private respondent insurance company was itself defrauded
due to the anomalies that took place in its Baguio branch office, such as the non-
accrual of said premiums to its account, does not free the same from its obligation to
petitioner Areola. As held in Prudential Bank v. Court of Appeals 13 citing the ruling
in McIntosh v. Dakota Trust Co.: 14

A bank is liable for wrongful acts of its officers done in the interests of the bank or in
the course of dealings of the officers in their representative capacity but not for acts
outside the scope of their authority. A bank holding out its officers and agent as
worthy of confidence will not be permitted to profit by the frauds they may thus be
enabled to perpetrate in the apparent scope of their employment; nor will it be
permitted to shirk its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent
third persons where the representation is made in the course of its business by an
agent acting within the general scope of his authority even though, in the particular
case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit.
Consequently, respondent insurance company is liable by way of damages for the
fraudulent acts committed by Malapit that gave occasion to the erroneous cancellation
of subject insurance policy. Its earlier act of reinstating the insurance policy can not
obliterate the injury inflicted on petitioner-insured. Respondent company should be
reminded that a contract of insurance creates reciprocal obligations for both insurer
and insured. Reciprocal obligations are those which arise from the same cause and in
which each party is both a debtor and a creditor of the other, such that the obligation
of one is dependent upon the obligation of the other. 15

Under the circumstances of instant case, the relationship as creditor and debtor
between the parties arose from a common cause: i.e., by reason of their agreement to
enter into a contract of insurance under whose terms, respondent insurance company
promised to extend protection to petitioner-insured against the risk insured for a
consideration in the form of premiums to be paid by the latter. Under the law
governing reciprocal obligations, particularly the second paragraph of Article
1191, 16 the injured party, petitioner-insured in this case, is given a choice between
fulfillment or rescission of the obligation in case one of the obligors, such as
respondent insurance company, fails to comply with what is incumbent upon him.
However, said article entitles the injured party to payment of damages, regardless of
whether he demands fulfillment or rescission of the obligation. Untenable then is
reinstatement insurance company's argument, namely, that reinstatement being
equivalent to fulfillment of its obligation, divests petitioner-insured of a rightful claim
for payment of damages. Such a claim finds no support in our laws on obligations and
contracts.

The nature of damages to be awarded, however, would be in the form of nominal

damages 17 contrary to that granted by the court below. Although the erroneous
cancellation of the insurance policy constituted a breach of contract, private
respondent insurance company, within a reasonable time took steps to rectify the
wrong committed by reinstating the insurance policy of petitioner. Moreover, no
actual or substantial damage or injury was inflicted on petitioner Areola at the time
the insurance policy was cancelled. Nominal damages are "recoverable where a legal
right is technically violated and must be vindicated against an invasion that has
produced no actual present loss of any kind, or where there has been a breach of
contract and no substantial injury or actual damages whatsoever have been or can be
shown. 18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the
decision of the Court of Appeals in CA-G.R. No. 16902 on May 31, 1990,
REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil Case No. D-
7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following
modifications: (a) that nominal damages amounting to P30,000.00 be awarded
petitioner in lieu of the damages adjudicated by court a quo; and (b) that in the
satisfaction of the damages awarded therein, respondent insurance company is
ORDERED to pay the legal rate of interest computed from date of filing of complaint
until final payment thereof.

SO ORDERED.

Feliciano, Melo and Vitug, JJ., concur.

Bidin, J., is on leave.

#Footnotes

1 Exh. "A."

2 Exh. "B."

3 Exh. "C."

4 Exh. "2."

5 Exh. "D."

6 Exh. "F."

7 Exh. "E."

8 Exh. "G."

9 Exh. "H."

10 Notation on upper right hand corner of Exh. "H."

11 Radio Communications of the Philippines v. Court of Appeals, et al., No. L-44748,

August 29, 1986, 143 SCRA 657.

12 Rollo, p. 35.

13 G.R. No. 108957, June 14, 1993, 223 SCRA 350.

14 52 ND 752, 204 NW 818, 40 ALR 1021.

15 Tolentino, Arturo, Civil Code of the Philippines Commentaries and Jurisprudence,

Vol. IV, p. 175.

16 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
17 Article 2221 (Civil Code) — Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded by the defendant, may be
vindicated or recognized and not for the purpose of indemnifying the plaintiff for any
loss suffered by him.

18 Algarra v. Sandejas, No. 8385, March 24, 1914, 27 Phil. 284.

SECOND DIVISION
AFP GENERAL INSURANCE G.R. No. 151133
CORPORATION,
Petitioner, Present:

QUISUMBING, J., Chairperson,

CARPIO MORALES,
- versus - TINGA,
VELASCO, JR., and
BRION, JJ.
NOEL MOLINA, JUANITO
ARQUEZA, LEODY VENANCIO,
JOSE OLAT, ANGEL CORTEZ,
PANCRASIO SIMPAO, CONRADO Promulgated:
CALAPON AND NATIONAL LABOR
RELATIONS COMMISSION (FIRST June 30, 2008
DIVISION),
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
QUISUMBING, J.:

[1]
This is a petition for review on certiorari of the Decision dated August 20, 2001 of the Court of
Appeals in CA-G.R. SP No. 58763 which dismissed herein petitioners special civil action for
certiorari. Before the appellate court, petitioner AFP General Insurance Corporation (AFPGIC) sought
[2]
to reverse the Resolution dated October 5, 1999 of the National Labor Relations Commission (NLRC)
in NLRC NCR CA-011705-96 for having been issued with grave abuse of discretion. The NLRC affirmed
[3]
the Order dated March 30, 1999 of Labor Arbiter Edgardo Madriaga in NLRC NCR Case No. 02-
00672-90 which had denied AFPGICs Omnibus Motion to Quash Notice/Writ of Garnishment and
Discharge AFPGICs appeal bond for failure of Radon Security & Allied Services Agency (Radon Security)
[4]
to pay the premiums on said bond. Equally challenged is the Resolution dated December 14,
2001 of the appellate court in CA-G.R. SP No. 58763 which denied herein petitioners motion for
reconsideration.

The facts of this case are not disputed.

The private respondents are the complainants in a case for illegal dismissal, docketed as NLRC NCR Case
No. 02-00672-90, filed against Radon Security & Allied Services Agency and/or Raquel Aquias and Ever
Emporium, Inc. In his Decision dated August 20, 1996, the Labor Arbiter ruled that the private
respondents were illegally dismissed and ordered Radon Security to pay them separation pay,
backwages, and other monetary claims.

Radon Security appealed the Labor Arbiters decision to public respondent NLRC and posted
a supersedeas bond, issued by herein petitioner AFPGIC as surety. The appeal was docketed as NLRC NCR
CA-011705-96.

On April 6, 1998, the NLRC affirmed with modification the decision of the Labor Arbiter. The NLRC
found the herein private respondents constructively dismissed and ordered Radon Security to pay
them their separation pay, in lieu of reinstatement with backwages, as well as their monetary benefits
limited to three years, plus attorneys fees equivalent to 10% of the entire amount, with Radon
Security and Ever Emporium, Inc. adjudged jointly and severally liable.

Radon Security duly moved for reconsideration, but this was denied by the NLRC in its Resolution
dated June 22, 1998.

Radon Security then filed a Petition for Certiorari docketed as G.R. No. 134891 with this Court, but we
dismissed this petition in our Resolution of August 31, 1998.

When the Decision dated April 6, 1998 of the NLRC became final and executory, private respondents
filed an Urgent Motion for Execution. As a result, the NLRC Research and Information Unit submitted a
Computation of the Monetary Awards in accordance with the NLRC decision. Radon Security opposed
said computation in its Motion for Recomputation.

[5]
On February 5, 1999, the Labor Arbiter issued a Writ of Execution incorporating the computation of
the NLRC Research and Information Unit. That same date, the Labor Arbiter dismissed the Motion for
Recomputation filed by Radon Security. By virtue of the writ of execution, the NLRC Sheriff issued a
[6]
Notice of Garnishment against the supersedeas bond.

Both Ever Emporium, Inc. and Radon Security moved to quash the writ of execution.
On March 30, 1999, the Labor Arbiter denied both motions, and Radon Security appealed to the NLRC.

On April 14, 1999, AFPGIC entered the fray by filing before the Labor Arbiter an Omnibus Motion to
Quash Notice/Writ of Garnishment and to Discharge AFPGICs Appeal Bond on the ground that said
bond has been cancelled and thus non-existent in view of the failure of Radon Security to pay the
[7]
yearly premiums.

[8]
On April 30, 1999, the Labor Arbiter denied AFPGICs Omnibus Motion for lack of merit. The Labor
Arbiter pointed out that the question of non-payment of premiums is a dispute between the party
who posted the bond and the insurer; to allow the bond to be cancelled because of the non-payment
of premiums would result in a factual and legal absurdity wherein a surety will be rendered nugatory
by the simple expedient of non-payment of premiums.

The petitioner then appealed the Labor Arbiters order to the NLRC. The appeals of Radon Security and
AFPGIC were jointly heard as NLRC NCR CA-011705-96.

On October 5, 1999, the NLRC disposed of NLRC NCR CA-011705-96 in this wise:

WHEREFORE, premises considered, the appeals under consideration are

hereby DISMISSED for lack of merit.

[9]
SO ORDERED.

In dismissing the appeal of AFPGIC, the NLRC pointed out that AFPGICs theory that the bond cannot
anymore be proceeded against for failure of Radon Security to pay the premium is untenable,
[10]
considering that the bond is effective until the finality of the decision. The NLRC stressed that a
contrary ruling would allow respondents to simply stop paying the premium to frustrate satisfaction of
[11]
the money judgment.

AFPGIC then moved for reconsideration, but the NLRC denied the motion in its
[12]
Resolution dated February 29, 2000.

AFPGIC then filed a special civil action for certiorari, docketed as CA-G.R. SP No. 58763, with the Court
of Appeals, on the ground that the NLRC committed a grave abuse of discretion in affirming the Order
dated March 30, 1999 of the Labor Arbiter.

On August 20, 2001, the appellate court dismissed CA-G.R. SP No. 58763, disposing as follows:

WHEREFORE, the foregoing considered, the petition is denied due course and
accordingly DISMISSED.
 [13]
SO ORDERED.

AFPGIC seasonably moved for reconsideration, but this was denied by the appellate court in its
[14]
Resolution of December 14, 2001.

Hence, the instant case anchored on the lone assignment of error that:

THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE PUBLIC RESPONDENT

NLRC ALTHOUGH THE LATTER GRAVELY ABUSED ITS DISCRETION WHEN IT
ARBITRARILY IGNORED THE FACT THAT SUBJECT APPEAL BOND WAS ALREADY
CANCELLED FOR NON-PAYMENT OF PREMIUM AND THUS IT COULD NOT BE SUBJECT
[15]
OF EXECUTION OR GARNISHMENT.

[16]
The petitioner contends that under Section 64 of the Insurance Code, which is deemed written into
every insurance contract or contract of surety, an insurer may cancel a policy upon non-payment of
the premium. Said cancellation is binding upon the beneficiary as the right of a beneficiary is
subordinate to that of the insured. Petitioner points out that in South Sea Surety & Insurance Co., Inc.
[17]
v. CA, this Court held that payment of premium is a condition precedent to and essential for the
[18]
efficaciousness of a contract of insurance. Hence, following UCPB General Ins. Co., Inc. v.
[19]
Masagana Telamart, Inc., no insurance policy, other than life, issued originally or on renewal is
[20]
valid and binding until actual payment of the premium. The petitioner also points to Malayan
[21]
Insurance Co., Inc. v. Cruz Arnaldo, which reiterated that an insurer may cancel an insurance policy
[22]
for non-payment of premium. Hence, according to petitioner, the Court of Appeals committed a
[23]
reversible error in not holding that under Section 77 of the Insurance Code, the surety bond
between it and Radon Security was not valid and binding for non-payment of premiums, even as
against a third person who was intended to benefit therefrom.

The private respondents adopted in toto the ratiocinations of the Court of Appeals that inasmuch as
a supersedeas bond was posted for the benefit of a third person to guarantee that the money judgment
will be satisfied in case it is affirmed on appeal, the third person who stands to benefit from said bond is
entitled to notice of its cancellation for any reason. Likewise, the NLRC should have been notified to enable
it to take the proper action under the circumstances. The respondents submit that from its very nature,
a supersedeas bond remains effective and the surety liable thereon until formally discharged from said
liability. To hold otherwise would enable a losing party to frustrate a money judgment by the simple
expedient of ceasing to pay premiums.

We find merit in the submissions of the private respondents.

The controversy before the Court involves more than just the mere application of the provisions of the
Insurance Code to the factual circumstances. This instant case, after all, traces its roots to a labor
controversy involving illegally dismissed workers. It thus entails the application of labor laws and
regulations. Recall that the heart of the dispute is not an ordinary contract of property or life
insurance, but an appeal bond required by both substantive and adjective law in appeals in labor
[24] [25]
disputes, specifically Article 223 of the Labor Code, as amended by Republic Act No. 6715, and
[26]
Rule VI, Section 6 of the Revised NLRC Rules of Procedure. Said provisions mandate that in labor
cases where the judgment appealed from involves a monetary award, the appeal may be perfected
only upon the posting of a cash or surety bond issued by a reputable bonding company accredited by
[27]
the NLRC. The perfection of an appeal by an employer only upon the posting of a cash or surety
bond clearly and categorically shows the intent of the lawmakers to make the posting of a cash or
surety bond by the employer to be the exclusive means by which an employers appeal may be
[28]
perfected. Additionally, the filing of a cash or surety bond is a jurisdictional requirement in an
[29]
appeal involving a money judgment to the NLRC. In addition, Rule VI, Section 6 of the Revised NLRC
Rules of Procedure is a contemporaneous construction of Article 223 by the NLRC. As an interpretation
[30]
of a law by the implementing administrative agency, it is accorded great respect by this Court. Note
that Rule VI, Section 6 categorically states that the cash or surety bond posted in appeals involving
monetary awards in labor disputes shall be in effect until final disposition of the case. This could only
be construed to mean that the surety bond shall remain valid and in force until finality and execution
of judgment, with the resultant discharge of the surety company only thereafter, if we are to give
teeth to the labor protection clause of the Constitution. To construe the provision any other way
would open the floodgates to unscrupulous and heartless employers who would simply forego paying
premiums on their surety bond in order to evade payment of the monetary judgment. The Court
cannot be a party to any such iniquity.

Moreover, the Insurance Code supports the private respondents arguments. The petitioners
reliance on Sections 64 and 77 of the Insurance Code is misplaced. The said provisions refer to
insurance contracts in general. The instant case pertains to a surety bond; thus, the applicable
[31]
provision of the Insurance Code is Section 177, which specifically governs suretyship. It provides
that a surety bond, once accepted by the obligee becomes valid and enforceable, irrespective of
whether or not the premium has been paid by the obligor. The private respondents, the obligees here,
accepted the bond posted by Radon Security and issued by the petitioner. Hence, the bond is both
valid and enforceable. A verbis legis non est recedendum (from the language of the law there must be
[32]
no departure).

When petitioner surety company cancelled the surety bond because Radon Security failed to
pay the premiums, it gave due notice to the latter but not to the NLRC. By its failure to give notice to
the NLRC, AFPGIC failed to acknowledge that the NLRC had jurisdiction not only over the appealed
case, but also over the appeal bond. This oversight amounts to disrespect and contempt for a quasi-
judicial agency tasked by law with resolving labor disputes. Until the surety is formally discharged, it
remains subject to the jurisdiction of the NLRC.

Our ruling, anchored on concern for the employee, however, does not in any way seek to
derogate the rights and interests of the petitioner as against Radon Security. The former is not devoid
[33]
of remedies against the latter. Under Section 176 of the Insurance Code, the liability of petitioner
and Radon Security is solidary in nature. There is solidary liability only when the obligation expressly
[34]
so states, or when the law so provides, or when the nature of the obligation so requires. Since the
law provides that the liability of the surety company and the obligor or principal is joint and several,
then either or both of them may be proceeded against for the money award.

The Labor Arbiter directed the NLRC Sheriff to garnish the surety bond issued by the
petitioner. The latter, as surety, is mandated to comply with the writ of garnishment, for as earlier
pointed out, the bond remains enforceable and under the jurisdiction of the NLRC until it is
discharged. In turn, the petitioner may proceed to collect the amount it paid on the bond, plus the
premiums due and demandable, plus any interest owing from Radon Security. This is pursuant to the
[35]
principle of subrogation enunciated in Article 2067 of the Civil Code which we apply to the
[36]
suretyship agreement between AFPGIC and Radon Security, in accordance with Section 178 of the
Insurance Code.Finding no reversible error committed by the Court of Appeals in CA-G.R. SP No.
58763, we sustain the challenged decision.

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed Decision dated
August 20, 2001 of the Court of Appeals in CA-G.R. SP No. 58763 and the Resolution dated December
14, 2001, of the appellate court denying the herein petitioners motion for reconsideration
are AFFIRMED. Costs against the petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice
WE CONCUR:
 CONCHITA CARPIO MORALES
Associate Justice

DANTE O. TINGA PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice
[1]
CA rollo, pp. 133-138. Penned by Associate Justice Wenceslao I. Agnir, Jr., with
Associate Justices Salvador J. Valdez, Jr. and Juan Q. Enriquez, Jr. concurring.
[2]
Id. at 16-21.
[3]
Id. at 14-15.
[4]
Id. at 161-162.
[5]
Rollo, pp. 63-65.
[6]
Id. at 66.
[7]
CA rollo, p. 30.
[8]
Id. at 14-15.
[9]
Id. at 20.
[10]
Rollo, pp. 58-59.
[11]
Id. at 59.
[12]
Id. at 61-62.
[13]
CA rollo, pp. 137-138.
[14]
Id. at 161-162.
[15]
Rollo, p. 24.
[16]
Sec. 64. No policy of insurance other than life shall be cancelled by the insurer
except upon prior notice thereof to the insured, and no notice of cancellation shall
be effective unless it is based on the occurrence, after the effective date of the
policy, of one or more of the following:
(a) non-payment of premium;
(b) conviction of a crime arising out of acts increasing the hazard insured against;
(c) discovery of fraud or material misrepresentation;
(d) discovery of willful or reckless acts or omissions increasing the hazard insured
against;
(e) physical changes in the property insured which result in the property becoming
uninsurable; or
(f) a determination by the Commissioner that the continuation of the policy would
violate or would place the insurer in violation of this Code.
[17]
314 Phil. 761 (1995).
[18]
Id. at 767.
[19]
367 Phil. 539 (1999).
[20]
Id. at 544.
[21]
No. L-67835, October 12, 1987, 154 SCRA 672.
[22]
Id. at 679.
[23]
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to
the contrary, no policy or contract of insurance issued by an insurance company is
valid and binding unless and until the premium thereof has been paid, except in
the case of a life or an industrial life policy whenever the grace period provision
applies.
[24]
ART. 223. Appeal. . . .
xxxx
In case of a judgment involving a monetary award, an appeal by the employer may be
perfected only upon the posting of a cash or surety bond issued by a reputable
bonding company duly accredited by the Commission in the amount equivalent to
the monetary award in the judgment appealed from.
In any event, the decision of the Labor Arbiter reinstating a dismissed or separated
employee, insofar as the reinstatement aspect is concerned, shall immediately be
executory, even pending appeal. The employee shall either be admitted back to
 work under the same terms and conditions prevailing prior to his dismissal or
separation or, at the option of the employer, merely reinstated in the payroll. The
posting of a bond by the employer shall not stay the execution for reinstatement
provided herein.
xxxx
[25]
AN ACT TO EXTEND PROTECTION TO LABOR, STRENGTHEN THE
CONSTITUTIONAL RIGHTS OF WORKERS TO SELF-ORGANIZATION,
COLLECTIVE BARGAINING AND PEACEFUL CONCERTED ACTIVITIES,
FOSTER INDUSTRIAL PEACE AND HARMONY, PROMOTE THE
PREFERENTIAL USE OF VOLUNTARY MODES OF SETTLING LABOR
DISPUTES, AND REORGANIZE THE NATIONAL LABOR RELATIONS
COMMISSION, AMENDING FOR THESE PURPOSES CERTAIN
PROVISIONS OF PRESIDENTIAL DECREE NO. 442, AS AMENDED,
OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES,
APPROPRIATING FUNDS THEREFOR, AND FOR OTHER PURPOSES,
effective on March 2, 1989.
[26]
Section. 6. Bond. In case the decision of the Labor Arbiter, the Regional Director or
his duly authorized Hearing Officer involves a monetary award, an appeal by the
employer shall be perfected only upon the posting of a cash or surety bond, which
shall be in effect until final disposition of the case, issued by a reputable bonding
company duly accredited by the Commission or the Supreme Court in an amount
equivalent to the monetary award, exclusive of moral and exemplary damages and
attorneys fees.
The employer, his counsel, as well as the bonding company, shall submit a joint
declaration under oath attesting that the surety bond posted is genuine.
The Commission may, in justifiable cases and upon Motion of the Appellant, reduce
the amount of the bond. The filing of the motion to reduce bond shall not stop the
running of the period to perfect appeal.
[27]
Navarro v. NLRC, 383 Phil. 765, 773 (2000).
[28]
Catubay v. National Labor Relations Commission, 386 Phil. 648, 658 (2000).
[29]
Blancaflor v. NLRC, G.R. No. 101013, February 2, 1993, 218 SCRA 366, 370-371.
[30]
Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 423 (1918).
[31]
Sec. 177. The surety is entitled to payment of the premium as soon as the contract
of suretyship or bond is perfected and delivered to the obligor. No contract of
suretyship or bonding shall be valid and binding unless and until the premium
therefor has been paid, except where the obligee has accepted the bond, in which
case the bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety; Provided, That if the contract
of suretyship or bond is not accepted by, or filed with the obligee, the surety shall
collect only a reasonable amount, not exceeding fifty per centum of the premium
due thereon as service fee plus the cost of stamps or other taxes imposed for the
issuance of the contract or bond; Provide, however, That if the non-acceptance of
the bond be due to the fault of the surety, no such service fee, stamps or taxes shall
be collected.
In the case of a continuing bond, the obligor shall pay the subsequent annual
premium as it falls due until the contract of suretyship is cancelled by the obligee
or by the Commissioner or by a court of competent jurisdiction, as the case may
be.
[32]
Cordero v. The Court of First Instance of Laguna, 67 Phil. 358, 362 (1939);
F. Moreno, PHILIPPINE LAW DICTIONARY 993 (3rd ed., 1988).
[33]
Sec. 176. The liability of the surety or sureties shall be joint and several with the
obligor and shall be limited to the amount of the bond. It is determined strictly by
the terms of the contract of suretyship in relation to the principal contract between
the obligor and the obligee. (as amended by Pres. Decree No. 1855.)
[34]
Sesbreo v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.
[35]
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid.
[36]
Sec. 178. Pertinent provisions of the Civil Code of the Philippines shall be applied
in a suppletory character whenever necessary in interpreting the provisions of a
contract of suretyship.

SECOND DIVISION

UNITED MERCHANTS G.R. No. 198588

CORPORATION,
Petitioner, Present:

CARPIO, J., Chairperson,

BRION,
PEREZ,
- versus - SERENO, and
REYES, JJ.

Promulgated:
COUNTRY BANKERS INSURANCE CORPORATION, July 11, 2012
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO, J.:

The Case

This Petition for Review on Certiorari [1] seeks to reverse the Court of Appeals Decision [2] dated 16 June
2011 and its Resolution[3] dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals
reversed the Decision[4] of the Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim
on the Insurance Policy is void.
The Facts

The facts, as culled from the records, are as follows:

Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling, and
manufacturing Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose Subdivision,
Barrio Manresa, Quezon City, where UMC assembled and stored its products.
On 6 September 1995, UMCs General Manager Alfredo Tan insured UMCs stocks in trade of Christmas
lights against fire with defendant Country Bankers Insurance Corporation (CBIC)
for P15,000,000.00. The Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No.
12959A, valid until 6 September 1996, states:

AMOUNT OF INSURANCE: FIFTEEN

MILLION PESOS
PHILIPPINE
CURRENCY

xxx

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the

properties of the Assured or held by them in trust, on commissions, or on joint
account with others and/or for which they are responsible in the event of loss
and/or damage during the currency of this policy, whilst contained in the building of
one lofty storey in height, constructed of concrete and/or hollow blocks with portion
of galvanized iron sheets, under galvanized iron rood, occupied as Christmas lights
storage.[5]
On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to form
part of the Insurance Policy. Endorsement F/96-154 provides that UMCs stocks in trade were insured
against additional perils, to wit: typhoon, flood, ext. cover, and full earthquake. The sum insured was
also increased to P50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC
issued Endorsement F/96-157 where the name of the assured was changed from Alfredo Tan to UMC.

On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment
Corporation (CRM) to investigate and evaluate UMCs loss by reason of the fire. CBICs reinsurer, Central
Surety, likewise requested the National Bureau of Investigation (NBI) to conduct a parallel
investigation. On 6 July 1996, UMC, through CRM, submitted to CBIC its Sworn Statement of Formal
Claim, with proofs of its loss.

On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from
CBIC. On 25 February 1997, UMC received CBICs letter, dated 10 January 1997, rejecting UMCs claim
due to breach of Condition No. 15 of the Insurance Policy. Condition No. 15 states:

If the claim be in any respect fraudulent, or if any false declaration be

made or used in support thereof, or if any fraudulent means or devices
are used by the Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be occasioned by the
willful act, or with the connivance of the Insured, all the benefits under
this Policy shall be forfeited.[6]

On 19 February 1998, UMC filed a Complaint [7] against CBIC with the RTC of Manila. UMC anchored its
insurance claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted, and
the Certification dated 24 July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J.
Garcia of the Bureau of Fire Protection. The Certification dated 24 July 1996 provides that:

This is to certify that according to available records of this office, on or about 6:10
P.M. of July 3, 1996, a fire broke out at United Merchants Corporation located at 19-
B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of Fifty-
Five Million Pesos (P55,000,000.00) to the building and contents, while the reported
insurance coverage amounted to Fifty Million Pesos (P50,000,000.00) with Country
Bankers Insurance Corporation.
The Bureau further certifies that no evidence was gathered to prove that the
establishment was willfully, feloniously and intentionally set on fire.

That the investigation of the fire incident is already closed being ACCIDENTAL in
nature.[8]
In its Answer with Compulsory Counterclaim [9] dated 4 March 1998, CBIC admitted the issuance of the
Insurance Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of
action; (2) that UMCs claim has already prescribed; and (3) that UMCs fire claim is tainted with
fraud. CBIC alleged that UMCs claim was fraudulent because UMCs Statement of Inventory showed
that it had no stocks in trade as of 31 December 1995, and that UMCs suspicious purchases for the
year 1996 did not even amount to P25,000,000.00. UMCs GIS and Financial Reports further revealed
that it had insufficient capital, which meant UMC could not afford the alleged P50,000,000.00 worth
of stocks in trade.

In its Reply[10] dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy.
UMC claimed that it did not make any false declaration because the invoices were genuine and the
Statement of Inventory was for internal revenue purposes only, not for its insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMCs disbursing
officer. Ebora testified that UMCs stocks in trade, at the time of the fire, consisted of: (1) raw materials
for its Christmas lights; (2) Christmas lights already assembled; and (3) Christmas lights purchased
from local suppliers. These stocks in trade were delivered from August 1995 to May 1996. She stated
that Straight Cargo Commercial Forwarders delivered the imported materials to the warehouse,
evidenced by delivery receipts. However, for the year 1996, UMC had no importations and only
bought from its local suppliers. Ebora identified the suppliers as Fiber Technology Corporation from
which UMC bought stocks worth P1,800,000.00 on 20 May 1996; Fuze Industries Manufacturer
Philippines from which UMC bought stocks worth P19,500,000.00 from 20 January 1996 to 23
February 1996; and Tomco Commercial Press from which UMC bought several Christmas boxes. Ebora
testified that all these deliveries were not yet paid. Ebora also presented UMCs Balance Sheet, Income
Statement and Statement of Cash Flow. Per her testimony, UMCs purchases amounted to P608,986.00
in 1994; P827,670.00 in 1995; and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales
only from its fruits business but no sales from its Christmas lights for the year 1995.

The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers
to assemble and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third witness,
Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters
of credit with MBTC for the year 1995 only. The fourth witness presented was Ernesto Luna (Luna), the
delivery checker of Straight Commercial Cargo Forwarders. Luna affirmed the delivery of UMCs goods
to its warehouse on 13 August 1995, 6 September 1995, 8 September 1995, 24 October 1995, 27
October 1995, 9 November 1995, and 19 December 1995. Lastly, CRMs adjuster Dominador Victorio
testified that he inspected UMCs warehouse and prepared preliminary reports in this connection.

On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a Securities
and Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and NBI Investigator
Arnold Lazaro (Lazaro). Caguindagan testified that he inspected the burned warehouse on 5 July 1996,
took pictures of it and referred the claim to an independent adjuster. The SEC representatives
testimony was dispensed with, since the parties stipulated on the existence of certain documents, to
wit: (1) UMCs GIS for 1994-1997; (2) UMCs Financial Report as of 31 December 1996; (3) SEC
Certificate that UMC did not file GIS or Financial Reports for certain years; and (4) UMCs Statement of
Inventory as of 31 December 1995 filed with the BIR.

Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMCs claim. On 19
November 1996, they concluded that arson was committed based from their interview
with barangay officials and the pictures showing that blackened surfaces were present at different
parts of the warehouse. On cross-examination, Lazaro admitted that they did not conduct a forensic
investigation of the warehouse, nor did they file a case for arson.

For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of UCPB
General Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner. When
asked to bring documents related to the insurance of Perfect Investment Company, Inc., Batallones
brought the papers of Perpetual Investment, Inc.

The Ruling of the Regional Trial Court

On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering

defendant to pay plaintiff:

a) the sum of P43,930,230.00 as indemnity with interest thereon at 6% per

annum from November 2003 until fully paid;
b) the sum of P100,000.00 for exemplary damages;
c) the sum of P100,000.00 for attorneys fees; and
d) the costs of suit.

Defendants counterclaim is denied for lack of merit.

SO ORDERED.[11]
The RTC found no dispute as to UMCs fire insurance contract with CBIC. Thus, the RTC ruled for UMCs
entitlement to the insurance proceeds, as follows:

Fraud is never presumed but must be proved by clear and convincing evidence. (see
Alonso v. Cebu Country Club, 417 SCRA 115 [2003]) Defendant failed to establish by
clear and convincing evidence that the documents submitted to the SEC and BIR
were true. It is common business practice for corporations to have 2 sets of
reports/statements for tax purposes. The stipulated documents of plaintiff (Exhs. 2
8) may not have been accurate.

The conflicting findings of defendants adjuster, CRM Adjustment [with stress] and
that made by Atty. Cabrera & Mr. Lazaro for Central Surety shall be resolved in favor
of the former. Definitely the formers finding is more credible as it was made soon
after the fire while that of the latter was done 4 months later. Certainly it would be a
different situation as the site was no longer the same after the clearing up operation
which is normal after a fire incident. The Christmas lights and parts could have been
swept away. Hence the finding of the latter appears to be speculative to benefit the
reinsurer and which defendant wants to adopt to avoid liability.

The CRM Adjustment report found no arson and confirmed substantial stocks in the
burned warehouse (Exhs. QQQ) [underscoring supplied]. This is bolstered by the BFP
certification that there was no proof of arson and the fire was accidental (Exhs. PPP).
The certification by a government agency like BFP is presumed to be a regular
performance of official duty. Absent convincing evidence to the contrary, the
presumption of regularity in the performance of official functions has to be upheld.
(People vs. Lapira, 255 SCRA 85) The report of UCPB General Insurances adjuster also
found no arson so that the burned warehouse owner PIC was indemnified. [12]

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the
Decision reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and
the Decision of the Regional Trial Court, of the National Judicial Capital Region,
Branch 3 of the City of Manila dated June 16, 2005 in Civil Case No. 98-87370 is
REVERSED and SET ASIDE. The plaintiff-appellees claim upon its insurance policy is
deemed avoided.

SO ORDERED.[13]
The CA ruled that UMCs claim under the Insurance Policy is void. The CA found that the fire was
intentional in origin, considering the array of evidence submitted by CBIC, particularly the pictures
taken and the reports of Cabrera and Lazaro, as opposed to UMCs failure to explain the details of the
alleged fire accident. In addition, it found that UMCs claim was overvalued through fraudulent
transactions. The CA ruled:

We have meticulously gone over the entirety of the evidence submitted by the
parties and have come up with a conclusion that the claim of the plaintiff-appellee
was indeed overvalued by transactions which were fraudulently concocted so that
the full coverage of the insurance policy will have to be fully awarded to the
plaintiff-appellee.

First, We turn to the backdrop of the plaintiff-appellees case, thus, [o]n September 6,
1995 its stocks-in-trade were insured for Fifteen Million Pesos and on May 7, 1996
the same was increased to 50 Million Pesos. Two months thereafter, a fire gutted the
plaintiff-appellees warehouse.

Second, We consider the reported purchases of the plaintiff-appellee as shown in its

financial report dated December 31, 1996 vis--vis the testimony of Ms. Ebora thus:

1994- P608,986.00
1995- P827,670.00
1996- P20,000,000.00 (more or less) which were purchased for a
period of one month.

Third, We shall also direct our attention to the alleged true and complete
purchases of the plaintiff-appellee as well as the value of all stock-in-trade it
had at the time that the fire occurred. Thus:
Exhibit Source Amount (pesos) Dates Covered

Exhs. P-DD, Fuze Industries 19,550,400.00 January 20, 1996

inclusive Manufacturer January 31, 1996
Phils. February 12, 1996
February 20, 1996
February 23, 1996
Exhs. EE-HH, Tomco 1,712,000.00 December 19, 1995
inclusive Commercial Press January 24, 1996
February 21, 1996
November 24, 1995
Exhs. II-QQ, Precious Belen 2,720,400.00 January 13, 1996
inclusive Trading January 19, 1996
January 26, 1996
February 3, 1996
February 13, 1996
February 20, 1996
February 27, 1996
Exhs. RR- Wisdom 361,966.00 April 3, 1996
EEE, inclusive Manpower April 12, 1996
Services April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996
Exhs. GGG- Costs of Letters of 15,159,144.71 May 29, 1995
NNN, inclusive Credit for June 15, 1995
 imported raw July 5, 1995
materials September 4, 1995
October 2, 1995
October 27, 1995
January 8, 1996
March 19, 1996
Exhs. GGG-11 SCCFI statements384,794.38 June 15, 1995
- GGG-24, of account June 28, 1995
HHH-12, HHH- August 1, 1995
22, III-11, III-14, September 4, 1995
JJJ-13, KKK-11, September 8, 1995
LLL-5 September 11, 1995
October 30, 199[5]
November 10, 1995
December 21, 1995

TOTAL 44,315,024.31

Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly

looking through the pieces of evidence that it adduced during the trial. The latter
alleged that fraud is present in the case at bar as shown by the discrepancy of the
alleged purchases from that of the reported purchases made by plaintiff-appellee. It
had also averred that fraud is present when upon verification of the address of Fuze
Industries, its office is nowhere to be found. Also, the defendant-appellant
expressed grave doubts as to the purchases of the plaintiff-appellee sometime in
1996 when such purchases escalated to a high 19.5 Million Pesos without any
contract to back it up.[14]

On 7 July 2011, UMC filed a Motion for Reconsideration, [15] which the CA denied in its
Resolution dated 8 September 2011. Hence, this petition.

The Issues

UMC seeks a reversal and raises the following issues for resolution:

I.

WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW,

APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON AND
FRAUD IN THE ABSENCE OF MATERIALLY CONVINCING EVIDENCE.

II.
 WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW,
APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER
BREACHED ITS WARRANTY.[16]

The Ruling of the Court

At the outset, CBIC assails this petition as defective since what UMC ultimately
wants this Court to review are questions of fact. However, UMC argues that where the
findings of the CA are in conflict with those of the trial court, a review of the facts
may be made. On this procedural issue, we find UMCs claim meritorious.

A petition for review under Rule 45 of the Rules of Court specifically provides that
only questions of law may be raised. The findings of fact of the CA are final and
conclusive and this Court will not review them on appeal, [17] subject to exceptions as
when the findings of the appellate court conflict with the findings of the trial court.
[18]
Clearly, the present case falls under the exception. Since UMC properly raised the
conflicting findings of the lower courts, it is proper for this Court to resolve such
contradiction.

Having settled the procedural issue, we proceed to the primordial issue which boils
down to whether UMC is entitled to claim from CBIC the full coverage of its fire
insurance policy.

UMC contends that because it had already established a prima facie case against
CBIC which failed to prove its defense, UMC is entitled to claim the full coverage
under the Insurance Policy. On the other hand, CBIC contends that because arson and
fraud attended the claim, UMC is not entitled to recover under Condition No. 15 of
the Insurance Policy.
Burden of proof is the duty of any party to present evidence to establish his claim or
defense by the amount of evidence required by law, [19] which is preponderance of
evidence in civil cases.[20] The party, whether plaintiff or defendant, who asserts the
affirmative of the issue has the burden of proof to obtain a favorable judgment.
[21]
Particularly, in insurance cases, once an insured makes out a prima facie case in its
favor, the burden of evidence shifts to the insurer to controvert the insureds prima
facie case.[22] In the present case, UMC established a prima facie case against CBIC.
CBIC does not dispute that UMCs stocks in trade were insured against fire under the
Insurance Policy and that the warehouse, where UMCs stocks in trade were stored,
was gutted by fire on 3 July 1996, within the duration of the fire insurance. However,
since CBIC alleged an excepted risk, then the burden of evidence shifted to CBIC to
prove such exception.
An insurer who seeks to defeat a claim because of an exception or limitation in the
policy has the burden of establishing that the loss comes within the purview of the
exception or limitation.[23] If loss is proved apparently within a contract of insurance,
the burden is upon the insurer to establish 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.[24] In the present case, CBIC failed to discharge its primordial burden of
establishing that the damage or loss was caused by arson, a limitation in the policy.

In prosecutions for arson, proof of the crime charged is complete where the evidence
establishes: (1) the corpus delicti, that is, a fire caused by a criminal act; and (2) the
identity of the defendants as the one responsible for the crime. [25] Corpus
delicti means the substance of the crime, the fact that a crime has actually been
committed.[26] This is satisfied by proof of the bare occurrence of the fire and of its
having been intentionally caused.[27]

In the present case, CBICs evidence did not prove that the fire was intentionally
caused by the insured. First, the findings of CBICs witnesses, Cabrera and Lazaro,
were based on an investigation conducted more than four months after the fire. The
testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene as told to
them by barangayofficials, are hearsay because the barangay officials were not
presented in court. Cabrera and Lazaro even admitted that they did not conduct a
forensic investigation of the warehouse nor did they file a case for arson.
[28]
Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM,
states that the cause of the fire was faulty electrical wiring/accidental in nature. CBIC
is bound by this evidence because in its Answer, it admitted that it designated CRM to
evaluate UMCs loss. Third, the Certification by the Bureau of Fire Protection states
that the fire was accidental in origin. This Certification enjoys the presumption of
regularity, which CBIC failed to rebut.

Contrary to UMCs allegation, CBICs failure to prove arson does not mean that it also
failed to prove fraud. Qua Chee Gan v. Law Union[29] does not apply in the present
case. In Qua Chee Gan,[30] the Court dismissed the allegation of fraud based on the
dismissal of the arson case against the insured, because the evidence was identical in
both cases, thus:

While the acquittal of the insured in the arson case is not res judicata
on the present civil action, the insurers evidence, to judge from the
decision in the criminal case, is practically identical in both cases and
must lead to the same result, since the proof to establish the defense of
connivance at the fire in order to defraud the insurer cannot be
materially less convincing than that required in order to convict the
insured of the crime of arson (Bachrach vs. British American
Assurance Co., 17 Phil. 536). [31]
In the present case, arson and fraud are two separate grounds based on two different
sets of evidence, either of which can void the insurance claim of UMC. The absence
of one does not necessarily result in the absence of the

other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.

Condition No. 15 of the Insurance Policy provides that all the benefits under the
policy shall be forfeited, if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, to wit:

15. If the claim be in any respect fraudulent, or if any false declaration

be made or used in support thereof, or if any fraudulent means or
devices are used by the Insured or anyone acting in his behalf to obtain
any benefit under this Policy; or if the loss or damage be occasioned by
the willful act, or with the connivance of the Insured, all the benefits
under this Policy shall be forfeited.

In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32] the Court held that where a fire insurance
policy provides that if the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone
acting on his behalf to obtain any benefit under this Policy, and the evidence is conclusive that the
proof of claim which the insured submitted was false and fraudulent both as to the kind, quality and
amount of the goods and their value destroyed by the fire, such a proof of claim is a bar against the
insured from recovering on the policy even for the amount of his actual loss.

In the present case, as proof of its loss of stocks in trade amounting

to P50,000,000.00, UMC submitted its Sworn Statement of Formal Claim together
with the following documents: (1) letters of credit and invoices for raw materials,
Christmas lights and cartons purchased; (2) charges for assembling the Christmas
lights; and (3) delivery receipts of the raw materials. However, the charges for
assembling the Christmas lights and delivery receipts could not support its insurance
claim. The Insurance Policy provides that CBIC agreed to insure UMCs stocks in
trade. UMC defined stock in trade as tangible personal property kept for sale or
traffic.[33] Applying UMCs definition, only the letters of credit and invoices for raw
materials, Christmas lights and cartons may be considered.

The invoices, however, cannot be taken as genuine. The invoices reveal that
the stocks in trade purchased for 1996 amounts to P20,000,000.00 which were
purchased in one month. Thus, UMC needs to prove purchases amounting
to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in the
Statement of Inventory it submitted to the BIR, which is considered an entry in
official records,[34] UMC stated that it had no stocks in trade as of 31 December 1995.
In its defense, UMC alleged that it did not include as stocks in trade the raw materials
to be assembled as Christmas lights, which it had on 31 December 1995. However, as
proof of its loss, UMC submitted invoices for raw materials, knowing that the
insurance covers only stocks in trade.
Equally important, the invoices (Exhibits P-DD) from Fuze Industries Manufacturer Phils. were
suspicious. The purchases, based on the invoices and without any supporting contract, amounted
to P19,550,400.00 worth of Christmas lights from 20 January 1996 to 23 February 1996. The
uncontroverted testimony of Cabrera revealed that there was no Fuze Industries Manufacturer Phils.
located at 55 Mahinhin St., Teachers Village, Quezon City, the business address appearing in the
invoices and the records of the Department of Trade & Industry. Cabrera testified that:

A: Then we went personally to the address as I stated a while ago

appearing in the record furnished by the United Merchants Corporation
to the adjuster, and the adjuster in turn now, gave us our basis in
conducting investigation, so we went to this place which according to
the records, the address of this company but there was no office of this
company.

Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon

City and discover the address indicated by the United Merchants as the
place of business of Fuze Industries Manufacturer, Phils. was a
residential place, what then did you do after determining that it was a
residential place?

A: We went to the owner of the alleged company as appearing in the

Department of Trade & Industry record, and as appearing a certain
Chinese name Mr. Huang, and the address as appearing there is
somewhere in Binondo. We went personally there together with the
NBI Agent and I am with them when the subpoena was served to them,
but a male person approached us and according to him, there was no
Fuze Industries Manufacturer, Phils., company in that building sir.[35]

In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,[36] the Court ruled that the
submission of false invoices to the adjusters establishes a clear case of fraud and
misrepresentation which voids the insurers liability as per condition of the policy.
Their falsity is the best evidence of the fraudulent character of plaintiffs claim.
[37]
In Verendia v. Court of Appeals,[38] where the insured presented a fraudulent lease
contract to support his claim for insurance benefits, the Court held that by its false
declaration, the insured forfeited all benefits under the policy provision similar to
Condition No. 15 of the Insurance Policy in this case.

Furthermore, UMCs Income Statement indicated that the purchases or costs of sales
are P827,670.00 for 1995 and P1,109,190.00 for 1996 or a total of P1,936,860.00.
[39]
To corroborate this fact, Ebora testified that:
 Q: Based on your 1995 purchases, how much were the purchases made
in 1995?
A: The purchases made by United Merchants Corporation for the
last year 1995 is P827,670.[00] sir
Q: And how about in 1994?
A: In 1994, its P608,986.00 sir.

Q: These purchases were made for the entire year of 1995 and
1994 respectively, am I correct?
A: Yes sir, for the year 1994 and 1995.[40] (Emphasis supplied)

In its 1996 Financial Report, which UMC admitted as existing, authentic and duly
executed during the 4 December 2002 hearing, it had P1,050,862.71 as total assets
and P167,058.47 as total liabilities.[41]

Thus, either amount in UMCs Income Statement or Financial Reports is twenty-five

times the claim UMC seeks to enforce. The RTC itself recognized that UMC padded
its claim when it only allowed P43,930,230.00 as insurance claim. UMC supported its
claim of P50,000,000.00 with the Certification from the Bureau of Fire Protection
stating that x x x a fire broke out at United Merchants Corporation located at 19-B
Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of Fifty-
Five Million Pesos (P55,000,000.00) to the building and contents x x x. However, this
Certification only proved that the estimated damage of P55,000,000.00 is shared by
both the building and the stocks in trade.
It has long been settled that a false and material statement made with an intent to
deceive or defraud voids an insurance policy.[42] In Yu Cua v. South British Insurance
Co.,[43]the claim was fourteen times bigger than the real loss; in Go Lu v. Yorkshire
Insurance Co,[44] eight times; and in Tuason v. North China Insurance Co.,[45] six
times. In the present case, the claim is twenty five times the actual claim proved.

The most liberal human judgment cannot attribute such difference to mere innocent
error in estimating or counting but to a deliberate intent to demand from insurance
companies payment for indemnity of goods not existing at the time of the fire. [46] This
constitutes the so-called fraudulent claim which, by express agreement between the
insurers and the insured, is a ground for the exemption of insurers from civil liability.
[47]

In its Reply, UMC admitted the discrepancies when it stated that discrepancies in its
statements were not covered by the warranty such that any discrepancy in the
declaration in other instruments or documents as to matters that may have some
relation to the insurance coverage voids the policy.[48]
On UMCs allegation that it did not breach any warranty, it may be argued that the
discrepancies do not, by themselves, amount to a breach of warranty. However, the
Insurance Code provides that a policy may declare that a violation of specified
provisions thereof shall avoid it.[49] Thus, in fire insurance policies, which contain
provisions such as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy
between the actual loss and that claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the insurer.[50]
Considering that all the circumstances point to the inevitable conclusion that UMC
padded its claim and was guilty of fraud, UMC violated Condition No. 15 of the
Insurance Policy. Thus, UMC forfeited whatever benefits it may be entitled under the
Insurance Policy, including its insurance claim.

While it is a cardinal principle of insurance law that a contract of insurance is to be

construed liberally in favor of the insured and strictly against the insurer company,
[51]
contracts of insurance, like other contracts, are to be construed according to the
sense and meaning of the terms which the parties themselves have used. [52] If such
terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary and popular sense. Courts are not permitted to make contracts for the parties;
the function and duty of the courts is simply to enforce and carry out the contracts
actually made.[53]

WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision

and the 8 September 2011 Resolution of the Court of Appeals in CA-G.R. CV No.
85777.

SO ORDERED.

ANTONIO T. CARPIO
Senior Associate Justice

WE CONCUR:

ARTURO D. BRION
Associate Justice
JOSE PORTUGAL PEREZ MARIA LOURDES P. A. SERENO
Associate Justice Associate Justice

BIENVENIDO L. REYES
Associate Justice
CERTIFICATION

I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Senior Associate Justice

(Per Section 12, R.A. 296,

The Judiciary Act of 1948, as amended)

[1]
Under Rule 45 of the 1997 Rules of Civil Procedure.
[2]
Rollo, pp. 37-62. Penned by Associate Justice Edwin D. Sorongon with Associate
Justices Rosalinda Asuncion-Vicente and Romeo F. Barza, concurring.
[3]
Id. at 65-66.
[4]
Id. at 207-210. Penned by Judge Antonio I. De Castro.
[5]
Id. at 14.
[6]
Id. at 83.
[7]
Id. at 74-80.
[8]
Id. at 92.
[9]
Id. at 123-128.
[10]
Id. at 130-132.
[11]
Id. at 210.
[12]
Id. at 209.
[13]
Id. at 61-62.
[14]
Id. at 54-56.
[15]
Id. at 344-355.
[16]
Id. at 16-17.
[17]
Microsoft Corp. v. Maxicorp. Inc., 481 Phil. 550 (2004) citing Amigo v. Teves, 96
Phil. 252 (1954).
[18]
Id. citing Ramos, et al. v. Pepsi-Cola Bottling Co. of the Phils., et al., 125 Phil. 701
(1967).
[19]
Rules of Court, Rule 131, Sec.1.
[20]
Rules of Court, Rule 133, Sec.1.
[21]
DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc.,
516 Phil. 110 (2006).
[22]
Id. citing Jison v. Court of Appeals, 350 Phil. 138 (1998).
[23]
Id.
[24]
Id.; Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-
Purpose Cooperative, Inc., 425 Phil. 511 (2002).
[25]
Gonzales, Jr. v. People, G.R. No. 159950, 12 February 2007, 515 SCRA 480.
[26]
People v. De Leon, G.R. No. 180762, 4 March 2009, 580 SCRA 617.
[27]
People v. Oliva, 395 Phil. 265 (2000).
[28]
Rollo, p. 171.
[29]
98 Phil. 85 (1955).
[30]
Id.
[31]
Id. at 98-99.
[32]
51 Phil. 231 (1927).
[33]
Rollo, p. 60.
[34]
Governed by Rule 130 of the Rules of Court. Section 44, Rule 130 of the Rules of
Court states:
Sec. 44. Entries in official records. Entries in official records made in the
performance of his duty by a public officer of the Philippines, or by a
person in the performance of a duty specially enjoined by law,
are prima facie evidence of the facts therein stated.
[35]
Rollo, p. 189.
[36]
121 Phil. 1275 (1965).
[37]
Id.
[38]
G.R. No. 75605, 22 January 1993, 217 SCRA 417.
[39]
Rollo, p. 186.
[40]
Id.
[41]
Id. at 191.
[42]
Tan It v. Sun Insurance Office, 51 Phil. 212 (1927), citing Yu Cua v. South British
Insurance Co., 41 Phil. 134 (1920); Go Lu v. Yorkshire Insurance Co., 43 Phil. 633
(1922); Tuason v. North China Insurance Co., 47 Phil. 14 (1924).
[43]
41 Phil. 134 (1920).
[44]
43 Phil. 633 (1922).
[45]
47 Phil. 14 (1924).
[46]
Sharruf & Co. v. Baloise Fire Insurance, Co., 64 Phil. 258 (1937).
[47]
Id.
[48]
Rollo, p. 385.
[49]
The Insurance Code, Sec. 75.
[50]
Yu Cua v. South British Insurance Co., supra note 43.
[51]
Pacific Banking Corporation v. Court of Appeals, 250 Phil. 1 (1988).
[52]
Id.
[53]
Id.
G.R. No. 190702, February 27, 2017 - JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE
AND SURETY CORPORATION, Respondent.
PHILIPPINE SUPREME COURT DECISIONS

THIRD DIVISION

G.R. No. 190702, February 27, 2017

JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY CORPORATION, Respondent.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11,
2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the
September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC
granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial
vehicle policy issued by Development Insurance and Surety Corporation (respondent),
viz.:ChanRoblesVirtualawlibrary

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant
ordered to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from
the date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5chanroblesvirtuallawlibrary
I

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with
plate number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance
business.6 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.8 Respondent also issued two other commercial
vehicle policies to petitioner covering two other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific
Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's
Ark Merchandising (Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far
East Bank check dated September 27, 1996 payable to Trans-Pacific on the same day.11 The check
bearing the amount of P140,893.50 represents payment for the three insurance policies, with
P55,620.60 for the premium and other charges over the vehicle.12 However, nobody from Trans-
Pacific picked up the check that day (September 27) because its president and general manager,
Rolando Herradura, was celebrating his birthday. Trans-Pacific informed Noah's Ark that its messenger
would get the check the next day, September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the
vicinity of SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine
National Police Traffic Management Command at Camp Crame in Quezon City.14 Despite search and
retrieval efforts, the vehicle was not recovered.15

Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an
official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60
for the premium and other charges over the vehicle.16 The check issued to Trans-Pacific for
P140,893.50 was deposited with Metrobank for encashment on October 1, 1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported
the loss and filed a claim with respondent for the insurance proceeds of P1,500,000.00.18 After
investigation, respondent denied petitioner's claim on the ground that there was no insurance
contract.19 Petitioner, through counsel, sent a final demand on July 7, 1997.20 Respondent, however,
refused to pay the insurance proceeds or return the premium paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21 with
the RTC where it sought to collect the insurance proceeds from respondent. In its Answer,22
respondent asserted that the non-payment of the premium rendered the policy ineffective. The
premium was received by the respondent only on October 2, 1996, and there was no known loss
covered by the policy to which the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the
premium paid as of September 27, even if the check was received only on September 28 because (1)
respondent's agent, Trans-Pacific, acknowledged payment of the premium on that date, September
27, and (2) the check that petitioner issued was honored by respondent in acknowledgment of the
authority of the agent to receive it.25 Instead of returning the premium, respondent sent a checklist
of requirements to petitioner and assigned an underwriter to investigate the claim.26 The RTC ruled
that it would be unjust and inequitable not to allow a recovery on the policy while allowing
respondent to retain the premium paid.27 Thus, petitioner was awarded an indemnity of
P1,500,000.00 and attorney's fees of P50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records
were forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance
contract becomes valid and binding only after the premium is paid pursuant to Section 77 of the
Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found that
the premium was not yet paid at the time of the loss on September 27, but only a day after or on
September 28, 1996, when the check was picked up by Trans-Pacific.34 It also found that none of the
exceptions to Section 77 obtains in this case.35 Nevertheless, the CA ordered respondent to return
the premium it received in the amount of P55,620.60, with interest at the rate of 6% per annum from
the date of the denial of the claim on October 9, 1996 until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract
between him and respondent.37 He submits that it comes within the exceptions to the rule in Section
77 of the Insurance Code that no contract of insurance becomes binding unless and until the premium
thereof has been paid. The prohibitive tenor of Section 77 does not apply because the parties
stipulated for the payment of premiums.38 The parties intended the contract of insurance to be
immediately effective upon issuance, despite non-payment of the premium, because respondent
trusted petitioner.39 He adds that respondent waived its right to a pre-payment in full of the terms of
the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the
return of the premiums paid, then he should be able to recover the full amount of P140,893.50, and
not merely P55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was
merely to disregard the contract for only the lost vehicle.42 According to petitioner, the principle of
mutuality of contracts is violated, at his expense, if respondent is allowed to be excused from
performance on the insurance contract only for one vehicle, but not as to the two others, just because
no loss is suffered as to the two. To allow this "would be to place exclusively in the hands of one of the
contracting parties the right to decide whether the contract should stand or not x x x."43

For failure of respondent to tile its comment to the petition, we declared respondent to have waived
its right to file a comment in our June 15, 2011 Resolution.44

The lone issue here is whether there is a binding insurance contract between petitioner and
respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.45 Just like any other contract, it
requires a cause or consideration. The consideration is the premium, which must be paid at the time
and in the way and manner specified in the policy.46 If not so paid, the policy will lapse and be
forfeited by its own terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the
insurance policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time of
the issuance of the policy, provides:ChanRoblesVirtualawlibrary
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an
insurance contract, both the insured and insurer undertake risks. On one hand, there is the insured, a
member of a group exposed to a particular peril, who contributes premiums under the risk of
receiving nothing in return in case the contingency does not happen; on the other, there is the insurer,
who undertakes to pay the entire sum agreed upon in case the contingency happens. This risk-
distributing mechanism operates under a system where, by prompt payment of the premiums, the
insurer is able to meet its legal obligation to maintain a legal reserve fund needed to meet its
contingent obligations to the public. The premium, therefore, is the elixir vitae or source of life of the
insurance business:ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk-distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid
whatever losses occur due to exposure to the peril insured against. Each party therefore takes a risk:
the insurer, that of being compelled upon the happening of the contingency to pay the entire sum
agreed upon, and the insured, that of parting with the amount required as premium. without
receiving anything therefor in case the contingency does not happen. To ensure payment tor these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. It should be understood that the integrity of this fund cannot be secured
and maintained if by judicial fiat partial offerings of premiums were to be construed as a legal nexus
between the applicant and the insurer despite an express agreement to the contrary. For what could
prevent the insurance applicant from deliberately or willfully holding back full premium payment and
wait for the risk insured against to transpire and then conveniently pass on the balance of the
premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to
the public, hence, the imperative need for its prompt payment and full satisfaction. It must be
emphasized here that all actuarial calculations and various tabulations of probabilities of losses under
the risks insured against are based on the sound hypothesis of prompt payment of premiums. Upon
this bedrock insurance firms are enabled to other the assurance of security to the public at favorable
rates. x x x50 (Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent,
Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made at the time
of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was
informed that the check was ready for pick-up on September 27, 1996, the notice of the availability of
the check, by itself, does not produce the effect of payment of the premium. Trans-Pacific could not be
considered in delay in accepting the check because when it informed petitioner that it will only be
able to pick-up the check the next day, petitioner did not protest to this, but instead allowed Trans-
Pacific to do so. Thus, at the time of loss, there was no payment of premium yet to make the insurance
policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is
paid. In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we
said:ChanRoblesVirtualawlibrary
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which

provides:ChanRoblesVirtualawlibrary
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals,
wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made at the time of loss. We said therein,
thus:ChanRoblesVirtualawlibrary
We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that the petitioners and private respondent intended subject insurance policies
to be binding and effective notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years, the
insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the
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 prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its
decision:ChanRoblesVirtualawlibrary
While the import of Section 77 is that prepayment of premiums is strictly required as a condition to
the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer would prevent the entire contract of insurance from going into
effect despite payment and acceptance of the initial premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely
precludes the parties from stipulating that the policy is valid even if premiums are not paid, but docs
not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary
to morals, good customs, public order or public policy (De Leon,' The Insurance Code, p. 175). So is an
understanding to allow insured to pay premiums in installments not so prescribed. At the very least,
both parties should be deemed in estoppel to question the arrangement they have voluntarily
accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term
for the payment of the premium and loss occurs before the expiration of the term, recovery on the
policy should be allowed even though the premium is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth
exception to Section 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or
industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77
itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of
premium, even if premium has not been actually paid, as expressly provided by Section 78 itself; (3)
where the parties agreed that premium payment shall be in installments and partial payment has
been made at the time of loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals;53
(4) where the insurer granted the insured a credit term for the payment of the premium, and loss
occurs before the expiration of the term, as held in Makati Tuscany Condominium Corp.; and (5)
where the insurer is in estoppel as when it has consistently granted a 60 to 90-day credit term for the
payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in UCPB
General Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not
contain an acknowledgment of the receipt of premium but merely a statement of account on its
face;54 and (3) no payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended
the contract of insurance to be immediately effective upon issuance, despite non-payment of the
premium. This waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the
insurers have consistently granted the insured a credit extension or term for the payment of the
premium. Here, however, petitioner failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent. While there was mention of a credit
agreement between Trans-Pacific and respondent, such arrangement was not proven and was internal
between agent and principal.55 Under the principle of relativity of contracts, contracts bind the
parties who entered into it. It cannot favor or prejudice a third person, even if he is aware of the
contract and has acted with knowledge.56
We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite non payment of the premiums. Even if there is a waiver
of pre-payment of premiums, that in itself does not become an exception to Section 77, unless the
insured clearly gave a credit term or extension. This is the clear import of the fourth exception in the
UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the requirement in Section
77 that "[n]otwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, x x x."
Moreover, the policy itself states:ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis
of this Contract and deemed incorporated herein, has applied to the company for the insurance
hereinafter contained, subject to the payment of the Premium as consideration for such insurance.57
(Emphasis supplied.)
The policy states that the insured's application for the insurance is subject to the payment of the
premium. There is no waiver of pre-payment, in full or in installment, of the premiums under the
policy. Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy
became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium paid for
the vehicle in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience.58 Petitioner cannot claim the full amount of P140,893.50, which includes the payment of
premiums for the two other vehicles. These two policies are not affected by our ruling on the policy
subject of this case because they were issued as separate and independent contracts of insurance.59
We, however, find that the award shall earn legal interest of 6% from the time of extrajudicial demand
on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009 and
the Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that respondent
should return the amount of P55,620.60 with the legal interest computed at the rate of 6% per annum
reckoned from July 7, 1997 until finality of this judgment. Thereafter, the total amount shall earn
interest at the rate of 6% per annum from the finality of this judgment until its full satisfaction.

SO ORDERED.chanroblesvirtuallawlibrary

Bersamin, (Acting Chairperson), Del Castillo,* and Caguioa,***JJ., concur.

Reyes, J., on official leave.

Endnotes:

* Designated as additional Member per Raffle dated February 6, 2017.

*** Designated as Fifth Member of the Third Division per Special Order No. 2417 dated January 4,
2017.

1Rollo, pp. 10-35.

2Id. at 37-44; penned by Associate Justice Mario L. Guariña III, and concurred in by Associate Justices
Mariflor P. Punzalan Castillo and Jane Aurora C. Lantion.

3Id. at 36.

4 CA rollo, pp. 32-36.

5Rollo, pp. 43-44.

6 CA rollo, p. 32.

7Rollo, pp. 46-47.

8Id. at 38.

9 CA rollo, p. 32.

10Rollo, p. 52.

11Id. at 38; 48.

12Id. at 39; 48.

13Id. at 38-39; TSN, September 10, 1998, p. 17.

14Rollo, pp. 38-39.

15Id. at 54.

16Id. at 53.

17Id. at 39.

18Id. at 15.

19Id. at 39-40.

20Id. at 59.

21 Docketed as Civil Case No. 97-85464; RTC records, pp. 1-4.

22Id. at 14-19.

23Rollo, p. 40.

24Supra note 4.

25 CA rollo, pp. 34-35.

26Id. at 35-36.

27Id. at 36.

28Id. The dispositive portion reads:chanRoblesvirtualLawlibrary

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiff and
against the defendant. Defendant is hereby ordered to pay plaintiff the
following:chanRoblesvirtualLawlibrary

a) P1,500,000.00 as indemnification for the loss of the subject vehicle under the insurance
policy;chanrobleslaw

b) P50,000.00 as attorney's fees. No pronouncement as to costs.

SO ORDERED.

29 CA rollo, p. 37.

30Id. at 13-14.

31Id. at 3; 15.

32Supra note 2.

33Rollo, p. 41.

34Id. at 42-43.

35Id. at 41-42.

36Id. at 43.

37Id. at 18.

38Id. at 20.

39Id. at 21.

40Id. at 22.

41Id. at 31.

42Id.

43Id. at 32.

44Id. at 83-84.

45 INSURANCE CODE, Sec. 2(1).

46Philippine Phoenix Surety & Insurance Company v. Woodworks, Inc., G.R. No. L-25317, August 6,
1979, 92 SCRA 419, 422.

47Id.

48American Home Assurance Company v. Chua, G.R. No. 130421, June 28, 1999, 309 SCRA 250, 259.

49 G.R. No. 119655, May 24, 1996, 257 SCRA 126.

50Id. at 140-141.

51 G.R. No. 137172, April 4, 2001, 356 SCRA 307.

52Id. at 316-318.

53 G.R. No. 95546, November 6, 1992, 215 SCRA 462.

54Rollo, p. 46.

55Id. at 42.
56 See Borromeo v. Court of Appeals. G.R. No. 169846, March 28, 2008, 550 SCRA 269, 282.

57 RTC records, p. 6-A.

58 See Flores v. Lindo, Jr., G.R. No. 183984, April 13, 2011, 648 SCRA 772, 782-783.

59Rollo, pp. 46-47.

60Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 453-459.
SECOND DIVISION

G.R. No. 171379 : January 10, 2011

JOSE MARQUES and MAXILITE TECHNOLOGIES, INC., Petitioners, v. FAR EAST BANK AND TRUST
COMPANY, FAR EAST BANK INSURANCE BROKERS, INC., and MAKATI INSURANCE COMPANY,
Respondents.

G.R. No. 171419 : January 10, 2011

FAR EAST BANK AND TRUST COMPANY and MAKATI INSURANCE COMPANY, Petitioners, v. JOSE
MARQUES and MAXILITE TECHNOLOGIES, INC., Respondents.

DECISION

CARPIO, J.:

The Case

These consolidated petitions for reviewcralaw1cralaw assail the 31 May 2005 Decision cralaw2cralaw
and the 26 January 2006 Resolutioncralaw3cralaw of the Court of Appeals-Cebu City in CA-G.R. CV No.
62105. The Court of Appeals affirmed with modifications the 4 September 1998
Decisioncralaw4cralaw of the Regional Trial Court of Cebu City, Branch 58, in Civil Case No. CEB-18979.

The Facts

Maxilite Technologies, Inc. (Maxilite) is a domestic corporation engaged in the importation and trading
of equipment for energy-efficiency systems. Jose N. Marques (Marques) is the President and
controlling stockholder of Maxilite.

Far East Bank and Trust Co. (FEBTC)cralaw5cralaw is a local bank which handled the financing and
related requirements of Marques and Maxilite. Marques and Maxilite maintained accounts with
FEBTC. Accordingly, FEBTC financed Maxilite's capital and operational requirements through loans
secured with properties of Marques under the latter's name. Among Maxilite's and Marques'
transactions with FEBTC were: chanrob1esvirtwallawlibrary

a. A straight loan in the name of Jose N. Marques for Maxilite at the original principal amount of P 1
million. This is secured by real estate mortgage. From said original principal amount, the bank
increased it by P 300, 000.00 about 26 October 1994 to enable the wiping out of Maxilite's Trust
Receipts Account and simplify the remaining accounts into straight loan accounts.

b. A straight loan in the name of Maxilite Technologies, Inc. for a principal amount of P 2 million. This
is secured with a Real Estate Mortgage of Marques' residential property.

c. Master Card transactions covering two (2) Master Card Accounts of Marques, and

d. Local credit card transactions covering one credit card account of Marques.cralaw6cralawredlaw
Far East Bank Insurance Brokers, Inc. (FEBIBI) is a local insurance brokerage corporation while Makati
Insurance Company cralaw7cralaw is a local insurance company. Both companies are subsidiaries of
FEBTC.cralaw8cralawredlaw

On 17 June 1993, Maxilite and Marques entered into a trust receipt transaction with FEBTC, in the sum
of US$80, 765.00, for the shipment of various high-technology equipment from the United States,
cralaw9cralaw with the merchandise serving as collateral. The foregoing importation was covered by a
trust receipt document signed by Marques on behalf of Maxilite, which pertinently reads:
chanrob1esvirtwallawlibrary

The undersigned (Marques) further agree(s) to keep said merchandise insured against fire to its full
value, payable to the said bank, at the cost and expense of the undersigned, who hereby further
agree(s) to pay all charges for storage on said merchandise or any or other expenses incurred thereon.

x x xcralaw10cralawredlaw

Sometime in August 1993, FEBIBI, upon the advice of FEBTC, facilitated the procurement and
processing from Makati Insurance Company of four separate and independent fire insurance policies
over the trust receipted merchandise: (1) Policy No. BR-F-1016333, issued on 15 September 1993,
covering the period 12 August 1993 to 12 November 1993 in the amount of P 1, 000,
000.00;cralaw11cralaw (2) Policy No. BR-F-1016888, issued on 15 September 1993 covering the period
8 September 1993 to 8 December 1993 in the amount of P 605, 494.28;cralaw12cralaw (3) Policy No.
BR-F-1016930, issued on 18 October 1993, covering the period 14 October 1993 to 12 January 1994 in
the amount of P 527, 723.66;cralaw13cralaw and (4) Policy No. BR-F-1018392, issued on 14 December
1993, covering the period 1 December 1993 to 1 March 1994 in the amount of P 725,
000.00.cralaw14cralaw Maxilite paid the premiums for these policies through debit arrangement.
FEBTC would debit Maxilite's account for the premium payments, as reflected in statements of
accounts sent by FEBTC to Maxilite.

On 19 August 1994, Insurance Policy No. 1024439, covering the period 24 June 1994 to 24 June 1995,
was released to cover the trust receipted merchandise. The policy relevantly provides:
chanrob1esvirtwallawlibrary

2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the
premium has been fully paid to and duly receipted by the Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent, broker or
Company official, shall be deemed invalid and of no effect.cralaw15cralawredlaw

Finding that Maxilite failed to pay the insurance premium in the sum of P 8, 265.60 for Insurance
Policy No. 1024439 covering the period 24 June 1994 to 24 June 1995, FEBIBI sent written reminders
to FEBTC, dated 19 October 1994, cralaw16cralaw 24 January 1995, cralaw17cralaw and 6 March
1995, to debit Maxilite's account.cralaw18cralawredlaw

On 24 and 26 October 1994, Maxilite fully settled its trust receipt account.

On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building along M.J. Cuenco Avenue, Cebu
City, where Maxilite's office and warehouse were located. As a result, Maxilite suffered losses
amounting to at least P 2.1 million, which Maxilite claimed against the fire insurance policy with
Makati Insurance Company. Makati Insurance Company denied the fire loss claim on the ground of
non-payment of premium. FEBTC and FEBIBI disclaimed any responsibility for the denial of the claim.

Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company. Maxilite prayed for (1)
actual damages totaling P 2.3 million representing full insurance coverage and "business opportunity
losses, " (2) moral damages, and (3) exemplary damages. cralaw19cralaw On the other hand, Marques
sought payment of actual, moral and exemplary damages, attorney's fees, and litigation expenses.
Maxilite and Marques also sought the issuance of a preliminary injunction or a temporary restraining
to enjoin FEBTC from (1) imposing penalties on their obligations; (2) foreclosing the real estate
mortage securing their straight loan accounts; and (3) initiating actions to collect their obligations.

FEBTC, FEBIBI, and Makati Insurance Company countered that Maxilite and Marques have no cause of
action against them and essentially denied the allegations in the complaint.

The Ruling of the Trial Court

In ruling in favor of Maxilite and Marques, the Regional Trial Court of Cebu City, Branch 58, explained:
chanrob1esvirtwallawlibrary

Considering the interest of the defendant FEBTC in the property insured, hence, its concern that the
insurance policy therefor has to be effected and enforceable, and considering that the payment of the
premium thereof was the procedure adopted by debiting the plaintiffs' account, the Court is of the
view that the non-payment of the premium of the insurance policy in question was due to the fault or
negligence of the defendant FEBTC. What could have happened to the interest of the defendant FEBTC
in the insurance policy in question had the fire occurred prior to the full settlement and payment of
plaintiff's Maxilite trust receipt account? Would defendant FEBTC have tossed the blame on the non-
payment of premium to the plaintiffs?

Although there were reminders by defendant FEBIBI of the non-payment of the premium, the same
were made by said defendant through the defendant FEBTC and not to the plaintiffs directly. Despite
said reminders, the first of which was made on October 19, 1994 when plaintiff Maxilite has sufficient
fund in its trust receipt account, defendant FEBTC did not heed the same and more so did it not care
to pay the premium after the plaintiff Maxilite fully and finally settled its trust receipt account with
defendant FEBTC as the latter has already lost its interest in the insurance policy in question by virtue
of said full payment. But despite the non-payment of the insurance premium, the defendant Makati
Insurance did not cancel the policy in question nor informed plaintiffs of its cancellation if the
insurance premium should not be paid. Just as defendant FEBIBI failed to notify directly the plaintiffs
of the said non-payment. Considering the relationship of the three (3) defendants herein, as
undeniably sister companies, the non-payment of the premium of the insurance policy in question
should be imputable to their fault or negligence. Under the factual milieu in the case at bar, the Court
finds it just and equitable to hold said defendants liable to pay all the consequent damages suffered by
the plaintiffs and their liability is solidary (Art. 2194, Civil Code).cralaw20cralawredlaw

The trial court disposed of the case as follows: chanrob1esvirtwallawlibrary

WHEREFORE, premises considered, judgment is hereby rendered ordering the defendants to pay
jointly and severally to the plaintiff Maxilite the sum of Two Million One Hundred Thousand Pesos ( P
2, 100, 000.00), Philippine Currency, representing the full coverage of Insurance Policy No.
1024439 (Exh. 'A'), as actual damages, plus interest of 12% per annum from filing of Complaint on July
11, 1996 until fully paid, to the plaintiff Marque[s] the sum of P 400, 000.00 as moral damages, to
both plaintiffs the sum of P 500, 000.00 as exemplary damages, the sum of P 50, 000.00 as
attorney's fees, the sum of P 23, 082.50, representing the filing fees, as litigation expenses, and to
pay the costs.

The counter-claims are hereby dismissed.

The writ of preliminary injunction is hereby made permanent.

SO ORDERED.cralaw21cralawredlaw

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court's decision, with modifications, on the following grounds:
chanrob1esvirtwallawlibrary
First, the relations among defendants with each other are closely related and so intertwined. The said
three defendants, FEBTC, FEBIBI and MICI, are sister companies. This was never denied by the
defendants themselves.

Second, the insurance coverage was the business of sister companies FEBIBI and Makati Insurance, not
with FEBTC, which has been the bank of plaintiffs which handled the latter's financing and related
transactions. Stated a bit differently, defendant FEBTC handled the financing and related requirements
of plaintiffs; defendant FEBIBI on the other hand is an insurance brokerage company of defendant
FEBTC, while Makati Insurance is the insurance (arm) company of both defendants FEBIBI and FEBTC.

Third, defendant FEBTC caused FEBIBI to facilitate the insurance coverage of plaintiffs. FEBIBI then
asked Makati Insurance to issue the subject policy. Makati Insurance delivered the policy to FEBIBI
which it tasked with the collection of premium. FEBIBI in turn delivered the policy to FEBTC from
where it sought the payment of the premiums.

Fourth, it must be noted that the cover note and policy was supposedly issued and made effective on
June 24, 1994, when the trust receipt account was still outstanding and the insured merchandise was
still theoretically owned by the bank. Thus, for all intents and purposes, it was to the best interest and
protection of the bank to see to it that the goods were properly covered by insurance.

Fifth, the payment of premium has never been made an issue when the subject policy was still
separated into three. Or even after the said consolidation into one policy (No. 1024439), still, payment
of the premium has never become an issue.

xxx

For another, if We were to believe defendants' claim that the premium for the subject policy was not
paid, then defendants should have cancelled the policy long before. But even up to the time the fire
gutted plaintiffs' warehouse in March 1995, defendants acknowledged that the subject policy
remained effective. x x x

Furthermore, there was no notice of cancellation or any communication from defendants sent to
plaintiffs that the policy shall be cancelled because of non-payment of premiums. Thus, the more
reasonable and logical conclusion is that the subject policy was still fully in force because plaintiffs are
still paying its premiums and defendants are collecting the same through debit
account.cralaw22cralawredlaw

The Court of Appeals disposed of the case as follows: chanrob1esvirtwallawlibrary

UPON THE VIEW WE TAKE OF THIS CASE, judgment appealed from is hereby MODIFIED in such that:
chanrob1esvirtwallawlibrary

a. the interest shall be at the rate of six percent (6%) per annum to run from the time of demand on
April 11, 1995, in accordance with Article 1589 of the Civil Code, until the finality of this decision;
chanroblesvirtualawlibrary

b. the moral damages of P 400, 000.00 is reduced to P 50, 000.00; chanroblesvirtualawlibrary

c. the exemplary damages of P 500, 000.00 is reduced to P 50, 000.00; and

d. the writ of preliminary injunction previously issued lifted and set aside.

In all other respects, judgment appealed from is AFFIRMED. Without pronouncement as to costs.

SO ORDERED.cralaw23cralawredlaw

Hence, these petitions.

The Issues

In G.R. No. 171379, petitioners assail the Court of Appeals' reduction of (1) the interest rate from 12%
to 6% per annum to be imposed on respondents' liabilities; and (2) the award of moral and exemplary
damages. Petitioners also question the portion of the Court of Appeals' judgment allowing FEBTC to
foreclose the real estate mortgage securing petitioners' loans and disallowing legal compensation for
the parties' mutual obligations.

In G.R. No. 171419, petitioners challenge the Court of Appeals' findings that (1) the premium for the
subject insurance policy has in fact been paid; (2) FEBTC, FEBIBI and Makati Insurance Company are
jointly and severally liable to pay respondents the full coverage of the subject insurance policy despite
(a) their separate juridical personalities; (b) the absence of any fault or negligence on their part; and
(c) respondents' failure to prove the extent of the alleged loss. Petitioners further impugn the award
of damages and attorney's fees.

The Court's Ruling

The petition in G.R. No. 171319 lacks merit, whereas the petition in G.R. No. 171419 is partially
meritorious.

Essentially, Maxilite and Marques invoke estoppel in claiming against FEBTC, FEBIBI, and Makati
Insurance Company the face value of the insurance policy. In their complaint, Maxilite and Marques
alleged they were led to believe and they in fact believed that the settlement of Maxilite's trust
receipt account included the payment of the insurance premium.cralaw24cralaw Maxilite and
Marques faulted FEBTC "if it failed to transmit the premium payments on subject insurance coverage
contrary to its represented standard operating procedure of solely handling the insurance coverage
and past practice of debiting [Maxilite's] account."cralaw25cralawredlaw

Article 1431 of the Civil Code defines estoppel as follows: chanrob1esvirtwallawlibrary

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.

Meanwhile, Section 2(a), Rule 131 of the Rules of Court provides: chanrob1esvirtwallawlibrary

SEC. 2. Conclusive presumptions. - The following are instances of conclusive presumptions:

chanrob1esvirtwallawlibrary

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing is true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act or omission, be permitted to falsify it.

In estoppel, a party creating an appearance of fact, which is false, is bound by that appearance as
against another person who acted in good faith on it.cralaw26cralaw Estoppel is based on public
policy, fair dealing, good faith and justice.cralaw27cralaw Its purpose is to forbid one to speak against
his own act, representations, or commitments to the injury of one who reasonably relied
thereon.cralaw28cralaw It springs from equity, and is designed to aid the law in the administration of
justice where without its aid injustice might result.cralaw29cralawredlaw

In Santiago Syjuco, Inc. v. Castro, cralaw30cralaw the Court stated that "estoppel may arise from
silence as well as from words." 'Estoppel by silence' arises where a person, who by force of
circumstances is obliged to another to speak, refrains from doing so and thereby induces the other to
believe in the existence of a state of facts in reliance on which he acts to his prejudice.cralaw31cralaw
Silence may support an estoppel whether the failure to speak is intentional or
negligent.cralaw32cralawredlaw
Both trial and appellate courts basically agree that FEBTC is estopped from claiming that the insurance
premium has been unpaid. That FEBTC induced Maxilite and Marques to believe that the insurance
premium has in fact been debited from Maxilite's account is grounded on the the following facts: (1)
FEBTC represented and committed to handle Maxilite's financing and capital requirements, including
the related transactions such as the insurance of the trust receipted merchandise; (2) prior to the
subject Insurance Policy No. 1024439, the premiums for the three separate fire insurance policies had
been paid through automatic debit arrangement; (3) FEBIBI sent FEBTC, not Maxilite nor Marques,
written reminders dated 19 October 1994, 24 January 1995, and 6 March 1995 to debit Maxilite's
account, establishing FEBTC's obligation to automatically debit Maxilite's account for the premium
amount; (4) there was no written demand from FEBTC or Makati Insurance Company for Maxilite or
Marques to pay the insurance premium; (5) the subject insurance policy was released to Maxilite on
19 August 1994; and (6) the subject insurance policy remained uncancelled despite the alleged non-
payment of the premium, making it appear that the insurance policy remained in force and binding.

Moreover, prior to the full settlement of the trust receipt account on 24 and 26 October 1994, FEBTC
had insurable interest over the merchandise, and thus had greater reason to debit Maxilite's account.
Further, as found by the trial court, and apparently undisputed by FEBTC, FEBIBI and Makati Insurance
Company, Maxilite had sufficient funds at the time the first reminder, dated 19 October 1994, was sent
by FEBIBI to FEBTC to debit Maxilite's account for the payment of the insurance premium. Since (1)
FEBTC committed to debit Maxilite's account corresponding to the insurance premium; (2) FEBTC had
insurable interest over the property prior to the settlement of the trust receipt account; and (3)
Maxilite's bank account had sufficient funds to pay the insurance premium prior to the settlement of
the trust receipt account, FEBTC should have debited Maxilite's account as what it had repeatedly
done, as an established practice, with respect to the previous insurance policies. However, FEBTC
failed to debit and instead disregarded the written reminder from FEBIBI to debit Maxilite's account.
FEBTC's conduct clearly constitutes negligence in handling Maxilite's and Marques' accounts.
Negligence is defined as "the omission to do something which a reasonable man, guided upon those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
something which a prudent man and reasonable man could not do." cralaw33cralawredlaw

As a consequence of its negligence, FEBTC must be held liable for damages pursuant to Article 2176 of
the Civil Code which states "whoever by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done." Indisputably, had the insurance premium been
paid, through the automatic debit arrangement with FEBTC, Maxilite's fire loss claim would have been
approved. Hence, Maxilite suffered damage to the extent of the face value of the insurance policy or
the sum of P 2.1 million.

Contrary to Maxilite's and Marques' view, FEBTC is solely liable for the payment of the face value of
the insurance policy and the monetary awards stated in the Court of Appeals' decision. Suffice it to
state that FEBTC, FEBIBI, and Makati Insurance Company are independent and separate juridical
entities, even if FEBIBI and Makati Insurance Company are subsidiaries of FEBTC. Absent any showing
of its illegitimate or illegal functions, a subsidiary's separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary shall be confined to those arising in their
respective business.cralaw34cralaw Besides, the records are bereft of any evidence warranting the
piercing of corporate veil in order to treat FEBTC, FEBIBI, and Makati Insurance Company as a single
entity. Likewise, there is no evidence showing FEBIBI's and Makati Insurance Company's negligence as
regards the non-payment of the insurance premium.

The Court agrees with the Court of Appeals in reducing the interest rate from 12% to 6% as the
obligation to pay does not arise from a loan or forbearance of money. In Eastern Shipping Lines, Inc. v.
Court of Appeals, cralaw35cralaw the Court laid down the following guidelines for the application of
the proper interest rates: chanrob1esvirtwallawlibrary

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:
chanrob1esvirtwallawlibrary

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 . . . 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 forbearance of credit. (Emphasis supplied)

With respect to Maxilite's and Marques' invocation of legal compensation, we find the same devoid of
merit. Aside from their bare allegations, there is no clear and convincing evidence that legal
compensation exists in this case. In other words, Maxilite and Marques failed to establish the essential
elements of legal compensation. Therefore, Maxilite's and Marques' claim of legal compensation must
fail.

WHEREFORE , we AFFIRM with MODIFICATION the 31 May 2005 Decision and the 26 January 2006
Resolution of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. Only Far East Bank and Trust
Company, and not Far East Bank Insurance Brokers, Inc. or Makati Insurance Company, is
ORDERED to PAY the face value of the subject insurance policy and the monetary awards stated
in the Court of Appeals' decision.

SO ORDERED .

ANTONIO T. CARPIO
Associate Justice

WE CONCUR: chanrob1esvirtwallawlibrary

BRION,*cralaw PERALTA, ABAD, and MENDOZA, JJ.

cralaw Endnotes:

cralaw*cralaw Designated additional member per Raffle dated 9 June 2010.

cralaw1cralaw Under Rule 45 of the Rules of Court.

cralaw2cralaw Rollo (G.R. No. 171419), pp. 94-113. Penned by Associate Justice Vicente L. Yap, with
Associate Justices Isaias P. Dicdican and Enrico A. Lanzanas concurring.
cralaw3cralaw Id. at 114-118.

cralaw4cralaw Id. at 631-664. Penned by Judge Jose P. Soberano, Jr.

cralaw5cralaw FEBTC has been merged with Bank of the Philippine Islands (BPI), which is the surviving
corporation.

cralaw6cralaw Rollo (G.R. No. 171379), p. 157.

cralaw7cralaw Now known as BPI/MS Insurance Corporation (BPI/MS-IC), id. at 198.

cralaw8cralaw Rollo (G.R. No. 171419), p. 330; TSN, 9 February 1998, p. 20.

cralaw9cralaw Id. at 251.

cralaw10cralaw Id. at 225; TSN, 31 July 1997, p. 8 (Benjamin Torno).

cralaw11cralaw Id. at 306.

cralaw12cralaw Id. at 309.

cralaw13cralaw Id. at 310.

cralaw14cralaw Id. at 308.

cralaw15cralaw Id. at 414.

cralaw16cralaw Id. at 403.

cralaw17cralaw Id. at 404.

cralaw18cralaw Id. at 405.

cralaw19cralaw Id. at 616-617.

cralaw20cralaw Id. at 661-662.

cralaw21cralaw Id. at 663-664.

cralaw22cralaw Id. at 107-109.

cralaw23cralaw Id. at 112-113.

cralaw24cralaw Id. at 605.

cralaw25cralaw Id. at 608.

cralaw26cralaw Aquino, Ramon C., The Civil Code of the Philippines, Vol. 2, 1990 Edition, p. 508, citing
Strong v. Gutierrez Repide, 6 Phil. 680, 685.

cralaw27cralaw Id. at 509.

cralaw28cralaw Id.

cralaw29cralaw Id., citing 28 Am Jur 2nd 28; PNB v. Perez, 183 Phil. 54 (1979); Lazo v. Republic Surety
& Ins. Co., Inc., 142 Phil. 158 (1970).
cralaw30cralaw G.R. No. 70403, 7 July 1989, 175 SCRA 171, 192, citing 31 C.J.S., pp. 490-494.

cralaw31cralaw Id.

cralaw32cralaw Id.

cralaw33cralaw Bank of the Philippine Islands v. Suaez , G.R. No. 167750, 15 March 2010, 615 SCRA
291, 298.

cralaw34cralaw Nisce v. Equitable PCI Bank, Inc. , G.R. No. 167434, 19 February 2007, 516 SCRA 231,
258.

cralaw35cralaw G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.

SECOND DIVISION

[G.R. No. 156167. May 16, 2005]

GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE

CORPORATION, respondent.

DECISION
PUNO, J.:

Before the Court is the petition for certiorari under Rule 45 of the Revised Rules
of Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court
decision[1] which dismissed its two appeals and affirmed the judgment of the trial
court.
For review are the warring interpretations of petitioner and respondent on the
scope of the insurance companys liability for earthquake damage to petitioners
properties. Petitioner avers that, pursuant to its earthquake shock endorsement rider,
Insurance Policy No. 31944 covers all damages to the properties within its resort
caused by earthquake. Respondent contends that the rider limits its liability for loss to
the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court
are as follows:

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU
from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1,
2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only to
plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1;
D-1, and E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in
those policies referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and
F-2); that subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206-
4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1)
and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-
1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the
time of issue read that plaintiff renewed its policy with AHAC (AIU) for the period of
March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which
carried the entry under Endorsement/Warranties at Time of Issue, which read
Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00
and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:

Item -P7,691,000.00 - on the Clubhouse only

@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:

a) Tilter House- P19,800.00- 0.551%

b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment

that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the
policy in question, contained on the right-hand upper portion of page 7 thereof, the
following:

Rate-Various

Premium - P37,420.60 F/L

2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs.
C, D, E, F, G and H), the premium against the peril of earthquake shock is the same,
that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and
5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944
issued by defendant, the shock endorsement provide(sic):

In consideration of the payment by the insured to the company of the

sum included additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this policy due to the contrary, that this insurance covers
loss or damage to shock to any of the property insured by this Policy occasioned by or
through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D and 7-
C);

that in Exhibit 7-C the word included above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiffs properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.[2]

After the earthquake, petitioner advised respondent that it would be making a

claim under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the claim
to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.[3] On July 30,
1990, respondent, through its adjuster, requested petitioner to submit various
documents in support of its claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de Leon, [4]rendered a preliminary
report[5] finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that except for the swimming pools, all
affected items have no coverage for earthquake shocks. [6] On August 11, 1990,
petitioner filed its formal demand[7] for settlement of the damage to all its properties in
the Agoo Playa Resort. On August 23, 1990, respondent denied petitioners claim on
the ground that its insurance policy only afforded earthquake shock coverage to the
two swimming pools of the resort. [8] Petitioner and respondent failed to arrive at a
settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] with the
regional trial court of Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured

properties, with interest thereon, as computed under par. 29 of the
policy (Annex B) until fully paid;

2.) The sum of P428,842.00 per month, representing continuing losses

sustained by plaintiff on account of defendants refusal to pay the
claims;

3.) The sum of P500,000.00, by way of exemplary damages;

4.) The sum of P500,000.00 by way of attorneys fees and expenses of

litigation;

5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the
respondent, viz:

The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools in all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently agree with
the position of defendant that the endorsement rider (Exhibit 7-C) means that only the
two swimming pools were insured against earthquake shock.

Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e., the
insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provisions therein.

From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimming
pools was appraised by defendants adjuster at P386,000.00, defendant must, by virtue
of the contract of insurance, pay plaintiff said amount.

Because it is the finding of the Court as stated in the immediately preceding paragraph
that defendant is liable only for the damage caused to the two (2) swimming pools and
that defendant has made known to plaintiff its willingness and readiness to settle said
liability, there is no basis for the grant of the other damages prayed for by plaintiff. As
to the counterclaims of defendant, the Court does not agree that the action filed by
plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is
meritorious. The prayer, therefore, of defendant for damages is likewise denied.

WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of

THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing
damage to the two (2) swimming pools, with interest at 6% per annum from the date
of the filing of the Complaint until defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]

Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an

appeal with the Court of Appeals based on the following assigned errors:[14]

A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT

CAN ONLY RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS
UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND
THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE
OF JULY 16, 1990.

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS

RIGHT TO RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944;
EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS
ISSUANCE AND THE ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.

C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-

APPELLANT IS ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST
COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.

On the other hand, respondent filed a partial appeal, assailing the lower courts
failure to award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled,
thus:

However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. G and H), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance
contract with Philippine Charter Insurance Corporation is said to have been based and
copied (Exh. I), covered an extended earthquake shock insurance on all the insured
properties.

xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools, as
the Court a quo and this Court correctly found it to be liable only, it then cannot be
said that it was in default and therefore liable for interest.

Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the

rule that the award thereof is subject to the sound discretion of the court. Thus, if such
discretion is well-exercised, it will not be disturbed on appeal (Castro et al. v. CA, et
al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an exception
rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award
(Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-
appellants action is not baseless and highly speculative, We find that the Court a quo
did not err in granting the same.

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED
and judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]
 Petitioner filed the present petition raising the following issues:[16]

A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT

UNDER RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE
TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF
EARTHQUAKE SHOCK.

B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED

PETITIONERS PRAYER FOR DAMAGES WITH INTEREST THEREON
AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF
LITIGATION.

Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words any property
insured by this policy, and it should be interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that
it is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On
Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already
been deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an
inadvertent omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence
over the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved
in favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondents liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended
to extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company
(AHAC-AIU), which covered all the resorts properties for earthquake shock damage
and respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondents insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thus, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review
by certiorari under Rule 45 of the Revised Rules of Court as its remedy, and there is
no need for calibration of the evidence in order to establish the facts upon which this
petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990
explicitly extended coverage against earthquake shock to petitioners insured
properties other than on the two swimming pools. Petitioner admitted that from 1984
to 1988, only the two swimming pools were insured against earthquake shock. From
1988 until 1990, the provisions in its policy were practically identical to its earlier
policies, and there was no increase in the premium paid. AHAC-AIU, in a letter [19] by
its representative Manuel C. Quijano, categorically stated that its previous policy,
from which respondents policy was copied, covered only earthquake shock for the
two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00
shows that the policy only covered earthquake shock damage on the two swimming
pools. The amount was the same amount paid by petitioner for earthquake shock
coverage on the two swimming pools from 1990-1991. No additional premium was
paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake
shock endorsement to the two swimming pools in the policy schedule did not expand
the earthquake shock coverage to all of petitioners properties. As per its agreement
with petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their
riders title, in the last two policies, this qualification in the title was deleted. AHAC-
AIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence.
This inadvertence did not make the policy incomplete, nor did it broaden the scope of
the endorsement whose descriptive title was merely enumerated. Any ambiguity in the
policy can be easily resolved by looking at the other provisions, specially the
enumeration of the items insured, where only the two swimming pools were noted as
covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through
1988, the phrase Item 5 P393,000.00 on the two swimming pools only (against the
peril of earthquake shock only) meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums
must be paid for all the properties covered. In all of its seven insurance policies,
petitioner only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier ANY instead of ALL to describe
the property covered was done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its
properties must be included in the earthquake shock coverage. Petitioners own
evidence shows that it only required respondent to follow the exact provisions of its
previous policy from AHAC-AIU. Respondent complied with this requirement.
Respondents only deviation from the agreement was when it modified the provisions
regarding the replacement cost endorsement. With regard to the issue under litigation,
the riders of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as
would estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjusters letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase
Item 5 Only after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties clear intention to limit earthquake
shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions.
It did not object to any deficiency nor did it institute any action to reform the policy.
The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and
litigation expenses. Since respondent was willing and able to pay for the damage
caused on the two swimming pools, it cannot be considered to be in default, and
therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of
the case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:

ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only)[20]

Second, under the breakdown for premium payments,[21] it was stated that:

PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx

3 393,000.00 0.100%-E/S 393.00[22]

 Third, Policy Condition No. 6 stated:

6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:--

(a) Earthquake, volcanic eruption or other convulsion of nature. [23]

Fourth, the rider attached to the policy, titled Extended Coverage Endorsement
(To Include the Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:

ANNUAL PAYMENT AGREEMENT ON

LONG TERM POLICIES

THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE

SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION
OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY
HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE
ABOVE NAMED x x x AND TO PAY THE PREMIUM.

Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . .

. . . . . . . . . . . additional premium the Company agrees, notwithstanding what is stated
in the printed conditions of this Policy to the contrary, that this insurance covers loss
or damage (including loss or damage by fire) to any of the property insured by this
Policy occasioned by or through or in consequence of Earthquake.

Provided always that all the conditions of this Policy shall apply (except in so far as
they may be hereby expressly varied) and that any reference therein to loss or damage
by fire should be deemed to apply also to loss or damage occasioned by or through or
in consequence of Earthquake.[24]

Petitioner contends that pursuant to this rider, no qualifications were placed on

the scope of the earthquake shock coverage. Thus, the policy extended earthquake
shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other. [25] All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain stipulations
cannot be segregated and then made to control; neither do particular words or phrases
necessarily determine its character. Petitioner cannot focus on the earthquake shock
endorsement to the exclusion of the other provisions. All the provisions and riders,
taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear
intent of the parties to extend earthquake shock coverage only to the two swimming
pools. Section 2(1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. Thus, an
insurance contract exists where the following elements concur:
 1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designated

peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual

losses among a large group of persons bearing a similar risk; and

5. In consideration of the insurer's promise, the insured pays a premium.

[26]
(Emphasis ours)

An insurance premium is the consideration paid an insurer for undertaking to

indemnify the insured against a specified peril.[27] In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches. [28] In the
subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is
consistent with the history of petitioners previous insurance policies from AHAC-
AIU. As borne out by petitioners witnesses:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your
insurance policy during the period from March 4, 1984 to March 4, 1985
the coverage on earthquake shock was limited to the two swimming
pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the
warranty, there is a provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding
to the two swimming pools only?
A. Yes, sir.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991

pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you
personally arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
 Q. And they are independent of your company insofar as operations are
concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they
are of course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend
what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to
March 14, 1989, did you give written instruction to Forte Insurance
Agency advising it that the earthquake shock coverage must extend to
all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an
oral instruction to that effect of extending the coverage on (sic) the other
properties of the company.
Q. And that instruction, according to you, was very important because in
April 1987 there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in
the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the
provisions with respect to your instructions that all properties must be
covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home
Assurance Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake
shock endorsement has no more limitation referring to the two
swimming pools only, I was contented already that the previous
limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement
on Long Term Policies[29] to the insurance policy as proof of the intent of the parties
to extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or endorsements
to which the policy is subject, as required under Section 50, paragraph 2 of the
Insurance Code.
We also hold that no significance can be placed on the deletion of the
qualification limiting the coverage to the two swimming pools. The earthquake shock
endorsement cannot stand alone. As explained by the testimony of Juan Baranda III,
underwriter for AHAC-AIU:

DIRECT EXAMINATION OF JUAN BARANDA III[30]

TSN, August 11, 1992
pp. 9-12

Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have
been previously marked by counsel for defendant as Exhibit[s] 1-6
inclusive. Did you have occasion to review of (sic) these six (6) policies
issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time,
sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C
to H respectively carries an earthquake shock endorsement[?] My
question to you is, on the basis on (sic) the wordings indicated in
Exhibits C to H respectively what was the extent of the coverage
[against] the peril of earthquake shock as provided for in each of the six
(6) policies?

xxx

WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and
H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock
as provided for in each of the six (6) policies extend to the two (2)
swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake
Shock Endorsement, in the Clauses and Warranties: Item 5 only
(Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone
basis. For swimming pools we do cover earthquake shock. For building
 we covered it for full earthquake coverage which includes earthquake
shock
COURT:
As far as earthquake shock endorsement you do not have a specific
coverage for other things other than swimming pool? You are covering
building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering
building or another we can issue earthquake shock solely but that the
moment I see this, the thing that comes to my mind is either insuring a
swimming pool, foundations, they are normally affected by earthquake
but not by fire, sir.

DIRECT EXAMINATION OF JUAN BARANDA III

TSN, August 11, 1992
pp. 23-25

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only

Exhibits C, D, E and F inclusive [remained] its coverage against
earthquake shock to two (2) swimming pools only but that Exhibits G
and H respectively entend the coverage against earthquake shock to all
the properties indicated in the respective schedules attached to said
policies, what can you say about that testimony of plaintiffs witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone
without the other half of it. I assure you that this one covers the two
swimming pools with respect to earthquake shock endorsement. Based
on it, if we are going to look at the premium there has been no change
with respect to the rates. Everytime (sic) there is a renewal if the
intention of the insurer was to include the earthquake shock, I think
there is a substantial increase in the premium. We are not only going to
consider the two (2) swimming pools of the other as stated in the policy.
As I see, there is no increase in the amount of the premium. I must say
that the coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If
you are going to do some computation based on the rates you will arrive
at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
 ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire
insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools
only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H
which you have pointed to during your direct-examination, the phrase
Item no. 5 only meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?

xxx

ATTY. ANDRES:
As an insurance executive will you not attach any significance to the
deletion of the qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is
inadvertent. Being a company underwriter, we do not cover. . it was
inadvertent because of the previous policies that we have issued with no
specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous
and subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioners own witness testified to this agreement, viz:

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 4-5

Q. Just to be clear about this particular answer of yours Mr. Witness, what
exactly did you tell Atty. Omlas (sic) to copy from Exhibit H for
purposes of procuring the policy from Philippine Charter Insurance
Corporation?
A. I told him that the insurance that they will have to get will have the same
provisions as this American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.
 Q. So, all the provisions here will be the same except that of the premium
rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates
that they will be charging will be limited to this one. I (sic) can even be
lesser.

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 12-14

Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of
the provisions and scope of coverage of Exhibits I and H sometime in
the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the
policy wordings as well as scope of coverage of Exhibits I and H
respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured
already that the policy wordings and rates were copied from the
insurance policy I sent them but it was only when this case erupted that
we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice
any discrepancy at any time between those indicated in Exhibit I and
those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was
exactly the same P393,000.00 on the two (2) swimming pools only
against the peril of earthquake shock which I understood before that this
provision will have to be placed here because this particular provision
under the peril of earthquake shock only is requested because this is an
insurance policy and therefore cannot be insured against fire, so this has
to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent
claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the
representative of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead
petitioner to believe that the endorsement for earthquake shock covered properties
other than the two swimming pools, viz:

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
 Q. Do you recall the circumstances that led to your discussion regarding the
extent of coverage of the policy issued by Philippine Charter Insurance
Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under
Item 3 specifically that the coverage is only for earthquake shock. Then,
I remember I had a talk with Atty. Umlas (sic), and I relayed to him what
I had found out in the policy and he confirmed to me indeed only Item 3
which were the two swimming pools have coverage for earthquake
shock.

xxx

Q. Now, may we know from you Engr. de Leon your basis, if any, for stating
that except for the swimming pools all affected items have no coverage
for earthquake shock?

xxx

A. I based my statement on my findings, because upon my examination of

the policy I found out that under Item 3 it was specific on the wordings
that on the two swimming pools only, then enclosed in parenthesis
(against the peril[s] of earthquake shock only), and secondly, when I
examined the summary of premium payment only Item 3 which refers to
the swimming pools have a computation for premium payment for
earthquake shock and all the other items have no computation for
payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which usually prepares it.[31] A contract of adhesion is one wherein a
party, usually a corporation, prepares the stipulations in the contract, while the other
party merely affixes his signature or his "adhesion" thereto. Through the years, the
courts have held that in these type of contracts, the parties do not bargain on equal
footing, the weaker party's participation being reduced to the alternative to take it or
leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.[32] Consequently, any ambiguity therein is resolved
against the insurer, or construed liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided. [34] Thus,
we have called on lower courts to remain careful in scrutinizing the factual
circumstances behind each case to determine the efficacy of the claims of contending
parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the
inception of the policy, petitioner had required the respondent to copy verbatim the
provisions and terms of its latest insurance policy from AHAC-AIU. The testimony of
Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioners knowledge, viz:

DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]

TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want
for those facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under
Philippine Charter Insurance Corporation as long as it will follow the
same or exact provisions of the previous insurance policy we had with
American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you
wanted in the American Home Insurance policy are to be incorporated in
the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance
Corporation I specifically told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU
Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that
there was variance in some terms, specifically in the replacement cost endorsement,
but the principal provisions of the policy remained essentially similar to AHAC-AIUs
policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule
in this case as the parties intent to limit the coverage of the policy to the two
swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The
petition for certiorari is dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

[1]
The decision was penned by Justice Jose L. Sabio, Jr., of the 10 th Division of the
Court of Appeals.
[2]
Rollo, pp. 10-12.
[3]
Original Records, p. 50.
[4]
Vice-President for the Fire, Engineering and Allied Claims Division.
[5]
Original Records, pp. 44-48.
[6]
Original Records, p. 47.
[7]
Id., p. 49.
[8]
Id., p. 50.
[9]
Id., pp. 50-54.
[10]
Id., pp. 1-7.
[11]
Id., pp. 6-7.
[12]
Original Records, pp. 28-42.
[13]
Original Records, pp. 400-401.
[14]
CA Rollo, p. 42.
[15]
CA Rollo, pp. 184-186.
[16]
Rollo, p. 402.
[17]
Rollo, pp. 408-409.
[18]
Rollo, pp. 348-395.
[19]
Exhibit 9.
[20]
Original Records, p. 17.
[21]
Original Records, p. 17.
[22]
Original Records, p. 68.
[23]
Rollo, p. 70.
[24]
Original Records, p. 71.
[25]
Ruiz v. Sheriff of Manila, 34 SCRA 83 (1970); National Union Fire Insurance
Company of Pittsburg v. Stolt-Nielsen Philippines, Inc., 184 SCRA 682
(1990).
[26]
See Vance, pp. 1-2, cited in Agbayani, Commercial Laws of the Philippines, vol. 2,
(1986), p. 6; Philamcare Health Systems, Inc. v. Court of Appeals, 379 SCRA
356 (2002).
[27]
43 Am. Jur. 2d 878.
[28]
De Leon, Hector S., The Insurance Code of the Philippines (1992), p. 194.
[29]
Exhibits I and I-2.
[30]
The underwriter for Phil-American Insurance Corporation (formerly AIU) who
reviewed the Agoo Playa Resort insurance policies.
[31]
Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 (1990);
Verendia v. Court of Appeals, 217 SCRA 417 (1993).
[32]
Philippine National Bank v. Court of Appeals, 196 SCRA 536 (1991).
[33]
Verendia v. Court of Appeals, 217 SCRA 417 (1993); New Life Enterprises v.
Court of Appeals, 207 SCRA 669 (1992); Sun Insurance Office, Ltd. v. Court
of Appeals, 211 SCRA 554 (1992).
[34]
Pan American World Airways, Inc. v. Rapadas, 209 SCRA 67 (1992); BPI Credit
Corporation v. Court of Appeals, 204 SCRA 601 (1991); Serra v. Court of
Appeals, 229 SCRA 60 (1994).
[35]
40 SCRA 624 (1971).
[36]
Testimony of the vice president for corporate affairs and corporate secretary of
petitioner, TSN, September 23, 1991.
[37]
Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978); Tan v. Court of Appeals, 174
SCRA 403 (1989).
EN BANC

[G.R. No. 137172. April 4, 2001]

UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA

TELAMART, INC., respondent.

R E S OLUTIO N
DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the
assailed decision[1] of the Court of Appeals, which affirmed with modification the
judgment of the trial court (a) allowing Respondent to consign the sum
of P225,753.95 as full payment of the premiums for the renewal of the five insurance
policies on Respondents properties; (b) declaring the replacement-renewal policies
effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering
Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties
covered by the renewal-replacement policies.The modification consisted in the (1)
deletion of the trial courts declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the award of the attorneys fees
from 25% to 10% of the total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in
Pasay City and Manila].

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22
May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties
located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On
July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank
Manager's Checks in the total amount of P225,753.45 as renewal premium payments
for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191)
was issued by defendant. On July 14, 1992, Masagana made its formal demand for
indemnification for the burned insured properties. On the same day, defendant
returned the five (5) manager's checks stating in its letter (Exhibit "R"/"8", Record, p.
192) that it was rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for
another term;
b) Defendant had put plaintiff and its alleged broker on notice of non-
renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took
place last June 13, 1992, or before tender of premium payment."
(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioners stand that Respondents tender of
payment of the premiums on 13 July 1992 did not result in the renewal of the policies,
having been made beyond the effective date of renewal as provided under Policy
Condition No. 26, which states:

26. Renewal Clause. -- Unless the company at least forty five days in advance of the
end of the policy period mails or delivers to the assured at the address shown in the
policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number of
years, had been granted a 60 to 90-day credit term for the renewal of the
policies. Such a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued
on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990
under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB
on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more
than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other
policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May
22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19,
1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but
premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X-
1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to
May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19,
1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126
to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22,
1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No.
40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering
risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils.
(Masagana's sister company) dated December 10, 1988 but premium therefor was
paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire
Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only
on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to
May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued
on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682
for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and
"DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but
premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance
coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire
Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor
was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks
coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances

constitute preponderant proof that no timely notice of non-renewal was made by
Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350)

from Ultramar Reinsurance Brokers that plaintiffs reinsurance facility had been
confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit
11. Apparently, the notice of non-renewal (Exhibit 7, Record, p. 320) was sent
not earlier than said date, or within 45 days from the expiry dates of the policies
as provided under Policy Condition No. 26; (2) Defendant insurer
unconditionally accepted, and issued an official receipt for, the premium payment
on July 1[3], 1992 which indicates defendant's willingness to assume the risk
despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer
appointed Esteban Adjusters and Valuers to investigate plaintiffs claim as shown
by the letter dated July 17, 1992 (Exhibit 11, Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be whether the fire
insurance policies issued by petitioner to the respondent covering the period
from May 22, 1991 to May 22, 1992 had been extended or renewed by an implied
credit arrangement though actual payment of premium was tendered on a later date
and after the occurrence of the (fire) risk insured against. We resolved this issue in the
negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela
v. Court of Appeals[2]; South Sea Surety and Insurance Co., Inc. v. Court of Appeals [3];
and Tibay v. Court of Appeals.[4] Accordingly, we reversed and set aside the decision
of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse
verdict. It alleges in the motion that we had made in the decision our own findings of
facts, which are not in accord with those of the trial court and the Court of
Appeals. The courts below correctly found that no notice of non-renewal was made
within 45 days before 22 May 1992, or before the expiration date of the fire insurance
policies. Thus, the policies in question were renewed by operation of law and were
effective and valid on 30 June 1992 when the fire occurred, since the premiums were
paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree
expressly or impliedly on the extension of credit or time to pay the premium nor
consider a policy binding before actual payment. It urges the Court to take judicial
notice of the fact that despite the express provision of Section 77 of the Insurance
Code, extension of credit terms in premium payment has been the prevalent practice
in the insurance industry. Most insurance companies, including Petitioner, extend
credit terms because Section 77 of the Insurance Code is not a prohibitive injunction
but is merely designed for the protection of the parties to an insurance contract. The
Code itself, in Section 78, authorizes the validity of a policy notwithstanding non-
payment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner.
Despite its awareness of Section 77 Petitioner persuaded and induced Respondent to
believe that payment of premium on the 60- to 90-day credit term was perfectly
alright; in fact it accepted payments within 60 to 90 days after the due dates. By
extending credit and habitually accepting payments 60 to 90 days from the effective
dates of the policies, it has implicitly agreed to modify the tenor of the insurance
policy and in effect waived the provision therein that it would pay only for the loss or
damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It
argues that both the trial court and the Court of Appeals overlooked the fact that on 6
April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal
and sent by personal delivery a copy thereof to Respondents broker, Zuellig. Both
courts likewise ignored the fact that Respondent was fully aware of the notice of non-
renewal. A reading of Section 66 of the Insurance Code readily shows that in order for
an insured to be entitled to a renewal of a non-life policy, payment of the premium
due on the effective date of renewal should first be made. Respondents argument that
Section 77 is not a prohibitive provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in
the motion for reconsideration and the pleadings filed thereafter by the parties, we
resolved to grant the motion for reconsideration. The following facts, as found by the
trial court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and
these policies were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term
within which to pay the premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as
there is no proof at all that the notice sent by ordinary mail was received
by Respondent, and the copy thereof allegedly sent to Zuellig was ever
transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount
of P225,753.95 were paid by Respondent within the 60- to 90-day credit
term and were duly accepted and received by Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioners
advantage despite its practice of granting a 60- to 90-day credit term for the payment
of premiums.
Section 77 of the Insurance Code of 1978 provides:
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to the
contrary, no policy or contract of insurance issued by an insurance company is valid
and binding unless and until the premium thereof has been paid, except in the case of
a life or an industrial life policy whenever the grace period provision applies.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance

Code) promulgated on 18 December 1974. In turn, this Section has its source in
Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by
R.A. No. 3540, approved on 21 June 1963, which read:

SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the peril insured against, unless there is clear agreement to grant the
insured credit extension of the premium due. No policy issued by an insurance
company is valid and binding unless and until the premium thereof has been paid.
(Underscoring supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72
expressly permitting an agreement to extend the period to pay the premium. But are
there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself, and that is, in case of a life or
industrial life policy whenever the grace period provision applies.
The second is that covered by Section 78 of the Insurance Code, which provides:

SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of

premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation

vs. Court of Appeals,[5] wherein we ruled that Section 77 may not apply if the parties
have agreed to the payment in installments of the premium and partial payment has
been made at the time of loss. We said therein, thus:

We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that the petitioners and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all
the installment payments. Such acceptance of payments speaks loudly of the insurers
intention to honor the policies it issued to petitioner. Certainly, basic principles of
equity and fairness would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.
 Not only that. In Tuscany, we also quoted with approval the following
pronouncement of the Court of Appeals in its Resolution denying the motion for
reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as

a condition to the validity of the contract, We are not prepared to rule that the request
to make installment payments duly approved by the insurer would prevent the entire
contract of insurance from going into effect despite payment and acceptance of the
initial premium or first installment. Section 78 of the Insurance Code in effect allows
waiver by the insurer of the condition of prepayment by making an acknowledgment
in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that the policy is
valid even if premiums are not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is not contrary to morals, good
customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is
an understanding to allow insured to pay premiums in installments not so
prescribed. At the very least, both parties should be deemed in estoppel to question
the arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of

Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the
insurer may grant credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the credit
term.
Moreover, there is nothing in Section 77 which prohibits the parties in an
insurance contract to provide a credit term within which to pay the premiums. That
agreement is not against the law, morals, good customs, public order or public
policy. The agreement binds the parties. Article 1306 of the Civil Code provides:

ART. 1306. The contracting parties may establish such stipulations clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the
policy would not be permitted against Petitioner, which had consistently granted a 60-
to 90-day credit term for the payment of premiums despite its full awareness of
Section 77. Estoppel bars it from taking refuge under said Section, since Respondent
relied in good faith on such practice. Estoppel then is the fifth exception to Section
77.
WHEREFORE, the Decision in this case of 15 June 1999
is RECONSIDERED and SET ASIDE, and a new one is hereby
entered DENYING the instant petition for failure of Petitioner to sufficiently show
that a reversible error was committed by the Court of Appeals in its challenged
decision, which is hereby AFFIRMED in toto.
No pronouncement as to cost.
 SO ORDERED.
Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-
Santiago, De Leon, Jr., and Sandoval-Gutierrez, JJ., concur.
Vitug, J., Please see separate opinion.
Melo, J., I join the dissents of Justices Vitug and Pardo.
Pardo, J., I dissent. See attached.
Puno and Quisumbing, JJ., I join the dissent of J. Pardo.

[1]
Rollo, 38.
[2]
191 SCRA 1 [1990].
[3]
244 SCRA 744 [1995].
[4]
257 SCRA 126 [1996] (erroneously stated in the decision as 275 SCRA, 126).
[5]
215 SCRA 463 [1992].
G.R. No. 190702, February 27, 2017 - JAIME T. GAISANO, Petitioner, v. DEVELOPMENT
INSURANCE AND SURETY CORPORATION, Respondent.
PHILIPPINE SUPREME COURT DECISIONS

THIRD DIVISION

G.R. No. 190702, February 27, 2017

JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY CORPORATION, Respondent.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11,
2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the
September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC
granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial
vehicle policy issued by Development Insurance and Surety Corporation (respondent),
viz.:ChanRoblesVirtualawlibrary

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant
ordered to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from
the date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5chanroblesvirtuallawlibrary
I

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with
plate number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance
business.6 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.8 Respondent also issued two other commercial
vehicle policies to petitioner covering two other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific
Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's
Ark Merchandising (Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far
East Bank check dated September 27, 1996 payable to Trans-Pacific on the same day.11 The check
bearing the amount of P140,893.50 represents payment for the three insurance policies, with
P55,620.60 for the premium and other charges over the vehicle.12 However, nobody from Trans-
Pacific picked up the check that day (September 27) because its president and general manager,
Rolando Herradura, was celebrating his birthday. Trans-Pacific informed Noah's Ark that its messenger
would get the check the next day, September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the
vicinity of SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine
National Police Traffic Management Command at Camp Crame in Quezon City.14 Despite search and
retrieval efforts, the vehicle was not recovered.15

Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an
official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60
for the premium and other charges over the vehicle.16 The check issued to Trans-Pacific for
P140,893.50 was deposited with Metrobank for encashment on October 1, 1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported
the loss and filed a claim with respondent for the insurance proceeds of P1,500,000.00.18 After
investigation, respondent denied petitioner's claim on the ground that there was no insurance
contract.19 Petitioner, through counsel, sent a final demand on July 7, 1997.20 Respondent, however,
refused to pay the insurance proceeds or return the premium paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21 with
the RTC where it sought to collect the insurance proceeds from respondent. In its Answer,22
respondent asserted that the non-payment of the premium rendered the policy ineffective. The
premium was received by the respondent only on October 2, 1996, and there was no known loss
covered by the policy to which the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the
premium paid as of September 27, even if the check was received only on September 28 because (1)
respondent's agent, Trans-Pacific, acknowledged payment of the premium on that date, September
27, and (2) the check that petitioner issued was honored by respondent in acknowledgment of the
authority of the agent to receive it.25 Instead of returning the premium, respondent sent a checklist
of requirements to petitioner and assigned an underwriter to investigate the claim.26 The RTC ruled
that it would be unjust and inequitable not to allow a recovery on the policy while allowing
respondent to retain the premium paid.27 Thus, petitioner was awarded an indemnity of
P1,500,000.00 and attorney's fees of P50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records
were forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance
contract becomes valid and binding only after the premium is paid pursuant to Section 77 of the
Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found that
the premium was not yet paid at the time of the loss on September 27, but only a day after or on
September 28, 1996, when the check was picked up by Trans-Pacific.34 It also found that none of the
exceptions to Section 77 obtains in this case.35 Nevertheless, the CA ordered respondent to return
the premium it received in the amount of P55,620.60, with interest at the rate of 6% per annum from
the date of the denial of the claim on October 9, 1996 until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract
between him and respondent.37 He submits that it comes within the exceptions to the rule in Section
77 of the Insurance Code that no contract of insurance becomes binding unless and until the premium
thereof has been paid. The prohibitive tenor of Section 77 does not apply because the parties
stipulated for the payment of premiums.38 The parties intended the contract of insurance to be
immediately effective upon issuance, despite non-payment of the premium, because respondent
trusted petitioner.39 He adds that respondent waived its right to a pre-payment in full of the terms of
the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the
return of the premiums paid, then he should be able to recover the full amount of P140,893.50, and
not merely P55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was
merely to disregard the contract for only the lost vehicle.42 According to petitioner, the principle of
mutuality of contracts is violated, at his expense, if respondent is allowed to be excused from
performance on the insurance contract only for one vehicle, but not as to the two others, just because
no loss is suffered as to the two. To allow this "would be to place exclusively in the hands of one of the
contracting parties the right to decide whether the contract should stand or not x x x."43

For failure of respondent to tile its comment to the petition, we declared respondent to have waived
its right to file a comment in our June 15, 2011 Resolution.44

The lone issue here is whether there is a binding insurance contract between petitioner and
respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.45 Just like any other contract, it
requires a cause or consideration. The consideration is the premium, which must be paid at the time
and in the way and manner specified in the policy.46 If not so paid, the policy will lapse and be
forfeited by its own terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the
insurance policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time of
the issuance of the policy, provides:ChanRoblesVirtualawlibrary
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to
the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium thereof
has been paid, except in the case of a life or an industrial life policy whenever the grace period
provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an
insurance contract, both the insured and insurer undertake risks. On one hand, there is the insured, a
member of a group exposed to a particular peril, who contributes premiums under the risk of
receiving nothing in return in case the contingency does not happen; on the other, there is the insurer,
who undertakes to pay the entire sum agreed upon in case the contingency happens. This risk-
distributing mechanism operates under a system where, by prompt payment of the premiums, the
insurer is able to meet its legal obligation to maintain a legal reserve fund needed to meet its
contingent obligations to the public. The premium, therefore, is the elixir vitae or source of life of the
insurance business:ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk-distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid
whatever losses occur due to exposure to the peril insured against. Each party therefore takes a risk:
the insurer, that of being compelled upon the happening of the contingency to pay the entire sum
agreed upon, and the insured, that of parting with the amount required as premium. without
receiving anything therefor in case the contingency does not happen. To ensure payment tor these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. It should be understood that the integrity of this fund cannot be secured
and maintained if by judicial fiat partial offerings of premiums were to be construed as a legal nexus
between the applicant and the insurer despite an express agreement to the contrary. For what could
prevent the insurance applicant from deliberately or willfully holding back full premium payment and
wait for the risk insured against to transpire and then conveniently pass on the balance of the
premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to
the public, hence, the imperative need for its prompt payment and full satisfaction. It must be
emphasized here that all actuarial calculations and various tabulations of probabilities of losses under
the risks insured against are based on the sound hypothesis of prompt payment of premiums. Upon
this bedrock insurance firms are enabled to other the assurance of security to the public at favorable
rates. x x x50 (Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent,
Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made at the time
of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was
informed that the check was ready for pick-up on September 27, 1996, the notice of the availability of
the check, by itself, does not produce the effect of payment of the premium. Trans-Pacific could not be
considered in delay in accepting the check because when it informed petitioner that it will only be
able to pick-up the check the next day, petitioner did not protest to this, but instead allowed Trans-
Pacific to do so. Thus, at the time of loss, there was no payment of premium yet to make the insurance
policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is
paid. In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we
said:ChanRoblesVirtualawlibrary
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy
whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which

provides:ChanRoblesVirtualawlibrary
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals,
wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in
installments of the premium and partial payment has been made at the time of loss. We said therein,
thus:ChanRoblesVirtualawlibrary
We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that the petitioners and private respondent intended subject insurance policies
to be binding and effective notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years, the
insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the
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 prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for reconsideration of its
decision:ChanRoblesVirtualawlibrary
While the import of Section 77 is that prepayment of premiums is strictly required as a condition to
the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer would prevent the entire contract of insurance from going into
effect despite payment and acceptance of the initial premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely
precludes the parties from stipulating that the policy is valid even if premiums are not paid, but docs
not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary
to morals, good customs, public order or public policy (De Leon,' The Insurance Code, p. 175). So is an
understanding to allow insured to pay premiums in installments not so prescribed. At the very least,
both parties should be deemed in estoppel to question the arrangement they have voluntarily
accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the
payment of the premium. This simply means that if the insurer has granted the insured a credit term
for the payment of the premium and loss occurs before the expiration of the term, recovery on the
policy should be allowed even though the premium is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth
exception to Section 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or
industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77
itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of
premium, even if premium has not been actually paid, as expressly provided by Section 78 itself; (3)
where the parties agreed that premium payment shall be in installments and partial payment has
been made at the time of loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals;53
(4) where the insurer granted the insured a credit term for the payment of the premium, and loss
occurs before the expiration of the term, as held in Makati Tuscany Condominium Corp.; and (5)
where the insurer is in estoppel as when it has consistently granted a 60 to 90-day credit term for the
payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in UCPB
General Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not
contain an acknowledgment of the receipt of premium but merely a statement of account on its
face;54 and (3) no payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended
the contract of insurance to be immediately effective upon issuance, despite non-payment of the
premium. This waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the
insurers have consistently granted the insured a credit extension or term for the payment of the
premium. Here, however, petitioner failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent. While there was mention of a credit
agreement between Trans-Pacific and respondent, such arrangement was not proven and was internal
between agent and principal.55 Under the principle of relativity of contracts, contracts bind the
parties who entered into it. It cannot favor or prejudice a third person, even if he is aware of the
contract and has acted with knowledge.56
We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite non payment of the premiums. Even if there is a waiver
of pre-payment of premiums, that in itself does not become an exception to Section 77, unless the
insured clearly gave a credit term or extension. This is the clear import of the fourth exception in the
UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the requirement in Section
77 that "[n]otwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, x x x."
Moreover, the policy itself states:ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis
of this Contract and deemed incorporated herein, has applied to the company for the insurance
hereinafter contained, subject to the payment of the Premium as consideration for such insurance.57
(Emphasis supplied.)
The policy states that the insured's application for the insurance is subject to the payment of the
premium. There is no waiver of pre-payment, in full or in installment, of the premiums under the
policy. Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy
became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium paid for
the vehicle in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience.58 Petitioner cannot claim the full amount of P140,893.50, which includes the payment of
premiums for the two other vehicles. These two policies are not affected by our ruling on the policy
subject of this case because they were issued as separate and independent contracts of insurance.59
We, however, find that the award shall earn legal interest of 6% from the time of extrajudicial demand
on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009 and
the Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that respondent
should return the amount of P55,620.60 with the legal interest computed at the rate of 6% per annum
reckoned from July 7, 1997 until finality of this judgment. Thereafter, the total amount shall earn
interest at the rate of 6% per annum from the finality of this judgment until its full satisfaction.

SO ORDERED.chanroblesvirtuallawlibrary

Bersamin, (Acting Chairperson), Del Castillo,* and Caguioa,***JJ., concur.

Reyes, J., on official leave.

Endnotes:

* Designated as additional Member per Raffle dated February 6, 2017.

*** Designated as Fifth Member of the Third Division per Special Order No. 2417 dated January 4,
2017.

1Rollo, pp. 10-35.

2Id. at 37-44; penned by Associate Justice Mario L. Guariña III, and concurred in by Associate Justices
Mariflor P. Punzalan Castillo and Jane Aurora C. Lantion.

3Id. at 36.

4 CA rollo, pp. 32-36.

5Rollo, pp. 43-44.

6 CA rollo, p. 32.

7Rollo, pp. 46-47.

8Id. at 38.

9 CA rollo, p. 32.

10Rollo, p. 52.

11Id. at 38; 48.

12Id. at 39; 48.

13Id. at 38-39; TSN, September 10, 1998, p. 17.

14Rollo, pp. 38-39.

15Id. at 54.

16Id. at 53.

17Id. at 39.

18Id. at 15.

19Id. at 39-40.

20Id. at 59.

21 Docketed as Civil Case No. 97-85464; RTC records, pp. 1-4.

22Id. at 14-19.

23Rollo, p. 40.

24Supra note 4.

25 CA rollo, pp. 34-35.

26Id. at 35-36.

27Id. at 36.

28Id. The dispositive portion reads:chanRoblesvirtualLawlibrary

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiff and
against the defendant. Defendant is hereby ordered to pay plaintiff the
following:chanRoblesvirtualLawlibrary

a) P1,500,000.00 as indemnification for the loss of the subject vehicle under the insurance
policy;chanrobleslaw

b) P50,000.00 as attorney's fees. No pronouncement as to costs.

SO ORDERED.

29 CA rollo, p. 37.

30Id. at 13-14.

31Id. at 3; 15.

32Supra note 2.

33Rollo, p. 41.

34Id. at 42-43.

35Id. at 41-42.

36Id. at 43.

37Id. at 18.

38Id. at 20.

39Id. at 21.

40Id. at 22.

41Id. at 31.

42Id.

43Id. at 32.

44Id. at 83-84.

45 INSURANCE CODE, Sec. 2(1).

46Philippine Phoenix Surety & Insurance Company v. Woodworks, Inc., G.R. No. L-25317, August 6,
1979, 92 SCRA 419, 422.

47Id.

48American Home Assurance Company v. Chua, G.R. No. 130421, June 28, 1999, 309 SCRA 250, 259.

49 G.R. No. 119655, May 24, 1996, 257 SCRA 126.

50Id. at 140-141.

51 G.R. No. 137172, April 4, 2001, 356 SCRA 307.

52Id. at 316-318.

53 G.R. No. 95546, November 6, 1992, 215 SCRA 462.

54Rollo, p. 46.

55Id. at 42.
56 See Borromeo v. Court of Appeals. G.R. No. 169846, March 28, 2008, 550 SCRA 269, 282.

57 RTC records, p. 6-A.

58 See Flores v. Lindo, Jr., G.R. No. 183984, April 13, 2011, 648 SCRA 772, 782-783.

59Rollo, pp. 46-47.

60Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 453-459.

G.R. No. 198174, September 02, 2013 - ALPHA INSURANCE AND SURETY CO., Petitioner, v. ARSENIA
SONIA CASTOR, Respondent.
PHILIPPINE SUPREME COURT DECISIONS

THIRD DIVISION

G.R. No. 198174, September 02, 2013

ALPHA INSURANCE AND SURETY CO., Petitioner, v. ARSENIA SONIA CASTOR, Respondent.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision1 dated May 31, 2011 and Resolution2 dated August 10, 2011 of the Court of Appeals (CA) in
CA-G.R. CV No. 93027.

The facts follow.

On February 21, 2007, respondent entered into a contract of insurance, Motor Car Policy No.
MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota Revo DLX DSL. The contract of
insurance obligates the petitioner to pay the respondent the amount of Six Hundred Thirty Thousand
Pesos (P630,000.00) in case of loss or damage to said vehicle during the period covered, which is from
February 26, 2007 to February 26, 2008.

On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel Salazar Lanuza
(Lanuza), to bring the above-described vehicle to a nearby auto-shop for a tune-up. However, Lanuza
no longer returned the motor vehicle to respondent and despite diligent efforts to locate the same,
said efforts proved futile. Resultantly, respondent promptly reported the incident to the police and
concomitantly notified petitioner of the said loss and demanded payment of the insurance proceeds
in the total sum of P630,000.00.

In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent, stating among
others, thus:chanrobles virtua1aw 1ibrary
Upon verification of the documents submitted, particularly the Police Report and your Affidavit, which
states that the culprit, who stole the Insure[d] unit, is employed with you. We would like to invite you
on the provision of the Policy under Exceptions to Section-III, which we quote:

1.) The Company shall not be liable for:chanrobles virtua1aw 1ibrary

xxxx

(4) Any malicious damage caused by the Insured, any member of his family or by “A PERSON IN THE
INSURED’S SERVICE.”
In view [of] the foregoing, we regret that we cannot act favorably on your claim.
In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim and argued that the
exception refers to damage of the motor vehicle and not to its loss. However, petitioner’s denial of
respondent’s insured claim remains firm.

Accordingly, respondent filed a Complaint for Sum of Money with Damages against petitioner before
the Regional Trial Court (RTC) of Quezon City on September 10, 2007.

In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of respondent in this
wise:chanrobles virtua1aw 1ibrary
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against
the defendant ordering the latter as follows:
To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum from the time of
demand up to the time the amount is fully settled;

To pay attorney’s fees in the sum of P65,000.00; and

To pay the costs of suit.

All other claims not granted are hereby denied for lack of legal and factual basis.3
Aggrieved, petitioner filed an appeal with the CA.

On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon City’s decision. The
fallo reads:chanrobles virtua1aw 1ibrary
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the Decision, dated
December 19, 2008, of Branch 215 of the Regional Trial Court of Quezon City, in Civil Case No. Q-07-
61099, is hereby AFFIRMED in toto.

SO ORDERED.4
Petitioner filed a Motion for Reconsideration against said decision, but the same was denied in a
Resolution dated August 10, 2011.

Hence, the present petition wherein petitioner raises the following grounds for the allowance of its
petition:chanrobles virtua1aw 1ibrary
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND GROSSLY OR GRAVELY
ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF THE PRIVATE RESPONDENT AND AGAINST
THE PETITIONER AND RULED THAT EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE
THE TERMS OF THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT
THE PARTIES THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR PROVISIONS, THE POLICY
WILL BE CONSTRUED BY THE COURTS LIBERALLY IN FAVOR OF THE ASSURED AND STRICTLY AGAINST
THE INSURER.

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE JUDGMENT OF THE TRIAL COURT.5
Simply, the core issue boils down to whether or not the loss of respondent’s vehicle is excluded under
the insurance policy.

We rule in the negative.

Significant portions of Section III of the Insurance Policy states:chanrobles virtua1aw 1ibrary
SECTION III – LOSS OR DAMAGE

The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to
the Schedule Vehicle and its accessories and spare parts whilst thereon:chanrobles virtua1aw 1ibrary
(a)
by accidental collision or overturning, or collision or overturning consequent upon mechanical
breakdown or consequent upon wear and tear;
(b)
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or theft;
(c)
by malicious act;
(d)
whilst in transit (including the processes of loading and unloading) incidental to such transit by road,
rail, inland waterway, lift or elevator.

xxxx
EXCEPTIONS TO SECTION III

The Company shall not be liable to pay for:chanrobles virtua1aw 1ibrary

Loss or Damage in respect of any claim or series of claims arising out of one event, the first amount of
each and every loss for each and every vehicle insured by this Policy, such amount being equal to one
percent (1.00%) of the Insured’s estimate of Fair Market Value as shown in the Policy Schedule with a
minimum deductible amount of Php3,000.00;

Consequential loss, depreciation, wear and tear, mechanical or electrical breakdowns, failures or
breakages;

Damage to tires, unless the Schedule Vehicle is damaged at the same time;

Any malicious damage caused by the Insured, any member of his family or by a person in the Insured’s
service.6
In denying respondent’s claim, petitioner takes exception by arguing that the word “damage,” under
paragraph 4 of “Exceptions to Section III,” means loss due to injury or harm to person, property or
reputation, and should be construed to cover malicious “loss” as in “theft.” Thus, it asserts that the
loss of respondent’s vehicle as a result of it being stolen by the latter’s driver is excluded from the
policy.

We do not agree.

Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that theft perpetrated
by the driver of the insured is not an exception to the coverage from the insurance policy, since
Section III thereof did not qualify as to who would commit the theft. Thus:chanrobles virtua1aw
1ibrary
Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance
policy subject of this case. This is evident from the very provision of Section III – “Loss or Damage.”
The insurance company, subject to the limits of liability, is obligated to indemnify the insured against
theft. Said provision does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of exception, the same
must be covered. As correctly pointed out by the plaintiff, “(A)n insurance contract should be
interpreted as to carry out the purpose for which the parties entered into the contract which is to
insure against risks of loss or damage to the goods. Such interpretation should result from the natural
and reasonable meaning of language in the policy. Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured is adopted.” The defendant would argue
that if the person employed by the insured would commit the theft and the insurer would be held
liable, then this would result to an absurd situation where the insurer would also be held liable if the
insured would commit the theft. This argument is certainly flawed. Of course, if the theft would be
committed by the insured himself, the same would be an exception to the coverage since in that case
there would be fraud on the part of the insured or breach of material warranty under Section 69 of
the Insurance Code.7
Moreover, contracts of insurance, like other contracts, are to be construed according to the sense and
meaning of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular sense.8
Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the
excluded classes therein are to be given their meaning as understood in common speech.9cralaw
virtualaw library
Adverse to petitioner’s claim, the words “loss” and “damage” mean different things in common
ordinary usage. The word “loss” refers to the act or fact of losing, or failure to keep possession, while
the word “damage” means deterioration or injury to property.

Therefore, petitioner cannot exclude the loss of respondent’s vehicle under the insurance policy under
paragraph 4 of “Exceptions to Section III,” since the same refers only to “malicious damage,” or more
specifically, “injury” to the motor vehicle caused by a person under the insured’s service. Paragraph 4
clearly does not contemplate “loss of property,” as what happened in the instant case.

Further, the CA aptly ruled that “malicious damage,” as provided for in the subject policy as one of the
exceptions from coverage, is the damage that is the direct result from the deliberate or willful act of
the insured, members of his family, and any person in the insured’s service, whose clear plan or
purpose was to cause damage to the insured vehicle for purposes of defrauding the insurer,
viz.:chanrobles virtua1aw 1ibrary
This interpretation by the Court is bolstered by the observation that the subject policy appears to
clearly delineate between the terms “loss” and “damage” by using both terms throughout the said
policy. x x x

xxxx

If the intention of the defendant-appellant was to include the term “loss” within the term “damage”
then logic dictates that it should have used the term “damage” alone in the entire policy or otherwise
included a clear definition of the said term as part of the provisions of the said insurance contract.
Which is why the Court finds it puzzling that in the said policy’s provision detailing the exceptions to
the policy’s coverage in Section III thereof, which is one of the crucial parts in the insurance contract,
the insurer, after liberally using the words “loss” and “damage” in the entire policy, suddenly went
specific by using the word “damage” only in the policy’s exception regarding “malicious damage.”
Now, the defendant-appellant would like this Court to believe that it really intended the word
“damage” in the term “malicious damage” to include the theft of the insured vehicle.

The Court does not find the particular contention to be well taken.

True, it is a basic rule in the interpretation of contracts that the terms of a contract are to be
construed according to the sense and meaning of the terms which the parties thereto have used. In
the case of property insurance policies, the evident intention of the contracting parties, i.e., the
insurer and the assured, determine the import of the various terms and provisions embodied in the
policy. However, when the terms of the insurance policy are ambiguous, equivocal or uncertain, such
that the parties themselves disagree about the meaning of particular provisions, the policy will be
construed by the courts liberally in favor of the assured and strictly against the insurer.10
Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation. Thus, in Eternal Gardens Memorial Park Corporation v.
Philippine American Life Insurance Company,11 this Court ruled –
It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s
interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:chanrobles
virtua1aw 1ibrary
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the
insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein
should be resolved against the insurer; in other words, it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the insurer from non-compliance with its
obligations.
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the
above ruling, stating that:chanrobles virtua1aw 1ibrary
When the terms of insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be construed strictly against the party which
prepared the contract, the insurer. By reason of the exclusive control of the insurance company over
the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to avoid forfeiture.12
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is DENIED.
Accordingly, the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of the Court of
Appeals are hereby AFFIRMED.chanroblesvirtualawlibrary

SO ORDERED.

Velasco, Jr., (Chairperson), Abad, Mendoza, and Leonen, JJ., concur.

Endnotes:

1 Penned by Associate Justice Romeo F. Barza, with Associate Justices Rosalinda Asuncion-Vicente and
Edwin D. Sorongon, concurring; rollo, pp. 16-32.cralawnad

2Id. at 33-35.cralawnad

3Id. at 41.cralawnad

4Id. at 31. (Emphasis in the original)

5Id. at 9.cralawnad

6Id. at 42-43. (Emphasis ours)

7Id. at 40. (Italics in the original)

8New Life Enterprises v. Court of Appeals, G.R. No. 94071, March 31, 1992, 207 SCRA 669,
676.cralawnad

9Fortune Insurance and Surety Co., Inc. v. Court of Appeals, 314 Phil. 184, 196 (1995).cralawnad

10Id. at 25-29. (Emphasis and underscoring in the original; citation omitted)

11 G.R. No.166245, April 9, 2008, 551 SCRA 1.cralawnad

12Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance Company, supra,
at 13. (Citation omitted)

G.R. No. 191849

FREDERICK F. FELIPE, Petitioners,

vs.
MGM MOTOR TRADING CORPORATION, doing business under the name
and style NISSAN GALLERY-ORTIGAS, and AYALA GENERAL
INSURANCE CORPORATION, Respondents.

RESOLUTION

PEREZ, J.:
This Petition for Review on Certiorari assails the 14 January 2010 Decision1 of the
Court of Appeals and its 16 March 2010 Resolution 2 in CAG. R. CV No. 89665
affirming the 22 February 2005 Order3 of the Regional Trial Court (RTC) of Quezon
City, Branch 80 which dismissed the case for· specific performance and damages on
demurrer to evidence.

In his Complaint for Specific Performance and Damages against respondents MGM
Motors, Inc. (MGM Motors) and Ayala General Insurance Corporation (Ayala
Insurance), petitioner Frederick Felipe claimed. that he purchased on installment basis
a Nissan Terrano Wagon through MGM Motors' authorized representative Jane
Sarmiento (Sarmiento). Petitioner allegedly gave a P200,000.00 downpayment and
P5,000.00 reservation fee to Sarmiento. He further issued seven (7) Allied Bank
checks, each bearing the amount of P24,165.00 payable to MGM Motors. On 14 May
1997, MGM Motors delivered the subject vehicle to petitioner. He then insured the
vehicle with Ayala Insurance under Policy No. PC970000440001-00-000 and paid a
premium of P40,220.67. On 15 November 1997, the subject vehicle, while parked
along Adriatico Street in Manila, was reportedly lost. He tried to claim from Ayala
Insurance but the latter refused to pay its liability causing damages to petitioner. On
the other hand, MGM Motors refused to produce, despite repeated demands, the
document of sale by installment covering the vehicle. Petitioner allegedly paid
additional P200,000.00 on 7 May 1998 as partial payment for the vehicle. The refusal
of MGM Motors to produce the document and its renouncement of the existence of
the installment sale; and the subsequent unlawful insistence on a cash transaction
agreement, had caused damages to petitioner.4

In its Answer, MGM Motors denied receiving the down payment of P200,000.00 and
P5,000.00 reservation fee paid through Sarmiento. The following is its version of the
controversy:

MGM Motors offered Petitioner a discount of P220,000.00 if the latter would pay in
cash. MGM Motors averred that the vehicle was delivered to petitioner on 14 May
1997 but the latter failed to pay in cash, thus MGM Motors did not give the
registration papers to petitioner. MGM Motors sent two letters to petitioner
demanding the payment for the said vehicle but the latter refused or failed to pay.
MGM Motors stated that petitioner was able. to fraudulently register the vehicle with
the Land Transportation Office in his name and insure the same with Ayala Insurance.
During a negotiation, the parties agreed that petitioner's obligation amounted to
Pl,020,000.00. In an effort to settle petitioner's obligation, his mother Purificacion
issued a postdated check for Pl,020,000.00 as full payment for the subject vehicle but,
upon maturity, the check bounced. Consequently, MGM Motors filed a case for
violation of Batas Pambansa Bilang 22 (BP 22) against petitioner's mother. In order to
settle the civil aspect of the BP 22 case, petitioner paid P200,00.00 to MGM Motors.
MGM Motors counterclaimed for damages.5

Ayala Insurance, for its part, contended that petitioner had no valid cause of action
against it. Ayala Insurance. asserted that petitioner had no insurable interest because
he is not the owner of the vehicle that he had insured with it. Ayala Insurance also
counterclaimed for damages.6
Trial proceeded with petitioner and his father Alberto Felipe (Alberto) testifying on
the behalf of the former. Petitioner's testimony was however stricken off the record
because he failed to return, despite numerous opportunities, to the witness stand for
cross-examination. Only two pieces of evidence were admitted by the trial court: (1)
the Official Receipt dated 7 May 1998 issued by MGM Motors wherein it
acknowledged receipt of P200,000.00 from petitioner; and (2) the testimony of his
father Alberto that he was present when petitioner paid P200,000.00 to MGM Motors.

MGM Motors and Ayala Insurance filed their respective Motions to Dismiss on
demurrer to evidence.

On 22 February 2005, the RTC dismissed the case. The trial court reasoned that the
evidence admitted by the trial court do not prove the material allegations of
petitioner's complaint, as well as the alleged liability of Ayala Insurance.

Petitioner filed a motion for reconsideration from said Order but it was denied by the
trial court on 23 May 2005.7

Meanwhile, the trial, with respect to MGM Motor's counterclaim, subsisted.

On 6 June 2007, the trial court awarded P25,000.00 in attorney's fees to MGM
Motors.8

Petitioner elevated the matter to the Court of Appeals. On 14 January 2010, the
appellate court gave weight to the factual findings of the trial court and found no
reason to reverse its ruling.9 Petitioner filed a motion for reconsideration but it was
likewise denied by the Court of Appeals.

In the instant petition for review on certiorari, petitioner raises a lone argument, to
wit:

THE COURT OF APPEALS HAS DISPOSED OF PETITIONER'S

(PLAINTIFF-APPELLANT THEREIN) APPEAL IN A WAY NOT IN
ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS
OF THIS HONORABLE TRIBUNAL, THUS COMMITTING
ERRORS THAT WARRANT REVERSAL BY THIS HONORABLE
TRIBUNAL THIS HAPPENED WHEN:

THE COURT OF APPEALS AFFIRMED THE RULING OF THE

TRIAL COURT THAT FAILED/REFUSED TO GRANT
PETITIONER THE RELIEFS PRAYED FOR IN THE COMPLAINT
DESPITE THE FACT THAT WITH THE EVIDENCE THAT HE
ADDUCED HE HAS CLEARLY, CONVINCINGLY AND
PREPONDERANTLY PROVEN HIS CAUSES OF ACTION
AGAINST THE RESPONDENTS (DEFENDANTS). THIS IS TRUE
EVEN IF A CONSIDERABLE PORTION OF HIS EVIDENCE WAS
DENIED ADMISSION BY THE TRIAL COURT.10

Petitioner insists that the two pieces of evidence admitted by the trial court are
sufficient to substantiate the material allegations of the complaint. Petitioner stresses
that Alberto's testimony established that the purchase of the subject vehicle was on
installment basis from MGM Motors; that Petitioner paid additional 1!200,000.00;
and that MGM Motors failed and refused to deliver the promised documents. of sale
on installment despite payments having been made. The fact of sale on installment,
according to petitioner, was further proved by the receipt issued by MGM Motors.
Petitioner highlights the fact that the vehicle was actually delivered to him, thus
.ownership was transferred to him upon delivery thereof. Proceeding from the same
line of argument, petitioner states that with respect to Ayala Insurance, he is already
the owner of the subject vehicle when the insurance on it was taken and when the
subject vehicle was lost. Assuming arguendo that title to the subject vehicle remained
with MGM Motors, petitioner addsthat his insurable interest on the vehicle consisted
of the substantial amount that he had paid on the purchase price of the vehicle.

MGM Motors cites the Municipal Trial Court's (MTC) finding in the criminal
complaint for BP 22 against petitioner's mother that the agreement for the purchase of
the subject vehicle was on cash basis and not installment MGM Motors echoes the
trial court's ruling that petitioner failed to substantiate the material allegations in his
complaint.

On its part, Ayala Insurance puts up the argument that the only evidence submitted by
petitioner against it was the receipt of the P200,000.00 that he paid to MGM
Motors.1âwphi1 The evidence does not constitute proof of the insurable interest.
Moreover, Ayala Insurance asserts that petitioner also failed to establish the following
proof: (1) premium payment; (2) that the insurable interest existed at the time of the
loss; (3) deed of sale; (4) proximate cause of the loss is one of the perils insured
against; (5) existence of the original insurance policy. Ayala Insurance maintains that
Petitioner failed to establish his case by preponderance of evidence.

The basic issue is whether the trial court correctly granted the demurrer to evidence
and subsequently dismissed the complaint.

We agree:

A demurrer to evidence is a motion to dismiss on the ground of insufficiency of

evidence and is presented after the plaintiff rests his case. It is an objection by one of
the parties in an action, to the effect that the evidence which his adversary produced is
insufficient in point of law, whether true or not, to make out a case or sustain the
issue.11

Rule 33, Section 1 of the 1997 Rules of Civil Procedure provides:

Section 1. Demurrer to evidence.-After the plaintiff has completed the presentation of

his evidence, the defendant may move for dismissal on the ground that upon the facts
and the law the plaintiff has shown no right to relief. If his motion is denied, he shall
have the right to present evidence. If the motion is granted but on appeal the order of
dismissal is reversed he shall be deemed to have waived the right to present evidence.

The essential question to be resolved in a demurrer to evidence is whether the plaintiff

has been able to show that he is entitled to his claim, and it is incumbent upon the trial
court judge to make such a determination.12
A review of the dismissal of the complaint naturally entails a Calibration of the
evidence to determine whether the material allegations of the complaint were
sufficiently backed by evidence. We have repeatedly stressed that the remedy of
appeal by certiorari under Rule 45 of the Rules of Court contemplates only questions
of law, not of fact.

A question of law exists when there is doubt or controversy as to what the law is on a
certain state of facts. There is a question of fact when doubt arises as to the truth or
falsity of the statement of facts. The resolution of a question of fact necessarily
involves a calibration of the evidence, the credibility of the witnesses, the existence
and the relevance of surrounding circumstances, and the probability of specific
situations. It is for this reason that this Court defers to the factual findings of a trial
judge, who has had the distinct advantage of directly observing the witnesses on the
stand and determining from their demeanor whether they· were speaking or distorting
the truth.13

The questions on whether the sale was on cash or installment basis and whether
petitioner had insurable interest on the subject car are evidently questions of fact
which are beyond the purview of the instant petition.

In any event, a perusal of the records show that the trial court correctly dismissed
petitioner's complaint on demurrer to evidence.

Well-established is the rule that the burden of proof lies on the party who makes the
allegations.14 There is no dispute that the only pieces of evidence admitted in court are
the testimony of Alberto and the receipt showing MGM Motors receiving
P200,000.00 from petitioner as partial payment of the subject car. The allegation that
the purchase of the vehicle was on an installment basis was not supported by any
evidence. The receipt of a partial payment does not suffice to prove that the purchase
was made on an installment basis. Petitioner did not present any document to prove
said allegation while MGM Motors produced a sales invoice wherein it was stated
that the mode of payment is "COD" or cash on delivery.

In the same vein, petitioner failed to substantiate his allegation against Ayala
Insurance. Petitioner has the burden of proof to show that a loss occurred and said loss
was covered by his insurance policy. Considering that the trial court only admitted
two pieces of evidence in petitioner's favor and none of those tend to prove loss of the
subject car and coverage thereof under the insurance policy, petitioner is not entitled
to the reliefs he had prayed for.

BASED ON THE FOREGOING, the Petition is DENIED. The 14 January 2010

Decision of the Court of Appeals and its 16 March 2010 Resolution in CA-G.R. CV
No. 89665are AFFIRMED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:
 MARIA LOURDES P. A. SERENO
Chief Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO LUCAS P. BERSAMIN

Associate Justice Associate Justice

FRANCIS H. JARDELEZA*
Associate Justice

C E R T I F I CAT I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions
in the above Resolution had been reached in consultation before the case was assigned
to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes
*
Acting Member per Special Order No. 2188 dated 16 September 2015.
1
Rollo, pp. 32-38; Penned by Associate Justice Arcangelita M. Romilla-Lontok with
Associate Justices Andres B. Reyes, Jr. and Priscilla J. Baltazar-Padilla, concurring.
2
id. at 39 .
3
Id. at 99-101; Issued by Judge Agustin S. Dizon.
4
Id. at 49-54; See Complaint.
5
Id. at 56-66; See Answer of MGM Motors.
6
Id. at 69-70; See Answer of Ayala Insurance.
7
Records, p. 356-357.
8
Rollo, p. 73-76; Presided by Pairing Judge Ma. Theresa Dela Torre-Yadao.
9
Id. at 37.
10
Rollo, pp. 16-17.
11
Celina v. Heirs of Alejo Santiago, 479 Phil. 617, 623 (2004).
12
Uy v. Chua, 616 Phil. 768, 784 (2009).
13
Abadv. Guimba, 503 Phil. 321, 328-329 (2005).
14
Heirs of Pedro Pasag v. Spouses Parocha, 550 Phil. 571, 583 (2007).

FIRST DIVISION

GAISANO CAGAYAN, INC. G.R. No. 147839

Petitioner,
Present:

PANGANIBAN, C.J.
(Chairperson)
- versus - *YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

INSURANCE COMPANY OF
NORTH AMERICA, Promulgated:
Respondent. June 8, 2006
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

AUSTRIA-MARTINEZ, J.:

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

The factual background of the case is as follows:

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

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

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

xxxx

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

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

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

At the pre-trial conference the parties failed to arrive at an amicable settlement. [7] Thus, trial
on the merits ensued.
 On August 31, 1998, the RTC rendered its decision dismissing respondents complaint. [8] It
held that the fire was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner; that it has not been established that petitioner is the debtor of IMC and
LSPI; that since the sales invoices state that it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the property of the vendor
until the purchase price is fully paid, IMC and LSPI retained ownership of the delivered goods and
must bear the loss.

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

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED

and SET ASIDE and a new one is entered ordering defendant-appellee Gaisano
Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the

plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus legal
interest from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the

plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.[10]

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

Petitioner filed a motion for reconsideration [12] but it was denied by the CA in its Resolution
dated April 11, 2001.[13]
 Hence, the present petition for review on certiorari anchored on the following Assignment of

Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT. [14]

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

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

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as
creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable
for loss of the ready-made clothing materials since it failed to overcome the presumption of liability
under Article 1265[16] of the Civil Code; that the fire was caused through petitioners negligence in
failing to provide stringent measures of caution, care and maintenance on its property because
electric wires do not usually short circuit unless there are defects in their installation or when there is
lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondents valid claim and should be liable to respondent for
contracted lawyers fees, litigation expenses and cost of suit. [17]

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

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

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

The Court disagrees with petitioners stand.

It is well-settled that when the words of a contract are plain and readily understood, there is
no room for construction.[22] In this case, the questioned insurance policies provide coverage for book
debts in connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines. [23]; and defined book debts as the
unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy.[24] Nowhere is it provided in the questioned insurance policies that the
subject of the insurance is the goods sold and delivered to the customers and dealers of the insured.
 Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood literally just
as they appear on the face of the contract. [25] Thus, what were insured against were the accounts of
IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the
loss or destruction of the goods delivered.

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

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the sellers risk
until the ownership therein is transferred to the buyer, but when the ownership
therein is transferred to the buyer the goods are at the buyers risk whether actual
delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee
for the buyer, in pursuance of the contract and the ownership in the goods has
been retained by the seller merely to secure performance by the buyer of his
obligations under the contract, the goods are at the buyers risk from the time of
such delivery; (Emphasis supplied)

xxxx

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

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

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

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

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

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

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

Under Article 1263 of the Civil Code, [i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation. If the obligation is generic
in the sense that the object thereof is designated merely by its class or genus without any particular
designation or physical segregation from all others of the same class, the loss or destruction of
anything of the same kind even without the debtors fault and before he has incurred in delay will not
have the effect of extinguishing the obligation. [35] This rule is based on the principle that the genus of a
thing can never perish. Genus nunquan perit.[36] An obligation to pay money is generic; therefore, it is
not excused by fortuitous loss of any specific property of the debtor. [37]
 Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.

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

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

Petitioner failed to refute respondents evidence.

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

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been subrogated to
any right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is
fatal to petitioners case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11,
2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848
are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
 No pronouncement as to costs.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson

(On Leave)
CONSUELO YNARES-SANTIAGO ROMEO J. CALLEJO, SR.
Associate Justice Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

*
On Leave.
[1]
Penned by Associate Justice Portia Alio-Hormachuelos and concurred in by
Associate Justices Angelina Sandoval-Gutierrez (now Associate Justice of this
Court) and Elvi John S. Asuncion.
[2]
Records, pp. 146, 190.
[3]
Id. at pp. 149 and 200; Exhibits A-3-a and E-2-a Levi Strauss.
[4]
Id., Exhibits A-3 and E-2 Levi Strauss.
[5]
Id. at 1.
[6]
Id. at 63.
[7]
Id. at 93.
[8]
Id. at 540.
[9]
CA rollo, p. 18.
[10]
Id. at 101-102.
[11]
Id. at 98-100.
[12]
Id. at 105.
[13]
Id. at 135.
[14]
Rollo, p. 36.
[15]
Id. at 28 (Petition), 132 (Memorandum).
[16]
Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other
natural calamity.
[17]
Rollo, pp. 105 (Comment), 153 (Memorandum).
[18]
Spouses Hanopol v. Shoemart, Incorporated, 439 Phil. 266, 277 (2002); St.
Michaels Institute v. Santos, 422 Phil. 723, 737 (2001).
[19]
Go v. Court of Appeals, G.R. No. 158922, May 28, 2004, 430 SCRA 358,
364; Spouses Hanopol v. Shoemart, Incorporated, supra.
[20]
Custodio v. Corrado, G.R. No. 146082, July 30, 2004, 435 SCRA 500,
511; Spouses Hanopol v. Shoemart, Incorporated, supra.
[21]
The Insular Life Assurance Company, Ltd. v. Court of Appeals, G.R. No. 126850, April 28, 2004, 428
SCRA 79, 86; Aguirre v. Court of Appeals, G.R. No. 122249, January 29, 2004, 421 SCRA 310,
319.
[22]
De Mesa v. Court of Appeals, 375 Phil. 432, 443 (1999).
[23]
Records, pp. 146, 190.
[24]
Id.
[25]
First Fil-Sin Lending Corporation v. Padillo, G.R. No. 160533, January 12, 2005,
448 SCRA 71, 76; Azarraga v. Rodriguez, 9 Phil. 637 (1908).
[26]
Records, at the back of pp. 151-173; Exhibits C to C-22.
[27]
See Lawyers Cooperative Publishing Co. v. Tabora, 121 Phil. 737, 741 (1965).
[28]
Aetna Ins. Co. v. King, 265 So 2d 716, cited in 43 Am Jur 2d 943.
[29]
43 Am Jur 2d 943.
[30]
Id.
[31]
43 Am Jur 2d 962.
[32]
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen were inevitable.
[33]
CA Decision, p. 11; CA rollo, p. 100.
[34]
Lawyers Cooperative Publishing v. Tabora, supra note 27, at 741.
[35]
Jurado, Comments and Jurisprudence on Obligations and Contracts (1993), pp.
289-290. See also Republic of the Philippines v. Grijaldo, 122 Phil. 1060,
1066 (1965); De Leon v. Soriano, 87 Phil. 193, 196 (1950).
[36]
Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91
Phil. 861, 865 (1952). See also Republic of the Philippines v. Grijaldo,
supra; De Leon v. Soriano, supra.
[37]
Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956).
[38]
Records, pp. 151-173.
[39]
Id. at 182.
[40]
Id. at 183.
[41]
Delsan Transport Lines, Inc. v. Court of Appeals, 420 Phil. 824, 834
(2001); Philippine American General Insurance Company, Inc. v. Court of
Appeals, 339 Phil. 455, 466 (1997).
[42]
Records, p. 201.

SECOND DIVISION

RCJ BUS LINES, INCORPORATED,

Petitioner,

- versus -

STANDARD INSURANCE COMPANY, INCORPORATED,

Respondent.

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

DECISION

CARPIO, J.:
 The Case

G.R. No. 193629 is a petition for review1 assailing the Decision2 promulgated on 11
March 2010 as well as the Resolution3 promulgated on 3 September 2010 by the
Court of Appeals (appellate court) in CA-G.R. SP No. 105338. The appellate court
affirmed with modification the 27 May 2008 Decision4 of Branch 37 of the Regional
Trial Court of Manila (RTC) in Civil Case No. 00-99410. The RTC dismissed RCJ
Bus Lines appeal from the 12 July 2000 Decision5 of the Metropolitan Trial Court of
Manila (MeTC) in Civil Case No. 153566. The MeTC rendered judgment in favor of
Standard Insurance Company, Incorporated (Standard) and
ordered Flor Bola Mangoba (Mangoba) and RCJ Bus Lines, Incorporated (RCJ) to
pay damages.

The Facts

The appellate court narrated the facts as follows:

On 01 December 2000, respondent Standard Insurance Co., Inc.

(STANDARD) filed an amended complaint against the
petitioners Flor Bola Mangoba and RCJ Bus Lines, Inc. (docketed as
Civil Case No. 153566-CV before the Metropolitan Trial Court of
Manila, Branch 29). Said amended complaint alleged, among others:

2. On June 19, 1994 along the National Highway

at Brgy. Amlang, Rosario, La Union,
defendant Flor B. Mangoba while driving [sic] an RCJ HINO
BLUE RIBBON PASSENGER BUS bearing Plate No. NYG-
363 in a reckless and imprudent manner, bumped and hit a
1991 Mitsubishi Lancer GLX bearing Plate No. TAJ-796, a
photocopy of the police report is attached hereto and made an
integral part hereof as Annex A.

3. The subject Mitsubishi Lancer which is owned

by Rodelene Valentino was insured for loss and damage with
plaintiff [Standard Insurance Co. Inc.] for P450,000.00, a
photocopy of the insurance policy is attached hereto and made
an integral part hereof as Annex B.
4. Defendant RCJ Bus Lines, Inc. is the registered owner of the
Passenger Bus bearing Plate No. NYG-363 while
defendant Flor Mangoba was the driver of the subject
Passenger Bus when the accident took place.

5. As a direct and proximate cause of the vehicular accident, the

Mitsubishi Lancer was extensively damaged, the costs of
repairs of which were borne by the plaintiff [Standard
Insurance Co. Inc.] at a cost of P162,151.22.

6. By virtue of the insurance contract, plaintiff [Standard

Insurance Co. Inc.] paid Rodelene Valentino the amount
of P162,151.22 for the repair of the Mitsubishi Lancer car.

7. After plaintiff [Standard Insurance Co. Inc.] has complied

with its obligation under the policy mentioned above, plaintiffs
assured executed in plaintiffs favor a Release of Claim thereby
subrogating the latter to all his rights of recovery on all claims,
demands and rights of action on account of loss, damage or
injury as a consequence of the accident from any person
liable therefor.

8. Despite demands, defendants have failed and refused and

still continue to fail and refuse to reimburse plaintiff the sum
of P162,151.22. A photocopy of the demand letter is attached
hereto and made an integral part hereof as Annex C.

9. As a consequence, plaintiff [Standard Insurance Co. Inc.] has

been compelled to resort to court action and thereby hire the
services of counsel as well as incur expenses of litigation for all
of which it should be indemnified by the defendant in the
amount of at least P30,000.00.

10. In order that it may serve as a deterrent for others and by

way of example for the public good, defendants should be
 adjudged to pay plaintiff [Standard Insurance Co. Inc.]
exemplary damages in the amount of P20,000.00.

Thus, STANDARD prayed:

WHEREFORE, plaintiff respectfully prays that after due trial

on the issues, this court render judgment against the defendants
adjudging them jointly and severally liable to pay plaintiff the
following amounts:

1. The principal claim of P162,151.22 with interest at 12% per

annum from September 1, 1995 until fully paid.

2. P30,000.00 as and by way of indemnification for attorneys

fees.

3. P25,000.00 as exemplary damages.

Plaintiff prays for such further or other reliefs as may be

deemed just and equitable under the premises.

In its answer, RCJ Bus Lines, Inc. maintained:

1. That the complaint states no cause of action against it;

2. That venue was improperly laid; and,

3. That the direct, immediate and proximate cause of the

accident was the negligence of the driver of the Mitsubishi
 Lancer when, for no reason at all, it made a sudden stop along
the National Highway, as if to initiate and/or create an accident.

Flor Bola Mangoba, in his own answer to the complaint, also pointed
his finger at the driver of the Mitsubishi Lancer as the one who caused
the vehicular accident on the time, date and place in question.

For his failure to appear at the pre-trial despite

notice, Flor Bola Mangoba was declared in default on 14 November
1997. Accordingly, trial proceeded sans his participation.

At the trial, the evidence adduced by the parties established the

following facts:

In the evening of 19 June 1994, at around 7:00 oclock, a Toyota

Corolla with Plate No. PHU-185 driven by Rodel Chua, cruised
along the National Highway at Barangay Amlang, Rosario, La
Union, heading towards the general direction of Bauan, La
Union. The Toyota Corolla travelled at a speed of 50 kilometers
per hour as it traversed the downward slope of the road, which
curved towards the right.

The Mitsubishi Lancer GLX with Plate No. TAJ-796, driven

by Teodoro Goki, and owned by Rodelene Valentino, was then
following the Toyota Corolla along the said highway. Behind
the Mitsubishi Lancer GLX was the passenger bus with Plate
No. NYG-363, driven by Flor Bola Mangoba and owned by
RCJ Bus Lines, Inc. The bus followed the Mitsubishi Lancer
GLX at a distance of ten (10) meters and traveled at the speed
of 60 to 75 kilometers per hour.

Upon seeing a pile of gravel and sand on the road, the Toyota
Corolla stopped on its tracks. The Mitsubishi Lancer followed
suit and also halted. At this point, the bus hit and bumped the
rear portion of the Mitsubishi Lancer causing it to move
forward and hit the Toyota Corolla in front of it.
 As a result of the incident, the Mitsubishi Lancer sustained
damages amounting to P162,151.22, representing the costs of
its repairs. Under the comprehensive insurance policy secured
by Rodelene Valentino, owner of the Mitsubishi Lancer,
STANDARD reimbursed to the former the amount she
expended for the repairs of her vehicle. Rodelene then executed
a Release of Claim and Subrogation Receipt, subrogating
STANDARD to all rights, claims and actions she may have
against RCJ Bus Lines, Inc. and its driver, Flor Bola Mangoba.6

The MeTCs Ruling

On 12 July 2000, the MeTC rendered its decision in favor of Standard, the dispositive
portion of which reads:

WHEREFORE, consistent with Section 1, Rule 131 and Section 1,

Rule 133 of the Revised Rules on Evidence, judgment is hereby
rendered in favor of the plaintiff, ordering
defendants Flor Bola Mangoba and RCJ Bus Lines, Inc.:

1. To pay the principal sum of ONE HUNDRED SIXTY TWO

THOUSAND ONE HUNDRED FIFTY ONE PESOS and 22/100
(P162,151.22), with legal rate of interest at 12% per annum from
September 1, 1995 until full payment;

2. To pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as

exemplary damages;

3. To pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as

reasonable attorneys fees; and

4. To pay the costs of suit.

 For want of merit, the separate Counterclaim is hereby DISMISSED.7

In an Order8 dated 2 May 2002, the RTC dismissed Mangoba and RCJs appeal for
filing their pleading beyond the reglementary period. The appellate court, however, in
a Decision9 in CA-G.R. SP No. 77598 dated 23 April 2004, granted RCJs petition and
remanded the case to the RTC for further proceedings.

The RTCs Ruling

In its Decision dated 27 May 2008, the RTC affirmed with modification
the MeTCs Decision dated 12 July 2000. The RTC deleted the award for exemplary
damages.

RCJ failed to convince the RTC that it observed the diligence of a good father of a
family to prevent damages sustained by the Mitsubishi Lancer. The RTC ruled that the
testimony of Conrado Magno, RCJs Operations Manager, who declared that all
applicants for employment in RCJ were required to submit clearances from
the barangay, the courts and the National Bureau of Investigation, is insufficient to
show that RCJ exercised due diligence in the selection and supervision of its drivers.
The allegation of the conduct of seminars and training for RCJs drivers is not proof
that RCJ examined Mangobas qualifications, experience and driving history.
Moreover, the testimony of Noel Oalog, the bus conductor, confirmed that the bus
was travelling at a speed of 60 to 75 kilometers per hour, which was beyond the
maximum allowable speed of 50 kilometers per hour for a bus on an open country
road. The RTC, however, deleted the award of exemplary damages because it found
no evidence that Mangoba acted with gross negligence.

In an Order10 dated 27 August 2008, the RTC partially reconsidered its 27 May 2008
Decision and modified the MeTCs Decision to read as follows:
 WHEREFORE, the Decision dated May 27, 2008 is partially
reconsidered and the Decision of the court a quo dated July 12, 2000 is
MODIFIED. Appellant RCJ Bus Lines, Inc. and
defendant Flor Bola Mangoba are ordered to pay jointly and severally
the appellee [Standard Insurance Co., Inc.] the following:

1. ONE HUNDRED SIXTY TWO THOUSAND ONE FIFTY ONE

PESOS and 22/100 (P162,151.22), with legal rate of interest at 6% per
annum from September 1, 1995 until full payment;

2. TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorneys fees; and

3. Cost of suit.

SO ORDERED.11

The Appellate Courts Ruling

Mangoba and RCJ filed a petition for review before the appellate court. The appellate
court found that the RTC committed no reversible error in affirming RCJs liability as
registered owner of the bus and employer of Mangoba, as well
as Mangobas negligence in driving the passenger bus. The appellate court, however,
deleted the award for attorneys fees and modified the legal interest imposed by
the MeTC.

The dispositive portion of the appellate courts decision reads:

WHEREFORE, the instant petition for review is DENIED. The

assailed Decision of the Regional Trial Court of Manila, Branch 37, in
Civil Case No. 00-99410 is hereby AFFIRMED with
MODIFICATION that the legal interest that should be imposed on the
 actual damages awarded in favor of respondent Standard Insurance,
Co., Inc. should be at the rate of 6% per annum computed from the
time of extra judicial demand until the finality of the 12 July 2000
Decision of the MeTC and thereafter, the legal interest shall be at the
rate of 12% per annum until the full payment of the actual damages.
The award of attorneys fees is DELETED.

SO ORDERED.12

The appellate court denied RCJs Motion for Reconsideration13 for lack of merit.14

The Issues

RCJ assigns the following as errors of the appellate court:

1. The Court of Appeals erroneously awarded the amount

of P162,151.22 representing actual damages based merely on the proof
of payment of policy/insurance claim and not on an official receipt of
payment of actual cost of repair;

2. The Court of Appeals erroneously disregarded the point that

petitioner RCJs defense of extraordinary diligence in the selection and
supervision of its driver was made as an alternative defense;

3. The Court of Appeals erroneously disregarded the legal principle

that the supposed violation of Sec. 35 of R.A. 4136 merely results in
a disputable presumption; and

4. The Court of Appeals erroneously held that petitioner RCJ is

vicariously liable for the claim of supposed actual damages incurred by
respondent Standard Insurance.15
 The Courts Ruling

The petition has no merit. We see no reason to overturn the findings of the lower
courts. We affirm the ruling of the appellate court.

RCJs Liability

RCJ argues that its defense of extraordinary diligence in the selection and supervision
of its employees is a mere alternative defense. RCJs initial claim was that Standards
complaint failed to state a cause of action against RCJ.

Standard may hold RCJ liable for two reasons, both of which rely upon facts
uncontroverted by RCJ. One, RCJ is the registered owner of the bus driven
by Mangoba. Two, RCJ is Mangobas employer.

Standards allegation in its amended complaint that RCJ is the registered owner of the
passenger bus with plate number NYG 363 was sufficient to state a cause of action
against RCJ. The registered owner of a vehicle should be primarily responsible to the
public for injuries caused while the vehicle is in use.16 The main aim of motor vehicle
registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways,
responsibility therefor can be fixed on a definite individual, the registered owner.17

Moreover, in its efforts to extricate itself from liability, RCJ proffered the defense of
the exercise of the diligence of a good father of a family. The MeTC characterized
RCJs defense against negligence in this manner:

To repel the idea of negligence, defendant [RCJ] bus companys

operations manager at the Laoag City Terminal was presented on the
witness stand on January 5, 2000 in regard to the companys seminars
and dialogues with respect to its employees, and the absence of any
record of a vehicular accident involving the co-defendant driver
 [Mangoba] (TSN, January 5, 2000, pp. 2-17; TSN, February 16, 2000,
pp. 2-9). As the last witness of defendant [RCJ] bus company,
Noel Oalog, bus conductor who was allegedly seated to the right side
of the bus driver during the incident, was presented on March 22, 2000
(TSN, March 22, 2000, page 2). He confirmed on direct examination
and cross examination that it was defendants bus, then running at 60-
75 [kph] and at a distance of 10 meters, which bumped a Mitsubishi
Lancer without a tail light. According to him, the incident occurred
when the driver of the Toyota Corolla, which was ahead of the Lancer,
stepped on the brakes due to the pile of gravel and sand in sight
(TSN, Vide at pp. 3-11). Subsequent to the proffer of exhibits
(TSN, Vide, at page 14), and in default of any rebuttal, the parties were
directed to file the Memoranda within thirty days from March 23,
2000.18

RCJ, by presenting witnesses to testify on its exercise of diligence of a good father of

a family in the selection and supervision of its bus drivers, admitted that Mangoba is
its employee. Article 218019 of the Civil Code, in relation to Article 2176,20 makes the
employer vicariously liable for the acts of its employees. When the employee causes
damage due to his own negligence while performing his own duties, there arises
the juris tantum presumption that the employer is negligent, rebuttable only by proof
of observance of the diligence of a good father of a family. For failure to rebut such
legal presumption of negligence in the selection and supervision of employees, the
employer is likewise responsible for damages, the basis of the liability being the
relationship of pater familias or on the employers own negligence.21

Mangoba, per testimony of his conductor, was ten meters away from the Mitsubishi
Lancer before the collision and was driving 60 to 75 kilometers per hour when the
speed limit was 50 kilometers per hour.22 The presumption under Article 218523 of the
Civil Code was thus proven true: Mangoba, as driver of the bus which collided with
the Mitsubishi Lancer, was negligent since he violated a traffic regulation at the time
of the mishap. We see no reason to depart from the findings of the MeTC, RTC and
appellate court that Mangoba was negligent. The appellate court stated:

To be sure, had not the passenger bus been speeding while traversing
the downward sloping road, it would not have hit and bumped the
Mitsubishi Lancer in front of it, causing the latter vehicle to move
forward and hit and bump, in turn, the Toyota Corolla. Had the bus
been moving at a reasonable speed, it could have avoided hitting and
bumping the Mitsubishi Lancer upon spotting the same, taking into
account that the distance between the two vehicles was ten (10) meters.
As fittingly opined by the MeTC, the driver of the passenger bus, being
 the rear vehicle, had full control of the situation as he was in a position
to observe the vehicle in front of him. Had he observed the diligence
required under the circumstances, the accident would not have
occurred.24

Subrogation

In the present case, it cannot be denied that the Mitsubishi Lancer sustained damages.
Moreover, it cannot also be denied that Standard
paid Rodelene Valentino P162,151.22 for the repair of the Mitsubishi Lancer pursuant
to a Release of Claim and Subrogation Receipt. Neither RCJ nor Mangoba cross-
examined Standards claims evaluator when he testified on his duties, the insurance
contract between Rodelene Valentino and Standard, Standards payment of insurance
proceeds, and RCJ and Mangobas refusal to pay despite demands. After being
lackadaisical during trial, RCJ cannot escape liability now. Standards right of
subrogation accrues simply upon its payment of the insurance claim.25

Article 2207 of the Civil Code reads:

Art. 2207. If the plaintiffs property has been insured and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful

claim or right, so that he who substitutes another succeeds to the rights of the other in
relation to a debt or claim, including its remedies or securities. The principle covers a
situation wherein an insurer who has paid a loss under an insurance policy is entitled
to all the rights and remedies belonging to the insured against a third party with
respect to any loss covered by the policy.26
WHEREFORE, we DENY the petition. We AFFIRM the Decision of the Court of
Appeals in CA-G.R. SP No. 105338 promulgated on 11 March 2010 as well as the
Resolution promulgated on 3 September 2010.

SO ORDERED.

ANTONIO T. CARPIO

Associate Justice

WE CONCUR:

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

MARIA LOURDES P. A. SERENO

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons
Attestation, I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

RENATO C. CORONA

Chief Justice
* Designated Acting Member per Special Order No. 1006 dated 10 June 2011.

** Designated Acting Member per Special Order No. 1062 dated 16 August 2011.

1 Under Rule 45 of the 1997 Rules of Civil Procedure.

2 Rollo, pp. 41-62. Penned by Associate Justice Mariflor P. Punzalan Castillo, with
Associate Justices Juan Q. Enriquez and Elihu A. Ybaez, concurring.

3 Id. at 77-79. Penned by Associate Justice Mariflor P. Punzalan Castillo, with

Associate Justices Juan Q. Enriquez and Elihu A. Ybaez, concurring.

4 Id. at 120-128. Penned by Judge Virgilio V. Macaraig.

5 Id. at 102-108. Penned by Judge Eduardo B. Peralta, Jr.

6 Id. at 43-46.

7 Id. at 108.

8 Id. at 109.

9 Id. at 110-119. Penned by Associate Justice Bienvenido L. Reyes, with Associate

Justices Ruben T. Reyes (retired Supreme Court Justice) and Jose C. Mendoza (now
Supreme Court Justice) concurring.

10 Id. at 129-131. Penned by Judge Virgilio V. Macaraig.

11 Id. at 131.

12 Id. at 61-62.

13 Id. at 63-75.

14 Id. at 77-79.

15 Id. at 17-18.

16See FEB Leasing and Finance Corporation (now BPI Leasing

Corporation) v. Spouses Baylon, G.R. No. 181398, 29 June
 2011; Guillang v. Bedania, G.R. No. 162987, 21 May 2009, 588 SCRA
73; Villanueva v. Domingo, 481 Phil. 837 (2004); MYC-Agro-Industrial Corp.
v. Camerino, 217 Phil. 11 (1984); Erezo v. Jepte, 102 Phil. 103 (1957).

17 Erezo v. Jepte, supra at 108.

18 Rollo, p. 103.

19 The pertinent portions of Article 2180 read: The obligation imposed by Article
2176 is demandable not only for ones own acts or omissions, but also for those of
persons for whom one is responsible. x x x Employers shall be liable for the damages
caused by their employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any business or industry.
x x x The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.

20 Article 2176 states: Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre- existing contractual relation between the parties, is
called a quasi-delict and is governed by the provisions of this Chapter.

21 Metro Manila Transit Corp. v. Court of Appeals, G.R. No. 104408, 21 June 1993,
223 SCRA 521, 539. Citations omitted.

22 Section 35, Article I, Chapter IV, Republic Act No. 4136.

23 Unless there is proof to the contrary, it is presumed that a person driving a motor
vehicle has been negligent if at the time of the mishap, he was violating any traffic
regulation.

24 Rollo, pp. 57-58.

25 See Delsan Transport Lines, Inc. v. Court of Appeals, 420 Phil. 824 (2001).

26 Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporation, G.R.
Nos. 180880-81, 25 September 2009, 601 SCRA 96, 141.

G.R. No. 184565, November 20, 2013 - MANOLITO DE LEON AND LOURDES E. DE LEON, Petitioners, v.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
PHILIPPINE SUPREME COURT DECISIONS

SECOND DIVISION

G.R. No. 184565, November 20, 2013

MANOLITO DE LEON AND LOURDES E. DE LEON, Petitioners, v. BANK OF THE PHILIPPINE ISLANDS,
Respondent.

DECISION

DEL CASTILLO, J.:

“[I]n the course of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty
or the burden of evidence shifts to defendant to controvert plaintiff’s prima facie case, otherwise, a
verdict must be returned in favor of plaintiff.”1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the November 16,
2007 Decision3 and the September 19, 2008 Resolution4 of the Court of Appeals (CA) in CA-G.R. SP
No. 91217.

Factual Antecedents

On June 13, 1995, petitioner-spouses Manolito and Lourdes de Leon executed a Promissory Note5
binding themselves to pay Nissan Gallery Ortigas the amount of P458,784.00 in 36 monthly
installments of P12,744.00, with a late payment charge of five percent (5%) per month.6 To secure the
obligation under the Promissory Note, petitioner-spouses constituted a Chattel Mortgage7 over a
1995 Nissan Sentra 1300 4-Door LEC with Motor No. GA-13-549457B and Serial No. BBAB-13B69336.8

On the same day, Nissan Gallery Ortigas, with notice to petitioner-spouses, executed a Deed of
Assignment9 of its rights and interests under the Promissory Note with Chattel Mortgage in favor of
Citytrust Banking Corporation (Citytrust).10

On October 4, 1996, Citytrust was merged with and absorbed by respondent Bank of the Philippine
Islands (BPI).11

Petitioner-spouses, however, failed to pay their monthly amortizations from August 10, 1997 to June
10, 1998.12 Thus, respondent BPI, thru counsel, sent them a demand letter13 dated October 16,
1998.

On November 19, 1998, respondent BPI filed before the Metropolitan Trial Court (MeTC) of Manila a
Complaint14 for Replevin and Damages, docketed as Civil Case No. 161617 and raffled to Branch 6,
against petitioner-spouses.15 The summons, however, remained unserved, prompting the MeTC to
dismiss the case without prejudice.16 Respondent BPI moved for reconsideration on the ground that it
was still verifying the exact address of petitioner-spouses.17 On March 21, 2002, the MeTC set aside
the dismissal of the case.18 On April 24, 2002, summons was served on petitioner-spouses.19

Petitioner-spouses, in their Answer,20 averred that the case should be dismissed for failure of
respondent BPI to prosecute the case pursuant to Section 321 of Rule 17 of the Rules of Court;22 that
their obligation was extinguished because the mortgaged vehicle was stolen while the insurance policy
was still in force;23 that they informed Citytrust of the theft of the mortgaged vehicle through its
employee, Meldy Endaya (Endaya);24 and that respondent BPI should have collected the insurance
proceeds and applied the same to the remaining obligation.25

On November 11, 2003, respondent BPI presented its evidence ex parte.26 It offered as evidence the
testimony of its Account Consultant, Lilie Coria Ultu (Ultu), who testified on the veracity of the
Promissory Note with Chattel Mortgage, the Deed of Assignment, the demand letter dated October
16, 1998, and the Statement of Account27 of petitioner-spouses.28

For their part, petitioner-spouses offered as evidence the Alarm Sheet issued by the Philippine
National Police on December 3, 1997, the Sinumpaang Salaysay executed by Reynaldo Llanos (Llanos),
the Subpoena for Llanos, the letter of Citytrust dated July 30, 1996, the letters of respondent BPI
dated January 6, 1998 and June 25, 1998, and the testimonies of Ultu and petitioner
Manolito.29ChanRoblesVirtualawlibrary

Ruling of the Metropolitan Trial Court

On November 17, 2004, the MeTC rendered a Decision30 in favor of respondent BPI and declared
petitioner-spouses liable to pay their remaining obligation for failure to notify Citytrust or respondent
BPI of the alleged theft of the mortgaged vehicle and to submit proof thereof.31 The MeTC considered
the testimony of petitioner Manolito dubious and self-serving.32 Pertinent portions of the Decision
read:chanRoblesvirtualLawlibrary

[Petitioner Manolito] declared on the witness stand that he sent to [Citytrust], through “fax,” the
papers necessary to formalize his report on the loss of [the] subject motor vehicle, which included the
Alarm Sheet (Exhibit “1”) and the Sinumpaang Salaysay of one Reynaldo Llanos y Largo (TSN dated
August 3, 2004, pp. 17-19).

However, [his claim that] such documents were indeed received by [Citytrust] only remains self-
serving and gratuitous. No facsimile report has been presented that such documents were indeed
transmitted to Citytrust. No formal letter was made to formalize the report on the loss. For an
individual such as [petitioner Manolito], who rather appeared sharp and intelligent enough to know
better, an apparent laxity has been displayed on his part. Heedless of the consequences, [petitioner
Manolito] simply satisfied himself with making a telephone call, if indeed one was made, to [a rank
and file employee] of Citytrust or [respondent BPI] x x x and did not exercise x x x due diligence to
verify any feedback or action on the part of the banking institution.

Worse, [petitioners] x x x failed to prove that they indeed submitted proof of the loss or theft of the
motor vehicle. [Petitioner-spouses] merely [presented] an Alarm Sheet and the Sinumpaang Salaysay
of one Reynaldo Llanos y Largo. But a formal police report on the matter is evidently missing. It
behooved [petitioner-spouses] to establish the alleged theft of the motor vehicle by submitting a
police action on the matter, but this, they did not do.

Haplessly, therefore, the required notice and proof of such loss have not been satisfied.33

Thus, the MeTC disposed of the case in this wise:chanRoblesvirtualLawlibrary

WHEREFORE, judgment is hereby rendered in favor of [respondent BPI] and against [petitioner-
spouses] Lourdes E. De Leon and Jose Manolito De Leon, as follows:chanRoblesvirtualLawlibrary

(i) Ordering [petitioner-spouses] to jointly and severally pay the sum of P130,018.08 plus 5% interest
per month as late payment charges from date of default on August 10, 1997, until fully paid;

(ii) Ordering [petitioner-spouses] to jointly and severally pay attorney’s fees fixed in the reasonable
sum of P10,000.00; and

(iii) Ordering [petitioner-spouses] to jointly and severally pay the costs of suit.
SO ORDERED.34

Ruling of the Regional Trial Court (RTC)

On appeal,35 the RTC, Branch 34, reversed the MeTC Decision. Unlike the

MeTC, the RTC gave credence to the testimony of petitioner Manolito that he informed Citytrust of
the theft of the mortgaged vehicle by sending through fax all the necessary documents.36 According
to the RTC, since there was sufficient notice of the theft, respondent BPI should have collected the
proceeds of the insurance policy and applied the same to the remaining obligation of petitioner-
spouses.37 The fallo of the RTC Order38 dated July 18, 2005 reads:chanRoblesvirtualLawlibrary

WHEREFORE, premised from the above considerations and findings, the decision appealed from is
hereby reversed and set aside.

The Complaint and the counterclaim are hereby DISMISSED for lack of merit.

SO ORDERED.39
Ruling of the Court of Appeals

Aggrieved, respondent BPI elevated the case to the CA via a Petition for Review under Rule 42 of the
Rules of Court.

On November 16, 2007, the CA reversed and set aside the RTC Order and reinstated the MeTC
Decision, thus:chanRoblesvirtualLawlibrary

WHEREFORE, the instant petition for review is GRANTED. The Order issued by the Regional Trial Court
of Manila (Branch 34), dated July 18, 2005, in Civil Case No. 05-111630, is REVERSED and SET ASIDE
and the Decision of the Metropolitan Trial Court of Manila (Branch 6) is REINSTATED. No
pronouncement as to costs.

SO ORDERED.40

Petitioner-spouses moved for reconsideration, which the CA partly granted in its September 19, 2008
Resolution,41 the dispositive portion of which reads:chanRoblesvirtualLawlibrary

WHEREFORE, the foregoing premises considered, our decision of 16 November 2007 is deemed
amended only to the extent herein discussed and the dispositive portion of said decision should now
read as follows:chanRoblesvirtualLawlibrary

“WHEREFORE, the instant petition for review is GRANTED. The Order issued by the Regional Trial Court
of

Manila (Branch 34), dated July 18, 2005, in Civil Case No. 05-111630, is REVERSED and SET ASIDE and
the Decision of the Metropolitan Trial Court of Manila (Branch 6) is REINSTATED with the [lone]
modification that the therein ordered payment of 5% interest per month as late payment charges, is
reduced to 1% interest per month from date of default on August 10, 1997 until fully paid.

No pronouncement as to costs.”

IT IS SO ORDERED.42

Issue

Hence, this recourse by petitioner-spouses arguing that:chanRoblesvirtualLawlibrary

THE REVERSAL BY THE [CA] OF THE DECISION OF THE [RTC] OF MANILA (BRANCH 34) THAT THE
PETITIONERS HAVE SATISFIED THE REQUIRED NOTICE OF LOSS TO [CITYTRUST] IS CONTRARY TO LAW
AND THE DECISIONS OF THIS HONORABLE COURT.43

Ultimately, the issue boils down to the credibility of petitioner Manolito’s testimony.

Petitioner-spouses’ Arguments

Petitioner-spouses contend that the CA erred in not giving weight and credence to the testimony of
petitioner Manolito.44 They claim that his credibility was never an issue before the MeTC45 and that
his testimony, that he sent notice and proof of loss to Citytrust through fax, need not be supported by
the facsimile report since it was not controverted by respondent BPI.46 Hence, they insist that his
testimony together with the documents presented is sufficient to prove that Citytrust received notice
and proof of loss of the mortgaged vehicle.47 Having done their part, they should be absolved from
paying their remaining obligation.48 Respondent BPI, on the other hand, should bear the loss for
failing to collect the proceeds of the insurance.49

Respondent BPI’s Arguments

Respondent BPI counter-argues that the burden of proving the existence of an alleged fact rests on the
party asserting it.50 In this case, the burden of proving that the mortgaged vehicle was stolen and that
Citytrust received notice and proof of loss of the mortgaged vehicle rests on petitioner-spouses.51
Unfortunately, they failed to present clear and convincing evidence to prove these allegations.52 In
any case, even if they were able to prove by clear and convincing evidence that notice and proof of
loss of the mortgaged vehicle was indeed faxed to Citytrust, this would not absolve them from liability
because the original documents were not delivered to Citytrust or respondent BPI.53 Without the
original documents, Citytrust or respondent BPI would not be able to file an insurance
claim.54chanroblesvirtualawlibrary

Our Ruling

The Petition is bereft of merit.

The party who alleges a fact has the burden of proving it.

Section 1, Rule 131 of the Rules of Court defines “burden of proof” as “the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence
required by law.” In civil cases, the burden of proof rests upon the plaintiff, who is required to
establish his case by a preponderance of evidence.55 Once the plaintiff has established his case, the
burden of evidence shifts to the defendant, who, in turn, has the burden to establish his defense.56

In this case, respondent BPI, as plaintiff, had to prove that petitioner-spouses failed to pay their
obligations under the Promissory Note. Petitioner-spouses, on the other hand, had to prove their
defense that the obligation was extinguished by the loss of the mortgaged vehicle, which was insured.

However, as aptly pointed out by the MeTC, the mere loss of the mortgaged vehicle does not
automatically relieve petitioner-spouses of their obligation57 as paragraph 7 of the Promissory Note
with Chattel Mortgage provides that:chanRoblesvirtualLawlibrary

7. The said MORTGAGOR covenants and agrees to procure and maintain through the MORTGAGEE, a
comprehensive insurance from a duly accredited and responsible insurance company approved by the
MORTGAGEE, over the personalty hereinabove mortgaged to be insured against loss or damage by
accident, theft, and fire for a period of one (1) year from date hereof and every year thereafter until
the mortgage DEBTS are fully paid with an insurance company or companies acceptable to the
MORTGAGEE in an amount not less than the outstanding balance of the mortgage DEBTS; that he/it
will make all loss, if any, under such policy or policies payable to the MORTGAGEE forthwith. x x x

xxx

MORTGAGOR shall immediately notify MORTGAGEE in case of los[s], damage or accident suffered by
herein personalty mortgaged and submit proof of such los[s], damages or accident. Said los[s],
damage or accident for any reason including fortuitous event shall not suspend, abate, or extinguish
[petitioner spouses’] obligation under the promissory note or sums due under this contract x x x

In case of loss or damage, the MORTGAGOR hereby irrevocabl[y] appoints the MORTGAGEE as his/its
attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle
insurance claims; to sign, execute and deliver the corresponding papers, receipts and documents to
the insurance company as may be necessary to prove the claim and to collect from the latter the
insurance proceeds to the extent of its interest. Said proceeds shall be applied by the MORTGAGEE as
payment of MORTGAGOR’s outstanding obligation under the Promissory Note and such other sums
and charges as may be due hereunder or in other instruments of indebtedness due and owing by the
MORTGAGOR to the MORTGAGEE and the excess, if any, shall thereafter be remitted to the
MORTGAGOR. MORTGAGEE however shall be liable in the event there is a deficiency.

x x x58
Based on the foregoing, the mortgagor must notify and submit proof of loss to the mortgagee.
Otherwise, the mortgagee would not be able to claim the proceeds of the insurance and apply the
same to the remaining obligation.

This brings us to the question of whether petitioner-spouses sent notice and proof of loss to Citytrust
or respondent BPI.

Testimonial evidence must also be credible, reasonable, and in accord with human experience.

Testimonial evidence, to be believed, must come not only from the mouth of a credible witness, but
must also “be credible, reasonable, and in accord with human experience.”59 A credible witness must,
therefore, be able to narrate a convincing and logical story.

In this case, petitioner Manolito’s testimony that he sent notice and proof of loss of the mortgaged
vehicle to Citytrust through fax lacks credibility especially since he failed to present the facsimile
report evidencing the transmittal.60 His failure to keep the facsimile report or to ask for a written
acknowledgement from Citytrust of its receipt of the transmittal gives us reason to doubt the
truthfulness of his testimony. His testimony on the alleged theft is likewise suspect. To begin with, no
police report was presented.61 Also, the insurance policy was renewed even after the mortgaged
vehicle was allegedly stolen.62 And despite repeated demands from respondent BPI, petitioner-
spouses made no effort to communicate with the bank in order to clarify the matter. The absence of
any overt act on the part of petitioner-spouses to protect their interest from the time the mortgaged
vehicle was stolen up to the time they received the summons defies reason and logic. Their inaction is
obviously contrary to human experience. In addition, we cannot help but notice that although the
mortgaged vehicle was stolen in November 1997, petitioner-spouses defaulted on their monthly
amortizations as early as August 10, 1997. All these taken together cast doubt on the truth and
credibility of his testimony.

Thus, we are in full accord with the findings of the MeTC and the CA that petitioner Manolito’s
testimony lacks credence as it is dubious and self-serving.63 Failing to prove their defense, petitioner-
spouses are liable to pay their remaining obligation.

WHEREFORE, the Petition is hereby DENIED. The assailed November 16, 2007 Decision and the
September 19, 2008 Resolution of the Court of Appeals in CA-G.R. SP No. 91217 are hereby
AFFIRMED.

SO ORDERED.

Carpio, (Chairperson), Brion, Perez, and Perlas-Bernabe, JJ., concur.

Endnotes:

1Jison v. Court of Appeals, 350 Phil. 138, 173 (1998).

2Rollo, pp. 11-37.

3 Id. at 39-46; penned by Associate Justice Aurora Santiago-Lagman and concurred in by Associate
Justices Bienvenido L. Reyes (now a Member of this Court) and Apolinario D. Bruselas, Jr.

4 Id. at 48-51; penned by Associate Justice Apolinario D. Bruselas, Jr. and concurred in by Associate
Justices Juan Q. Enriquez, Jr. and Japar B. Dimaampao.

5 CA rollo, p. 84.

6 Id.

7 Id. at 85-88.
8 Id. at 85.

9 Id. at 86.

10 Id.

11Rollo, p. 40.

12 Id. at 57.

13 CA rollo, p. 90.

14 Id. at 75-83.

15Rollo, pp. 52.

16 Id. at 53.

17 Id.

18 Id.

19 Id.

20 CA rollo, pp. 92-99.

21 Section 3. Dismissal due to fault of plaintiff. – If, for no justifiable cause, the plaintiff fails to appear
on the date of the presentation of his evidence in chief on the complaint, or to prosecute his action for
an unreasonable length of time, or to comply with these Rules or any order of the court, the
complaint may be dismissed upon motion of the defendant or upon the court’s own motion, without
prejudice to the right of the defendant to prosecute his counterclaim in the same or in a separate
action. This dismissal shall have the effect of an adjudication upon the merits, unless otherwise
declared by the court.

22 CA rollo, pp. 93-94.

23 Id. at 94-98.

24 Id. at 96.

25 Id. at 96-98.

26 Rollo, p. 55.

27 CA rollo, p. 91.

28Rollo, p. 55.

29 Id. at 55-56.

30 Id. at 52-60; penned by Presiding Judge Ma. Theresa Dolores C. Gomez-Estoesta.

31 Id. at 58-59.

32 Id.
33 Id. at 58.

34 Id. at 60.

35 Docketed as Civil Case No. 05-111630.

36 Rollo, pp. 65-67.

37 Id. at 67-68.

38 Id. at 61-68; penned by Judge Romulo A. Lopez.

39 Id. at 68.

40 Id. at 46.

41 Id. at 48-51.

42 Id. at 50-51.

43 Id. at 22.

44 Id. at 124-128.

45 Id. at 132.

46 Id. at 131-134.

47 Id. at 124-125

48 Id. at 125.

49 Id.

50 Id. at 143.

51 Id. at 143-144.

52 Id. at 144.

53 Id.

54 Id.

55Aznar v. Citibank, N.A. (Philippines), 548 Phil. 218, 230 (2007).

56 Jison v. Court of Appeals, supra note 1.

57 Rollo, pp. 57-58.

58 CA rollo, p. 87.

59People v. Padrones, 508 Phil. 439, 461 (2005).

60Rollo, p. 58.

61 Id.
62 Id. at 59.

63 Id. at 45 and 58.